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2023 ReportPeers and competitors of iQIYI:
VeritoneUNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
☐
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
For the fiscal year ended December 31, 2022.
OR
☐
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report.
For the transition period from to
Commission file number: 001-38431
iQIYI, 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)
4/F, iQIYI Youth Center, Yoolee Plaza
No. 21, North Road of Workers' Stadium, Chaoyang District
Beijing 100027, People’s Republic of China
(Address of principal executive offices)
Jun Wang, Chief Financial Officer
E-mail: ir@qiyi.com
4/F, iQIYI Youth Center, Yoolee Plaza
No. 21, North Road of Workers' Stadium, Chaoyang District
Beijing 100027, People’s Republic of China
Telephone: +86 10-6267-7171
(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
American Depositary Shares, each
representing seven Class A ordinary shares
par value US$0.00001 per share
Class A ordinary shares,
par value US$0.00001 per share*
Trading Symbol(s)
IQ
Name of each exchange on which registered
The Nasdaq Stock Market LLC
(The Nasdaq Global Select Market)
The Nasdaq Stock Market LLC
(The Nasdaq Global Select Market)
(1)*Not for trading, but only in connection with the listing on The Nasdaq Global Select Market of our American depositary shares, each representing seven Class A ordinary shares.
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
None
(Title of Class)
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 annual report.
As of December 31, 2022, there were 6,088,666,178 ordinary shares outstanding, being the sum of 3,047,568,900 Class A ordinary shares (excluding 198,912,543 Class A ordinary
shares issued to our depositary bank for bulk issuance of ADSs reserved for future issuances upon the exercise or vesting of awards under our share incentive plans) and 3,041,097,278 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 ☐ No
If 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) of the Securities Exchange Act of 1934.
☐ Yes ☒ No
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under
those Sections.
Indicate 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 1934 during 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 filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate 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 “accelerated filer
and large 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 has elected not to use the extended transition
period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
†The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5,
2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under
Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.☒
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 issued ☐
Other ☐
by the International Accounting Standards Board
If “other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. ☐ 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 Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court. ☐ Yes ☐ No
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an
error to previously issued financial statements. ☐ Yes ☒ No
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s
executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐ Yes ☒ No
TABLE OF CONTENTS
INTRODUCTION
FORWARD-LOOKING INFORMATION
PART I.
ITEM 1.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 4.A.
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 8.
ITEM 9.
ITEM 10.
ITEM 11.
ITEM 12.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
OFFER STATISTICS AND EXPECTED TIMETABLE
KEY INFORMATION
INFORMATION ON THE COMPANY
UNRESOLVED STAFF COMMENTS
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
FINANCIAL INFORMATION
THE OFFER AND LISTING
ADDITIONAL INFORMATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
PART II.
ITEM 13.
ITEM 14.
ITEM 15.
ITEM 16.A.
ITEM 16.B.
ITEM 16.C.
ITEM 16.D.
ITEM 16.E.
ITEM 16.F.
ITEM 16.G.
ITEM 16.H.
ITEM 16.I.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
CONTROLS AND PROCEDURES
AUDIT COMMITTEE FINANCIAL EXPERT
CODE OF ETHICS
PRINCIPAL ACCOUNTANT FEES AND SERVICES
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
CORPORATE GOVERNANCE
MINE SAFETY DISCLOSURE
DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
PART III.
ITEM 17.
ITEM 18.
ITEM 19.
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
EXHIBITS
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3
3
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94
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128
128
141
142
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146
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Unless otherwise indicated and except where the context otherwise requires, references in this annual report to:
•“ADSs” refers to our American depositary shares, each of which represents seven Class A ordinary shares;
•“AI” refers to artificial intelligence;
INTRODUCTION
•“Average daily number of total subscribing members” for a given period is calculated by averaging the number of total subscribing members, including
individuals with trial membership, in each day of such period;
•“Average daily number of subscribing members excluding individuals with trial memberships” for a given period is calculated by averaging the number of
subscribing members excluding individuals with trial memberships in each day of such period;
•“Monthly ARM” refers to average revenue per membership during a month. Monthly ARM is calculated by dividing our total revenues from membership
services during a given period by the average daily number of total subscribing members and the number of months during such period;
•“Baidu” refers to Baidu, Inc., our parent company and controlling shareholder;
•“bullet chat” known as Danmu in Chinese, refers to a form of video commentary used on online videos. Bullet chats are comments that appear directly on the
video in real-time;
•“IP” refers to intellectual property;
•“IT” refers to information technology;
•“RMB” and “Renminbi” refer to the legal currency of mainland China;
•“shares” or “ordinary shares” refers to our Class A and Class B ordinary shares, par value $0.00001 per share;
•“subscribing members,” refers to the individuals who subscribed for our membership packages during a given period, including individuals with trial
membership, and excluding individuals who pay for video on-demand services or stand-alone packages for sports paid content, online literature or online games;
subscribing members are calculated using the number of unique iQIYI user accounts that have subscribed for the relevant services;
•“U.S. GAAP” refers to generally accepted accounting principles in the United States;
•“US$,” “U.S. dollars,” “$,” and “dollars” refer to the legal currency of the United States;
•“video views” refers to the number of times a video is launched on our platform, regardless of time spent viewing the video;
•“WAP” refers to wireless application protocol; and
•“we,” “us,” “our company” and “our” refer to iQIYI, Inc., a Cayman Islands company, and its subsidiaries, and, in the context of describing our operations and
combined and consolidated financial information, also include the variable interest entities, including Beijing iQIYI Science & Technology Co., Ltd. (“Beijing
iQIYI”), Shanghai iQIYI Culture Media Co., Ltd. (“Shanghai iQIYI”), Shanghai Zhong Yuan Network Co., Ltd. (“Shanghai Zhong Yuan”), iQIYI Pictures
(Beijing) Co., Ltd. (“iQIYI Pictures”) and Beijing iQIYI Intelligent Entertainment Technology Co., Ltd., (“Intelligent Entertainment”). All of the variable
interest entities are domestic companies incorporated in mainland China in which we do not have any equity ownership but whose financial results have been
consolidated into our consolidated financial statements based solely on contractual arrangements in accordance with U.S. GAAP. See “Item 4. Information on the
Company—C. Organizational Structure” for an illustrative diagram of our corporate structure.
We present our financial results in RMB. 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, or at all. The mainland China government imposes control over its foreign currency reserves in part through
direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade. This annual report contains translations of certain foreign
currency amounts into U.S. dollars for the convenience of the reader. Unless otherwise stated, all translations of Renminbi into U.S. dollars were made at the rate at
RMB6.8972 to US$1.00, the exchange rate as set forth in the H.10 statistical release of the Board of Governors of the Federal Reserve System in effect as of December
30, 2022.
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FORWARD-LOOKING INFORMATION
This annual report contains forward-looking statements that involve risks and uncertainties. These statements involve known and unknown risks, uncertainties
and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking
statements. These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigations Reform Act of 1995.
You can identify these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,”
“believe,” “likely to” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future
events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking
statements include, but are not limited to, statements about:
•our goals and strategies;
•our ability to retain and increase the number of users, members and advertising customers, and expand our service offerings;
•our future business development, financial condition and results of operations;
•expected changes in our revenues, costs or expenditures;
•competition in our industry;
•relevant government policies and regulations relating to our industry;
•general economic and business conditions globally and in mainland China; and
•assumptions underlying or related to any of the foregoing.
You should read this annual report and the documents that we refer to in this annual report and have filed as exhibits to this annual report completely and with the
understanding that our actual future results may be materially different from what we expect. Other sections of this annual report discuss factors which could adversely
impact our business and financial performance. Moreover, we operate in an evolving environment. New risk factors emerge from time to time and it is not possible for
our management to predict all risk factors, 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 actual results to differ materially from those contained in any forward-looking statements. We qualify all of our forward-looking statements by these cautionary
statements.
You should not rely upon forward-looking statements as predictions of future events. The forward-looking statements made in this annual report relate only to
events or information as of the date on which the statements are made in this annual report. Except as required by law, we undertake no obligation to update or revise
publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect
the occurrence of unanticipated events.
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ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
PART I.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. Key Information
Our Holding Company Structure and Contractual Arrangements with the Variable Interest Entities
iQIYI, Inc. is not a Chinese operating company, but rather a Cayman Islands holding company with no equity ownership in the variable interest entities. Our
Cayman Islands holding company does not conduct business operations directly. We conduct our operations in mainland China through (i) our mainland China
subsidiaries and (ii) the variable interest entities with which we have maintained contractual arrangements, and their subsidiaries in mainland China. PRC laws and
regulations impose certain restrictions or prohibitions on foreign ownership of companies that engage in certain value-added telecommunication services, internet audio-
video program services and certain other businesses. Accordingly, we operate these businesses in mainland China through the variable interest entities and their
subsidiaries, and rely on contractual arrangements among our mainland China subsidiaries, the variable interest entities and their nominee shareholders to control the
business operations of the variable interest entities. The variable interest entities are consolidated for accounting purposes, but are not entities in which our Cayman
Islands holding company, or our investors, own equity. Revenues contributed by the variable interest entities accounted for 92%, 94% and92% of our total revenues for
the years ended December 31, 2020, 2021 and 2022, respectively. As used in this annual report, “we,” “us,” “our company,” “our,” or “iQIYI” refers to iQIYI, Inc., its
subsidiaries, and, in the context of describing our operations and consolidated financial information, the variable interest entities in mainland China, including Beijing
iQIYI Science & Technology Co., Ltd. (“Beijing iQIYI”), Shanghai iQIYI Culture Media Co., Ltd. (“Shanghai iQIYI”), Shanghai Zhong Yuan Network Co., Ltd.
(“Shanghai Zhong Yuan”), iQIYI Pictures (Beijing) Co., Ltd. (“iQIYI Pictures”) and Beijing iQIYI Intelligent Entertainment Technology Co., Ltd., (“Intelligent
Entertainment”). Investors in our ADSs are not purchasing equity interest in the variable interest entities in mainland China, but instead are purchasing equity interest
in a holding company incorporated in the Cayman Islands.
A series of contractual agreements, including loan agreement, share pledge agreement, exclusive purchase option agreement, business operation agreement,
business cooperation agreement, commitment letter, shareholder voting rights trust agreement, exclusive technology consulting and services agreement, trademark
license agreement, software usage license agreement, power of attorney and spousal consent letter, have been entered into by and among our subsidiaries, the variable
interest entities and their respective shareholders. Terms contained in each set of contractual arrangements with the variable interest entities and their respective
shareholders are substantially similar. Despite the lack of legal majority ownership, our Cayman Island holding company is considered the primary beneficiary of the
variable interest entities and consolidates the variable interest entities and their subsidiaries as required by Accounting Standards Codification (“ASC”) topic 810,
Consolidation. Accordingly, we treat the variable interest entities as our consolidated entities under U.S. GAAP and we consolidate the financial results of the variable
interest entities in our consolidated financial statements in accordance with U.S. GAAP. For more details of these contractual arrangements, see “Item 4. Information on
the Company—C. Organizational Structure—Contractual Arrangements with the Variable Interest Entities and Their Respective Shareholders.”
However, the contractual arrangements may not be as effective as direct ownership in providing us with control over the variable interest entities and we may
incur substantial costs to enforce the terms of the arrangements. As such, the variable interest entity structure involves unique risks to investors of our Cayman Islands
holding company. In addition, the legality and enforceability of the contractual agreements among our mainland China subsidiaries, the variable interest entities, and
their nominee shareholders, as a whole, have not been tested in a court of law in mainland China. In the event we are unable to enforce these contractual arrangements,
or if we suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, we may not be able to impose control over the variable
interest entities, and our ability to conduct our business may be materially adversely affected. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our
Corporate Structure—We rely on contractual arrangements with the variable interest entities and their shareholders for our business operations, which may not be as
effective as direct ownership in providing operational control” and “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—The
shareholders of the variable interest entities may have potential conflicts of interest with us, which may materially and adversely affect our business and financial
condition.”
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There are also substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules regarding the status of
the rights of our Cayman Islands holding company with respect to its contractual arrangements with the variable interest entities and their nominee shareholders. Though
the Foreign Investment Law does not explicitly classify contractual arrangements as a form of foreign investment, the definition of “foreign investment” thereunder is
relatively wide and contains a catch-all provision which includes investments made by foreign investors through means stipulated in laws or administrative regulations
or other methods prescribed by the State Council. Therefore, there is no assurance that foreign investment via contractual arrangement would not be interpreted as a type
of indirect foreign investment activities in the future. If any of the variable interest entities were deemed as a foreign-invested enterprise under any such future laws,
administrative regulations or provisions, we may be subject to restrictions, ratification requirements and may need to take further actions to comply with such future
laws, administrative regulations or provisions. Such actions may have a material and adverse impact on our business, financial condition, result of operations and
prospects. In addition, it is uncertain whether any new PRC laws or regulations relating to variable interest entity structures will be adopted or if adopted, what they
would provide. If we or any of the variable interest entities is found to be in violation of any existing or future PRC laws or regulations, or fail to obtain or maintain any
of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion in accordance with the applicable laws and regulations to take
action in dealing with such violations or failures. If the PRC government deems that our contractual arrangements with the variable interest entities do not comply with
PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change or are interpreted
differently in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations. Our Cayman Islands holding company, our
mainland China subsidiaries and the variable interest entities, and investors of our company face uncertainty about potential future actions by the PRC government that
could affect the enforceability of the contractual arrangements with the variable interest entities and, consequently, significantly affect the financial performance of the
variable interest entities and our company as a whole. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—If the PRC
government finds that the agreements that establish the structure for operating certain of our operations in mainland China do not comply with PRC regulations relating
to the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to
relinquish our interests in those operations” and “—Uncertainties exist with respect to the interpretation and implementation of the newly enacted PRC Foreign
Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operations.”
We face various risks and uncertainties related to doing business in mainland China. Our business operations are primarily conducted in mainland China, and we
are subject to complex and evolving PRC laws and regulations. For example, we face risks associated with regulatory approvals on offshore offerings, anti-monopoly
regulatory actions, and oversight on cybersecurity and data privacy, which may impact our ability to conduct certain businesses, accept foreign investments or financing,
or list on a United States or other foreign exchange. In addition, our ADSs may be prohibited from trading in the United States under the Holding Foreign Companies
Accountable Act, or the HFCAA, in the future, if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been
subject to inspections by the PCAOB for two consecutive years. On December 16, 2021, the PCAOB issued a report to notify the SEC of its determination that the
PCAOB was unable to inspect or investigate completely registered public accounting firms headquartered in mainland China and Hong Kong, including our auditor. In
April 2022, the SEC conclusively listed us as a Commission-Identified Issuer under the HFCAA following the filing of our annual report on Form 20-F for the fiscal
year ended December 31, 2021. On December 15, 2022, the PCAOB issued a report that vacated its December 16, 2021 determination and removed mainland China
and Hong Kong from the list of jurisdictions where it is unable to inspect or investigate completely registered public accounting firms. For this reason, we do not expect
to be identified as a Commission-Identified Issuer under the HFCAA after we file this annual report on Form 20-F. Each year, the PCAOB will determine whether it can
inspect and investigate completely audit firms in mainland China and Hong Kong, among other jurisdictions. If PCAOB determines in the future that it no longer has full
access to inspect and investigate completely accounting firms in mainland China and Hong Kong and we continue to use an accounting firm headquartered in one of
these jurisdictions to issue an audit report on our financial statements filed with the SEC, we would be identified as a Commission-Identified Issuer following the filing
of the annual report on Form 20-F for the relevant fiscal year. There can be no assurance that we would not be identified as a Commission-Identified Issuer for any
future fiscal year, and if we were so identified for two consecutive years, we would become subject to the prohibition on trading under the HFCAA. The delisting of our
ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment. Additionally, the inability of the PCAOB to conduct
inspections in the past has deprived our investors with the benefits of such inspections. These risks could result in a material adverse change in our operations and the
value of our ADSs, significantly limit or completely hinder our ability to continue to offer securities to investors, or cause the value of such securities to significantly
decline or become worthless. For a detailed description of risks related to doing business in mainland China, “Item 3.D. Key Information—Risk Factors—Risks Related
to Doing Business in Mainland China.”
PRC government’s significant authority in regulating our operations and its oversight and control over offerings conducted overseas by, and foreign investment
in, China-based issuers could significantly limit or completely hinder our ability to offer or continue to offer securities to investors. Implementation of industry-wide
regulations in this nature may cause the value of such
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securities to significantly decline or become worthless. For more details, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in Mainland
China—The PRC government’s significant oversight and discretion over our business operation could result in a material adverse change in our operations and the value
of our ADSs.”
Risks and uncertainties arising from the legal system in mainland China, including risks and uncertainties regarding the enforcement of laws and quickly
evolving rules and regulations in mainland China, could result in a material adverse change in our operations and the value of our ADSs. For more details, see “Item 3.
Key Information—D. Risk Factors—Risks Related to Doing Business in Mainland China—Uncertainties with respect to the PRC legal system could adversely affect
us.”
Cash Flows through Our Organization
iQIYI, Inc. is a holding company with no material operations of its own. We conduct our operations primarily through our mainland China subsidiaries, the
variable interest entities and their subsidiaries in mainland China. As a result, iQIYI, Inc.’s ability to pay dividends depends upon dividends paid by our mainland China
subsidiaries. If our existing mainland China subsidiaries or any newly formed ones incur debt on their own behalf in the future, the instruments governing their debt
may restrict their ability to pay dividends to us. In addition, current PRC regulations permit our mainland China subsidiaries to pay dividends to their respective
shareholders only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. Furthermore, each of our mainland
China subsidiaries and the variable interest entities is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such
reserve reaches 50% of its registered capital. Each of such entities in mainland China is also required to further set aside a portion of its after-tax profits to fund the
employee welfare fund, although the amount to be set aside, if any, is determined at the discretion of its board of directors. These reserves are not distributable as cash
dividends. For more details, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Holding Company Structure.” Our
subsidiaries’ ability to distribute dividends is based upon their distributable earnings.
We have established stringent controls and procedures for cash flows within our organization. Each transfer of cash between our Cayman Islands holding
company and a subsidiary, the variable interest entities or the subsidiaries of the variable interest entities is subject to internal approval. The cash inflows of the Cayman
Islands holding company were primarily generated from the proceeds we received from our public offerings of ordinary shares, our offerings of convertible senior notes
and other financing activities. For the years ended December 31, 2020, 2021 and 2022, the Cayman Islands holding company provided capital contributions of
RMB5,074.0 million, RMB3,573.0 million and RMB2,314.5 million (US$335.6 million), respectively, to our subsidiaries. For the years ended December 31, 2020,
2021 and 2022, the Cayman Islands holding company provided loans of RMB9,556.6 million, RMB7,395.4 million and RMB3,577.6 million (US$518.7 million),
respectively, to our subsidiaries, and received repayments of RMB6,409.4 million, RMB11,175.5 million and RMB3,398.5 million (US$492.7 million), respectively. For
the years ended December 31, 2020, 2021 and 2022, the variable interest entities received nil, nil and nil as loans provided by the Cayman Islands holding company,
respectively, and repaid RMB90.5 million, nil and nil, respectively. For the years ended December 31, 2020, 2021 and 2022, no assets other than cash were transferred
between the Cayman Islands holding company and a subsidiary, a variable interest entity or its subsidiary, no subsidiaries paid dividends or made other distributions to
the holding company, and no dividends or distributions were paid or made to U.S. investors. For the years ended December 31, 2020, 2021 and 2022, our subsidiaries
provided capital contributions of nil, nil and nil, respectively, to the variable interest entities. For the years ended December 31, 2020, 2021 and 2022, no assets other
than the above cash transactions were transferred between our subsidiaries and the variable interest entities. We currently intend to retain most, if not all, of our available
funds and any future earnings to operate and expand our business. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—
Dividend Policy.” However, if our mainland China subsidiaries declare and distribute profits to us, such payments will be subject to withholding tax, which will increase
our tax liability and reduce the amount of cash available to our company. For example, IQIYI Film Group HK Limited, which directly owns our mainland China
subsidiaries, Beijing iQIYI New Media Science and Technology Co., Ltd., or iQIYI New Media, is incorporated in Hong Kong. For the potential distributable profits to
be distributed to IQIYI Film Group HK Limited, the deferred tax liabilities will be accrued at a 5% withholding tax rate. However, if IQIYI Film Group HK Limited is
not considered to be the beneficial owner of the dividends paid to it by iQIYI New Media under the tax circulars promulgated in February and October 2009, such
dividends would be subject to withholding tax at a rate of 10%. For more information on related risks, please see “Item 3. Key Information—D. Risk Factors—Risks
Related to Doing Business in Mainland China—We may rely on dividends and other distributions on equity paid by our mainland China subsidiaries to fund any cash
and financing requirements we may have, and any limitation on the ability of our mainland China subsidiaries to make payments to us and any tax we are required to pay
could have a material and adverse effect on our ability to conduct our business.” For mainland China and United States federal income tax considerations in connection
with an investment in our ADSs, see “Item 10. Additional Information—E. Taxation.”
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For details of the financial position, cash flows and results of operations of the variable interest entities, see “Item 3. Key Information—Financial Information
Related to the Variable Interest Entities.” We plan to continue to determine the amount of service fee and payment method with the variable interest entities and their
shareholders based on the working capital needs of the variable interest entities, and settle fees under the contractual arrangements accordingly in the future.
In addition, our mainland China subsidiaries, the variable interest entities and their subsidiaries generate their revenue primarily in Renminbi, which is not freely
convertible into other currencies. As a result, any restriction on currency exchange may limit the ability of our mainland China subsidiaries to pay dividends to us. For
more details, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in Mainland China—PRC regulation of loans to and direct investment in
mainland China entities by offshore holding companies and governmental control of currency conversion may delay or prevent us to make loans to or make additional
capital contributions to our mainland China subsidiaries and the variable interest entities, which could materially and adversely affect our liquidity and our ability to
fund and expand our business.”
Permissions Required from the PRC Authorities for Our Operations
We conduct our business primarily through our subsidiaries and the variable interest entities in mainland China. Our operations in mainland China are governed
by PRC laws and regulations. As of the date of this annual report, our mainland China subsidiaries, variable interest entities and their subsidiaries have obtained the
requisite licenses and permits from the PRC government authorities that are material for the business operations of our holding company, the variable interest entities in
mainland China, including, among others, the Value-added Telecommunications Business Operation License for information services via internet, or ICP License, the
Permit for Internet Audio-video Program Service, the Network Culture Business Permit, the Permit to Produce or Operate Radio and Television Programs, and the
Permit for Internet Drug Information Service. Given the uncertainties of interpretation and implementation of relevant laws and regulations and the enforcement practice
by relevant government authorities, we may be required to obtain additional licenses, permits, filings or approvals for the functions and services of our platform in the
future, and may not be able to maintain or renew our current licenses, permits, filings or approvals. For more detailed information, see “Item 3. Key Information—D.
Risk Factors—Risks Related to Our Business and Industry—Any lack of requisite permits for any of our internet video and other content or any of our business may
expose us to regulatory sanctions.”
Furthermore, under current PRC laws, regulations and regulatory rules, we, our mainland China subsidiaries and the variable interest entities may be required to
obtain permissions from the China Securities Regulatory Commission, or the CSRC, and may be required to go through cybersecurity review by the Cyberspace
Administration of China, or the CAC, in connection with any future offering and listing in an overseas market. As of the date of this annual report, we have not been
subject to any cybersecurity review made by the CAC.
6
Table of Contents
Permissions Required from the PRC Authorities for Overseas Financing Activities
On February 17, 2023, the CSRC published the Interim Administrative Measures on Overseas Securities Offering and Listing by the Domestic Enterprises, or the
Overseas Listing Measures, which will become effective on March 31, 2023. Under the Overseas Listing Measures, a filing-based regulatory system will be applied to
“indirect overseas offerings and listings” of PRC domestic companies, which refers to securities offerings and listings in an overseas market made under the name of an
offshore entity but based on the underlying equity, assets, earnings or other similar rights of a domestic company that operates its main business domestically in the
PRC. The Overseas Listing Measures state that, any overseas offering of securities, including issuance of shares, convertible notes and other similar securities, by a PRC
domestic company, and listing by a PRC domestic company in an overseas market, shall be subject to filing requirement within three business days after the completion
of such offering or listing. In connection with the Overseas Listing Measures, on February 17, 2023 the CSRC also published the Notice on the Administrative
Arrangements for the Filing of Overseas Securities Offering and Listing by the Domestic Enterprises, or the Notice on Overseas Listing Measures. According to the
Notice on Overseas Listing Measures, issuers that have already been listed in an overseas market by March 31, 2023, the date on which the Overseas Listing Measures
will become effective, such as our company, are not required to make any immediate filing. However, such issuers will be required to comply with the filing
requirements under Overseas Listing Measures if and when they pursue any future securities offerings and listings outside of mainland china, including but not limited
to follow-on offerings, secondary listings and going private transactions. If we fail to obtain required approval or complete other review or filing procedures, under the
Overseas Listing Measures or otherwise, for any future securities offerings and listings outside of mainland China, including but not limited to follow-on offerings,
secondary listings and going private transactions, we may face sanctions by the CSRC or other PRC regulatory authorities, which may include fines and penalties on our
operations in mainland China, limitations on our operating privileges in mainland China, restrictions on or prohibition of the payments or remittance of dividends by our
subsidiaries in mainland China, restrictions on or delays to our future financing transactions offshore, or other actions that could have a material and adverse effect on
our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our ADSs.
For more detailed information, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in Mainland China—The approval of or the
filing with the CSRC or other PRC government authorities may be required in connection with our future offshore listings and capital raising activities under PRC law,
and, if required, we cannot predict whether or for how long we will be able to obtain such approval or filing” and “Item 3. Key Information—D. Risk Factors—Risks
Related to Our Business and Industry—Our business is subject to complex and evolving Chinese and international laws and regulations regarding cybersecurity,
information security, privacy and data protection. Many of these laws and regulations are subject to change and uncertain interpretation, and any failure or perceived
failure to comply with these laws and regulations could result in claims, changes to our business practices, negative publicity, legal proceedings, increased cost of
operations, or declines in user growth or engagement, or otherwise harm our business.”
Selected Consolidated Financial Data
The following selected consolidated statements of comprehensive loss data for the years ended December 31, 2020, 2021 and 2022, selected consolidated
balance sheet data as of December 31, 2021 and 2022 and selected consolidated cash flows data for the years ended December 31, 2020, 2021 and 2022 have been
derived from our audited consolidated financial statements included in this annual report beginning on page F-2. The following selected consolidated statements of
comprehensive loss data for the years ended December 31, 2018 and 2019, selected consolidated balance sheet data as of December 31, 2018, 2019 and 2020 and
selected consolidated cash flows data for the years ended December 31, 2018 and 2019 have been derived from our audited consolidated financial statements not
included in this annual report. Our historical results for any period are not necessarily indicative of results to be expected for any future period.
The selected consolidated financial data should be read in conjunction with, and are qualified in their entirety by reference to, our audited consolidated financial
statements and related notes and “Item 5. Operating and Financial Review and Prospects” below. Our consolidated financial statements are prepared and presented in
accordance with U.S. GAAP. Despite the lack of equity ownership, our Cayman Island holding company is considered the primary beneficiary of the variable interest
entities and consolidates the variable interest entities and their subsidiaries as required by ASC topic 810,Consolidation. Accordingly, we treat the variable
7
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interest entities as our consolidated entities under U.S. GAAP and we consolidate the financial results of the variable interest entities in our consolidated financial
statements in accordance with U.S. GAAP.
(2)
(2)
(2)
Selected Consolidated Statements of
Comprehensive Loss Data:
Total revenues
Operating costs and expenses
Cost of revenues
Selling, general and administrative
Research and development
Total operating costs and expenses
Operating (loss)/income
Total other expense, net
Loss before income taxes
Income tax expense
Net loss
Less: Net income attributed to non-controlling
interests
Accretion of redeemable convertible preferred
shares
Accretion of redeemable noncontrolling
interests
Net loss attributable to ordinary
shareholders
Net loss per Class A and Class B ordinary
share
Basic
Diluted
Net loss per ADS:
Basic
Diluted
Shares used in net loss per Class A and
Class B ordinary share computation
Basic
Diluted
(1)
2018
RMB
2019
RMB
For the year ended December 31,
2020
RMB
2021
RMB
2022
RMB
US$
(in thousands, except for share and per share data)
24,989,116
28,993,658
29,707,215
30,554,359
28,997,548
4,204,249
(27,132,811)
(4,167,889)
(1,994,652)
(33,295,352)
(8,306,236)
(676,194)
(8,982,430)
(78,801)
(9,061,231)
(30,348,342)
(5,236,007)
(2,667,146)
(38,251,495)
(9,257,837)
(967,050)
(10,224,887)
(51,852)
(10,276,739)
(27,884,395)
(5,187,835)
(2,675,494)
(35,747,724)
(6,040,509)
(943,368)
(6,983,877)
(23,276)
(7,007,153)
(27,513,497)
(4,725,142)
(2,794,927)
(35,033,566)
(4,479,207)
(1,532,781)
(6,011,988)
(96,545)
(6,108,533)
(22,319,315)
(3,466,579)
(1,899,233)
(27,685,127)
1,312,421
(1,346,197)
(33,776)
(84,000)
(117,776)
(3,235,996)
(502,607)
(275,363)
(4,013,966)
190,283
(195,180)
(4,897)
(12,179)
(17,076)
48,545
46,590
31,208
61,051
18,436
2,673
(298,990)
—
—
—
—
(1,542)
(7,087)
(20,336)
—
—
—
—
(9,408,766)
(10,324,871)
(7,045,448)
(6,189,920)
(136,212)
(19,749)
(2.43)
(2.43)
(17.01)
(17.01)
(2.02)
(2.02)
(14.14)
(14.14)
(1.36)
(1.36)
(9.52)
(9.52)
(1.11)
(1.11)
(7.77)
(7.77)
(0.02)
(0.02)
(0.16)
(0.16)
(0.00)
(0.00)
(0.02)
(0.02)
3,867,931,786
3,867,931,786
5,104,882,400
5,104,882,400
5,176,180,057
5,176,180,057
5,570,736,706
5,570,736,706
5,988,021,425
5,988,021,425
5,988,021,425
5,988,021,425
(1)Our ordinary shares are comprised of Class A ordinary shares and Class B ordinary shares. Each holder of Class A ordinary shares is entitled to one vote per share and each holder of Class B
ordinary shares is entitled to ten votes per share on all matters submitted to them for a vote. Class B ordinary shares are convertible at any time by the holder thereof into Class A ordinary shares on a
one-for-one basis. As holders of Class A and Class B ordinary shares have the same dividend rights and the same participation rights in our undistributed earnings, the basic and diluted loss per Class
A ordinary share and Class B ordinary share are the same for all the periods presented during which there were two classes of ordinary shares.
(2)Share-based compensation expenses were allocated in operating costs and expenses as follows:
Selected Consolidated Statements of
Comprehensive Loss Data:
Cost of revenues
Selling, general and administrative
Research and development
Total
2018
RMB
2019
RMB
2020
RMB
2021
RMB
2022
RMB
US$
For the year ended December 31,
(in thousands)
83,351
368,598
104,262
556,211
171,053
675,278
238,189
1,084,520
201,970
851,416
316,709
1,370,095
173,263
718,377
327,523
1,219,163
147,045
425,209
239,187
811,441
21,320
61,650
34,679
117,649
8
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Selected Consolidated Balance Sheet Data:
Cash and cash equivalents
Restricted cash
Short-term investments
Total current assets
Total assets
Total current liabilities
Total liabilities
Total mezzanine equity
Total shareholders’ equity
(1)(2)
(1)
(2)
(1)
2018
RMB
2019
RMB
As of December 31,
2020
RMB
2021
RMB
(in thousands)
2022
RMB
US$
4,586,405
2,174,042
6,061,832
19,853,443
44,759,698
19,812,356
26,604,135
—
18,155,563
5,934,742
974,932
4,579,313
20,272,838
44,792,550
20,173,166
35,077,618
101,542
9,613,390
10,915,282
25,230
3,358,174
22,290,424
48,185,429
24,854,578
38,741,131
108,629
9,335,669
2,997,212
77,652
1,348,255
11,524,117
42,472,165
22,476,470
36,799,052
397,385
5,275,728
7,097,938
13,618
818,265
13,785,635
46,048,349
28,130,018
39,704,910
—
6,343,439
1,029,104
1,974
118,637
1,998,729
6,676,383
4,078,469
5,756,671
—
919,712
Note:
(1)We adopted Accounting Standards Update (“ASU”) No. 2016-02: Leases on January 1, 2019 using the modified retrospective transition method. Right-of-use assets (“ROU assets”) and lease
liabilities (including current and non-current) for operating leases are presented on the face of the consolidated balance sheets as of December 31, 2019, 2020, 2021 and 2022, while the consolidated
balance sheets data as of December 31, 2018 has been prepared in accordance with ASC topic 840, Accounting for Leases (“ASC 840”). For further information, see Note 12 to our consolidated
financial statements included elsewhere in this annual report.
We adopted ASU 2019-02, Improvements to Accounting for Costs of Films and License Agreements for Program Materials (“ASU 2019-02”) on January 1, 2020, using a prospective
transition method, which includes the following major changes from previous legacy GAAP that are applicable to us:
•The content distinction for capitalization of production costs of an episodic television series and production costs of films is removed;
•We are required to test films and license agreements for program material for impairment at a film group level when the film or license agreements are
predominantly monetized with other films and license agreements;
•We shall assess estimates of the use of a film in a film group and account for such changes prospectively; and
•Cash outflows for the costs incurred to obtain rights for both produced and licensed content are required to be reported as operating cash outflows in the
statement of cash flows.
For further information, see Notes 2, 7 and 9 to our consolidated financial statements included elsewhere in this annual report.
(2)We adopted ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”) on January 1, 2022, using a modified retrospective transition
method. Upon the adoption of ASU 2020-06, all of the proceeds received from the issuance of the existing notes should be recorded as a liability on the balance sheet in accordance with ASC 470-20.
The difference between the principal amount of each of the existing notes and net proceeds from the issuance is considered debt discount and is amortized at their respective effective interest rates to
accrete the carrying value of the existing notes to its face value on the respective put dates of the existing notes. For further information, see Note 14 to our consolidated financial statements included
elsewhere in this annual report.
9
Table of Contents
The following table presents our selected consolidated cash flows data for the years indicated.
Selected Consolidated Cash Flows Data:
Net cash provided by/(used for) operating
activities
Net cash (used for)/provided by investing
activities
Net cash provided by/(used for) financing
activities
Effect of exchange rate changes on cash, cash
equivalents and restricted cash
Net increase/(decrease) in cash, cash
equivalents and restricted cash
Cash, cash equivalents and restricted cash at the
beginning of the year
Cash, cash equivalents and restricted cash at the
end of the year
2018
RMB
2019
RMB
For the year ended December 31,
2021
RMB
2020
RMB
(in thousands)
2022
RMB
US$
2,884,186
3,906,227
(5,411,071)
(5,951,847)
(70,569)
(10,232)
(20,949,094)
(11,749,571)
159,296
1,262,350
265,980
38,564
23,474,959
7,880,306
9,373,906
(2,959,455)
4,468,863
647,925
617,386
112,265
(91,293)
(216,696)
122,418
17,748
6,027,437
149,227
4,030,838
(7,865,648)
4,786,692
694,005
733,010
6,760,447
6,909,674
10,940,512
3,074,864
445,813
6,760,447
6,909,674
10,940,512
3,074,864
7,861,556
1,139,818
Financial Information Related to the Variable Interest Entities
The following tables present the condensed consolidating schedule of financial information for iQIYI, Inc., the primary beneficiary of the variable interest
entities under U.S. GAAP, the variable interest entities and other entities as of the dates presented.
•“iQIYI, Inc.” is our holding company in the Cayman Islands, and the primary beneficiary of the variable interest entities including, but not limited to, Beijing
iQIYI, Shanghai iQIYI and Shanghai Zhong Yuan;
•“Variable interest entities and their subsidiaries” refer to the sum of Beijing iQIYI, Shanghai iQIYI, Shanghai Zhong Yuan, iQIYI Pictures, Intelligent
Entertainment and their respective subsidiaries;
•“Subsidiaries” refer to the sum of our wholly-owned subsidiaries, which mainly include but not limited to Beijing QIYI Century, iQIYI New Media, Tianjin
iQIYI Network & Technology Co., Ltd., Shanghai iQIYI Network & Technology Co., Ltd., Beijing iQIYI Interactive Technology Co., Ltd., Shanghai iQIYI
New Media Science & Technology Co., Ltd., and Hainan iQIYI Information Technology Co., Ltd.
10
Table of Contents
Selected Condensed Consolidating Statements of Comprehensive Loss Information
Variable
interest
entities and
their
subsidiaries
iQIYI, Inc.
2020
Subsidiaries
RMB
RMB
RMB
For the year ended December 31,
2021
Consolidate
d
totals
iQIYI, Inc.
Variable
interest
entities and
their
subsidiaries
RMB
RMB
RMB
Eliminating
adjustments
RMB
Eliminating
adjustments
RMB
Subsidiaries
RMB
(in thousands)
2022
Consolidate
d totals
iQIYI, Inc.
Variable
interest
entities and
their
subsidiaries
RMB
RMB
RMB
Subsidiaries
RMB
Eliminating
adjustments
RMB
Consolidate
d
totals
RMB
—
27,412,800
9,640,759
(7,346,344)
29,707,215
—
28,947,480
10,721,956
(9,115,077)
30,554,359
—
26,966,013
9,948,967
(7,917,432)
28,997,548
(1,388,260)
(7,038,361)
—
—
(1,360,562)
(4,710,321)
1,388,260
6,102,091
—
(7,007,153)
(1,733,264)
(6,169,584)
—
—
(1,688,711)
(3,520,528)
1,733,264
5,270,290
— 329,881
(6,108,533)
(136,212)
—
334,414
—
(294,116)
(329,881)
(21,862)
—
(117,776)
Total revenues
Share of losses of variable
interest entities and their
subsidiaries
Net loss
11
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Selected Condensed Consolidating Balance Sheets Information
2021
2022
As of December 31,
Variable interest
entities and their
subsidiaries
RMB
iQIYI, Inc.
RMB
Subsidiaries
RMB
Eliminating
adjustments
RMB
Consolidated
totals
RMB
iQIYI, Inc.
RMB
Variable interest
entities and their
subsidiaries
RMB
Subsidiaries
RMB
Eliminating
adjustments
RMB
Consolidated
totals
RMB
ASSETS
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Licensed copyrights, net
Prepayments and other assets
Total current assets
Non-current assets:
Fixed assets, net
Long-term investments
Licensed copyrights, net
Produced content, net
Operating lease assets
Goodwill
Others
Total non-current assets
(1)
Amounts due from the entities within our company
Total assets
LIABILITIES
Third-party liabilities
Current liabilities:
Accounts and notes payable
Customer advances and deferred revenue
Short-term loans
Convertible senior notes, current portion
Operating lease liabilities, current portion
Accrued expenses and other liabilities
Total current liabilities
Non-current liabilities:
Convertible senior notes
Operating lease liabilities
Other non-current liabilities
Total non-current liabilities
Amounts due to the entities within the Company
(1)
Total liabilities
Redeemable noncontrolling interests
Shareholders’ equity/(deficit):
Noncontrolling interests
Total shareholders’ equity/(deficit)
Total liabilities, redeemable noncontrolling interests
and
shareholders’ equity/(deficit)
(2)
1,615,953
—
—
—
12,350
1,628,303
—
—
—
—
—
—
—
—
16,285,294
17,913,597
—
—
—
—
—
70,823
70,823
12,652,172
—
3,003
12,655,175
—
12,725,998
—
950,267
595,754
2,613,546
669,672
3,027,691
7,856,930
430,992
752,501
134,228
261,517
459,646
2,038,884
726,115
1,987,678
2,288,848
10,425,514
697,965
2,412,989
919,713
19,458,822
—
27,315,752
618,669
1,047,477
4,969,194
525,564
209,332
1,475,357
2,643,633
11,489,226
—
13,528,110
5,068,907
3,370,582
2,292,899
—
108,059
3,101,273
13,941,720
—
579,844
339,238
919,082
20,835,196
35,695,998
397,385
3,827,553
113,927
1,824,875
—
63,482
2,634,090
8,463,927
—
45,893
702,432
748,325
10,591,824
19,804,076
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(16,285,294)
(16,285,294)
—
—
—
—
—
—
—
—
—
—
—
(31,427,020)
(31,427,020)
—
(in thousands)
2,997,212
1,348,255
2,747,774
931,189
3,499,687
11,524,117
1,344,784
3,035,155
7,258,042
10,951,078
907,297
3,888,346
3,563,346
30,948,048
—
42,472,165
8,896,460
3,484,509
4,117,774
—
171,541
5,806,186
22,476,470
12,652,172
625,737
1,044,673
14,322,582
—
36,799,052
397,385
4,334,968
—
—
—
20,751
4,355,719
—
—
—
—
—
—
—
—
19,925,446
24,281,165
—
—
—
8,305,447
—
156,807
8,462,254
9,568,279
—
—
9,568,279
—
18,030,533
—
1,882,877
529,411
2,316,961
527,792
2,366,445
7,623,486
880,093
288,854
85,714
218,266
333,503
1,806,430
—
—
—
—
—
649,690
1,941,014
1,952,497
12,534,227
578,937
2,350,790
712,697
20,719,852
—
28,343,338
455,031
512,630
4,888,132
467,677
95,034
1,475,357
3,649,001
11,542,862
—
—
—
—
—
—
—
—
— (19,925,446)
13,349,292 (19,925,446)
3,315,976
4,125,789
2,381,846
—
95,603
2,315,572
12,234,786
—
502,687
1,247,571
1,750,258
22,808,971
36,794,015
—
2,677,440
106,321
965,792
—
7,914
3,675,511
7,432,978
—
—
—
—
—
—
—
—
5,884
250,471
256,355
—
—
—
—
11,963,474 (34,772,445)
19,652,807 (34,772,445)
—
—
7,097,938
818,265
2,402,675
746,058
2,720,699
13,785,635
1,104,721
2,453,644
6,840,629
13,001,904
673,971
3,826,147
4,361,698
32,262,714
—
46,048,349
5,993,416
4,232,110
3,347,638
8,305,447
103,517
6,147,890
28,130,018
9,568,279
508,571
1,498,042
11,574,892
—
39,704,910
—
—
5,187,599
113,334
(8,890,965)
(25,205)
(6,250,761)
—
15,141,726
88,129
5,187,599
—
6,250,632
125,135
(8,575,812)
(32,383)
(6,271,187)
—
14,846,999
92,807
6,250,632
5,187,599
(8,380,246)
(6,275,966)
15,141,726
5,673,113
6,250,632
(8,450,677)
(6,303,515)
14,846,999
6,343,439
Note:
(1)Represents the elimination of intercompany balances among iQIYI, Inc., our subsidiaries, and the variable interest entities and their subsidiaries. The short-term loans and long-term loans provided
to the variable interest entities and their subsidiaries were RMB7,000.0 million and RMB1,274.5 million, respectively, as of December 31, 2021, and RMB7,000.0 million (US$1,014.9 million) and
RMB1,381.8
million (US$200.3 million), respectively, as of December 31, 2022.
(2)The loans provided to the nominee shareholders were RMB177.0 million and RMB177.0 million (US$25.7 million) as of December 31, 2021 and 2022, respectively, which will mature from 2027
to 2034. The loans provided to the nominee shareholders were to fund the capitalization of the VIEs for which the Company does not intend to seek repayment. The term of all such loans provided to
the nominee shareholders has historically been extended prior to their respective original maturity dates, and we will continue to extend the term of all outstanding loans before they become due.
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Selected Condensed Consolidating Cash Flows Information
2020
Variable
interest
entities and
their
iQIYI, Inc.
subsidiaries Subsidiaries
RMB
RMB
RMB
For the year ended December 31,
2021
2022
Consolidate
d totals
iQIYI, Inc.
Variable
interest
entities and
their
subsidiaries
RMB
RMB
RMB
Eliminating
adjustments
RMB
Eliminating
adjustments
RMB
Subsidiaries
RMB
(in thousands)
Consolidate
d totals
iQIYI, Inc.
Variable
interest
entities and
their
subsidiaries
RMB
RMB
RMB
Subsidiaries
RMB
Eliminating
adjustments
RMB
Consolidate
d totals
RMB
(281,636)
980,975
(6,110,410)
—
(5,411,071)
(360,187)
160,904
(5,752,564)
—
(5,951,847)
(157,273)
275,422
(188,718)
—
(70,569)
(7,189,640)
(625,675)
267,913
7,706,698
159,296
483,685
(540,018)
1,344,550
(25,867)
1,262,350
(2,462,807)
547,231
396,174
1,785,382
265,980
9,804,491
(380,298)
7,656,411
(7,706,698)
9,373,906
(3,441,602)
515,423
(59,143)
25,867
(2,959,455)
5,307,603
79,733
866,909
(1,785,382)
4,468,863
Net cash (used
for)/provided by
operating activities
Net cash (used
for)/provided by
investing
(1)
activities
Net cash provided
by/(used for)
financing
(1)
activities
Note:
(1)For the years ended December 31, 2020, 2021 and 2022, the variable interest entities received nil, nil and nil as loans provided by iQIYI, Inc., respectively, and repaid RMB90.5 million, nil and nil,
respectively. For the years ended December 31, 2020, 2021 and 2022, no assets other than cash were transferred between iQIYI, Inc. and variable interest entities or their subsidiaries. For the years
ended December 31, 2020, 2021 and 2022, subsidiaries provided capital contributions of nil, nil and nil, respectively, to the variable interest entities. For the years ended December 31, 2020, 2021
and 2022, no assets other than the above cash transactions were transferred between subsidiaries and the variable interest entities.
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A.[RESERVED]
B.CAPITALIZATION AND INDEBTEDNESS
Not Applicable.
C.REASONS FOR THE OFFER AND USE OF PROCEEDS
Not Applicable.
D.RISK FACTORS
Summary of Risk Factors
An investment in our ADSs or Class A ordinary shares involves significant risks. Below is a summary of material risks we face, organized under relevant
headings. These risks are discussed more fully in Item 3. Key Information—D. Risk Factors.
Risks Related to Our Business and Industry
•We have incurred net losses since our inception and may continue to incur losses in the future;
•If we fail to anticipate user preferences and provide high-quality content, especially popular original content, in a cost-effective manner, we may not be able to
attract and retain users to remain competitive;
•If we fail to procure content from content providers upon terms acceptable to us, our business may be materially and adversely affected;
•If our efforts to retain members and attract new members are not successful, our business and results of operations will be materially and adversely affected;
•If we fail to retain existing or attract new advertising customers to advertise on our platform, maintain and increase their wallet share of advertising budget or if
we are unable to collect accounts receivable in a timely manner, our financial condition and results of operations may be materially and adversely affected;
•Our business is subject to complex and evolving Chinese and international laws and regulations regarding cybersecurity, information security, privacy and data
protection. Many of these laws and regulations are subject to change and uncertain interpretation, and any failure or perceived failure to comply with these laws
and regulations could result in claims, changes to our business practices, negative publicity, legal proceedings, increased cost of operations, or declines in user
growth or engagement, or otherwise harm our business;
•We operate in a capital intensive industry and require a significant amount of cash to fund our operations, content acquisitions and technology investments. If
we cannot obtain sufficient capital, our business, financial condition and prospects may be materially and adversely affected;
•We have substantial indebtedness and we may continue to incur substantial additional indebtedness in the future, which could adversely affect our financial
health and our ability to generate sufficient cash to satisfy our outstanding and future debt obligations on a timely manner. Deterioration of our cash flow position
could materially and adversely affect our ability to service our indebtedness and continue our operations;
•We have significant working capital requirements and have in the past experienced working capital deficits. If we experience such working capital deficits in
the future, our business, liquidity, financial condition and results of operations may be materially and adversely affected; and
•We may not have the ability to raise the funds necessary to settle redemption of our existing notes, or to repurchase such notes upon a fundamental change or on
certain specific dates, and our future debt may contain limitations on our ability to pay cash upon conversion or to repurchase the notes.
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Risks Related to Our Corporate Structure
•We are a Cayman Islands holding company with no equity ownership in the variable interest entities and we conduct our operations in mainland China through
(i) our mainland China subsidiaries and (ii) the variable interest entities with which we have maintained contractual arrangements and their subsidiaries. Investors
in our Class A ordinary shares or the ADSs thus are not purchasing equity interest in the variable interest entities in mainland China but instead are purchasing
equity interest in a Cayman Islands holding company. If the PRC government finds that the agreements that establish the structure for operating certain of our
operations in mainland China do not comply with PRC regulations relating to the relevant industries, or if these regulations or the interpretation of existing
regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations. Our holding company in the
Cayman Islands, the variable interest entities, and investors of our company face uncertainty about potential future actions by the PRC government that could
affect the enforceability of the contractual arrangements with the variable interest entities and, consequently, significantly affect the financial performance of the
variable interest entities and our company as a group;
•We rely on contractual arrangements with the variable interest entities and their shareholders for our business operations, which may not be as effective as direct
ownership in providing operational control; and
•Any failure by the variable interest entities or their shareholders to perform their obligations under our contractual arrangements with them would have a
material and adverse effect on our business.
Risks Related to Our Relationship with Baidu
•We have limited experience operating as a stand-alone public company;
•We may have conflicts of interest with Baidu and, because of Baidu’s controlling ownership interest in our company, we may not be able to resolve such
conflicts on terms favorable to us; and
•Our agreements with Baidu may be less favorable to us than similar agreements negotiated with unaffiliated third parties. In particular, our master business
cooperation agreement with Baidu limits the scope of business that we are allowed to conduct.
Risks Related to Doing Business in Mainland China
•The PCAOB had historically been unable to inspect our auditor in relation to their audit work performed for our financial statements and the inability of the
PCAOB to conduct inspections of our auditor in the past has deprived our investors with the benefits of such inspections;
•Our ADSs may be prohibited from trading in the United States under the HFCAA in the future if the PCAOB is unable to inspect or investigate completely
auditors located in China. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment;
•The approval of or the filing with the CSRC or other PRC government authorities may be required in connection with our future offshore listings and capital
raising activities under PRC law, and, if required, we cannot predict whether or for how long we will be able to obtain such approval or filing;
•Changes in mainland China’s economic, political or social conditions or government policies could have a material adverse effect on our business and
operations;
•Uncertainties with respect to the PRC legal system could adversely affect us; and
•The PRC government’s significant oversight and discretion over our business operation could result in a material adverse change in our operations and the value
of our ADSs.
Risks Related to our ADSs
•The trading price of our ADSs has been and is likely to continue to be volatile regardless of our operating performance;
•If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the market price for our ADSs and
trading volume could decline; and
•Techniques employed by short sellers may drive down the market price of our ADSs.
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Risks Related to Our Business and Industry
We have incurred net losses since our inception and may continue to incur losses in the future.
We have incurred net losses since our inception, including net losses in the amount of RMB7,007.2 million, RMB6,108.5 million and RMB117.8 million
(US$17.1 million) in 2020, 2021 and 2022, respectively. Our ability to achieve profitability is affected by various factors, many of which are beyond our control. For
example, our revenues depend on the number of subscribing members, ARM and advertising customers’ allocation of more budget to internet video streaming platforms.
In addition, our users’ willingness to pay and subscribe to our content depends on the quality and breadth of our content offerings and availability of alternative
entertainment content offerings. Producing high-quality, popular original content is costly and time-consuming and it will typically take a long period of time to realize
returns on investment, if at all. The quality and breadth of our content offerings may be compromised if inadequate spending is allocated to the content production due to
our cost control initiatives. As a result, we may not be able to continuously grow our subscribing member base, and our business and results of operations may be
negatively affected. The market prices for professionally produced content, especially popular TV series and movies, have increased significantly in mainland China
during the past few years. The production and procurement of content have historically accounted for the majority of our cost of revenues. In 2020, 2021 and 2022, we
incurred RMB27.9 billion, RMB27.5 billion and RMB22.3 billion (US$3.2 billion) in cost of revenues, respectively. We expect that our cost of revenues, as a
percentage of our total revenue, will continue to improve going forward benefiting from the improvement in operating efficiency, the content production infrastructure
we have developed, and the better supply and demand dynamic. However, in absolute amounts, our cost of revenues may increase in the foreseeable future as we are
committed to enhancing and diversifying our original content offerings and to supporting our overseas expansion. If we cannot successfully realize satisfactory returns
on our content investment and generate sufficient revenues, our financial condition and results of operations may be materially and adversely affected. We may again
incur net losses in the future as a result of our continued investments in content and technology. We may also incur net losses in the future due to changes in the
macroeconomic and regulatory environment, competitive dynamics and in the event of our inability to respond to these changes in a timely and effective manner.
We had an accumulated deficit of RMB46.5 billion (US$6.7 billion) as of December 31, 2022 and negative cash flow from operations of RMB70.6 million
(US$10.2 million) for the year ended December 31, 2022. As of December 31, 2022, we had cash, cash equivalents, restricted cash and short-term investments of
RMB7.9 billion (US$1.1 billion), unused credit lines of RMB1.6 billion (US$0.2 billion) and a working capital deficit (defined as total current assets deducted by total
current liabilities) of RMB14.3 billion (US$2.1 billion).
As disclosed in our consolidated financial statements as of December 31, 2021, there was substantial doubt regarding our ability to continue as a going concern
as we did not have sufficient funds to repurchase all or a significant portion of the outstanding 2025 Notes if redeemed by noteholders on April 1, 2023 without securing
additional financing.
We have implemented plans and improved our financial position by reducing discretionary capital expenditures and operational expenses (the “Plans”) and
secured additional financing. In March 2022, we issued ordinary shares for a total cash purchase price of US$285 million in a private placement transaction. In
December 2022, we issued US$500 million convertible senior notes due January 2028, or the PAG Notes, to PAGAC IV-1 (Cayman) Limited, PAG Pegasus Fund LP
and/or their affiliates, collectively referred to as PAG in this annual report. In February 2023, we issued to PAG an additional US$50 million principal amount of the
PAG Notes upon its exercise to subscribe for additional notes in full. In January 2023, we completed a registered follow-on public offering and received net proceeds of
US$500 million in aggregate. In March 2023, we completed an offering of US$600 million in aggregate principal amount of 6.50% convertible senior notes due March
2028, or the 2028 Notes. Concurrently with and shortly after the offering of the 2028 Notes, we entered into separate individually and privately negotiated agreements
with certain holders of the 2026 Notes to repurchase US$340 million principal amount of such notes for cash. We generated positive operating cash flow in the second,
third and fourth quarters of 2022. As a result of the cash generated from operations, coupled with the Plans and fund raised from the above actions, the substantial doubt
regarding our ability to continue as a going concern has been resolved as of the date of this annual report. We intend to further strengthen our financial position and
generate cash from our operations by continuing to focus on improving operational efficiency.
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If we fail to anticipate user preferences and provide high-quality content, especially popular original content, in a cost-effective manner, we may not be able to
attract and retain users to remain competitive.
Our success depends on our ability to engage users on our platform. To attract and retain users and compete against our competitors, we must continue to offer
high-quality content, especially popular original content, in a cost-effective manner, to provide our users with a superior streaming entertainment experience. To this
end, we must continue to produce new original content and source new professionally produced or other video content in a cost-effective manner. Given that we operate
in a rapidly evolving industry, we need to anticipate user preferences and industry changes and respond to such changes in a timely and effective manner. If we fail to
cater to the needs and preferences of our users, control our costs in doing so or fail to deliver superior user experience, we may suffer from reduced user traffic, and our
business, financial condition and results of operations may be materially and adversely affected. Various phases of our original content production are outsourced to our
content production partners. If they fail to generate quality content satisfactory to our demands or provide services upon terms commercially acceptable to us, we may be
unable to provide high-quality original content offerings to our users.
We rely on our in-house team to generate creative ideas for original content and to supervise the original content origination and production process, and we
intend to continue to invest resources in content production. We face fierce competition for qualified personnel in a limited pool of high-quality creative talent. Our
competitors include well-capitalized companies that are capable of offering compensation packages more attractive to talents. If we are not able to compete effectively
for talents or attract and retain top talents at reasonable costs, our original content production capabilities would be negatively impacted. Any deterioration in our in-
house content production capability, inability to attract creative talents at reasonable costs or losses in personnel may materially and adversely affect our business and
operating results. If we are unable to offer popular original content that meets user tastes and preferences in a cost-effective manner, our user experience may be
adversely affected, we may suffer from reduced user traffic and our business, financial condition and results of operations may be materially and adversely affected.
If we fail to procure content from content providers upon terms acceptable to us, our business may be materially and adversely affected.
Our ability to provide our users with high-quality, popular content depends in part on our ability to procure content from studios and other content providers, as
well as distributors and other licensors of content. We typically enter into license and sub-license agreements with third-party content providers and other IP holders on
various terms and conditions. If content providers and other rights holders are no longer willing or able to license content to us upon terms acceptable to us, or, in the
case where we obtained the right to distribute content through sub-license agreements, and subsequently the licensors lose their right to sub-license such content to us,
our ability to offer content to our users will be adversely affected and we may have to incur additional costs. For content sub-licensed and currently being showcased on
our platform, we may be forced to remove such content as a result of our licensor’s disputes with the original content provider, which may result in loss of user traffic
and revenues. If we fail to remove such content in a timely manner, we may become the subject of adverse legal actions from the original content provider. As
competition intensifies, we may see the cost of licensed content increase. As we seek to differentiate our service, we are increasingly focused on securing a broader
range of rights other than merely distribution and online streaming rights. We also acquire other forms of copyright such as rights to adapt the original content into
online games, films, drama series, animation and other entertainment formats. We focus on offering an overall mix of content that appeals to our users in a cost-efficient
manner. If we do not maintain a compelling mix of content, our user acquisition and retention may be adversely affected.
If our efforts to retain members and attract new members are not successful, our business and results of operations will be materially and adversely affected.
Our ability to continue to retain members and attract new members will depend in part on our ability to consistently provide our members with compelling
content choices, user experience, as well as a quality experience for selecting and viewing video content. Furthermore, the relative service levels, content offerings,
pricing and related features of competitors may adversely impact our ability to attract and retain members. If we introduce new or adjust existing features, adjust pricing
or service offerings, or change the mix of content in a manner that is not favorably received by our members, we may not be able to attract and retain members. Many of
our members originate from organic growth. If our efforts to satisfy our existing members are not successful, we may not be able to attract new members, and as a result,
our ability to maintain and grow our membership revenues will be adversely affected. Members may cancel or decide not to renew our service for many reasons,
including a perception that they do not use the service sufficiently, payment inconveniences, the need to cut household expenses, availability of content is unsatisfactory,
competitive services provide a better value or experience and customer service issues are not satisfactorily resolved. In addition, we use various marketing and sales
strategies to enroll members, including but not limited to discounts and bundled sales, we may not be able to retain those members if our promotion strategy fails or
discontinue. We are also exploring various opportunities and marketing strategies to better monetize our membership base, including launching movies exclusively on
our platform in premium video-on-demand (PVOD) mode. Such initiatives may not be well received by our members and may have a negative impact on our reputation
and results of operations. Additionally, if we are unable to successfully compete with current and new competitors in both retaining our existing members and
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attracting new members, our business will be adversely affected. Further, if an excessive number of members cancel or opt not to renew our service, we may be required
to incur significantly higher marketing expenditures to attract new members than we currently anticipate. In addition, due to COVID-19’s restraining effect on content
production, which resulted in an industry-wide weaker supply of high-quality content, particularly in the vertical of cinema movies, we experienced fluctuations in our
subscribing member base in 2021 and 2022. To the extent quarantine restrictions are re-imposed in the future in areas in which we, our content partners or other content
sources are operating, our content release schedules may be impacted again and our membership services could be negatively affected as a result. Further, content
production is heavily regulated in mainland China. If the regulatory or administrative authorities impose new requirements relating to, among other things, content
supervision and approval, we may not be able to offer a variety of content offerings in time, or at all, and we cannot assure you that we will continue to maintain our
membership base in the future.
If we fail to retain existing or attract new advertising customers to advertise on our platform, maintain and increase their wallet share of advertising budget or if we
are unable to collect accounts receivable in a timely manner, our financial condition and results of operations may be materially and adversely affected.
We generated a substantial part of our revenues from online advertising. If our advertising customers find that they can generate better returns elsewhere, or if
our competitors provide better online advertising services to suit our advertising customers’ goals, we may lose our advertising customers. In addition, third parties may
develop and use certain technologies to block the display, and our members are able to skip the viewing, of our advertising customers’ advertisements on our platform,
which may in turn cause us to lose advertising customers and adversely affect our results of operations. If our advertising customers determine that their marketing
expenditures on internet video streaming platforms do not generate expected returns, they may allocate a portion or all of their advertising budgets to other advertising
channels such as television, newspapers and magazines or other internet channels such as search engines, news aggregation platforms, short-form video platforms, e-
commerce platforms and social media platforms, and reduce or discontinue business with us. Since most of our advertising customers are not bound by long-term
contracts, they may lessen or discontinue advertising arrangements with us easily without incurring material liabilities. Failure to retain existing advertising customers,
or maintain their level of budget allocated to us, or attract new advertising customers to our platform may materially and adversely affect our financial conditions and
results of operations. Our online advertising revenue witnessed year-on-year deceases of 17.5% in 2020, increases of 3.6% in 2021, and decreases of 24.6% in 2022,
respectively. The declines primarily resulted from challenging macroeconomic environment, tightened advertising budget of advertisers, intensified competition in the
advertising industry, as well as heightened regulatory scrutiny in mainland China. We cannot assure you that our online advertising business will not experience growth
deceleration or witness declines again in the future.
Our brand advertising customers typically enter into online advertising agreements with us through various third-party advertising agencies. In mainland China’s
advertising industry, advertising agencies typically have good relationships and maintain longer periods of cooperation with the brand advertising customers they
represent. Therefore, even if we have direct contact with advertising customers, we typically enter into advertising contracts with third-party advertising agencies, which
represent advertising customers. As a result, we rely on third-party advertising agencies for sales to, and collection of payment from, our brand advertisers. In
consideration for the third-party advertising agencies’ services, we offer them rebates based on the volume of business they bring to us. The financial soundness of our
advertising customers and advertising agencies may affect our collection of accounts receivable. We make a credit assessment of our advertising customers and
advertising agencies to evaluate the collectability of the advertising service fees before entering into an advertising contract. However, we cannot assure you that we are
or will be able to accurately assess the creditworthiness of each advertising customer or advertising agency, and any inability of advertising customers or advertising
agencies to pay us in a timely manner may adversely affect our liquidity and cash flows. In addition, there has been some consolidation among mainland China’s
advertising agencies. If this trend continues, a small number of large advertising agencies may have stronger bargaining power to demand higher rebate for advertising
agency services, which could reduce our online advertising revenue.
In addition, we do not have long-term cooperation agreements or exclusive arrangements with third-party advertising agencies and they may elect to direct
business opportunities to other advertising service providers, including our competitors. If we fail to retain and enhance the business relationships with third-party
advertising agencies, we may suffer from a loss of advertising customers and our financial condition and results of operations may be materially and adversely affected.
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Our business is subject to complex and evolving Chinese and international laws and regulations regarding cybersecurity, information security, privacy and data
protection. Many of these laws and regulations are subject to change and uncertain interpretation, and any failure or perceived failure to comply with these laws and
regulations could result in claims, changes to our business practices, negative publicity, legal proceedings, increased cost of operations, or declines in user growth
or engagement, or otherwise harm our business.
We are subject to complex and evolving statutory and regulatory requirements relating to cybersecurity, information security, privacy and data protection.
Regulatory authorities in mainland China have enhanced data protection and cybersecurity regulatory requirements. These laws continue to develop, and the PRC
government may adopt other rules and restrictions in the future. Non-compliance could result in penalties or other significant legal liabilities.
The PRC Cybersecurity Law, which became effective in June 2017, created China’s first national-level data protection framework for “network operators.” It is
relatively new and subject to interpretations by the regulator. It requires, among others, that network operators take security measures to protect the network from
unauthorized interference, damage and unauthorized access and prevent data from being divulged, stolen or tampered with. Network operators are also required to
collect and use personal information in compliance with the principles of legitimacy, properness and necessity, and strictly within the scope of authorization by the
subject of personal information unless otherwise prescribed by laws or regulations. Significant capital, managerial and human resources are required to comply with
legal requirements, enhance information security and address any issues caused by security failures.
In addition, numerous regulations, guidelines and other measures have been and are expected to be adopted under the PRC Cybersecurity Law. For example, the
PRC government promulgated the Measures for Cybersecurity Review in April 2020, which became effective in June 2020. Under these measures, critical information
infrastructure operators must pass a cybersecurity review when purchasing network products and services which do or may affect national security. On December 28,
2021, the CAC, together with certain other PRC governmental authorities, jointly released the Revised Cybersecurity Review Measures, which took effect on February
15, 2022. Pursuant to the Revised Cybersecurity Review Measures, operators of critical information infrastructure that intend to purchase network products and services
that affect or may affect national security must apply for a cybersecurity review. The cybersecurity review will evaluate, among others, the risk of critical information
infrastructure, core data, important data, or the risk of a large amount of personal information being influenced, controlled or maliciously used by foreign governments
after going public, and cyber information security risk. The Revised Cybersecurity Review Measures set out certain general factors which would be the focus in
assessing the national security risk during a cybersecurity review. However, as advised by our PRC counsel, the scope of network product or service or data processing
activities that will or may affect national security is still unclear, and the PRC government authorities may have wide discretion in the interpretation and enforcement of
these laws, rules and regulations. As of the date of this annual report, we have not been involved in any investigations or become subject to a cybersecurity review
initiated by the CAC, and we have not received any inquiry, notice, warning, sanctions in such respect or any regulatory objections to our listing status from the CAC.
On August 17, 2021, the PRC State Council promulgated the Regulations on Security Protection of Critical Information Infrastructure, which became effective
on September 1, 2021. Pursuant to such regulations, “critical information infrastructure” shall mean any important network facilities or information systems of important
industries or fields such as public communication and information service, energy, communications, water conservation, finance, public services, e-government affairs
and national defense science, and any other important network facilities or information systems which may endanger national security, people’s livelihood and public
interest in case of damage, function loss or data leakage. In addition, relevant administration departments of each critical industry and sector, or Protection Departments,
shall be responsible to formulate eligibility criteria and determine the critical information infrastructure operator in the respective industry or field. The operators shall
be informed about the final determination as to whether they are categorized as critical information infrastructure operators. As of the date hereof, no detailed rules or
implementation has been issued by any Protection Departments, and we have not been informed as a critical information infrastructure operator by any governmental
authorities. As this regulation is newly issued and the governmental authorities, including Protection Departments, may further formulate detailed rules or explanations
with respect to the interpretation and implementation of this regulation, the exact scope of “critical information infrastructure operators” under the current regulatory
regime remains unclear, and the PRC governmental authorities may have wide discretion in the interpretation and enforcement of these laws. Therefore, it is uncertain
whether we would be deemed as a critical information infrastructure operator under PRC law. It also remains uncertain whether the future regulatory changes would
impose additional restrictions on companies like us. If we are not able to comply with the cybersecurity and data privacy requirements in a timely manner, or at all, we
may be subject to government enforcement actions and investigations, fines, penalties, suspension of our non-compliant operations, or removal of our app, including
mobile and smart TV apps, from the relevant application stores, among other sanctions, which could materially and adversely affect our business and results of
operations. As of the date of this annual report, we have not been involved in any investigations on cybersecurity review made by the Cyberspace Administration of
China on such basis, and we have not received any inquiry, notice, warning, or sanctions in such respect.
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The PRC Personal Information Protection Law, or the PIPL, took effect in November 2021. The PIPL sets forth detailed rules on processing personal
information, clarifies the relevant rights of the individuals and the obligations of the personal information processors, and further strengthens the liabilities for illegal
process of personal information. In addition to other rules and principles of personal information processing, the PIPL specifically provides rules for processing sensitive
personal information. Sensitive personal information refers to personal information that, once leaked or illegally used, could easily lead to the infringement of human
dignity or harm to the personal or property safety of an individual, including biometric recognition, religious belief, specific identity, medical and health, financial
account, personal whereabouts and other information of an individual, as well as any personal information of a minor under the age of 14. Only where there is a specific
purpose and sufficient necessity, and under circumstances where strict protection measures are taken, may personal information processors process sensitive personal
information. A personal information processor shall inform the individual of the necessity of processing such sensitive personal information and the impact thereof on
the individual’s rights and interests. Some information we collect, such as location and mobile numbers, may be deemed to be sensitive personal information under the
PIPL. The PIPL also strengthens the supervision of automatic decision making to protect the rights of individuals to obtain fair transaction terms and the supervision of
mobile applications. As uncertainties remain regarding the interpretation and implementation of the PIPL, we cannot assure you that we will comply with the PIPL in all
respects, or that regulatory authorities will not order us to rectify or terminate our current practice of collecting and processing sensitive personal information. We may
also become subject to fines and other penalties which may have material adverse effect on our business, operations and financial condition.
On November 14, 2021, the CAC published a discussion draft of Regulations on the Administration of Cyber Data Security, or the Draft Measures for Internet
Data Security, for public comments, which provides that data processors conducting the following activities shall apply for cybersecurity review: (i) merger,
reorganization or division of internet platform operators that have acquired a large number of data resources related to national security, economic development or
public interests affects or may affect national security; (ii) listing abroad of data processors processing over one million users’ personal information; (iii) listing in Hong
Kong which affects or may affect national security; or (iv) other data processing activities that affect or may affect national security. The Draft Cyber Data Security
Regulations also provide that operators of large internet platforms that set up headquarters, operation centers or R&D centers overseas shall report to the national
cyberspace administration and competent authorities. In addition, the Draft Cyber Data Security Regulations also require that data processors processing important data
or going public overseas shall conduct an annual data security self-assessment or entrust a data security service institution to do so, and submit the data security
assessment report of the previous year to the local branch of the CAC before January 31 each year. As of the date of this annual report, this draft has not been formally
adopted. Substantial uncertainties exist with respect to the enactment timetable, final content, interpretation and implementation.
The PRC government authorities also further enhanced the supervision and regulation of cross-border data transmission. On July 7, 2022, the CAC promulgated
the Measures for the Security Assessment of Cross-border Data Transfer, which became effective on September 1, 2022. In accordance with such measures, data
processors will be subject to security assessment conducted by the CAC prior to any cross-border transfer of data if the transfer involves (i) important data; (ii) personal
information transferred overseas by operators of critical information infrastructure or a data processor that has processed personal data of more than one million persons;
(iii) personal information transferred overseas by a data processor which has already provided personal data of 100,000 persons or sensitive personal data of 10,000
persons overseas since January 1 of the preceding year; or (iv) other circumstances as required by the CAC. In addition, any cross-border data transfer activities
conducted in violation of the Measures for the Security Assessment of Cross-border Data Transfer before the effectiveness of such measures are required to be rectified
within six months of the effectiveness date thereof. Since these measures are relatively new, there are still substantial uncertainties with respect to the interpretation and
implementation of these measures in practice and how they will affect our business operation.
In addition, internet information in mainland China is regulated from a national security standpoint. According to the PRC National Security Law, institutions
and mechanisms for national security review and administration will be established to conduct national security review on key technologies and IT products and services
that affect or may affect national security. The PRC Data Security Law took effect in September 2021 and provides for a security review procedure for the data activities
that may affect national security. It also introduces a data classification and hierarchical protection system based on the importance of data in economic and social
development, as well as the degree of harm it will cause to national security, public interests, or legitimate rights and interests of individuals or organizations when such
data is tampered with, destroyed, leaked, or illegally acquired or used. The appropriate level of protection measures is required to be taken for each respective category
of data. It is not clear under the Data Security Law what constitutes “important data” or “state critical data.” If we are deemed to collect “important data” or “state
critical data,” we may need to adopt internal reforms in order to comply with the Data Security Law.
While we take measures to comply with applicable data privacy and protection laws and regulations, we cannot guarantee the effectiveness of the measures
undertaken by us and business partners. The activities of third parties such as our customers and business partners are beyond our control. If our business partners violate
the PRC Cybersecurity Law and related laws and regulations,
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or fail to fully comply with the service agreements with us, or if any of our employees fails to comply with our internal control measures and misuses the information,
we may be subject to penalties. As part of the efforts by the Cyber Administration of China, MIIT and other regulators to enhance data protection, a wide number of
apps and companies have been notified to enhance data privacy protection as of the date of this annual report, including certain iQIYI apps. Although we have updated
the apps to comply with the requirements of the regulators to the best we can, we cannot guarantee you that we will not be subject to more similar rectification requests
from the governmental authorities or that we will fully comply with all applicable rules and regulations at all times. Any failure or perceived failure to comply with all
applicable data privacy and protection laws and regulations, or any failure or perceived failure of our business partners to do so, or any failure or perceived failure of our
employees to comply with our internal control measures, may prevent us from using or providing certain network products and services, result in fines and other
penalties such as suspension of our related business, closure of our website, mobile apps and smart TV apps and suspension of new downloads of our apps, as well as
subjecting us to negative publicity and legal proceedings or regulatory actions and discouraging current and potential users and customers from using our services, which
could have a material adverse effect on our business and results of operations.
As we gradually expand into overseas markets, we may be subject to laws and regulations of other countries regarding cybersecurity, information security,
privacy and data protection. We strive to comply with local laws and regulations in markets where we have operations. For example, the General Data Protection
Regulation, or the GDPR, of the European Union imposes obligations on companies regarding the handling of personal data and provides certain individual privacy
rights to persons whose data is stored. The GDPR requires companies to submit personal data breach notifications to designated European privacy regulator in each
country they have business operations, and includes significant penalties for non-compliance with the notification obligation as well as other requirements of the
regulation. For another instance, some countries are considering or have passed legislation implementing data protection requirements or requiring local storage and
processing of data or similar requirements, which, if adopted and implemented, could increase the cost and complexity of delivering our services. In addition, wherever
we operate, we could be subject to new laws or regulations or the interpretation and application of existing consumer and data protection laws or regulations. These new
laws, regulations and interpretations are often uncertain and in flux and may be inconsistent with our practices. We cannot guarantee that we will be able to maintain
compliance at all times, especially in light of the fact that laws and regulations on cybersecurity and data protection are evolving. Our launch of new products or services
or other actions that we may take may also subject us to additional laws, regulations, or other government scrutiny. Complying with these new or additional laws,
regulations and requirements could cause us to incur substantial costs or require us to change our business practices in a manner materially adverse to our business.
We operate in a capital intensive industry and require a significant amount of cash to fund our operations, content acquisitions and technology investments. If we
cannot obtain sufficient capital, our business, financial condition and prospects may be materially and adversely affected.
The operation of an internet video streaming platform requires significant and continuous investment in content and technology. Producing high-quality original
content is costly and time-consuming and it will typically take a long period of time to realize returns on investment, if at all. To date, we have financed our operations
primarily with net cash generated from financing activities such as placements of shares, convertible senior notes and asset-based securities, bank loans, the financial
support from Baidu, and the proceeds from our initial public offering and follow-on offering of our securities. In order to implement our growth strategies, we will incur
additional capital in the future to cover, among others, costs to produce and license content. We may need to obtain additional financing, including equity offerings or
debt financing, to fund the operation and expansion of business. Our ability to obtain additional financing in the future, however, is subject to a number of uncertainties,
including those relating to:
•our future business development, financial condition and results of operations;
•general market conditions for financing activities by companies in our industry;
•macro-economic and other conditions in mainland China and elsewhere; and
•our relationship with Baidu.
As a public company with a growing business, we expect to increasingly rely on net cash provided by operating activities, financing through capital markets and
commercial banks for our liquidity needs. If we fail to diversify our funding sources and obtain sufficient capital to meet our capital needs, we may not be able to
execute our growth strategies and our business, financial condition and prospects may be materially and adversely affected.
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We have substantial indebtedness and we may continue to incur substantial additional indebtedness in the future, which could adversely affect our financial health
and our ability to generate sufficient cash to satisfy our outstanding and future debt obligations on a timely manner. Deterioration of our cash flow position could
materially and adversely affect our ability to service our indebtedness and continue our operations.
We maintain a considerable level of indebtedness to finance our operations and business expansion. Historically, we have issued the 2023 Notes, 2025 Notes and
2026 Notes, which are senior, unsecured obligations of our company. Pursuant to the terms and conditions of these Notes, we are contractually obliged to repay principal
amounts of US$3.2 million, US$1,200.0 million and US$900.0 million to redeem the 2023 Notes, 2025 Notes and 2026 Notes upon their scheduled maturities in 2023,
2025 and 2026, respectively, assuming there is no conversion or early redemption of the Notes, the convertible senior note bondholders hold the Notes until their
respective maturity dates and our company elects to settle the Notes in full by cash, among others. If the 2025 Notes and 2026 Notes are redeemed early, we will need to
repay such principal amounts earlier than their respective scheduled maturities. Additionally, holders of the Notes may require us to repurchase all or portion for cash
earlier to their respective maturity date on certain dates or in certain events, including upon a fundamental change, at a repurchase price equal to 100% of the principal
amount, plus accrued and unpaid interest. In November 2021, we completed the repurchase right offer relating to the 2023 Notes. US$746.8 million aggregate principal
amount of the 2023 Notes were validly surrendered and not withdrawn prior to the expiration of the repurchase right offer.
In addition, in December 2022, we issued an aggregate amount of US$500 million PAG Notes to PAG. In February 2023, we issued to PAG an additional US$50
million principal amount of the PAG Notes upon its exercise to subscribe for additional notes in full. PAG Notes are secured by certain collateral arrangements. Holders
of the PAG Notes have the right to require us to repurchase or repay for cash all or part of their notes, at a price equal to 120% and 130% of the principal amount of the
PAG Notes on or shortly after the third anniversary of the issuance date and the fifth anniversary of the issuance date, respectively. They also have the right to require us
to repurchase for cash all or part of their notes in the event of certain fundamental changes and events of default. In March 2023, we completed an offering of US$600
million in aggregate principal amount of 6.50% convertible senior notes due March 2028, or the 2028 Notes. Holders of the 2028 Notes may require us to repurchase all
or a portion of their notes for cash on March 16, 2026 or in the event of certain fundamental changes at a repurchase price equal to 100% of the principal amount, plus
accrued and unpaid interest. Our current and future debt requires us to dedicate a portion of our cash flow to service interest and principal payments and may limit our
ability to engage in other transactions.
As a result, we are subject to refinancing risks against such indebtedness. There can be no assurance that we would be able to repay and refinance the notes or
other indebtedness in a timely manner on acceptable terms or at all. The agreements of certain of our outstanding indebtedness contain financial covenants that depend
on the financial position and performance of our company and our subsidiaries, variable interest entities and their subsidiaries; and certain agreements contain other
covenants, including those relating to our solvency or listing status. If we fail to comply with these covenants, or there is an event of default under any of the agreements
relating to our outstanding indebtedness, the holders of the defaulted debt could cause all amounts outstanding with respect to that debt to be due and payable
immediately, which may further trigger early repayments of our other debts. In particular, as of December 31, 2022, one of our variable interest entities failed to satisfy
certain financial covenants under its existing loan facility, which, pursuant to the loan facility agreement, would allow the lender to cancel the credit line and/or cause all
or part of the outstanding amount of the loans totaling RMB600.0 million (US$87.0 million) that would originally mature in 2023 to accelerate and become repayable
immediately. As of the date of this annual report, the lender has waived its right to demand immediate repayment. Therefore, we believe this would not result in an event
of default with respect to our convertible senior notes. However, we cannot assure you that breaches of these covenants of our company, our subsidiaries, the variable
interest entities or their subsidiaries will not occur again in the future.
In addition, we may from time to time incur additional indebtedness and other liabilities in the future. Our current and future debt may also require us to dedicate
a portion of our cash flow to service interest and principal payments and may limit our ability to engage in other transactions. Our ability to generate sufficient cash from
our operations or find alternative funding sources to satisfy our outstanding and future debt obligations and other liabilities will depend upon our future operating and
financial performance, economic conditions and other factors, many of which are beyond our control. There is no assurance that we will be able to generate sufficient
cash flows or obtain additional funding to service our debt obligations. As of December 31, 2022, our total consolidated indebtedness, including short-term loans and
net carrying amount of the existing notes, was RMB21,221.4 million (US$3,076.8 million), including US$3.2 million principal amount of the 2023 notes, US$1,200
million principal amount of the 2025 Notes, US$900 million principal amount of 2026 Notes and US$500 million principal amount of the PAG Notes. As of the same
date, the variable interest entities and their subsidiaries had RMB36,794.0 million (US$5,334.6 million) of total liabilities (including amounts due to us and our
subsidiaries that are eliminated in our consolidated financial statements) to which the notes would have been structurally subordinated. We have only recently been able
to generate operating income, and have only started to generate positive operating cash flows since the second quarter of 2022. Any deterioration of our cash flow
position could materially and adversely affect our ability to service our indebtedness. If we foresee we are unable to service our indebtedness, we will be forced to adopt
an
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alternative strategy that may include actions such as significantly reducing or delaying our investment in content and technologies, selling assets, restructuring or
refinancing our indebtedness, and, in the event of defaults, our lenders and other creditors could, among other things, declare outstanding amounts due and payable and
take actions to enforce us to repay our debts; we may have to renegotiate, repay or refinance these obligations, and may not have sufficient funds available to repay them.
These may materially and adversely impact our liquidity, business, financial condition and results of operations.
We have significant working capital requirements and have in the past experienced working capital deficits. If we experience such working capital deficits in the
future, our business, liquidity, financial condition and results of operations may be materially and adversely affected.
As a result of changes in our funding position and operating assets and liabilities, we had a working capital deficit (defined as total current assets deducted by
total current liabilities) of RMB14.3 billion (US$2.1 billion) as of December 31, 2022. In November 2021, we completed the repurchase relating to the 2023 Notes.
US$746.8 million aggregate principal amount of the 2023 Notes were validly surrendered and not withdrawn prior to the expiration of the repurchase right offer. As of
December 31, 2022, RMB22.1 million (US$3.2 million) of the net carrying amount of the 2023 Notes was included in the current liabilities. In addition, holders of the
2025 Notes may require us to repurchase for cash all or part of their notes on April 1, 2023 or upon a fundamental change, at a repurchase price equal to 100% of the
principal amount, plus accrued and unpaid interest. In February, 2023, we notified holders of the 2025 Notes that each holder has the right to, between March 3, 2023
and March 30, 2023, require us to repurchase for cash all or part of their 2025 Notes on April 1, 2023. The repurchase price for the 2025 Notes shall be an amount in
cash equal to 100% of the principal amount of the 2025 notes to be so repurchased, plus accrued and unpaid interest, if any, to, but excluding, April 1, 2023. Any such
accrued and unpaid interest shall be paid, on April 3, 2023, to the holder of the 2025 Notes at the close of business on March 15, 2023, regardless of whether such 2025
Notes have been surrendered for repurchase as of March 15, 2023. Holders of the 2026 Notes also have the right to require us to repurchase for cash all or part of their
notes on August 1, 2024 or upon a fundamental change, at a repurchase price equal to 100% of the principal amount, plus accrued and unpaid interest. Furthermore, upon
the occurrence of an event of default, the trustee or the holders of at least 25% in aggregate principal amount of these convertible senior notes may declare the whole
principal of, and accrued and unpaid interest on, all the notes to be due and payable immediately, subject to certain exceptions and conditions under the respective
indenture. Holders of the PAG Notes have the right to require us to repurchase or repay for cash all or part of their notes, at a price equal to 120% and 130% of the
principal amount of the PAG Notes on or shortly after the third anniversary of the issuance date and the fifth anniversary of the issuance date, respectively. They also
have the right to require us to repurchase for cash all or part of their notes in the event of certain fundamental changes and events of default. In addition, holders of the
2028 Notes may require us to repurchase all or a portion of their notes for cash on March 16, 2026 or in the event of certain fundamental changes at a repurchase price
equal to 100% of the principal amount, plus accrued and unpaid interest. These repurchase obligations under the terms of our notes or the occurrence of any fundamental
changes or event of default, as the case may be, may impact our future working capital position and our ability to continue as a going concern. For actions that we plan
to take in order to manage our working capital, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources.” There can be no
assurance, however, that we will be able to prudently manage our working capital, or raise additional equity or debt financing on terms that are acceptable to us. Our
failure to properly manage our working capital as planned and when necessary could materially and adversely affect our liquidity, results of operations, financial
condition and ability to operate.
We may not have the ability to raise the funds necessary to settle redemption of our existing notes, or to repurchase such notes upon a fundamental change or on
certain specific dates, and our future debt may contain limitations on our ability to pay cash upon conversion or to repurchase the notes.
Our existing notes contain protections concerning the holders’ rights to require us to repurchase their notes and to pay cash to settle redemption of their notes. For
example, holders of the 2026 Notes have the right to require us to repurchase for cash all or part of their notes on August 1, 2024 or upon a fundamental change, at a
repurchase price equal to 100% of the principal amount, plus accrued and unpaid interest; holders of the PAG Notes have the right to require us to repurchase or repay
for cash all or part of their notes, at a price equal to 120% and 130% of the principal amount of the PAG Notes on or shortly after the third anniversary of the issuance
date and the fifth anniversary of the issuance date, respectively; and holders of the 2028 Notes may require us to repurchase all or a portion of their notes for cash on
March 16, 2026 or in the event of certain fundamental changes at a repurchase price equal to 100% of the principal amount, plus accrued and unpaid interest. We cannot
assure you that we will be able to generate sufficient cash flow from our operations or secure additional financing to support the repayment of our existing notes when
our payments become due. Furthermore, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of our
existing notes surrendered therefor or our existing notes being converted. Our failure to repurchase notes at a time when the repurchase is required by the indenture or to
pay any cash payable on future conversions of the notes as required by the indenture would constitute a default under the indenture. A default under the indenture or a
fundamental change itself could also lead to a default under agreements or indentures governing any outstanding future indebtedness. If the repayment of our existing
notes or
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any outstanding future indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and
repurchase the notes or make cash payments to the holders upon conversions of the notes.
We have been and may again be subject to legal proceedings, claims and investigations in the ordinary course of business. If the outcomes of these proceedings are
adverse to us, it could have a material adverse effect on our business, results of operations and financial condition.
We are subject to various legal proceedings, claims and government investigations that have arisen in the ordinary course of business and have not yet been fully
resolved. New legal proceedings, claims and investigations may arise in the future. The existence of litigation, claims, investigations and proceedings may harm our
reputation, business and adversely affect the trading price of our ADSs.
Starting in April 2020, we and certain of our current and former officers and directors were named as defendants in several putative securities class actions filed
in federal court, which were purportedly brought on behalf of a class of persons who allegedly suffered damages as a result of alleged misstatements and omissions in
our company’s public disclosure documents. In May 2021, these actions were consolidated under the caption In re iQIYI, Inc. Securities Litigation, No. 1:20-CV-01830
(U.S. District Court for the Eastern District of New York). In June 2021, lead plaintiffs filed the operative amended complaint. In July 2021, defendants filed motion to
dismiss the case. Briefing on the motion to dismiss was completed on September 29, 2021. However, in light of the common questions of law and fact at issue in this
case and a related action under the caption In re Baidu Inc. Securities Litigation, 20-cv-03794 (U.S. District Court for the Eastern District of New York), the Court
terminated the motion to dismiss without prejudice and ordered motion-to-dismiss briefing for the two cases to be completed by March 3, 2023 under a new briefing
schedule. The coordinated motion-to-dismiss briefing has now been completed under the new schedule, and we await a decision from the court on these motions.
Regardless of the merit of particular claims, legal proceedings and investigations may result in reputational harm, be expensive, time consuming, disruptive to our
operations and distracting to management. In the event we do not prevail or we enter into settlement arrangements in any of these proceedings or investigations, we may
incur significant expenses which may materially adversely affect our results of operations.
Following the publication in April 2020 of a short seller report by Wolfpack Research, or the Wolfpack Report, the SEC asked us to produce certain financial,
operating, and other documents and records. We provided the SEC with requested documents and information. Although no further information has been requested by
the SEC since early 2021, we cannot predict if there will be further requests or the duration, outcome, or impact of the SEC investigation.
In addition, we are subject to legal proceedings in the ordinary course of business. We have been involved in litigation based on allegations of infringement of
third-party copyright, including information network dissemination rights, and other rights, due to the content available on our platform. We have been subject to
lawsuits in mainland China for alleged unfair competition in connection with our platform. We may also face litigation or administrative actions for defamation,
negligence, copyright and trademark infringement, or other purported injuries resulting from the content we provide or the nature of our services.
We were subject to a total of 1,846 lawsuits in mainland China for alleged copyright infringement between January 1, 2020 and December 31, 2022, in
connection with our platform. Approximately 85.0% of the lawsuits filed from January 1, 2020 through December 31, 2022 in connection with the iQIYI platform were
rejected by relevant PRC courts, withdrawn by the plaintiffs or settled by the parties. As of December 31, 2022, a total of 138 lawsuits against us in connection with our
platform were pending in mainland China, with the aggregate amount of damages sought under these pending cases being RMB350.9 million (US$50.9 million).
The outcome of legal proceedings and investigations is inherently uncertain. If one or more legal matters were resolved against us or an indemnified third-party
in a reporting period for amounts in excess of management’s expectations, our financial condition and operating results for that reporting period could be materially
adversely affected. Further, such an outcome could result in significant compensatory, punitive or trebled monetary damages, disgorgement of revenue or profits,
remedial corporate measures or injunctive relief against us that could materially adversely affect our financial condition and operating results.
The success of our business depends on our ability to maintain and enhance our brand.
We believe that maintaining and enhancing our iQIYI brand is of significant importance to the success of our business. Our well-recognized brand is critical to
increasing our user base and, in turn, expanding our membership base and attractiveness to advertising customers and content providers. Since the streaming
entertainment industry is highly competitive, maintaining and enhancing our brand depends largely on our ability to remain the market leader in mainland China, which
may be difficult and expensive. To the extent our content, in particular, our original content, is perceived as low quality or otherwise not appealing to users, our ability to
maintain and enhance our brand may be adversely impacted.
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Our overseas operations may not be successful and may be adversely affected by legal, regulatory, political and economic risks.
We began to expand our overseas business operations in late 2019. We have launched our multilingual iQIYI app, which currently supports more than ten
languages and can be downloaded globally from major app stores. We also cooperate with local partners to promote our app and expand our user base. We are subject to
PRC law in addition to the laws of the foreign countries and regions in which we operate. If any of our overseas investments or operations violate such laws, we could
become subject to sanctions or other penalties, which could negatively affect our reputation, business and operating results.
•Our overseas expansion may not be successful and may expose us to a number of risks inherent in doing business internationally, including:
•difficulties with staffing and managing foreign operations, which may be exacerbated as a result of distance, time zone, language and cultural differences;
•challenges in formulating effective local sales and marketing strategies targeting users from various jurisdictions and cultures, who have a diverse range of
preferences and demands;
•challenges in identifying appropriate local business partners and establishing and maintaining good working relationships with them;
•challenges in producing and acquiring content that is appealing to local population and catering to local cultural environment, and screening out content that
may be inappropriate, offensive or unwelcoming in certain countries or regions;
•challenges in recruiting quality local content creators to attract and engage local users;
•challenges in effectively managing overseas operations from our headquarters or new regional headquarters and establishing overseas IT systems and
infrastructure;
•competitions from other participants in the market, including international leading companies;
•challenges in selecting suitable geographical regions for overseas expansion;
•currency exchange rate fluctuations and foreign exchange control risks;
•exposure to changes in macroeconomic conditions in foreign jurisdictions;
•political or social unrest or economic instability;
•difficulties and costs relating to compliance with applicable foreign laws and regulations and unexpected changes in laws or regulations;
•challenges in investing in countries and regions that restrict or may restrict foreign investment in the internet service provider, online video, entertainment,
advertising or culture related industry, and unexpected changes in such restrictions;
•difficulties in and costs relating to the obtaining and keeping valid licenses, permits or other applicable governmental authorizations, content control from local
authorities;
•complexity of intellectual property protection and enforcement regime overseas and the potential exposure of claims relating to intellectual property
infringement;
•exposure to different tax jurisdictions that may subject us to greater fluctuations in our effective tax rate and potentially adverse tax consequences;
•exposure to different labor protection requirements and potential labor-related claims and disputes; and
•increased costs associated with doing business in foreign jurisdictions.
One or more of these factors could harm our overseas operations and consequently, could harm our overall business, financial condition and results of
operations. In addition, the regulatory framework for online video content or other services we provide is still developing and remains uncertain in certain countries
where we are exploring overseas operations. As we continue to expand our business overseas, we cannot assure you that we will be able to fully comply with the legal
requirements of each foreign jurisdiction and successfully adapt our business model to local market conditions.
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We may be the subject of detrimental conduct by third parties, including complaints to regulatory agencies and the public dissemination of malicious assessments of
our business, which could have a negative impact on our reputation and cause us to lose market share, users, advertising customers and revenues, and adversely
affect the price of our ADSs.
We have been, and in the future may be, the target of anti-competitive, harassing or other detrimental conduct by third parties. Such conduct may include
complaints, anonymous or otherwise, to regulatory agencies regarding our operations, accounting, revenues, business relationships, business prospects and business
ethics. Additionally, allegations and other negative publicity, directly or indirectly against us, may be posted online or otherwise generally disseminated by anyone,
whether or not related to us. We may be subject to regulatory investigations, lawsuits or public perception backlash as a result of such third-party conduct and may be
required to expend significant time and incur substantial costs to address such third-party conduct, and there is no assurance that we will be able to conclusively refute
each of the allegations within a reasonable period of time, or at all. Our reputation may also be negatively affected as a result of the public dissemination of anonymous
allegations or malicious statements about our business, which in turn may cause us to lose market share, users, advertising customers and revenues, and adversely affect
the price of our ADSs.
Increases in market price of professionally produced content, or PPC, may have a material and adverse effect on our business, financial condition and results of
operations.
PPC constitutes a significant part of our content offerings. The market prices for PPC, especially TV series and movies, have increased significantly in mainland
China during the past few years. Due to the improving monetization prospects, internet video streaming platforms are generating more revenues and are competing
aggressively to license popular content titles, which have in turn led to increases in licensing fees of PPC in general. As the market further grows, the expectations of
copyright owners, distributors and industry participants may continue to rise, and as such they may demand higher licensing fees for PPC. Furthermore, with the
expansion of our content library, the costs for PPC may continue to increase. If we are unable to generate sufficient revenues to outpace the increase in market prices for
PPC, we may incur more losses and our business, financial condition and results of operations may be adversely affected.
We operate in a highly competitive market and we may not be able to compete effectively.
We face competition for content sourcing, user traffic and advertising customers from other streaming entertainment platforms in mainland China, primarily
including Tencent Video, Youku, Mango TV and Bilibili. We compete for users, usage time and advertising customers. In addition, we also face competition from other
forms of entertainment content, including short videos and online games. Some of our competitors have a longer operating history and significantly greater financial
resources than we do, and, in turn, may be able to attract and retain more users, usage time and advertising customers. Our competitors may compete with us in a variety
of ways, including by obtaining IP rights to popular content, conducting brand promotions and other marketing activities, and making investments in and acquisitions of
our business partners. In addition, certain internet video streaming platforms may continue to derive their revenues from providing content that infringes third-party
copyright and may not monitor their platforms for any such infringing content. As a result, we may be placed at a disadvantage to some of these companies that do not
incur similar costs as we do with respect to content production, acquisition and moderation. If any of our competitors achieves greater market acceptance than we do or
is able to offer more attractive internet video content, our user traffic and our market share may decrease, which may result in a loss of advertising customers and
members, as well as have a material and adverse effect on our business, financial condition and results of operations.
We face competition from traditional media such as major TV stations, which also provide and may increase their internet and on-demand video offerings. Most
large companies in mainland China allocate, and will likely continue to allocate, a significant portion of their advertising budgets to traditional media, particularly major
TV stations. We also face increasing competition for users, user time and advertising budgets from other internet media and entertainment services, such as internet and
social media platforms and short-form video platforms.
The continued and collaborative efforts of our senior management and key employees are crucial to our success, and our business may be harmed if we lose their
services.
Our success depends on the continued and collaborative efforts of our senior management, especially our executive officers, including our founder, Dr. Yu Gong.
If, however, one or more of our executives or other key personnel are unable or unwilling to continue to provide services to us, we may not be able to find suitable
replacements easily or at all. Competition for management and key personnel is intense and the pool of qualified candidates is limited. We may not be able to retain the
services of our executives or key personnel, or attract and retain experienced executives or key personnel in the future. If any of our executive officers or key employees
joins a competitor or forms a competing business, we may lose crucial business secrets, technological know-how, advertiser customers and other valuable resources.
Each of our executive officers and key employees has entered into an employment
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agreement with us, which contains non-compete provisions. However, we cannot assure you that they will abide by the employment agreements or our efforts to enforce
these agreements will be effective enough to protect our interests.
Our limited operating history makes it difficult to evaluate our business and prospects.
We launched our platform and internet video streaming services in 2010 and have grown rapidly since then. However, due to our limited operating history, our
historical growth rate may not be indicative of our future performance. We cannot assure you that our growth rate will be the same as in the past. In addition, we may in
the future introduce new services or significantly expand our existing services, including those that currently are of relatively small scale or with which we have little or
no prior development or operating experience. If these new or enhanced services fail to engage users and customers, our business and operating results may suffer as a
result. We cannot assure you that we will be able to recoup our investments in introducing these new services or enhancing existing smaller business lines, and we may
experience significant loss and impairment of asset value due to such efforts. Furthermore, as a technology-based entertainment company, we frequently introduce
innovative products and services to our users and advertising customers in order to capture new market opportunities. However, we cannot assure you that our products
and services will be well received by our users and advertising customers. In addition, it is possible that our users and advertising customers may find our products and
services objectionable. If our existing or new products and services are not well received by our users and customers, we may suffer damages to our brand image and
may not be able to maintain or expand our user and customer base, which in turn may have a material and adverse effect on our business, financial condition and results
of operations. You should consider our prospects in light of the risks and uncertainties fast-growing companies with limited operating histories in a fast-evolving
industry may encounter.
We may not be able to manage our growth effectively or expand our offerings successfully.
To manage the further expansion of our business, products and offerings and the growth of our operations and personnel, we need to continually expand and
enhance our infrastructure and technology, and improve our operational and financial systems, procedures, compliance and controls. We also need to expand, train and
manage our growing employee base. In addition, our management will be required to maintain and expand our relationships with talents, content providers, distributors,
advertising customers, advertising agencies and other third parties. We cannot assure you that our current infrastructure, systems, procedures and controls will be
adequate to support our expanding operations. If we fail to manage our expansion effectively, our business, results of operations and prospects may be materially and
adversely affected.
We have been constantly endeavoring to develop new products and offerings that provide other contents, content formats or services such as, short-form videos,
live streaming, online literatures and comics. However, our expansion of new products and offerings may result in unseen risks, challenges and uncertainties. We may
incur additional expenditure to support our expansion and it may strain our managerial, financial, operational and other resources. Any failure in managing expenditures
and evaluating user demands for new products and offerings could materially and adversely affect our business, financial condition and results of operations.
We cannot guarantee our monetization strategies will be successfully implemented or generate sustainable revenues and profit.
Our monetization model is evolving. We currently generate a substantial majority of our revenues from membership services and online advertising. We plan to
strengthen revenue contribution from our other monetization methods, such as online games and IP licensing. We have no proven track record of or experience in
generating substantial revenues from other monetization methods. If our strategic initiatives do not enhance our monetization ability or enable us to develop new
approaches to monetization, we may not be able to maintain or increase our revenues or recover any associated costs. In addition, we may in the future introduce new
services to further diversify our revenue streams, including services with which we have little or no prior development or operating experience. If these new or enhanced
services fail to engage users, customers or content partners, we may fail to attract or retain users or to generate sufficient revenues to justify our investments, and our
business and operating results may suffer as a result.
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Our business, prospects and financial results may be impacted by our relationship with third-party platforms.
In addition to our iQIYI platform, we also distribute video content through third-party platforms. We generate membership service and online advertising service
revenues through revenue-sharing arrangements with such third-party platforms, which include leading internet companies in mainland China. However, there can be no
assurance that our arrangements with those platforms will be extended or renewed after their respective expiration or that we will be able to extend or renew such
arrangements on terms and conditions favorable to us. In addition, if any of such third-party platforms breaches its obligations under any of the agreements entered into
with us or refuses to extend or renew it when the term expires, and we cannot find suitable replacement on a timely basis, or at all, we may suffer significant loss to our
user base and revenue streams we have developed therefrom, or lose the opportunity to expand our business through such platform. We may be involved with legal or
other disputes with third-party platforms that may affect our relationship with such platforms or have an adverse effect on our business.
We face risks, such as unforeseen costs and potential liability in connection with content we produce, license or distribute through our platform.
As a producer, licensor and distributor of content, we face potential liability for negligence, copyright and trademark infringement, or other claims based on the
content that we produce, license, provide or distribute. We also may face potential liability for content used in promoting our service, including marketing materials and
features on our platform such as user reviews. We are responsible for the production costs and other expenses of our original content. We also take on risks associated
with production, such as completion and key talent risk. To the extent we do not accurately anticipate costs or mitigate risks, including for content that we obtain but
ultimately does not appear on our platform, or if we become liable for content we produce, license or distribute, our business may suffer. Litigation to defend these
claims could be costly and the expenses and damages arising from any liability or unforeseen production risks could harm our results of operations. We may not be
indemnified against claims or costs of these types and we may not have insurance coverage for these types of claims.
Videos and other content displayed on our platform may be found objectionable by PRC regulatory authorities and may subject us to penalties and other
administrative actions.
We are subject to PRC regulations governing internet access and the distribution of videos and other forms of information over the internet. Under these
regulations, internet content providers and internet publishers are prohibited from posting or displaying over the internet any content that, among other things, violates
PRC laws and regulations, impairs the national dignity of China or the public interest, or is obscene, superstitious, frightening, gruesome, offensive, fraudulent or
defamatory. Furthermore, as an internet video streaming platform, we are not allowed to (i) produce or disseminate programs that distort, parody or vilify classic literary
works; (ii) re-edit, re-dub or re-caption the subtitles of classic literary works, radio and television programs, and network-based original audio-video programs, (iii)
intercept program segments and splice them into new programs; or (iv) disseminate edited pieces of works that distort the originals. We shall strictly supervise our self-
made content and the reprogramed videos uploaded by our users and shall not facilitate the dissemination of defective audio-video programs. New laws and regulations
may be adopted from time to time to prohibit or restrict internet platforms from distribution of certain types of videos and information. For example, On September 2,
2021, the National Radio and Television Administration, or the NRTA (previously known as the State Administration of Press Publication, Radio, Film and Television,
or the SAPPRFT) issued the Circular of the General Office of the National Radio and Television Administration on Further Strengthening the Management of Cultural
Programs and Their Personnel, pursuant to which online audio-video platforms shall not broadcast idol training shows, as well as variety entertainment shows and reality
shows participated by celebrities’ children. Failure to comply with these requirements may result in monetary penalties, revocation of licenses to provide internet content
or other licenses, suspension of the concerned programs or platforms, delay of content air time and reputational harm. In addition, these laws and regulations are subject
to interpretation by the relevant authorities, which may change in a manner that could render our current content moderation efforts insufficient. As a result, it may not
be possible to determine in all cases the types of content that could cause us to be held liable as an internet content provider. Furthermore, as we continue to diversify
our content offerings, we are subject to increased uncertainties and extended period of time needed for the review of our content. For a detailed discussion, see “Item 4.
Information on the Company—B. Business Overview—Government Regulations—Regulations on Internet Content Providers,” “—Regulations on Internet Audio-video
Program Services” and “—Regulations on Internet Information Security, Censorship and Privacy Protection.”
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Internet platform operators may also be held liable for the content displayed on or linked to its platform that is subject to certain restrictions. In addition to
professionally produced content, we allow our users to upload other video content, such as internet movies, internet drama series, interactive videos, vertical or
horizontal videos, short-form videos, micro-videos, and video blogs, or Vlogs, among others. Although we have adopted internal procedures to monitor the content
displayed on our platform, due to the significant amount of content uploaded by our users, we may not be able to identify all videos or other content that may be illegal
or otherwise objectionable. In addition, we may not be able to always keep these internal procedures abreast of changes in the PRC government’s requirements for
content display. See “Item 4. Information on the Company—B. Business Overview—Content Moderation” for more details relating to our content moderation
procedures. Failure to identify and prevent illegal or inappropriate content from being displayed on our platform may subject us to liability, government sanctions or loss
of licenses and permits.
To the extent that PRC regulatory authorities, such as Cyberspace Administration of China, which has promulgated the Provisions on the Governance of
Network Information Content Ecology with effect from March 1, 2020, find any content displayed on our platform objectionable, they may require us to limit or
eliminate the dissemination of such content on our platform in the form of take-down orders or otherwise. In the past, we have from time to time received phone calls
and written notices from the relevant PRC regulatory authorities requesting us to delete or restrict certain content that the government deemed inappropriate or sensitive.
The NRTA, publishes from time to time lists of content that is objectionable, and we monitor content uploaded on to our platform and remove those referenced in the
list. In addition, regulatory authorities may impose penalties on us for content displayed on or linked to our platform in cases of material violations or lacking proper
license, including a revocation of our operating licenses or a suspension or shutdown of our online operations. Although we have not been materially penalized for our
content so far, in the event that the PRC regulatory authorities find the video and other content on our platform objectionable and impose penalties on us or take other
actions against us in the future, our business, results of operations and reputation may be materially and adversely affected. Moreover, the costs of compliance with these
regulations may continue to increase as a result of more content uploaded by our users.
Our business is significantly impacted by the reputation of artists featured in videos produced by us or presented on our platform.
Audience are drawn to videos we presented based on factors such as the artists reputation and popularity, the content themes and the overall production value of
the videos. Any negative news about these artists, such as inappropriate conduct in their private life, scandals or criminal allegations, will pose a negative impact on the
videos or TV series featuring these artists. Negative publicity of or media coverage about our artists or the content we provide will cause a negative impact on the image
of the artists and ourselves, which could have a negative impact on our brand image in the online entertainment industry and our relationships with the agencies we work
with.
Furthermore, the popularity and audience acceptance of artists featured in videos produced by us or provided on our platform cannot be predicted accurately, and
we may not be able to timely respond to the changes in the market trends. There is no guarantee that we will be able to accommodate the audiences’ preferences on the
type of videos and the selection of artists catering to the changing market trends. The failure to achieve any of the foregoing or the sudden changes in the audiences’
preferences will adversely affect our business, financial condition and results of operations.
We operate in a rapidly evolving industry that is subject to continuous technology developments. Adjusting our services in response to developments in the industry
and technology and the resulting changes in users’ demands and preferences could result in our incurrence of additional costs and expenses, and if we fail to keep
up with such changes, our business, results of operations and prospects may be materially and adversely affected.
The streaming entertainment industry is rapidly evolving and subject to continuous technology developments. Our success depends on our ability to capture the
trends in technology developments and offer services and products catering to the resulting changes in users’ demands preferences. We have been innovating on our
content formats and viewing features and enabling the availability of our content on more viewing terminals to serve users’ evolving demands and preferences along
with technological developments. We have expanded our content reach from personal computers and mobile devices to connected TV devices, capturing the evolution of
users’ preference from viewing videos on personal computers to mobile devices and from small screens to connected TV devices. We have also directed research and
development efforts to the area of virtual reality technologies, based on which we launched our VR devices and VR movies in response to users’ demand for more
personalized and immersive viewing experience. Nonetheless, we cannot assure you that we will always be able to accurately predict or capture the trends in technology
developments that could result in users’ behavior changes and guide our operations accordingly. In addition, we may incur substantial, extra costs and capital
expenditures as we develop and modify products, services, systems or infrastructure in response to changes in users’ demands and preferences resulting from technology
developments. For example, the expansion of our content reach from personal computers and mobile devices to connected TV devices resulted in increase in bandwidth
costs and operating expenses historically. There could be further adaptations needed in the future as the industry and technology continue to evolve, which could impose
additional challenges and result in rise in cost. While we have been improving bandwidth and operation efficiency through technology innovations, we cannot assure you
that our technology innovations will always be developed fast enough to offset potential negative impacts on our operation efficiency associated with such adaptions.
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Further, as we make our services available across content terminals from personal computers and mobile devices operating on different systems to connected TV
devices, we are dependent on the interoperability of our services with such terminals, whose systems and the functionality, compatibility and performance thereof, such
as those of set up boxes operated by cable TV networks as well as Android and iOS mobile operating systems, are beyond our control. Any changes in the functions and
features of such systems or devices that degrade the functionality of our services or give preferential treatment to our competitive services could adversely affect usage
of our services. Meanwhile, if the number of platforms for which we develop our services increases, which is typically seen in a dynamic and fragmented market such as
China, it will result in an increase in our costs and expenses.
If we fail to adapt our products and services to trends and changes in technology and to the resulting evolution of users’ demands and preferences in an effective
and timely manner, users’ experience on our platform may deteriorate, our products and services may become less attractive and we may miss potential growth
opportunities and suffer from decrease in user traffic and shrinkage in subscribing member base and number of advertising customers. If we cannot effectively address
the cost and efficiency impediments associated with related service and operation adaptations and strategy adjustments, our ability to achieve profitability will be
hindered. Each of these occurrences could materially and adversely affect our business, results of operations, financial conditions and prospects.
We have been, and may continue to be, subject to liabilities for infringement, misappropriation or other violation of third-party intellectual property rights or other
allegations based on the content available on our platform or services we provide.
Our success depends, in large part, on our ability to operate our business without infringing, misappropriating or otherwise violating third-party rights, including
third-party intellectual property rights. Companies in the internet, technology and media industries own, and are seeking to obtain, a large number of patents, copyrights,
trademarks and trade secrets, and they are frequently involved in litigation based on allegations of infringement, misappropriation or other violations of intellectual
property rights or other related legal rights. There may be patents issued or pending that are held by others that cover significant aspects of our technologies, products,
or services, and such third parties may attempt to enforce such rights against us. In addition, we may not have obtained licenses for all content we offer and the scope,
type and term of the licenses we obtained for certain content may not be broad enough to cover all fashions we currently employ or may employ in the future. In
addition, if any purported licensor does not actually have sufficient authorization relating to the content or right to license a content to us, or if such purported licensor
had lost its authorization to sub-license content that we are distributing on our platform, and do not timely inform us of such loss of authorization, we may be subject to
claims of intellectual property infringement from third parties.
Although we have set up procedures to enable copyright owners to provide us with notice of alleged infringement, given the volume of content available on our
platform, it is not possible, and we do not attempt to, identify and remove or disable all potentially infringing content that may exist. Similarly, although we have set up
screening processes to try to filter out or disable access to content that we have previously been informed is subject to claims of copyright or other intellectual property
protection, we do not attempt to filter out or disable access to all potentially infringing content available through our services. As a result, third parties may take action
and file claims against us if they believe that certain content available on our platform violates their copyrights or other intellectual property rights. We have been, and
may in the future be, subject to such claims filed in mainland China and other jurisdictions. We have been involved in litigation based on allegations of infringement of
third-party copyright, including information network dissemination rights, and other rights, due to the content available on our platform.
Our platform allows users to search the internet for content that resides on certain third parties’ servers and online platforms. While uncertainties still exist with
respect to the legal standards as well as the judicial interpretation of such standards for determining liabilities for our providing links and access to content on third-party
servers and websites that infringes others’ copyrights and other intellectual property rights under PRC laws and the laws of other jurisdictions, third parties may take
action and file claims against us if they believe that certain content we provide links or access to through our platform violates their copyrights or other intellectual
property rights.
We cannot assure you that we will not be subject to copyright laws or legal proceedings initiated by third parties in other jurisdictions, such as the United States,
as a result of the ability of users to access our videos and other content in the United States and other jurisdictions, the ownership of our ADSs by investors in the United
States and other jurisdictions, the extraterritorial application of foreign law by foreign courts, the fact that we sub-licensed content from licensors who in turn obtained
their authorizations from content providers in the United States and other jurisdictions or otherwise. In addition, as a publicly listed company, we may be exposed to
increased risk of litigation. If a claim of infringement brought against us in the United States or other jurisdictions is successful, we may be required to, upon
enforcement, (i) pay substantial statutory or other damages and fines, (ii) remove relevant content from our platform or (iii) enter into royalty or license agreements
which may not be available on commercially reasonable terms or at all.
Moreover, although U.S. copyright laws, including the Digital Millennium Copyright Act (17 U.S.C. § 512), or the DMCA, provide safeguards or “safe harbors”
from claims in the U.S. for monetary relief for copyright infringement for certain entities that
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host user-uploaded content or provide information location tools that may link to infringing content, these safe harbors only apply to companies that comply with
specified statutory requirements. While we seek to voluntarily comply with DMCA safe harbor requirements, we cannot ensure that we satisfy all of the requirements of
any DMCA safe harbor. It is possible that we could be subject to claims of copyright infringement or other violation of intellectual property rights in the U.S. and be
required to pay substantial damages or prevented from offering all or part of our services in the U.S.
We have been subject to lawsuits in mainland China for alleged unfair competition in connection with our platform. We may also face litigation or administrative
actions for defamation, negligence, copyright and trademark infringement, or other purported injuries resulting from the content we provide or the nature of our services.
Such litigation and administrative actions, with or without merits, may be expensive and time-consuming to defend and may result in significant diversion of resources
and management attention from our business operations. Furthermore, such litigation or administrative actions may adversely affect our brand image and reputation.
In addition, we operate our platform primarily through the variable interest entities and their subsidiaries, and our ability to monitor content as described above
depends in large part on the experience and skills of the management of, and our control over, those variable interest entities. Our control over the management and
operations of the variable interest entities through contractual arrangements may not be as effective as that through direct ownership. See “—Risks Related to Our
Corporate Structure—We rely on contractual arrangements with the variable interest entities and their shareholders for our business operations, which may not be as
effective as direct ownership in providing operational control.”
We may not be able to adequately protect our intellectual property rights, and any failure to protect our intellectual property rights could adversely affect our
revenues and competitive position.
We believe that trademarks, trade secrets, copyright, and other intellectual property we use are critical to our business. We rely on a combination of trademark,
copyright and trade secret protection laws in mainland China and other jurisdictions, as well as confidentiality procedures and contractual provisions to protect our
intellectual property and our brand. Protection of intellectual property rights in mainland China may not be as effective as in the United States or other jurisdictions, and
as a result, we may not be able to adequately protect our intellectual property rights, which could adversely affect our revenues and competitive position. In addition, any
unauthorized use of our intellectual property by third parties may adversely affect our revenues and our reputation. In particular, our members may abuse their
membership privilege and illegally distribute paid content exclusively available to paid members, which could have a material and adverse effect on our financial
condition, results of operations and prospects. Further, we may have difficulty addressing the threats to our business associated with piracy of our copyrighted content,
particularly our original content. Our content and streaming services may be potentially subject to unauthorized consumer copying and illegal digital dissemination
without an economic return to us. We adopt a variety of measures to mitigate risks associated with piracy, including by litigation and through technology measures. We
cannot assure that such measures will be effective.
In addition, while we typically require our employees, consultants and contractors who may be involved in the development of intellectual property to execute
agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who in fact develops intellectual property
that we regard as our own. In addition, such agreements may not be self-executing such that the intellectual property subject to such agreements may not be assigned to
us without additional assignments being executed, and we may fail to obtain such assignments. In addition, such agreements may be breached. Accordingly, we may be
forced to bring claims against third parties, or defend claims that they may bring against us related to the ownership of such intellectual property.
Furthermore, policing unauthorized use of copyrights, proprietary technology and other intellectual properties is difficult and expensive, and we may need to
resort to litigation to enforce or defend intellectual property or to determine the enforceability, scope and validity of our proprietary rights or those of others. Historically
and up to the date hereof, we have commenced multiple actions, some of which are at their preliminary stages, to protect our copyrighted content from being streamed
on other streaming entertainment platforms without authorization. Such litigations and an adverse determination in any such litigations could result in substantial costs
and diversion of resources and management attention. While we obtained favorable rulings in some of these cases, we cannot guarantee success in others or any future
ones, neither can we assure you that we are able to recover our loss resulting from the infringements or the cost incurred in enforcing our rights.
If our security measures are breached, or if our products and services are subject to attacks that degrade or deny the ability of users to access our products and
services, our products and services may be perceived as insecure, users and advertising customers may curtail or stop using our products and services and our
business and operating results may be harmed.
Our products and services involve the storage and transmission of users’ and advertising customers’ information, particularly billing data, as well as original
content, and security breaches expose us to a risk of loss of this information, loss of users, litigation and potential liability. We experience cyber-attacks of varying
degrees on a regular basis, including hacking into our user accounts
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and redirecting our user traffic to other internet platforms, and we have been able to rectify attacks without significant impact to our operations in the past. Functions that
facilitate interactivity with other internet platforms could increase the scope of access of hackers to user accounts. We take measures to protect against unauthorized
intrusion into our users’ data. Nevertheless, our payment processing services or other third-party services we use could experience an unauthorized intrusion into our
users’ data. In the event of such a breach, current and potential users may become unwilling to provide to us the information that is necessary for them to use our
services or become our members. Additionally, we could face legal claims or regulatory fines or penalties for such a breach. The costs relating to any data breach could
be material, and we currently do not carry insurance against the risk of a data breach. For these reasons, should an unauthorized intrusion into our users’ data occur, our
business could be adversely affected.
Our security measures may also be breached due to employee error, malfeasance or otherwise. For example, we face risks of users bypassing the membership
verification process on our platform with illegal technology and manipulating our system into recognizing them as paid members. As a result, such users may illegally
gain access to premium content without purchasing our membership. Additionally, external parties may attempt to fraudulently induce employees, users or customers to
disclose sensitive information in order to gain access to our data or our users’ or customers’ data or accounts, or may otherwise obtain access to such data or accounts.
Since our users and customers may use their accounts to establish and maintain online identities, unauthorized communications from accounts that have been
compromised may damage their reputations and brands as well as ours. Furthermore, we face the risk of hackers gaining illegal access to and illegally distributing our
original content that has not been released. While such incidents have not occurred in the past, we cannot assure you that they will not happen in the future. Any such
breach or unauthorized access could result in significant legal and financial exposure, damage to our reputation and a loss of confidence in the security of our products
and services that could have an adverse effect on our business and operating results. Because the techniques used to obtain unauthorized access, disable or degrade
service or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to
implement adequate preventative measures. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures
and our reputation and relationships with users could be harmed, we may lose users and customers and we may be exposed to significant legal and financial risks,
including legal claims and regulatory fines and penalties. Any of these actions could have a material and adverse effect on our business, reputation and operating results.
We rely upon our partner to make our service available through smart TV.
In smart TV video streaming market, only a small number of qualified license holders can provide internet audio and visual program service to the TV terminal
users via smart TVs, set-top boxes and other electronic products. Most of those license holders are radio or TV stations. Private companies that wish to operate such
business need to cooperate with those license holders to legally provide relevant services. We entered into a cooperation arrangement with Galaxy Internet Television
Co., Ltd., our license partner, and our license partner currently offers certain of our members the ability to receive streaming content through smart TV. If we are not
successful in maintaining existing or creating new relationships, or if we encounter technological, content licensing, regulatory or other impediments to delivering our
streaming content to our members via these devices, our ability to grow our business may be adversely impacted.
Advertisements shown on our platform may subject us to penalties and other administrative actions.
Under PRC advertising laws and regulations, we are obligated to monitor the advertising content shown on our platform to ensure that such content is true,
accurate and in full compliance with applicable laws and regulations. In addition, where a special government review is required for specific types of advertisements
prior to posting, such as advertisements relating to pharmaceuticals, medical instruments, agrochemicals and veterinary pharmaceuticals, we are obligated to confirm that
such review has been performed and approval has been obtained from competent governmental authority. To fulfill these monitoring functions, we include clauses in all
of our advertising contracts requiring that all advertising content provided by advertising agencies and advertisers must comply with relevant laws and regulations.
Under PRC law, we may have claims against advertising agencies and advertisers for all damages to us caused by their breach of such representations. Violation of these
laws and regulations may subject us to penalties, including fines, confiscation of our advertising income, orders to cease dissemination of the advertisements and orders
to publish an announcement correcting the misleading information. In circumstances involving serious violations, such as posting a pharmaceutical product
advertisement without approval, or posting an advertisement for any fake pharmaceutical product, PRC governmental authorities may force us to terminate our
advertising operation or revoke our licenses.
A majority of the advertisements shown on our platform are provided to us by third parties. Although we have implemented automated and manual content
moderation systems and significant efforts have been made to ensure that the advertisements shown on our platform are in full compliance with applicable laws and
regulations, we cannot assure you that all the content contained in such advertisements is true and accurate as required by the advertising laws and regulations, especially
given the large volume of in-feed ads and the uncertainty in the application of these laws and regulations. In addition, advertisers, especially in-feed advertisers, may,
through illegal technology, evade our content moderation procedures to display advertisements that do not comply with applicable
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laws and regulations on our platform. The inability of our systems and procedures to adequately and timely discover such evasions may subject us to regulatory penalties
or administrative sanctions. Although we have not been subject to material penalties or administrative sanctions in the past for the advertisements shown on our
platform, if we are found to be in violation of applicable PRC advertising laws and regulations in the future, we may be subject to penalties and our reputation may be
harmed, which may have a material and adverse effect on our business, financial condition, results of operations and prospects.
If we cannot maintain our corporate culture as we grow, we could lose the innovation, collaboration and focus that contribute to our business.
We believe that a critical component of our success is our corporate culture, which fosters innovation and cultivates creativity. As we continue to expand and
grow our business, we may find it difficult to maintain these valuable aspects of our corporate culture. Any failure to preserve our culture could undermine our
reputation and negatively impact our ability to attract and retain employees, which would in turn jeopardize our future success.
Our quarterly operating results may fluctuate, which makes our results of operations difficult to predict and may cause our quarterly results of operations to fall
short of expectations.
Our quarterly operating results have fluctuated in the past and may continue to fluctuate depending upon a number of factors, many of which are out of our
control. Our operating results tend to be seasonal. For instance, we have experienced lower online advertising services revenue in the first quarter of each year in
connection with the Chinese New Year holiday as advertisers limit their budget for online platforms and less blockbuster content is released during that period.
Furthermore, our content distribution revenue may fluctuate significantly from quarter to quarter as a result of the varying availability of popular content titles for
distribution and adjustments to our market strategies. For these reasons, comparing our operating results on a period-to-period basis may not be meaningful, and you
should not rely on our past results as an indication of our future performance. Our quarterly and annual revenues and costs and expenses as a percentage of our revenues
in a given period may be significantly different from our historical or projected rates and our operating results in future quarters may fall below expectations.
Disruption or failure of our IT systems, cybersecurity related threats or our failure to timely and effectively scale and adapt our existing technology and
infrastructure could impair our users’ streaming entertainment experience and adversely affect our reputation, business and operating results.
Our ability to provide users with a high-quality streaming entertainment experience depends on the continuous and reliable operation of our IT systems. We
cannot assure you that we will be able to procure sufficient bandwidth in a timely manner or on acceptable terms or at all. Failure to do so may significantly impair user
experience on our platform and decrease the overall effectiveness of our platform to both users and advertisers. Disruptions, failures, unscheduled service interruptions
or a decrease in connection speeds could hurt our reputation and cause our users and advertising customers to switch to our competitors’ platforms. Our IT systems and
proprietary content delivery network, or CDN, are vulnerable to damage or interruption as a result of fires, floods, earthquakes, power losses, telecommunications
failures, undetected errors in software, computer viruses, hacking and other attempts to harm our systems. These interruptions may be due to unforeseen events that are
beyond our control or the control of our third-party service providers. For example, we have experienced intermittent interruptions for up to 48 hours of viewer access to
one popular drama title in the past. In addition, in February 2020, we have experienced intermittent interruption for approximately two hours of user access to our
platform. Such interruption was caused by a malfunction at an internet data center, combined with slow response from our backup server supplier caused by the
COVID-19 outbreak and a peak of user traffic on our platform. The interruption was fixed within approximately two hours and we have expanded the capacity of our
servers hosted at internet data centers. Our platform has also experienced general intermittent interruptions in the past. These interruptions were caused by (i) overload of
our servers; (ii) unexpected overflow of user traffic; (iii) service malfunction of payment gateway; and (iv) service malfunction of the telecommunications operators,
such as power outage of internet data centers or network transmission congestion. We may continue to experience similar interruptions in the future despite our
continuous efforts to improve our IT systems. Since we host our servers at third-party internet data centers, any natural disaster or unexpected closure of internet data
centers operated by third-party providers may result in lengthy service interruptions. Furthermore, in the future experience, service disruptions, outages and other
performance problems due to a variety of factors, including infrastructure changes and cybersecurity related threats as follows:
•our technology, system, networks and our users’ devices have been subject to, and may continue to be the target of, cyber-attacks, computer viruses, malicious
code, phishing attacks or information security breaches that could result in an unauthorized release, gathering, monitoring, misuse, loss or destruction of
confidential, proprietary and other information of ours, our employees or sensitive information provided by our users, or otherwise disrupt our, our users’ or
other third parties’ business operations;
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•we periodically encounter attempts to create false accounts or use our platform to send targeted and untargeted spam messages to our users, or take other actions
on our platform for purposes such as spamming or spreading misinformation, and we may not be able to repel spamming attacks;
•the use of encryption and other security measures intended to protect our systems and confidential data may not provide absolute security, and losses or
unauthorized access to or releases of confidential information may still occur;
•our security measures may be breached due to employee error, malfeasance or unauthorized access to sensitive information by our employees, who may be
induced by outside third parties, and we may not be able to anticipate any breach of our security or to implement adequate preventative measures; and
•we may be subject to IT system failures or network disruptions caused by natural disasters, accidents, power disruptions, telecommunications failures, acts of
terrorism or war, computer viruses, physical or electronic break-ins, or other events or disruptions.
If we experience frequent or persistent service disruptions, whether caused by failures of our own systems or those of third-party service providers, our users’
experience with us may be negatively affected, which in turn, may have a material and adverse effect on our reputation. We cannot assure you that we will be successful
in minimizing the frequency or duration of service interruptions.
As the number of our users increases and our users generate more content on our platform, we may be required to expand and adapt our technology and
infrastructure to continue to reliably store and analyze this content. It may become increasingly difficult to maintain and improve the performance of our services,
especially during peak usage times, as our services become more complex and our user traffic increases. If our users are unable to access our online application in a
timely fashion, or at all, our user experience may be compromised and the users may seek other platforms to meet their needs, and may not return to iQIYI or use iQIYI
as often in the future, or at all. This would negatively impact our ability to attract users and maintain the level of user engagement.
If the technologies we use in operating our business fails, becomes unavailable, or does not operate to meet expectations, our business and results of operation may
be adversely impacted.
We utilize a combination of proprietary and third-party technologies to operate our business. These include the technologies that we have developed to
recommend and monetize content to our users as well as enable fast and efficient delivery of content to our users and their various internet connected devices. For
example, we use our own CDN, and third-party CDN services to support our operation. To the extent internet service providers do not interconnect with the CDN
services we use, or if we experience difficulties in its operation, our ability to efficiently and effectively deliver our streaming content to our users could be adversely
impacted and our business and results of operation could be adversely affected. Likewise, if our recommendation and monetization technology does not enable us to
predict and recommend content that our users will enjoy, our ability to attract and retain users may be adversely affected. We also utilize third-party technology to help
market our service, process payments, and otherwise manage the daily operations of our business. If our technology or that of third parties we utilize in our operations
fails or otherwise operates improperly, our ability to operate our service, retain existing users and add new users may be impaired. Also, any harm to our users’
electronic devices caused by software used in our operations could have an adverse effect on our business, results of operations and financial condition.
Any lack of requisite permits for any of our internet video and other content or any of our business may expose us to regulatory sanctions.
All films and television shows in mainland China, whether produced in mainland China or overseas, must be pre-approved by SARFT, the authority of which is
currently exercised by the NRTA and the State Film Bureau, or the SFB, and distributors of these films and television shows must obtain an applicable permit before
releasing them. In addition, online games are also subject to approval by the SAPPRFT, the authority of which is currently exercised by the National Press and
Publication Administration, or the NPPA.
In terms of licensed third-party content published or online games we distribute, we obtain and rely on written representations from content providers and third-
party operators regarding the NRTA, SFB, NPPA and other approval and filing status of these content and online games, and, to a lesser extent, require content
providers and third-party operators to produce evidence demonstrating that they and the licensed content or the online games have received all requisite permits and
approvals. We also import some foreign TV dramas and films and apply for the permits for and register such contents with the competent authorities by ourselves.
However, we cannot assure you that our monitoring procedures with respect to licensed content and online games are fully adequate, and we cannot guarantee that the
remedies provided by these content providers, if any, will be sufficient to compensate us for potential regulatory sanctions imposed by the NRTA, SFB or NPPA due to
violations of the approval and permit requirements and for the foreign TV dramas and movies imported by us, we cannot assure you that we will be able to obtain the
permits for or register such contents with the competent authorities in a timely manner or at all. Nor can we ensure that any such sanctions will not adversely
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affect either the general availability of video, online games or other content on our platform or our reputation. In addition, such risks may persist due to ambiguities and
uncertainties relating to the implementation and enforcement of the relevant laws and regulations. Although we have internal content moderation procedures in place to
review our procured content, we face risks of termination or revocation of permits and approvals, contractual misrepresentations and failure to honor representations or
indemnify us against any claims or costs by content providers.
We have obtained the Value-added Telecommunications Business Operation License for information services via internet, or ICP License, the Internet Audio-
video Program Transmission License, the Network Culture Business Permit, Permit to Produce or Operate Radio and Television Programs, the Permit for Internet Drug
Information Service, and other relevant permits required for operating our main business. However, we have not obtained certain approvals or permits which are
required or may be required for our operation of certain businesses. For example, we have not obtained the Permit for Internet News Information Service to publish
current political news on our platform or disseminate such news through the internet. Beijing iQIYI has not obtained the Internet Publishing Service License in relation
to our online comics and online literature operation. We also have not obtained certain service items for our Permit for Internet Audio-video Program Service, such as
displaying and forwarding current political audio-video news programs. Although we plan to apply for such licenses to the extent practical and we maintain regular oral
communication with relevant regulatory authorities, which have not objected to the operations of our business in question, if we fail to obtain, maintain or renew such
licenses, or obtain any additional licenses and permits or make any records or filings required by new laws, regulations or executive orders required for our new business
in a timely manner or at all, we could be subject to liabilities or penalties, and our operations could be adversely affected.
In addition, new laws and regulations, and the evolving practice in the implementation of the existing laws and regulations may be adopted from time to time to
address new issues that come to the authorities’ attention, which may require us to obtain new license and permits, or take certain actions that may adversely affect our
business operations. For example, we have voluntarily taken down certain online advertisements on our platform due to tightened regulations on online advertisements.
We have also taken down or cut down contents on our platform due to sanctions put on their cast or other limitations imposed by relevant governmental authorities from
time to time.
As the industry that we operate in is still evolving in mainland China, new laws and regulations may be adopted from time to time to require additional licenses
and permits other than those we currently have, and to address new issues that arise from time to time. We may not timely obtain or maintain all the required licenses or
approvals or make all the necessary filings in the future. Nor can we assure you that we will be able to timely address all the change in policy, failure of which may
subject us to liabilities or penalties, and our operations could be adversely affected.
Undetected programming errors could adversely affect our user experience and market acceptance of our video content, which may materially and adversely affect
our business and results of operations.
Video content on our platform may contain programming errors that may only become apparent after their release. We receive user feedbacks in connection with
programming errors affecting the user experience from time to time, and such errors may also come to our attention during our monitoring process. We generally have
been able to resolve such programming errors in a timely manner. However, we cannot assure you that we will be able to detect and resolve all these programming errors
effectively. Undetected audio or video programming errors or defects may adversely affect user experience, cause users to refrain from becoming our paid members or
to cancel their membership subscriptions, and cause our advertising customers to reduce their use of our services, any of which could materially and adversely affect our
business and results of operations.
We have invested in or acquired complementary assets, technologies and businesses in the future, and such efforts may fail, may cause risks of non-compliance and
may result in equity or earnings dilution.
We have invested in and acquired, and may continue to invest in and acquire, assets, technologies and businesses that are complementary to our business in the
future. For example, in July 2018, we acquired 100% equity stake in Skymoons. Acquired businesses or assets may not yield the results we expect. In addition,
investments and acquisitions involve uncertainties and risks, including:
•potential ongoing financial obligations and unforeseen or hidden liabilities, including liability for infringement of third-party copyrights or other intellectual
property;
•costs and difficulties of integrating acquired businesses and managing a larger business;
•in the case of investments where we do not obtain management and operational control, lack of influence over the controlling partner or shareholder, which may
prevent us from achieving our strategic goals in the investments;
•possible loss of key employees of a target business;
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•potential claims or litigation regarding our board’s exercise of its duty of care and other duties required under applicable law in connection with any of our
significant acquisitions or investments approved by the board;
•diversion of resources and management attention;
•regulatory hurdles and compliance risks, including the anti-monopoly and competition laws, rules and regulations of mainland China and other jurisdictions; and
•enhanced compliance requirements for outbound acquisitions and investment under the laws and regulations of mainland China.
Any failure to address these risks successfully may have a material and adverse effect on our financial condition and results of operations. Investments and
acquisitions may require a significant amount of capital, which would decrease the amount of cash available for working capital or capital expenditures. In addition, if
we use our equity securities to pay for investments and acquisitions, we may dilute the value of our ADSs and the underlying ordinary shares. If we borrow funds to
finance investments and acquisitions, such debt instruments may contain restrictive covenants that could, among other things, restrict us from distributing dividends.
Moreover, acquisitions may also generate significant amortization expenses related to intangible assets. We may also incur impairment charges to earnings for
investments and acquired businesses and assets.
We are subject to payment processing risk.
Our members pay for our service using a variety of different online payment methods. We rely on third parties to process such payment. Acceptance and
processing of these payment methods are subject to certain rules and regulations and require payment of interchange and other fees. To the extent there are increases in
payment processing fees, material changes in the payment ecosystem, such as delays in receiving payments from payment processors and changes to rules or regulations
concerning payment processing, our revenue, operating expenses and results of operation could be adversely impacted.
Negative media coverage could adversely affect our business.
Negative publicity about us or our business, shareholders, affiliates, directors, officers or other employees, as well as the industry in which we operate or the
talents on our platform, can harm our operations. Such negative publicity could be related to a variety of matters, including:
•alleged misconduct or other improper activities committed by our shareholders, affiliates, directors, officers, other employees, talents on our platform, or by
third-party suppliers;
•false or malicious allegations or rumors about us or our shareholders, affiliates, directors, officers, other employees, talents on our platform, or by third-party
suppliers;
•user complaints about the quality of our products and services;
•copyright infringements involving us and content offered on our platform;
•security breaches of confidential user information;
•improper actions by fans; and
•governmental and regulatory investigations or penalties resulting from our failure to comply with applicable laws and regulations.
Furthermore, negative publicity about talents on our platform could occur in many circumstances that are beyond our control. For instance, they may post
unlawful, false, offensive or controversial content on their social media pages, notwithstanding any terms of use of the social media platforms and our guidelines, which
may thus receive negative comments and complaints or even cause their accounts to be closed by social media platforms. In addition, they may also receive negative
publicity if they are involved in any illegal activities, scandals or rumors. Any negative publicity of or media coverage about the talents on our platform, regardless of its
veracity, could harm our reputation and have a negative impact on our business.
In addition, we are exploring various opportunities and marketing strategies to better monetize our membership base, including offering early access privilege to
certain drama series for an additional fee. We may receive negative news reports, or negative publicity on influential TV shows, on such initiatives, which may
negatively impact our reputation and results of operations. We may also be affected by publicity relating to third-party service providers. In addition to traditional media,
there has been an increasing use of social media platforms and similar devices in mainland China, including instant messaging applications, such as Weixin/WeChat,
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social media apps and other forms of internet-based communications that provide individuals with access to a broad audience of users and other interested persons. The
availability of information on instant messaging applications and social media platforms is virtually immediate as is its impact without affording us an opportunity for
redress or correction. The opportunity for dissemination of information, including inaccurate information, is seemingly limitless and readily available. Information
concerning our company, shareholders, directors, officers and employees may be posted on such platforms at any time. The risks associated with any such negative
publicity or incorrect information cannot be completely eliminated or mitigated and may materially harm our reputation, business, financial condition and results of
operations.
The COVID-19 epidemic had and could continue to have a material adverse impact on our business, operating results and financial condition.
The COVID-19 pandemic created unique global and industry-wide challenges, including challenges to many aspects of our business. Substantially all of our
revenues and workforce are concentrated in mainland China. The spread of the disease and the preventive actions taken imposed a strong restraining effect on content
production and title release in the entire online entertainment industry, causing an undersupply of content, especially cinema movies, throughout 2020, 2021 and 2022.
The decrease in the quantity of content offerings in turn negatively affected our ability to retain existing subscribing members and attract new ones during the past three
years.
China began to modify its zero-COVID policy at the end of 2022, and most of the travel restrictions and quarantine requirements were lifted in December 2022.
There remains uncertainty as to the future impact of the virus, especially in light of this change in policy. The extent to which the pandemic impacts our results of
operations going forward will depend on future developments which are highly uncertain and unpredictable, including the frequency, duration and extent of outbreaks of
COVID-19, the appearance of new variants with different characteristics, the effectiveness of efforts to contain or treat cases, and future actions that may be taken in
response to these developments. In light of the uncertainties in the global market and economic conditions attributable to the COVID-19 pandemic, we will continue to
evaluate the nature and extent of the impact of the COVID-19 pandemic to our financial condition and liquidity. If there is not a material recovery in the COVID-19
situation, or the situation further deteriorates in mainland China, our business, results of operations and financial condition could be materially and adversely affected.
A severe or prolonged downturn in mainland China or global economy could materially and adversely affect our business and financial condition.
COVID-19 had a severe and negative impact on the Chinese and the global economy in 2022. Whether this will lead to a prolonged downturn in the economy is
still unknown. Even before the outbreak of COVID-19, global macroeconomic environment was facing numerous challenges. The growth rate of the Chinese economy
has gradually slowed in recent years and the trend may continue. There is considerable uncertainty over the long-term effects of the monetary and fiscal policies adopted
by the central banks and financial authorities of some of the world’s leading economies, including the United States and China. The conflict in Ukraine and the
imposition of broad economic sanctions on Russia could raise energy prices and disrupt global markets. Unrest, terrorist threats and the potential for war may increase
market volatility across the globe. There have also been concerns on the relationship among China and other countries, including the surrounding Asian countries, which
may potentially have economic effects. In particular, there is significant uncertainty about the future relationship between the United States and China with respect to
trade policies, treaties, government regulations and tariffs, as well as sanctions and anti-sanction actions implemented by both sides. Economic conditions in mainland
China are sensitive to global economic conditions, as well as changes in domestic economic and political policies and the expected or perceived overall economic
growth rate in mainland China. Any severe or prolonged slowdown in the global or mainland China economy may materially and adversely affect our business, results
of operations and financial condition. In addition, continued turbulence in the international markets may adversely affect our ability to access capital markets to meet
liquidity needs.
Furthermore, in the wake of the United Kingdom’s exit from the European Union on January 31, 2020 (“Brexit”), there remains uncertainty about the future
relationship between the United Kingdom and the European Union. It remains unclear how Brexit would affect the fiscal, monetary and regulatory landscape within the
United Kingdom, the European Union and globally, which may have a negative impact on our business and results of operations.
Our operations depend on the performance of the internet infrastructure and telecommunications networks in mainland China.
The successful operation of our business depends on the performance of the internet infrastructure and telecommunications networks in mainland China. Almost
all access to the internet is maintained through state-owned telecommunications operators under the administrative control and regulatory supervision of the MIIT.
Moreover, we have entered into contracts with various subsidiaries of a limited number of telecommunications service providers at provincial level and rely on them to
provide us with data communications capacity through local telecommunications lines. We have limited access to alternative networks or services in the
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event of disruptions, failures or other problems with China’s internet infrastructure or the telecommunications networks provided by telecommunications service
providers. Our platform regularly serves a large number of users and advertisers. With the expansion of our business, we may be required to upgrade our technology and
infrastructure to keep up with the increasing traffic on our platform. However, we have no control over the costs of the services provided by telecommunications service
providers. If the prices we pay for telecommunications and internet services rise significantly, our results of operations may be materially and adversely affected. If
internet access fees or other charges to internet users increase, our user traffic may decline and our business may be harmed.
We have granted, and may continue to grant, share incentives, which may result in increased share-based compensation expenses.
We adopted the 2010 Equity Incentive plan on October 18, 2010, or the 2010 Plan, which was amended and restated on November 3, 2014 and August 6, 2016,
the 2017 Share Incentive Plan on November 30, 2017, or the 2017 Plan, and the 2021 Share Incentive Plan on December 2, 2021, or the 2021 Plan, which was amended
and restated on November 2, 2022. We account for compensation costs for all share-based awards using a fair-value based method and recognize expenses in our
consolidated statements of comprehensive loss in accordance with U.S. GAAP. Under the 2010 Plan, we are authorized to grant options, stock appreciation rights,
restricted stock units and other types of awards that the administrator of the 2010 Plan decides. Under the 2017 Plan, we are authorized to grant options, restricted shares
and restricted share units. Under the 2021 Plan, we are authorized to grant options and restricted share units. Under the 2010 Plan, as amended, the maximum aggregate
number of shares which may be issued pursuant to all awards is 589,729,714 shares. Under the 2017 Plan, the maximum aggregate number of shares which may be
issued pursuant to all awards is 720,000 shares. Under the 2021 Plan, the maximum aggregate number of shares which may be issued pursuant to all awards is
364,000,000 Class A ordinary shares, or the 2021 Plan Award Pool, provided that if restricted share units are granted, each restricted share unit (that entitles the holder to
one share) granted shall reduce the number of shares in the 2021 Plan Award Pool available for future grants by 1.3 shares; any option with nil exercise price have the
same effect of reducing the number of shares in the 2021 Plan Award Pool as the restricted share units. As of February 28, 2023, options to purchase a total of
340,864,386 ordinary shares were outstanding under the 2010 Plan, and options with nil exercise price to purchase a total of 127,127,798 ordinary shares were
outstanding under the 2021 Plan. No awards were outstanding under the 2017 Plan. For the years ended December 31, 2020, 2021, and 2022, we recorded RMB1,370.1
million, RMB1,219.2 million and RMB811.4 million (US$117.6 million), respectively, in share-based compensation expenses. We believe the granting of share-based
awards is of significant importance to our ability to attract and retain key personnel and employees, and we will continue to grant share-based awards in the future. As a
result, our expenses associated with share-based compensation may increase, which may have an adverse effect on our results of operations.
We are subject to changing law and regulations regarding regulatory matters, corporate governance and public disclosure that have increased both our costs and the
risk of non-compliance.
We are subject to rules and regulations by various governing bodies, including, for example, the SEC, which is charged with the protection of investors and the
oversight of companies whose securities are publicly traded, and the various regulatory authorities in mainland China and the Cayman Islands, and to new and evolving
regulatory measures under applicable law. Our efforts to comply with new and changing laws and regulations have resulted in and are likely to continue to result in,
increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.
Moreover, because these laws, regulations and standards are subject to varying interpretations, their application in practice may evolve over time as new guidance
becomes available. This evolution may result in continuing uncertainty regarding compliance matters and additional costs necessitated by ongoing revisions to our
disclosure and governance practices. If we fail to address and comply with these regulations and any subsequent changes, we may be subject to penalty and our business
may be harmed.
We have limited business insurance coverage.
Insurance companies in mainland China offer limited business insurance products. We do not have any business liability or disruption insurance coverage for our
operations in mainland China. Any business disruption may result in our incurring substantial costs and the diversion of our resources, which could have an adverse
effect on our results of operations and financial condition.
Failure to maintain effective internal control over financial reporting could have a material and adverse effect on the trading price of our ADSs.
We are subject to the reporting obligations under the U.S. securities laws. The SEC, as required by Section 404 of the Sarbanes-Oxley Act, adopted rules
requiring every public company to include a report from management on the effectiveness of such company’s internal control over financial reporting in its annual
report on Form 20-F. In addition, the independent registered public accounting firm must report on the effectiveness of such company’s internal control over financial
reporting. If we fail to maintain effective internal control over financial reporting, we will not be able to conclude and our independent registered public accounting firm
will not be able to report that we have effective internal control over financial reporting in accordance with the Sarbanes-Oxley
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Act of 2002 in our future annual report on Form 20-F covering the fiscal year in which this failure occurs. Effective internal control over financial reporting is necessary
for us to produce reliable financial reports. Any failure to maintain effective internal control over financial reporting could result in the loss of investor confidence in the
reliability of our financial statements, which in turn could have a material and adverse effect on the trading price of our ADSs. Furthermore, we may need to incur
additional costs and use additional management and other resources as our business and operations further expand or in an effort to remediate any significant control
deficiencies that may be identified in the future.
We face risks related to health epidemics and other outbreaks, as well as natural disasters, which could significantly disrupt our operations and adversely affect our
business, financial condition or results of operation.
In addition to the impact of COVID-19, our business could be materially and adversely affected by natural disasters, such as snowstorms, earthquakes, fires or
floods, the outbreak of other widespread health epidemic, such as swine flu, avian influenza, severe acute respiratory syndrome, or SARS, Ebola, Zika or other events,
such as wars, acts of terrorism, environmental accidents, power shortage or communication interruptions. Our business operations could be disrupted if any of our
employees is suspected of having any transmissible health epidemic, since this may cause our employees to be quarantined and our offices to be temperately shut down.
In addition, our results of operations may be adversely affected to the extent that any of these epidemics harms the Chinese economy in general.
We are also vulnerable to natural disasters and other calamities. Fire, floods, typhoons, earthquakes, power loss, telecommunications failures, break-ins, war,
riots, terrorist attacks or similar events may give rise to server interruptions, breakdowns, system failures, technology platform failures or internet failures, which could
cause the loss or corruption of data or malfunctions of software or hardware as well as adversely affect our ability to provide content and services on our platform.
Increasing focus with respect to environmental, social and governance matters may impose additional costs on us or expose us to additional risks. Failure to adapt to
or comply with the evolving expectations and standards on environmental, social and governance matters from investors and the PRC government may adversely
affect our business, financial condition and results of operation.
The PRC government and public advocacy groups have been increasingly focused on environment, social and governance (“ESG”) issues in recent years,
making our business more sensitive to ESG issues and changes in governmental policies and laws and regulations associated with environment protection and other
ESG-related matters. Investor advocacy groups, certain institutional investors, investment funds, and other influential investors are also increasingly focused on ESG
practices and in recent years have placed increasing importance on the implications and social cost of their investments. Regardless of the industry, increased focus from
investors and the PRC government on ESG and similar matters may hinder access to capital, as investors may decide to reallocate capital or to not commit capital as a
result of their assessment of a company’s ESG practices. Any ESG concern or issue could increase our regulatory compliance costs. If we do not adapt to or comply with
the evolving expectations and standards on ESG matters from investors and the PRC government or are perceived to have not responded appropriately to the growing
concern for ESG issues, regardless of whether there is a legal requirement to do so, we may suffer from reputational damage and the business, financial condition, and
the price of our ADSs could be materially and adversely effected.
Risks Related to Our Relationship with Baidu
We have limited experience operating as a stand-alone public company.
We have limited experience conducting our operations as a stand-alone public company. Since we became a stand-alone public company in March 2018, we
have faced and will continue to face enhanced administrative and compliance requirements, which may result in substantial costs.
In addition, as we are a public company, our management team needs to develop the expertise necessary to comply with the regulatory and other requirements
applicable to public companies, including requirements relating to corporate governance, listing standards and securities and investor relations issues. While we were a
private subsidiary of Baidu, we were indirectly subject to requirements to maintain an effective internal control over financial reporting under Section 404 of the
Sarbanes-Oxley Act of 2002. However, as a stand-alone public company, our management has to evaluate our internal control system independently with new
thresholds of materiality, and to implement necessary changes to our internal control system. We cannot guarantee that we will be able to do so continuously in an
effective manner.
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We may have conflicts of interest with Baidu and, because of Baidu’s controlling ownership interest in our company, we may not be able to resolve such conflicts
on terms favorable to us.
Conflicts of interest may arise between Baidu and us in a number of areas relating to our ongoing relationships. Potential conflicts of interest that we have
identified include the following:
•Our board members may have conflicts of interest. Our directors Mr. Junjie He, Dr. Dou Shen, Mr. Fei Qi and Ms. Luyao Han are also employees of Baidu.
These relationships could create, or appear to create, conflicts of interest when these persons are faced with decisions with potentially different implications for
Baidu and us.
•Sale of shares in our company. Baidu may decide to sell all or a portion of our shares that it holds to a third-party, including to one of our competitors, thereby
giving that third-party substantial influence over our business and our affairs. Such a sale could be in conflict with the interests of our employees or our other
shareholders.
•Developing business relationships with Baidu’s competitors. So long as Baidu remains our controlling shareholder, we may be limited in our ability to do
business with its competitors. This may limit our ability to market our services for the best interests of our company and our other shareholders.
•Allocation of business opportunities. Business opportunities may arise that both we and Baidu find attractive, and which would complement our businesses. We
may be prevented from taking advantage of new business opportunities that Baidu has entered into.
Although our company became a stand-alone public company in March 2018, we expect to operate, for as long as Baidu is our controlling shareholder, as a
subsidiary of Baidu. Baidu may from time to time make strategic decisions that it believes are in the best interests of its business as a whole, including our company.
These decisions may be different from the decisions that we would have made on our own. Baidu’s decisions with respect to us or our business, including any related
party transactions between Baidu and us, may be resolved in ways that favor Baidu and therefore Baidu’s own shareholders, which may not coincide with the interests
of our other shareholders. If Baidu were to compete with us, our business, financial condition, results of operations and prospects could be materially and adversely
affected.
Our agreements with Baidu may be less favorable to us than similar agreements negotiated with unaffiliated third parties. In particular, our master business
cooperation agreement with Baidu limits the scope of business that we are allowed to conduct.
We have entered into a master business cooperation agreement with Baidu and may enter into additional agreements with Baidu in the future. Under our master
business cooperation agreement with Baidu, we agree during the non-competition period, which will end on the eighth anniversary of the date of execution of the
agreement unless otherwise terminated earlier pursuant to the agreement, not to compete with Baidu in its core businesses. Such contractual limitations may affect our
ability to expand our business and may adversely impact our growth and prospects. Furthermore, while Baidu has agreed not to compete with us in our long-form video
businesses, existing business activities conducted by Baidu and its affiliates are not subject to such non-compete limitation. Potential conflicts of interest could arise in
connection with the resolution of any dispute between Baidu and us, regarding the terms of the arrangements governing our agreements with Baidu including the master
business cooperation agreement. For example, so long as Baidu continues to control us, we may not be able to bring a legal claim against Baidu in the event of
contractual breach, notwithstanding our contractual rights under the master business cooperation agreement and other inter-company agreements to be entered into by
Baidu and us from time to time.
If our collaboration with Baidu is terminated or curtailed, or if we are no longer able to benefit from the synergies of our business cooperation with Baidu, our
business may be adversely affected.
Our controlling shareholder and strategic partner, Baidu, is one of the largest internet companies in mainland China. Our business has benefited significantly
from Baidu’s advanced technological capabilities and strong market position in mainland China. In addition, we have benefited from Baidu’s financial support in the
past. We cooperate with Baidu in a number of areas, including AI technology, cloud services and traffic. However, we cannot assure you that we will continue to
maintain our cooperative relationships with Baidu and its affiliates in the future. To the extent we cannot maintain our cooperative relationships with Baidu at
reasonable prices or at all, we will need to source other business partners to provide services, which could result in material and adverse effects to our business and
results of operations. We may also need to obtain financing through other means if Baidu ceases to provide financial support to us. In addition, our current customers and
content partners may react negatively to our carve-out from Baidu. Our inability to maintain a cooperative relationship with Baidu could materially and adversely affect
our business, growth and prospects.
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Baidu will control the outcome of shareholder actions in our company.
As of February 28, 2023, Baidu held 45.5% of our outstanding ordinary shares, representing 89.3% of our total voting power. Baidu has advised us that it does
not anticipate disposing of its voting control in us in the near future. Baidu’s voting power gives it the power to control certain actions that require shareholder approval
under Cayman Islands law, our memorandum and articles of association and the Nasdaq Stock Market requirements, including approval of mergers and other business
combinations, changes to our memorandum and articles of association, the number of shares available for issuance under any share incentive plans, and the issuance of
significant amounts of our ordinary shares in private placements.
Baidu’s voting control may cause transactions to occur that might not be beneficial to you as a holder of ADSs and may prevent transactions that could have been
beneficial to you. For example, Baidu’s voting control may prevent a transaction involving a change of control of us, including transactions in which you as a holder of
our ADSs might otherwise receive a premium for your securities over the then-current market price. In addition, Baidu is not prohibited from selling a controlling
interest in us to a third-party and may do so without your approval and without providing for a purchase of your ADSs. In addition, the significant concentration of share
ownership may adversely affect the trading price of the ADSs due to investors’ perception that conflicts of interest may exist or arise.
We are a “controlled company” within the meaning of the Nasdaq Stock Market Rules and, as a result, will rely on exemptions from certain corporate governance
requirements that provide protection to shareholders of other companies.
We are a “controlled company” as defined under the Nasdaq Stock Market Rules because Baidu beneficially owns more than 50% of our total voting power. For
so long as we remain a controlled company under that definition, we are permitted to elect to rely, and will rely, on certain exemptions from corporate governance rules,
including:
•an exemption from the rule that a majority of our board of directors must be independent directors;
•an exemption from the rule that the compensation of our chief executive officer must be determined or recommended solely by independent directors; and
•an exemption from the rule that our director nominees must be selected or recommended solely by independent directors.
As a result, you will not have the same protection afforded to shareholders of companies that are subject to these corporate governance requirements.
Risks Related to Our Corporate Structure
If the PRC government finds that the agreements that establish the structure for operating certain of our operations in mainland China do not comply with PRC
regulations relating to the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe
penalties or be forced to relinquish our interests in those operations.
Foreign ownership of telecommunication businesses and certain other businesses, such as provision of internet video and online game services, is subject to
restrictions under current PRC laws and regulations. For example, foreign investors are generally not allowed to own more than 50% of the equity interests in a
commercial internet content provider or other value-added telecommunication service provider (other than operating e-commerce, domestic multi-party communication,
store-and-forward, and call center) and the major foreign investor in a value-added telecommunication service provider in mainland China must have experience in
providing value-added telecommunications services overseas and maintain a good track record in accordance with the Negative List, and other applicable laws and
regulations.
In addition, foreign investors are prohibited from investing in companies engaged in internet video, culture and publishing business and film/drama production
and operation (including importation) business. We are a Cayman Islands company and our mainland China subsidiaries are considered foreign-invested enterprises. As
such, none of our mainland China subsidiaries are eligible to operate internet video and other businesses which foreign-owned companies are prohibited or restricted
from conducting in mainland China. Accordingly, we conduct such business activities through the variable interest entities in mainland China, Beijing iQIYI, Shanghai
iQIYI, Shanghai Zhong Yuan, iQIYI Pictures and Intelligent Entertainment, and their subsidiaries. Our wholly-owned subsidiaries, Beijing QIYI Century and iQIYI
New Media, have entered into contractual arrangements with the variable interest entities and their respective shareholders, and such contractual arrangements enable us
to impose control over, receive the economic benefits of, and have an exclusive option to purchase all or part of the equity interest and assets in the variable interest
entities when and to the extent permitted by PRC law. Because of these contractual arrangements, we are the primary beneficiary of the variable interest entities in
mainland China and hence consolidate their financial results as our variable interest entities under U.S. GAAP. We conduct our operations in mainland China through (i)
our mainland China subsidiaries and (ii) the variable interest entities
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with which we maintained these contractual arrangements and their subsidiaries in mainland China. Investors in our ADSs thus are not purchasing equity interest in the
variable interest entities in mainland China but instead are purchasing equity interest in a Cayman Islands holding company with no equity ownership in the variable
interest entities.
Our holding company in the Cayman Islands, the variable interest entities, and investments in our Company face uncertainty about potential future actions by the
PRC government that could affect the enforceability of the contractual arrangements with the variable interest entities and, consequently, the business, financial
condition, and results of operations of the variable interest entities and our Company as a group. In addition, our ADSs may decline in value or become worthless if we
are unable to assert our contractual control rights over the assets of the variable interest entities which contributed 92% of our revenues in 2022. If the PRC government
finds that our contractual arrangements do not comply with its restrictions on foreign investment in online video and other foreign-restricted services, or if the PRC
government otherwise finds that we, the variable interest entities, or any of their subsidiaries are in violation of PRC laws or regulations or lack the necessary permits or
licenses to operate our business, the relevant PRC regulatory authorities, including the MIIT, NRTA, the SFB, the NPPA, the Ministry of Culture and the MOFCOM,
would have broad discretion in dealing with such violations or failures, including, without limitation:
•revoking the business licenses and operating licenses of such entities;
•discontinuing or placing restrictions or onerous conditions on our operation through any transactions between our mainland China subsidiaries and the variable
interest entities;
•imposing fines, confiscating the income from our mainland China subsidiaries or the variable interest entities, or imposing other requirements with which we or
the variable interest entities may not be able to comply;
•requiring us to restructure our ownership structure or operations, including terminating the contractual arrangements with the variable interest entities and
deregistering the equity pledges of the variable interest entities, which in turn would affect our ability to consolidate, derive economic interests from, or impose
control over the variable interest entities; or
•restricting or prohibiting our use of the proceeds of any of our offshore financings to finance our business and operations in mainland China.
In addition, in September 2009, the General Administration of Press and Publication, or the GAPP, together with several other government agencies issued a
notice, or the Circular 13, prohibiting foreign investors from participating in online game operating businesses through wholly-owned enterprises, equity joint ventures
or cooperative joint ventures in mainland China. Circular 13 expressly prohibits foreign investors from gaining control over or participating in PRC operating
companies’ online game operations through indirect means, such as establishing joint venture companies, entering into contractual arrangements with or providing
technical support to the operating companies, or through a disguised form, such as incorporating user registration, user account management or payment through game
cards into online game platforms that are ultimately controlled or owned by foreign investors. Other government agencies that also had the authority to regulate online
game operations in mainland China when the Circular 13 was issued, such as the Ministry of Culture and the MIIT, did not join the GAPP in issuing the Circular 13. The
GAPP was replaced by the SAPPRFT and later by the NPPA. To date, none of the GAPP, the SAPPRFT and the NPPA has issued any interpretation of the Circular 13.
Due to the ambiguity among various regulations on online games and a lack of interpretations from the relevant PRC authorities governing online game operations, there
are uncertainties regarding whether PRC authorities would consider our relevant contractual arrangements to be foreign investment in online game operation businesses.
While we are not aware of any online game companies which use the same or similar contractual arrangements as ours having been penalized or ordered to terminate
operation by PRC authorities claiming that the contractual arrangements constitute control over, or participation in, the operation of online game operations through
indirect means, it is unclear whether and how the various regulations of the PRC authorities might be interpreted or implemented in the future. If our relevant
contractual arrangements were deemed to be “indirect means” or “disguised form” under the Circular 13, the relevant contractual arrangements may be challenged by
the NPPA or other governmental authorities. If we were found to be in violation of the Circular 13 to operate our mobile game business, the NPPA, in conjunction with
relevant regulatory authorities, would have the power to investigate and deal with such violations, including in the most serious cases, suspending or revoking the
relevant licenses and registrations. If we were found to be in violation of any existing or future PRC laws or regulations, including the MIIT notice and the Circular 13,
the relevant regulatory authorities would have broad discretion in dealing with such violations.
Furthermore, it is uncertain whether any new PRC laws, rules or regulations relating to contractual arrangements will be adopted or if adopted, what they would
provide. For example, the National People’s Congress approved the Foreign Investment Law on March 15, 2019 and the State Council approved the Regulation on
Implementing the Foreign Investment Law (the “Implementation Regulations”) on December 12, 2019, effective from January 1, 2020. The Supreme People’s Court of
China issued a judicial interpretation on the Foreign Investment Law on December 27, 2019, effective from January 1, 2020. The Foreign Investment Law and the
Implementation Regulations do not touch upon the relevant concepts and regulatory regimes that were historically suggested
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for the regulation of the variable interest entity structures, and thus this regulatory topic remains unclear under the Foreign Investment Law. Since the Foreign
Investment Law and the Implementation Regulations are new, there are substantial uncertainties exist with respect to its implementation and interpretation and it is also
possible that variable interest entities will be deemed as foreign invested enterprises and be subject to restrictions in the future. Such restrictions may cause interruptions
to our operations, products and services and may incur additional compliance cost, which may in turn materially and adversely affect our business, financial condition
and results of operations.
Any of these events could cause significant disruption to our business operations and severely damage our reputation, which would in turn materially and
adversely affect our business, financial condition and results of operations. If occurrences of any of these events results in our inability to direct the activities of the
variable interest entities in mainland China that most significantly impact their economic performance, or our failure to receive the economic benefits from the variable
interest entities, we may not be able to consolidate the entity in our consolidated financial statements in accordance with U.S. GAAP.
We rely on contractual arrangements with the variable interest entities and their shareholders for our business operations, which may not be as effective as direct
ownership in providing operational control.
We have relied and expect to continue to rely on contractual arrangements with variable interest entities and their shareholders to operate our business in
mainland China. For a description of these contractual arrangements, see “Item 4. Information on the Company—C. Organizational Structure—Contractual
Arrangements with the Variable Interest Entities and Their Respective Shareholders.” These contractual arrangements may not be as effective as direct ownership in
providing us with control over the variable interest entities. For example, the variable interest entities and their shareholders could breach their contractual arrangements
with us by, among other things, failing to conduct its operations in an acceptable manner or taking other actions that are detrimental to our interests.
If we had direct ownership of the variable interest entities in mainland China, we would be able to exercise our rights as a shareholder to effect changes in the
board of directors of the variable interest entities, which in turn could implement changes, subject to any applicable fiduciary obligations, at the management and
operational level. However, under the current contractual arrangements, we rely on the performance by the variable interest entities and their shareholders of their
obligations under the contracts to impose control over the variable interest entities. The shareholders of the variable interest entities may not act in the best interests of
our company or may not perform their obligations under these contracts. Such risks exist throughout the period in which we intend to operate a certain portion of our
business through the contractual arrangements with the variable interest entities. If any dispute relating to these contracts remains unresolved, we will have to enforce our
rights under these contracts through the operations of PRC law and arbitration, litigation and other legal proceedings and therefore will be subject to uncertainties in the
PRC legal system. In addition, the legality and enforceability of the contractual agreements between our mainland China subsidiaries, the variable interest entities, and
their nominee shareholders, as a whole, have not been tested in a court of law in mainland China. In the event we are unable to enforce these contractual arrangements,
or if we suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, we may not be able to impose control over the variable
interest entities, and our ability to conduct our business may be materially adversely affected. Therefore, our contractual arrangements with the variable interest entities
may not be as effective in ensuring our control over the relevant portion of our business operations as direct ownership would be.
Any failure by the variable interest entities or their shareholders to perform their obligations under our contractual arrangements with them would have a material
and adverse effect on our business.
If the variable interest entities or their shareholders fail to perform their respective obligations under the contractual arrangements, we may have to incur
substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC law, including seeking specific
performance or injunctive relief, and claiming damages, which we cannot assure you will be effective under PRC law. For example, if the shareholders of the variable
interest entities were to refuse to transfer their equity interests in the variable interest entities to us or our designee if we exercise the purchase option pursuant to these
contractual arrangements, or if they were otherwise to act in bad faith toward us, then we may have to take legal actions to compel them to perform their contractual
obligations.
All the agreements under our contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in mainland
China. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. We
face uncertainties in the enforcement of these contractual arrangements. There remain significant uncertainties regarding the ultimate outcome of such arbitration should
legal action become necessary. In addition, under PRC law, rulings by arbitrators are final, parties cannot appeal the arbitration results in courts, and if the losing parties
fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration awards in PRC courts through arbitration
award recognition proceedings, which would require additional expenses and
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delay. In the event we are unable to enforce these contractual arrangements, or if we suffer significant delay or other obstacles in the process of enforcing these
contractual arrangements, we may not be able to impose control over the variable interest entities, and our ability to conduct our business may be negatively affected.
See “—Risks Related to Doing Business in Mainland China—Uncertainties with respect to the PRC legal system could adversely affect us.”
The shareholders of the variable interest entities may have potential conflicts of interest with us, which may materially and adversely affect our business and
financial condition.
The shareholders of the variable interest entities may have potential conflicts of interest with us. These shareholders may breach, or cause the variable interest
entities to breach, or refuse to renew, the existing contractual arrangements we have with them and the variable interest entities, which would have a material and adverse
effect on our ability to effectively direct the business operations of the variable interest entities and receive economic benefits from it. For example, the shareholders
may be able to cause our agreements with the variable interest entities to be performed in a manner adverse to us by, among other things, failing to remit payments due
under the contractual arrangements to us on a timely basis. In particular, none of Mr. Ning Ya, who currently holds 50% of equity interest in iQIYI Pictures, nor Mr.
Xiaohua Geng, who currently holds 50% of the equity interests in Shanghai iQIYI and 100% of the equity interests in Beijing iQIYI, is our director or executive officer,
and we cannot assure you that their interests will be aligned with ours. We cannot assure you that when conflicts of interest arise, any or all of these shareholders will act
in the best interests of our company or such conflicts will be resolved in our favor. Currently, we do not have any arrangements to address potential conflicts of interest
between these shareholders and our company. If we cannot resolve any conflict of interest or dispute between us and these shareholders, we would have to rely on legal
proceedings, which could result in disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.
Contractual arrangements in relation to the variable interest entities may be subject to scrutiny by the PRC tax authorities and they may determine that we or our
PRC variable interest entities owe additional taxes, which could negatively affect our financial condition and the value of your investment.
Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities
within ten years after the taxable year when the transactions are conducted. We could face material and adverse tax consequences if the PRC tax authorities determine
that the our contractual arrangements with the variable interest entities were not entered into on an arm’s length basis in such a way as to result in an impermissible
reduction in taxes under applicable PRC laws, rules and regulations, and adjust the income of the variable interest entities in the form of a transfer pricing adjustment. A
transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded by the variable interest entities for PRC tax purposes, which
could in turn increase their tax liabilities without reducing our mainland China subsidiary’s tax expenses. In addition, the PRC tax authorities may impose late payment
fees and other penalties on the variable interest entities for the adjusted but unpaid taxes according to the applicable regulations. Our financial position could be
materially and adversely affected if our variable interest entities’ tax liabilities increase or if they are required to pay late payment fees and other penalties.
We may lose the ability to use and enjoy assets held by the variable interest entities that are material to the operation of certain portion of our business if the entity
goes bankrupt or becomes subject to a dissolution or liquidation proceeding.
As part of our contractual arrangements with the variable interest entities, the entities hold certain assets that are material to the operation of certain portion of our
business, including permits, domain names and most of our IP rights. If the variable interest entities go bankrupt and all or part of its assets become subject to liens or
rights of third-party creditors, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, financial
condition and results of operations. Under the contractual arrangements, the variable interest entities may not, in any manner, sell, transfer, mortgage or dispose of their
assets or legal or beneficial interests in the business without our prior consent. If the variable interest entities undergo a voluntary or involuntary liquidation proceeding,
the independent third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and
adversely affect our business, financial condition and results of operations.
Uncertainties exist with respect to the interpretation and implementation of the newly enacted PRC Foreign Investment Law and how it may impact the viability of
our current corporate structure, corporate governance and business operations.
The National People’s Congress approved the Foreign Investment Law on March 15, 2019 and the State Council approved the Regulation on Implementing the
Foreign Investment Law (the “Implementation Regulations”) on December 12, 2019, effective from January 1, 2020, to replace the trio of existing laws regulating
foreign investment in mainland China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and
the Wholly Foreign-invested Enterprise
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Law, together with their implementation rules and ancillary regulations. The Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its
foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign
and domestic investments. However, since it is relatively new, uncertainties still exist in relation to its interpretation and implementation. For instance, under the Foreign
Investment Law, “foreign investment” refers to the investment activities directly or indirectly conducted by foreign individuals, enterprises or other entities in mainland
China. Though it does not explicitly classify contractual arrangements as a form of foreign investment, there is no assurance that foreign investment via contractual
arrangement would not be interpreted as a type of indirect foreign investment activities under the definition in the future. In addition, the definition contains a catch-all
provision which includes investments made by foreign investors through means stipulated in laws or administrative regulations or other methods prescribed by the State
Council. Therefore, it still leaves leeway for future laws, administrative regulations or provisions promulgated by the State Council to provide for contractual
arrangements as a form of foreign investment. In any of these cases, it will be uncertain whether our contractual arrangements will be deemed to be in violation of the
market access requirements for foreign investment under the PRC laws and regulations. Furthermore, if future laws, administrative regulations or provisions prescribed
by the State Council mandate further actions to be taken by companies with respect to existing contractual arrangements, we may face substantial uncertainties as to
whether we can complete such actions in a timely manner, or at all. Failure to take timely and appropriate measures to cope with any of these or similar regulatory
compliance challenges could materially and adversely affect our current corporate structure, corporate governance and business operations.
Risks Related to Doing Business in Mainland China
The PCAOB had historically been unable to inspect our auditor in relation to their audit work performed for our financial statements and the inability of the
PCAOB to conduct inspections of our auditor in the past has deprived our investors with the benefits of such inspections.
Our auditor, the independent registered public accounting firm that issues the audit report included elsewhere in this annual report, as an auditor of companies
that are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular
inspections to assess its compliance with the applicable professional standards. The auditor is located in mainland China, a jurisdiction where the PCAOB was
historically unable to conduct inspections and investigations completely before 2022. As a result, we and investors in our ADSs were deprived of the benefits of such
PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in mainland China in the past has made it more difficult to evaluate the effectiveness
of our independent registered public accounting firm’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to the
PCAOB inspections. On December 15, 2022, the PCAOB issued a report that vacated its December 16, 2021 determination and removed mainland China and Hong
Kong from the list of jurisdictions where it is unable to inspect or investigate completely registered public accounting firms. However, if the PCAOB determines in the
future that it no longer has full access to inspect and investigate completely accounting firms in mainland China and Hong Kong, and we use an accounting firm
headquartered in one of these jurisdictions to issue an audit report on our financial statements filed with the SEC, we and investors in our ADSs would be deprived of the
benefits of such PCAOB inspections again, which could cause investors and potential investors in the ADSs to lose confidence in our audit procedures and reported
financial information and the quality of our financial statements.
Our ADSs may be prohibited from trading in the United States under the HFCAA in the future if the PCAOB is unable to inspect or investigate completely auditors
located in China. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment.
Pursuant to the HFCAA, if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to
inspections by the PCAOB for two consecutive years, the SEC will prohibit our shares or ADSs from being traded on a national securities exchange or in the over-the-
counter trading market in the United States. On December 16, 2021, the PCAOB issued a report to notify the SEC of its determination that the PCAOB was unable to
inspect or investigate completely registered public accounting firms headquartered in mainland China and Hong Kong and our auditor was subject to that determination.
In April 2022, the SEC conclusively listed us as a Commission-Identified Issuer under the HFCAA following the filing of our annual report on Form 20-F for the fiscal
year ended December 31, 2021. On December 15, 2022, the PCAOB removed mainland China and Hong Kong from the list of jurisdictions where it is unable to inspect
or investigate completely registered public accounting firms. For this reason, we do not expect to be identified as a Commission-Identified Issuer under the HFCAA after
we file this annual report on Form 20-F for the fiscal year ended December 31, 2022.
Each year, the PCAOB will determine whether it can inspect and investigate completely audit firms in mainland China and Hong Kong, among other
jurisdictions. If the PCAOB determines in the future that it no longer has full access to inspect and investigate completely accounting firms in mainland China and Hong
Kong and we use an accounting firm headquartered in one of these jurisdictions to issue an audit report on our financial statements filed with the SEC, we would be
identified as a Commission-Identified Issuer following the filing of the annual report on Form 20-F for the relevant fiscal year. In accordance with the HFCAA,
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our securities would be prohibited from being traded on a national securities exchange or in the over-the-counter trading market in the United States if we are identified
as a Commission-Identified Issuer for two consecutive years in the future. If our shares and ADSs are prohibited from trading in the United States, there is no certainty
that we will be able to list on a non-U.S. exchange or that a market for our shares will develop outside of the United States. A prohibition of being able to trade in the
United States would substantially impair your ability to sell or purchase our ADSs when you wish to do so, and the risk and uncertainty associated with delisting would
have a negative impact on the price of our ADSs. Also, such a prohibition would significantly affect our ability to raise capital on terms acceptable to us, or at all, which
would have a material adverse impact on our business, financial condition, and prospects.
The approval of or the filing with the CSRC or other PRC government authorities may be required in connection with our future offshore listings and capital
raising activities under PRC law, and, if required, we cannot predict whether or for how long we will be able to obtain such approval or filing.
The Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in 2006
and amended in 2009, requires an overseas special purpose vehicle formed for listing purposes through acquisitions of PRC domestic companies and controlled by PRC
persons or entities to obtain the approval of the CSRC prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. The
interpretation and application of the regulations remain unclear and uncertain. If the CSRC approval is required for any of our offshore listings and capital raising
activities, it is uncertain whether we can or how long it will take us to obtain the approval and, even if we obtain such CSRC approval, the approval could be rescinded.
Any failure to obtain or delay in obtaining the CSRC approval for any of our offshore listings and capital raising activities if such approval is required, or a rescission of
such CSRC approval obtained by us, would subject us to sanctions imposed by the CSRC or other PRC regulatory authorities, which could include fines and penalties on
our operations in mainland China, restrictions or limitations on our ability to pay dividends outside of China, and other forms of sanctions that may materially and
adversely affect our business, financial condition, and results of operations.
On July 6, 2021, the relevant PRC government authorities issued the Opinions on Strictly Cracking Down Illegal Securities Activities in Accordance with the
Law, which called for the enhanced administration over illegal securities activities and the supervision of overseas-listed China-based companies and proposed to revise
the relevant regulation governing the overseas issuance and listing of shares by such companies and clarified the responsibilities of competent domestic industry
regulators and government authorities.
On February 17, 2023, the CSRC published the Interim Administrative Measures on Overseas Securities Offering and Listing by the Domestic Enterprises
(CSRC Announcement [2022] No. 43), or the Overseas Listing Measures, which will become effective on March 31, 2023. Under the Overseas Listing Measures, a
filing-based regulatory system will be applied to “indirect overseas offerings and listings” of PRC domestic companies, which refers to securities offerings and listings
in an overseas market made under the name of an offshore entity but based on the underlying equity, assets, earnings or other similar rights of a domestic company that
operates its main business domestically. The Overseas Listing Measures state that, any overseas offering of securities, including issuance of shares, convertible notes and
other similar securities, by a PRC domestic company, and listing by a PRC domestic company in an overseas market, shall be subject to filing requirement within three
business days after the completion of such offering or listing. In addition, According to the Notice on Overseas Listing Measures, issuers that have already been listed in
an overseas market by March 31, 2023, the date on which the Overseas Listing Measures will become effective, such as company, are not required to make any
immediate filing. However, such issuers will be required to comply with the filing requirements under Overseas Listing Measures if and when they pursue any future
securities offerings and listings outside of mainland China, including but not limited to follow-on offerings, secondary listings and going private transactions. If we fail
to obtain required approval or complete other review or filing procedures, under the Overseas Listing Measures or otherwise, for any future securities offerings and
listings outside of mainland China, including but not limited to follow-on offerings, secondary listings and going private transactions, we may face sanctions by the
CSRC or other PRC regulatory authorities, which may include fines and penalties on our operations in mainland China, limitations on our operating privileges in
mainland China, restrictions on or prohibition of the payments or remittance of dividends by our subsidiaries in mainland China, restrictions on or delays to our future
financing transactions offshore, or other actions that could have a material and adverse effect on our business, financial condition, results of operations, reputation and
prospects, as well as the trading price of our ADSs.
In addition, according to the Negative List promulgated by the MOFCOM and the NDRC that became effective on January 1, 2022, domestic enterprises
engaged in activities in any field prohibited from foreign investment under the Negative List shall be subject to review and approval by the relevant authorities of the
State when listing and trading overseas. Furthermore, the Enterprise Mid- and Long-Term Foreign Debt Registration Administrative Measures that became effective on
February 10, 2023 established a foreign debt approval registration system that replaced the foreign debt filing registration system under the NDRC Circular on
Promoting the Reform of the Filing and Registration System on the Issuance by Enterprises of Foreign Debt. As a result, a new foreign debt approval registration system
that replaced the foreign debt filing registration system under the NDRC Circular on
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Promoting the Reform of the Filing and Registration System on the Issuance by Enterprises of Foreign Debt (the “Circular 2044”). We obtained a certificate for the
registration of issuances of foreign debt in December 2022 pursuant to Circular 2044, such registration certificate remains valid and in full force under the New NDRC
Measures and were used for our PAG Notes and 2028 Notes. However, given the uncertainties regarding the interpretation and application of the newly promulgated
Enterprise Mid- and Long-Term Foreign Debt Registration Administrative Measure, there is no assurance that we can register future foreign debt offerings or
accomplish the required filings or other regulatory procedures in a timely manner, or at all.
If it is determined that any approval, filing or other administrative procedure from the CSRC or other PRC governmental authorities is required for any future
securities offerings and listings outside of mainland China, including but not limited to follow-on offerings, secondary listings and going private transactions, we cannot
assure that we can obtain the required approval or accomplish the required filings or other regulatory procedures in a timely manner, or at all. Failure to obtain the
relevant approval or complete the filings and other relevant regulatory procedures may negatively impact our ability to further raise capital from the market or pursue
restructuring or refinancing of our indebtedness. We may also face sanctions by the CSRC or other PRC regulatory agencies, which may include fines and penalties on
our operations in mainland China, limitations on our operating privileges in mainland China, restrictions on or prohibition of the payments or remittance of dividends by
our subsidiaries in mainland China, or other actions that could have a material and adverse effect on our business, financial condition, results of operations, reputation
and prospects, as well as the trading price and listing status of our ADSs. The CSRC or other PRC regulatory authorities also may take actions requiring us, or making it
advisable for us, to halt our future securities offerings and listings outside of mainland China, including but not limited to follow-on offerings, secondary listings and
going private transactions. Consequently, if investors engage in market trading or other activities in anticipation of and prior to settlement and delivery, they do so at the
risk that settlement and delivery may not occur.
Changes in mainland China’s economic, political or social conditions or government policies could have a material adverse effect on our business and operations.
Substantially all of our operations are located in mainland China. Accordingly, our business, financial condition, results of operations and prospects may be
influenced to a significant degree by political, economic, social conditions and government policies in mainland China generally. The Chinese economy differs from the
economies of most developed countries in many respects, including the level of government involvement, level of development, growth rate, control of foreign
exchange. In recent decades, the Chinese government has implemented a series of reform measures, including among others, emphasizing the utilization of market
forces for economic reform, and the establishment of improved corporate governance in business enterprises. Meanwhile, a considerable portion of productive assets in
mainland China is still owned by the government. In addition, the Chinese government also plays a significant role in regulating industry development and has extensive
influence over China’s economic growth through allocating resources, foreign exchange control, and setting monetary and fiscal policy.
While the Chinese economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among various sectors
of the economy, and the rate of growth has been slowing since 2012. Any adverse changes in economic conditions in mainland China, in the policies of the Chinese
government or in the laws and regulations in mainland China could have a material adverse effect on the overall economic growth of China. Such developments could
adversely affect our business and operating results, lead to reduction in demand for our services and adversely affect our competitive position. The Chinese government
has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall Chinese
economy, but may have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over
capital investments or changes in tax regulations.
Uncertainties with respect to the PRC legal system could adversely affect us.
The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. Since these laws and
regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations and the enforcement of these laws, regulations and rules involves
uncertainties.
The laws and regulations of mainland China have significantly enhanced the protections afforded to various forms of foreign investments in mainland China for
the past decades. However, China has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of
economic activities in mainland China. In particular, because these laws and regulations are relatively new, and because of the limited volume of published decisions and
their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties.
Furthermore, the PRC legal system is based in part on government policies and internal rules, some of which are not published or not on a timely basis. As a
result, we may not be aware of our potential violation of these policies and rules. In addition, certain
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administrative and court proceedings in mainland China may be protracted, resulting in substantial costs and diversion of resources and management attention.
The PRC government’s significant oversight and discretion over our business operation could result in a material adverse change in our operations and the value of
our ADSs.
We conduct our business primarily in mainland China. Our operations in mainland China are governed by PRC laws and regulations. The PRC government has
significant oversight and discretion over the conduct of our business, and it may intervene or influence our operations as the government deems appropriate to advance
regulatory and societal goals and policy positions, which could result in a material adverse change in our operation, and our ordinary shares and ADSs may decline in
value or become worthless. Also, the PRC government has recently promulgated certain regulations and rules to exert more oversight and control over offerings that are
conducted overseas and foreign investment in mainland China-based issuers. Any such action could significantly limit or completely hinder our ability to offer or
continue to offer securities to investors. In addition, implementation of industry-wide regulations directly targeting our operations and enhanced supervision over large
internet platforms may adversely affect our business, financial condition and results of operations, and could cause the value of our securities to significantly decline.
Therefore, investors of our company and our business face potential uncertainty from actions taken by the PRC government affecting our business.
We may rely on dividends and other distributions on equity paid by our mainland China subsidiaries to fund any cash and financing requirements we may have, and
any limitation on the ability of our mainland China subsidiaries to make payments to us and any tax we are required to pay could have a material and adverse effect
on our ability to conduct our business.
We are a Cayman Islands holding company and we may rely on dividends and other distributions on equity from our mainland China subsidiaries for our cash
requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders and for services of any debt we may incur. Our
subsidiaries’ ability to distribute dividends is based upon their distributable earnings. Current PRC regulations permit our mainland China subsidiaries to pay dividends
to their respective shareholders only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, each
of our mainland China subsidiaries and the variable interest entities is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory
reserve until such reserve reaches 50% of its registered capital. Each of such entities in mainland China is also required to further set aside a portion of its after-tax
profits to fund the employee welfare fund, although the amount to be set aside, if any, is determined at the discretion of its board of directors. These reserves are not
distributable as cash dividends. If our mainland China subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their
ability to pay dividends or make other payments to us. Any limitation on the ability of our mainland China subsidiaries to distribute dividends or other payments to their
respective shareholders could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay
dividends or otherwise fund and conduct our business.
In response to the persistent capital outflow and RMB’s depreciation against U.S. dollar in the fourth quarter of 2016, the People’s Bank of China and the State
Administration of Foreign Exchange, or SAFE, have implemented a series of capital control measures over recent months, including stricter vetting procedures for
China-based companies to remit foreign currency for overseas acquisitions, dividend payments and shareholder loan repayments. For instance, the People’s Bank of
China issued the Circular on Further Clarification of Relevant Matters Relating to Offshore RMB Loans Provided by Domestic Enterprises, or the PBOC Circular 306,
on November 22, 2016, which provides that offshore RMB loans provided by a domestic enterprise to offshore enterprises that it holds equity interests in shall not
exceed 30% of the domestic enterprise’s ownership interest in the offshore enterprise. The PBOC Circular 306 may constrain our mainland China subsidiaries’ ability to
provide offshore loans to us. The PRC government may continue to strengthen its capital controls and our mainland China subsidiaries’ dividends and other distributions
may be subjected to tighter scrutiny in the future. Any limitation on the ability of our mainland China subsidiaries to pay dividends or make other distributions to us
could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and
conduct our business.
Under the EIT Law and related regulations, dividends, interests, rent or royalties payable by a foreign-invested enterprise, such as our mainland China
subsidiaries, to any of its foreign non-resident enterprise investors, and proceeds from any such foreign enterprise investor’s disposition of assets (after deducting the net
value of such assets) are subject to a 10% withholding tax, unless the foreign enterprise investor’s jurisdiction of incorporation has a tax treaty with China that provides
for a reduced rate of withholding tax.
Undistributed profits earned by foreign-invested enterprises prior to January 1, 2008 are exempted from any withholding tax. The Cayman Islands, where iQIYI,
Inc., the direct parent company of our mainland China subsidiaries Beijing QIYI Century, and Chongqing QIYI Tianxia Science & Technology Co., Ltd., is
incorporated, does not have such a tax treaty with China. Hong Kong has a tax arrangement with China that provides for a 5% withholding tax on dividends subject to
certain conditions and requirements,
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such as the requirement that the Hong Kong resident enterprise own at least 25% of the PRC enterprise distributing the dividend at all times within the 12-month period
immediately preceding the distribution of dividends and be a “beneficial owner” of the dividends. For example, IQIYI Film Group HK Limited, which directly owns our
mainland China subsidiaries iQIYI New Media, is incorporated in Hong Kong. However, if IQIYI Film Group HK Limited is not considered to be the beneficial owner
of the dividends paid to it by iQIYI New Media under the tax circulars promulgated in February and October 2009, such dividends would be subject to withholding tax
at a rate of 10%. If our mainland China subsidiaries declare and distribute profits to us, such payments will be subject to withholding tax, which will increase our tax
liability and reduce the amount of cash available to our company.
PRC regulation of loans to and direct investment in mainland China entities by offshore holding companies and governmental control of currency conversion may
delay or prevent us to make loans to or make additional capital contributions to our mainland China subsidiaries and the variable interest entities, which could
materially and adversely affect our liquidity and our ability to fund and expand our business.
Any funds we transfer to our mainland China subsidiaries, either as a shareholder loan or as an increase in registered capital, are subject to approval by or
registration or filing with relevant governmental authorities in mainland China. According to the relevant PRC regulations on foreign-invested enterprises, or FIEs, in
mainland China, capital contributions to our mainland China subsidiaries are subject to registration with the SAMR or its local branches, the information reporting in the
online enterprise registration system, and foreign exchange registration with qualified banks. In addition, (a) any foreign loan procured by our mainland China
subsidiaries and the variable interest entities is required to be registered with the SAFE or its local branches or filed with SAFE in its information system, and (b) each of
our mainland China subsidiaries and the variable interest entities may not procure loans which exceed the difference between its registered capital and its total
investment amount as recorded in the foreign investment comprehensive management information system or, as an alternative, only procure loans subject to the Risk-
Weighted Approach and the Net Asset Limits (as defined below). See “Item 4. Information on the Company—B. Business Overview—Government Regulations—
Regulations on Foreign Exchange.” Any loan to be provided by us to our mainland China subsidiaries, variable interest entities and their subsidiaries with a term of
more than one year must be recorded and registered by the NDRC or its local branches. We may not obtain these government approvals or complete such registrations
on a timely basis, if at all, with respect to future capital contributions or foreign loans by us to our mainland China subsidiaries and the variable interest entities. If we fail
to receive such approvals or complete such registration or filing, our ability to capitalize our mainland China operations may be negatively affected, which could
adversely affect our liquidity and our ability to fund and expand our business. There is, in effect, no statutory limit on the amount of capital contribution that we can
make to our mainland China subsidiaries. This is because there is no statutory limit on the amount of registered capital for our mainland China subsidiaries, and we are
allowed to make capital contributions to our mainland China subsidiaries by subscribing for their initial registered capital and increased registered capital, provided that
the mainland China subsidiaries complete the relevant filing and registration procedures. With respect to loans to the mainland China subsidiaries by us, (i) if the
relevant mainland China subsidiaries adopt the traditional foreign exchange administration mechanism, or the Current Foreign Debt mechanism, the outstanding amount
of the loans shall not exceed the difference between the total investment and the registered capital of the mainland China subsidiaries and there is, in effect, no statutory
limit on the amount of loans that we can make to our mainland China subsidiaries under this circumstance because we can increase the registered capital of our mainland
China subsidiaries by making capital contributions to them, subject to the completion of the required registrations, and the difference between the total investment and
the registered capital will increase accordingly; and (ii) if the relevant mainland China subsidiaries adopt the foreign exchange administration mechanism as provided in
the PBOC Notice No. 9, or the Notice No. 9 Foreign Debt mechanism, the risk-weighted outstanding amount of the loans, which shall be calculated based on the
formula provided in the PBOC Notice No. 9, shall not exceed 200% of the net asset of the relevant mainland China subsidiary (the “Risk-Weighted Approach and the
Net Asset Limits”). According to the PBOC Notice No. 9, after a transition period of one year since the promulgation of the PBOC Notice No. 9, the PBOC and SAFE
will determine the cross-border financing administration mechanism for the foreign-invested enterprises after evaluating the overall implementation of the PBOC Notice
No. 9. As of the date hereof, neither PBOC nor SAFE has promulgated and made public any further rules, regulations, notices or circulars in this regard. It is uncertain
which mechanism will be adopted by PBOC and SAFE in the future and what statutory limits will be imposed on us when providing loans to our mainland China
subsidiaries. Currently, our mainland China subsidiaries have the flexibility to choose between the Current Foreign Debt mechanism and the Notice No. 9 Foreign Debt
mechanism. However, if the Notice No. 9 Foreign Debt Mechanism, or a more stringent foreign debt mechanism becomes mandatory and our mainland China
subsidiaries are no longer able to choose the Current Foreign Debt mechanism, our ability to provide loans to our mainland China subsidiaries or the variable interest
entities may be significantly limited, which may adversely affect our business, financial condition and results of operations.
In 2008, the SAFE promulgated the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement
of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular 142. SAFE Circular 142 regulates the conversion by FIEs of foreign currency into
Renminbi by restricting the usage of converted Renminbi. SAFE Circular 142 provides that any Renminbi capital converted from registered capitals in foreign currency
of FIEs may only be used for purposes within the business scopes approved by PRC governmental authority and such Renminbi capital may not be
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used for equity investments within mainland China unless otherwise permitted by the PRC law. In addition, the SAFE strengthened its oversight of the flow and use of
the Renminbi capital converted from registered capital in foreign currency of FIEs. The use of such Renminbi capital may not be changed without SAFE approval, and
such Renminbi capital may not in any case be used to repay Renminbi loans if the proceeds of such loans have not been utilized. On April 8, 2015, the SAFE
promulgated the Circular on Reforming the Management Approach Regarding the Foreign Exchange Capital Settlement of Foreign-Invested Enterprises, or SAFE
Circular 19. SAFE Circular 19 took effect as of June 1, 2015 and superseded SAFE Circular 142 on the same date. SAFE further promulgated Circular 16, effective on
June 9, 2016, which, among other things, amend certain provisions of Circular 19. SAFE Circulars 19 and 16 launched a nationwide reform of the administration of the
settlement of the foreign exchange capitals of FIEs and allows FIEs to settle their foreign exchange capital at their discretion, but continues to prohibit FIEs from using
the Renminbi fund converted from their foreign exchange capitals for expenditure beyond their business scopes, and also prohibit FIEs from using such Renminbi fund
to provide loans to persons other than affiliates unless otherwise permitted under its business scope. As a result, we are required to apply Renminbi funds converted
from the net proceeds we received from our financing activities within the business scopes of our mainland China subsidiaries. On October 23, 2019, the SAFE issued
the Notice of the State Administration of Foreign Exchange on Further Facilitating Cross-border Trade and Investment, which, among other things, expanded the use of
foreign exchange capital to domestic equity investment area. SAFE Circular 19, SAFE Circular 16 and other relevant rules and regulations may significantly limit our
ability to transfer to and use in mainland China any foreign currency, which may adversely affect our business, financial condition and results of operations.
Fluctuations in exchange rates could have a material and adverse effect on our results of operations and the value of your investment.
The conversion of Renminbi into foreign currencies, including U.S. dollars, is based on rates set by the People’s Bank of China. The Renminbi has fluctuated
against the U.S. dollar, at times significantly and unpredictably. The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by,
among other things, changes in political and economic conditions in mainland China and by China’s foreign exchange policies. We cannot assure you that the Renminbi
will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy
may impact the exchange rate between the Renminbi and the U.S. dollar in the future.
Any significant appreciation or depreciation of Renminbi may have a material and adverse effect on your investment. For example, to the extent that we need to
convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we
would receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our
ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount
available to us.
Very limited hedging options are available in mainland China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any
material hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the
future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure or at all. In addition, our currency
exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currency. As a result, fluctuations in
exchange rates may have a material adverse effect on your investment.
Our use of some leased properties could be challenged by third parties or governmental authorities, which may cause interruptions to our business operations.
As of the date of this annual report, some of the lessors of our properties leased by us in mainland China have not provided us with their property ownership
certificates or any other documentation proving their right to lease those properties to us. If our lessors are not the owners of the properties and they have not obtained
consents from the owners or their lessors or permits from the relevant governmental authorities, our leases could be invalidated. If this occurs, we may have to
renegotiate the leases with the owners or other parties who have the right to lease the properties, and the terms of the new leases may be less favorable to us. Although
we may seek damages from such lessors, such leases may be void and we may be forced to relocate. We can provide no assurance that we will be able to find suitable
replacement sites on terms acceptable to us on a timely basis, or at all, or that we will not be subject to material liability resulting from third parties’ challenges on our
use of such properties. As a result, our business, financial condition and results of operations may be materially and adversely affected.
In addition, a substantial portion of our leasehold interests in leased properties have not been registered with the relevant PRC governmental authorities as
required by relevant PRC laws. The failure to register leasehold interests may expose us to potential warnings and penalties up to RMB10,000 per unregistered leased
property.
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The enforcement of the PRC Labor Contract Law and other labor-related regulations in mainland China may adversely affect our business and results of
operations.
The Standing Committee of the National People’s Congress enacted the Labor Contract Law in 2008, and amended it on December 28, 2012. The Labor Contract
Law introduced specific provisions related to fixed-term employment contracts, part-time employment, probationary periods, consultation with labor unions and
employee assemblies, employment without a written contract, dismissal of employees, severance, and collective bargaining to enhance previous PRC labor laws. Under
the Labor Contract Law, an employer is obligated to sign an unlimited-term labor contract with any employee who has worked for the employer for ten consecutive
years. Further, if an employee requests or agrees to renew a fixed-term labor contract that has already been entered into twice consecutively, the resulting contract, with
certain exceptions, must have an unlimited term, subject to certain exceptions. With certain exceptions, an employer must pay severance to an employee where a labor
contract is terminated or expires. In addition, the PRC governmental authorities have continued to introduce various new labor-related regulations since the effectiveness
of the Labor Contract Law.
Under the PRC Social Insurance Law and the Administrative Measures on Housing Fund, employees are required to participate in pension insurance, work-
related injury insurance, medical insurance, unemployment insurance, maternity insurance, and housing funds and employers are required, together with their employees
or separately, to pay the social insurance premiums and housing funds for their employees. If we fail to make adequate social insurance and housing fund contributions,
we may be subject to fines and legal sanctions, and our business, financial conditions and results of operations may be adversely affected.
These laws designed to enhance labor protection tend to increase our labor costs. In addition, as the interpretation and implementation of these regulations are
still evolving, our employment practices may not be at all times be deemed in compliance with the regulations. As a result, we could be subject to penalties or incur
significant liabilities in connection with labor disputes or investigations.
The M&A Rules and certain other PRC regulations establish complex procedures for some acquisitions of Chinese companies by foreign investors, which could
make it more difficult for us to pursue growth through acquisitions in mainland China.
The M&A Rules and some other regulations and rules concerning mergers and acquisitions established additional procedures and requirements that could make
merger and acquisition activities by foreign investors more time consuming and complex, including requirements that the approval from MOFCOM be obtained in
circumstances where overseas companies established or controlled by mainland China enterprises or natural persons acquire an affiliated mainland China domestic
enterprise. After the Foreign Investment Law and its Implementation Regulations became effective on January 1, 2020, the provisions of the M&A Rules remain
effective to the extent they are not inconsistent with the PRC Foreign Investment Law and its Implementation Regulations. Moreover, the Anti-Monopoly Law requires
that the SAMR (or MOFCOM before March 2018) shall be notified in advance of any concentration of undertaking if certain thresholds are triggered. In addition, the
Rules of Ministry of Commerce on Implementation of Security Review System of Mergers and Acquisitions of Domestic Enterprises by Foreign Investors issued by the
MOFCOM that became effective in September 2011 and the Measures for the Security Review of Foreign Investment promulgated by the NDRC and the MOFCOM in
December 2020 have established procedures and requirements that are expected to make merger and acquisition activities in mainland China by foreign investors
increasingly time-consuming and complex. These rules specify that mergers and acquisitions by foreign investors that raise “national defense and security” concerns and
mergers and acquisitions through which foreign investors may acquire de facto control over domestic enterprises that raise “national security” concerns are subject to
strict review by the competent authority, and the rules prohibit any activities attempting to bypass a security review, including by structuring the transaction through a
proxy or contractual control arrangement. In the future, we may grow our business by acquiring complementary businesses. Complying with the requirements of the
above-mentioned regulations and other relevant rules to complete such transactions could be time consuming, and any required approval processes, including obtaining
approval from the competent authority may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain
our market share.
PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident beneficial owners or our
mainland China subsidiaries to liability or penalties, limit our ability to inject capital into our mainland China subsidiaries, limit our mainland China subsidiaries’
ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.
The SAFE promulgated the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special
Purpose Vehicles, or SAFE Circular 37, in July 2014 that requires PRC residents or entities to register with SAFE or its local branch in connection with their
establishment or control of an offshore entity established for the purpose of overseas investment or financing with such PRC residents or entities’ legally owned assets or
equity interests in domestic enterprises or offshore assets or interests. In addition, such PRC residents or entities must update their SAFE registrations when the
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offshore special purpose vehicle undergoes material events relating to any change of basic information (including change of such PRC citizens or residents, name and
operation term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or divisions.
SAFE Circular 37 is issued to replace the Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents Engaging in Financing and
Roundtrip Investments via Overseas Special Purpose Vehicles, or SAFE Circular 75.
If our shareholders who are PRC residents or entities do not complete their registration with the local SAFE branches, our mainland China subsidiaries may be
prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to us, and we may be restricted in our ability to
contribute additional capital to our mainland China subsidiaries. Moreover, failure to comply with the SAFE registration described above could result in liability under
PRC laws for evasion of applicable foreign exchange restrictions.
We have notified all PRC residents or entities who directly or indirectly hold shares in our Cayman Islands holding company and who are known to us as being
PRC residents to complete the foreign exchange registrations. However, we may not be informed of the identities of all the PRC residents or entities holding direct or
indirect interest in our company, nor can we compel our beneficial owners to comply with SAFE registration requirements. As a result, we cannot assure you that all of
our shareholders or beneficial owners who are PRC residents or entities have complied with, and will in the future make, obtain or update any applicable registrations or
approvals required by, SAFE regulations. Failure by such shareholders or beneficial owners to comply with SAFE regulations, or failure by us to amend the foreign
exchange registrations of our mainland China subsidiaries, could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit
our mainland China subsidiaries’ ability to make distributions or pay dividends to us or affect our ownership structure, which could adversely affect our business and
prospects.
If the chops of our mainland China subsidiaries and the variable interest entities are not kept safely, are stolen or are used by unauthorized persons or for
unauthorized purposes, the corporate governance of these entities could be severely and adversely compromised.
In mainland China, a company chop or seal serves as the legal representation of the company towards third parties even when unaccompanied by a signature.
Each legally registered company in mainland China is required to maintain a company chop, which must be registered with the local Public Security Bureau. In addition
to this mandatory company chop, companies may have several other chops which can be used for specific purposes. The chops of our mainland China subsidiaries and
the variable interest entities are generally held securely by personnel designated or approved by us in accordance with our internal control procedures. To the extent
those chops are not kept safely, are stolen or are used by unauthorized persons or for unauthorized purposes, the corporate governance of these entities could be severely
and adversely compromised and those corporate entities may be bound to abide by the terms of any documents so chopped, even if they were chopped by an individual
who lacked the requisite power and authority to do so. In addition, if the chops are misused by unauthorized persons, we could experience disruption to our normal
business operations. We may have to take corporate or legal action, which could involve significant time and resources to resolve while distracting management from
our operations.
Any failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants or us
to fines and other legal or administrative sanctions.
Pursuant to SAFE Circular 37, PRC residents who participate in share incentive plans in overseas non-publicly-listed companies may submit applications to
SAFE or its local branches for the foreign exchange registration with respect to offshore special purpose companies. In the meantime, our directors, executive officers
and other employees who are PRC citizens or who are non-PRC residents residing in the PRC for a continuous period of not less than one year, subject to limited
exceptions, and who have been granted share-based awards by us, may follow the Notices on Issues Concerning the Foreign Exchange Administration for Domestic
Individuals Participating in Stock Incentive Plan of Overseas Publicly Listed Company, promulgated by the SAFE in 2012. Pursuant to the 2012 SAFE notices, PRC
citizens and non-PRC citizens who reside in mainland China for a continuous period of not less than one year who participate in any stock incentive plan of an overseas
publicly listed company, subject to a few exceptions, are required to register with SAFE through a domestic qualified agent, which could be the mainland China
subsidiaries of such overseas listed company, and complete certain other procedures. In addition, an overseas entrusted institution must be retained to handle matters in
connection with the exercise or sale of stock options and the purchase or sale of shares and interests. We, our directors, our executive officers and other employees who
are PRC citizens or who reside in the PRC for a continuous period of not less than one year and who have been granted share-based awards are subject to these
regulations since we have become an overseas listed company. Failure to complete the SAFE registrations may subject them to fines, and legal sanctions and may also
limit our ability to contribute additional capital into our mainland China subsidiaries and limit our mainland China subsidiaries’ ability to distribute dividends to us. We
have completed filing with the relevant SAFE branch for our equity incentive plans and are required to update our filing
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periodically or in the event of any material changes. We also face regulatory uncertainties that could restrict our ability to adopt additional incentive plans for our
directors, executive officers and employees under PRC law. See “Item 4. Information on the Company—B. Business Overview—Government Regulations—Regulations
on Employment and Social Welfare—Employee Stock Incentive Plan.”
The State Administration of Taxation, or SAT, has issued certain circulars concerning employee share options and restricted shares. Under these circulars, our
employees working in mainland China who exercise or transfer share options or are granted restricted shares will be subject to mainland China individual income tax.
Our mainland China subsidiaries have obligations to file documents related to employee share options or restricted shares with relevant tax authorities and to withhold
individual income taxes of those employees who exercise their share options. If our employees fail to pay or we fail to withhold their income taxes according to relevant
laws and regulations, we may face sanctions imposed by the tax authorities or other PRC governmental authorities. See “Item 4. Information on the Company—B.
Business Overview—Government Regulations—Regulations on Employment and Social Welfare—Employee Stock Incentive Plan.”
If we are classified as a mainland China resident enterprise for mainland China income tax purposes, such classification could result in unfavorable tax
consequences to us and our non-mainland China shareholders or ADS holders.
Under the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside of mainland China with its “de facto management
body” within mainland China is considered a “resident enterprise” and will be subject to mainland China enterprise income tax on its global income at the rate of 25%.
The implementation rules define the term “de facto management body” as the body that exercises full and substantial control and overall management over the business,
productions, personnel, accounts and properties of an enterprise. In 2009, the SAT issued a circular, known as SAT Circular 82, which provides certain specific criteria
for determining whether the “de facto management body” of a mainland China-controlled enterprise that is incorporated offshore is located in mainland China. Although
this circular only applies to offshore enterprises controlled by mainland China enterprises or mainland China enterprise groups, not those controlled by mainland China
individuals or foreigners, the criteria set forth in the circular may reflect the SAT’s general position on how the “de facto management body” test should be applied in
determining the tax resident status of all offshore enterprises. According to SAT Circular 82, an offshore incorporated enterprise controlled by a mainland China
enterprise or a mainland China enterprise group will be regarded as a mainland China tax resident by virtue of having its “de facto management body” in mainland
China and will be subject to mainland China enterprise income tax on its global income only if all of the following conditions are met: (i) the primary location of the
day-to-day operational management is in mainland China; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to
approval by organizations or personnel in mainland China; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder
resolutions, are located or maintained in mainland China; and (iv) at least 50% of voting board members or senior executives habitually reside in mainland China.
We believe none of our entities outside of China is a mainland China resident enterprise for mainland China tax purposes. However, the tax resident status of an
enterprise is subject to determination by the mainland China tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management
body.” If the mainland China tax authorities determine that iQIYI, Inc. is a mainland China resident enterprise for enterprise income tax purposes, we may be required to
withhold a 10% withholding tax from interest or dividends we pay to our shareholders that are non-resident enterprises, including the holders of our ordinary shares or
ADSs. In addition, non-resident enterprise shareholders (including our ADS holders) may be subject to mainland China tax at a rate of 10% on gains realized on the sale
or other disposition of the ADSs or ordinary shares, if such income is treated as sourced from within mainland China. Furthermore, if mainland China tax authorities
determine that we are a mainland China resident enterprise for enterprise income tax purposes, interest or dividends paid to our non-mainland China individual
shareholders (including our ADS holders) and any gain realized on the transfer of the ADSs or ordinary shares by such holders may be subject to mainland China tax at
a rate of 20% (which, in the case of interest or dividends, may be withheld at source by us), if such gain is deemed to be from mainland China sources. These rates may
be reduced by an applicable tax treaty, but it is unclear whether non-mainland China shareholders of iQIYI, Inc. would be able to claim the benefits of any tax treaties
between their country of tax residence and mainland China in the event that iQIYI, Inc. is treated as a mainland China resident enterprise. Any such tax may reduce the
returns on your investment in the ADSs.
Any failure or perceived failure by us to comply with the anti-monopoly, anti-unfair competition, and consumer rights protection laws and regulations may result in
governmental investigations or enforcement actions, litigation or claims against us and could have an adverse effect on our business, financial condition and
results of operations.
The PRC government has adopted a series of anti-monopoly and anti-unfair competition laws and regulations and has recently enhanced its enforcement of such
laws and regulations. The PRC Anti-monopoly Law and the relevant implementing rules (i) require that where concentration of undertakings reaches the filing threshold
stipulated by the State Council, a filing must be made with the
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anti-monopoly authority before the parties implement the concentration, (ii) prohibit a business operator with a dominant market position from abusing such position,
such as by selling commodities at unfairly high prices or buying commodities at unfairly low prices, selling products at prices below cost without any justifiable cause,
or refusing to trade with a trading party without any justifiable cause, and (iii) prohibit business operators from entering into monopoly agreements, which refer to
agreements that eliminate or restrict competition with competing business operators or transaction counterparties, such as by boycotting transactions, fixing or changing
the price of commodities, limiting the output of commodities or fixing the price of commodities for resale to third parties, unless the agreements satisfy certain
exemptions under the PRC Anti-monopoly Law. Furthermore, in February 2021, the Anti-monopoly Commission of the State Council officially promulgated the Anti-
Monopoly Guidelines for the Internet Platform Economy Sector, or the Anti-Monopoly Guidelines. The Anti-Monopoly Guidelines prohibit certain monopolistic acts of
internet platforms so as to protect market competition and safeguard the interests of users and undertakings participating in the internet platform economy, including,
without limitation, prohibiting platforms with a dominant position from abusing their market dominance (such as discriminating against customers in terms of pricing
and other transactional conditions using big data and analytics, coercing counterparties into exclusivity arrangements, using technology to block competitors’ interfaces,
favorable positioning in search results of goods displays, using bundle services to sell services or products, compulsory collection of unnecessary user data). In addition,
the Anti-Monopoly Guidelines also reinforce antitrust merger review for internet platform related transactions to safeguard market competition. As the Anti-Monopoly
Guidelines were newly promulgated, it is still uncertain how they will impact on our business, financial condition, results of operations and prospects. On August 1,
2022, the Standing Committee further amended the Anti-Monopoly Law, which, among others, (i) emphasized that business operators with a dominant market position
shall not engage in any conduct of abusing a dominant market position by utilizing data and algorithm, technology, and platform rules, (ii) increased the fines on
business operators for illegal concentration to “no more than ten percent of the preceding year’s sales revenue of the business operators if the concentration of business
operators has or may have an effect of excluding or limiting competition; or a fine of up to RMB5 million if the concentration of business operators does not have an
effect of excluding or limiting competition,” and (iii) increased the fines on business operators that reaching monopoly agreements to “no less than one percent but no
more than ten percent of the preceding year’s sales revenue of the business operators, or a fine of up to RMB5 million if no sales revenue in the preceding year; and if
such monopoly agreements have not been implemented, a fine of up to RMB3 million.”
According to the PRC Anti-unfair Competition Law, unfair competition, which refers to the production and operating activities where the operator disrupts the
market competition order and damages the legitimate rights and interests of other operators or consumers in violation of the provisions of the PRC Anti-unfair
Competition Law, shall be prohibited. Pursuant to the PRC Anti-unfair Competition Law, operators shall abide by the principle of voluntariness, equality, impartiality,
integrity and adhere to laws and business ethics during market transactions. Operators in violation of the PRC Anti-unfair Competition Law may be subject to civil,
administrative or criminal liabilities depending on the specific circumstances.
In practice, the PRC governmental authority also strengthens the supervision of monopoly and other unfair competition acts, activities infringing consumer
rights, and requests to establish a new order of the platform economy. In March 2018, the SAMR was formed as a new governmental agency to take over, among other
things, the anti-monopoly enforcement functions from the relevant departments under the MOFCOM, the NDRC, and the former State Administration for Industry and
Commerce, respectively. Since its inception, the SAMR has continued to strengthen anti-monopoly enforcement. In December 2018, the SAMR issued the Notice on
Anti-monopoly Enforcement Authorization, which grants authorities to its provincial branches to conduct anti-monopoly enforcement within their respective
jurisdictions. In September 2020, the SAMR issued Anti-monopoly Compliance Guideline for Operators, which requires operators to establish anti-monopoly
compliance management systems to prevent anti-monopoly compliance risks. In particular, the PRC regulators have been increasingly focused on inspection and
regulation on potential noncompliance with anti-unfair competition and anti-monopoly related laws recently. For example, in April 2021, the SAMR, the Cyberspace
Administration of China and the SAT, held an administrative guidance meeting for internet platform enterprises. During the meeting, it was pointed out that illegal
activities including, among others, forcing the implementation of “choose one” among the enterprise and its competitors, abusing dominant market position, “cash
burning” to seize the “community group buying” market, making use of big data analysis to the disadvantage of existing customers, etc., shall be prohibited and
rectified. In addition, many platforms, including 34 enterprises which attended such administrative guidance meeting as representatives of internet platform enterprises,
are required to conduct a comprehensive self-inspection and make necessary rectification accordingly. The competent administration for market regulation will organize
and conduct inspections on the platforms’ rectification results. If the platforms are found to conduct illegal activities including forcing the implementation of “choose
one” among them and their competitors, abusing dominant market position, infringing consumers rights and interests, etc., they will be imposed with more severe
penalties in accordance with the laws. We have conducted necessary self-inspection and rectifications in accordance with such guidance and completed rectification
procedures, such as filing of concentration notification for our past investments and M&A deals. In addition, China Consumers’ Associations and other local consumers’
associations, who have the authority to bring civil public interest lawsuit and make complains to relevant governmental authorities, have been targeting large platforms
more frequently. Complaints made by consumers’ associations may lead to negative publicity, and increase the risk of governmental investigations and public interest
lawsuits.
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We cannot guarantee you that we will not be subject to more similar or even stricter rectification requests from the governmental authorities or that we will fully
comply with all applicable rules and regulations at all times. As a result of the regulators’ focus on anti-monopoly and anti-unfair competition compliance and consumer
rights protection and enhanced regulation of platform enterprises, our business practice and expansion strategy may be subject to heightened regulatory scrutiny. In order
to comply with existing laws and regulations and new laws and regulations that may be enacted in the future, we may need to devote significant resources and efforts,
including restructuring affected businesses, adjusting investment activities and adjusting our business strategy, which may adversely affect our business operation,
growth prospects and reputation. In addition, we cannot assure you that our efforts are sufficient to comply with the all the applicable laws and regulations on anti-
monopoly, anti-unfair competition and consumer rights protection, and the authorities’ requirements in all respects. Any anti-monopoly, anti-unfair competition or
consumer rights protection related lawsuit, regulatory investigations or administrative proceedings initiated against us could also result in our being subject to regulatory
actions, significant fines, and constraints on our investments and acquisitions, which could include forced termination of any agreements or transactions, required
divestitures, or limitations on certain pricing and business practices or significant fines. As a result, we may be subject to significant difficulties in operating our current
business and pursuing our operation, investment and acquisition strategy.
It may be difficult for overseas regulators to conduct investigation or collect evidence within mainland China.
Shareholder claims or regulatory investigation that are common in the United States generally are difficult to pursue as a matter of law or practicality in mainland
China. For example, in mainland China, there are significant legal and other obstacles to providing information needed for regulatory investigations or litigation initiated
outside China. Although the authorities in mainland China may establish a regulatory cooperation mechanism with the securities regulatory authorities of another
country or region to implement cross-border supervision and administration, such cooperation with the securities regulatory authorities in the Unities States may not be
efficient in the absence of mutual and practical cooperation mechanism. Furthermore, according to Article 177 of the PRC Securities Law, or Article 177, which became
effective in March 2020, no overseas securities regulator is allowed to directly conduct investigation or evidence collection activities within the territory of mainland
China and without the consent by the Chinese securities regulatory authorities and the other competent governmental agencies, no entity or individual may provide
documents or materials related to securities business overseas. In addition, the Data Security Law and the PIPL provide that no entity or individual within the territory of
mainland China shall provide any foreign judicial body and law enforcement body with any data or any personal information stored within the territory of mainland
China without the approval of the competent governmental authority of the PRC. While detailed interpretation of or implementation rules under these laws have yet to
be promulgated, the inability for an overseas securities regulator to directly conduct investigation or evidence collection activities within mainland China, and restrictions
on the provision of documents, materials, data and personal information by PRC entities and individuals to an overseas securities regulator, foreign judicial body or
foreign law enforcement body may further increase difficulties faced by you in protecting your interests.
Risks Related to Our ADSs
The trading price of our ADSs has been and is likely to continue to be volatile regardless of our operating performance.
The trading price of our ADSs has been volatile and has ranged from a low of US$2.01 to a high of US$46.23 since our ADSs started to trade on the Nasdaq
Global Select Market on March 29, 2018. The market price for our ADSs may continue to be volatile and subject to wide fluctuations in response to factors including,
but not limited to, the following:
•actual or anticipated fluctuations in our quarterly results of operations;
•changes in financial estimates by securities research analysts;
•conditions in online entertainment markets;
•announcements of new investments, acquisitions by us or our competitors, strategic partnerships, joint ventures or capital commitments;
•addition or departure of key personnel;
•fluctuations of exchange rates between RMB and the U.S. dollar;
•litigation, government investigation or other legal or regulatory proceeding; and
•general economic or political conditions in mainland China or elsewhere in the world.
In addition, the stock market in general, and the performance and fluctuation of the market prices for internet-related companies and other companies with
operations mainly in mainland China in particular, may affect the volatility in the prices of and trading volumes for our ADSs. The securities of some China-based
companies that have listed their securities in the United States have
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experienced significant volatility that often has been unrelated to the operating performance of such companies, including, in some cases, substantial declines in the
trading prices of their securities. The trading performances of these companies’ securities may affect the attitudes of investors towards Chinese companies listed in the
United States in general, which consequently may impact the trading performance of our ADSs, regardless of our actual operating performance. In addition, any
negative news or perceptions about inadequate corporate governance practices or fraudulent accounting, corporate structure or other matters of other Chinese companies
may also negatively affect the attitudes of investors towards Chinese companies in general, including us, regardless of whether we have engaged in any inappropriate
activities. In particular, the global financial crisis, the ensuing economic recessions and deterioration in the credit market in many countries have contributed and may
continue to contribute to extreme volatility in the global stock markets. These broad market and industry fluctuations may adversely affect the market price of our ADSs.
Volatility or a lack of positive performance in the price of our ADSs may also adversely affect our ability to retain key employees, most of whom have been granted
options or other equity incentives.
In the past, shareholders of public companies have often brought securities class action suits against those companies following periods of instability in the
market price of their securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from
our business and operations and require us to incur significant expenses to defend the suit, which could harm our results of operations. Any such class action suit,
whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may
be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the market price for our ADSs and
trading volume 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 our business. If research
analysts do not maintain adequate research coverage or if one or more of the analysts who covers us downgrades our ADSs or publishes inaccurate or unfavorable
research about our business, the market price for our ADSs would likely decline. If one or more of these analysts cease coverage of our company or fail to publish
reports on us regularly, we could lose visibility in the financial markets, which, in turn, could cause the market price of or trading volume for our ADSs to decline.
Techniques employed by short sellers may drive down the market price of our ADSs.
Short selling is the practice of selling securities that the seller does not own but rather has borrowed from a third-party with the intention of buying identical
securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed
securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the sale. As it is in the short seller’s
interest for the price of the security to decline, many short sellers publish, or arrange for the publication of, negative opinions regarding the relevant issuer and its
business prospects in order to create negative market momentum and generate profits for themselves after selling a security short. These short attacks have, in the past,
led to selling of shares in the market.
Public companies listed in the United States that have a substantial majority of their operations in mainland China have been the subject of short selling. Much of
the scrutiny and negative publicity has centered on allegations of a lack of effective internal control over financial reporting resulting in financial and accounting
irregularities and mistakes, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result, many of these
companies are now conducting internal and external investigations into the allegations and, in the interim, are subject to shareholder lawsuits and SEC enforcement
actions.
We are currently, and may in the future be, the subject of unfavorable allegations made by short sellers. See “Item 8. Financial Information—A. Consolidated
Statements and Other Financial Information—Legal Proceedings” for more information about the Wolfpack short seller report, including the related SEC investigation
and class action lawsuits. Any such allegations may be followed by periods of instability in the market price of our ordinary shares and ADSs and negative publicity. If
and when we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we could have to expend a significant amount
of resources to investigate such allegations and defend ourselves. While we would strongly defend against any such short seller attacks, we may be constrained in the
manner in which we can proceed against the relevant short seller by principles of freedom of speech, applicable federal or state law or issues of commercial
confidentiality. Such a situation could be costly and time-consuming and could distract our management from growing our business. Even if such allegations are
ultimately proven to be groundless, allegations against us could severely impact our business operations and shareholder’s equity, and the value of any investment in our
ADSs could be greatly diminished.
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Because we do not expect to pay dividends in the foreseeable future, you must rely on price appreciation of our ADSs for return on your investment.
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, you should not rely on an investment in our ADSs as a source for any future dividend
income.
Our board of directors has complete discretion as to whether to distribute dividends. Even if our board of directors decides to declare and pay dividends, the
timing, amount and form of future dividends, if any, will depend on our future results of operations and 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 of directors.
Accordingly, the return to ADS holders will likely depend entirely upon any future price appreciation of our ADSs. There is no guarantee that our ADSs will appreciate
in value or even maintain the price at which ADS holders purchased the ADSs.
The exercise of voting rights of holders of ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise your right to vote your Class
A ordinary shares.
Holders of our ADSs will only be able to exercise the voting rights with respect to the underlying Class A ordinary shares in accordance with the provisions of
the deposit agreement. Under the deposit agreement, ADS holders must vote by giving voting instructions to the depositary. If we ask for instructions of ADS holders,
then upon receipt of such voting instructions, the depositary will try to vote the underlying Class A ordinary shares in accordance with these instructions. If we do not
instruct the depositary to ask for instructions of ADS holders, the depositary may still vote in accordance with instructions given by holders of ADSs, but it is not
required to do so. ADS holders will not be able to directly exercise your right to vote with respect to the underlying shares unless you withdraw the shares. When a
general meeting is convened, an ADS holder may not receive sufficient advance notice to withdraw the shares underlying his or her ADSs to allow such holder to vote
with respect to any specific matter. If we ask for instructions of holders of ADSs, the depositary will notify ADS holders of the upcoming vote and will arrange to deliver
our voting materials to ADS holders. We have agreed to give the depositary at least 30 days’ prior notice of shareholder meetings. Nevertheless, we cannot assure you
that ADS holders will receive the voting materials in time to ensure that ADS holders can instruct the depositary to vote their shares. In addition, the depositary and its
agents are not responsible for failing to carry out voting instructions or for their manner of carrying out ADS holders’ voting instructions. This means that an ADS holder
may not be able to exercise the right to vote and may have no legal remedy if the shares underlying his or her ADSs are not voted as such holder requested.
ADS holders may experience dilution of his or her 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, the depositary will not
distribute rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either exempt from registration under the
Securities Act with respect to all holders of ADSs, or are registered under the provisions of the Securities Act. 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 be unable to establish an exemption from registration under the Securities Act, and
we are under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared
effective. Accordingly, holders of ADSs may be unable to participate in our rights offerings and may experience dilution of their holdings as a result.
ADS holders may be subject to limitations on transfer of their 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 it deems 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 ADS holders on its books for a specified period. The depositary
may also close its books in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of our ADSs generally
when our share register or the books of the depositary are closed, or at any 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 under any provision of the deposit agreement, or for any other reason.
Certain judgments obtained against us by our shareholders may not be enforceable.
We are a Cayman Islands company and substantially all of our assets are located outside of the United States. Substantially all of our current operations are
conducted in mainland China, and are all located outside of the Cayman Islands. Service of court
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documents on a Cayman Islands company can be effected by serving the documents at the company’s registered office and it may be possible to enforce foreign
judgments in the Cayman Islands against a Cayman Islands company, subject to some exceptions. However, if investors wish to serve documents on and/or enforce
foreign judgments against our directors and officers, they will need to ensure that they comply with the rules of the jurisdiction where the directors and officers are
located. In addition, most of our current directors and officers are nationals and residents of countries other than the United States. As a result, it may be difficult for you
to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the U.S. federal
securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce
a judgment against our assets or the assets of our directors and officers, depending on where our directors and officers are located.
You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited (depending on the remedies you are
seeking), because we are incorporated under Cayman Islands law.
We are an exempted company incorporated under the laws of the Cayman Islands with limited liability. Our corporate affairs are governed by our memorandum
and articles of association, the Companies Act and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by
minority shareholders and the fiduciary duties of our directors to us under Cayman Islands law are to a large extent also governed by our memorandum and articles of
association, the Companies Act and the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited
judicial precedent in the Cayman Islands (as compared to the United States) as well as from the common law of England, the decisions of the English courts are of
highly persuasive authority, but are not binding, on a court in the Cayman Islands (except for those decisions handed down from the Judicial Committee of the Privy
Council to the extent that these have been appealed from the Cayman Islands courts). The rights of our shareholders and the fiduciary duties of our directors under
Cayman Islands law are broadly similar to those in other common law jurisdictions, but there may be differences in the statutes or judicial precedent in some
jurisdictions in the United States. In particular, the Cayman Islands has a different body of securities laws than the United States. Some U.S. states, such as Delaware,
have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, if shareholders want to proceed against us outside of
the Cayman Islands, they will need to demonstrate that they have standing to initiate a shareholder derivative action in a federal court of the United States.
Shareholders of Cayman Islands exempted companies with limited liability like us have no general rights under Cayman Islands law to inspect corporate records
(other than the memorandum and articles of association, the register of mortgages and charges and any special resolutions passed by shareholders) or to obtain copies of
lists of shareholders of these companies. Under Cayman Islands law, the names of our current directors can be obtained from a search conducted at the Registrar of
Companies in the Cayman Islands. Our directors have discretion under our articles of association to determine whether or not, and under what conditions, our corporate
records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the
information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.
As a result of all of the above, our public shareholders may have more difficulty in protecting their interests in the face of actions taken by management,
members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the United States.
Since we are a Cayman Islands exempted company, the rights of our shareholders may be more limited than those of shareholders of a company organized in the
United States.
Under the laws of some jurisdictions in the United States, majority and controlling shareholders generally have certain fiduciary responsibilities to the minority
shareholders. Shareholder action must be taken in good faith, and actions by controlling shareholders which are obviously unreasonable may be declared null and void.
Cayman Islands law protecting the interests of minority shareholders may not be as protective in all circumstances as the law protecting minority shareholders in some
U.S. jurisdictions. In addition, the circumstances in which a shareholder of a Cayman Islands company may sue the company derivatively, and the procedures and
defenses that may be available to the company, may result in the rights of shareholders of a Cayman Islands company being more limited than those of shareholders of a
company organized in the United States.
Furthermore, our directors have the power to take certain actions without shareholder approval which would require shareholder approval under the laws of most
U.S. jurisdictions. The directors of a Cayman Islands company, without shareholder approval, may implement a sale of any assets, property, part of the business, or
securities of the company. Our ability to create and issue new classes or series of shares without shareholders’ approval could have the effect of delaying, deterring or
preventing a change in control without any further action by our shareholders, including a tender offer to purchase our ordinary shares at a premium over then current
market prices.
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Our dual-class voting structure limits your ability to influence corporate matters and could discourage others from pursuing any change of control transactions that
holders of our ADSs may view as beneficial.
Our authorized and issued ordinary shares are divided into Class A ordinary shares and Class B ordinary shares (and a further class of authorized but
undesignated shares). Holders of Class A ordinary shares are entitled to one vote per share, while holders of Class B ordinary shares are entitled to ten votes per share.
Due to the disparate voting powers attached to these two classes of ordinary shares, Baidu, holder of our Class B ordinary shares, held approximately 45.5% of
our total issued and outstanding ordinary shares on an as-converted basis and 89.3% of the voting power of our outstanding shares as of February 28, 2023. Therefore,
Baidu has decisive influence over matters requiring shareholders’ approval, including election of directors and significant corporate transactions, such as a merger or sale
of our company or our assets. This concentrated control limits the ability of holders of Class A ordinary shares and ADSs to influence corporate matters and could
discourage others from pursuing any potential merger, takeover or other change of control transactions that holders of Class A ordinary shares and ADSs may view as
beneficial.
Our memorandum and articles of association contain anti-takeover provisions that could have a material adverse effect on the rights of holders of our ordinary
shares and ADSs.
Our memorandum and articles of association contain provisions to limit the ability of others to acquire control of our company or cause us to engage in change-
of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market
prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. Subject to our memorandum and articles of
association and the Companies Act, our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series
and to fix their designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions,
including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated
with our ordinary shares, in the form of ADS or otherwise. Preferred shares could be issued quickly with terms calculated to delay or prevent a change in control of our
company or make removal of management more difficult. If our board of directors decides to issue preferred shares, the price of our ADSs may fall and the voting and
other rights of the holders of our ordinary shares and ADSs may be materially and adversely affected.
We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to United
States domestic public companies.
Because we are a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States
that are applicable to U.S. domestic issuers, including: (i) the rules under the Exchange Act requiring the filing of quarterly reports on Form 10-Q or current reports on
Form 8-K with the SEC; (ii) the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under
the Exchange Act; (iii) the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders
who profit from trades made in a short period of time; (iv) the selective disclosure rules by issuers of material nonpublic information under Regulation FD; and (v)
certain audit committee independence requirements in Rule 10A-3 of the Exchange Act.
We are required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we publish our results on a quarterly basis
through press releases, distributed pursuant to the rules and regulations of Nasdaq Stock Market. Press releases relating to financial results and material events will also
be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that
required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information, which would be made available to
you, were you investing in a U.S. domestic issuer.
In addition, as a foreign private issuer whose securities are listed on the Nasdaq Global Select Market, we are permitted to follow certain home country corporate
governance practices in lieu of the requirements of the Nasdaq Rules pursuant to Nasdaq Rule 5615(a)(3), which provides for such exemption to compliance with the
Nasdaq Rule 5600 Series. We rely on the exemption available to foreign private issuers for the requirement under Nasdaq Rule 5605(c)(2)(A)(i) that each member of the
audit committee must be an independent director as defined under Nasdaq Rule 5605(a)(2). Mr. Weijian Shan and Mr. Fei Qi, who are non-voting members of our audit
committee, are not independent directors as defined under Nasdaq Rule 5605(a)(2). In addition, we follow home country practice with respect to annual shareholders
meetings and did not hold an annual meeting of shareholders in 2022. Furthermore, Nasdaq Rule 5635(c) requires shareholder approval prior to the issuance of securities
when a stock option or purchase plan is to be established or materially amended or other equity compensation arrangement made or materially amended, pursuant to
which stock may be acquired by officers, directors, employees, or consultants. We elected to follow our home country practice and did not obtain shareholder
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approval the amendment to our 2021 Plan. If we continue to rely on these and other exemptions available to foreign private issuers in the future, our shareholders may be
afforded less protection than they otherwise would under the Nasdaq corporate governance listing standards applicable to U.S. domestic issuers. Furthermore, as a result
of our use of the “controlled company” exemptions, our investors will not have the same protection afforded to shareholders of companies that are subject to all of
Nasdaq’s corporate governance requirements.
We may be a passive foreign investment company, or PFIC, which could result in adverse U.S. federal income tax consequences for U.S. shareholders.
Generally, a non-U.S. corporation, such as our company, will be considered a PFIC for any taxable year if either (i) at least 75% of its gross income is passive
income or (ii) at least 50% of the value of its assets (generally based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that
produce or are held for the production of passive income. For purposes of these rules, the value of certain of our assets is generally determined by reference to the
market price of the ADSs and class A ordinary shares, which may fluctuate considerably.
Based on the market price of our ADSs, the value of our assets and the composition of our assets and income, we believe that we were not a PFIC for our taxable
year ended December 31, 2022, and do not presently expect to be a PFIC for the 2023 taxable year or the foreseeable future. However, PFIC status is a fact-intensive
determination that generally cannot be determined until after the close of the taxable year in question, and is based on that year’s composition of income and assets
(which could change significantly during the course of a taxable year). Fluctuations in the market price of our ADSs, for instance, may cause us to become a PFIC for the
current or subsequent taxable years because the value of certain of our assets for the purpose of the asset test is generally determined by reference to the market price of
our ADSs. The composition of our income and assets may also be affected by how, and how quickly, we use our liquid assets. In addition, there are uncertainties in the
application of the PFIC rules to our particular circumstances. It is possible that the Internal Revenue Service, or IRS, may challenge our classification of certain income
and assets or our valuation of our tangible and intangible assets, each of which may result in our becoming a PFIC for the current or subsequent taxable years.
Furthermore, we may also be a PFIC if we were not treated as the owner of the variable interest entities for U.S. tax purposes. Accordingly, no assurance can be given
regarding our PFIC status for the current or any taxable year.
If we were treated as a PFIC for any taxable year during which a U.S. shareholder held an ADS or Class A ordinary share, certain adverse U.S. federal income
tax consequences could apply to the U.S. shareholder. See “Item 10. Additional Information—Taxation—U.S. Federal Income Tax Considerations—Passive Foreign
Investment Company Considerations.”
Provisions of our convertible senior notes could discourage an acquisition of us by a third-party.
Certain provisions of our outstanding convertible senior notes, including the 2023 Notes, 2025 Notes, 2026 Notes, PAG Notes and 2028 Notes, could make it
more difficult or more expensive for a third-party to acquire us. The indentures for our convertible senior notes define a “fundamental change” to include, among other
things: (i) any person or group becoming a beneficial owner of our company through gaining more than 50% voting power of our ordinary share capital or more than
50% of our outstanding Class A ordinary shares; (ii) any recapitalization, reclassification or change of our ordinary shares or ADSs as a result of which these securities
would be converted into, or exchanged for, stock, other securities, other property or assets or any share exchange, consolidation or merger or similar transaction pursuant
to which our ordinary shares or ADSs will be converted into cash, securities or other property or any sale, lease or other transfer in one transaction or series of
transaction of all or substantially all our consolidated assets, to any person other than one of our subsidiaries or variable interest entities; (iii) the adoption of any plan or
proposal relating to the liquidation or dissolution of our company; (iv) our ADSs ceasing to be listed or quoted on any of The Nasdaq Global Select Market, The Nasdaq
Global Market, The New York Stock Exchange (or any of their respective successors) and none of the ADSs, Class A ordinary shares, other common equity and ADSs
in respect of reference property is listed or quoted on one of The Nasdaq Global Select Market, The Nasdaq Global Market, The New York Stock Exchange (or any of
their respective successors) within one trading day of such cessation; or (v) any change in or amendment to the laws, regulations and rules in the PRC that prohibits us
from operating substantially all of our business operations and prevents us from continuing to derive substantially all of the economic benefits from our business
operations. Upon the occurrence of a fundamental change, holders of these notes will have the right, at their option, to require us to repurchase all of their notes or any
portion of the principal amount of such notes in integral multiples of US$1,000. In the event of a fundamental change, we may also be required to issue additional ADSs
upon conversion of our convertible senior notes.
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Conversion of the convertible senior notes may dilute the ownership interest of existing shareholders, including holders who had previously converted their
convertible senior notes.
The conversion of some or all of the convertible senior notes will dilute the ownership interests of existing shareholders and existing holders of our ADSs. Any
sales in the public market of the ADSs issuable upon such conversion may increase the opportunities to create short positions with respect to the ADSs, which could
adversely affect prevailing market prices of our ADSs. In addition, the existence of the convertible senior notes may encourage short selling by market participants
because the conversion of the convertible senior notes could depress the price of our ADSs.
The sale or availability for sale of substantial amounts of our ADSs could adversely affect their market price.
Sales of substantial amounts of our ADSs in the public market, or the perception that these sales could occur, could adversely affect the market price of our ADSs
and could materially impair our ability to raise capital in the future. We cannot predict what effect, if any, market sales of securities held by our significant shareholders
or any other shareholder or the availability of these securities for future sale will have on the market price of our ADSs.
ITEM 4. INFORMATION ON THE COMPANY
A.HISTORY AND DEVELOPMENT OF THE COMPANY
We launched qiyi.com under the QIYI brand in April 2010 as an internet video streaming service in mainland China. Our holding company, Ding Xin, Inc., was
incorporated in November 2009 in the Cayman Islands. Ding Xin, Inc. was subsequently renamed Qiyi.com, Inc. in August 2010 and later iQIYI, Inc. in November
2017. QIYI was rebranded as iQIYI in November 2011.
In March 2010, we established a wholly-owned mainland China subsidiary, Beijing QIYI Century Science and Technology Co., Ltd., or Beijing QIYI Century.
In November 2011, we obtained control over Beijing Xinlian Xinde Advertisement Media Co., Ltd. and in May 2012 we renamed it Beijing iQIYI Science &
Technology Co., Ltd., or Beijing iQIYI, to operate our internet video streaming services. In December 2012, Shanghai iQIYI Culture Media Co., Ltd., or Shanghai
iQIYI, was established as our exclusive advertising agent. In May 2013, we acquired the online video business of PPS. We primarily provide live streaming service
through Shanghai Zhong Yuan
Network Co., Ltd., or Shanghai Zhong Yuan, the operating entity of PPS. We have control over and are the primary beneficiary of Beijing iQIYI, Shanghai
iQIYI and Shanghai Zhong Yuan through a series of contractual arrangements. Beijing iQIYI and Shanghai Zhong Yuan hold our ICP licenses and other licenses and
permits necessary for our business operation.
In May 2017, we established a wholly-owned Cayman Islands subsidiary, iQIYI Film Group Limited. Subsequently, we established IQIYI Film Group HK
Limited in June 2017, and Beijing iQIYI New Media Science and Technology Co., Ltd., or iQIYI New Media, in July 2017. iQIYI Film Group Limited holds 100% of
the equity of IQIYI Film Group HK Limited, which in turn holds 100% of equity in iQIYI New Media. iQIYI Pictures (Beijing) Co., Ltd., or iQIYI Pictures, was
established in December 2014, and Beijing iQIYI Intelligent Entertainment Technology Co., Ltd., or Intelligent Entertainment (previously known as Beijing iQIYI
Cinema Management Co., Ltd., or Beijing iQIYI Cinema), was established in June 2017. We have control and are the primary beneficiary of iQIYI Pictures and
Intelligent Entertainment through a series of contractual arrangements.
Between March 2010 and September 2014, Baidu made substantial investments in our company, and we issued ordinary shares and several series of preferred
shares to Baidu Holdings. In our Series F preferred shares financing, which took place in November 2014, we issued 136,749,954 Series F preferred shares to Baidu
Holdings, 341,874,885 Series F preferred shares to Xiaomi Ventures Limited and 68,374,978 Series F preferred shares to Prominent TMT Limited, an affiliate of
Xiaomi Ventures Limited. In January 2017, we raised US$1.53 billion from the issuance of convertible notes to a group of investors. These notes were converted into
Series G preferred shares in October 2017, including 215,484,776 Series G-1 preferred shares issued to Baidu Holdings and another investor, as well as 798,951,243
Series G-2 preferred shares issued to other investors. All preferred shares were converted into ordinary shares upon the completion of our initial public offering. In
addition, in April 2018, we issued to Baidu Holdings an aggregate of 36,860,691 Class B ordinary shares, pursuant to a share purchase agreement we entered into with
Baidu Holdings in February 2018.
On March 29, 2018, our ADS commenced trading on the Nasdaq Global Select Market under the symbol “IQ.” On April 3, 2018, at the closing of our initial
public offering, we issued and sold a total of 875,000,000 Class A ordinary shares, represented by ADSs at a public offering price of US$18.00 per ADS. On April 30,
2018, we issued and sold an additional 67,525,675 Class A ordinary shares, represented by ADSs at US$18.00 per ADS, at the closing of the over-allotment option
exercised by the underwriters of our initial public offering.
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On July 17, 2018, we completed the acquisition of 100% equity stake in Skymoons Inc. and Chengdu Skymoons Digital Entertainment Co., Ltd., (“Chengdu
Skymoons,” together with Skymoons Inc., “Skymoons”). The aggregate consideration consists of a fixed payment of RMB1.27 billion, as well as additional
consideration valued at RMB730 million as of June 30, 2018 to be delivered in the event the acquiree satisfies the agreed upon performance benchmarks in the next two
years.
In December 2018, we completed an offering of US$750 million in aggregate principal amount of convertible senior notes due 2023, or the 2023 Notes. The
2023 Notes have been offered in the United States to qualified institutional buyers pursuant to Rule 144A and to non-U.S. persons outside the United States in reliance
on Regulation S under the Securities Act. The initial conversion rate of the 2023 Notes is 37.1830 ADSs per US$1,000 principal amount of Notes (which is equivalent to
an initial conversion price of approximately US$26.89 per ADS and represents a conversion premium of approximately 40% above the closing price of the ADSs on
November 29, 2018, which was US$19.21 per ADS). The conversion rate for the 2023 Notes is subject to adjustment upon the occurrence of certain events. The 2023
Notes will bear interest at a rate of 3.75% per year, payable semi-annually in arrears on June 1 and December 1 of each year, beginning on June 1, 2019. The 2023 Notes
will mature on December 1, 2023, unless previously repurchased, redeemed or converted in accordance with their terms prior to such date. The holders may require us to
repurchase all or portion of the Notes for cash on December 1, 2021, or upon a fundamental change, at a repurchase price equal to 100% of the principal amount, plus
accrued and unpaid interest. In connection with the offering of the 2023 Notes, we have entered into capped call transactions with certain counterparties, where we
purchased capped call options at the price of US$67.5 million. The cap price of the capped call transactions is initially US$38.42 per ADS and is subject to adjustment
under the terms of the capped call transactions.
In March 2019, we completed an offering of US$1.2 billion in aggregate principal amount of convertible senior notes due 2025, or the 2025 Notes. The 2025
Notes have been offered in the United States to qualified institutional buyers pursuant to Rule 144A and to non-U.S. persons outside the United States in reliance on
Regulation S under the Securities Act. The initial conversion rate of the 2025 Notes is 33.0003 ADSs per US$1,000 principal amount of Notes (which is equivalent to an
initial conversion price of approximately US$30.30 per ADS and represents a conversion premium of 32.5% above the closing price of our ADSs on March 26, 2019,
which was US$22.87 per ADS). The conversion rate for the 2025 Notes is subject to adjustment upon the occurrence of certain events. The 2025 Notes will bear interest
at a rate of 2.00% per year, payable semi-annually in arrears on April 1 and October 1 of each year, beginning on October 1, 2019. The 2025 Notes will mature on April
1, 2025, unless previously repurchased, redeemed or converted in accordance with their terms prior to such date. The holders may require us to repurchase all or portion
of the 2025 Notes for cash on April 1, 2023, or upon a fundamental change, at a repurchase price equal to 100% of the principal amount, plus accrued and unpaid
interest. In connection with the offering of the 2025 Notes, we have entered into capped call transactions with certain counterparties, where we purchased capped call
options at the price of US$84.5 million. The cap price of the capped call transactions is initially US$40.02 per ADS and is subject to adjustment under the terms of the
capped call transactions.
In December 2020, we completed a registered public offering of US$800 million in aggregate principal amount of convertible senior notes due 2026, or the 2026
Notes. The underwriters exercised their option in full to purchase an additional US$100 million aggregate principal amount of the 2026 Notes in January 2021. The
initial conversion rate of the 2026 Notes is 44.8179 ADSs per US$1,000 principal amount of Notes (which is equivalent to an initial conversion price of approximately
US$22.31 per ADS and represents a conversion premium of approximately 27.5% over the price to public per ADSs in the ADSs offering concurrent with the offering of
the 2026 Notes, which was US$17.50 per ADS). The conversion rate for the 2026 Notes is subject to adjustment upon the occurrence of certain events, but will not be
adjusted for any accrued and unpaid interest. The 2026 Notes will bear interest at a rate of 4.00% per year, payable semi-annually in arrears on June 15 and December
15 of each year, beginning on June 15, 2021. The 2026 Notes will mature on December 15, 2026, unless repurchased, redeemed or converted in accordance with the
terms of the Notes prior to such date. The holders may require us to repurchase all or part of the 2026 Notes for cash on August 1, 2024, or upon a fundamental change,
at a repurchase price equal to 100% of the principal amount, plus accrued and unpaid interest.
Concurrently with the issuance of 2026 Notes, we also completed a registered follow-on public offering of 40,000,000 ADSs at a public offering price of
US$17.50 per ADS. The underwriters exercised their option to purchase 4,594,756 additional ADSs at the price of US$17.50 per ADS in January 2021.
In November 2021, we completed the repurchase right offer relating to the 2023 Notes. US$746.8 million aggregate principal amount of the 2023 Notes were
validly surrendered and not withdrawn prior to the expiration of the repurchase right offer.
In March 2022, we entered into subscription agreements with Baidu and a consortium of financial investors that include Oasis Management Company Ltd., who
have agreed to subscribe for and purchase from us, through a private placement, a total of 164,705,882 newly issued Class B ordinary shares and 304,705,874 newly
issued Class A ordinary shares of our company, for a total purchase price of US$285 million in cash. In accordance with the subscription agreements, Baidu subscribed
for Class B ordinary shares, and the financial investors subscribed for Class A ordinary shares.
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In December 2022, we issued an aggregate amount of US$500 million in secured convertible senior notes due January 2028 to PAG. In February 2023, we
issued to PAG an additional US$50 million principal amount of the PAG Notes upon its exercise to subscribe for additional notes in full. The PAG Notes bear an interest
rate of 6% per annum and will mature on the fifth anniversary of the issuance date. The PAG Notes may be convertible into our ADSs at the holder’s option and subject
to the terms of the PAG Notes, at an initial conversion rate of 216.9668 ADS per US$1,000 principal amount of the PAG Notes (which is equivalent to an initial
conversion price of approximately US$4.61 per ADS). Holders of the PAG Notes have the right to require us to repurchase or repay for cash all or part of their notes, at a
price equal to 120% and 130% of the principal amount of the PAG Notes on or shortly after the third anniversary of the issuance date and the fifth anniversary of the
issuance date, respectively. They also have the right to require us to repurchase for cash all or part of their notes in the event of certain fundamental changes and events
of defaults.
In January 2023, we completed a registered follow-on public offering of 76,500,000 ADSs at a public offering price of US$5.90 per ADS. The underwriters
exercised their option to purchase 9,975,000 additional ADSs at the price of US$5.90 per ADS in January 2023. We received net proceeds of US$500.0 million from the
follow-on offering, including the exercise of the underwriters’ option to purchase additional ADSs, after deducting the underwriters’ discounts and commissions.
In March 2023, we completed an offering of US$600 million in aggregate principal amount of the 2028 Notes. Holders of the 2028 Notes may require us to
repurchase all or a portion of their notes for cash on March 16, 2026 or in the event of certain fundamental changes at a repurchase price equal to 100% of the principal
amount, plus accrued and unpaid interest. Concurrently with and shortly after the offering of the 2028 Notes, we entered into separate individually and privately
negotiated agreements with certain holders of the 2026 Notes to repurchase US$340 million principal amount of such notes for cash.
Our principal executive offices are located at 4/F, iQIYI Youth Center, Yoolee Plaza, No. 21, North Road of Workers’ Stadium, Chaoyang District, Beijing,
100027 People’s Republic of China. Our telephone number at this address is +86 10 6267-7171. Our registered office in the Cayman Islands is located at PO Box 309,
Ugland House, Grand Cayman, KY1-1104, Cayman Islands. Our agent for service of process in the United States in connection with the registration statement on Form
F-3 is Cogency Global Inc., located at 122 East 42nd Street, 18th Floor, New York, NY 10168.
SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the
SEC on www.sec.gov. You can also find information on our website http://ir.iqiyi.com. The information contained on our website is not a part of this annual report.
B.BUSINESS OVERVIEW
iQIYI is a leading provider of online entertainment video services in China. Since the beginning, we have always put content and users at the center, orienting
each of our business strategies around delivering superior content quality and user-friendliness. Artistically crafted and imbued with industry expertise distilled from
over a decade of operational experience, many iQIYI original titles have secured their places among the most successful IP franchises in the history of Chinese popular
entertainment. Designed and refined by our engineers with a deep understanding of the evolving user preferences, our products continue to offer superior entertainment
experience for users.
Our platform features a variety of premium video content, in particular iQIYI original dramas and shows. With in-house studios spearheading our original
content production, we are home to many acclaimed original drama series and variety show franchises, and have successfully serialized our original content into
blockbuster sequels to accumulate and amplify IP value overtime. Our in-house content production studios, together with our experienced supporting teams, help us
industrialize content production, amass creative talents and produce premium content efficiently. With valuable experience gained over the past years, our content
studios have produced high-quality content that has been well received by the market and economically viable. We also expand our premium content offering through
licenses and collaboration with third-party partners, which supplement our original content. As of December 31, 2022, we had over 40,000 professionally produced
content (PPC) titles in our comprehensive and diversified video content library, comprised of drama series, variety shows, films and others.
We have one of the largest subscribing member base among all internet video streaming services in mainland China. In 2022, we achieved an average daily
number of total subscribing members of 103.1 million and an average daily number of subscribing members excluding individuals with trial memberships of 102.4
million. The monthly average revenue per membership (“ARM”) in 2022 was RMB14.31, compared to RMB13.71 in 2021, increasing 4.4% year over year. Beyond our
core focus on content, we have also crafted new strategies to attract more users to become our subscribing members through additional privileges to enhance the value of
our membership. With a strong dedication to offering diversified premium content and membership privileges, we have attracted a massive and loyal paying user base.
We have developed diversified monetization models. We generate revenues through membership services, online advertising services and a suite of other monetization
methods. Our monetization model fosters an environment for
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high-quality content production and effective content distribution on our platform, which in turn expands our subscriber base and increases user engagement, creating a
virtuous cycle.
Our Products and Services
We provide our users with a variety of products and services encompassing online video, online games, online literature, animations and others.
Video
We produce, aggregate and distribute a wide variety of professionally produced content, or PPC, as well as a broad spectrum of other video content in a variety
of formats.
Professionally Produced Content (PPC)
iQIYI original content
Driven by our long-term commitment to original content, we have established a unique and effective methodology for both original content production and
operations. Powered by a strong team of professionals and supported by a mature and highly efficient operating mechanism, our methodology encompasses from
content creation, production to post-broadcasting. We have achieved breakthrough in original content as evidenced by the scores tracked by iQIYI popularity index,
which is an influential indicator of content popularity.
Our original content includes content produced in-house and content produced in collaboration with quality third-party partners. Our original content titles
include popular drama series, such as Love Between Fairy and Devil (苍兰诀), Chasing the Undercurrent (罚罪), New Life Begins (卿卿日常), and Wild Bloom (风吹
半夏), all of which were launched in 2022 and broke the landmark 10,000 iQIYI popularity index score; popular variety shows, such as The Big Band (乐队的夏天),
Qipa Talk (奇葩说), The Rap of China (中国说唱巅峰对决) and Super Sketch Show(一年一度喜剧大赛); high-quality movies, such as Mirrors and Feathers (北方一
片苍茫), Tough Out (棒!少年), Break Through the Darkness(扫黑•决战) and Northeastern Bro (东北恋哥); and popular animations, such as Deer Squad (无敌鹿战
队), The World of Fantasy (灵域) and Love Between Fairy and Devil (苍兰诀). iQIYI obtains the IP through production, adaptation or purchase from third parties, while
the partners, typically established entertainment production companies, are responsible for content development and production. iQIYI maintains a high degree of
control during the content development and production process.
We also adapt high-quality video IP into multiple entertainment products, such as online games, animations, online literature, and derivative merchandise.
Licensed content
In addition to original content, we also provide users with a curated selection of high-quality PPC from third parties. Leveraging our expertise in content
selection, we have successfully debuted well-received titles such as drama series iPartment (爱情公寓), In the Name of People (人民的名义), Go Go Squid (亲爱的,热
爱的), My Heroic Husband (赘婿), A Lifelong Journey (人世间) and variety show Keep Running (奔跑吧). Our licensed content library also features a rich collection of
movies, animations, documentaries and other content.
Our licensed video content are typically procured at fixed rates for a specified term. The average term of licenses varies depending on the type of content, with
films and drama series having an average term of nine years and thirteen years, respectively. Payments of licensing fees are generally made in installments upon signing
of the contacts and during the license period. We also exchange rights to distribute licensed content with other online video streaming services to enrich our content
library. In certain cases, we have the right of first refusal to purchase new content produced by the licensor.
We leverage our content procurement team’s insights and our AI-based big data analytics capabilities to optimize content procurement. We have established
strong partnerships with content providers to ensure access to high-quality content. These partners include leading domestic drama series production companies, film
production companies and TV stations, “Big Six” Hollywood production studios, top TV networks in the U.S., etc.
Other Video Content
In addition to professionally produced content, we also offer a broad base of other video content with all kinds of genres, formats and lengths of duration, such as
internet movies and dramas, mini variety shows and animations, vertical or horizontal videos,
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as well as grassroot or influencer uploaded videos, edited video clips, and video blogs, or Vlogs, among others. Our other video content expands our library and allows
us to capture a broader user base, drive user engagement and enhance user stickiness.
Our other video content is created and uploaded to our platform by a wide array of content providers. The content providers range from, among others, ordinary
registered users, amateurs, semiprofessional partners, to internet influencers, multi-channel networks, self-media, and production studios, which collectively contribute to
growing our creative user community. Content providers upload their videos onto their iQIYI partner accounts, an open platform we provide, to share, distribute and
monetize their video content. We then evaluate the quality of uploaded videos before final approval. Users can subscribe for and follow their favorite iQIYI partner
accounts.
Other Products and Services
Our other products and services include online games, literature, comics and others.
We develop and distribute online games featured in various formats to domestic and overseas users. Following the acquisition of Skymoons in July 2018, we
further broadened our game offerings, especially self-developed games that fully leverage the IP value in our content. We provide high-quality online literature and
comics works which can be adapted into script for derivative entertainment products. Furthermore, we are developing a video community to build an ecosystem that
empowers users to discover video content based on their interests, follow content creators, and interact with other users with the same interests.
iQIYI Lite
In January 2021, we officially released the iQIYI Lite app, which offers users an easy and quick access to the personalized videos based on their user preferences.
We offer various free content on iQIYI Lite app with advertisements catered to the preferences of users, and we also offer ad-supported membership services for
subscribing members of iQIYI Lite app. iQIYI Lite helps us to expand our total addressable market by penetrating into regions and user cohorts which are not yet
covered by our main app.
Overseas Business
We expand our business overseas through our multilingual iQIYI app and website, which offer a curated selection of popular imported and local video content
titles. We currently support interfaces in more than ten languages and our app can be downloaded globally from major app stores. We also seek collaboration with local
partners to leverage their strong marketing capabilities and know-how in high-quality local contents.
User Experience
We offer entertainment content across our user-friendly and feature-rich interfaces on our website, mobile app, smart TV and other online terminals.
Our home page is a one-stop portal for users to access both trending and recommended content. Leveraging our big data analytics, we analyze user browsing
behavior to understand their tastes and preference, and dynamically update the content shown on the home page to offer users with the most desirable content. Our
interface offers comprehensive viewing functions designed to enhance user experience. We provide various picture resolution and play options. Other key functions
include bullet chat, screenshots, VR viewing, screen mirroring and video caching.
Monetization
We generate revenues primarily through membership services, online advertising and content distribution. We also generate revenues from other monetization
methods, including online games, IP licensing, talent agency, online literature and more.
Membership Services
Our membership services generally provide subscribing members with superior entertainment experience that is embodied in various membership privileges. Our
current membership program is composed of multiple packages, each offered at a different price and provides subscribing members with access to a large collection of
VIP-only content comprised of drama series, movies, animations, cartoons and online literature, earlier access to certain content aired on iQIYI platform and a bundle of
viewing functions and features. For example, the members-first model of The Lost Tomb (盗墓笔记) enabled members to gain instant access to the entire season while
non-paying users could only follow weekly updates for new episodes; and certain auxiliary content of Folk
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2022(我们民谣2022) was accessible exclusively to our members. Our members primarily include subscribing members and, to a lesser extent, users who gain access to
our premium content library through paid video-on-demand service.
We review and evaluate the price of our membership services and adjust the price accordingly, from time to time. In November 2020, we increased the pricing of
our monthly, quarterly and annual membership packages on non-iOS channels to the same level of iOS channels. In December 2021 and December 2022, respectively,
we further increased the pricing of certain membership packages.
Online Advertising
The prices of our advertising services depend upon various factors, including form and size of the advertising, level of sponsorship, popularity of the content or
event in which the advertisements will be placed, and specific targeting requirements. Prices for the brand advertising service purchased by each advertiser or advertising
agency are generally fixed under our sales contracts.
In addition to traditional pre-video and pop-up advertisements, we also launched various innovative advertising products and solutions. For example, video-out
advertisement appears on the screen when the video is showing content related to the advertised product; soft product placement incorporates the advertised product into
the production of our premium original content to facilitate a more natural advertisement viewing experience; content-integrated advertisement integrate brands with
content itself, such as theme songs with lyrics embedding brand names of advertisers; and interactive advertisement that facilitates enhanced interaction between brands
and users.
We also offer performance-based advertising, the prices of which are competitively priced through an online bidding process.
Content Distribution
We monetize and enrich our content through content distribution. We sub-license content within its authorized scope to TV stations and other internet video
streaming services. We also enter into barter agreements to exchange internet broadcasting rights of licensed content with other internet video streaming services. The
barter agreement provides the licensee with the right to broadcast the licensed content, and the licensor retains the right to continue broadcasting and/or sub-licensing the
exchanged content. We distribute our selected content not only to third-party platforms in China but also to regions outside of China.
Others
Our other monetization models include online games, IP licensing, talent agency, online literature, other licensing and others.
For our online games, we distribute both self-developed and third-party games, and we monetize online games through users’ in-app purchases of virtual gifts
and game privileges. For IP licensing, we license our proprietary IP to third parties to develop derivative merchandise products, with a focus on long-term licensing. We
also license our popular trademarks to third parties for use in their products. We collaborate with our partners generally through fixed-price licensing fees and/or
revenue-sharing arrangements. We monetize our talent agency business by organizing our talents to participate in dramas, variety shows, commercial performances and
brand endorsements, among others. For online literature, we monetize through advertisement and paid reading (including membership subscription) on our platform,
where readers can pay to gain access to our premium online literary titles.
We also generate revenue from other licensing by granting rights to certain customers to re-create short-form videos for selected content assets from our existing
content library over a fixed license period.
Sales and Marketing
Brand Promotion
iQIYI’s brand values are youth, vitality and positivity. We believe that our high-quality video content and services lead to strong word-of-mouth referrals, which
drives customer awareness of our brand in mainland China. Our market position benefits significantly from our large and high-quality user base and our strong brand
recognition.
Leveraging our in-depth understanding of user behavior, we employ a variety of online marketing programs and promotional activities to build our brand as part
of our overall market strategy, including celebrity endorsement, hot topic dissemination through different media outlets, brand value embedment in blockbuster content,
as well as resource exchange with major internet media platforms.
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We host many offline activities to enhance our brand recognition. To increase members’ loyalty, we organize special events for members such as on-site visits
during the show productions. We also host innovative offline marketing activities such as offline music festivals and our content IP based exhibitions.
We also execute marketing strategies aimed at young users to enhance user affinity. We use innovative technology to communicate with the younger generation,
such as using AR to enable user interaction at bus stops. We use social media platforms to facilitate user engagement. We attract young users by offering artist-fans
interactions opportunities. We also collaborate with major wireless carriers to provide monthly unlimited data package for using iQIYI app on mobile devices.
Advertising Sales
For brand advertising, we sell our advertising services primarily through third-party advertising agencies, including members of American Association of
Advertising Agencies, or 4As, and leading Chinese advertising agencies, and a portion of our brand advertising services directly to advertisers. We primarily sell our
performance-based advertising service through third-party advertising agencies. We strategically leverage advertising agencies’ existing long-term relationships and
network resources to increase our sales and expand our advertiser base. Depending on the type of advertiser and content, the duration of an advertising framework
agreement is typically 12 months.
We have an experienced sales team consisting of salespeople with prior experience at Chinese internet companies, members of 4As and domestic advertising
agencies. We divide our sales team by regions across the country to ensure the delivery of targeted advertising solutions. We provide regular training to our sales team to
help them provide advertisers with comprehensive information about our services.
Content promotion
We employ a variety of traditional and internet promotional activities to promote our content. We deploy outdoor brand advertisements, such as display ads in
subway stations. Our promotional efforts are also focused on brand advertisements placed on internet video platforms and social media campaigns. Furthermore, we also
organize offline promotional events attended by popular celebrities to raise the awareness of our content offerings.
Intellectual Property and Copyright Protection
We highly value our intellectual property rights, which are fundamental to our success and competitiveness. We rely on a combination of patent, copyright,
trademark and trade secret laws and restrictions to protect our intellectual property rights. As of December 31, 2022, we have applied for the registration of 9,080
patents, among which 2,078 patents of invention, 30 utility model patents and 3,758 patents of appearance have been registered with the State Administration for Market
Regulation of the PRC, or the SAMR. As of December 31, 2022, we have applied for 6,022 trademarks, among which 5,077 have been registered with the Trademark
Office of the State Administration for Industry & Commerce of the PRC. We have also registered 509 software copyrights with the Copyright Protection Center of the
PRC, as of December 31, 2022, our “爱奇艺” and “
” trademarks have been recognized as well-known trademarks by the SAMR.
We employ a three-phase copyright protection scheme consisting of copyright management, network monitoring, and complaint or legal action. Our proprietary
copyright management system registers all procured copyrights and ensures that licensed content on our platform do not exceed its scope and term of the licensing
agreement. We developed a proprietary system to detect unauthorized use of iQIYI content on other internet platforms. We also establish various other channels for
copyright protection. After a user registers and before each upload, we require the user to confirm that the content to be uploaded is in compliance with the terms and
conditions set forth in the user agreement, to guarantee that he or she is the copyright owner or has obtained all necessary consents and authorizations for such content.
We set technical barriers to deter illegal video content extractions. We encourage our users to report pirated content, and our copyright protection team promptly
removes any suspected infringing content once we receive proper notification from the legitimate copyright owner. As a major market player in the streaming
entertainment industry, we also attach great value to industrial response and feedback. We actively liaise with other major internet video streaming services to form
industry union and collectively protect copyright.
Content Moderation
We implement strict monitoring procedures to remove inappropriate or illegal content, including video, online literature, animations, iQIYI Show, bullet chat and
comment postings, and content from other services. Text, images and videos are screened by
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our content moderation team, which reviews our content on a 24/7 basis. Illegal and inappropriate content can generally be identified and removed promptly after it has
been uploaded.
Our content moderation team employs systematic monitoring procedures that include machine screening and manual review based on the latest laws and
regulations. Our proprietary machine identification system automatically screens text, picture and video content. The text identification system screens text content based
on pre-set key words and anti-spam system; the picture identification system screens picture content based on optical character recognition and pornographic-content
detection; and the video identification system screens video content based on similarity analysis against our video database to analyze each frame and each second of
video content. The machine screening process may have three possible outcomes: suggesting to delete content identified as illegal or inappropriate, releasing content
identified as safe, or flagging content for manual review when the system cannot make a judgment. The content moderation team manually reviews flagged content to
make judgment on whether to block or to release, and the machine identification system conducts auto-learning based on the judgment from manual review. The content
moderation team also conducts random screening on content that has passed the machine screening process. We regularly communicate with relevant government
authorities to stay abreast of relevant laws and regulations to ensure compliance. We provide periodic and comprehensive training to our content moderation team to
ensure and enhance their understanding of regulatory requirements.
We conduct thorough background checks on our content providers. We request entities to provide us with copies of registration information and organization
code certificate, and individuals to provide us with copies of official governmental ID. We request individuals to provide a mobile phone number, which is registered
with one’s ID. We monitor all live content broadcast on our platform in real time using both machine screening and manual review. Despite our content moderation
efforts, we may still be subject to risks arising from contents on our platform. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and
Industry—Videos and other content displayed on our platform may be found objectionable by PRC regulatory authorities and may subject us to penalties and other
administrative actions.”
Competition
We face competition for content sourcing, user traffic and advertising customers from other providers of online entertainment video services in mainland China,
primarily including Tencent Video, Youku, Mango TV and Bilibili. We also compete with other internet media and entertainment services, such as internet and social
platforms and short-form video platforms, as well as major TV stations. For a discussion of risks related to competition, see “Item 3. Key Information—D. Risk Factors
—Risks Related to Our Business and Industry—We operate in a highly competitive market and we may not be able to compete effectively.”
Seasonality
Seasonal fluctuations have affected, and are likely to affect our business in the future. Historically, we have experienced lower online advertising services
revenue in the first quarter of each year in connection with the Chinese New Year holiday as advertisers limit their budget for online platforms. The first and third
quarters of each year typically represent the peak seasons for our membership services historically, when users tend to consume more content during Chinese New Year
and summer holiday. However, the seasonal pattern of our business can be impacted by our content release schedule and other factors. For a discussion of risk related to
seasonality and fluctuation of our operating results, see “Item 3. Key Information—D. Risk Factor—Risks Related to Our Business and Industry—Our quarterly
operating results may fluctuate, which makes our results of operations difficult to predict and may cause our quarterly results of operations to fall short of expectations.”
Insurance
As required by laws and regulations in mainland China, we participate in various employee social benefits plans that are organized by municipal and provincial
governments, including medical insurance, job-related injury insurance, maternity insurance and unemployment insurance. We do not have any business liability or
disruption insurance coverage for our operations in mainland China. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—We
have limited business insurance coverage.”
Government Regulations
PRC Regulations
This section sets forth a summary of the most significant rules and regulations that affect our business activities in mainland China.
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Regulations Related To Foreign Investment in Mainland China
Foreign Investment Industrial Policy
Investments activities in mainland China by foreign investors are principally governed by the Catalog for the Encouragement of Foreign Investment Industries
(2022 Edition) (the “Catalog”) and the Negative List, which were both promulgated by the MOFCOM and the NDRC and each became effective on January 1, 2023 and
January 1, 2022. The Catalog and the Negative List set forth the industries in which foreign investments are encouraged, restricted and prohibited. Industries that are not
listed in any of these three categories are generally open to foreign investment unless otherwise specifically restricted by other PRC rules and regulations.
According to the Negative List, the foreign equity interests ownership of entities that engage in value-added telecommunications business (except for e-
commerce, domestic multi-party communication, storage and forwarding and call center) must not exceed 50%. In addition, foreign investments in the internet cultural
business (except for music), the internet audio-video program business, the radio and television program production and operation business, the production of audio-
video products and/or electronic publications and film production and distribution business are prohibited. However, foreign investors are allowed to hold up to 100% of
equity interests in an online data processing and transaction processing business (including e-commerce business operation) in mainland China.
Foreign Investment Law and its Implementation Measures
On March 15, 2019, Foreign Investment Law was enacted by the National People’s Congress, which became effective on January 1, 2020 and has replaced the
previous major laws and regulations governing foreign investment in mainland China, including the Sino-foreign Equity Joint Ventures Enterprises Law of the PRC, the
Sino-foreign Co-operative Enterprises Law of the PRC and the Wholly Foreign-invested Enterprise Law of the PRC. According to the Foreign Investment Law,
“foreign-invested enterprises” refers to enterprises that are wholly or partly invested by foreign investors and registered under the PRC laws within mainland China, and
“foreign investment” refers to any foreign investor’s direct or indirect investment activities in mainland China, including: (i) establishing foreign-invested enterprises in
mainland China either individually or jointly with other investors; (ii) obtaining stock shares, equity shares, shares in properties or other similar interests of Chinese
domestic enterprises; (iii) investing in new projects in mainland China either individually or jointly with other investors; and (iv) investing through other methods
provided by laws, administrative regulations or provisions prescribed by the State Council.
On December 26, 2019, the State Council issued Implementation Regulations for the Foreign Investment Law of the PRC (the “Implementation Rules”) which
came into effect on January 1, 2020, and replaced the Implementing Rules of the Sino-foreign Equity Joint Ventures Enterprises Law of the PRC, the Implementing
Rules of the Sino-foreign Co-operative Enterprises Law of the PRC and the Implementing Rules of the Wholly Foreign-invested Enterprise Law of the PRC. According
to the Implementation Rules, in the event of any discrepancy between the Foreign Investment Law, the Implementation Rules and the relevant provisions on foreign
investment promulgated prior to January 1, 2020, the Foreign Investment Law and the Implementation Rules shall prevail. The Implementation Rules also set forth that
foreign investors that invest in sectors on the Negative List in which foreign investment is restricted shall comply with special management measures with respect to,
among others, shareholding and senior management personnel qualification in the Negative List. Pursuant to the Foreign Investment Law and the Implementation Rules,
the existing foreign-invested enterprises established prior to the effective date of the Foreign Investment Law are allowed to keep their corporate organization forms for
five years from the effectiveness of the Foreign Investment Law before such existing foreign-invested enterprises change their organization forms and organization
structures in accordance with the PRC Company Law, the Partnership Enterprise Law of the PRC and other applicable laws.
On December 30, 2019, the MOFCOM and the SAMR jointly promulgated the Measures on Reporting of Foreign Investment Information, which came into
effect on January 1, 2020, and has replaced the Interim Measures for the Administration of Record-filling on the Establishment and Changes in Foreign-Invested
Enterprises. Foreign investors or foreign-invested enterprises shall submit investment information to the commerce administrative authorities through the Enterprise
Registration System and the National Enterprise Credit Information Publicity System.
On December 19, 2020, the NDRC and the MOFCOM jointly promulgated the Measures on the Security Review of Foreign Investment, effective on January 18,
2021, setting forth provisions concerning the security review mechanism on foreign investment, including the types of investments subject to review, review scopes and
procedures, among others. The Office of the Working Mechanism of the Security Review of Foreign Investment (the “Office of the Working Mechanism”) will be
established under the NDRC, who will lead the task together with the MOFCOM. Foreign investor or relevant parties in mainland China must declare the security
review to the Office of the Working Mechanism prior to (i) the investments in the military industry, military industrial supporting and other fields relating to the security
of national defense, and investments in areas surrounding military facilities and military industry facilities; and (ii) investments in important agricultural products,
important energy and resources, important
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equipment manufacturing, important infrastructure, important transport services, important cultural products and services, important information technology and internet
products and services, important financial services, key technologies and other important fields relating to national security, and obtain control in the target enterprise.
Control exists when the foreign investor (i) holds over 50% equity interests in the target, (ii) has voting rights that can materially impact on the resolutions of the board
of directors or shareholders meeting of the target even when it holds less than 50% equity interests in the target, or (iii) has material impact on target’s business
decisions, human resources, accounting and technology.
Regulations on Value-added Telecommunications Services
On September 25, 2000, the State Council promulgated the Telecommunications Regulations of the People’s Republic of China, or the Telecom Regulations,
which was amended on July 29, 2014 and February 6, 2016. The Telecom Regulations is the primary PRC law governing telecommunications services and sets out the
general regulatory framework for telecommunications services provided by PRC companies. The Telecom Regulations distinguishes between “basic telecommunications
services” and “value-added telecommunications services.” The Telecom Regulations defines value-added telecommunications services as telecommunications and
information services provided through public network infrastructures. Pursuant to the Telecom Regulations, commercial operators of value-added telecommunications
services must first obtain an operating license from the MIIT, or its provincial level counterparts.
The Catalog of Telecommunications Business, or the Catalog, which was issued as an attachment to the Telecom Regulations and most recently amended on
June 6, 2019, further categorizes value-added telecommunications services into two classes: Class 1 value-added telecommunications services and Class 2 value-added
telecommunications services. Information services provided via cable networks, mobile networks or internet fall within Class 2 value-added telecommunications
services.
The Administrative Measures on Internet Content Services, or the Internet Content Services Measures, promulgated by the State Council on September 25, 2000,
amended and effective on January 8, 2011, sets out guidelines on the provision of internet content services. According to the Internet Content Services Measures, the
internet content services are classified into commercial internet content services and non-commercial internet content services. An internet content services provider
must obtain a Value-added Telecommunications Business Operation License for the provision of internet content services, or an ICP License, from the appropriate
telecommunications authorities.
On July 3, 2017, the MIIT issued the Measures on the Administration of Telecommunications Business Operating Permits, or the Telecom License Measures,
which became effective on September 1, 2017, to supplement the Telecom Regulations and further regulate the telecommunications business permits. The Telecom
License Measures sets forth the types of licenses required to operate value-added telecommunications services and the qualifications and procedures for obtaining such
licenses. The Telecom License Measures also provides that an operator providing value-added services in multiple provinces is required to obtain an inter-regional
license, whereas an operator providing value-added services in one province is required to obtain an intra-provincial license. Any telecommunication services operator
must conduct its business in accordance with the specifications in its license. We engage in business activities that are value-added telecommunications services as
defined in the Telecom Regulations and the Catalog. To comply with the relevant laws and regulations, Beijing iQIYI, Shanghai Zhong Yuan, and Chengdu Skymoons
have each obtained the ICP License, which will remain effective until September 8, 2026, May 11, 2026, and May 12, 2027 respectively.
Regulations on Foreign Direct Investment In Value-added Telecommunications Companies
According to the Negative List, the foreign equity interests ownership of entities that engage in value-added telecommunications business (except for e-
commerce, domestic multi-party communication, storage and forwarding and call center) must not exceed 50% and the industry of value-added telecommunications
services we currently operate falls into the restricted category.
Foreign direct investment in telecommunications companies in mainland China is governed by the Provisions on the Administration of Foreign-Invested
Telecommunications Enterprises, which was promulgated by the State Council on December 11, 2001 and was last amended on March 29, 2022 with effect from May 1,
2022. These regulations require that foreign-invested value-added telecommunications enterprises in mainland China must be established as Sino-foreign equity joint
ventures and that the foreign investors may acquire up to 50% equity interests in such joint ventures. In addition, a major foreign investor in a value-added
telecommunications business in mainland China must demonstrate a good track record and experience in operating value-added telecommunications businesses.
Moreover, foreign investors that meet these requirements must obtain approvals from the MIIT, to provide value-added telecommunication services in mainland China
and the MIIT retain considerable discretion in granting such approvals.
On July 13, 2006, the Ministry of Information Industry, or the MII, which was the predecessor to the MIIT, released the Notice on Strengthening the
Administration of Foreign Investment in the Operation of Value-added Telecommunications Business, or the
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MII Notice, pursuant to which, for any foreign investor to invest in telecommunications businesses in mainland China, a foreign-invested telecommunications enterprise
must be established and such enterprise must apply for the relevant telecommunications business operation licenses. Furthermore, under the MII Notice, domestic
telecommunications enterprises may not rent, transfer or sell a telecommunications business operation license to foreign investors in any form, and they may not provide
any resources, premises, facilities and other assistance in any form to foreign investors for their illegal operation of any telecommunications business in mainland China.
In addition, under the MII Notice, the internet domain names and registered trademarks used by a value-added telecommunication service operator shall be legally
owned by such operator or its shareholders.
In view of these restrictions on foreign direct investment in value-added telecommunications services and certain other types of businesses under which our
business may fall, including internet culture services, internet audio-video program services and radio/television programs production and operation business, we have
established various domestic variable interest entities to engage in value-added telecommunications services and other foreign investment restricted or prohibited
businesses. Due to the lack of interpretative guidance from the relevant PRC governmental authorities, there are uncertainties regarding whether PRC governmental
authorities would consider our corporate structure and contractual arrangements to constitute foreign ownership of a value-added telecommunications business or any
other foreign investment restricted or prohibited business. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—If the PRC
government finds that the agreements that establish the structure for operating certain of our operations in mainland China do not comply with PRC regulations relating
to the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to
relinquish our interests in those operations.” In order to comply with PRC regulatory requirements, we operate a substantial portion of our business through the variable
interest entities, which we have contractual relationships with but we do not have actual ownership interests in. If our current ownership structure is found to be in
violation of current or future PRC laws, rules or regulations regarding the legality of foreign investment in value-added telecommunications services and other types of
businesses on which foreign investment is restricted or prohibited, we could be subject to severe penalties.
Regulations on Internet Content Providers
The Internet Content Services Measures, set out guidelines on the provision of internet content services. The Internet Content Services Measures specifies that
internet content services regarding news, publications, education, medical and health care, pharmacy and medical appliances, among other things, are required to be
examined, approved and regulated by the relevant authorities. Internet information providers are prohibited from providing services beyond those included in the scope
of their licenses or filings. Furthermore, the Internet Content Services Measures specifies a list of prohibited content. Internet information providers are prohibited from
producing, copying, publishing or distributing information that is humiliating or defamatory to others or that infringes the legal rights of others. Internet information
providers that violate such prohibition may face criminal charges or administrative sanctions. Internet information providers must monitor and control the information
posted on their websites. If any prohibited content is found, they must remove the content immediately, keep a record of such content and report to the relevant
authorities.
On December 15, 2019, the Office of the Central Cyberspace Affairs Commission promulgated the Provisions on the Governance of Network Information
Content Ecology, or the Network Information Content Provisions. According to the Network Information Content Provisions, content platforms shall set up a mechanism
for ecological governance of network information content, develop detailed rules for ecological governance of the network information content, and improve systems for
user registration, account management, information release examination, posts and comments examination, among others. If a content platform violates the Network
Information Content Provisions, the competent cyberspace authorities may hold interviews, give warnings and order the platform to make rectifications within a
specified time limit. If the content platform fails to do so or if the circumstances are severe, the cyberspace authorities may order such platform to suspend its
information update and impose other penalties. As a provider of commercial internet content services, we are required to comply with the Network Information Content
Provisions. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—Videos and other content displayed on our platform may be
found objectionable by PRC regulatory authorities and may subject us to penalties and other administrative actions.”
Regulations on Internet Audio-video Program Services
On December 20, 2007, the MII and the SARFT, jointly issued the Administrative Provisions for the Internet Audio-video Program Services, or the Audio-video
Program Provisions, which came into effect on January 31, 2008 and was amended on August 28, 2015. The Audio-video Program Provisions defines “internet audio-
video program services” as producing, editing and integrating of audio-video programs, supplying audio-video programs to the public via the internet, and providing
audio-video programs uploading and transmission services to a third-party. Entities providing internet audio-video program services must obtain an Internet Audio-video
Program Transmission License. Applicants for such licenses shall be state-owned or state-controlled entities unless an internet audio-video program transmission license
has been obtained prior to the effectiveness of the Audio-video Program Provisions
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in accordance with the then-in-effect laws and regulations. According to the Official Answers to Press Questions Regarding the Internet Audio-video Program
Regulations published by the SARFT on February 3, 2008, the SARFT and MII clarified that providers of Internet audio-video program services who had legally
engaged in such services prior to the adoption of the Audio-video Program Provisions, provided they have not been in violation of laws and regulations, shall be eligible
to re-register and continue operations of Internet audio-video program services. This policy has later been reflected in the Notice on Relevant Issues Concerning
Application and Approval of Audio-video Permit, issued by SARFT on May 21, 2008 and amended on August 28, 2015. In addition, in accordance with the Decisions of
the State Council on the Entry of the Non-state-owned Capital into the Cultural Industry, promulgated by the State Council on April 13, 2005, and the Opinions on
Introducing Foreign Investments to the Cultural Sector, jointly adopted by five PRC regulatory agencies and the Negative List, foreign-invested enterprises are not
allowed to engage in the above-mentioned services.
According to the Audio-video Program Provisions and other relevant laws and regulations, audio-video programs provided by the entities supplying internet
audio-video program services shall not contain any illegal content or other content prohibited by the laws and regulations, such as any content against the basic
principles in the PRC Constitution, any content that damages the sovereignty of the country or national security, and any content that disturbs social order or undermine
social stability. An audio-video program that has already been broadcast shall be retained in full for at least 60 days. Movies, television programs and other media
content used as internet audio-video programs shall comply with relevant administrative regulations on programs broadcasts through radio, movie and television
channels. Entities providing services related to internet audio-video programs shall immediately delete the audio-video programs violating laws and regulations, keep
relevant records, report relevant authorities and implement other regulatory requirements.
The Categories of the Internet Audio-video Program Services (Trial), or the Audio-video Program Categories, promulgated by SAPPRFT on March 17, 2010 and
amended on March 10, 2017, classifies internet audio/visual programs into four categories: (I) Category I internet audio/video program service, which is carried out with
a form of radio station or television station; (II) Category II internet audio/video program service, including (a) re-broadcasting service of current political news
audio/video programs; (b) hosting, interviewing, reporting and commenting service of arts, entertainment, technology, finance and economics, sports, education and
other specialized audio/video programs; (c) producing (interviewing not included) and broadcasting service of arts, entertainment, technology, finance and economics,
sports, education and other specialized audio/video programs; (d) producing and broadcasting service of internet films/dramas; (e) aggregating and broadcasting service
of films, television dramas and cartoons; (f) aggregating and broadcasting service of arts, entertainment, technology, finance and economics, sports, education and other
specialized audio/video programs; and (g) live audio/video broadcasting service of cultural activities of common social organizations, sport events or other organization
activities; and (III) Category III internet audio/video program service, including (a) aggregating service of online audio/video contents, and (b) re-broadcasting service
of the audio/video programs uploaded by internet users; and (IV) Category IV internet audio/video program service, including (a) re-broadcasting of the radio/television
program channels; (b) re-broadcasting of internet audio/video program channels; and (c) re-broadcasting of live internet-based audio/video programs.
On July 20, 2015, the SAPPRFT issued the Notice on Relevant Issues concerning Implementing the Approval Works of Upgrading Mobile Internet Audio-video
Program Service, or the Mobile Audio-video Program Notice. The Mobile Audio-video Program Notice provides that the mobile internet audio-video program services
shall be deemed internet audio-video program service. Entities which have obtained the approvals to provide the internet audio-video program services may use mobile
WAP websites or mobile applications to provide audio-video program services. Entities with regulatory approvals may operate mobile applications to provide the audio-
video program services. The types of the programs shall be within the permitted scope as provided in the licenses and such mobile applications shall be filed with the
NRTA and/or SFB. On March 16, 2018, the SAPPRFT issued the Notice on Further Regulating the Transmission Orders of Internet Audio-video Programs, or the
SAPPRFT Notice No. 21. According to the SAPPRFT Notice No. 21, online platforms shall not illegally capture, edit, or reprogram audio-video programs, shall
strengthen the administration of audio-video programs, such as online movie clips and trailers, shall strengthen the management of the naming or sponsorship of the
various programs, and the relevant authorities shall strengthen their administration and supervision over online audio-video platforms, as well as radio and television
stations on content management. Among other, SAPPRFT Notice No. 21 requires that online audio-video platforms shall not produce or disseminate programs that
distort, parody or vilify classic literary works; shall not re-edit, re-dub, or re-caption the subtitles of classic literary works, radio and television programs, network-based
original audio-video programs or intercept certain program segments and splice them into new programs; and shall not disseminate edited pieces of works that distort the
originals. Online platforms shall strictly supervise reprogramed videos uploaded by users and shall not facilitate the dissemination of defective audio-video programs. In
addition, when receiving a complaint about defective programs from copyright owners, broadcasting agencies or producing agencies, online platforms shall immediately
delete such programs.
On October 31, 2018, the State Administration of Radio and Television issued the Notice on Further Strengthening the Management of Radio and Television and
Network Audio-video Programs, or the Notice 60. According to Notice 60, all radio and
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television broadcasting institutes, network audio-video program service institutes and program production institutes shall stick to the right political direction and
strengthen value guidance; pursue people-centered creative orientation to curb bad tendencies such as pursuing celebrities, pan-entertainment and so on; persist in
providing high-quality content, constantly innovate programs, and strictly control the remuneration of guests; and strengthen the governance of TV series, network
series (including network movies) to promote the benign development of the industry; shall strengthen the use and management of ratings (click-through rate) survey
data and resolutely crack down on ratings (click-through rate) forgeries, etc. Notice 60 further provides that as to main network audiovisual programs, the total
remuneration of all guests in each program shall not exceed 40% of the total cost of the program, the total remuneration of main guests in each program shall not exceed
40% of the total remuneration of all guests, and information such as the names, salaries and cost proportion of the guests shall be reported to the State Administration of
Radio and Television before going online. Meanwhile, the total remuneration of all actors of each TV series and network series (including network movies) shall not
exceed 40% of the total cost of production, of which the total remuneration of main actors shall not exceed 70% of the total remuneration of all actors.
On December 27, 2018, the SART issued the Notice on the Upgrading of the Network Audio-video Program Information Recording System, or the Notice 158.
According to the Notice 158, the State Administration of Radio and Television has added a new module called “Main Network Movies and Teleplays Information
Recording System,” or the Recording System, in the “Network Play, Micro Film and other Network Audiovisual Program Information Recording System” set up in
2012. Since February 15, 2019, before the production of main network movies and teleplays (including network plays, network movies and network animations), the
producers shall provide relevant information, such as name, type, content outline, budget making, etc. Main network movies and teleplays shall include network series
(network animations) with total investment of more than RMB five million and network movies with an investment of more than RMB one million. After shooting and
production of main network movies and teleplays, the producers shall provide relevant information, such as the expected broadcasting platform, amount of actual
investment, actor’s remuneration and so on in the Recording System, and submit the finished programs to the relevant radio and television administrative departments.
Main network series, network movies and network animations with on-line filing numbers could be broadcasted and promoted on the home pages of various audio-video
program websites, or could be used for investment promotion, membership recommendation, online recommendation and program optimization of audio-video program
websites. On September 2, 2021, the NRTA issued the Circular of the General Office of the National Radio and Television Administration on Further Strengthening the
Management of Cultural Programs and Their Personnel or the Notice 267, pursuant to which online audio-video platforms shall not broadcast idol training shows, as
well as variety entertainment and reality shows participated by celebrities’ children. The Notice 267 also requires platforms to strictly control voting in the talent shows
and not to use in programs actors and guests who have violated laws or have conducted unethical behaviors. Beijing iQIYI has obtained the Internet Audio-video
Program Transmission License which will remain effective until October 23, 2024, covering certain audio-video program services as provided in Category II and
Category III, and Shanghai Zhong Yuan has obtained the Internet Audio-video Program Transmission License which will remain effective until March 23, 2023,
covering certain audio-video program services as provided in Category II, Category III and Category IV.
The Cyberspace Administration of China, or the CAC, the MCT and the NRTA issued the Notice on Issuing the Administrative Provisions on Online Audio-
video Information Services on November 18, 2019, which provides that online audio-video information service providers shall authenticate user’s real identity
information based on the organization code, identity card number, mobile phone number, etc. Online audio-video information service providers shall not serve users
who fail to provide their real identity information. Online audio-video information service providers shall strengthen the management of the audio-video information
posted by users, deploy and apply identification technologies for illegal and non-real audio and video; if any user is found to produce, post or disseminate content
prohibited by laws or regulations, the transmission of such information shall be ceased, and disposal measures such as deletion shall be taken to prevent the information
from spreading, and such service providers shall keep relevant records, and report to the CAC, the MCT, the NRTA, etc.
Regulations on Online Live Streaming Services
On November 4, 2016, the State Internet Content Office issued the Administrative Regulations on Online Live- Streaming Services, or the Online Live-streaming
Regulations, which came into effect on December 1, 2016. According to the Online Live-streaming Regulations, when providing internet news information services,
both online live-streaming service providers and online live-streaming publishers must obtain the relevant licenses for providing internet news information service and
may only carry out internet news information services within the scope of their licenses. All online live-streaming service providers (whether or not providing internet
news information) must take certain actions to operate their services, including establishing platforms for monitoring live-streaming content.
On September 2, 2016, the SAPPRFT issued the Circular on Issues concerning Strengthening the Administration of Online Live Streaming of Audio-video
Programs, or the Online Live Streaming Circular. According to the Online Live Streaming Circular, the Internet Audio-video Program Transmission License is a
prerequisite for online audio-video live streaming of general cultural events, such as social communities, sports events, as well as important political, military, economic,
social and cultural events. Relevant
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information about specific activities to be streamed shall be filed in advance with the provincial counterparts of the NRTA. Online audio-video live streaming service
providers shall censor and tape such programs and retain them for at least 60 days for future check by the administrative departments; and they shall have emergency
plans in place to replace programs in violation of laws and regulations. Bullet chats are not allowed in the live streaming of major political, military, economic, social,
cultural, sports and other activities and events. Special censorship shall be implemented over the bullet chats during the live streaming of cultural activities of general
social groups, sports events and other organizational activities.
According to the Measures for the Administration of Cyber Performance Business Operations, promulgated by the Ministry of Culture, or the MOC, which was
the predecessor to the MCT, on December 2, 2016 and became effective on January 1, 2017, a cyber-performance business entity engaging in cyber performance
business operations shall apply to the cultural administrative department at the provincial level for a Network Cultural Business Permit, and the permit shall specify the
scope of its cyber performance. Each of Beijing iQIYI and Shanghai Zhong Yuan has obtained a Network Cultural Business Permit from the relevant authorities.
According to the Notice on Strengthening the Management of Online Show Live Streaming and e-commerce- Live Streaming promulgated by the NRTA on
November 12, 2020, live streaming platforms for online shows are requested to strengthen positive value guidance and enable those tasteful, meaningful, interesting and
warm live-streaming programs to have good traffic, and to prevent the spread of the trends of wealth flaunting, money worshiping and vulgarity. In addition, the number
of content reviewers a platform is required to keep must in principle be no less than 1/50 of the number of live streaming rooms. Live streaming platforms for online
shows need to manage the hosts and “virtual gifting” users based on the real-name- registration system, and users who have not registered with real names or who are
minors are prohibited from virtual gifting. The live streaming platforms are required to implement real-name registration system by real-name verification, face
recognition, manual review and other measures to prevent minors from virtual gifting. The platform shall limit the maximum amount of virtual gifting each user may
give per time, day and month. Live streaming platforms for e-commerce shall not illegally produce and broadcast, beyond their business scope of e-commerce, any
commentary programs unrelated to sales of goods.
According to the Law of the PRC on the Protection of Minors (2020 Revision), which became effective on June 1, 2021, among others, live streaming service
providers are not allowed to provide minors under age 16 with online live streaming publisher account registration service, and must obtain the consent from parents or
guardians and verify the identity of the minors before allowing minors aged 16 or above to register live streaming publisher accounts.
Regulations on Mobile Internet Applications Information Services
In addition to the Telecom Regulations and other regulations above, mobile internet applications, or the Apps, are further regulated by the Administrative
Provisions on Mobile Internet Applications Information Services, or the APP Provisions, which was promulgated by the CAC and became effective on August 1, 2022.
The APP Provisions sets forth the relevant requirements on the App information service providers and the App Store service providers. The CAC and its local branches
shall be responsible for the supervision and administration of nationwide and local App information respectively.
App providers shall strictly fulfill their responsibilities of information security management, and perform the following duties: (i) in accordance with the
principles of “real name at background, any name at foreground,” verify identities with the registered users through mobile phone numbers etc.; (ii) establish and
improve the mechanism for user information security protection, follow the principles of “legality, appropriateness and necessity” in collection and use of personal
information, expressly state the purpose, methods and scope of information collection, and obtain the users’ consent; (iii) establish and improve the verification and
management mechanism for the information content; adopt proper sanctions and measures such as warning, limiting functions, suspending updates, and closing
accounts, for releasing illegal information content, as appropriate; keep records and report to the competent department; (iv) according to the law, protect and safeguard
users’ “rights to know and rights to choose” during installation or use; do not turn on the functions of collecting geographic location, reading address books, or using
cameras or recordings, without express statement to the users and the consent of the users; do not turn on functions irrelevant to the services; do not tie up and install
irrelevant Apps; (v) respect and protect intellectual property rights; do not produce or release Apps which violate others’ intellectual property rights; and (vi) keep
records of user log information for 60 days.
Regulations on Production and Operation of Radio/Television Programs
On July 19, 2004, the SARFT promulgated the Administrative Measures on the Production and Operation of Radio and Television Programs, or the Radio and
Television Program Production Measures, which came into effect on August 20, 2004 and was amended on August 28, 2015 and October 31, 2018. The Radio and
Television Program Production Measures provides that any business that produces or operates radio or television programs must first obtain a Radio and Television
Program Production and Operation Permit. Entities holding such permits shall conduct their business within the permitted scope as provided in their permits. In
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addition, foreign-invested enterprises are not allowed to engage in the above-mentioned services. Both Beijing iQIYI and Shanghai Zhong Yuan have obtained the Radio
and Television Program Production and Operation Permit for their respective businesses
Regulations on Online Culture Activities
According to the Interim Administrative Provisions on Internet Culture, or the Internet Culture Provisions, promulgated by the MOC, on February 17, 2011, and
most recently amended on December 15, 2017. Internet culture activities include: (i) production, reproduction, import, release or broadcast of internet culture products
(such as online music, online game, online performance and cultural products by certain technical means and copied to the internet for spreading); (ii) distribution or
publication of cultural products on internet; and (iii) exhibitions, competitions and other similar activities concerning internet culture products. The Internet Culture
Provisions further classifies internet cultural activities into commercial internet cultural activities and non-commercial internet cultural activities. Entities engaging in
commercial internet cultural activities must apply to the relevant authorities for a Network Cultural Business Permit, while non-commercial cultural entities are only
required to report to related culture administration authorities within 60 days of the establishment of such entity. If any entity engages in commercial internet culture
activities without approval, the cultural administration authorities or other relevant government may order such entity to cease to operate internet culture activities as
well as levying penalties including administrative warning, fines up to RMB30,000 and listing such entity on the cultural market blacklist to impose credit penalty in
case of continued non-compliance. In addition, foreign-invested enterprises are not allowed to engage in the above-mentioned services except online music. Each of
Beijing iQIYI and Shanghai Zhong Yuan has obtained a Network Cultural Business Permit from the relevant authorities.
In accordance with the Administrative Measures for Content Self-Review by Network Culture Business Entities, issued by MOC on August 12, 2013 and became
effective on December 1, 2013, the entities that engage in the internet cultural business shall review the content of products and services to be provided before providing
such content and services to the public. These entities shall establish content management system, set up departments for content management and employ proper
personnel to ensure the legality of content. The content management system of an internet cultural business entity is required to specify the responsibilities, standards
and processes for content review as well as accountability measures, and is required to be filed with the provincial level counterpart of the MCT.
Regulations on Online Advertising Services
On April 24, 2015, the Standing Committee of the National People’s Congress enacted the Advertising Law of the People’s Republic of China, or the New
Advertising Law, effective on September 1, 2015 and most recently amended on April 29, 2021.
The New Advertising Law increases the potential legal liability of advertising services providers and strengthens regulations of false advertising. On July 4,
2016, the State Administration for Industry and Commerce, or the SAIC, issued the Interim Measures of the Administration of Online Advertising, or the SAIC Interim
Measures, effective on September 1, 2016. The New Advertising Law and the SAIC Interim Measures require that online advertisements may not affect users’ normal
internet use and internet pop-up ads must display a “close” sign prominently and ensure one-key closing of the pop-up windows. The SAIC Interim Measures provides
that all online advertisements must be marked “Advertisement” so that viewers can easily identify them as such. Moreover, the SAIC Interim Measures treats paid
search results as advertisements that are subject to PRC advertisement laws, and requires that paid search results be conspicuously identified on search result pages as
advertisements. The New Advertising Law and SAIC Interim Measures require us to conduct more stringent examination and monitoring of our advertisers and the
content of their advertisements.
Regulations on Internet Publishing
On February 4, 2016, the SAPPRFT and MIIT jointly issued the Rules for the Administration for Internet Publishing Services, or the Internet Publishing Rules,
which became effective on March 10, 2016, to replace the Provisional Rules for the Administration for Internet Publishing that had been jointly issued by the SAPPRFT
and the MIIT on June 27, 2002. The Internet Publishing Rules defines “internet publications” as digital works that are edited, produced, or processed to be published and
provided to the public through the internet, including (i) original digital works, such as pictures, maps, games, and comics; (ii) digital works with content that is
consistent with the type of content that has been published in media such as books, newspapers, periodicals, audio-video products, and electronic publications; (iii)
digital works in the form of online databases compiled by selecting, arranging, and compiling other types of digital works; and (iv) other types of digital works identified
by the NPPA. Under the Internet Publishing Rules, internet operators distributing such publications via internet are required to apply for an internet publishing license
with the relevant governmental authorities and for NPPA approval before distributing internet publications. Shanghai Zhong Yuan currently holds an internet publishing
license to publish the internet games through the internet, while Beijing iQIYI plans to apply for the internet publishing license to the extent practical.
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Regulations on Online Games
Regulatory Authorities, Online Game Publications and Online Game Operations
On September 28, 2009, the General Administration of Press and Publication, or the GAPP, together with the National Copyright Administration, and the
National Office of Combating Pornography and Illegal Publications jointly issued the Notice on Further Strengthening on the Administration of Pre-examination and
Approval of Online Game and the Examination and Approval of Imported Online Game, or the Circular 13. The Circular 13 states that foreign investors are not
permitted to invest in online game operating businesses in mainland China via wholly foreign-owned entities, Sino-foreign equity joint ventures or cooperative joint
ventures or to exercise control over or participate in the operation of domestic online game businesses through indirect means, such as other joint venture companies or
contractual or technical arrangements. If our contractual arrangements were deemed under the Circular 13 to be an “indirect means” for foreign investors to exercise
control over or participate in the operation of a domestic online game business, our contractual arrangements might be challenged by the NPPA. We are not aware of any
online game companies which use the same or similar contractual arrangements having been challenged by the GAPP, the SAPPRFT or the NPPA as using those
contractual arrangements as an “indirect means” for foreign investors to exercise control over or participate in the operation of a domestic online game business or
having been penalized or ordered to terminate operations since the Circular 13 became effective. However, it is unclear whether and how the Circular 13 might be
interpreted or implemented in the future. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—If the PRC government finds that
the agreements that establish the structure for operating certain of our operations in mainland China do not comply with PRC regulations relating to the relevant
industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our
interests in those operations.”
Pursuant to the Notice on Issuing the Provisions on the Main Functions, Internal Bodies and Staffing of the General Administration of Press and Publication
(National Copyright Administration) promulgated by the General Office of the State Council on July 11, 2008, the Notice of the State Commission Office for Public
Sector Reform on Interpretation of the State Commission Office for Public Sector Reform on Several Provisions relating to Animation, Online Game and Comprehensive
Law Enforcement in Culture Market in the Three Provisions jointly promulgated by the MOC, SARFT and the GAPP on September 7, 2009, the Notice on Issuing the
Provisions on the Main Functions, Internal Bodies and Staffing of the State Administration of Press, Publication, Radio, Film and Television promulgated by the
General Office of the State Council on July 11, 2013, and the Internet Publishing Rules, the GAPP is responsible for the examination and approval process of online
games prior to online publication, the SAPPRFT is responsible for the approval of game registration and issuance of game publication numbers, and after the online
games uploaded on the internet, online games will be administered by the MOC. Moreover, if an online game is launched on the internet without the prior approval of
the GAPP, the MOC will be responsible for guiding the cultural market law enforcement team to conduct investigation and punishment.
In March 2018, the Central Committee of the Communist Party of China issued the Plan for Deepening the Institutional Reform of the Party and State and the
National People’s Congress promulgated the Decision of the First Session of the Thirteenth National People’s Congress on the State Council Institutional Reform
Proposal, or collectively, the Institutional Reform Plans. According to the Institutional Reform Plans, the SAPPRFT was reformed and now known as the NRTA under
the State Council, and the responsibility of the SAPPRFT for the approval of online game registrations and issuance of game publication numbers has been transferred to
the NPPA, effective from March 21, 2018. The NPPA at the national level suspended approval of game registration and issuance of publication numbers for online
games since March 2018 and resumed to issue game publication numbers by batches periodically since December 2018. Beginning in December 2018, the NPPA at the
national level started to approve new online games.
On May 20, 2019, the MCT released the Notice on Adjusting the Scope of Examination and Approval regarding the Network Cultural Business Permit to Further
Regulate the Approval Work, which quotes the Regulations on the Function Configuration, Internal Institutions and Staffing of the MCT and further specifies that the
MCT no longer assumes the responsibility for administering the industry of online games. On July 10, 2019, the MCT issued the Abolition Decisions on the Interim
Administrative Measures for the Administration of Online Games and the Administrative Measures for Tourism Development Plan, or the Abolition Decision. The
Abolition Decision also cites the Regulations on the Function Configuration, Internal Institutions and Staffing of the MCT and further abolishes the Interim Measures for
the Administration of Online Games, or Online Game Measures, which means that the MCT will no longer regulate the industry of the online games. The Abolition
Decision reduced the regulatory burden on online game operators, as Network Cultural Business Permit and post-operation filings are no longer required for online
games, and imported online games are no longer subject to content review by the MCT, while a currently valid games-related Network Cultural Business Permit will
remain valid until the term of the license expires.
Protection of Minors
In April 2007, GAPP and several other government authorities jointly promulgated the Notice Concerning the Protection of Minors’ Physical and Mental Well-
being and Implementation of Anti-addiction System on Online Games (the “Anti-Addiction
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Notice”), which confirms the real-name verification scheme and anti-addiction system standard made by GAPP in previous years and requires online game operators to
develop and test their anti-addiction systems from April 2007 to July 2007, after which no online games can be registered or operated without an anti-addiction system,
in accordance with the Anti-Addiction Notice. Since then, the governmental authorities have issued rules to restrict playtime of minors. On August 30, 2021, the NPPA
promulgated the Notice on Further Strengthening Regulation to Effectively Prevent Online Gaming Addictions among Minors, according to which all online game
companies can only provide one hour of online game services to minors between 8p.m. and 9p.m. on Fridays, Saturdays, Sundays and legal holidays, and are not
allowed to provide online game services in any form to minors in any other time.
Regulations on E-Commerce
On March 15, 2021, SAMR promulgated the Measures for the Supervision and Administration of Online Transactions, which became effective on May 1, 2021.
It imposes stringent requirements and obligations on online trading or service operators as well as marketplace platform providers. For example, marketplace platform
providers are obligated to examine the legal status of each third-party merchant selling products or services on their platforms and display on a prominent location on a
merchant’s web page the information stated in the merchant’s business license or a link to its business license. On December 24, 2014, MOFCOM promulgated the
Provisions on the Procedures for Formulating Transaction Rules of Third-Party Online Retail Platforms (Trial) to regulate the formulation, revision and enforcement of
transaction rules for online retail marketplace platforms.
The Standing Committee of the National People’s Congress enacted the PRC E-Commerce Law on August 31, 2018, which came into effect on January 1, 2019.
Under the PRC E-Commerce Law, E-Commerce refers to operating activities of selling goods or providing services through the internet or other information networks.
The PRC E-Commerce Law generally applies to: (i) platform operators, which refer to legal persons or unincorporated organizations that provide network places of
business, transaction matching, information release and other services to enable the transaction parties to carry out independent transaction activities; (ii) operators on the
platform, which refer to e-commerce operators that sell goods or provide services to customers through e-commerce platforms; and (iii) other e-commerce operators that
sell goods or provide services through self-established websites or other network services. The PRC E-Commerce Law also provides rules in relation to e-commerce
contracts, dispute settlements, e-commerce development as well as legal liabilities involved in e-commerce.
According to the Notice on Lifting the Restriction to Foreign Shareholding Percentage in Online Data Processing and Transaction Processing Business
(Operational E-commerce) promulgated by the MIIT on June 19, 2015, as well as the Negative List, foreign investors are allowed to hold up to 100% of all equity
interest in the online data processing and transaction processing business (operational e-commerce) in mainland China. An e-commerce operator shall obtain a license
for value-added telecommunications services with the specification of online data processing and transaction processing business from appropriate telecommunications
authorities, pursuant to the Telecom Regulations and the Catalog.
The Consumer Protection Law, which was promulgated by the SCNPC on October 31, 1993 and was last amended on October 25, 2013 with effect from March
15, 2014, sets out the obligations of business operators and the rights and interests of the consumers. Business operators must guarantee the quality, function, usage and
term of validity of the goods or services they sell or provide. The consumers whose interests have been damaged due to their purchase of goods or acceptance of services
on online platforms may claim damages from the sellers or service providers. Online platform operators may be subject to liabilities if the lawful rights and interests of
consumers are infringed in connection with consumers’ purchase of goods or acceptance of services on online platforms and the platform operators fail to provide
consumers with authentic contact information of the sellers or service providers. In addition, platform operators may be jointly and severally liable with the sellers and
service providers if they are aware or should be aware that the sellers or the service providers are using the online platform to infringe upon the lawful rights and interests
of consumers and fail to take measures necessary to prevent or stop this activity. On January 6, 2017, the SAIC issued the Interim Measures for No Reason Return of
Online Purchased Commodities within Seven Days, which became effective on March 15, 2017 and was amended on October 23, 2020, further clarifying the scope of
consumers’ rights to make returns without a reason, including exceptions, return procedures and online marketplace platform providers’ responsibility to formulate
seven-day no-reason return rules and related consumer protection systems, and supervise the merchants for compliance with these rules.
Regulations on Internet Information Security, Censorship and Privacy Protection
The Standing Committee of the National People’s Congress, China’s national legislative body, enacted the Decisions on the Maintenance of Internet Security on
December 28, 2000 and amended them on August 27, 2009 that may subject persons to criminal liabilities in mainland China for any attempt to use the internet to: (i)
gain improper entry to a computer or system of strategic importance; (ii) disseminate politically disruptive information; (iii) leak state secrets; (iv) spread false
commercial information or (v) infringe upon intellectual property rights. In 1997, the Ministry of Public Security issued the Administration Measures on the Security
Protection of Computer Information Network with International Connections which was amended in 2011 and prohibits using the internet to leak
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state secrets or to spread socially destabilizing materials. If an ICP license holder violates these measures, the PRC government may revoke its ICP license and shut
down its websites.
On July 1, 2015, the SCNPC issued the National Security Law, which became effective on the same day. The National Security Law provides that the state shall
safeguard the sovereignty, security and cyber security development interests of the state, and that the state shall establish a national security review and supervision
system to review, among other things, foreign investment, key technologies, internet and information technology products and services, and other important activities
that are likely to impact the national security of China.
Pursuant to the Ninth Amendment to the Criminal Law issued by the Standing Committee of the National People’s Congress on August 29, 2015, effective on
November 1, 2015, any ICP provider that fails to fulfill the obligations related to internet content security as required by applicable laws and refuses to take corrective
measures, will be subject to criminal liability for (i) any large-scale dissemination of illegal information; (ii) any severe effect due to the leakage of users’ personal
information; (iii) any serious loss of evidence of criminal activities; or (iv) other severe situations, and any individual or entity that (i) sells or provides personal
information to others unlawfully or (ii) steals or illegally obtains any personal information will be subject to criminal liability in severe situations.
The Cybersecurity Law of the PRC, or the PRC Cybersecurity Law, which was promulgated on November 7, 2016 by the Standing Committee of the National
People’s Congress and came into effect on June 1, 2017, provides that network operators shall meet their cyber security obligations and shall take technical measures
and other necessary measures to protect the safety and stability of their networks. Under the PRC Cybersecurity Law, network operators are subject to various security
protection-related obligations, including: (i) network operators shall comply with certain obligations regarding maintenance of the security of internet systems; (ii)
network operators shall verify users’ identities before signing agreements or providing certain services such as information publishing or real-time communication
services; (iii) when collecting or using personal information, network operators shall clearly indicate the purposes, methods and scope of the information collection, the
use of information collection, and obtain the consent of those from whom the information is collected; (iv) network operators shall strictly preserve the privacy of user
information they collect, and establish and maintain systems to protect user privacy; (v) network operators shall strengthen management of information published by
users, and when they discover information prohibited by laws and regulations from publication or dissemination, they shall immediately stop dissemination of that
information, including taking measures such as deleting the information, preventing the information from spreading, saving relevant records, and reporting to the
relevant governmental agencies. In addition, the PRC Cyber Security Law requires that critical information infrastructures operators generally shall store, within the
territory of mainland China, the personal information and important data collected and produced during their operations in mainland China and their purchase of
network products and services that affect or may affect national securities shall be subject to national cybersecurity review.
On June 10, 2021, the SCNPC promulgated the PRC Data Security Law, which became effect in September 2021. The PRC Data Security Law provides for data
security and privacy obligations on entities and individuals carrying out data activities and introduces a data classification and hierarchical protection system based on
the importance of data in economic and social development, as well as the degree of harm it will cause to national security, public interests, or legitimate rights and
interests of individuals or organizations when such data is tampered with, destroyed, leaked, or illegally acquired or used. The appropriate level of protection measures is
required to be taken for each respective category of data. For example, a processor of important data shall designate the personnel and the management body responsible
for data security, carry out risk assessments for its data processing activities and file the risk assessment reports with the competent authorities. In addition, the PRC
Data Security Law provides a national security review procedure for those data activities which affect or may affect national security and imposes export restrictions on
certain data and information.
On April 13, 2020, the CAC, the NDRC, and several other administrations jointly promulgated the Measures for Cybersecurity Review, or the Review Measures,
which became effective on June 1, 2020. The Review Measures establish the basic framework for national security reviews of network products and services, and
provide the principal provisions for undertaking cyber security reviews. In addition, on July 22, 2020, the Ministry of Public Security issued the Guiding Opinions on
Implementing the Cyber Security Protection System and Critical Information Infrastructure Security Protection System to further improve the national cyber security
prevention and control system. On December 28, 2021, the CAC, together with certain other PRC governmental authorities, jointly released the Revised Cybersecurity
Review Measures, which took effect on February 15, 2022. Pursuant to the Revised Cybersecurity Review Measures, operators of critical information infrastructure that
intend to purchase network products and services that affect or may affect national security must apply for a cybersecurity review. The cybersecurity review will
evaluate, among others, the risk of critical information infrastructure, core data, important data, or the risk of a large amount of personal information being influenced,
controlled or maliciously used by foreign governments after going public, and cyber information security risk. The Revised Cybersecurity Review Measures set out
certain general factors which would be the focus in assessing the national security risk during a cybersecurity review. However, as advised by our PRC counsel, the
scope of network product or service or data
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processing activities that will or may affect national security is still unclear, and the PRC government authorities may have wide discretion in the interpretation and
enforcement of these laws, rules and regulations.
The PIPL took effect in November 2021. The PIPL sets forth detailed rules on processing personal information, clarifies the relevant rights of the individuals and
the obligations of the personal information processors, and further strengthens the liabilities for illegal process of personal information. In addition to other rules and
principles of personal information processing, the PIPL specifically provides rules for processing sensitive personal information. Sensitive personal information refers to
personal information that, once leaked or illegally used, could easily lead to the infringement of human dignity or harm to the personal or property safety of an
individual, including biometric recognition, religious belief, specific identity, medical and health, financial account, personal whereabouts and other information of an
individual, as well as any personal information of a minor under the age of 14. Only where there is a specific purpose and sufficient necessity, and under circumstances
where strict protection measures are taken, may personal information processors process sensitive personal information. A personal information processor shall inform
the individual of the necessity of processing such sensitive personal information and the impact thereof on the individual’s rights and interests. Some information we
collect, such as location and mobile numbers, may be deemed to be sensitive personal information under the PIPL. The PIPL also strengthens the supervision of
automatic decision making to protect the rights of individuals to obtain fair transaction terms and the supervision of mobile applications.
On November 14, 2021, the CAC published the Draft Measures for Internet Data Security for public comments, which provides that data processors conducting
the following activities shall apply for cybersecurity review: (i) merger, reorganization or division of internet platform operators that have acquired a large number of
data resources related to national security, economic development or public interests affects or may affect national security; (ii) listing abroad of data processors
processing over one million users’ personal information; (iii) listing in Hong Kong which affects or may affect national security; or (iv) other data processing activities
that affect or may affect national security. The Draft Cyber Data Security Regulations also provide that operators of large internet platforms that set up headquarters,
operation centers or R&D centers overseas shall report to the national cyberspace administration and competent authorities. In addition, the Draft Cyber Data Security
Regulations also require that data processors processing important data or going public overseas shall conduct an annual data security self-assessment or entrust a data
security service institution to do so, and submit the data security assessment report of the previous year to the local branch of CAC before January 31 each year. As of
the date of this annual report, this draft has not been formally adopted. Substantial uncertainties exist with respect to the enactment timetable, final content,
interpretation and implementation.
On August 17, 2021, the PRC State Council promulgated the Regulations on Security Protection of Critical Information Infrastructures, which took effect on
September 1, 2021 and provide that “critical information infrastructures” shall mean any important network facilities or information systems of important industries or
fields such as public communication and information service, energy, communications, water conservation, finance, public services, e-government affairs and national
defense science, and any other important network facilities or information systems which may endanger national security, people’s livelihood and public interest in case
of damage, function loss or data leakage. In addition, relevant administration departments of each critical industry and sector, or Protection Departments, shall be
responsible to formulate eligibility criteria and determine the critical information infrastructure operator in the respective industry or field. The operators shall be
informed about the final determination as to whether they are categorized as critical information infrastructure operators. The regulations further require critical
information infrastructures operators, among others, (i) to report to the competent Protection Departments in a timely manner when the identification result may be
affected due to material changes in the critical information infrastructures; (ii) to plan, construct or put into use the security protection measures and the critical
information infrastructures simultaneously; and (iii) to report to the competent Protection Departments in a timely manner in the event of merger division or dissolution,
and deal with critical information infrastructures as required by the competent Protection Departments. Operators in violation of the regulations may be ordered to
rectify, subject to warnings, fines and other administrative penalties or even criminal liabilities, and the directly responsible personnel in charge may also be imposed on
fines or other liabilities.
Under the Several Provisions on Regulating the Market Order of Internet Content Services, which was issued by the MIIT in December 2011 and took effect in
March 2012, an internet content service provider may not collect any personal information on a user or provide any such information to third parties without the user’s
consent. It must expressly inform the user of the method, content and purpose of the collection and processing of such user’s personal information and may only collect
information to the extent necessary to provide its services. An internet content service provider is also required to properly maintain users’ personal information, and in
case of any leak or likely leak of such information, it must take immediate remedial measures and, in the event of a serious leak, report to the telecommunications
regulatory authority immediately.
Pursuant to the Decision on Strengthening the Protection of Online Information, which was issued by the SCNPC and took effect in December 2012, and the
Order for the Protection of Telecommunication and Internet User Personal Information, which was issued by the MIIT in 2013, any collection and use of a user’s
personal information must be subject to the consent of the user, be legal, rational and necessary and be limited to specified purposes, methods and scopes. An internet
content service provider must also keep such information strictly confidential, and is further prohibited from divulging, tampering or destroying any such information, or
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selling or providing such information to other parties. An internet content service provider is required to take technical and other measures to prevent the collected
personal information from any unauthorized disclosure, damage or loss. Any violation of these laws and regulations may subject the internet content service provider to
warnings, fines, confiscation of illegal gains, revocation of licenses, cancelation of filings, closedown of websites or even criminal liabilities.
Interpretations of the Supreme People’s Court and the Supreme People’s Procuratorate on Several Issues Concerning the Application of Law in the Handling of
Criminal Cases Involving Infringement of Personal Information, issued on May 8, 2017 and effective on June 1, 2017, specified certain standards for the conviction and
sentencing of the criminals in relation to personal information infringement. On May 28, 2020, the National People’s Congress adopted the Civil Code, which came into
effect on January 1, 2021. Pursuant to the Civil Code, the personal information of a natural person shall be protected by the law. Any organization or individual shall
legally obtain such personal information of others when necessary and ensure the safety of such information, and shall not illegally collect, use, process or transmit
personal information of others, or illegally purchase or sell, provide or make public personal information of others.
The Provisions on Technological Measures for Internet Security Protection, published by the Ministry of Public Security on December 13, 2005 and became
effective on March 1, 2006, requires internet service providers to keep records of certain information about their users (including user registration information, log-in
and log-out times, IP addresses, content and time of posts by users) for at least 60 days. Under the PRC Cybersecurity Law, network operators must also report any
instances of public dissemination of prohibited content. If a network operator fails to comply with such requirements, the PRC government may revoke its ICP License
and shut down its websites.
On January 23, 2019, the SAMR, the Office of the Central Cyberspace Affairs Commission, the MIIT and the Ministry of Public Security jointly issued the
Announcement on Carrying out Special Campaigns against Mobile Internet Application Programs Collecting and Using Personal Information in Violation of Laws and
Regulations, or “the App Announcement,” which prohibits mobile app operators from collecting personal information irrelevant to their services, or forcing users to give
authorization in disguised manner. According to the App Announcement, mobile app operators shall indicate to users the rules for collecting and using personal
information in a simple, concise and easy-to-understand manner, with permission independently granted by the user. Furthermore, coercive or excessive collection of
personal information, collection and use of personal information without user permission, leakage and loss of information or possible leakage and loss of personal
information without any remedial measure, illegal use of personal information are prohibited. On November 28, 2019, the SAMR, the CAC, the MIIT and the Ministry
of Public Security jointly issued the Measures for the Determination of the Collection and Use of Personal Information by Apps in Violation of Laws and Regulations,
which provides guidance for the regulatory authorities to identify the illegal collection and use of personal information through mobile apps, and for the app operators to
conduct self-examination and self-correction and for other participants to voluntarily monitor compliance.
On August 22, 2019, the CAC promulgated the Cyber Protection of Children’s Personal Information Provisions, effective on October 1, 2019, which requires,
among others, that network operators who collect, store, use, transfer and disclose personal information of children under the age of 14 shall establish special rules and
user agreements for the protection of children’s personal information, inform the children’s guardians in a noticeable and clear manner, and shall obtain the consent of
the children’s guardians.
On August 20, 2021, the SCNPC promulgated the PRC Personal Information Protection Law, which will take effect from November 1, 2021. Pursuant to the
PRC Personal Information Protection Law, personal information refers to the information related to an identified or identifiable individual recorded electronically or by
other means, excluding the anonymized information, and processing of personal information includes among others, the collection, storage, use, handling, transmission,
provision, disclosure, deletion of personal information. The PRC Personal Information Protection Law explicitly sets forth the circumstances where it is allowed to
process personal information, including (i) the consent from the individual has been obtained; (ii) it is necessary for the conclusion and performance of a contract under
which an individual is a party, or it is necessary for human resource management in accordance with the labor related rules and regulations and the collective contracts
formulated or concluded in accordance with laws; (iii) it is necessary to perform statutory duties or statutory obligations; (iv) it is necessary to respond to public health
emergencies, or to protect the life, health and property safety of individuals in emergencies; (v) carrying out news reports, public opinion supervision and other acts for
the public interest, and processing personal information within a reasonable scope; (vi) processing personal information disclosed by individuals or other legally
disclosed personal information within a reasonable scope in accordance with this law; or (vii) other circumstances stipulated by laws and administrative regulations. In
addition, this law emphasizes that individuals have the right to withdraw their consent to process their personal information, and the processors must not refuse to
provide products or services on the grounds that the individuals do not agree to the processing of their personal information or withdraw their consent, unless processing
of personal information is necessary for the provision of products or services. Before processing the personal information, the processors should truthfully, accurately
and completely inform individuals of the following matters in a conspicuous manner and in clear and easy-to-understand language: (i) the name and contact information
of the personal information processor; (ii) the purpose of processing personal information, processing method, type of personal information processed, and the retention
period; (iii) methods and procedures for individuals to exercise their rights under this law; (iv) other matters that should be notified according
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to laws and administrative regulations. Furthermore, the law provides that personal information processors who use personal information to make automated decisions
should ensure the transparency of decision-making and the fairness and impartiality of the results, and must not impose unreasonable differential treatment on
individuals in terms of transaction prices and other transaction conditions.
In addition to the aforementioned general rules, the PRC Personal Information Protection Law also introduces the rules for processing sensitive personal
information, which refers to the personal information that, once leaked or illegally used, can easily lead to the infringement of the personal dignity of natural persons or
harm personal and property safety, including biometrics, religious beliefs, specific identities, medical health, financial accounts, whereabouts and other information, as
well as personal information of minors under the age of fourteen. Personal information processors can process sensitive personal information only if they have a specific
purpose and sufficient necessity, and take strict protective measures. In addition, the law provides rules for cross-border provision of personal information. In particular,
it is provided that the operators of critical information infrastructures and the personal information processors that process personal information up to the number
prescribed by the national cyberspace administration shall store personal information collected and generated within mainland China. If it is really necessary to provide
such personal information overseas, they shall pass the security assessment organized by the national cyberspace administration, except as otherwise stipulated by laws,
administrative regulations and the national cyberspace administration. Any processor in violation of this law may be subject to administrative penalties including
rectifications, warnings, fines, confiscation of illegal gains, suspension of the apps illegally processing personal information or suspension of the relevant business,
revocation of business operation permits or business licenses, civil liabilities or even criminal liabilities. The directly responsible personnel in charge and other directly
responsible personnel may be imposed with fines and prohibited from serving as directors, supervisors, senior management personnel and personal information
protection officers of related companies within a certain period of time.
While we take measures to comply with all applicable data privacy and protection laws and regulations, we cannot guarantee the effectiveness of the measures
undertaken by us and business partners. As certain laws and regulations, including the PRC Data Security Law and the PRC Personal Information Protection Law, were
recently promulgated, we may be required to make further adjustments to our business practices to comply with these laws and regulations. See “Item 3. Key
Information—D. Risk Factors—Risks Related to Our Business and Industry—Our business is subject to complex and evolving Chinese and international laws and
regulations regarding cybersecurity, information security, privacy and data protection. Many of these laws and regulations are subject to change and uncertain
interpretation, and any failure or perceived failure to comply with these laws and regulations could result in claims, changes to our business practices, negative publicity,
legal proceedings, increased cost of operations, or declines in user growth or engagement, or otherwise harm our business.”
Regulations on Internet News Information Services
The Provisional Regulations for the Administration of Website Operation of News Publications, which was jointly issued by the State Council Information Office
of the PRC, or the SCIO, and MII on November 6, 2000, stipulates that websites of non-news organizations shall not publish news items produced by themselves, and
that their websites shall be approved by SCIO after securing permission from SCIO at the provincial level. On June 1, 2017, the Provisions for the Administration of
Internet News Information
Services and the Implementing Rules for the Administration of the Licensing for Internet News Information Services, promulgated by the CAC, came into effect,
which superseded the previous regulations. According to the revised provisions, to provide internet news information services to the public via internet websites,
applications, forums, blogs, micro-blogs, public accounts, instant communication tools and online live-stream, providers must obtain an Internet News Information
Service License, issued by the CAC or a local cyberspace administrative office. In addition, the regulations prohibit organizations from establishing foreign, partially or
wholly-owned, entities that invest or operate internet-based news information services. The CAC and the local cyberspace administrative offices are responsible for the
supervision, management and inspection of internet-based news information services. If any entity or individual provides internet news information services without
licenses, the PRC regulatory authorities may suspend the services and impose a fine from RMB10,000 to RMB30,000.
Regulations on Intellectual Property Rights
Copyright
The Copyright Law of the PRC, or the Copyright Law, which took effect on June 1, 1991 and was latest amended on November 11, 2020 and effective on June 1,
2021, provides that Chinese citizens, legal persons, or other organizations shall, whether published or not, own copyright in their copyrightable works, which include,
among others, works of literature, art, natural science, social science, engineering technology and computer software. Copyright owners enjoy certain legal rights,
including right of publication, right of authorship and right of reproduction. The Copyright Law as revised in 2001 extends copyright protection to internet activities and
products disseminated over the internet. In addition, Copyright Law provides for a voluntary registration system administered by
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the China Copyright Protection Center, or the CPCC. According to the Copyright Law, an infringer of the copyrights shall be subject to various civil liabilities, which
include ceasing infringement activities, apologizing to the copyright owners and compensating the loss of copyright owner. Infringers of copyright may also subject to
fines and/or administrative or criminal liabilities in severe situations.
The Computer Software Copyright Registration Measures, or the Software Copyright Measures, promulgated by the National Copyright Administration on April
6, 1992 and amended on May 26, 2000 and February 20, 2002, regulates registrations of software copyright, exclusive licensing contracts for software copyright and
assignment agreements. The National Copyright Administration, or the NCA administers software copyright registration and the CPCC, is designated as the software
registration authority. The CPCC shall grant registration certificates to the Computer Software Copyrights applicants which meet the requirements of both the Software
Copyright Measures and the Computer Software Protection Regulations (Revised in 2013).
The Provisions of the Supreme People’s Court on Certain Issues Related to the Application of Law in the Trial of Civil Cases Involving Disputes on Infringement
of the Information Network Dissemination Rights, which was promulgated on December 17, 2012, and further amended on December 29, 2020 and became effective on
January 1, 2021, specifies that disseminating works, performances or audio-video products by the internet users or the internet service providers via the internet without
the permission of the copyright owners shall be deemed to have infringed the right of dissemination of the copyright owner.
The Measures for Administrative Protection of Copyright Related to Internet, which was jointly promulgated by the NCA and the MIIT on April 29, 2005 and
became effective on May 30, 2005, provides that upon receipt of an infringement notice from a legitimate copyright holder, an ICP operator must take remedial actions
immediately by removing or disabling access to the infringing content. If an ICP operator knowingly transmits infringing content or fails to take remedial actions after
receipt of a notice of infringement that harms public interest, the ICP operator could be subject to administrative penalties, including an order to cease infringing
activities, confiscation by the authorities of all income derived from the infringement activities, or payment of fines.
On May 18, 2006, the State Council promulgated the Regulations on the Protection of the Right to Network Dissemination of Information (as amended in 2013).
Under these regulations, an owner of the network dissemination rights with respect to written works, performance or audio or video recordings who believes that
information storage, search or link services provided by an internet service provider infringe his or her rights may require that the internet service provider delete, or
disconnect the links to, such works or recordings.
Patent
According to the Patent Law of the PRC (Revised in 2020), the State Intellectual Property Office is responsible for administering patent law in the PRC. The
patent administration departments of provincial, autonomous region or municipal governments are responsible for administering patent law within their respective
jurisdictions. The Chinese patent system adopts a first-to-file principle, which means that when more than one person file different patent applications for the same
invention, only the person who files the application first is entitled to obtain a patent of the invention. To be patentable, an invention or a utility model must meet three
criteria: novelty, inventiveness and practicability. A patent is valid for twenty years in the case of an invention and ten years in the case of utility models and designs.
The Patent Law of the PRC was recently amended on October 17, 2020 and the revised version came into effect on June 1, 2021.
As of December 31, 2022, we had applied for approximately 9,080 patents in mainland China, among which 5,866 have been registered.
Trademark
Trademarks are protected by the Trademark Law of the PRC (Revised in 2019) which was adopted in 1982 and subsequently amended in 1993, 2001, 2013 and
2019 respectively as well as by the Implementation Regulations of the PRC Trademark Law adopted by the State Council in 2002 and as most recently amended on April
29, 2014. The Trademark Office of the SAMR handles trademark registrations. The Trademark Office grants a ten-year term to registered trademarks and the term may
be renewed for another ten-year period upon request by the trademark owner. A trademark registrant may license its registered trademarks to another party by entering
into trademark license agreements, which must be filed with the Trademark Office for its record. As with patents, the Trademark Law has adopted a first-to-file principle
with respect to trademark registration. If a trademark applied for is identical or similar to another trademark which has already been registered or subject to a preliminary
examination and approval for use on the same or similar kinds of products or services, such trademark application may be rejected. Any person applying for the
registration of a trademark may not injure existing trademark rights first obtained by others, nor may any person register in advance a trademark that has already been
used by another party and has already gained a “sufficient degree of reputation” through such party’s use. As of
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December 31, 2022, we had applied for registration of 6,022 trademarks with the Trademark Office of the SAMR, among which 5,077 have been registered.
Domain Names
The MIIT promulgated the Measures on Administration of Internet Domain Names, or the Domain Name Measures, on August 24, 2017, which took effect on
November 1, 2017 and replaced the Administrative Measures on China Internet Domain Names promulgated by MII on November 5, 2004. According to the Domain
Name Measures, the MIIT is in charge of the administration of PRC internet domain names. The domain name registration follows a first-to-file principle. Applicants for
registration of domain names shall provide the true, accurate and complete information of their identities to domain name registration service institutions. The applicants
will become the holder of such domain names upon the completion of the registration procedure. On November 27, 2017, the MIIT promulgated the Notice of the
Ministry of Industry and Information Technology on Regulating the Use of Domain Names in Providing Internet-based Information Services, which became effective on
January 1, 2018. Pursuant to the notice, the domain name used by an internet-based information service provider in providing internet-based information services must
be registered and owned by such provider in accordance with the law. If the internet-based information service provider is an entity, the domain name registrant must be
the entity (or any of the entity’s shareholders), or the entity’s principal or senior manager. As of December 31, 2022, we had registered 159 domain names in mainland
China.
Regulations on Foreign Exchange
General Administration of Foreign Exchange
Under the PRC Foreign Exchange Administration Rules promulgated on January 29, 1996 and most recently amended on August 5, 2008 and various regulations
issued by the SAFE and other relevant PRC government authorities, Renminbi is convertible into other currencies for current account items, such as trade-related
receipts and payments and payment of interest and dividends. The conversion of Renminbi into other currencies and remittance of the converted foreign currency outside
mainland China for of capital account items, such as direct equity investments, loans and repatriation of investment, requires the prior approval from the SAFE or its
local office.
Payments for transactions that take place within mainland China must be made in Renminbi. Unless otherwise approved, mainland China companies may not
repatriate foreign currency payments received from abroad or retain the same abroad. Foreign-invested enterprises may retain foreign exchange in accounts with
designated foreign exchange banks under the current account items subject to a cap set by the SAFE or its local office. Foreign exchange proceeds under the current
accounts may be either retained or sold to a financial institution engaged in settlement and sale of foreign exchange pursuant to relevant SAFE rules and regulations. For
foreign exchange proceeds under the capital accounts, approval from the SAFE is generally required for the retention or sale of such proceeds to a financial institution
engaged in settlement and sale of foreign exchange.
Pursuant to the Circular of the SAFE on Further Improving and Adjusting Foreign Exchange Administration Policies for Direct Investment, or the SAFE Circular
No. 59 promulgated by SAFE on November 19, 2012, which became effective on December 17, 2012 and was further amended on May 4, 2015 and on October 10,
2018, approval is not required for opening a foreign exchange account and depositing foreign exchange into the accounts relating to the direct investments. SAFE
Circular No. 59 also simplified foreign exchange-related registration required for the foreign investors to acquire the equity interests of Chinese companies and further
improve the administration on foreign exchange settlement for foreign-invested enterprises.
Pursuant to the Circular on Further Simplifying and Improving the Foreign Currency Management Policy on Direct Investment, or the SAFE Circular No. 13,
which was promulgated by SAFE on February 13, 2015 and became effective on June 1, 2015, and was later amended on December 30, 2019, which cancels the
administrative approvals of foreign exchange registration of direct domestic investment and direct overseas investment and simplifies the procedure of foreign exchange-
related registration, the investors shall register with banks for direct domestic investment and direct overseas investment.
The Circular on Reforming the Management Approach regarding the Settlement of Foreign Capital of Foreign-invested Enterprise, or the SAFE Circular No. 19,
which was promulgated by the SAFE on March 30, 2015 and became effective on June 1, 2015, provides that a foreign-invested enterprise may, according to its actual
business needs, settle with a bank the portion of the foreign exchange capital in its capital account for which the relevant foreign exchange administration has confirmed
monetary capital contribution rights and interests (or for which the bank has registered the injection of the monetary capital contribution into the account). Pursuant to
the SAFE Circular No.19, for the time being, foreign-invested enterprises are allowed to settle 100% of their foreign exchange capitals on a discretionary basis; a
foreign-invested enterprise shall truthfully use its capital for its own operational purposes within the scope of business; where an ordinary foreign-invested enterprise
makes domestic equity investment with the amount of foreign exchanges settled, the invested enterprise shall first go through domestic re-investment registration and
open a
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corresponding account for foreign exchange settlement pending payment with the foreign exchange administration or the bank at the place where it is registered.
The Circular on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts, or the SAFE Circular No. 16, which
was promulgated by the SAFE and became effective on June 9, 2016, provides that enterprises registered in mainland China may also convert their foreign debts from
foreign currency into Renminbi on self-discretionary basis. The SAFE Circular No. 16 also provides an integrated standard for conversion of foreign exchange under
capital account items (including but not limited to foreign currency capital and foreign debts) on self-discretionary basis, which applies to all enterprises registered in
mainland China.
In January 2017, SAFE promulgated the Circular on Further Improving Reform of Foreign Exchange Administration and Optimizing Genuineness and
Compliance Verification, or Circular 3, which stipulates several capital control measures with respect to the outbound remittance of profits from domestic entities to
offshore entities, including (i) banks must check whether the transaction is genuine by reviewing board resolutions regarding profit distribution, original copies of tax
filing records and audited financial statements, and (ii) domestic entities must retain income to account for previous years’ losses before remitting any profits. Moreover,
pursuant to Circular 3, domestic entities must explain in detail the sources of capital and how the capital will be used, and provide board resolutions, contracts and other
proof as a part of the registration procedure for outbound investment.
On October 23, 2019, SAFE promulgated the Notice of the State Administration of Foreign Exchange on Further Promoting the Facilitation of Cross-border
Trade and Investment, or SAFE Notice 28, which permits non-investment foreign-invested enterprises to use their capital funds to make equity investments in mainland
China, with genuine investment projects and in compliance with effective foreign investment restrictions and other applicable laws. However, as the SAFE Notice 28
was newly issued, there are still substantial uncertainties as to its interpretation and implementations in practice.
Based on SAFE Circular No.13 and other laws and regulations relating to foreign exchange, when setting up a new foreign-invested enterprise, the foreign
invested enterprise shall register with the bank located at its registered place after obtaining the business license, and if there is any change in capital or other changes
relating to the basic information of the foreign-invested enterprise, including, without limitation any increase in its registered capital or total investment, the foreign
invested enterprise shall register such changes with the bank located at its registered place after obtaining the approval from or completing the filing with competent
authorities. Pursuant to the relevant foreign exchange laws and regulations, the above-mentioned foreign exchange registration with the banks will typically take less
than four weeks upon the acceptance of the registration application.
Based on the foregoing, if we intend to provide funding to our wholly foreign owned subsidiaries through capital injection at or after their establishment, we
shall register the establishment of and any follow-on capital increase in our wholly foreign owned subsidiaries with the SAMR or its local counterparts, file such via the
FICMIS and register such with the local banks for the foreign exchange related matters.
Loans by the Foreign Companies to their mainland China subsidiaries
A loan made by foreign investors as shareholders in a foreign invested enterprise is considered to be foreign debt in mainland China and is regulated by various
laws and regulations, including the PRC Foreign Currency Exchange Administration Rules, the Interim Provisions on the Management of Foreign Debts, the Statistical
Monitoring of Foreign Debts Tentative Provisions, the Detailed Rules for the Implementation on Statistical Monitoring of Foreign Debt, and the Administrative
Measures for Registration of Foreign Debts. Under these rules and regulations, a shareholder loan in the form of foreign debt made to a mainland China entity does not
require the prior approval of SAFE. However, such foreign debt must be registered with and recorded by SAFE or its local branches within 15 business days after
entering into the foreign debt contract. Pursuant to these rules and regulations, the balance of the foreign debts of a foreign invested enterprise shall not exceed the
difference between the total investment and the registered capital of the foreign invested enterprise, or Total Investment and Registered Capital Balance.
Pursuant to the Interim Provisions of the State Administration for Industry and Commerce on the Ratio of the Registered Capital to the Total Investment of a
Sino-Foreign Equity Joint Venture Enterprise, or the Provisions on Ratio of the Registered Capital to the Total Investment, promulgated by SAIC on February 17, 1987
and effective on March 1, 1987, with respect to a Sino-foreign equity join venture, the registered capital shall be (i) no less than 7/10 of its total investment, if the total
investment is US$3 million or under US$3 million; (ii) no less than 1/2 of its total investment, if the total investment is ranging from US$3 million to US$10 million
(including US$10 million), provided that the registered capital shall not be less than US$2.1 million if the total investment is less than US$4.2 million; (iii) no less than
2/5 of its total investment, if the total investment is ranging from US$10 million to US$30 million (including US$30 million), provided that the registered capital shall
not be less than US$5 million if the total investment is less than US$12.5 million; and (iv) no less than 1/3 of its total investment, if the total investment exceeds US$30
million, provided that the registered capital shall not be less than US$12 million if the total investment is less than US$36 million.
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On January 11, 2017, the PBOC promulgated the Notice of the People’s Bank of China on Matters concerning the Macro-Prudential Management of Full-
Covered Cross-Border Financing, or the PBOC Notice No. 9. Pursuant to the PBOC Notice No. 9, within a transition period of one year from January 11, 2017, the
foreign invested enterprises may adopt the currently valid foreign debt management mechanism, or Current Foreign Debt Mechanism, or the mechanism as provided in
the PBOC Notice No. 9, or Notice No. 9 Foreign Debt Mechanism, at their own discretion. The PBOC Notice No. 9 provides that, enterprises may conduct independent
cross-border financing in RMB or foreign currencies as required. Pursuant to the PBOC Notice No. 9, the outstanding cross-border financing of an enterprise (the
outstanding balance drawn, here and below) shall be calculated using a risk-weighted approach, or Risk-Weighted Approach, and shall not exceed the specified upper
limit, namely: risk-weighted outstanding cross-border financing £ the upper limit of risk-weighted outstanding cross-border financing. Risk-weighted outstanding cross-
border financing = ∑ outstanding amount of RMB and foreign currency denominated cross-border financing * maturity risk conversion factor * type risk conversion
factor + ∑ outstanding foreign currency denominated cross-border financing * exchange rate risk conversion factor. Maturity risk conversion factor shall be 1 for
medium- and long-term cross-border financing with a term of more than one year and 1.5 for short-term cross-border financing with a term of less than one year. Type
risk conversion factor shall be 1 for on-balance-sheet financing and 1 for off-balance-sheet financing (contingent liabilities) for the time being. Exchange rate risk
conversion factor shall be 0.5. The PBOC Notice No. 9 further provides that the upper limit of risk-weighted outstanding cross-border financing for enterprises shall be
200% of its net assets, or Net Asset Limits. Enterprises shall file with SAFE in its capital item information system after entering into the relevant cross-border financing
contracts and prior to three business day before drawing any money from the foreign debts.
Based on the foregoing, if we provide funding to our wholly foreign owned subsidiaries through shareholder loans, the balance of such loans shall not exceed the
Total Investment and Registered Capital Balance and we will need to register such loans with SAFE or its local branches in the event that the Current Foreign Debt
Mechanism applies, or the balance of such loans shall be subject to the Risk-Weighted Approach and the Net Asset Limits and we will need to file the loans with SAFE
in its information system in the event that the Notice No. 9 Mechanism applies. According to the PBOC Notice No. 9, after a transition period of one year from January
11, 2017, the PBOC and SAFE will determine the cross-border financing administration mechanism for the foreign-invested enterprises after evaluating the overall
implementation of the PBOC Notice No. 9. As of the date hereof, neither PBOC nor SAFE has promulgated and made public any further rules, regulations, notices or
circulars in this regard. It is uncertain which mechanism will be adopted by PBOC and SAFE in the future and what statutory limits will be imposed on us when
providing loans to our mainland China subsidiaries.
Offshore Investment
Under the Circular of the SAFE on Issues Concerning the Foreign Exchange Administration over the Overseas Investment and Financing and Round-trip
Investment by Domestic Residents via Special Purpose Vehicles, or the SAFE Circular No. 37, issued by the SAFE and effective on July 4, 2014, mainland China
residents are required to register with the local SAFE branch prior to the establishment or control of an offshore special purpose vehicle, or SPV, which is defined as
offshore enterprises directly established or indirectly controlled by mainland China residents for offshore equity financing of the enterprise assets or interests they hold
in mainland China. An amendment to registration or subsequent filing with the local SAFE branch by such mainland China resident is also required if there is any
change in basic information of the offshore company or any material change with respect to the capital of the offshore company. At the same time, the SAFE has issued
the Operation Guidance for the Issues Concerning Foreign Exchange Administration over Round-trip Investment regarding the procedures for SAFE registration under
the SAFE Circular No. 37, which became effective on July 4, 2014 as an attachment of Circular No. 37.
Under the relevant rules, failure to comply with the registration procedures set forth in the SAFE Circular No. 37 may result in restrictions on the foreign
exchange activities of the relevant onshore company, including the payment of dividends and other distributions to its offshore parent or affiliates, and may also subject
relevant mainland China residents to penalties under PRC foreign exchange administration regulations.
On February 13, 2015, the SAFE promulgated the Notice on Simplifying and Improving the Foreign Currency Management Policy on Direct Investment,
effective from June 1, 2015, which further amends SAFE Circular No. 37 by requiring domestic residents to register with qualified banks rather than the SAFE or its
local branches in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing.
Regulations on Dividend Distribution
The principal laws and regulations regulating to the dividend distribution of dividends by foreign-invested enterprises in mainland China include the Company
Law of the PRC, as amended in 2004, 2005, 2013 and 2018, the Foreign Investment Law and the Implementation Regulations. Under the current regulatory regime in
mainland China, foreign-invested enterprises in mainland China may pay dividends only out of their retained earnings, if any, determined in accordance with PRC
accounting standards and
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regulations. A mainland China company is required to set aside as statutory reserve funds at least 10% of its after-tax profit, until the cumulative amount of such reserve
funds reaches 50% of its registered capital unless laws regarding foreign investment provide otherwise. A mainland China company shall not distribute any profits until
any losses from prior fiscal years have been offset. Profits retained from prior fiscal years may be distributed together with distributable profits from the current fiscal
year.
As of December 31, 2022, all of our wholly foreign-owned subsidiaries, including but not limited to Beijing QIYI Century, iQIYI New Media, Tianjin iQIYI
Network & Technology Co., Ltd., Shanghai iQIYI Network & Technology Co., Ltd., Beijing iQIYI Interactive Technology Co., Ltd., Shanghai iQIYI New Media
Science & Technology Co., Ltd., and Hainan iQIYI Information Technology Co., Ltd., were in an accumulated loss position, all of which have not and will not be able to
pay dividends to our offshore entities until they generate accumulated profits and meet the requirements for statutory reserve funds.
Regulations on Taxation
Enterprise Income Tax
On March 16, 2007, the Standing Committee of the National People’s Congress promulgated the EIT Law, which was amended on February 24, 2017 and
December 29, 2018. On December 6, 2007, the State Council enacted the Regulations for the Implementation of the Law on Enterprise Income Tax, which came into
effect on January 1, 2008 and was amended on April 23, 2019. Under the EIT Law and its implementing regulations, both resident enterprises and non-resident
enterprises are subject to tax in mainland China. Resident enterprises are defined as enterprises that are established in mainland China in accordance with PRC laws, or
that are established in accordance with the laws of foreign countries but are actually or in effect controlled from within mainland China. Non-resident enterprises are
defined as enterprises that are organized under the laws of foreign countries and whose actual management is conducted outside mainland China, but who have
established institutions or premises in mainland China or income generated from inside mainland China. Under the EIT Law and relevant implementing regulations, a
uniform corporate income tax rate of 25% is applied. However, if non-resident enterprises have not formed permanent establishments or premises in mainland China, or
if their permanent establishment or premises in mainland China have no actual relationship to the relevant income derived in mainland China, enterprise income tax is
set at the rate of 10% with respect to their income sourced from inside mainland China.
Value-Added Tax
The Provisional Regulations of the PRC on Value-added Tax were promulgated by the State Council on December 13, 1993 and came into effect on January 1,
1994 which were subsequently amended on November 10, 2008 and came into effect on January 1, 2009 and most recently amended on February 6, 2016 and November
19, 2017. The Detailed Rules for the Implementation of the Provisional Regulations of the PRC on Value-added Tax (Revised in 2011) was promulgated by the Ministry
of Finance on December 25, 1993 and subsequently amended on December 15, 2008 and October 28, 2011, or collectively, VAT Law. On November 19, 2017, the
State Council promulgated The Decisions on Abolishing the Provisional Regulations of the PRC on Business Tax and Amending the Provisional Regulations of the PRC
on Value-added Tax, or Order 691. According to the VAT Law and Order 691, all enterprises and individuals engaged in the sale of goods, the provision of processing,
repair and replacement services, sales of services, intangible assets, real property and the importation of goods within the territory of mainland China are the taxpayers of
VAT. The VAT tax rates generally applicable are simplified as 17%, 11%, 6% and 0%, and the VAT tax rate applicable to the small-scale taxpayers is 3%. The Notice
of the Ministry of Finance and the SAT on Adjusting Value-added Tax Rates, or the Notice, was promulgated on April 4, 2018 and came into effect on May 1, 2018. The
Notice adjusted the VAT tax rates of 17% and 11% to 16% and 10%, respectively. According to the Announcement on Relevant Policies for Deepening Value-Added
Tax Reform, with effect from April 1, 2019, the VAT tax rate of 16% and 10% are changed into 13% and 9%, respectively.
As of the date of this annual report, our mainland China subsidiaries and the variable interest entities are generally subject to 3%, 6%, 9% or 13% VAT rate.
Dividend Withholding Tax
The EIT Law provides that since January 1, 2008, an income tax rate of 10% will normally be applicable to dividends declared to non-mainland China resident
enterprise investors which do not have an establishment or place of business in mainland China, or which have an establishment or place of business that is not
effectively connected with the relevant income, to the extent such dividends are derived from sources within mainland China.
Pursuant to an Arrangement Between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with Respect to Taxes on Incomes, or the Double Tax Avoidance Arrangement, and other applicable PRC laws, if a Hong Kong resident
enterprise is determined by the competent PRC tax authority to
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have satisfied the relevant conditions and requirements under such Double Tax Avoidance Arrangement and other applicable laws, the 10% withholding tax on the
dividends the Hong Kong resident enterprise receives from a mainland China resident enterprise may be reduced to 5%. However, based on the Circular on Certain
Issues with Respect to the Enforcement of Dividend Provisions in Tax Treaties, or the SAT Circular 81, issued on February 20, 2009 by the SAT, if the relevant PRC tax
authorities determine, in their discretion, that a company benefits from such reduced income tax rate due to a structure or arrangement that is primarily tax-driven, such
PRC tax authorities may adjust the preferential tax treatment. According to the Circular on Several Questions regarding the “Beneficial Owner” in Tax Treaties, which
was issued on February 3, 2018 by the SAT and will take effect on April 1, 2018, when determining the applicant’s status as a “beneficial owner” with respect to the tax
treatment of dividends, interest or royalties under certain tax treaties, several factors, including whether the applicant is obligated to pay more than 50% of his or her
income over a twelve-month period to residents of a third country or region, whether the business operated by the applicant constitutes actual business activities; and
whether the counterparty country or region to the tax treaty does not levy any tax, exempts the relevant income from tax or levies tax at an extremely low rate, will be
taken into account and be analyzed according to the actual circumstances of specific cases. This circular further provides that applicants who intend to prove his or her
“beneficial owner” status shall submit the relevant documents to the relevant tax bureau according to the Announcement on Issuing the Measures for the Administration
of Non-Resident Taxpayers’ Enjoyment of the Treatment under Tax Agreements.
Tax on Indirect Transfer
On February 3, 2015, the SAT issued the Circular on Issues of Enterprise Income Tax on Indirect Transfers of Assets by Non-PRC Resident Enterprises, or
Circular 7. Pursuant to Circular 7, an “indirect transfer” of assets, including equity interests in a mainland China resident enterprise, by a non-mainland China resident
enterprise, may be recharacterized and treated as a direct transfer of mainland China taxable assets, if such arrangement does not have a reasonable commercial purpose
and was established for the purpose of avoiding payment of mainland China enterprise income tax. As a result, gains derived from such indirect transfer may be subject
to mainland China enterprise income tax. When determining whether there is a “reasonable commercial purpose” of the transaction arrangement, features to be taken into
consideration include, inter alia, whether the main value of the equity interest of the relevant offshore enterprise derives directly or indirectly from mainland China
taxable assets; whether the assets of the relevant offshore enterprise mainly consist of direct or indirect investments in mainland China, or whether its income is mainly
derived from China; and whether the offshore enterprise and its subsidiaries that directly or indirectly hold mainland China taxable assets have a real commercial nature
which is evidenced by their actual function and risk exposure. According to Circular 7, where the payor fails to withhold any or sufficient tax, the transferor shall declare
and pay such tax to the tax authority by itself within the statutory time limit. Late payment of applicable tax will subject the transferor to default interest. Circular 7 does
not apply to sales of shares by investors through a public stock exchange where such shares were acquired on a public stock exchange. On October 17, 2017, the SAT
issued the Circular on Issues of Tax Withholding regarding Non-PRC Resident Enterprise Income Tax, or SAT Circular 37, which was amended on June 15, 2018. SAT
Circular 37 further elaborates the relevant implemental rules regarding the calculation, reporting and payment obligations of the withholding tax by the non-resident
enterprises. Nonetheless, there remain uncertainties as to the interpretation and application of Circular 7. Circular 7 may be determined by the tax authorities to be
applicable to our offshore transactions or sale of our shares or those of our offshore subsidiaries where non-resident enterprises, being the transferors, were involved.
Regulations on Employment and Social Welfare
Labor Contract Law
The Labor Contract Law of the PRC, or the Labor Contract Law, which took effect on January 1, 2008 and was amended on December 28, 2012, is primarily
aimed at regulating rights and obligations of employer and employee relationships, including the establishment, performance and termination of labor contracts.
Pursuant to the Labor Contract Law, labor contracts shall be concluded in writing if labor relationships are to be or have been established between employers and the
employees. Employers are prohibited from forcing employees to work above certain time limit and employers shall pay employees for overtime work in accordance to
national regulations. In addition, employee wages shall be no lower than local standards on minimum wages and shall be paid to employees timely.
Social Insurance and Housing Fund
As required under the Regulation of Insurance for Labor Injury implemented on January 1, 2004 and amended in 2010, the Provisional Measures for Maternity
Insurance of Employees of Corporations implemented on January 1, 1995, the Decisions on the Establishment of a Unified Program for Old-Aged Pension Insurance of
the State Council issued on July 16, 1997, the Decisions on the Establishment of the Medical Insurance Program for Urban Workers of the State Council promulgated on
December 14, 1998, the Unemployment Insurance Measures promulgated on January 22, 1999 and the Social Insurance Law of the PRC implemented on July
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1, 2011 and amended in 2018, employers are required to provide their employees in mainland China with welfare benefits covering pension insurance, unemployment
insurance, maternity insurance, labor injury insurance and medical insurance.
In accordance with the Regulations on the Management of Housing Fund which was promulgated by the State Council in 1999 and amended in 2002 and 2019,
employers must register at the designated administrative centers and open bank accounts for depositing employees’ housing funds. Employer and employee are also
required to pay and deposit housing funds, with an amount no less than 5% of the monthly average salary of the employee in the preceding year in full and on time. See
“Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in Mainland China—The enforcement of the PRC Labor Contract Law and other labor-
related regulations in mainland China may adversely affect our business and results of operations.”
Employee Stock Incentive Plan
Pursuant to the Notice of Issues Related to the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas
Listed Company, or Circular 7, which was issued by the SAFE on February 15, 2012, employees, directors, supervisors, and other senior management who participate in
any stock incentive plan of a publicly listed overseas company and who are mainland China citizens or non-mainland China citizens residing in mainland China for a
continuous period of no less than one year, subject to a few exceptions, are required to register with SAFE through a qualified domestic agent, which may be a mainland
China subsidiary of such overseas listed company, and complete certain other procedures.
In addition, the SAT has issued certain circulars concerning employee stock options and restricted shares. Under these circulars, employees working in mainland
China who exercise stock options or are granted restricted shares will be subject to mainland China individual income tax. The mainland China subsidiaries of an
overseas listed company are required to file documents related to employee stock options and restricted shares with relevant tax authorities and to withhold individual
income taxes of employees who exercise their stock option or purchase restricted shares. If the employees fail to pay or the mainland China subsidiaries fail to withhold
income tax in accordance with relevant laws and regulations, the mainland China subsidiaries may face sanctions imposed by the tax authorities or other PRC
governmental authorities.
Regulations on Anti-Unfair Competition and Anti-Monopoly
According to the Anti-Unfair Competition Law, which was adopted by the SCNPC on September 2, 1993, became effective as of December 1, 1993, and last
amended on April 23, 2019, unfair competition refers to the production and operating activities where the operator disrupts the market competition order and damages
the legitimate rights and interests of other operators or consumers in violation of the provisions of the Anti-unfair Competition Law. Pursuant to the Anti-unfair
Competition Law, operators shall abide by the principle of voluntariness, equality, impartiality, integrity and adhere to laws and business ethics during market
transactions. Operators in violation of the Anti-unfair Competition Law may be subject to civil, administrative or criminal liabilities depending on the specific
circumstances.
The currently effective PRC Anti-Monopoly Law was promulgated by the SCNPC in 2007. Pursuant to the PRC Anti-Monopoly Law, the relevant operators of a
concentration of undertakings which reaches the standard for declaration shall make an advance declaration to the anti-monopoly law enforcement authority under the
State Council and it prohibits monopolistic conduct, such as entering into monopoly agreements, abuse of dominant market position and concentration of undertakings
that have the effect of eliminating or restricting competition.
Monopoly Agreement
Competing business operators may not enter into monopoly agreements that eliminate or restrict competition, such as by boycotting transactions, fixing or
changing the price of commodities, limiting the output of commodities, fixing the price of commodities for resale to third parties, among others, unless the agreement
will satisfy the exemptions under the PRC Anti-monopoly Law, such as improving technologies, increasing the efficiency and competitiveness of small and medium-
sized undertakings, or safeguarding legitimate interests in cross-border trade and economic cooperation with foreign counterparts. Sanctions for violations include an
order to cease the relevant activities, and confiscation of illegal gains and fines (from 1% to 10% of sales revenue from the previous year, or RMB500,000 if the intended
monopoly agreement has not been performed).
On June 26, 2019, the SAMR further issued the Interim Provisions on the Prohibitions of Monopoly Agreements which took effect on September 1, 2019 and
supersedes certain anti-monopoly rules and regulations previously issued by the SAIC.
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Abuse of Dominant Market Position
A business operator with a dominant market position may not abuse its dominant market position to conduct acts, such as selling commodities at unfairly high
prices or buying commodities at unfairly low prices, selling products at prices below cost without any justifiable cause, and refusing to trade with a trading party without
any justifiable cause. Sanctions for violation of the prohibition on the abuse of dominant market position include an order to cease the relevant activities, confiscation of
the illegal gains and fines (from 1% to 10% of sales revenue from the previous year).
On June 26, 2019, the SAMR issued the Interim Provisions on the Prohibitions of Acts of Abuse of Dominant Market Positions which took effect on September
1, 2019 to further prevent and prohibit the abuse of dominant market positions.
Concentration of Undertakings
Where a concentration of undertakings reaches the declaration threshold stipulated by the State Council, a declaration must be approved by the anti-monopoly
authority before the parties implement the concentration. Concentration refers to (1) a merger of undertakings; (2) acquiring control over other undertakings by acquiring
equities or assets; or (3) acquisition of control over, or the possibility of exercising decisive influence on, an undertaking by contract or by any other means. If business
operators fail to comply with the mandatory declaration requirement, the anti-monopoly authority is empowered to terminate and/or unwind the transaction, dispose of
relevant assets, shares or businesses within certain periods and impose fines of up to RMB500,000.
Furthermore, on February 7, 2021, the Anti-Monopoly Committee of the State Council promulgated the Anti-Monopoly Guidelines for the Internet Platform
Economy Sector, or the Anti-Monopoly Guidelines, aiming to provide guidelines for supervising and prohibiting the monopolistic conducts in connection with the
internet platform business operations and further elaborate on the factors for recognizing such monopolistic conducts in the internet platform industry. In particular,
pursuant to the Anti-monopoly Guidelines, the methods of an internet platform collecting, using the privacy information of the internet users may also be one of the
factors to be considered for analyzing and recognizing the monopolistic conducts in the internet platform industry. For example, whether the relevant business operator
compulsorily collects unnecessary user information may be considered to analyze whether there is a bundled sale or additional unreasonable trading condition, which is
one of the behaviors constituting the abuse of dominant market position. In addition, the factors including, among other things, based on the big data and algorithms,
whether differentiated transaction prices or other transaction conditions are implemented for consumers with different payment ability, consumption preferences and
usage habits, may be used to analyze whether there is a differentiated treatment, which is also one of the behaviors constituting abuse of dominant market position.
Furthermore, whether the relevant business operators are required to “choose one” among the internet platform and its competitive platforms may be considered to
analyze whether such internet platform operator with dominant market position abuses its dominant market position and excludes or restricts market competition, etc.
M&A Rules and Overseas Listing
On August 8, 2006, six PRC governmental and regulatory agencies, including MOFCOM and the China Securities Regulatory Commission, or the CSRC,
promulgated the M&A Rules, governing the mergers and acquisitions of domestic enterprises by foreign investors that became effective on September 8, 2006 and was
revised on June 22, 2009. The M&A Rules, among other things, requires that if an overseas company established or controlled by mainland China companies or
individuals, or mainland China Citizens, intends to acquire equity interests or assets of any other mainland China domestic company affiliated with the mainland China
Citizens, such acquisition must be submitted to the MOFCOM for approval. The M&A Rules also requires that an offshore SPV formed for overseas listing purposes
and controlled directly or indirectly by the mainland China Citizens shall obtain the approval of the CSRC prior to overseas listing and trading of such SPV’s securities
on an overseas stock exchange. On July 6, 2021, the General Office of the Central Committee of the Communist Party of China and the General Office of the State
Council jointly promulgated the Opinions on Strictly Cracking Down on Illegal Securities Activities in Accordance with the Law, or the Opinions. The Opinions
emphasized the need to strengthen the administration over illegal securities activities, and the need to strengthen the supervision over overseas listings by Chinese
companies. Effective measures, such as promoting the construction of relevant regulatory systems will be taken to deal with the risks and incidents of China-based
overseas listed companies, and cybersecurity and data privacy protection requirements and etc. The Opinions and any related implementing rules to be enacted may
subject us to compliance requirement in the future.
Furthermore, on February 17, 2023, the CSRC published the Interim Administrative Measures on Overseas Securities Offering and Listing by the Domestic
Enterprises, or the Overseas Listing Measures, which will become effective on March 31, 2023. Under the Overseas Listing Measures, a filing-based regulatory system
will be applied to “indirect overseas offerings and listings” of PRC domestic companies, which refers to securities offerings and listings in an overseas market made
under the name of an offshore entity but based on the underlying equity, assets, earnings or other similar rights of a domestic company that operates its main business
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domestically in the PRC. The Overseas Listing Measures state that, any overseas offering of securities, including issuance of shares, convertible notes and other similar
securities, by a PRC domestic company, and listing by a PRC domestic company in an overseas market, shall be subject to filing requirement within three business days
after the completion of such offering or listing. In connection with the Overseas Listing Measures, on February 17, 2023 the CSRC also published the Notice on the
Administrative Arrangements for the Filing of Overseas Securities Offering and Listing by the Domestic Enterprises, or the Notice on Overseas Listing Measures.
According to the Notice on Overseas Listing Measures, issuers that have already been listed in an overseas market by March 31, 2023, the date on which the Overseas
Listing Measures will become effective, such as our company, are not required to make any immediate filing. However, such issuers will be required to comply with the
filing requirements under Overseas Listing Measures if and when they pursue any future securities offerings and listings outside of mainland China, including but not
limited to follow-on offerings, secondary listings and going private transactions.
C.ORGANIZATIONAL STRUCTURE
The following diagram illustrates our current corporate structure, which include our significant subsidiaries and the variable interest entities as of the date of this
annual report:
For details of contractual arrangements, see “—Contractual Arrangements with the Variable Interest Entities and Their Respective Shareholders.”
Equity interest.
Notes
(1)The shareholders of Shanghai iQIYI are Dr. Yu Gong and Mr. Xiaohua Geng, our senior vice president, each holding 50% of equity interest.
(2)The shareholder of Beijing iQIYI is Mr. Xiaohua Geng, holding 100% of equity interest.
(3)The shareholder of Shanghai Zhong Yuan is Dr. Yu Gong, holding 100% of equity interest.
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Contractual Arrangements with the Variable Interest Entities and Their Respective Shareholders
Current PRC laws and regulations impose certain restrictions or prohibitions on foreign ownership of companies that engage in certain value -added
telecommunication services, internet audio-video program services and certain other businesses. We are an exempted company with limited liability incorporated in the
Cayman Islands. Beijing QIYI Century, our mainland China subsidiary, is considered a foreign-invested enterprise. To comply with PRC laws and regulations, we
primarily conduct our business in mainland China through Beijing iQIYI, Shanghai iQIYI and Shanghai Zhong Yuan, the variable interest entities in mainland China,
and their subsidiaries, based on a series of contractual arrangements by and among Beijing QIYI Century, the variable interest entities and their shareholders.
Such contractual arrangements enable us to impose control over activities that most significantly affect the economic performance of the variable interest entities,
receive economic benefits of and absorb losses that potentially could be significant to the variable interest entities, and have an exclusive option to purchase all or part of
the equity interest and assets in the variable interest entities when and to the extent permitted by PRC law. Because of these contractual arrangements, we are the primary
beneficiary of the variable interest entities in mainland China and hence consolidate their financial results as our variable interest entities.
The following is a summary of the currently effective contractual arrangements among Beijing QIYI Century, Beijing iQIYI, Beijing iQIYI’s shareholder and
iQIYI, Inc.
Loan Agreement
Pursuant to the amended and restated loan agreement dated January 30, 2013 between Beijing QIYI Century and Mr. Xiaohua Geng, the sole shareholder of
Beijing iQIYI, Beijing QIYI Century made loans in an aggregate amount of RMB27 million to Mr. Geng for the acquisition and capitalization of Beijing iQIYI.
Pursuant to the amended and restated loan agreement, Mr. Geng can only repay the loans by the sale of all his equity interest in Beijing iQIYI to iQIYI, Inc. insofar as
permitted under PRC law and pay all of the proceeds from sale of such equity interests to iQIYI, Inc. In the event that Mr. Geng sells his equity interests in Beijing
iQIYI to iQIYI, Inc. with a price equivalent to or less than the amount of the principal, the loans will be interest free. If the price is higher than the amount of the
principal, the excess amount will be paid to Beijing QIYI Century as the loan interest to or cost for capital occupancy to the extent allowed under PRC law. The initial
loan maturity date is June 23, 2021 unless otherwise decided by Beijing QIYI Century, and can be extended upon the written notification from Beijing QIYI Century.
On December 21, 2020, Beijing QIYI Century executed a confirmation letter to extend the term of the loan agreement to June 23, 2031.
Share Pledge Agreement
Pursuant to the amended and restated share pledge agreement dated January 30, 2013, Mr. Xiaohua Geng has pledged all of his equity interest in Beijing iQIYI to
guarantee his and Beijing iQIYI’s performance of his obligations under, where applicable, the amended and restated exclusive technology consulting and services
agreement and the amended and restated loan agreement. If Beijing iQIYI or Mr. Geng breach their contractual obligations under these agreements, Beijing QIYI
Century, as pledgee, will have the right to dispose of the pledged equity interests. Mr. Geng agrees that, during the term of the share pledge agreements, he will not
dispose of the pledged equity interests or create or allow any encumbrance on the pledged equity interests, and he also agrees that Beijing QIYI Century’s rights relating
to the equity pledge should not be prejudiced by the legal actions of Mr. Geng, his successor or his assignee. During the term of the amended and restated share pledge
agreement, Beijing QIYI Century has the right to receive all of the dividends and profits distributed on the pledged equity. The amended and restated share pledge
agreement will terminate on the date when Beijing iQIYI and Mr. Geng have completed all their obligations under the amended and restated exclusive technology
consulting and services agreement and the amended and restated loan agreement unless otherwise unilaterally terminated by Beijing QIYI Century.
Exclusive Purchase Option Agreement
Pursuant to the amended and restated exclusive purchase option agreement dated January 30, 2013 by and among iQIYI, Inc., Beijing QIYI Century, Beijing
iQIYI, and Mr. Xiaohua Geng, Mr. Geng irrevocably grants iQIYI, Inc. or its designee an exclusive option to purchase at its discretion, to the extent permitted under
PRC law, all or part of his equity interests in Beijing iQIYI. In addition, the purchase price should equal the amount that Mr. Geng contributed to Beijing iQIYI as
registered capital for the equity interest to be purchased, or be the lowest price permitted by applicable PRC law. If any dividends or assets of other form were
distributed, such dividends or distributions, including the purchase consideration received if the exclusive purchase option is exercised, will have to be repaid by Mr.
Geng to iQIYI, Inc. Without the prior written consent of iQIYI, Inc., Beijing iQIYI may not amend its articles of associate, increase or decrease the registered capital,
sell or otherwise dispose of its assets or beneficial interest, create or allow any encumbrance on its assets or other beneficial interests, provide any loans to any third
parties, enter into any
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material contract with a value of more than RMB300,000 (except those contracts entered into in the ordinary course of business), merge with or acquire any other
persons or make any investments, or distribute dividends to the shareholders. Mr. Geng agrees that, without the prior written consent of iQIYI, Inc., he will not dispose
of his equity interests in Beijing iQIYI or create or allow any encumbrance on the equity interests, and will not cause Beijing iQIYI to provide any persons with any
loans. The initial term of the amended and restated exclusive purchase option agreement is ten years and can be renewed at the discretion of iQIYI, Inc. On December
21, 2020, iQIYI, Inc. executed a confirmation letter to extend the term of the amended and restated exclusive purchase option agreement to November 22, 2032.
Business Operation Agreement
Pursuant to the amended and restated business operation agreement dated January 30, 2013 by and among Beijing QIYI Century, Beijing iQIYI and Mr. Xiaohua
Geng, Beijing QIYI Century agrees to provide Beijing iQIYI with performance guarantees with respect to any contracts, agreements and transactions Beijing iQIYI
entered into in connection with its business. As a counter-guarantee, Beijing iQIYI agrees to offer all its account receivables and assets as collateral. The initial term of
the business operation agreement is ten years and can be renewed at the discretion of Beijing QIYI Century. On December 21, 2020, Beijing QIYI Century executed a
confirmation letter to extend the term of the business operation agreement to January 30, 2033.
Business Cooperation Agreement
Pursuant to the business cooperation agreement, which took effect on November 23, 2011 by and between Beijing QIYI Century and Beijing iQIYI, Beijing
iQIYI agrees to provide Beijing QIYI Century with services, including internet information services, online advertising and other services reasonably necessary within
the scope of Beijing QIYI Century’s business. Beijing iQIYI agrees to use, on the website it operates, technology services provided by Beijing QIYI Century, including
but not limited to, P2P download and video on-demand system. As consideration for the internet information services and other services provided by Beijing iQIYI,
Beijing QIYI Century agrees to pay specified service fees to Beijing iQIYI. Beijing iQIYI has the right to waive the service fees. The initial term of the business
cooperation agreement is ten years and can be renewed at the discretion of Beijing QIYI Century. On December 21, 2020, Beijing QIYI Century executed a
confirmation letter to extend the term of the business cooperation agreement to November 23, 2031.
Commitment Letter
Pursuant to the commitment letter dated January 30, 2013, under the condition that Beijing iQIYI remains as an entity of which the financial statements are
consolidated by iQIYI, Inc. and Beijing QIYI Century under U.S. GAAP and the relevant contractual arrangements remain in effect, iQIYI, Inc. and Beijing QIYI
Century undertake to provide financial support to Beijing iQIYI for any financial loss that might affect its business operation occurred before and after the execution of
the commitment letter as permitted by relevant laws. Such financial support shall be forgiven by iQIYI, Inc. and Beijing QIYI Century. As of December 31, 2022, iQIYI
has provided RMB785.8 million (US$113.9 million) in financial support to Beijing iQIYI under this commitment letter, all of which has been forgiven.
Shareholder Voting Rights Trust Agreement
Pursuant to the amended and restated shareholder voting rights trust agreement dated January 30, 2013 by and between Beijing QIYI Century and Mr. Xiaohua
Geng, Mr. Geng has agreed to irrevocably entrust a person designated by Beijing QIYI Century to represent him to exercise all the voting rights and other shareholders’
rights to which he is entitled as the shareholder of Beijing iQIYI. The agreement will remain effective for as long as Mr. Geng remains the shareholder of Beijing iQIYI
unless Beijing QIYI Century unilaterally terminates the agreement by written notice.
Exclusive Technology Consulting and Services Agreement
Pursuant to the exclusive technology consulting and services agreement, which took effect on November 23, 2011 by and between Beijing QIYI Century and
Beijing iQIYI, Beijing QIYI Century has the sole and exclusive right to provide specified technology consulting and services to Beijing iQIYI. Beijing iQIYI agrees to
accept such services and, without the prior written consent of Beijing QIYI Century, may not accept the same or similar technology consulting and services provided by
any third-party during the term of the agreement. Beijing iQIYI agrees to pay specified service fees to Beijing QIYI Century on a quarterly basis. Beijing QIYI Century
has the right to adjust the calculation basis and payment method through written confirmation, without the prior consent of Beijing iQIYI. All the benefits and interests
generated from the agreement, including but not limited to software copyrights, intellectual property rights, know-how and trade secrets, will be Beijing QIYI Century’s
sole and exclusive rights. The initial term of the exclusive technology consulting and services agreement is ten years and can be renewed at the discretion of Beijing
QIYI Century.
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On December 21, 2020, Beijing QIYI Century executed a confirmation letter to extend the term of the exclusive technology consulting and services agreement to
November 23, 2031.
Trademark License Agreement
Pursuant to the trademark license agreement, which took effect on November 23, 2011 by and between Beijing QIYI Century and Beijing iQIYI, Beijing QIYI
Century grants Beijing iQIYI trademark licenses to use the trademarks held by Beijing QIYI Century in specified areas. Beijing QIYI Century may not grant trademark
licenses to third parties. Beijing iQIYI agrees to pay specified usage fees to Beijing QIYI Century. The initial term of this trademark license agreement is five years and
is afterwards automatically renewed for one additional year each year, unless terminated by Beijing QIYI Century by written notice.
Software Usage License Agreement
Pursuant to the software usage license agreement, which took effect on November 23, 2011 by and between Beijing QIYI Century and Beijing iQIYI, Beijing
QIYI Century grants Beijing iQIYI non-exclusive rights to use specified software in mainland China. Beijing iQIYI agrees not to sublicense such software usage rights,
and agrees to pay specified usage fees to Beijing QIYI Century. The initial term of this software usage license agreement is five years and can be renewed at the
discretion of Beijing QIYI Century. On December 2, 2016, Beijing QIYI Century executed a confirmation letter to extend the term of the software usage license
agreement for five years. On December 21, 2020, Beijing QIYI Century executed another confirmation letter to extend the term of the software usage license agreement
to December 1, 2031.
Power of Attorney
On January 30, 2013, Beijing QIYI Century granted iQIYI, Inc. irrevocable power of attorney under the amended and restated shareholder voting rights trust
agreement. Pursuant to the irrevocable power of attorney, iQIYI, Inc. may exercise all shareholder rights during the term of the amended and restated shareholder voting
rights trust agreement and may transfer such rights to a designated third-party without written notice to Beijing QIYI Century.
Spousal Consent Letter
The spouse of the shareholder of Beijing iQIYI signed a spousal consent letter. Under the spousal consent letter, the signing spouse unconditionally and
irrevocably agreed that the spouse is aware of the above-mentioned loan agreement, share pledge agreement, exclusive purchase option agreement, business operation
agreement, and shareholder voting rights trust agreement, and has no objection regarding the contractual arrangements aforesaid. The signing spouse committed not to
impose any adverse assertions upon the validity of such contractual arrangement based on the existence or termination of the marital relationship with the relevant
shareholder, or exert any impediment or adverse influence over the relevant shareholder’s performance of any contractual arrangement or claim rights on Beijing iQIYI.
The contractual arrangements by and among iQIYI, Inc., Beijing QIYI Century, Shanghai iQIYI, and the shareholders of Shanghai iQIYI, including loan
agreement, share pledge agreement, exclusive purchase option agreement, business operation agreement, commitment letter, shareholder voting rights trust agreement,
spousal consent letter and exclusive technology consulting and services agreement, are substantially the same as the corresponding contractual arrangements discussed
above. The relevant loan agreements, exclusive purchase option agreement, business operation agreement and exclusive technology consulting and services agreement
were extended by Beijing QIYI Century and iQIYI, Inc. before their respective expiration dates to October 25, 2033, and can be further renewed at the discretion of
Beijing QIYI Century and iQIYI, Inc..
The contractual arrangements by and among iQIYI, Inc., Beijing QIYI Century, Shanghai Zhong Yuan, and the shareholder of Shanghai Zhong Yuan, including
loan agreement, share pledge agreement, exclusive purchase option agreement, business operation agreement, commitment letter, shareholder voting rights trust
agreement, spousal consent letter and exclusive technology consulting and services agreement, are substantially the same as the corresponding contractual arrangements
discussed above. The relevant loan agreement, exclusive purchase option agreement, business operation agreement and exclusive technology consulting and services
agreement were extended by Beijing QIYI Century and iQIYI, Inc. before their respective expiration dates to January 14, 2034, and can be further renewed at the
discretion of Beijing QIYI Century and iQIYI, Inc.
In the opinion of Jingtian & Gongcheng, our PRC legal counsel:
•the ownership structure of the variable interest entities and our wholly-foreign owned subsidiaries are in compliance with PRC laws or regulations currently in
effect; and
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•the contractual arrangements among our wholly-foreign owned subsidiaries, variable interest entities and their respective shareholder(s), either individually or
taken as a whole, are valid and legally binding upon each party to such arrangement and are enforceable against each party thereto in accordance with their terms,
and do not contravene any PRC laws or regulations currently in effect.
However, there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules. Accordingly, the
PRC regulatory authorities may in the future take a view that is contrary to the above opinion of our PRC legal counsel. We have been further advised by our PRC
counsel that if the PRC government finds that the agreements that establish the structure for operating our internet video streaming business and related business do not
comply with PRC government restrictions on foreign investment in internet video streaming and related businesses, we could be subject to severe penalties including
being prohibited from continuing operations. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—If the PRC government finds
that the agreements that establish the structure for operating certain of our operations in mainland China do not comply with PRC regulations relating to the relevant
industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our
interests in those operations.” and “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in Mainland China—Uncertainties with respect to the
PRC legal system could adversely affect us.”
D.PROPERTY, PLANTS AND EQUIPMENT
Our principal executive offices are located in Beijing, China, where we lease premises of approximately 28,219 square meters. We own office premises of
approximately 17,570 square meters in Shanghai and land of approximately 506,722 square meters in Zhejiang Province. We also lease offices in Shanghai, Chongqing
and various other cities, with an aggregate area of approximately 26,437 square meters. We lease our premises from unrelated third parties. Below is a summary of the
term of each of our current leases, and we plan to renew most of these leases when they expire:
Leased properties
Beijing
Shanghai
Chongqing
Others
Total
Term
1, 3, 4 and 6 years
1, 3 and 20 years
2 years
1, 2, 3, 4, 5 and 10 years
28,219
2,920
6,760
16,757
54,656
Area (square meters)
Our main IT infrastructure include internet data centers (IDC) and content delivery networks (CDN). We lease IDC facilities from China Telecom, China
Unicom and China Mobile. Our bandwidth provider includes self-built CDN, cooperating bandwidth, commercial CDN and Internet Exchange.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion of our financial condition and results of operations is based upon and should be read in conjunction with our consolidated financial
statements and the related notes included in this annual report. This report contains forward-looking statements. See “Forward-Looking Information.” In evaluating our
business, you should carefully consider the information provided under the caption “Item 3. Key Information—D. Risk Factors” in this annual report. We caution you
that our businesses and financial performance are subject to substantial risks and uncertainties.
A.OPERATING RESULTS
Overview
We have developed multiple monetization methods to capture entertainment market opportunities in mainland China. We generate revenues through (i)
membership services, (ii) online advertising services, (iii) content distribution, and (iv) others.
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Selected Income Statement Items
Total Revenues
We derive our revenues from (i) membership services, (ii) online advertising services, (iii) content distribution and (iv) others. The following table presents our
revenue lines and as percentages of our total revenues for the periods presented.
2020
2021
RMB
%
RMB
%
RMB
2022
US$
%
(in thousands, except for percentages)
For the year ended December 31,
16,491,030
6,822,115
2,660,074
3,733,996
29,707,215
55.5
23.0
9.0
12.5
100.0
16,713,664
7,066,751
2,855,602
3,918,342
30,554,359
54.7
23.1
9.3
12.9
100.0
17,710,830
5,331,697
2,469,771
3,485,250
28,997,548
2,567,829
773,023
358,083
505,314
4,204,249
61.1
18.4
8.5
12.0
100.0
Revenues:
Membership services
Online advertising services
Content distribution
Others
Total revenues
Membership services
We offer membership packages primarily to provide our members with (i) access to streaming of a library of premium content, (ii) certain commercial skipping
and other viewing privilege, and (iii) merchandise selection and privilege. We also offer a broader selection of paid services with innovative privileges. We generate a
small portion of our membership services revenue from on-demand content purchase by our users and the sale of the right to membership services through the
cooperation with other parties, where we recognize revenue on a net basis when we do not control the specified services before they are transferred to the customer. Our
users’ willingness to pay continued to increase along with our efforts in premium content production. In November 2020, we increased the pricing of our monthly,
quarterly and annual membership packages on non-iOS channels to the same level of iOS channels. In December 2021 and December 2022, we further increased the
pricing of certain membership packages.
Online advertising services
Our advertising revenues are recognized net of advertising agency rebates in 2020, 2021 and 2022. Most of our online advertising services are in the form of
brand advertising.
Content distribution
We distribute video content by sub-licensing such content to other third-party internet video streaming platforms, and as consideration, receive either cash or the
right to broadcast certain licensed content from such platforms on our platform. We also distribute selected content to regions outside of mainland China and/or to TV
stations in mainland China.
Others
We generate revenues from various other channels, such as online games, and talent agency business. We generate revenues from online games both by
distributing third-party online games and sharing revenues with them, and offering our self-developed online games. We launched several new self-developed and
licensed games following the acquisition of Skymoons in July 2018, and plan to further broaden our offerings, especially self-developed games that fully leverage the IP
value in our content. We generate revenues from talent agency services, primarily from celebrity endorsement contracts for the artists we represent. In addition, we
generate revenues from IP licensing, online literature and other business lines. We also generate revenue from other licensing, granting rights to certain customers to re-
create short-form videos for selected content assets from our existing content library over a fixed license period.
Operating Costs and Expenses
Our operating costs and expenses consist of (i) cost of revenues, (ii) selling, general and administrative expenses and (iii) research and development expenses.
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Cost of revenues. Our cost of revenues mainly consists of content costs and others. Content costs mainly consist of costs for original content, which includes
amortization and impairment of capitalized produced content and expenses recorded when production costs exceed the total revenues to be earned; licensed content,
which includes amortization and impairment of licensed copyrights; and revenue sharing cost for content uploaded by partners and cost incurred for live streaming hosts.
We expect that our cost of revenues as a percentage of total revenues will continue to improve going forward benefiting from the improvement in operating efficiency,
the content production infrastructure we have developed, and the better supply and demand dynamics.
Selling, general and administrative expenses. Our selling expenses primarily consist of promotional and marketing expenses and compensation for our sales and
marketing personnel. We expect our selling and marketing expenses as a percentage of total revenues to modestly increase in the foreseeable future to achieve high-
quality growth.
Our general and administrative expenses primarily consist of salaries and benefits for our general and administrative personnel and fees and expenses for legal,
accounting and other professional services. We expect our general and administrative expenses as a percentage of total revenues to decrease in the foreseeable future as
we continue to enhance overall cost control to improve operating margin.
Research and development expenses. Research and development expenses primarily consist of salaries and benefits for our research and development personnel.
We expect our research and development expenses as a percentage of total revenues to decrease in the foreseeable future as we continue to enhance overall cost control
to improve operating margin.
Taxation
We had income tax expense of RMB23.3 million, RMB96.5 million and RMB84.0 million (US$12.2 million) in 2020, 2021 and 2022, respectively. We are
subject to various rates of income tax under different jurisdictions. The following summarizes major factors affecting our applicable tax rates in the Cayman Islands,
Hong Kong, Singapore and mainland China.
Cayman Islands
We are an exempted company incorporated in the Cayman Islands. The Cayman Islands currently levies no taxes on individuals or corporations based upon
profits, income, gains or appreciation and there is no taxation in the nature of estate duty or inheritance tax. There are no other taxes likely to be material to us levied by
the government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or after execution brought within the jurisdiction of
the Cayman Islands. The Cayman Islands is not party to any double tax treaties that are applicable to any payments made to or by our company. There are no exchange
control regulations or currency restrictions in the Cayman Islands. In addition, the Cayman Islands does not impose withholding tax on dividend payments.
Hong Kong
Our subsidiaries in Hong Kong are subject to the uniform tax rate of 16.5%. Under the Hong Kong tax laws, we are exempted from the Hong Kong income tax
on our foreign-derived income. Hong Kong does not impose a withholding tax on dividends.
Singapore
Generally, entities in Singapore are subject to a unified 17% tax rate. Under the Singapore tax laws, certain entities may be entitled to preferential tax treatments.
Our primary subsidiary in Singapore was granted a five-year Development and Expansion Incentive (“DEI”) commencing from September 15, 2020, which awards a
concessionary tax rate of 10% on qualifying income, subject to certain terms and conditions imposed. Singapore does not impose a withholding tax on dividends.
Mainland China
Generally, our mainland China subsidiaries, the variable interest entities and their subsidiaries are subject to enterprise income tax on their taxable income in
mainland China at a rate of 25%. The enterprise income tax is calculated based on the entity’s global income as determined under mainland China tax laws and
accounting standards.
An enterprise may benefit from a preferential tax rate of 15% under the EIT Law if it qualifies as a High and New Technology Enterprise, or HNTE. A HNTE
certificate is normally effective for a period of three years. Certain of our mainland China subsidiaries and variable interest entities including Beijing QIYI Century,
Shanghai Zhong Yuan, Beijing iQIYI and Skymoons Interactive are qualified as HNTEs. The related tax holiday under such HNTE certificates of our entities will expire
in 2024 and 2025.
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Our mainland China subsidiaries, the variable interest entities and their subsidiaries are subject to VAT at a rate of 3%, 6%, 9% or 13% on the services we
provide and related surcharges.
If our holding company in the Cayman Islands or our subsidiary outside of mainland China were deemed to be a “resident enterprise” under the EIT Law, it
would be subject to enterprise income tax on its worldwide income at a rate of 25%. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business
in Mainland China—If we are classified as a mainland China resident enterprise for mainland China income tax purposes, such classification could result in unfavorable
tax consequences to us and our non-mainland China shareholders or ADS holders.”
Impact of COVID-19 on Our Operations and Financial Performance
Substantially all of our revenues and workforce are concentrated in mainland China. Beginning in 2020, outbreaks of COVID-19 resulted in the temporary
closure of many corporate offices, retail stores, and manufacturing facilities across China.
The spread of the disease and the preventive actions taken dampened content production and title release in the entire online entertainment industry. This caused
an undersupply of content, especially cinema movies, throughout 2020, 2021 and 2022. For example, our subscribing member base witnessed fluctuation: the number of
subscribing members increased during the first half of 2020 driven by the increased demand for entertainment during the period resulting from the temporary office
closure and quarantine and social distancing measures, while the same witnessed decline at the end of 2020 as compared with 2019 due to the weakened supply of
content, particularly of movies.
Our revenue from membership services slightly increased by 6.0% in 2022 as compared with 2021. In 2022, our online advertising services revenue was
RMB5,331.7 million (US$733.0 million), representing a 24.6% decrease from RMB7,066.8 million in 2021, primarily due to the challenging macroeconomic
environment, pandemic resurgence, and fewer number of variety shows launched.
China began to modify its zero-COVID policy at the end of 2022, and most of the quarantine requirements were lifted in December 2022. There remains
uncertainty as to the future impact of the virus, especially in light of this change in policy. The extent to which the pandemic impacts our results of operations going
forward will depend on future developments which are highly uncertain and unpredictable, including the frequency, duration and extent of outbreaks of COVID-19, the
appearance of new variants with different characteristics, the effectiveness of efforts to contain or treat cases, and future actions that may be taken in response to these
developments. See also “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—We face risks related to health epidemics and other
outbreaks, as well as natural disasters, which could significantly disrupt our operations and adversely affect our business, financial condition or results of operation.”
As of December 31, 2022, we had RMB7,097.9 million (US$1,029.1 million), RMB13.6 million (US$2.0 million), RMB818.3 million (US$118.6 million) and
RMB750.0 million (US$108.7 million) in cash and cash equivalents, restricted cash, short-term investments and long-term restricted cash included in prepayments and
other assets, respectively. For more details about the composition of our cash and cash equivalents, restricted cash and short-term investments, please see “—B.
Liquidity and Capital Resources.”
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Results of Operations
Despite the lack of equity ownership, our Cayman Island holding company is considered the primary beneficiary of the variable interest entities and consolidates
the variable interest entities and their subsidiaries as required by ASC topic 810, Consolidation. Accordingly, we treat the variable interest entities as our consolidated
entities under U.S. GAAP and we consolidate the financial results of the variable interest entities in our consolidated financial statements in accordance with
U.S. GAAP. The following table summarizes our consolidated results of operations in absolute amounts and as percentages of our total revenues for the years
presented.
Revenues:
Membership services
Online advertising services
Content distribution
Others
Total revenues
Operating costs and expenses:
(1)
Cost of revenues
Selling, general and administrative
Research and development
(1)
(1)
Total operating costs and expenses
Operating (loss)/income
Total other expenses, net
Loss before income taxes
Income tax expenses
Net loss
Note:
2020
RMB
%
2021
RMB
%
(in thousands, except for percentages)
RMB
2022
US$
%
16,491,030
6,822,115
2,660,074
3,733,996
29,707,215
(27,884,395)
(5,187,835)
(2,675,494)
(35,747,724)
(6,040,509)
(943,368)
(6,983,877)
(23,276)
(7,007,153)
55.5
23.0
9.0
12.5
100.0
(93.9)
(17.5)
(9.0)
(120.4)
(20.4)
(3.2)
(23.6)
(0.1)
(23.7)
16,713,664
7,066,751
2,855,602
3,918,342
30,554,359
(27,513,497)
(4,725,142)
(2,794,927)
(35,033,566)
(4,479,207)
(1,532,781)
(6,011,988)
(96,545)
(6,108,533)
54.7
23.1
9.3
12.9
100.0
(90.0)
(15.5)
(9.1)
(114.6)
(14.6)
(5.0)
(19.6)
(0.3)
(19.9)
17,710,830
5,331,697
2,469,771
3,485,250
28,997,548
(22,319,315)
(3,466,579)
(1,899,233)
(27,685,127)
1,312,421
(1,346,197)
(33,776)
(84,000)
(117,776)
2,567,829
773,023
358,083
505,314
4,204,249
(3,235,996)
(502,607)
(275,363)
(4,013,966)
190,283
(195,180)
(4,897)
(12,179)
(17,076)
61.1
18.4
8.5
12.0
100.0
(77.0)
(12.0)
(6.5)
(95.5)
4.5
(4.6)
(0.1)
(0.3)
(0.4)
(1)Share-based compensation expense was allocated as follows:
Cost of revenues
Selling, general and administrative
Research and development
Total
2020
RMB
201,970
851,416
316,709
1,370,095
For the year ended December 31,
2021
RMB
173,263
718,377
327,523
1,219,163
2022
RMB
US$
147,045
425,209
239,187
811,441
21,320
61,650
34,679
117,649
Year Ended December 31, 2022 Compared with Year Ended December 31, 2021
Revenues
Our revenues decreased by 5.1% from RMB30,554.4 million in 2021 to RMB28,997.5 million (US$4,204.2 million) in 2022.
Membership services. Our membership services revenue increased by 6.0% from RMB16,713.7 million in 2021 to RMB17,710.8 million (US$2,567.8 million) in
2022, primarily because we launched a variety of premium content that elevated user experiences in 2022 and continued to refine operations to improve our
monetization capabilities. The average daily number of total subscribing members in 2022 was 103.1 million, as compared to 101.6 million in 2021. The average daily
number of subscribing
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members excluding individuals with trial memberships was 102.4 million in 2022, as compared to 100.7 million in 2021. In addition, monthly ARM in 2022 increased
by 4.4% to RMB14.31, as compared to RMB13.71 in 2021. We track the number of average daily subscribing members and monthly ARM as key indicators for
membership revenue growth, and have been cultivating users’ willingness to pay. We are dedicated to providing more premium content through diversified approaches,
as we did in the past by launching theme-based drama theaters, members only content and the PVOD mode, to expand our subscribing member base, nurture members’
willingness to pay and diversify our routes to membership monetization to drive membership services revenue.
Online advertising services. Our online advertising services revenue decreased by 24.6% from RMB7,066.8 million in 2021 to RMB5,331.7 million (US$773.0
million) in 2022, as a result of the challenging macroeconomic environment, pandemic resurgence, and fewer number of variety shows launched. Average brand
advertising revenue per brand advertiser decreased by 21.4% from RMB4.9 million in 2021 to RMB3.8 million (US$0.6 million) in 2022. We track the average brand
advertising revenue per brand advertiser as a key indicator to evaluate our advertising services business and adapt our sales strategy, advertisement solutions and content
scheduling accordingly.
Content distribution. Our content distribution revenue decreased by 13.5% from RMB2,855.6 million in 2021 to RMB2,469.8 million (US$358.1 million) in
2022, primarily attributable to the decrease in barter transactions during the year.
Others. Other revenues decreased by 11.1% from RMB3,918.3 million in 2021 to RMB3,485.3 million (US$505.3 million) in 2022, primarily due to the
performance deterioration in various business lines and the adjustment in business operation model of certain business line, partially offset by the revenue derived from
third-party cooperation.
Cost of revenues
Our cost of revenues decreased by 18.9% from RMB27,513.5 million in 2021 to RMB22,319.3 million (US$3,236.0 million) in 2022, primarily due to the
decrease of content cost.
Content cost. Content cost decreased by 20.3% from RMB20,744.8 million in 2021 to RMB16,533.8 million (US$2,397.2 million) in 2022. The decrease in
content cost resulted from our strategy of prioritizing the production of high-quality original content, fewer number of variety shows launched, and improvement in
operating efficiency.
Gross profit
As a result of the foregoing, we recorded gross profit of RMB3,040.9 million and RMB6,678.2 million (US$968.3 million) in 2021 and 2022, respectively. Our
gross profit as a percentage of total revenues improved from 10.0% in 2021 to 23.0% in 2022, which was primarily attributed to the increase in the membership services
revenue and the decrease in our content cost.
Selling, general and administrative expenses
Selling expenses decreased by 27.3% from RMB3,660.3 million in 2021 to RMB2,662.0 million (US$386.0 million) in 2022, primarily due to disciplined
marketing spending and decline in personnel compensation expenses. Our sales and marketing personnel compensation expenses decreased by 32.0% from RMB1,057.0
million in 2021 to RMB718.5 million (US$104.2 million) in 2022 primarily due to decreased employee headcount. Our marketing and promotional expenses decreased
by 24.1% from RMB2,383.3 million in 2021 to RMB1,809.1 million (US$262.3 million) in 2022 as we decreased our games, contents and brand promotional spending.
General and administrative expenses decreased by 24.4% from RMB1,064.8 million in 2021 to RMB804.6 million (US$116.7 million) in 2022, primarily due to
decreases in personnel compensation expenses. Our general and administrative personnel compensation expenses decreased by 37.5% from RMB775.5 million in 2021
to RMB484.4 million (US$70.2 million) in 2022, primarily due to decreased share-based compensation expenses.
Research and development expenses
Our research and development expenses decreased by 32.0% from RMB2,794.9 million in 2021 to RMB1,899.2 million (US$275.4 million) in 2022, which was
primarily due to a decrease in personnel-related compensation expenses.
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Income tax expense
In 2022, RMB84.0 million (US$12.2 million) of income tax expense was recognized, which resulted from RMB53.9 million (US$7.8 million) current year
income tax and RMB30.1 million (US4.4 million) deferred income tax expense. In comparison, in 2021, RMB96.5 million income tax expense was recognized, which
resulted from RMB78.0 million current year income tax and RMB18.5 million deferred income tax expense.
Net loss
As a result of the foregoing, we had net losses of RMB6,108.5 million and RMB117.8 million (US$17.1 million) in 2021 and 2022, respectively. For specific
factors that may constrain our ability to reverse our net loss, see “Item 3. Key Information—D. Risk Factors—Risk Factors—Risks Related to Our Business and Industry
—We have incurred net losses since our inception and may continue to incur losses in the future.”
Year Ended December 31, 2021 Compared with Year Ended December 31, 2020
For a detailed description of the comparison of our operating results for the year ended December 31, 2021 to the year ended December 31, 2020, see “Item 5.A.
Operating and Financial Review and Prospects—A. Operating Results—Results of Operation—Year Ended December 31, 2021 Compared with Year Ended December
31, 2020” of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 28, 2022.
Inflation
To date, inflation in mainland China has not materially impacted our results of operations. According to the National Bureau of Statistics of China, the year-over-
year percent changes in the consumer price index for December 2020, 2021 and 2022 were increases of 0.2%, 1.5% 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 higher rates of inflation in mainland China. For
example, certain operating costs and expenses, such as employee compensation and office operating expenses may increase as a result of higher inflation. Additionally,
because a substantial portion of our assets consists of cash and cash equivalents and short-term investments, high inflation could significantly reduce the value and
purchasing power of these assets. We are not able to hedge our exposure to higher inflation in mainland China.
Impact of Foreign Currency Fluctuation
See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in Mainland China—Fluctuations in exchange rates could have a material
and adverse effect on our results of operations and the value of your investment.” and “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Foreign
Exchange Risk.”
Impact of Governmental Policies
See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in Mainland China” and “Item 4. Information on the Company—B. Business
Overview—Government Regulations.”
B.LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2022, we had RMB7,097.9 million (US$1,029.1 million) and RMB13.6 million (US$2.0 million) in cash and cash equivalents and restricted
cash, respectively. Our cash and cash equivalents primarily consist of cash on hand and highly liquid investments, which are unrestricted from withdrawal or use, or
which have original maturities of three months or less when purchased. Our restricted cash mainly represents restricted deposits used as collateral against short-term
loans and certain lawsuits. As of December 31, 2022, we had RMB818.3 million (US$118.6 million) in short-term investments. Our short-term investments consisted of
available-for-sale debt securities with maturities of less than one year purchased from commercial banks and other financial institutions. Our total current liabilities were
RMB28.1 billion (US$4.1 billion) as of December 31, 2022, which primarily included RMB8,305.4 million (US$1,204.2 million) in convertible senior notes, current
portion, RMB5,993.4 million (US$869.0 million) in accounts and notes payable, RMB4,232.1 million (US$613.6 million) in customer advances and deferred revenue,
and RMB3,347.6 million (US$485.4 million) in short-term loans. As of December 31, 2022, we had unused credit lines of RMB1.6 billion (US$0.2 billion) and a
working capital deficit of RMB14.3 billion (US$2.1 billion).
We recorded net loss of RMB117.8 million (US$17.1 million) in 2022. We had not been profitable in the past financial years since our inception and we had only
been able to generate positive net cash flows in some of the financial years, in which case the
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positive net cash flows were mainly attributable to the net proceeds we received in our initial public offering, our convertible notes offerings and our ADSs offering.
Accounts and notes payable amounted to RMB8,896.5 million and RMB5,993.4 million (US$869.0 million) as of December 31, 2021 and 2022, respectively. A
substantial majority of our accounts and notes payable are due to content providers. The decrease in accounts and notes payable in 2022 was primarily due to a decrease
in content acquisition related payables. To finance our operations, we have incurred a significant amount of indebtedness and other liabilities in relation to our
convertible senior notes and other financing arrangements. We cannot assure you that we will be able to generate sufficient cash flow from our operations or secure
additional financing to support the repayment of our indebtedness when our payments become due.
As disclosed in our consolidated financial statements as of December 31, 2021, there was substantial doubt regarding our ability to continue as a going concern
as we did not have sufficient funds to repurchase all or a significant portion of the outstanding 2025 Notes if redeemed by noteholders on April 1, 2023 without securing
additional financing. We have implemented plans and improved our financial position by reducing discretionary capital expenditures and operational expenses and
raising additional financing. In March 2022, we issued ordinary shares for a total cash purchase price of US$285 million in a private placement transaction. In December
2022, we issued US$500 million convertible senior notes for cash. In February 2023, we issued to PAG an additional US$50 million principal amount of the PAG Notes
upon its exercise to subscribe for additional notes in full. In January 2023, we completed a registered follow-on public offering and received net proceeds of US$500
million in aggregate. In March 2023, we completed an offering of US$600 million in aggregate principal amount of 2028 Notes. Concurrently with and shortly after the
offering of the 2028 Notes, we entered into separate individually and privately negotiated agreements with certain holders of the 2026 Notes to repurchase US$340
million principal amount of such notes for cash. We generated positive operating cash flow in the second, third and fourth quarters of 2022. As a result of the cash
generated from operations, coupled with the Plans and fund raised from the above actions, the substantial doubt regarding our ability to continue as a going concern has
been resolved as of the date of this annual report. We intend to further strengthen our financial position and generate cash from our operations by continuing to focus on
improving operational efficiency.
Historically, we have issued convertible senior notes, which are senior, unsecured obligations of our company. Upon the occurrence of an event of default, the
trustee or the holders of at least 25% in aggregate principal amount of our convertible senior notes may declare the whole principal of, and accrued and unpaid interest
on, all the notes to be due and payable immediately, subject to certain exceptions and conditions under the respective indenture. Furthermore, upon the occurrence of a
fundamental change, holders of the notes will have the right, at their option, to require us to repurchase all of their notes or any portion of the principal amount and
accrued and unpaid interests. In the event of a fundamental change, we may also be required to issue additional ADSs upon conversion of the notes. The accompanying
consolidated financial statements included elsewhere in this annual report on Form 20-F have been prepared on a going concern basis, which contemplates the
realization of assets and settlement of liabilities and commitments in the normal course of business.
Our current cash and cash equivalents, restricted cash, short-term investments and proceeds and lines of credit/financing available to us and our anticipated cash
flows from operations will be sufficient to meet our anticipated working capital requirements and capital expenditures for at least the next 12 months. We prudently
manage our working capital to support our business and operations. We have been exploring and executing plans to reduce discretionary capital expenditures and
operational expenses and secure additional financing, including, but not limited to, obtaining additional credit facilities from banks in the normal course of business, re-
financing certain existing loans and credit facilities, issuance of asset-backed debt securities and raising funds through additional issuances of equity and/or debt in
public and/or private capital market transactions.
We have conducted the below debt and equity financing activities since our initial public offering:
•In December 2018, we completed an offering of US$750 million in aggregate principal amount of 3.75% convertible senior notes due 2023, or the 2023 Notes.
In connection with the 2023 Notes, we also entered into capped call transactions. The holders of the 2023 Notes may require us to repurchase all or a portion of
their notes for cash on December 1, 2021 at a repurchase price equal to 100% of the principal amount, plus accrued and unpaid interest. In November 2021, we
completed the repurchase relating to the 2023 Notes. US$746.8 million aggregate principal amount of the 2023 Notes were validly surrendered and not
withdrawn prior to the expiration of the repurchase right offer. The aggregate purchase price of these 2023 Notes was US$746.8 million. As of December 31,
2022, RMB22.1 million (US$3.2 million) of the net carrying amount of the 2023 Notes was included in the current liabilities.
•In March 2019, we completed an offering of US$1.2 billion in aggregate principal amount of 2.00% convertible senior notes due 2025, or the 2025 Notes. In
connection with the 2025 Notes, we also entered into capped call transactions. In February, 2023, we notified holders of the 2025 Notes that each holder has the
right to, between March 3, 2023 and March 30, 2023, require us to repurchase for cash all or part of their 2025 Notes on April 1, 2023 at a repurchase price equal
to 100% of the principal amount, plus accrued and unpaid interest.
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•In December 2020, we completed the offering of the US$800 million in aggregate principal amount of 4.00% convertible senior notes due 2026, or the 2026
Notes, and 40,000,000 ADSs at the price of US$17.50 per ADS. The underwriters exercised their option in full to purchase an additional US$100 million
aggregate principal amount of the 2026 Notes and their option in part to purchase 4,594,756 additional ADSs at the price of US$17.50 per ADS, which
transaction was closed on January 8, 2021. The holders of the 2026 Notes have the right to require us to repurchase for cash all or part of their notes on August 1,
2024 at a repurchase price equal to 100% of the principal amount, plus accrued and unpaid interest.
•In March 2022, we entered into subscription agreements with Baidu and a consortium of financial investors that include Oasis Management Company Ltd.,
pursuant to which these parties purchased from us, through a private placement, a total of 164,705,882 newly issued Class B ordinary shares and 304,705,874
newly issued Class A ordinary shares of our company, for a total purchase price of US$285 million in cash. In accordance with the subscription agreements,
Baidu subscribed for Class B ordinary shares, and the financial investors subscribed for Class A ordinary shares.
•In December 2022, we issued an aggregate amount of US$500 million convertible notes due January 2028, or the PAG Notes, to PAG. In February 2023, we
issued to PAG an additional US$50 million principal amount of the PAG Notes upon its exercise to subscribe for additional notes in full. The PAG Notes bear an
interest rate of 6% per annum and will mature on the fifth anniversary of the issuance date. Holders of the PAG Notes have the right to require us to repurchase
or repay for cash all or part of their notes, at a price equal to 120% and 130% of the principal amount of the PAG Notes on or shortly after the third anniversary of
the issuance date and the fifth anniversary of the issuance date, respectively.
•In January 2023, we completed a registered follow-on public offering of 76,500,000 ADSs at a public offering price of US$5.90 per ADS. The underwriters
exercised their option to purchase 9,975,000 additional ADSs at the price of US$5.90 per ADS in January 2023. We received net proceeds of US$500.0 million
from the follow-on offering, including the exercise of the underwriters’ option to purchase additional ADSs, after deducting the underwriters’ discounts and
commissions.
•In March 2023, we completed an offering of US$600 million in aggregate principal amount of 6.50% convertible senior notes due March 2028, or the 2028
Notes. Holders of the 2028 Notes may require us to repurchase all or a portion of their notes for cash on March 16, 2026 or in the event of certain fundamental
changes at a repurchase price equal to 100% of the principal amount, plus accrued and unpaid interest.
Under the terms of the indentures governing the 2023 Notes, 2025 Notes, 2026 Notes, PAG Notes and 2028 Notes, events of default include: (i) default in any
payment of interest or additional amounts as defined under the respective indenture for a period of 30 days; (ii) default in the payment of principal for the 2023 Notes,
2025 Notes, 2026 Notes and 2028 Notes when due and payable, or repurchase amount for the PAG Notes when due; (iii) failure by our company to comply with its
obligation to convert the notes upon exercise of a holder’s conversion right for a period of five business days; (iv) failure by our company to issue a Fundamental Change
Company Notice or a Make-Whole Fundamental Change as defined under the respective indenture or a specified corporate event when due for a period of five business
days; (v) failure by our company to comply with its obligations relating to consolidation, merger, sale, conveyance and lease under article 11 of the respective indenture;
(vi) failure by our company for 60 days after written notice from the trustee or by the trustee at the request of the holders of at least 25% in aggregate principal amount
of the respective notes then outstanding has been received by our company to comply with any of our other agreements contained in the respective notes or the
indenture; (vii) default by our company or any significant subsidiaries, as defined in Article 1, Rule 1-02 of Regulation S-X, with respect to any mortgage, agreement or
other instrument under which there may be outstanding, secured or evidenced any indebtedness in excess of US$60 million (or an equivalent amount in foreign
currency) for the 2023 Notes, 2025 Notes, 2026 Notes or 2028 Notes or in excess of US$100 million (or an equivalent amount in foreign currency) for the PAG Notes,
resulting in accelerated maturity or a failure to pay principal or interest when due, and such indebtedness is not discharged, or such acceleration is not otherwise cured or
rescinded, within 30 days; (viii) a delay in payment or discharge of a final judgment for the payment of US$60 million (or an equivalent amount in foreign currency) for
the 2023 Notes, 2025 Notes, 2026 Notes or 2028 Notes or the payment of US$100 million (or an equivalent amount in foreign currency) for the PAG Notes rendered
against us or any of our significant subsidiaries; (ix) we or any of our significant subsidiaries shall commence a voluntary case or other proceeding seeking liquidation,
reorganization or other relief; and (x) for the 2023 Notes, 2025 Notes, 2026 Notes or PAG Notes, an involuntary case or other proceeding shall be commenced against
our company or any significant subsidiary seeking liquidation, reorganization or other relief, and such involuntary case or other proceeding shall remain undismissed and
unstayed for a period of 30 consecutive days.
The indentures for these convertible notes define a “fundamental change” to include, among other things: (i) any person or group gaining control of our
company; (ii) any recapitalization, reclassification or change of our ordinary shares or the ADSs as a result of which these securities would be converted into, or
exchanged for, stock, other securities, other property or assets; (iii) the shareholders of our company approving any plan or proposal for the liquidation or dissolution of
our company; (iv) our ADSs ceasing to be listed on Nasdaq Stock Market; or (v) any change in or amendment to the laws, regulations and rules of the PRC resulting in
our
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company being legally prohibited from operating substantially all of the business operations conducted by our subsidiaries in mainland China, our variable interest
entities and subsidiaries of our variable interest entities or being unable to continue to derive the economic benefits from the business operations conducted by these
entities.
Upon the occurrence of an event of default, the trustee or the holders of at least 25% in aggregate principal amount may declare, in the case of the 2023 Notes,
2025 Notes, 2026 Notes or 2028 Notes, the whole principal of, or, in the case of the PAG Notes, 120% or 130% of the principal amount thereof depending on the
occurrence date, and accrued and unpaid interest on, all the notes to be due and payable immediately, subject to certain exceptions and conditions under the respective
indenture. We may also be required to pay additional interests. Upon the occurrence of a fundamental change, holders of these notes will have the right, at their option,
to require us to repurchase all of their notes or any portion of the principal amount, in the case of the 2023 Notes, 2025 Notes, 2026 Notes or 2028 Notes, or, in the case
of the PAG Notes, 120% or 130% of the principal amount thereof depending on the when the fundamental change occurs, and accrued and unpaid interests. In the event
of a fundamental change, we may also be required to issue additional ADSs upon conversion of its convertible notes. As of December 31, 2022, there was no such event
of default or fundamental change.
We have also conducted the following asset-backed debt securities transactions and structured payable arrangements:
•In December 2018, our suppliers sold certain receivables due from us, which were recorded as accounts payable in our consolidated balance sheets totaling
RMB525.3 million to certain financial institutions at a discount. The factored receivables were further transferred to a securitization vehicle and used to
securitize debt securities issued to third-party investors with a stated interest rate ranging from 5.0%-5.5% for gross proceeds of RMB446.0 million.
Concurrently, we also entered into an agreement with the financial institutions to extend the repayment of the underlying payables to mirror the repayment terms
for the asset-back debt securities with maturities in December 2019 and December 2020.
•In November 2019, July 2021 and November 2021, we entered into similar reverse factoring arrangements whereby our suppliers sold certain receivables due
from us amounting to RMB587.0 million, RMB231.6 million and RMB633.9 million, respectively, to the financial institutions at a discount. The factored
receivables were recorded as accounts payable in our consolidated balance sheets. The factored receivables were further transferred to a securitization vehicle
and used to securitize debt securities issued to third-party investors with a stated interest of 5.1%, 5.5% and 4.5% for gross proceeds of RMB500.0 million,
RMB200.0 million and RMB570.0 million, respectively. Concurrently, we also entered into an agreement with the financial institutions to extend the repayment
of the underlying payables to mirror the repayment terms for the corresponding asset-back debt securities which matured in November 2021, July 2022 and
November 2022, respectively. The borrowings have an effective interest rate of 5.97%, 8.40% and 8.26%, respectively.
•In 2020, 2021 and 2022, we entered into structured payable arrangements with banks or other financial institutions, pursuant to which the suppliers’ receivables
collection process was accelerated through selling their receivables from us to the banks or other financial institutions at a discount. We were legally obligated to
pay the banks or other financial institutions in the amount totaling RMB395.9 million, RMB1,058.6 million and RMB1,497.4 million (US$217.1 million),
respectively, which will mature within one year. As of December 31, 2022, the outstanding borrowings from the factoring arrangements was RMB754.6 million
(US$109.4 million), which is repayable within one year.
In terms of business and operational initiatives, we will continue to (i) pursue diversified monetization models, including membership services, online advertising
services, content distribution, online games, IP licensing, talent agency, and online literature, (ii) work closely with our advertising customers and suppliers to optimize
our payment terms, and (iii) strengthen our content production capabilities and improve production efficiency to enhance content quality, increase return on investment,
and manage our cost and operating expenses, in particular content costs.
As we will continue to invest in both original and licensed content and technology to support our growth, we may not be able to improve our working capital or
liquidity position or to generate or maintain positive net cash flows beyond the next 12 months. We have taken a series of measures to mitigate such risks, including
stepping up efforts in accounts receivable collection as well as actively controlling spending through careful budget formulation, stringent budge implementation and
payment arrangements with longer payment period. We are also exploring opportunities to obtain additional financing, including financing from new and/or existing
shareholders, and financing generated through capital market transactions and commercial banks. The issuance and sale of additional equity would result in further
dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict our
operations. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—We have substantial indebtedness and we may continue to
incur substantial additional indebtedness in the future, which could adversely affect our financial health and our ability to generate sufficient cash to satisfy our
outstanding and future debt obligations on a timely manner. Deterioration of our cash flow position could materially and adversely affect our ability to service our
indebtedness and continue our operations.” and “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—We have significant working
capital requirements and have in the past
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experienced working capital deficits. If we experience such working capital deficits in the future, our business, liquidity, financial condition and results of operations
may be materially and adversely affected.” Despite our efforts to pursue our fund raising plans and business initiatives, the successful completion of these plans is
dependent on factors outside of our control and there can be no assurances that new financings or other transactions will be available to us on commercially acceptable
terms, or at all. In addition, the potential worsening global economic conditions and the recent disruptions to, and volatility in, the global financial markets resulting
from factors such as intensified geopolitical conflicts and other adverse changes in macro-economic conditions may adversely impact our ability to secure additional
financing.
As of December 31, 2022, 36.7% of our cash and cash equivalents, restricted cash and short-term investments were held in mainland China, while 30.6% of our
cash and cash equivalents, restricted cash and short-term investments were held by the variable interest entities and their subsidiaries.
Although we consolidate the results of the variable interest entities and their subsidiaries, we only have access to the assets or earnings of the variable interest
entities and their subsidiaries through our contractual arrangements with the variable interest entities and their shareholders.
See “Item 4. Information on the Company—C. Organizational Structure” For restrictions and limitations on liquidity and capital resources as a result of our
corporate structure, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Holding company structure.” We may make
additional capital contributions to our mainland China subsidiaries, establish new mainland China subsidiaries and make capital contributions to these new mainland
China subsidiaries, make loans to our mainland China subsidiaries, or acquire offshore entities with business operations in mainland China in offshore transactions.
However, most of these uses are subject to PRC regulations and approvals. For example:
•capital contributions to our mainland China subsidiaries must be registered with the SAMR or its local counterparts, and reported to the competent commerce
authorities through the enterprise registration system and the National Enterprise Credit Information Publicity System; and
•loans by us to our mainland China subsidiaries to finance their activities cannot exceed the difference between its registered capital and its total investment
amount as recorded in the foreign investment comprehensive management information system or, as an alternative, only procure loans subject to the Risk-
Weighted Approach and the Net Asset Limits and must be registered with SAFE or its local branches or filed with SAFE in its information system. Any loan to
be provided by us to our mainland China subsidiaries, variable interest entities and their subsidiaries with a term of more than one year must be recorded and
registered by the NDRC or its local branches.
See “Item 4. Information on the Company—B. Business Overview—Government Regulations—Regulations on Foreign Exchange.” There is, in effect, no
statutory limit on the amount of capital contribution that we can make to our mainland China subsidiaries. This is because there is no statutory limit on the amount of
registered capital for our mainland China subsidiaries, and we are allowed to make capital contributions to our mainland China subsidiaries by subscribing for their
initial registered capital and increased registered capital, provided that the mainland China subsidiaries complete the relevant filing and registration procedures. With
respect to loans to the mainland China subsidiaries by us, (i) if the relevant mainland China subsidiaries determine to adopt the traditional foreign exchange
administration mechanism, or the Current Foreign Debt mechanism, the outstanding amount of the loans shall not exceed the difference between the total investment
and the registered capital of the mainland China subsidiaries and there is, in effect, no statutory limit on the amount of loans that we can make to our mainland China
subsidiaries under this circumstance since we can increase the registered capital of our mainland China subsidiaries by making capital contributions to them, subject to
the completion of relevant registrations, and the difference between the total investment and the registered capital will increase accordingly; and (ii) if the relevant
mainland China subsidiaries determine to adopt the foreign exchange administration mechanism as provided in the PBOC Notice No. 9, or the Notice No. 9 Foreign Debt
mechanism, the risk-weighted outstanding amount of the loans, which shall be calculated based on the formula provided in the PBOC Notice No. 9, shall not exceed
200% of the net asset of the relevant mainland China subsidiary. According to the PBOC Notice No. 9, after a transition period of one year since the promulgation of the
PBOC Notice No. 9, the PBOC and SAFE will determine the cross-border financing administration mechanism for the foreign-invested enterprises after evaluating the
overall implementation of the PBOC Notice No. 9. As of the date hereof, neither PBOC nor SAFE has promulgated and made public any further rules, regulations,
notices or circulars in this regard. It is uncertain which mechanism will be adopted by PBOC and SAFE in the future and what statutory limits will be imposed on us
when providing loans to our mainland China subsidiaries.
A majority of our future revenues are likely to continue to be in the form of Renminbi. Under existing PRC foreign exchange regulations, Renminbi may be
converted into foreign exchange for current account items, including profit distributions, interest payments and trade and service related foreign exchange transactions.
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Our mainland China subsidiaries may convert Renminbi amounts that they generate in their own business activities, including technical consulting and related
service fees pursuant to their contracts with the variable interest entities, as well as dividends they receive from their own subsidiaries, into foreign exchange and pay
them to their non-mainland China parent companies in the form of dividends. However, current PRC regulations permit our mainland China subsidiaries to pay
dividends to us only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. Each of our mainland China
subsidiaries is required to set aside at least 10% of its after-tax profits after making up previous years’ accumulated losses each year, if any, to fund certain reserve funds
until the total amount set aside reaches 50% of its registered capital. These reserves are not distributable as cash dividends.
The following table sets forth a summary of our cash flows for the periods indicated.
Summary Consolidated Cash Flows Data:
Net cash used for operating activities
Net cash provided by investing activities
Net cash provided by/(used for)
financing activities
Effect of exchange rate changes on cash, cash equivalents and restricted cash
Net increase/(decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at the beginning of the year
Cash, cash equivalents and restricted cash at the end of the year
Net cash used for operating activities
2020
RMB
For the year ended December 31,
2021
RMB
(in thousands)
2022
RMB
US$
(5,411,071)
159,296
9,373,906
(91,293)
4,030,838
6,909,674
10,940,512
(5,951,847)
1,262,350
(2,959,455)
(216,696)
(7,865,648)
10,940,512
3,074,864
(70,569)
265,980
4,468,863
122,418
4,786,692
3,074,864
7,861,556
(10,232)
38,564
647,925
17,748
694,005
445,813
1,139,818
Net cash used for operating activities decreased from RMB5,951.8 million in 2021 to RMB70.6 million (US$10.2 million) in 2022, primarily due to a decrease in
net loss by RMB5,990.7 million from RMB6,108.5 million of net loss in 2021 to RMB117.8 million (US$17.1 million) of net loss in 2022, as adjusted by a decrease of
non-cash items by RMB3,202.5 million from RMB17,742.9 million in 2021 to RMB14,540.4 million (US$2,108.2 million) in 2022 and a decrease of cash outflow from
changes in operating assets and liabilities by RMB3,093.0 million from RMB17,586.2 million in 2021 to RMB14,493.2 million (US$2,101.3 million) in 2022. The
decrease of cash outflow from changes in operating assets and liabilities was primarily due to decreased licensed copyrights and produced content, offset by increased
accounts payable. The decrease in non-cash items was primarily due to decreases of amortization and impairment of licensed copyrights and produced content.
Net cash used for operating activities increased from RMB5,411.1 million in 2020 to RMB5,951.8 million in 2021, primary due to an increase of cash outflow for
operating assets and liabilities by RMB972.9 million from RMB16,613.3 million in 2020 to RMB17,586.2 million in 2021 and a decrease of non-cash items by
RMB466.5 million from RMB18,209.4 million in 2020 to RMB17,742.9 million in 2021, offset by a decrease in net loss by RMB898.7 million from RMB7,007.2
million in 2020 to RMB6,108.5 million in 2021. The increase of cash outflow for operating assets and liabilities was primarily due to increased licensed copyrights and
produced content, offset by increased accounts payable. The decrease in non-cash items was primarily due to decreases of amortization and impairment of licensed
copyrights, decreases of provision for credit loss, which was offset by increases of amortization and impairment of produced content, driven by business expansion to
maintain our market leadership.
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Net cash provided by investing activities
Net cash provided by investing activities decreased from RMB1,262.4 million in 2021 to RMB266.0 million (US$38.6 million) in 2022, primarily due to (i)
decreased cash outflow from purchasing of debt securities by RMB15,515.6 million from RMB19,975.1 million in 2021 to RMB4,459.5 million (US$646.5 million) in
2022, (ii) decreased cash inflow from maturities of debt securities by RMB16,956.5 million from RMB21,987.1 million in 2021 to RMB5,030.6 million (US$729.4
million) in 2022, and (iii) decreased cash outflow from purchase of long-term investments by RMB308.1 million from RMB386.4 million in 2021 to RMB78.3 million
(US$11.3 million) in 2022.
Net cash provided by investing activities increased from RMB159.3 million in 2020 to RMB1,262.4 million in 2021, primary due to (i) increased cash outflow
from purchasing of debt securities by RMB4,794.4 million from RMB15,180.7 million in 2020 to RMB19,975.1 million in 2021, and (ii) increased cash inflow from
maturities of debt securities by RMB5,352.8 million from RMB16,634.2 million in 2020 to RMB21,987.1 million in 2021, and (iii) decreased purchase of long-term
investments by RMB664.4 million from RMB1,050.8 million in 2020 to RMB386.4 million in 2021.
Net cash provided by/(used for) financing activities
Net cash provided by financing activities increased from cash outflow of RMB2,959.5 million in 2021 to inflow of RMB4,468.9 million (US$647.9 million) in
2022, primarily due to (i) the increase in net cash inflow from issuance of convertible senior notes of RMB3,448.6 million (US$500.0 million) in 2022, (ii) the decrease
in net cash outflow used for repayments of convertible senior notes, which was RMB4,751.0 million in 2021.
Net cash provided by financing activities decreased from cash inflow of RMB9,373.9 million in 2020 to cash outflow of RMB2,959.5 million in 2021, primarily
due to (i) decreases of net cash inflow of issuance of convertible senior notes and follow-on offering by RMB8,475.1 million from RMB9,607.9 million in 2020 to
RMB1,132.7 million in 2021, and (ii) increases of repayments of convertible senior notes, which was RMB4,751.0 million in 2021.
Material Cash requirements
Our material cash requirements as of December 31, 2022 and any subsequent period primarily include our capital expenditures, long-term debt obligations,
capital lease obligations, operating lease obligations, and purchase obligations.
Our capital expenditures are incurred primarily in connection with leasehold improvements, computers and servers. Our capital expenditures were RMB240.8
million, RMB261.5 million and RMB174.3 million (US$25.3 million) in the years ended December 31, 2020, 2021 and 2022, respectively.
Our capital expenditures may decrease in the future as we continue to enhance overall cost control. We currently plan to fund these expenditures with our current
cash and cash equivalents, short-term investments and anticipated cash flow generated from our operating activities.
We intend to fund our existing and future material cash requirements with our existing cash and cash equivalents, restricted cash, short-term investments and
other financing alternatives. We will continue to make cash commitments, including capital expenditures, to support the growth of our business.
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The following table sets forth our contractual obligations by specified categories as of December 31, 2022.
(1)
Long-Term Debt and Convertible Senior
Notes Obligations
Capital Lease Obligations
Operating Lease Obligations
Purchase Obligations
(3)
(4)
(2)
Total
Notes:
Total
2023
Payment due by period
2024
2025
(in RMB thousands)
2026
2027 and after
21,438,429
59,487
782,670
13,028,484
35,309,070
644,782
31,533
102,756
5,158,272
5,937,343
620,748
27,954
79,602
3,628,458
4,356,762
8,816,423
6,664,112
4,692,364
-
74,799
2,641,375
11,532,597
-
70,441
1,264,544
7,999,097
-
455,072
335,835
5,483,271
(2)On December 4, 2018, we issued US$750 million convertible senior notes (the “2023 Notes”). The 2023 Notes are senior, unsecured obligations of us, and interest is payable semi-annually in cash
at a rate of 3.75% per annum on June 1 and December 1 of each year, beginning on June 1, 2019. The 2023 Notes will mature on December 1, 2023 unless redeemed, repurchased or converted prior
to such date. The holders may require us to repurchase all or a portion of the 2023 Notes for cash on December 1, 2021, or upon a fundamental change. In 2021, we redeemed US$746.8 million
aggregate principal amount of the 2023 Notes as requested by the holders.
On March 29, 2019, we issued US$1,200 million convertible senior notes (the “2025 Notes”). The 2025 Notes are senior, unsecured obligations of us, and interest is payable semi-annually in
cash at a rate of 2.00% per annum on October 1 and April 1 of each year, beginning on October 1, 2019. The 2025 Notes will mature on April 1, 2025 unless redeemed, repurchased or
converted prior to such date. The holders may require us to repurchase all or a portion of the 2025 Notes for cash on April 1, 2023, which may result in a material cash outlay of our company.
The holders of the 2025 Notes may also require us to repurchase all or a portion of the 2025 Notes for cash upon a fundamental change.
On December 21, 2020, we issued US$800 million convertible senior notes and offered an additional US$100 million principal amount simultaneously, issuable pursuant to the underwriters’
exercise of option to purchase additional notes. On January 8, 2021, the additional US$100 million principal amount was issued pursuant to the underwriters’ exercise of their option. The
convertible senior notes issued on December 21, 2020 and January 8, 2021 (collectively, the “2026 Notes”) are senior, unsecured obligations of us, and interest is payable semi-annually in
cash at a rate of 4.00% per annum on June 15 and December 15 of each year, beginning on June 15, 2021. The 2026 Notes will mature on December 15, 2026, unless repurchased, redeemed
or converted prior to such date. The holders may require us to repurchase all or a portion of the 2026 Notes for cash on August 1, 2024, or upon a fundamental change.
On December 30, 2022, we issued an aggregate amount of US$500 million convertible senior notes due January 2028, or the PAG Notes, to PAG. In February 2023, we issued to PAG an
additional US$50 million principal amount of the PAG Notes upon its exercise to subscribe for additional notes in full. The PAG Notes, secured by certain collateral arrangements, bear an
interest rate of 6% per annum and will mature on the fifth anniversary of the issuance date. Holders of the PAG Notes have the right to require us to repurchase or repay for cash all or part of
their notes, at a price equal to 120% and 130% of the principal amount of the PAG Notes on or shortly after the third anniversary of the issuance date and the fifth anniversary of the issuance
date, respectively. They also have the right to require us to repurchase for cash all or part of their notes in the event of certain fundamental changes and events of defaults. For further
information, please see “Loans Payable” under Note 13 and “Convertible Senior Notes” under Note 14 to our consolidated financial statements included elsewhere in this annual report.
(3)Capital lease obligations represent our obligations for the finance leases of fixed assets.
(4)Operating lease obligations represent our obligations for leasing office premises and internet data center facilities.
(5)Purchase obligations represent our future minimum payments under non-cancelable agreements for licensed copyrights, produced content and property management fees.
Other than the contractual obligations set forth above, we do not have any contractual obligations that are long-term debt obligations, capital/operating lease
obligations, purchase obligations or other long-term liabilities reflected on our balance sheet as of December 31, 2022.
Holding Company Structure
iQIYI, Inc. is a holding company with no material operations of its own. We conduct our operations primarily through our mainland China subsidiaries, the
variable interest entities and their subsidiaries in mainland China. As a result, iQIYI, Inc.’s ability to pay dividends depends upon dividends paid by our mainland China
subsidiaries. If our existing mainland China subsidiaries or any newly formed ones incur debt on their own behalf in the future, the instruments governing their debt
may restrict their ability to pay dividends to us. In addition, our wholly foreign-owned subsidiaries in mainland China are permitted to pay dividends to us only out of
their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Under PRC law, each of our subsidiaries and the variable
interest entities in mainland China is required to set aside at least 10% of its after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve
funds reach 50% of its registered capital. In addition, each of our wholly foreign-owned subsidiaries in mainland China may allocate a portion of its after-tax profits
based on PRC accounting standards to enterprise expansion funds and staff bonus and welfare funds at its discretion, and the variable interest entities may allocate a
portion of
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their after-tax profits based on PRC accounting standards to a discretionary surplus fund at its discretion. The statutory reserve funds and the discretionary funds are not
distributable as cash dividends. Remittance of dividends by a wholly foreign-owned company out of mainland China is subject to examination by the banks designated
by SAFE. Our mainland China subsidiaries have not paid dividends and will not be able to pay dividends until they generate accumulated profits and meet the
requirements for statutory reserve funds.
The table below sets forth the respective revenue contribution and assets of iQIYI, Inc. and our wholly-owned subsidiaries and the variable interest entities as of
the dates and for the periods indicated:
iQIYI, Inc. and its wholly-owned subsidiaries
Variable interest entities
Total
Notes:
(1)
Total revenues
For the year ended December 31,
2021
2020
7.7%
92.3%
100.0%
5.9%
94.1%
100.0%
2022
7.6%
92.4%
100.0%
(6)The percentages exclude the inter-company transactions and balances between iQIYI, Inc. and our wholly-owned subsidiaries and the variable interest entities.
iQIYI, Inc. and its wholly-owned subsidiaries
Variable interest entities
Total
C.RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
Technology
2020
53.0%
47.0%
100.0%
Total assets
As of December 31,
2021
35.7%
64.3%
100.0%
2022
38.4%
61.6%
100.0%
Technology is the bedrock of our products and services. Approximately half of our employees, excluding general and administrative employees, are engineers
dedicated to technological innovation and breakthrough. We utilize AI technology to drive the entire business, including video content creation, purchase, production,
tagging, distribution, monetization and customer service, to achieve automation and intelligence in the entire business process. Our advanced technologies facilitate
better content production, enhanced operation efficiency and superior user experience. To maintain our industry-leading position, we have established extensive
cooperation with many industry-leading research institutes.
Technologies to Enhance Content Production and Operation Efficiency
We empower content production and monetization cycle by applying various technologies. We have developed and put into use an integral set of technology
infrastructures and tools, comprising of: (i) intelligent integrated production systems that improve digital workflow by integrating and streamlining the elements of video
production; (ii) production business intelligence systems and integrated production tool sets that empower content producers with AI-powered decision-making, and (iii)
other tools that support the facilitation of the content production process.
Leveraging our massive user data and big data analytics, we have developed a comprehensive system for script evaluation and casting. Our holistic data analysis
supports content investment strategy through advanced algorithms that forecast video views and film box office, which result in more monetization opportunities and
higher user value. Promising monetization capabilities then encourage the generation and distribution of more high-quality content on iQIYI platform, creating a
virtuous cycle.
Our technologies also enhance our efficiency. We have leveraged AI, big data, and cloud computing technologies to distribute our massive content to targeted
users accurately. Our user and content tagging system precisely analyzes user profile and conduct content recommendation. We provide personalized content
distribution by intelligent recommendations. We balance user experience with video monetization by utilizing personalized and automatic advertising customized to
video scenarios, video-in, video-out and other ad-marketing technology. We provide timely response and feedback service through AI-based autonomous service robots
and online customer service center.
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Technologies to Enhance User Experience
We apply advanced deep learning technology to areas such as advanced content tagging, user profiling, developing knowledge graph and content
recommendation. Users are given recommendations based on automatic classification of their tags.
In addition to content recommendations catering to users’ interests, our advanced video, audio and AI technologies provide users with superior viewing
experience in a cost-effective manner. We are one of a few streaming entertainment service providers in mainland China providing concurrent 4K/8K high-definition
video quality, HDR (High Dynamic Range) imaging, Dolby Atmos® audio effect and immersive experience via 360 VR for live video streaming. We provide users
with clear and smooth video play through adaptive coding technology. Our iQIYI VR app provides an immersive viewing experience via 360 VR. QiYu 4K VR HMD is
one of the first 4K mobile VR devices in the world with 3D audio. Leveraging our big data analytics, features such as AI Radar and Watch Me Only support real-time
recognition and search of information from video images, or allow users to view only the segments featuring particular artists. We have one of the world’s largest P2P
and CDN-based HCDN (hybrid content delivery network), which seamlessly distributes and transmits massive internet video with high quality and low bandwidth cost.
In the years ended December 31, 2020, 2021 and 2022, our research and development expenditures, including share-based compensation expenses for research
and development staff, were RMB2,675.5 million, RMB2,794.9 million and RMB1,899.2 million (US$275.4 million), respectively, representing 9.0%, 9.1% and 6.5%
of our total revenues for the years ended December 31, 2020, 2021 and 2022, respectively. Our research and development expenses consist primarily of personnel-
related costs (including share-based compensation expenses).
D.TREND INFORMATION
Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the period from
January 1, 2020 to December 31, 2022 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 or financial conditions.
E.CRITICAL ACCOUNTING ESTIMATES
We prepare our financial statements in conformity with U.S. GAAP, which requires us to make estimates and assumptions that affect our reporting of, among
other things, assets and liabilities, contingent assets and liabilities and total revenues and expenses. On an on-going basis, we evaluate our estimates based on historical
experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other sources. Since our financial reporting process inherently relies on the use of estimates
and assumptions, our actual results could differ from what we expect.
We consider an accounting estimate to be critical if: (i) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the
time the accounting estimate was made, and (ii) changes in the estimate that are reasonably likely to occur from period to period or use of different estimates that we
reasonably could have used in the current period, would have a material impact on our financial condition or results of operations. Such critical estimates are discussed
below. For further information on our other significant accounting estimates, see Note 2 to our consolidated financial statements included elsewhere in this annual
report.
Impairment of content assets
We review our film groups and individual content for impairment when there are events or changes in circumstances that indicate the fair value of a film group or
an individual content may be less than its unamortized costs. When such events or changes in circumstances are identified, we perform a quantitative assessment to
determine whether the fair value of a film group or an individual content is less than its unamortized film costs.
For the mainland China film group, we use a discounted cash flow approach to estimate the fair value, which requires the use of inputs such as the forecasted
future revenues, costs and operating expenses attributable to the film group and the discount rate. Our estimates of these inputs require subjective management judgment
and are inherently uncertain. Changes in our estimates of these inputs may cause us to realize material write-downs in the future. The quantitative impairment
assessment we performed with the assistance of a third-party valuation firm as of December 31, 2022 indicated that the fair value of our mainland China film group is in
excess of their carrying value and, therefore, did not result in an impairment.
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For the fair value of the produced content predominantly monetized on its own, we use a discounted cash flow approach to estimate the fair value, which requires
the use of inputs include forecasted future revenues, production costs required to complete the content and exploitation and participation costs. Based on the above
assessment, certain produced content predominantly monetized on its own are determined to be impaired and re-measured to the fair value as of each quarter end.
Amortization of content assets
Based on factors including historical and estimated future viewership consumption patterns, our content assets (licensed copyrights and produced content) are
amortized using an accelerated method by content categories over the shorter of each content’s contractual period or estimated useful lives within ten years, beginning
with the month of first availability. We review factors that impact the amortization of the content assets on a regular basis, such as the estimates of future viewership
consumption patterns and estimated useful lives. Our estimates related to these factors require complex and subjective management judgment and any changes in our
estimates of future viewership consumption patterns and estimated useful lives may cause us to realize different amounts of amortization in future periods.
Critical Accounting Policies and Judgments
The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to
changes in conditions and assumptions are factors that should be considered when reviewing our financial statements. For further information on our significant
accounting policies, see Note 2 to our consolidated financial statements included elsewhere in this annual report.
Consolidation of Affiliated Entities
In order to comply with PRC laws and regulations limiting foreign ownership of or imposing conditions on value-added telecommunication services, internet,
value-added telecommunication-based online advertising, online audio and video services and mobile application distribution businesses, we operate our internet
platform and conduct our value-added telecommunication-based online advertising, online audio and video services and mobile application distribution businesses
through our affiliated entities in mainland China by means of contractual arrangements. We have entered into certain exclusive agreements with the affiliated entities
through our subsidiaries, which obligate us to absorb losses of the affiliated entities that could potentially be significant to them or entitle us to receive economic benefits
from the affiliated entities that could potentially be significant to them. In addition, we have entered into certain agreements with the affiliated entities and the nominee
shareholders of affiliated entities, which enable us to direct the activities that most significantly affect the economic performance of the affiliated entities. Based on these
contractual arrangements, we consolidate the affiliated entities as required by ASC topic 810, Consolidation, because we hold all the variable interests of the variable
interest entities directly or through our subsidiaries, which are the primary beneficiaries of the variable interest entities. We will reconsider the initial determination of
whether a legal entity is a variable interest entity upon certain events listed in ASC 810-10-35-4 occurred. We will also continuously reconsider whether we are the
primary beneficiary of our affiliated entities as facts and circumstances change. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate
Structure.”
Revenue Recognition
Our revenues are derived principally from membership services, online advertising services and content distribution. Revenue is recognized when control of
promised goods or services is transferred to our customers in an amount of consideration to which an entity expects to be entitled to in exchange for those goods or
services. Value added taxes (“VAT”) are presented as a reduction of revenues. Our revenue recognition policies are set forth as follows.
Membership services
We offer membership services to subscribing members with various privileges, which primarily include access to exclusive and ad-free streaming of premium
content 1080P/4K high-definition video, Dolby Audio, and accelerated downloads and others.
When the receipt of membership fees is for services to be delivered over a period of time, the receipt is initially recorded as “Customer advances and deferred
revenue” on the consolidated balance sheets and revenue is recognized ratably over the membership period as services are rendered. Membership services revenue also
includes fees earned from subscribing members for on-demand content purchases and early access to premium content. We are the principal in our relationships where
partners, including consumer electronics manufacturers (TVs and cell phones), mobile operators, internet service providers and online payment agencies, provide access
to the membership services or payment processing services as we retain control over our service delivery to our subscribing members. Typically, payments made to the
partners, are recorded as cost of revenues. For the sale of the right to other membership
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services, through strategic cooperation with other parties, we recognize revenue on a net basis when we do not control the specified services before they are transferred to
the customer.
Online advertising services
We sell advertising services primarily to third-party advertising agencies and a small portion is sold directly to advertisers. Advertising contracts are signed to
establish the price and advertising services to be provided. Pursuant to the advertising contracts, we provide advertisement placements on our platforms in different
formats, including but not limited to video, banners, links, logos, brand placement and buttons. We perform a credit assessment of the customer to assess the
collectability of the contract price prior to entering into contracts. For contracts where we provide customers with multiple performance obligations, primarily for
advertisements to be displayed in different spots, placed under different forms and occur at different times, we would evaluate all the performance obligations in the
arrangement to determine whether each performance obligation is distinct. Consideration is allocated to each performance obligation based on its standalone selling
price and revenue is recognized as each performance obligation is satisfied through our display of the advertisements in accordance with the revenue contracts.
We provide various sales incentives to our customers for meeting certain cumulative purchase volume requirements, including cash rebates to certain third-party
advertising agencies and non-cash credits which can be used to acquire future online advertising services in certain bundled arrangements, which are negotiated on a
contract by contract basis with customers. We account for cash rebates granted to customers as variable consideration which is measured based on the most likely
amount of incentive to be provided to customers. Non-cash credits granted to customers are considered options to acquire additional services that provide customers with
a material right. The contract consideration related to these customer options to acquire additional services are deferred and recognized as revenue when future services
are transferred or when the options expire.
Content distribution
We generate revenues from sub-licensing content assets for cash or through nonmonetary exchanges mainly with other online video broadcasting companies. The
exclusive licensing agreements we enter into with the vendors has a specified license period and provide us rights to sub-license these content assets to other parties. We
enter into a non-exclusive sub-license agreement with a sub-licensee for a period that falls within the original exclusive license period. For cash sub-licensing
transactions, we are entitled to receive the sub-license fee under the sub-licensing arrangements and do not have any future obligation once we have provided the
underlying content to the sub-licensee (which is provided at or before the beginning of the sub-license period). The sub-licensing of content assets represents a license of
functional intellectual property which grants a right to use our content assets and is recognized at the point in time when the content asset is made available for the
customer’s use and benefit.
We also enter into nonmonetary transactions to exchange online broadcasting rights of content assets with other online video broadcasting companies from time
to time. The exchanged content assets provide rights for each party to broadcast the content assets received on its own platform only. Each transferring party retains the
right to continue broadcasting the exclusive content on its own platform and/or sublicense the rights to the content it surrendered in the exchange. We account for these
nonmonetary exchanges based on the fair value of the asset received. Barter sublicensing revenues are recognized in accordance with the same revenue recognition
criteria above. We estimate the fair value of the content assets received using a market approach based on various factors, including the purchase price of similar non-
exclusive and/or exclusive contents, broadcasting schedule, cast and crew, theme, popularity and box office. The transaction price of barter transaction revenues is
calculated on the individual content asset basis. For a significant barter sublicensing transaction, we further review the fair value by analyzing against the cost of the
content assets bartered out and/or engage a third-party valuation firm to assess the reasonableness of its fair value. The attributable cost of sublicensing transactions,
whether for cash or through nonmonetary exchanges, is recognized as cost of revenues through the amortization of the sublicensing right component of the exclusive
content asset.
Long-term investments
Our long-term investments consist of equity securities without readily determinable fair values, equity method investments, available-for-sale debt securities
accounted for at fair value and equity securities with readily determinable fair value.
Equity investments, except for those accounted for under the equity method, those that result in consolidation of the investee and certain other investments, are
measured at fair value in accordance with ASC topic 321, Investments-Equity Securities (“ASC 321”) and any changes in fair value are recognized in earnings. For
equity securities without readily determinable fair values and do not qualify for the existing practical expedient in ASC topic 820, Fair Value Measurements and
Disclosures (“ASC 820”) to estimate fair value using the net asset value per share (or its equivalent) of the investment, we elected to use the measurement alternative to
measure those investments at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly
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transactions for identical or similar investments of the same issuer, if any. Equity securities with readily determinable fair values are measured at fair value, and any
changes in fair value are recognized in earnings.
Investments in entities in which we can exercise significant influence and hold an investment in voting common stock or in-substance common stock (or both) of
the investee but do not own a majority equity interest or control are accounted for using the equity method of accounting in accordance with ASC topic 323, Investments-
Equity Method and Joint Ventures (“ASC 323”). Under the equity method, we initially record our investments at cost and the difference between the cost of the equity
investee and the amount of the underlying equity in the net assets of the equity investee is accounted for as if the investee was a consolidated subsidiary. We
subsequently adjust the carrying amount of the investments to recognize our proportionate share of each equity investee’s net income or loss into earnings after the date
of investment. When calculating its proportionate share of each equity investee’s net income or loss, we adjust the net income or loss of equity investee to include
accretion of preferred stock that is classified in temporary equity in the equity investee’s financial statements. Intra-entity profits and losses shall be eliminated until
realized by us or investee as if the investee was consolidated. We will discontinue applying the equity method if an investment (plus additional financial support
provided to the investee, if any) has been reduced to zero. When we have other investments in our equity-method investee and are not required to advance additional
funds to the investee, we would continue to report our share of equity method losses in our consolidated statements of comprehensive loss after our equity-method
investment in ordinary shares has been reduced to zero, to the extent of and as an adjustment to the adjusted basis of our other investments in the investee. We evaluate
the equity method investments for impairment under ASC 323. An impairment loss on the equity method investments is recognized in the consolidated statements of
comprehensive loss when the decline in value is determined to be other-than-temporary.
Available-for-sale debt securities are convertible debt instruments issued by private companies and investments in equity securities that are redeemable at our
option, which are measured at fair value, with interest income recorded in earnings and unrealized gains or losses recorded in accumulated other comprehensive income.
Produced content, net
We produce original content in-house and collaborates with external parties. Produced content primarily consists of films, episodic series, variety shows and
animations. The costs incurred in the physical production of original content include direct production costs, production overhead and acquisition costs. Produced
content also includes cash expenditures made to acquire a proportionate share of certain rights to films including profit sharing, distribution and/or other rights.
Exploitation costs are expensed as incurred. Participation costs are accrued using the individual-film-forecast-computation method, which recognizes the costs in the
same ratio as the associated ultimate revenue. Production costs for original content that are predominantly monetized in a film group are capitalized. Production costs for
original content predominantly monetized on its own are capitalized to the extent that they are recoverable from total revenues expected to be earned (“ultimate
revenue”); otherwise, they are expensed as cost of revenues.
Ultimate revenue estimates include revenue expected to be earned from all sources, including exhibition, licensing, or exploitation of produced content if we have
demonstrated a history of earning such revenue. We estimate ultimate revenue to be earned during the estimated useful lives of produced content based on anticipated
release patterns and historical results of similar produced content, which are identified based on various factors, including cast and crew, target audience and popularity.
The capitalized production costs are reported separately as noncurrent assets with caption of “Produced content, net” on the consolidated balance sheets.
Based on factors including historical and estimated future viewership consumption patterns, we amortize film costs for produced content that is predominantly
monetized in a film group. For produced content that is monetized on its own, we consider historical and estimated usage patterns to determine the pattern of
amortization for film costs. Based on the estimated patterns, we amortize produced content using an accelerated method over its estimated useful lives within ten years,
beginning with the month of first availability and such costs are included in “Cost of revenues” in the consolidated statements of comprehensive loss.
Licensed copyrights, net
Licensed copyrights consist of professionally produced content, such as films, television series, variety shows and other video content acquired from external
parties. The license fees are capitalized and, unless prepaid, a corresponding liability is recorded when the cost of the content is known, the content is accepted by us in
accordance with the conditions of the license agreement and the content is available for its first showing on our platforms. Licensed copyrights are presented on the
consolidated balance sheets as current and non-current based on estimated time of usage.
The licensed copyrights include the right to broadcast and, in some instances, the right to sublicense. The broadcasting right, refers to the right to broadcast the
content on our own platforms and the sublicensing right, refers to the right to sublicense the
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underlying content to external parties. When licensed copyrights include both broadcasting and sublicensing rights, the content costs are allocated to these two rights
upon initial recognition, based on the relative proportion of the estimated total revenues that will be generated by each right over its estimated useful lives.
For the right to broadcast the contents on our own platforms that generates online advertising and membership services revenues, based on factors including
historical and estimated future viewership patterns, the content costs are amortized using an accelerated method by content categories over the shorter of each content’s
contractual period or estimated useful lives within ten years, beginning with the month of first availability. Content categories accounting for most of our content include
newly released drama series, newly released movies, animations, library drama series and library movies. Estimates of future viewership consumption patterns and
estimated useful lives are reviewed periodically, at least on an annual basis and revised, if necessary. Revisions to the amortization patterns are accounted for as a change
in accounting estimate prospectively in accordance with ASC topic 250, Accounting Changes and Error Corrections (“ASC 250”). For the right to sublicense the
content to external parties that generates direct content distribution revenues, the content costs are amortized based on its estimated usage pattern and recorded as cost of
revenues.
Impairment of licensed copyrights and produced content
Our business model is mainly subscription and advertising based, as such the majority of the content assets (licensed copyrights and produced content) are
predominantly monetized with other content assets, whereas a smaller portion of the content assets are predominantly monetized at a specific title level such as variety
shows and investments in a proportionate share of certain rights to films including profit sharing, distribution and/or other rights. Because the identifiable cash flows
related to content launched on the mainland China platform are largely independent of the cash flows of other content launched on the overseas platform, we have
identified two separate film groups. We review our film groups and individual content for impairment when there are events or changes in circumstances that indicate
the fair value of a film group or individual content may be less than its unamortized costs. Examples of such events or changes in circumstances include, a significant
adverse change in technological, regulatory, legal, economic, or social factors that could affect the fair value of the film group or the public’s perception of a film or the
availability of a film for future showings, a significant decrease in the number of subscribers or forecasted subscribers, or the loss of a major distributor, a change in the
predominant monetization strategy of a film that is currently monetized on its own, actual costs substantially in excess of budgeted costs, substantial delays in
completion or release schedules, or actual performance subsequent to release failing to meet expectations set before release such as a significant decrease in the amount
of ultimate revenue expected to be recognized.
When such events or changes in circumstances are identified, we assess whether the fair value of an individual content (or film group) is less than its unamortized
film costs, determines the fair value of an individual content (or film group) and recognizes an impairment charge for the amount by which the unamortized capitalized
costs exceed the individual content’s (or film group’s) fair value. We mainly use a discounted cash flow approach to determine the fair value of an individual content or
film group, for which the most significant inputs include the forecasted future revenues, costs and operating expenses attributable to an individual content or the film
group and the discount rate. An impairment loss attributable to a film group is allocated to individual licensed copyrights and produced content within the film group on
a pro rata basis using the relative carrying values of those assets as we cannot estimate the fair value of individual contents in the film group without undue cost and
effort.
ITEM 6 DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A.DIRECTORS AND SENIOR MANAGEMENT
The following table sets forth information regarding our executive officers and directors as of the date of this annual report.
Directors and Executive Officers
Junjie He
Yu Gong
Dou Shen
Fei Qi
Luyao Han
Weijian Shan
Sam Hanhui Sun
Conor Chia-hung Yang
Age
38
54
43
41
36
69
50
60
Position/Title
Chairman of the Board
Chief Executive Officer and Director
Director
Director
Director
Director
Independent Director
Independent Director
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Directors and Executive Officers
Jun Wang
Xiaohui Wang
Wenfeng Liu
Youqiao Duan
Xianghua Yang
Age
44
54
44
53
46
Chief Financial Officer
Chief Content Officer
Chief Technology Officer
Senior Vice President
Senior Vice President
Position/Title
Junjie He has served as our director since March 2021 and chairman of our board of directors since November 2022. Mr. He joined Baidu (Nasdaq: BIDU;
SEHK: 9888) in June 2019. Currently serving as a senior vice president of Baidu, Mr. He was appointed as the leader, and be in full charge, of the Mobile Ecosystem
Group (MEG) in May 2022. Prior to his current position, Mr. He oversaw Baidu’s M&A (Mergers & Acquisition), SIM (Strategic Investment Management), SOM
(Sales Operation and Management), and FP&A (Financial Planning & Analysis) departments. Prior to joining Baidu, he had rich working experience with investment
firms, including China International Capital Corporation (CICC), CITIC Private Equity, Warburg Pincus and Tibet Langrun Capital. Mr. He currently also serves on the
board of directors of Trip.com Group Limited (Nasdaq: TCOM; SEHK: 9961). Mr. He obtained his bachelor’s degree from the Guanghua School of Management,
Peking University in 2007.
Yu Gong is the founder, chief executive officer and director of our company, and oversees our overall strategy and business operations. Prior to founding iQIYI,
Dr. Gong was the president and chief operating officer of umessage.com, a top mobile internet services solution provider in China. Prior to that, Dr. Gong served in the
roles of vice president, senior vice president, and chief operating officer at Sohu.com, a Nasdaq-listed company (Nasdaq: SOHU), from 2003 to 2008. From 1999 to
2003, Dr. Gong was the founder and chief executive officer of focus.cn, the then largest real estate search website in China, which was sold to Sohu.com. Dr. Gong
received a bachelor’s degree, a master’s degree and a doctorate degree in automation control from Tsinghua University.
Dr. Dou Shen has served as our director since September 2019. Dr. Shen currently serves as executive vice president of Baidu (Nasdaq: BIDU; SEHK: 9888)
and the chief of Baidu AI Cloud, overseeing the development of AI Cloud. Dr. Shen has served in various other roles since joining Baidu in 2012, including in search,
display advertising and financial services group. Prior to Baidu, Dr. Shen served as a researcher at Microsoft’s AdCenter Labs. He was also founder of Buzzlabs, a
social media analytics company that was later acquired by IAC-owned CityGrid Media. Dr. Shen is currently the vice chair of KDDC (China chapter of ACM in data-
mining). Dr. Shen currently serves on the board of directors of Kuaishou Technology (SEHK: 1024). He was previously a director of Uxin Limited (Nasdaq: UXIN) and
a director of Trip.com Group Limited (Nasdaq: TCOM). Dr. Shen holds a bachelor’s degree in engineering from North China Electric Power University, a master’s
degree in engineering from Tsinghua University, and a Ph.D. in computer science from Hong Kong University of Science and Technology.
Fei Qi has served as our director since December 2022. Mr. Fei Qi joined Baidu (Nasdaq: BIDU; SEHK: 9888) in March 2021, and currently serves as vice
president of Baidu, chief of staff to CEO, and head of corporate strategic department. Prior to joining Baidu, Mr. Qi served as managing director at China International
Capital Corporation (CICC), where he had over 15 years of experience in the investment banking division with a focus on the TMT sector. Mr. Qi obtained his bachelor's
degree in management information systems from Tsinghua University in 2003.
Luyao Han has served as our director since November 2022. Ms. Luyao Han joined Baidu in February 2014, and currently serves as Head of Baidu’s
Investments, Mergers and Acquisitions Department. Ms. Han has rich work experience in strategic investments, M&A and investment banking industry. Prior to joining
Baidu, she worked in the Investment Banking Division of China International Capital Corporation Limited (SH: 601995; SEHK: 3908) from 2008 to 2014. Ms. Han
obtained her bachelor’s degree in economics from Peking University.
Weijian Shan has served as our director since December 2022. Mr. Shan is the executive chairman and cofounder of PAG – one of Asia’s leading investment
management groups. Between 1998 and 2010, Mr. Shan was co-managing partner of the private equity firm Newbridge Capital (now known as TPG Asia) and a partner
of TPG. Before Newbridge, Mr. Shan was a managing director at J.P. Morgan where he worked for five years. Mr. Shan was an assistant professor at the Wharton
School, the University of Pennsylvania for six years. Mr. Shan also worked at the World Bank in 1987. Mr. Shan is a Trustee of the British Museum. Mr. Shan is also
member of the International Advisory Council of Hong Kong Exchanges and Clearing Limited, and an independent director of Alibaba Group. Mr. Shan is the author of
three books: Out of the Gobi, Money Games and Money Machine. Mr. Shan holds an M.A. and a Ph.D. from the University of California, Berkeley, and an M.B.A. from
the University of San Francisco. Mr. Shan graduated with a major in English from the Beijing University of International Business and Economics.
Sam Hanhui Sun has served as our independent director since March 2018. Mr. Sun has been the Chairman of VSP Private Fund Management (Zhuhai) Co.,
Limited since 2021. From 2016 to 2020, Mr. Sun was a venture partner at Blue Lake Capital. From 2010
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to 2015, Mr. Sun served various positions at Qunar Cayman Islands Limited, a Nasdaq-listed company, including Qunar’s president in 2015 and its chief financial
officer from 2010 to 2015. From 2007 to 2009, Mr. Sun was the chief financial officer of KongZhong Corporation, a Nasdaq-listed company. From 2004 to 2007, Mr.
Sun served in several financial controller positions at Microsoft China R&D Group, Maersk China Co. Ltd., and SouFun.com. From 1995 to 2004, Mr. Sun worked in
KPMG’s auditing practice group. Mr. Sun currently serves as a director on the boards of Zhihu Inc. (NYSE: ZH) and Yiren Digital Ltd. (NYSE: YRD). Mr. Sun served
as an independent director of Fang Holdings Limited (NYSE: SFUN) from September 2010 to May 2019, Sunlands Technology Group (NYSE: STG) from March 2018
to July 2019 and CAR Inc. (formerly SEHK: 699) from August 2014 to July 2021, when CAR Inc. was privatized. Mr. Sun received a bachelor’s degree in business
administration from Beijing Institute of Technology. He is a Certified Public Accountant in China.
Conor Chia-hung Yang has served as our independent director since April 2022. Mr. Yang is the chief financial officer of Sunrate Holdings Limited since
February 2023. Mr. Yang was the co-founder and president of Black Fish Group Limited from 2017 to 2021. From 2007 to 2017, Mr. Yang served in several chief
financial officer positions at US-listed companies including Tuniu Corporation (Nasdaq: TOUR), E-Commerce China Dangdang Inc., and AirMedia Group Inc. Mr.
Yang was the chief executive officer of Rock Mobile Corporation from 2004 to 2007, and the chief financial officer of the Asia Pacific region for Cellstar Asia
Corporation from 1999 to 2004. Prior to that, Mr. Yang was a senior banker at Goldman Sachs (Asia) L.L.C., Lehman Brothers Asia Limited and Morgan Stanley Asia
Limited from 1992 to 1999. Mr. Yang currently serves as an independent director and chairman of the audit committee of Ehang Holdings Limited (Nasdaq: EH), I-Mab
(Nasdaq: IMAB), Tongcheng Travel Holdings Limited (HKSE: 0780) and UP Fintech Holding Limited (Nasdaq: TIGR). Mr. Yang received his master's degree in
business administration from the University of California, Los Angeles.
Jun Wang has served as our chief financial officer since February 2022. Mr. Jun Wang has been engaged with us in January 2018 and has been responsible for
advising on major capital market transactions since then. Prior to joining us, he served as a partner of Waterwood Group Limited, a private equity firm, from December
2015 to October 2017. From June 2014 to August 2015, he served as a managing director of TBP Consulting (Hong Kong) Limited. From July 2008 to June 2014, he
worked at J.P. Morgan Securities (Asia Pacific) Limited with his last position being the vice president of investment banking. Mr. Wang obtained a bachelor’s degree in
English from Tsinghua University in July 2000 and a master’s degree in business administration from the University of Chicago in June 2008.
Xiaohui Wang joined us in 2016 as our chief content officer. Mr. Wang is responsible for the procurement, production and operations of content business. From
2019, Mr. Wang also serves as president of our Professional Content Business Group (PCG). Prior to joining iQIYI, Mr. Wang was vice president of China National
Radio, where he served in various positions from 1990 to 2016, including director of news center from 2002 to 2003, vice president of Voice of China from 2003 to
2006, director of finance office from 2006 to 2007, and vice president from 2007 to 2016. Mr. Wang currently serves on the board of directors of Strawbear
Entertainment Group (SEHK: 2125). Mr. Wang holds a bachelor’s degree in journalism from Jilin University, a master’s degree in business administration from Cheong
Kong Graduate School of Business and a Ph.D. in literature from the Communication University of China.
Wenfeng Liu joined us in 2012 and is our chief technology officer. From 2019, Mr. Liu also serves as president of our Infrastructure and Intelligent Content
Distribution Business Group (IIG). Mr. Liu served as our vice president of technology, IT operation, product marketing and business development. Prior to joining us,
Mr. Liu served as research and development manager from 2011 to 2012 at VMware China Research Center, where he led the research, development and distribution of
various update and maintenance releases of Vmware vSphere projects. From 2003 to 2011, Mr. Liu served in various senior positions at Intel China Research Center,
including the role of research and development manager between 2007 to 2011, in which position he spearheaded Intel’s various global R&D initiatives. Mr. Liu holds a
bachelor’s degree and a master’s degree in computer science from Zhejiang University.
Youqiao Duan joined us in 2012 and is our senior vice president responsible for membership business and intelligent device business. Prior to joining us, Mr.
Duan was senior director responsible for investment business at Skyworth Group, where he worked from 2008 to 2012. Mr. Duan holds a bachelor’s degree in
automation control from Tsinghua University.
Xianghua Yang joined us in 2010 and is our senior vice president responsible for oversea business and motion picture business. Mr. Yang led iQIYI Pictures from
2014 to 2016 and led our mobile business department from 2010 to 2014. Prior to joining us, Mr. Yang served as deputy general manager of wireless business
department at Sohu.com, responsible for R&D, marketing and mobile business. Mr. Yang holds both bachelor’s and master’s degrees in hydraulic and hydroelectric
engineering from Tsinghua University.
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B.COMPENSATION
For the fiscal year ended December 31, 2022, we paid an aggregate of RMB56.7 million (US$8.2 million) in cash to our executive officers and directors. We
have not set aside or accrued any amount to provide pension, retirement or other similar benefits to our executive officers and directors. Our mainland China subsidiaries
and variable interest entities are required by law to make contributions equal to certain percentages of each employee’s salary for his or her pension insurance, medical
insurance, unemployment insurance and other statutory benefits and a housing provident fund. For share incentive grants to our officers and directors, see “—Share
Incentive Plans.”
Employment Agreements and Indemnification Agreements
We have entered into an employment agreement with each of our executive officers. Under these agreements, each of our executive officers is employed at will.
We may terminate employment for cause. We may also terminate an executive officer’s employment without cause upon 60-day advance written notice. In such case of
termination by us, we will provide severance payments to the executive officer as agreed by us and the executive officer. The executive officer may resign at any time
with a 60-day advance written notice.
Each executive officer has agreed to hold, both during and after the termination or expiry of his or her employment agreement, in strict confidence and not to use,
except as required in the performance of his or her duties in connection with the employment or pursuant to applicable law, any of our confidential information or trade
secrets, any confidential information or trade secrets of our customers or prospective customers, or the confidential or proprietary information of any third-party received
by us and for which we have confidential obligations. The executive officers have also agreed to disclose in confidence to us all inventions, designs and trade secrets
which they conceive, develop or reduce to practice during the executive officer’s employment with us and to assign all right, title and interest in them to us, and assist us
in obtaining and enforcing patents, copyrights and other legal rights for these inventions, designs and trade secrets.
In addition, each executive officer has agreed to be bound by non-competition and non-solicitation restrictions during the term of his or her employment and
typically for one year following the last date of employment. Specifically, each executive officer has agreed not to (i) approach our suppliers, clients, direct or end
customers or contacts or other persons or entities introduced to the executive officer in his or her capacity as a representative of us for the purpose of doing business with
such persons or entities that will harm our business relationships with these persons or entities; (ii) assume employment with or provide services to any of our
competitors, or engage, whether as principal, partner, licensor or otherwise, any of our competitors, without our express consent; or (iii) seek directly or indirectly, to
solicit the services of, or hire or engage, any person who is known to be employed or engaged by us; or (iv) otherwise interfere with our business or accounts.
We have also entered into indemnification agreements with each of our directors and executive officers. Under these agreements, we agree to indemnify our
directors and executive officers against liabilities and expenses incurred by such persons in connection with claims made by reason of their being a director or officer of
our company.
Share Incentive Plans
The 2010 Plan
We adopted the 2010 Plan on October 18, 2010, which was subsequently amended and restated on November 3, 2014, August 6, 2016 and September 15, 2020,
for the purpose of granting share-based compensation awards either through a proprietary interest in our long-term success, or compensation based on fulfilling certain
performance goals to employees, officers, directors and consultants to incentivize their performance and promote the success of our business. Under the 2010 Plan, the
maximum aggregate number of shares which may be issued pursuant to all awards is 589,729,714 shares. As of February 28, 2023, options to purchase a total of
340,864,386 Class A ordinary shares were outstanding under the 2010 Plan.
The following paragraphs summarize the terms of the 2010 Plan.
Types of Awards. The Plan permits the awards of options, share appreciation rights, share grants and restricted share units.
Plan Administration. A committee consisting of at least two individuals determined by our board acts as the plan administrator. The plan administrator will
determine the participants who are to receive awards, the number of awards to be granted, and the terms and conditions of each award grant. The plan administrator can
amend outstanding awards and interpret the terms of the 2010 Plan and any award agreement.
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Award Agreement. Options to purchase ordinary shares granted under the 2010 Plan are evidenced by an award agreement that sets forth the terms and conditions
for each grant.
Exercise Price. The excises price of an option or a share appreciation right will be determined by the plan administrator. In certain circumstances, such as a
recapitalization, a spin-off, reorganization, merger, separation and split-up, the plan administrator may adjust the exercise price of outstanding options and share
appreciation rights.
Eligibility. We may grant awards to our employees, directors or consultants or employees, directors or consultants or our affiliates.
Term of the Awards. Unless otherwise determined by the board of directors, the term of each option or share appreciation right granted under the 2010 Plan shall
not exceed ten years from date of the grant.
Vesting Schedule. In general, the plan administrator determines the vesting schedule, which is set forth in the award agreement.
Acceleration of Awards upon Change in Control. The plan administrator may determine, at the time of grant or thereafter, that an award shall become vested and
exercisable, in full or in part, in the event that a change in control of our company occurs.
Transfer Restrictions. Awards may not be transferred in any manner by the recipient other than by will or the laws of descent and distribution, except as
otherwise provided by the plan administrator.
Termination. The plan shall terminate on October 17, 2030 provided that our board may terminate the plan at any time and for any reason.
The 2017 Plan
We adopted the 2017 Plan on November 30, 2017, which was further amended on December 7, 2017, for the purpose of promoting the success and enhance the
value of iQIYI, Inc., by linking the personal interests of the members of the board, employees, consultants and other individuals to those of our shareholders and, by
providing an incentive for outstanding performance, to generate superior returns for our shareholders. Under the 2017 Plan, the maximum aggregate number of ordinary
shares which may be issued pursuant to all awards is 720,000 ordinary shares, all of which have been granted in the form of restricted share units. As of February 28,
2023, 369,500 of the granted restricted share units had been forfeited due to the departure of the relevant grantees, and the remaining 350,500 restricted share units had
been vested and exercised. As such, as of February 28, 2023, no awards were outstanding under the 2017 Plan.
The following paragraphs summarize the terms of the 2017 Plan.
Types of Awards. The Plan permits the awards of options, restricted shares and restricted share units.
Plan Administration. A committee of one or more members of the board acts as the plan administrator. The plan administrator will determine the participants
who are to receive awards, the type or types of awards to be granted, the number of awards to be granted, and the terms and conditions of each award grant. The plan
administrator can amend outstanding awards and interpret the terms of the 2017 Plan and any award agreement.
Award Agreement. Awards granted under the 2017 Plan are evidenced by an award agreement that sets forth the terms and conditions for each grant.
Exercise Price. The excises price of an option will be determined by the plan administrator, but shall not be less than the fair market value on the grant date of
the respective option or share appreciation right. In certain circumstances, such as a recapitalization, a spin-off, reorganization, merger, separation and split-up, the plan
administrator may adjust the exercise price of outstanding options and share appreciation rights.
Eligibility. We may grant awards to our employees, consultants, and all members of the board, and other individuals.
Term of the Awards. The term of each option or share appreciation right granted under the 2017 Plan shall not exceed ten years from date of the grant.
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Vesting Schedule. In general, the plan administrator determines the vesting schedule, which is set forth in the relevant award agreement.
Transfer Restrictions. Awards may not be transferred in any manner by the recipient other than by will or the laws of descent and distribution, except as
otherwise provided by the plan administrator.
Termination. The plan shall terminate on November 29, 2027, provided that our board may terminate the plan at any time and for any reason.
The shares reserved and to be issued under the 2010 Plan and the 2017 Plan have been registered on the Form S-8 on May 24, 2018.
The 2021 Plan
We also adopted the 2021 Plan on December 2, 2021, as amended and restated on November 2, 2022, for the purpose of promoting the success and enhance the
value of iQIYI, Inc., by linking the personal interests of the directors, employees and consultants to those of our shareholders and, by providing an incentive for
outstanding performance, to generate superior returns for our shareholders. Under the 2021 Plan, the maximum aggregate number of ordinary shares which may be
issued pursuant to all awards is initially 364,000,000 Class A ordinary shares, or the 2021 Plan Award Pool, provided that if restricted share units are granted, each
restricted share unit (that entitles the holder to one share) granted shall reduce the number of shares in the 2021 Plan Award Pool available for future grants by 1.3 shares;
any option with nil exercise price shall have the same effect of reducing the number of shares in the 2021 Plan Award Pool as the restricted share units. As of February
28, 2022, options with nil exercise price to purchase a total of 127,127,798 ordinary shares were outstanding under the 2021 Plan.
The following paragraphs summarize the terms of the 2021 Plan.
Types of Awards. The Plan permits the awards of options and restricted share units.
Plan Administration. A committee of one or more members of the board acts as the plan administrator, and the board shall conduct the general administration of
the plan if required by applicable laws, and with respect to awards granted to members of the committee that acts as the plan administrator. The plan administrator will
determine the participants who are to receive awards, the type or types of awards to be granted, the number of awards to be granted, and the terms and conditions of each
award grant. The plan administrator can amend outstanding awards and interpret the terms of the 2021 Plan and any award agreement.
Award Agreement. Awards granted under the 2021 Plan are evidenced by an award agreement that sets forth the terms and conditions for each grant.
Exercise Price. The excises price of an option will be determined by the plan administrator. In certain circumstances, such as a recapitalization, a spin-off,
reorganization, merger, separation and split-up, the plan administrator may adjust the exercise price of outstanding options and share appreciation rights.
Eligibility. We may grant awards to our directors, employees and consultants.
Term of the Awards. The term of each option or share appreciation right granted under the 2021 Plan shall not exceed ten years from date of the grant unless
otherwise determined by the shareholders or the board under the condition that our company decides to follow home country practice.
Vesting Schedule. In general, the plan administrator determines the vesting schedule, which is set forth in the relevant award agreement.
Transfer Restrictions. Awards may not be transferred in any manner by the recipient other than by will or the laws of descent and distribution, except as
otherwise provided by the plan administrator.
Termination. The plan shall terminate on December 2, 2031, provided that our board may terminate the plan at any time and for any reason.
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The following table summarizes, as of February 28, 2023, the outstanding options and restricted share units that we granted to our directors and executive
officers:
Name
Class A Ordinary Shares Underlying
Options Awarded
Exercise Price
(US$/Share)
Date of Grant
Date of
Expiration
Yu Gong
Jun Wang
Xiaohui Wang
Wenfeng Liu
Youqiao Duan
Xianghua Yang
Total
Notes:
147,820,116
*
*
*
*
*
219,908,274
0 to 0.51
0 to 0.51
0 to 0.51
0 to 0.51
0 to 0.51
0 to 0.5
Various dates from 2010/10/18
to 2022/3/11
Various dates from
2024/12/15 to 2032/3/11
Various dates from 2018/2/28
to 2022/3/11
Various dates from
2028/2/28 to 2032/3/11
Various dates from 2016/8/5 to
2022/3/11
Various dates from 2014/12/15
to 2022/3/11
Various dates from
2026/8/5 to 2032/3/11
Various dates
from 2024/12/15
to 2032/3/11
Various dates from 2014/12/25
to 2022/3/11
Various dates from
2024/12/25 to 2032/3/11
Various dates from 2014/12/25
to 2022/3/11
Various dates from
2024/12/25 to 2032/3/11
* The aggregate number of ordinary shares exercisable from all options granted is less than 1% of our total issued and outstanding ordinary shares.
As of February 28, 2023, other grantees as a group held options to purchase 248,083,910 Class A ordinary shares of our company, with exercise prices
ranging from US$0 to US$0.51 per share.
C.BOARD PRACTICES
Board of Directors
Our board of directors consists of eight directors. Baidu has the right to appoint a majority of our directors as long as it holds no less than 50% of the voting
power of our Company. In addition, some of our directors are also senior management of Baidu. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our
Relationship with Baidu—We may have conflicts of interest with Baidu and, because of Baidu’s controlling ownership interest in our company, we may not be able to
resolve such conflicts on terms favorable to us.” In addition, PAG Asia has the right to appoint, remove and replace one director, who should be elected as a non-voting
member of the audit committee and a voting member of the compensation committee of the board of directors, so long as the PAG Notes or Class A ordinary shares
issued upon conversion of the PAG Notes beneficially owned by PAG Asia and its affiliates represents no less than 50% of the aggregate principal amount of the notes.
A director is not required to hold any shares in our company by way of qualification. A director may vote with respect to any contract, proposed contract or arrangement
in which he is materially interested provided (i) such director, if his interest in such contract or arrangement is material, has declared the nature of his interest at the
earliest meeting of the board at which it is practicable for him to do so, either specifically or by way of a general notice and (ii) if such contract or arrangement is a
transaction with a related party, such transaction has been approved by the audit committee. The directors may exercise all the powers of the company to borrow money,
mortgage its undertaking, property and uncalled capital, and issue debentures or other securities whenever money is borrowed or as security for any obligation of the
company or of any third-party. None of our non-executive directors has a service contract with us that provides for benefits upon termination of service.
Committees of the Board of Directors
We have established an audit committee and a compensation committee under the board of directors. We have adopted a charter for each of the two committees.
Each committee’s members and functions are described below.
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Audit Committee. Our audit committee consists of Sam Hanhui Sun, Conor Chia-hung Yang, Fei Qi and Weijian Shan, and is chaired by Mr. Sam Hanhui Sun.
We have determined that Sam Hanhui Sun and Conor Chia-hung Yang satisfy the “independence” requirements of Rule 5605(a)(2) of the Listing Rules of the Nasdaq
Stock Market and meet the independence standards under Rule 10A-3 under the Exchange Act. We have determined that members including Sam Hanhui Sun and
Conor Chia-hung Yang qualify as “audit committee financial experts.” Fei Qi and Weijian Shan are non-voting members of the audit committee. The audit committee
oversees our accounting and financial reporting processes and the audits of the financial statements of our company. The audit committee is responsible for, among other
things:
•selecting the independent registered public accounting firm and pre-approving all auditing and non-auditing services permitted to be performed by the
independent registered public accounting firm;
•reviewing with the independent registered public accounting firm any audit problems or difficulties and management’s response;
•reviewing and approving all proposed related party transactions, as defined in Item 404 of Regulation S-K under the Securities Act;
•discussing the annual audited financial statements with management and the independent registered public accounting firm;
•reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted in light of material control deficiencies;
•annually reviewing and reassessing the adequacy of our audit committee charter;
•meeting separately and periodically with management and the independent registered public accounting firm; and
•reporting regularly to the board.
Compensation Committee. Our compensation committee consists of Junjie He, Fei Qi, Weijian Shan and Sam Hanhui Sun, and is chaired by Mr. Junjie He. We
have determined that Sam Hanhui Sun satisfies the “independence” requirements of Rule 5605(a)(2) of the Listing Rules of the Nasdaq Stock Market. The compensation
committee assists the board in reviewing and approving the compensation structure, including all forms of compensation, relating to our directors and executive officers.
Our chief executive officer may not be present at any committee meeting during which their compensation is deliberated upon. The compensation committee is
responsible for, among other things:
•reviewing the total compensation package for our executive officers and making recommendations to the board with respect to it;
•approving and overseeing the total compensation package for our executives other than the three most senior executives;
•reviewing the compensation of our directors and making recommendations to the board with respect to it; and
•periodically reviewing and approving any long-term incentive compensation or equity plans, programs or similar arrangements, annual bonuses, and employee
pension and welfare benefit plans.
Duties of Directors
Under Cayman Islands law, our directors owe fiduciary duties to our company, including a duty of loyalty, a duty to act honestly and a duty to act in what they
consider in good faith to be in our best interests. Our directors must also exercise their powers only for a proper purpose. Our directors also owe to our company a duty
to act with skill and care. It was previously considered 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 of his knowledge and experience. However, English and Commonwealth courts have moved towards an objective standard with regard to the
required skill and care and these authorities are likely to be followed in the Cayman Islands. In fulfilling their duty of care to us, our directors must ensure compliance
with our memorandum and articles of association. Our company has the right to seek damages if a duty owed by our directors is breached. In limited exceptional
circumstances, a shareholder may have the right to seek damages in our name if a duty owed by our directors is breached.
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Terms of Directors and Officers
Our officers are appointed by and serve at the discretion of the shareholders. Our directors are not subject to a term of office and hold office until such time as
they are removed from office by the shareholders or by the board. A director will be removed from office automatically if, among other things, the director (i) becomes
bankrupt or makes any arrangement or composition with his creditors; (ii) dies or is found to be or becomes of unsound mind; (iii) resigns his office by notice in writing
to our company; (iv) without special leave of absence from the Board, is absent from meetings of the Board for three consecutive meetings and the Board resolves that
his office be vacated; or (v) is removed from office pursuant to any other provision of our current memorandum and articles of association.
Board Diversity Matrix
Country of Principal Executive Offices
Foreign Private Issuer
Disclosure Prohibited Under Home Country Law
Total Number of Directors
Part I: Gender Identity
Directors
Part II: Demographic Background
Underrepresented Individual in Home Country Jurisdiction
LGBTQ+
Did Not Disclose Demographic Background
D.EMPLOYEES
Board Diversity Matrix (As of February 28, 2023)
Mainland China
Yes
No
8
Female
Male
Non-Binary
1
7
0
0
0
0
Did Not
Disclose
Gender
0
We had 7,721, 5,856 and 4,981 employees as of December 31, 2020, 2021 and 2022, respectively. As of December 31, 2022, we had 2,743 employees in
Beijing and 2,238 employees in other cities in mainland China and overseas. The following table sets forth the number of our employees by function as of December 31,
2022:
Research and development
Content production and operation
Sales and marketing
General and administrative
Total
2,042
1,558
985
396
4,981
Our success depends on our ability to attract, retain and motivate qualified employees. We offer employees competitive salaries, performance-based cash bonuses
and other incentives. We believe that we maintain a good working relationship with our employees, and we have not experienced any material labor disputes. None of
our employees are represented by labor unions.
As required by laws and regulations in mainland China, we participate in various employee social benefits plans that are organized by municipal and provincial
governments, including housing funds, pension, medical insurance, job-related injury insurance, maternity insurance and unemployment insurance. We are required
under PRC law to make contributions to employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a
maximum amount specified by the local government from time to time.
We typically enter into standard confidentiality and employment agreements with our employees. These contracts include a standard non-compete covenant that
prohibits the employee from competing with us, directly or indirectly, during his or her employment as well as certain period of time after employment is terminated.
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E.SHARE OWNERSHIP
Except as specifically noted, the following table sets forth information with respect to the beneficial ownership of our ordinary shares as of February 28, 2023:
•each of our directors and executive officers; and
•each person known to us to own beneficially 5% or more of our ordinary shares.
The calculations in the table below are based on 6,696,857,188 ordinary shares outstanding as of February 28, 2023, comprising of 3,655,759,910 Class A
ordinary shares (excluding 196,046,533 Class A ordinary shares issued to our depositary bank for bulk issuance of ADSs reserved for future issuances upon the exercise
or vesting of awards under our share incentive plans) and 3,041,097,278 Class B ordinary shares.
Beneficial ownership is determined in accordance with the rules and regulations of the SEC. In computing the number of shares beneficially owned 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, 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.
Directors and Executive Officers:**
Class A Ordinary Shares Beneficially Owned
(†)
Class B Ordinary Shares Beneficially Owned
(††)
Number
%
Number
%
Voting Power (†††)
%
Ordinary Shares Beneficially Owned
(4)
(2)
(3)
(1)
Junjie He
Yu Gong
Dou Shen
Fei Qi
Luyao Han
Weijian Shan
Sam Hanhui Sun
Conor Chia-hung Yang
Jun Wang
Xiaohui Wang
Wenfeng Liu
Youqiao Duan
Xianghua Yang
All directors and executive officers as a
group
Principal Shareholders:
Baidu
(6)
PAG
Best Ventures Limited
(7)
(5)
—
143,859,044
*
—
—
—
—
—
*
*
*
*
*
197,366,463
7,933,331
840,222,180
341,874,885
—
3.8
*
—
—
—
—
—
*
*
*
*
*
5.1
*
18.7
9.4
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,041,097,278
—
—
100.0
—
—
—
*
*
—
—
—
—
—
—
*
*
*
*
*
89.3
2.3
1.0
Notes:
* Less than 1%.
* * Except for Junjie He, Dou Shen, Fei Qi and Luyao Han, and as indicated otherwise below, the business address of our directors and executive officers is 4/F, iQIYI Youth Center, Yoolee Plaza,
No. 21, North Road of Workers’ Stadium, Chaoyang District, Beijing, 100027, China. The business address of Junjie He, Dou Shen, Fei Qi, and Luyao Han is Baidu Campus, No. 10 Shangdi 10th
Street, Haidian District, Beijing 100085, China.
† For each person and group included in this column, percentage ownership is calculated by dividing the number of Class A ordinary shares beneficially owned by such person or group, including
Class A ordinary shares that such person or group has the right to acquire within 60 days of February 28, 2023, by the sum of the total number of Class A ordinary shares outstanding as of February
28, 2023 and the number of Class A ordinary shares underlying the options or other right held by such person or group that are exercisable to acquire Class A ordinary shares within 60 days of
February 28, 2023.
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†† For each person and group included in this column, percentage ownership is calculated by dividing the number of Class B ordinary shares beneficially owned by such person or group, including
Class B ordinary shares that such person or group has the right to acquire within 60 days of February 28, 2023, by the sum of the total number of Class B ordinary shares outstanding as of February
28, 2023 and the number of Class B ordinary shares underlying the options or other right held by such person or group that are exercisable to acquire Class B ordinary shares within 60 days of
February 28, 2023.
††† For each person or group included in this column, percentage of total voting power represents voting power based on both Class A and Class B ordinary shares held by such person or group,
including Class A and Class B ordinary shares that such person or group has the right to acquire within 60 days of February 28, 2023, with respect to all outstanding shares of our Class A and Class B
ordinary shares as a single class. Each holder of Class A ordinary shares is entitled to one vote per Class A ordinary share. Each holder of our Class B ordinary shares is entitled to ten votes per Class
B ordinary share. Our Class B ordinary shares are convertible at any time by the holder into Class A ordinary shares on a share-for-share basis.
(1)Representing (i) 137,423,870 Class A ordinary shares that Dr. Gong may purchase upon exercise of options within 60 days of February 28, 2023, and (ii) 6,435,174 Class A ordinary shares held
by Cannes Ventures Limited, a company incorporated in the Cayman Islands. Cannes Ventures Limited is wholly-owned by Dr. Gong. The registered address of Cannes Ventures Limited is 190 Elgin
Avenue, George Town, Grand Cayman, Cayman Islands.
(2)The address of Mr. Weijian Shan is 33/F, Three Pacific Place, 1 Queen’s Road East, Hong Kong.
(3)The address of Sam Hanhui Sun is 64 Donggong Street, Dongcheng District, Beijing 100009, China.
(4)The address of Conor Chia-hung Yang is 12/F, No. 1217 Dongfang Road, Pudong, Shanghai 200122, China.
(5)Representing (i) 7,933,331 Class A ordinary shares, in the form of ADSs, and (ii) 2,876,391,396 Class B ordinary shares held by Baidu Holdings Limited, a company incorporated in British Virgin
Islands, and (iii) 164,705,882 Class B ordinary shares held by Baidu (Hong Kong) Limited, a company incorporated in Hong Kong. Baidu (Hong Kong) Limited is wholly-owned by Baidu Holding
Limited, which in turn is wholly-owned by Baidu. The business address of each of Baidu Holdings Limited and Baidu (Hong Kong) Limited is No. 10 Shangdi 10th Street, Haidian District, Beijing
100085, China.
(6)Representing 797,352,990 Class A ordinary shares issuable upon conversion of the PAG Notes held by PAGAC IV-1 (Cayman) Limited, 37,969,190 Class A ordinary shares issuable upon
conversion of the PAG Notes held by PM Partners I LP and 4,900,000 Class A ordinary shares issuable upon conversion of the PAG Notes held by Polymer Asia Fund LP, as reported in the
Amendment No. 1 to the Schedule 13D filed jointly by PAGAC IV-1 (Cayman) Limited, PAGAC IV-2 (Cayman) Limited, PAG Asia IV LP, PAG Asia Capital GP IV Limited, PAG Capital Limited,
Pacific Alliance Group Limited and PAG on January 23, 2023. PAGAC IV-1 (Cayman) Limited is controlled by PAGAC IV-2 (Cayman) Limited. PAGAC IV-2 (Cayman) Limited is controlled by
PAG Asia IV LP and PAG Asia Capital GP IV Limited is the general partner of PAG Asia IV LP. PAG Asia Capital GP IV Limited is controlled by PAG Capital Limited which in turn is controlled
by Pacific Alliance Group Limited. PM Partners I LP is indirectly controlled by Pacific Alliance Group Limited. Pacific Alliance Group Limited is controlled by PAG. Polymer Asia Fund LP is
indirectly controlled by PAG. PAGAC IV-1 (Cayman) Limited is a company incorporated in British Virgin Islands. PM Partners I LP is a partnership established and registered under the laws of the
British Virgin Islands. Polymer Asia Fund LP is a partnership established and registered in the Cayman Islands. The address of each of PAGAC IV-1 (Cayman) Limited, PM Partners I LP and
Polymer Asia Fund LP is P.O. Box 472, Harbour Place, 2nd Floor, 103 South Church Street, George Town, Grand Cayman KY1-1106 Cayman Islands.
(7)Representing 341,874,885 Class A ordinary shares held by Best Ventures Limited (formerly known as Xiaomi Ventures Limited) as of December 31, 2018, as reported in a Schedule 13G filed by
Xiaomi Ventures Limited on February 1, 2019. Best Ventures Limited is a company incorporated in British Virgin Islands. Best Ventures Limited is beneficially owned and controlled by Xiaomi
Corporation. The registered address of Best Ventures Limited is c/o P.O. Box 2221, Road Town, Tortola, British Virgin Islands.
Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares are entitled to one vote per share,
while holders of Class B ordinary shares are entitled to ten votes per share. We issued Class A ordinary shares represented by our ADSs in our initial public offering in
April 2018. Holders of our Class B ordinary shares may choose to convert their Class B ordinary shares into the same number of Class A ordinary shares at any time.
Class A ordinary shares are not convertible into Class B ordinary shares under any circumstance.
We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company. To our knowledge, as of February 28, 2023,
3,427,133,369 of our Class A ordinary shares were held by three record holders in the United States, representing 93.7% of our total issued and outstanding Class A
ordinary shares as of such date (excluding 196,046,533 Class A ordinary shares reserved for future issuances upon the exercising or vesting of awards granted under the
issuer’s share incentive plans). As of February 28, 2023, none of our Class B ordinary shares are held by record holders in the United States.
For options and restricted share units granted to our officers, directors and employees, see “—B. Compensation—Share Incentive Plans.”
F.DISCLOSURE OF A REGISTRANT’S ACTION TO RECOVER ERRONEOUSLY AWARDED COMPENSATION
Not applicable.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A.MAJOR SHAREHOLDERS
See “Item 6. Directors, Senior Management and Employees—E. Share Ownership.”
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B.RELATED PARTY TRANSACTIONS
Contractual Arrangements with the Variable Interest Entities and Their Respective Shareholders
See “Item 4. Information on the Company—C. Organizational Structure—Contractual Arrangements with the Variable Interest Entities and Their Respective
Shareholders.”
Transactions with Shareholders and Affiliates
Baidu
We enjoy significant business synergies with Baidu primarily in the form of complementary content offerings for users and cross-sale of each other’s services.
Master Business Cooperation Agreement
We have entered into a master business cooperation agreement with Baidu on January 19, 2018.
Under the master business cooperation agreement, we and Baidu agree to cooperate with each other in areas including but not limited to AI technology, smart
devices/DuerOS (the dialog-type AI system and open platform developed by Baidu), cloud services, online advertising, internet traffic, data and content, and to treat
each other as the most preferred strategic partner in our areas of cooperation.
Specifically, (i) Baidu agrees to cooperate with us on leveraging AI technology to further improve our user experience; (ii) we and Baidu agree to share sales
channel resources to promote smart devices/DuerOS and increase iQIYI’s market share in its industry; (iii) Baidu agrees to provide support for our cloud computing
infrastructure and provide us with cloud computing infrastructure services on Baidu’s most favored terms; (iv) we and Baidu agree to cross sell our respective
advertising services, and Baidu agrees to grant us priority to advertise on its platform; (v) we and Baidu agree to leverage our respective services to increase user traffic;
and (vi) we and Baidu agree to allow our respective registered users and content providers to log onto each other’s platforms.
Under this agreement, (i) Baidu agrees not to compete with us in providing video content services that are the same as or substantially similar to our long-form
video businesses (with the exception of existing business activities conducted by Baidu and its affiliates and of the business activities conducted by the entity that
currently operates Baidu’s online video business), and (ii) we agree not to compete with Baidu in any business that is the same as or substantially similar to Baidu’s core
businesses (with the exception of existing business activities conducted by us or our affiliates). Long-form video business means long-form video content services
currently provided by iQIYI, such long-form video content includes, but is not limited to, movies, TV series, network series, cartoons, variety shows, documentaries,
etc. Whether any service is Baidu’s core business or is the same as or substantially similar to Baidu’s core business shall be determined by Baidu and us in a
commercially reasonable manner.
The master business cooperation agreement will expire on the eighth anniversary of the date of execution, extendable for a term of eight years upon agreement by
both parties. In the event we are no longer controlled by Baidu, either we or Baidu may terminate this agreement.
Loan Agreement
Under the master business cooperation agreement, Baidu would provide us with a RMB650.0 million (US$94.2 million) loan, which mature on the fifth
anniversary of the grant date. We entered into an interest-free loan agreement with Baidu with respect to such loan on January 19, 2018. The loan was repaid in full in
March 2023.
Share Purchase Agreement and Ticket Business Cooperation Agreement
On February 12, 2018, we entered into a share purchase agreement with Baidu Holdings, pursuant to which we would issue to Baidu Holdings an aggregate of
36,860,691 Class B ordinary shares. The transaction has closed in April 2018. As consideration for the issuance of such shares and subject to the conditions set forth in
the share purchase agreement, Baidu Holdings agreed to (i) undertake certain non-compete obligations towards us with respect to the online movie ticket and show ticket
booking business of Baidu Holdings and its affiliates, (ii) direct user traffic related to such ticket business to us, (iii) provide us with technological support with respect
to our ticket booking business, (iv) license certain domain names and certain intellectual property rights to us and (v) enter into a ticket business cooperation agreement
with us, which has been signed concurrently.
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Share Subscription by Baidu
In March 2022, we entered into subscription agreements with Baidu and a consortium of financial investors who agreed to subscribe for and purchase from us,
through a private placement, a total of 164,705,882 newly issued Class B ordinary shares and 304,705,874 newly issued Class A ordinary shares of our company, for a
total purchase price of US$285 million in cash. In accordance with the subscription agreements, Baidu subscribed for Class B ordinary shares.
Other Transactions with Baidu
For the years ended December 31, 2020, 2021 and 2022, we generated membership services revenue of RMB19.8 million, nil and RMB54.4 million (US$7.9
million), respectively, advertising services revenue of RMB113.9 million, RMB122.9 million and RMB55.7 million (US$8.1 million), respectively, and other revenues
of RMB15.4 million, RMB14.5 million and RMB1.8 million (US$0.3 million), respectively, from Baidu.
We incurred cost of revenues for license fees in the amount of RMB13.7 million, RMB13.9 million and RMB8.2 million (US$1.2 million) for the years ended
December 31, 2020, 2021 and 2022, respectively. We incurred cost of revenues for bandwidth services and cloud services in the amount of RMB1,007.5 million,
RMB918.8 million and RMB653.0 million (US$94.7 million) for the years ended December 31, 2020, 2021 and 2022, respectively. We incurred selling, general and
administrative expenses for advertising services provided by Baidu in the amount of RMB2.5 million, RMB13.4 million and RMB47.6 million (US$6.9 million) for the
years ended December 31, 2020, 2021 and 2022, respectively. We incurred research and development expenses for cloud services provided by Baidu in the amount of
RMB7.4 million, nil and nil for the years ended December 31, 2020, 2021 and 2022, respectively.
As of December 31, 2020, 2021 and 2022, we had RMB38.3 million, RMB34.9 million and RMB20.0 million (US$2.9 million), respectively, due from Baidu.
The balance mainly represents amounts due from Baidu for advertising, membership and other services.
As of December 31, 2020, 2021 and 2022, we had RMB1,037.8 million, RMB1,405.5 million and RMB1,879.1 million (US$272.4 million), respectively, due to
Baidu. The related party balances mainly represented accrued expenses for bandwidth services and cloud services provided by Baidu. As of December 31, 2020, 2021
and 2022, we had RMB700.0 million, RMB700.0 million and RMB700.0 million (US$101.5 million), respectively, in loans due to Baidu. As of December 31, 2020,
2021 and 2022, the total outstanding balance represents an interest-free loan of RMB50.0 million that is due on demand, and an interest-free loan of RMB650.0 million
provided by Baidu in January 2018. The RMB650.0 million interest-free loan was repaid in full in March 2023.
Other Transactions with Related Parties
For the years ended December 31, 2020, 2021 and 2022, we generated content distribution revenue of RMB176.2 million, RMB297.3 million and RMB190.4
million (US$27.6 million), respectively, from equity investees. For the years ended December 31, 2020, 2021 and 2022, we purchased content from equity investees in
the amount of RMB1,455.9 million, RMB2,358.7 million and RMB1,513.7 million (US$219.5 million), respectively. Other related party transactions, including services
provided by/to our equity method investees and other investees measured using the measurement alternative in the ordinary course of business, were insignificant for
each of the years presented.
As of December 31, 2020, 2021 and 2022, we had RMB97.2 million, RMB201.6 million and RMB144.0 million (US$20.9 million), respectively, due from other
related parties. The balance mainly represents amounts due from our equity investees for content distribution services or paid in advance by us for licensed copyrights
acquisition.
As of December 31, 2020, 2021 and 2022, we had RMB1,018.4 million, RMB1,309.2 million and RMB1,043.5 million (US$151.3 million), respectively, due to
other related parties. The related party balances mainly represented, (i) deferred revenues in relation to content distribution, IP licensing, advertising services and traffic
support services to be provided to one of our equity investees; (ii) amounts owed to our equity investees for licensed copyrights; and (iii) advances made by one of our
equity investees for online advertising services.
Shareholders Agreement
Other than provisions with respect to registration rights, the description of which is set forth below, all provisions and rights under our sixth amended and
restated shareholders agreement terminated upon consummation of our initial public offering.
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Demand Registration Rights. At any time after the earlier of (i) the four-year period following the date of the shareholders agreement or (ii) 180 days after the
effective date of the registration statement for a public offering, holders of at least 30% of the registrable securities then outstanding, or Existing Initiating Holders,
holders of at least 30% of the registrable securities issued or issuable upon conversion of the Series F preferred shares then outstanding, or Series F Initiating Holders,
and holders of at least 30% of the registrable securities issued or issuable upon conversion of the Series G preferred shares then outstanding, or Series G Initiating
Holders, have the right to demand that we file a registration statement covering the registration of any registrable securities of such holders. We have the right to defer
filing of a registration statement for a period of not more than 90 days after the receipt of the request of the initiating holders under certain conditions, but we cannot
exercise the deferral right more than once in any twelve-month period and we cannot register any other share during such twelve-month period. We are not obligated to
effect a demand registration if we have, within the six-month period prior to the date of a demand registration request, already effected a registration. We are not
obligated to effect more than four demand registrations initiated by the Existing Initiating Holders, more than two demand registrations initiated by the Series F Initiating
Holders, or more than two demand registrations initiated by the Series G Initiating Holders, other than demand registration to be effected pursuant to registration
statement on Form F-3, for which an unlimited number of demand registrations shall be permitted.
Piggyback Registration Rights. If we propose to file a registration statement for a public offering of our securities, we must offer holders of our registrable
securities an opportunity to include in the registration the number of registrable securities of the same class or series as those proposed to be registered. If the managing
underwriters of any underwritten offering determine in its view the number of registrable securities exceeds the maximum offering size, the registrable securities shall
allocate first to us, second to each of holders requesting for the inclusion of their registrable securities pursuant to the piggyback registration, and third to holders of our
other securities with such priorities among them as we shall determine.
Form F-3 Registration Rights. Any of the Existing Initiating Holders, Series F Initiating Holders and Series G Initiating Holders may request us in writing to file
an unlimited number of registration statements on Form F-3. Promptly after receiving such request, we shall give written notice of the proposed registration and within
20 days of such notice, we shall effect the registration of the securities on Form F-3.
Expenses of Registration. We will bear all registration expenses, other than underwriting discounts and selling commissions incurred in connection with any
demand, piggyback or F-3 registration.
Employment Agreements and Indemnification Agreements
See “Item 6. Directors, Senior Management and Employees—B. Compensation—Employment Agreements and Indemnification Agreements.”
Share Option Grants
See “Item 6. Directors, Senior Management and Employees—B. Compensation—Share Incentive Plans.”
C.INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A.CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
We have appended consolidated financial statements filed as part of this annual report.
Legal Proceedings
Following the publication in April 2020 of a short seller report by Wolfpack Research, or the Wolfpack Report, the SEC asked us to produce certain financial,
operating, and other documents and records. We also engaged professional advisers, including a Big Four accounting firm that is not our auditor, to conduct an internal
review into certain of the key allegations in the Wolfpack Report and to report their findings to our audit committee. The SEC also sought the production of certain
documents and records from us related to such internal review and other related information. We cooperated with the SEC. Our internal review within the agreed scope
was substantially complete and did not uncover any evidence that would substantiate the allegations.
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Furthermore, starting in April 2020, we and certain of our current and former officers and directors were named as defendants in several putative securities class
actions filed in federal court, which were purportedly brought on behalf of a class of persons who allegedly suffered damages as a result of alleged misstatements and
omissions in our company’s public disclosure documents. In May 2021, these actions were consolidated under the caption In re iQIYI, Inc. Securities Litigation, No.
1:20-CV-1830 (U.S. District Court for the Eastern District of New York). In June 2021, lead plaintiffs filed the operative amended complaint. In July 2021, defendants
filed motion to dismiss the case. Briefing on the motion to dismiss was completed on September 29, 2021. However, in light of the common questions of law and fact at
issue in this case and a related action under the caption In re Baidu Inc. Securities Litigation, 20-cv-03794 (U.S. District Court for the Eastern District of New York), the
Court terminated the motion to dismiss without prejudice and ordered motion-to-dismiss briefing for the two cases to be completed by March 3, 2023 under a new
briefing schedule. The coordinated motion-to-dismiss briefing has now been completed under the new schedule, and we await a decision from the court on these
motions.
We will have to defend against these putative securities class action lawsuits, as applicable, including any appeals of such lawsuits should our initial defense be
unsuccessful. We are currently unable to estimate the possible outcome or loss or possible range of loss, if any, associated with the resolution of these lawsuits. In the
event that our initial defense of these lawsuits is unsuccessful, we cannot assure you that we will prevail in any appeal. Any adverse outcome of these cases, including
any plaintiff’s appeal of a judgment in these lawsuits, could have a material adverse effect on our business, financial condition, results of operation, cash flows, and
reputation. Although no further information has been requested from us since early 2021, we are currently unable to predict the duration, outcome, or impact of the SEC
investigation of iQIYI, or from the SEC’s review of the documents and records requested from us. The litigation or SEC investigation process may utilize a significant
portion of our resources and divert management’s attention from the day-to-day operations, all of which could harm our business.
As of December 31, 2022, 138 cases against us were pending before various courts in mainland China. The aggregate amount of damages sought under these
pending cases is approximately RMB350.9 million. We are currently unable to estimate the reasonably possible loss or a range of reasonably possible loss as the
proceedings are in the early stages, or there is a lack of clear or consistent interpretation of laws. As a result, there is considerable uncertainty regarding the timing or
ultimate resolution of such proceedings, which includes eventual loss, fine, penalty or business impact, if any, and therefore, an estimate for the reasonably possible loss
or a range of reasonably possible loss cannot be made. With respect to the limited number of proceedings for which we are able to estimate the reasonably possible loss
or the range of reasonably possible loss, such estimates are immaterial.
In addition, as of December 31, 2022, 1,046 cases brought by us against others for copyright and trademark infringement, unfair competition and other
commercial disputes were pending before various courts in mainland China. The aggregate amount of damages we are seeking under these pending cases is
approximately RMB980.1 million.
Dividend Policy
Our board of directors has complete discretion on whether to distribute dividends. Even if our board of directors decides to pay dividends, the form, frequency
and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors
that the board of directors may deem relevant.
We do not have any present plan to pay any cash dividends on our ordinary shares in the foreseeable 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 may rely on dividends from our subsidiaries in mainland China for our cash requirements,
including any payment of dividends to our shareholders. PRC regulations may restrict the ability of our mainland China subsidiaries to pay dividends to us. See “Item 3.
Key Information—D. Risk Factors—Risks Related to Doing Business in Mainland China—We may rely on dividends and other distributions on equity paid by our
mainland China subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our mainland China subsidiaries to make
payments to us and any tax we are required to pay could have a material and adverse effect on our ability to conduct our business.” If we pay any dividends, we will pay
our ADS holders to the same extent as holders of our Class A ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses payable
thereunder.
B.SIGNIFICANT CHANGES
Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our audited consolidated financial
statements included in this annual report.
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ITEM 9. THE OFFER AND LISTING
A.OFFERING AND LISTING DETAILS.
See “—C. Markets.”
B.PLAN OF DISTRIBUTION
Not applicable.
C.MARKETS
Our ADSs have been listed on the Nasdaq Global Select Market under the symbol “IQ” since March 29, 2018.
D.SELLING SHAREHOLDERS
Not applicable.
E.DILUTION
Not applicable.
F.EXPENSES OF THE ISSUE
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A.SHARE CAPITAL
Not applicable.
B.MEMORANDUM AND ARTICLES OF ASSOCIATION
The following are summaries of material provisions of our currently effective ninth amended and restated memorandum and articles of association, as well as the
Companies Act (as revised) insofar as they relate to the material terms of our ordinary shares.
Board of Directors
See “Item 6. Directors, Senior Management and Employees—C. Board Practices.”
Ordinary Shares
General. All of our issued and outstanding ordinary shares are fully paid and non-assessable. Certificates representing the ordinary shares are issued in registered
form. Our shareholders who are non-residents of the Cayman Islands may freely hold and vote their ordinary shares. Our company will issue only non-negotiable shares,
and will not issue bearer or negotiable shares.
Register of Members. Under Cayman Islands law, we must keep a register of members and there should be entered therein:
•the names and addresses of the members, a statement of the shares held by each member, of the amount paid or agreed to be considered as paid, on the shares of
each member and whether each relevant category of shares held by a member carries voting rights under the articles of association of the company, and if so,
whether such voting rights are conditional;
•the date on which the name of any person was entered on the register as a member; and
•the date on which any person ceased to be a member.
Under Cayman Islands law, the register of members of our company is prima facie evidence of the matters set out therein (i.e. the register of members will raise a
presumption of fact on the matters referred to above unless rebutted) and a member registered in the register of members is deemed as a matter of Cayman Islands law to
have legal title to the shares as set against its name in the
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register of members. Once our register of members has been updated, the shareholders recorded in the register of members should be deemed to have legal title to the
shares set against their name in the register of members.
If the name of any person is incorrectly entered in or omitted from our register of members, or if there is any default or unnecessary delay in entering on the
register the fact of any person having ceased to be a member of our company, the person or member aggrieved (or any member of our company or our company itself)
may apply to the Cayman Islands Grand Court for an order that the register be rectified, and the Court may either refuse such application or it may, if satisfied of the
justice of the case, make an order for the rectification of the register.
Dividends. The holders of our ordinary shares are entitled to such dividends as may be declared by our board of directors (provided always that dividends may
be declared and paid only out of funds of the Company lawfully available therefor, namely out of either profit, retained earnings or our share premium account, and
provided further that a dividend may not be paid if this would result in our company being unable to pay its debts as they fall due in the ordinary course of business).
Classes of Ordinary Shares. Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares (and a further class of authorized but
undesignated shares). Except for conversion rights and voting rights, the Class A ordinary shares and Class B ordinary shares shall carry equal rights and rank pari passu
with one another, including but not limited to the rights to dividends (subject to the ability of the board of directors, under our current memorandum and articles of
association, to determine that a dividend shall be paid wholly or partly by the distribution of specific assets (which may consist of the shares or securities of any other
company) and to settle all questions concerning such distribution (including fixing the value of such assets, determining that cash payment shall be made to some
shareholders in lieu of specific assets and vesting any such specific assets in trustees on such terms as the directors think fit)) and other capital distributions.
Conversion. Class B ordinary shares may be converted into the same number of Class A ordinary shares by the holders thereof at any time, while Class A
ordinary shares cannot be converted into Class B ordinary shares under any circumstances.
Voting Rights. Holders of Class A ordinary shares and Class B ordinary shares shall, at all times, vote together as one class on all matters submitted to a vote by
the members at any general meeting of our company. Each Class A ordinary share shall be entitled to one vote on all matters subject to the vote at general meetings of
our company, and each Class B ordinary share shall be entitled to ten votes on all matters subject to the vote at general meetings of our company. Voting at any meeting
of shareholders is by show of hands unless a poll is demanded. A poll may be demanded by the chairman of such meeting or any one shareholder present in person or by
proxy.
Walkers (Hong Kong), our counsel as to Cayman Islands law, has advised that such voting structure is in compliance with current Cayman Islands law as in
general terms, a company and its shareholders are free to provide in the articles of association for such rights as they consider appropriate, subject to such rights not
being contrary to any provision of the Companies Act and not inconsistent with common law.
An ordinary resolution to be passed by the shareholders requires the affirmative vote of a simple majority of the votes attached to the ordinary shares cast by
those shareholders entitled to vote who are present in person or by proxy (or, in the case of corporations, by their duly authorized representatives) at a general meeting,
while a special resolution requires the affirmative vote of a majority of no less than two-thirds of the votes attached to the ordinary shares cast by those shareholders who
are present in person or by proxy (or, in the case of corporations, by their duly authorized representatives) at a general meeting. Both ordinary resolutions and special
resolutions may also be passed by a unanimous written resolution signed by all the shareholders of our company, as permitted by the Companies Act and our
memorandum and articles of association. A special resolution will be required for important matters such as a change of name or making changes to our memorandum
and articles of association.
Transfer of Ordinary Shares. Any of our shareholders may transfer all or any of his or her ordinary shares by an instrument of transfer in the usual or common
form or any other form approved by our board of directors.
However, our board of directors may, in its absolute discretion, decline to register any transfer of any ordinary share which is not fully paid up or on which our
company has a lien. Our board of directors may also decline to register any transfer of any ordinary share unless:
•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 to show the right of the transferor to make the transfer;
•the instrument of transfer is in respect of only one class of shares;
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•the instrument of transfer is properly stamped, if required;
•a fee of such maximum sum as the Nasdaq Global Select Market may determine to be payable, or such lesser sum as the board of directors may from time to
time require, is paid to our company in respect thereof; and
•in the case of a transfer to joint holders, the transfer is not to more than four joint holders.
If our directors refuse to register a transfer they are required, within three months after the date on which the instrument of transfer was lodged, to send to each of
the transferor and the transferee notice of such refusal.
Liquidation. On a return of capital on winding up or otherwise (other than on conversion, redemption or purchase of ordinary shares or, on a winding up, with the
sanction of a special resolution of our company and any other sanction required by the Companies Act), assets available for distribution among the holders of ordinary
shares will be distributed among the holders of the ordinary shares in proportion to the par value of the shares held by them (subject to, on a winding up where the assets
available for distribution amongst the shareholders of our company shall be more than sufficient to repay the whole of the share capital at the commencement of the
winding up, a deduction from ordinary shares in respect of which there are monies due of all monies payable to our company for unpaid calls or otherwise). If our assets
available for distribution are insufficient to repay all of the paid-up capital, the assets will be distributed so that, as nearly as may be, the losses are borne by our
shareholders in proportion to the par value of the shares held by them. We are a “limited liability” company registered under the Companies Act, and under the
Companies Act, the liability of our members is limited to the amount, if any, unpaid on the shares respectively held by them. Our current memorandum of association
contains a declaration that the liability of our members is so limited.
Calls on Ordinary Shares and Forfeiture of Ordinary shares. Our board of directors may from time to time make calls upon shareholders for any amounts unpaid
on their ordinary shares (together with any interests which may have accrued). The ordinary shares that have been called upon and remain unpaid are subject to
forfeiture.
Redemption. Repurchase and Surrender of Ordinary Shares. We may issue shares on terms that such shares are subject to redemption, at our option or at the
option of the holders thereof, on such terms and in such manner as may be determined, before the issue of such shares, by our board of directors or by an ordinary
resolution of our shareholders. Our company may also repurchase any of our shares provided that the manner and terms of such purchase have been approved by our
board of directors or by ordinary resolution of our shareholders, or are otherwise authorized by our memorandum and articles of association. Under the Companies Act,
the redemption or repurchase of any share may be paid out of our company’s profits or out of the proceeds of a fresh issue of shares made for the purpose of such
redemption or repurchase, or out of capital (including share premium account and capital redemption reserve) if our company can, immediately following such payment,
pay its debts as they fall due in the ordinary course of business. In addition, under the Companies Act no such share may be redeemed or repurchased (a) unless it is
fully paid up, (b) if such redemption or repurchase would result in there being no shares outstanding other than shares held as treasury shares, or (c) if the company has
commenced liquidation. In addition, our company may accept the surrender of any fully paid share for no consideration.
Variations of Rights of Shares. If at any time, our share capital is divided into different classes of shares, all or any of the rights attached to any such class may
(subject to any rights or restrictions for the time being attached to any class of share) only be materially adversely varied with the consent in writing of the holders of
two-thirds of the issued shares of that class or with the sanction of a resolution passed at a separate meeting of the holders of the shares of that class by the holders of
two-thirds of the issued shares of that class. The rights conferred upon the holders of the shares of any class issued with preferred or other rights will not, unless
otherwise expressly provided by the terms of issue of the shares of that class, be deemed to be materially adversely varied by the creation or issue of further shares
ranking pari passu with or subsequent to such existing class of shares or the redemption or purchase of any shares of any class by our company. The rights of the holders
of shares shall not be deemed to be materially adversely varied by the creation or issue of shares with preferred or other rights including, without limitation, the creation
of shares with enhanced or weighted voting rights.
General Meetings of Shareholders and Shareholder Proposals. As a Cayman Islands exempted company, we are not obliged by the Companies Act to call
shareholders’ annual general meetings. Our current memorandum and articles of association provide that we may (but are not obliged to) in each year hold a general
meeting as our annual general meeting in which case we shall specify the meeting as such in the notices calling it, and the annual general meeting shall be held at such
time and place as may be determined by our directors.
Shareholders’ annual general meetings and any other general meetings of our shareholders may be convened by a majority of our board of directors or our
chairman. Advance notice of at least seven calendar days is required for the convening of our annual general shareholders’ meeting and any other general meeting of our
shareholders. A quorum required for a general meeting of shareholders consists of one or more shareholders holding shares in our Company which carry in aggregate (or
representing by proxy) not less than one-third of all votes attaching to all shares in our Company in issue and entitled to vote at such general meeting, present in person
or by proxy or, if a corporation or other non-natural person, by its duly authorized representative.
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Cayman Islands law provides shareholders with only limited rights to requisition a general meeting, and does not provide shareholders with any right to put any
proposal before a general meeting. However, these rights may be provided in a company’s articles of association. Our current memorandum and articles of association
allow our shareholders holding shares representing in aggregate not less than one-third of all votes attaching to all issued and outstanding shares of our company that as
at the date of the deposit of such requisition carry the right to vote at general meetings of our company, to requisition an extraordinary general meeting of the
shareholders, in which case our directors are obliged to call such meeting and to put the resolutions so requisitioned to a vote at such meeting; however, our current
memorandum and articles of association do not provide our shareholders with any right to put any proposals before annual general meetings or extraordinary general
meetings not called by such shareholders.
Inspection of Books and Records. Holders of our ordinary shares have no general right under Cayman Islands law to inspect or obtain copies of our list of
shareholders or our corporate records (other than the memorandum and articles of association, the register of mortgages and charges and any special resolutions passed
by shareholders). Under Cayman Islands law, the names of our current directors can be obtained from a search conducted at the Registrar of Companies of the Cayman
Islands.
Changes in Capital. Our shareholders may from time to time by ordinary resolution:
•increase our share capital by such sum, to be divided into shares of such classes and amount, as the resolution shall prescribe;
•consolidate and divide all or any of our share capital into shares of a larger amount than our existing shares;
•sub-divide our existing shares, or any of them into shares of a smaller amount, provided that in the subdivision the proportion between the amount paid and the
amount, if any, unpaid on each reduced share shall be the same as it was in case of the share from which the reduced share is derived; or
•cancel any shares which, at the date of the passing of the resolution, have not been taken or agreed to be taken by any person and diminish the amount of our
share capital by the amount of the shares so canceled.
Our shareholders may by special resolution, subject to confirmation by the Grand Court of the Cayman Islands on an application by our company for an order
confirming such reduction, reduce our share capital or any capital redemption reserve in any manner permitted by law.
Exempted Company. We are an exempted company with limited liability under the Companies Act of the Cayman Islands. The Companies Act in the Cayman
Islands distinguishes between ordinary resident companies and exempted companies. Any company that is registered in the Cayman Islands but conducts business
mainly outside of the Cayman Islands may apply to be registered as an exempted company. The requirements for an exempted company are essentially the same as for
an ordinary company except for the exemptions and privileges listed below:
•an exempted company does not have to file an annual return of its shareholders with the Registrar of Companies;
•an exempted company’s register of members is not required to be open to inspection;
•an exempted company does not have to hold an annual general meeting;
•an exempted company may issue no par value shares;
•an exempted company may obtain an undertaking against the imposition of any future taxation (such undertakings are usually given for 30 years in the first
instance);
•an exempted company may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands;
•an exempted company may register as a limited duration company; and
•an exempted company may register as a segregated portfolio company.
“Limited liability” means that the liability of each shareholder is limited to the amount unpaid by the shareholder on that shareholder’s shares of the company
(except in exceptional circumstances, such as involving fraud, the establishment of an agency relationship or an illegal or improper purpose or other circumstances in
which a court may be prepared to pierce or lift the corporate veil).
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Registered Office and Objects
Our registered office in the Cayman Islands is located at PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands, or at such other location
within the Cayman Islands as our directors may from time to time decide. The objects for which our company is established are unrestricted and we have full power and
authority to carry out any object not prohibited by the Companies Act or any other law of the Cayman Islands.
Differences in Corporate Law
The Companies Act is derived, to a large extent, from the older Companies Acts of England but does not follow recent United Kingdom statutory enactments,
and accordingly there are significant differences between the Companies Act and the current Companies Act of England. In addition, the Companies Act differs from
laws applicable to United States corporations and their shareholders. Set forth below is a summary of the significant differences between the provisions of the
Companies Act applicable to us and the comparable provisions of the laws applicable to companies incorporated in Delaware and their shareholders.
Mergers and Similar Arrangements. The Companies Act permits mergers and consolidations between Cayman Islands companies and between Cayman Islands
companies and non-Cayman Islands companies. For these purposes, (a) “merger” means the merging of two or more constituent companies and the vesting of their
undertaking, property and liabilities in one of such companies as the surviving company and (b) a “consolidation” means the combination of two or more constituent
companies into a combined company and the vesting of the undertaking, property and liabilities of such companies to the consolidated company. In order to effect such
a merger or consolidation, the directors of each constituent company must approve a written plan of merger or consolidation, which must then be authorized by (a) a
special resolution of the shareholders of each constituent company, and (b) such other authorization, if any, as may be specified in such constituent company’s articles of
association. The written plan of merger or consolidation must be filed with the Registrar of Companies together with a declaration as to (amongst other matters) the
solvency of the consolidated or surviving company, a statement of the assets and liabilities of each constituent company and an undertaking that a copy of the certificate
of merger or consolidation will be given to the members and creditors of each constituent company and that notification of the merger or consolidation will be published
in the Cayman Islands Gazette. Dissenting shareholders have the right to be paid the fair value of their shares (which, if not agreed between the parties, will be
determined by the Cayman Islands court) if they follow the required procedures, subject to certain exceptions. Court approval is not required for a merger or
consolidation which is effected in compliance with these statutory procedures.
In addition, there are statutory provisions that facilitate, compromises or arrangements between a Cayman Islands company and its members (or any class of
them).
Following amendments to the Companies Act that became effective on August 31, 2022, the majority-in-number "headcount test" in relation to the approval of
members' schemes of arrangement has been abolished. Section 86(2A) of the Companies Act provides that, if 75% in value of the members (or class of members) of a
Cayman Islands company agree to any compromise or arrangement, such compromise or arrangement shall, if sanctioned by the Cayman Court, be binding on all
members (or class of members) of such company and on the company itself. Where a Cayman Islands company is in the course of being wound up, such compromise or
arrangement would be binding on the liquidator and contributories of the company. In contrast, section 86(2) of the Companies Act continues to require (a) approval by
a majority in number representing 75% in value; and (b) the sanction of the Grand Court of the Cayman Islands, in relation to any compromise or arrangement between a
company and its creditors (or any class of them). At the initial directions hearing, the Cayman Islands court will make orders for (amongst other things) the convening of
the meetings of creditors or members (or classes of them, as applicable). While a dissenting shareholder or creditor has the right to express to the court the view that the
transaction ought not to be approved, the court would nevertheless be likely to approve the arrangement if it determines that:
•the company has complied with the directions set down by the Cayman Islands court;
•the meeting was properly held and 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 of the minority to
promote interests adverse to those of the class; and
•the arrangement is such that may be reasonably approved by an intelligent and honest man of that class acting in respect of his/her interest.
If a compromise or arrangement of a Cayman Islands company is approved by the members in the context of a members' scheme and the Cayman Islands court
subsequently sanctions such scheme (as described above), a dissenting shareholder would have no rights comparable to the appraisal rights which it would have if the
company in question were a Delaware corporation (being the
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right to receive payment in cash for the judicially determined value of its shares). This is because such scheme will be binding on all members (or class of members),
regardless of whether all the members (or class of members) approved the scheme, upon the sanction order being made. Having said that, a dissenting shareholder
would have the right to appeal the making of the sanction order to the Cayman Islands Court of Appeal, if there were grounds for doing so.
Shareholders’ Suits. In principle, we will normally be the proper plaintiff to sue for a wrong done to us as a company, and as a general rule a derivative action
may not be brought by a minority shareholder. However, based on English authorities, which would in all likelihood be of persuasive authority in the Cayman Islands,
the Cayman Islands court can be expected to follow and apply the common law principles (namely the rule in Foss v. Harbottle and the exceptions thereto) which permit
a minority shareholder to commence a class action against or derivative actions in the name of the company to challenge actions where:
•a company acts or proposes to act illegally or ultra vires;
•the act complained of, although not ultra vires, could only be effected duly if authorized by more than a simple majority vote that has not been obtained; and
•those who control the company are perpetrating a “fraud on the minority.”
Indemnification of Directors and Executive Officers and Limitation of Liability. The ability of Cayman Islands companies to provide in their articles of
association for indemnification of officers and directors is limited, insofar as it is not permissible for the directors to contract out of the core fiduciary duties they owe to
the company, nor would any indemnity be effective if it were held by the Cayman Islands courts to be contrary to public policy, which would include any attempt to
provide indemnification against civil fraud or the consequences of committing a crime. Our current memorandum and articles of association provide that our directors
and officers shall be indemnified against all actions, proceedings, costs, charges, expenses, losses, damages or liabilities incurred or sustained by such director or officer,
other than by reason of such person’s own dishonesty, willful default or fraud, in or about the conduct of our company’s business or affairs (including as a result of any
mistake of judgment) or in the execution or discharge of his duties, powers, authorities or discretions, including without prejudice to the generality of the foregoing, any
costs, expenses, losses or liabilities incurred by such director or officer in defending (whether successfully or otherwise) any civil proceedings concerning our company
or its affairs in any court whether in the Cayman Islands or elsewhere. This standard of conduct is generally the same as permitted under the Delaware General
Corporation Law for a Delaware corporation. In addition, we have entered into indemnification agreements with each of our directors and executive officers that will
provide such persons with additional indemnification beyond that provided in our current 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 us under the foregoing
provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore
unenforceable.
Anti-Takeover Provisions in the Memorandum and Articles of Association. Some provisions of our current memorandum and articles of association may
discourage, delay or prevent a change in control of our company or management that shareholders may consider favorable, including provisions that authorize our board
of directors to issue preferred shares in one or more series and to designate the price, rights, preferences, privileges and restrictions of such preferred shares without any
further vote or action by our shareholders.
However, under Cayman Islands law, our directors may only exercise the rights and powers granted to them under our memorandum and articles of association,
as amended and restated from time to time, for a proper purpose and for what they believe in good faith to be in the best interests of our company.
Directors’ Fiduciary Duties. Under Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the corporation and its shareholders.
This duty has two components: 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 prudent
person would exercise under similar circumstances. Under this duty, a director must inform himself of and disclose to shareholders, all material information reasonably
available regarding a significant transaction. The duty of loyalty requires that a director act in a manner he or she reasonably believes to be in the best interests of the
corporation. He or she must not use his or her corporate position for personal gain or advantage. This duty prohibits self-dealing by a director and mandates that the best
interest of the corporation and its shareholders take precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the
shareholders generally. In general, actions of a director are presumed to have been made 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, this presumption may be rebutted by evidence of a breach of one of the fiduciary duties. Should such evidence be
presented concerning a transaction by a director, a director must prove the procedural fairness of the transaction and that the transaction was of fair value to the
corporation.
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As a matter of Cayman Islands law, a director of a Cayman Islands company owes duties to the company including the following—a duty to act in good faith in
the best interests of the company, a duty not to make a personal profit based on his or her position as director (unless the company permits him to do so), a duty not to put
himself in a position where the interests of the company conflict with his or her personal interest or his or her duty to a third-party and a duty to exercise powers for the
purpose for which such powers were intended. A director of a Cayman Islands company owes to the company a duty to act with skill and care. In fulfilling their duty of
care to us, our directors must ensure compliance with our memorandum and articles of association, as amended and restated from time to time.
Shareholder Proposals. Under 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. The Delaware General Corporation Law does not provide shareholders an express right to
put any proposal before the annual meeting of shareholders, but in keeping with common law, Delaware corporations generally afford shareholders an opportunity to
make proposals and nominations provided that they comply with the notice provisions in the certificate of incorporation or bylaws. A special meeting may be called by
the board of directors or any other person 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 any right to table
resolutions at a general meeting. However, these rights may be provided in a company’s articles of association. Our current memorandum and articles of association
provides that, on the requisition of shareholders holding shares representing in aggregate not less than one-third (1/3) of all votes attaching to all issued and outstanding
shares of our company that as at the date of the deposit of such requisition carry the right to vote at general meetings of our company, the board shall convene an
extraordinary general meeting. However, our current memorandum and articles of association do not provide our shareholders with any right to put any proposals before
annual general meetings or extraordinary general meetings not called by such shareholders. As an exempted Cayman Islands company, we are not obliged by law to call
shareholders’ annual general meetings.
Cumulative Voting. Under the Delaware General Corporation Law, cumulative voting for elections of directors is not permitted unless the corporation’s
certificate of incorporation specifically provides for it. Cumulative voting potentially facilitates the representation of minority shareholders on a board of directors since
it permits the minority shareholder to cast all the votes to which the shareholder is entitled on a single director, which increases the shareholder’s voting power with
respect to electing such director. Cayman Islands law does not prohibit cumulative voting, but our current articles of association do not provide for cumulative voting.
As a result, our shareholders are not afforded any less protections or rights on this issue than shareholders of a Delaware corporation.
Appointment of Directors. For so long as Baidu Holdings and its affiliates collectively hold no less than 50% of the voting power of our company, Baidu shall be
entitled to appoint, remove and replace a majority of the directors.
The board of directors may, by the affirmative vote of a simple majority of the remaining directors present and voting at a meeting of the board of directors,
appoint any person as a director, to fill a casual vacancy on the board of directors that is not a Baidu Holdings appointed director or as an addition to the existing board
of directors. A vacancy on the board of directors created by the removal of a non-Baidu Holdings appointed director may be filled by way of an ordinary resolution of
our company’s shareholders or by the affirmative vote of a simple majority of the remaining directors present and voting at a meeting of the board of directors.
Each director whose term of office expires shall be eligible for re-election at a meeting of our company’s shareholders or re-appointment by the board of
directors.
Removal of Directors. Under the Delaware General Corporation Law, a director of a corporation with a classified board may be removed only for cause with the
approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. Under our current memorandum and articles
of association, directors not appointed by Baidu Holdings may be removed by ordinary resolution of our shareholders or pursuant to an existing written agreement
between the director and our company.
Transactions with Interested Shareholders. The Delaware General Corporation Law contains a business combination statute applicable to Delaware public
corporations whereby, unless the corporation has specifically elected not to be governed by such statute by amendment to its certificate of incorporation or bylaws that is
approved by its shareholders, it is prohibited from engaging in certain business combinations with an “interested shareholder” for three years following the date that
such person becomes an interested shareholder. An interested shareholder generally is a person or a group who or which owns or owned 15% or more of the target’s
outstanding voting stock or who or which is an affiliate or associate of the corporation and owned 15% or more of the corporation’s outstanding voting stock 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 all shareholders would not be treated
equally. The statute does not apply if, among other
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things, prior to the date on which such shareholder becomes an interested shareholder, the board of directors approves either the business combination or the transaction
which resulted in the person becoming an interested shareholder. This encourages any potential acquirer of a Delaware corporation to negotiate the terms of any
acquisition transaction with the target’s board of directors.
Cayman Islands law has no comparable statute. As a result, we cannot avail ourselves of the types of protections afforded by the Delaware business combination
statute. However, although Cayman Islands law does not regulate transactions between a company and its significant shareholders, it does provide that such transactions
must be entered into bona fide in the best interests of the company and for a proper corporate purpose and not with the effect of constituting a fraud on the minority
shareholders.
Dissolution; Winding Up. Under the Delaware General Corporation Law, unless the board of directors approves the proposal to dissolve, dissolution must be
approved by shareholders holding 100% of the total voting power of the corporation. Only if the dissolution is initiated by the board of directors may it be approved by a
simple majority of the corporation’s outstanding shares. Delaware law allows a Delaware corporation to include in its certificate of incorporation a supermajority voting
requirement in connection with dissolutions initiated by the board.
Under Cayman Islands law, a company may be wound up either voluntarily or compulsorily. A company may be wound up by the Grand Court of the Cayman
Islands for a number of reasons, including: (i) the company has passed a special resolution requiring the company to be wound up by the Grand Court; (ii) the company
is unable to pay its debts; and (iii) the Grand Court is of opinion that it is just and equitable that the company should be wound up.
Variation of Rights of Shares. Under the Delaware General Corporation Law, a corporation may vary the rights of a class of shares with the approval of a
majority of the outstanding shares of such class, unless the certificate of incorporation provides otherwise. Under our current articles of association, we may only
materially adversely vary the rights attached to any class of shares (subject to any rights or restrictions for the time being attached to any class of share) with the consent
in writing of the holders of two-thirds of the issued shares of that class or with the sanction of a resolution passed at a separate meeting of the holders of the shares of
that class by the holders of two-thirds of the issued shares of that class.
Amendment of Governing Documents. Under the Delaware General Corporation Law, a corporation’s certificate of incorporation may be amended only if
adopted and declared advisable by the board of directors and approved by a majority of the outstanding shares entitled to vote and the bylaws may be amended with the
approval of a majority of the outstanding shares entitled to vote and may, if so provided in the certificate of incorporation, also be amended by the board of directors.
Under the Companies Act, our memorandum and articles of association may only be amended by special resolution of our shareholders.
Rights of Non-Resident or Foreign Shareholders. There are no limitations imposed by our current memorandum and articles of association on the rights of non-
resident or foreign shareholders to hold or exercise voting rights on our shares. In addition, there are no provisions in our current memorandum and articles of association
governing the ownership threshold above which shareholder ownership must be disclosed.
Directors’ Power to Issue Shares. Under our current memorandum and articles of association, our board of directors is empowered to issue or allot shares or
grant options and warrants with or without preferred, deferred, qualified or other special rights or restrictions.
C.MATERIAL CONTRACTS
We 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” or elsewhere in this annual report on Form 20-F.
D.EXCHANGE CONTROLS
See “Item 4. Information on the Company—B. Business Overview—Government Regulations—Regulations on Foreign Exchange” and “Item 4. Information on
the Company—B. Business Overview—Government Regulations—Regulations on Dividend Distribution.”
E.TAXATION
The following summary of Cayman Islands, People’s Republic of China and U. S. federal income tax considerations generally applicable to an investment in our
ADSs or Class A ordinary shares 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
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relating to an investment in our ADSs or Class A ordinary shares, such as tax consequences under state, local and other tax laws. To the extent that the discussion relates
to matters of Cayman Islands tax law, it represents the opinion of Walkers (Hong Kong), our Cayman Islands counsel. To the extent that the discussion relates to matters
of PRC tax law, it represents the opinion of Jingtian & Gongcheng, our PRC counsel.
Cayman Islands Taxation
The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation 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 Cayman Islands except for stamp duties
which may be applicable on instruments executed in, or after execution brought within the jurisdiction of the Cayman Islands. The Cayman Islands is not party to any
double tax treaties that are applicable to any payments made to or by our company. There are no exchange control regulations or currency restrictions in the Cayman
Islands.
Payments of dividends and capital in respect of the shares will not be subject to taxation in the Cayman Islands and no withholding tax will be required on the
payment of dividends or capital to any holder of our ADSs or ordinary shares, nor will gains derived from the disposal of our ADSs or ordinary shares be subject to
Cayman Islands income or corporation tax.
Mainland China Taxation
The Enterprise Income Tax Law provides that an enterprise established under the laws of a foreign country or region but whose “de facto management body” is
located in mainland China is treated as a mainland China resident enterprise for mainland China tax purposes and consequently subject to mainland China income tax at
the rate of 25% on its global income. The implementing rules of the Enterprise Income Tax Law merely define the location of the “de facto management body” as an
“organizational body which effectively manages and controls the production and business operation, personnel, accounting, properties and other aspects of operations of
an enterprise.” Based on a review of surrounding facts and circumstances, we do not believe that we should be considered a mainland China resident enterprise for
mainland China tax purposes. However, there is limited guidance and implementation history of the Enterprise Income Tax Law, and if we are treated as a mainland
China resident enterprise for mainland China tax purposes, we will be subject to mainland China tax on our global income at a uniform tax rate of 25%.
Mainland China income tax at the rate of 10% will be withheld from payments of interest or dividends we make to investors that are “non-resident enterprises” of
mainland China, if such investors do not have an establishment or place of business in mainland China, or if they have such establishment or place of business in
mainland China but the relevant income is not effectively connected with such establishment or place of business, to the extent such interest or dividends are deemed to
be sourced within mainland China.
Furthermore, any gain realized on the transfer of the ADSs or shares by such investors would also be subject to mainland China income tax at 10% if such gain is
regarded as income derived from sources within mainland China.
Furthermore, if we are considered a mainland China resident enterprise and relevant mainland China tax authorities consider the interest or dividends we pay or
any gains realized from the transfer of our ADSs or shares to be income derived from sources within mainland China, such interest or dividends and gains earned by
non-resident individuals would be subject to the 20% mainland China individual income tax (which may be withheld at source).
These rates could be reduced by applicable tax treaties or similar arrangements between China and the jurisdiction of the investor. For example, for investors in
Hong Kong, the tax rate is reduced to 7% for interest payments and 5% for dividends. However, it is unclear whether non-mainland China shareholders would be able to
claim the benefits of any tax treaties between their country of tax residence and mainland China in the event that we are treated as a mainland China resident enterprise.
U.S. Federal Income Tax Considerations
The following discussion is a summary of U.S. federal income tax considerations under present law of the ownership and disposition of the ADSs or Class A
ordinary shares. This summary applies only to investors that are U.S. Holders (as defined below) and that hold the ADSs or Class A ordinary shares as capital assets for
U.S. federal income tax purposes. This discussion is based on the applicable provisions of the Internal Revenue Code of 1986, as amended, or the Code, the Treasury
Regulations promulgated thereunder, pertinent judicial decisions, interpretive rulings of the IRS and such other authorities as we have considered relevant. All of the
foregoing authorities are subject to change, which change could apply retroactively and could affect the tax considerations described below.
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The following discussion does not deal with all the tax considerations to any particular investor or to persons that may be subject to special treatment under U.S.
federal income tax laws, including:
•banks;
•financial institutions;
•insurance companies;
•broker dealers;
•persons that elect to mark their securities to market;
•tax-exempt entities;
•persons liable for the alternative minimum tax;
•regulated investment companies;
•certain expatriates or former long-term residents of the United States;
•governments or agencies or instrumentalities thereof;
•persons holding the ADSs or Class A ordinary shares as part of a straddle, hedging, conversion or integrated transaction;
•persons that actually or constructively own ADSs or ordinary shares representing 10% or more of our voting power or value;
•persons whose functional currency is other than the U.S. dollar; or
•persons who acquired ADSs or Class A ordinary shares pursuant to the exercise of any employee share option or otherwise as compensation or in connection
with services.
U.S. Holders are urged to consult their tax advisors about the application of the U.S. federal tax rules to their particular circumstances as well as the state, local
and foreign tax consequences to them of ownership and disposition of ADSs or Class A ordinary shares.
The discussion below of the U.S. federal income tax considerations will apply if you are a “U.S. Holder.” You are a “U.S. Holder” if you are the beneficial owner
of the ADSs or Class A ordinary shares and you are, for U.S. federal income tax purposes:
•an individual citizen or resident of the United States;
•a corporation (or other entity subject to tax as a corporation for U.S. federal income tax purposes) that is created or organized in or under the laws of the United
States, any State thereof or the District of Columbia;
•an estate whose income is subject to U.S. federal income taxation regardless of its source; or
•a trust that (i) is subject to the supervision of a court within the United States and one or more U.S. persons has or have the authority to control all substantial
decisions of the trust or (ii) has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person.
This discussion does not consider the tax treatment of partnerships or other pass-through entities that hold the ADSs or Class A ordinary shares, or of persons
who hold the ADSs or Class A ordinary shares through such entities. If a partnership (or other entity classified as a partnership for U.S. federal income tax purposes) is
the beneficial owner of the ADSs or Class A ordinary shares, the U.S. federal income tax treatment of a partner in the partnership will generally depend on the status of
the partner and the activities of the partnership.
The discussion below assumes that the representations contained in the deposit agreement are true and that the obligations in the deposit agreement and any
related agreement will be complied with in accordance with their terms. If you hold ADSs, you will be treated as the holder of the underlying Class A ordinary shares
represented by those ADSs for U.S. federal income tax purposes.
This discussion does not address any aspect of U.S. federal non-income tax laws, such as gift or estate tax laws, or state, local or foreign tax laws or the Medicare
tax on certain net investment income. We have not sought, and will not seek, a ruling from the IRS or an opinion as to any U.S. federal income tax consequence
described herein. The IRS may disagree with the discussion herein, and its determination may be upheld by a court.
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Taxation of Dividends or Other Distributions on the ADSs or Class A Ordinary Shares
Subject to the discussion under “—Passive Foreign Investment Company Considerations” below, the gross amount of all our distributions to you with respect to
the ADSs or Class A ordinary shares will be included in your gross income as dividend income on the day actually or constructively received by the depositary, in the
case of ADSs, or by you, in the case of Class A ordinary shares, but only to the extent that the distribution is paid out of our current or accumulated earnings and profits
(computed under U.S. federal income tax principles). Because we do not intend to calculate our earnings and profits on the basis of U.S. federal income tax principles,
you should expect to treat the full amount of the distribution as a dividend for U.S. federal income tax purposes. Dividends paid by us will not be eligible for the
dividends-received deduction allowed to corporations in respect of dividends received from U.S. corporations.
With respect to individuals and certain other non-corporate holders, dividends paid on our ADSs may be subject to reduced rates of taxation provided that (1) our
ADSs are readily tradeable on an established securities market in the United States, or otherwise, in the event we are deemed to be a mainland China “resident
enterprise” under the PRC tax law, we are eligible for the benefit of the income tax treaty between the United States and the PRC, or the Treaty, (2) we are not a PFIC (as
discussed below) for either the taxable year in which the dividend is paid or the preceding taxable year and (3) certain holding period and other requirements are met.
Because our ADSs are listed on the Nasdaq Global Select Market and will accordingly be considered to be readily tradable on an established securities market in the
United States, and we believe that we were not a PFIC for U.S. federal income tax purposes for our taxable year ended December 31, 2022 and we do not expect to be a
PFIC in the foreseeable future, we believe that we are a qualified foreign corporation with respect to dividends paid on the ADSs, but not with respect to dividends paid
on our ordinary shares. In the event that we are deemed to be a mainland China resident enterprise under PRC tax law, we may be eligible for the benefits of the Treaty.
If we are eligible for such benefits, dividends we pay on our ordinary shares, regardless of whether such shares are represented by our ADSs, would be eligible for the
reduced rates of taxation applicable to qualified dividend income, as discussed above. You should consult your tax advisor regarding the availability of the lower rate for
dividends paid with respect to our ADSs or Class A ordinary shares.
Dividends will generally be treated as income from foreign sources for U.S. foreign tax credit purposes and will generally constitute passive category income. In
the event that we are deemed to be a mainland China resident enterprise under the PRC tax law and dividends paid on our ADSs or Class A ordinary shares are subject to
mainland China withholding taxes, depending on your particular facts and circumstances, you may be eligible, subject to a number of complex limitations, to claim a
foreign tax credit in respect of any foreign withholding taxes imposed (at a rate not exceeding the applicable Treaty rate) on dividends received on the ADSs or Class A
ordinary shares. If you do not elect to claim a foreign tax credit for foreign taxes withheld, you may instead, subject to applicable limitations, claim a deduction, for U.S.
federal income tax purposes, in respect of such withholdings, 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 advised to consult your tax advisor regarding the availability of the foreign tax credit under your particular circumstances.
Sale or Other Taxable Disposition of the ADSs or Class A Ordinary Shares
Subject to the discussion under “—Passive Foreign Investment Company Considerations” below, you will recognize gain or loss on any sale, exchange or other
taxable disposition of an ADS or Class A ordinary share equal to the difference between the amount realized for the ADS or Class A ordinary share and your tax basis in
the ADS or Class A ordinary share. The gain or loss will generally be capital gain or loss, which will be long-term capital gain or loss if your holding period for the
shares exceeds one year at the time of disposition. Long-term capital gains are generally eligible for a preferential rate of taxation for individuals and certain other non-
corporate U.S. Holders. The deductibility of capital losses is subject to limitations. Any such gain or loss that you recognize will generally be treated as U.S.-source
income or loss for foreign tax credit limitation purposes, in which event you may not be able to use the foreign tax credit arising from any mainland China tax imposed
on the disposition of the ADSs or Class A ordinary shares unless such credit can be applied (subject to applicable limitations) against tax due on other income derived
from foreign sources in the same category. However, in the event we are deemed to be a mainland China resident enterprise under PRC tax law, we may be eligible for
the benefits of the Treaty. In such event, if PRC tax were to be imposed on any gain from the disposition of the ADSs or Class A ordinary shares, a U.S. Holder that is
eligible for the benefits of the Treaty may elect to treat such gain as mainland China-source income for foreign tax credit purposes. You should consult your tax advisor
regarding the tax consequences in case any mainland China tax is imposed on gain on a disposition of the ADSs or Class A ordinary shares, including the availability of
the foreign tax credit and the election to treat any gain as mainland China-source, under your particular circumstances.
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Passive Foreign Investment Company Considerations
A non-U.S. corporation, such as our company, is considered a PFIC for any taxable year if either (i) at least 75% of its gross income is passive income, or (ii) at
least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the
production of passive income. We will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other
corporation in which we own, directly or indirectly, more than 25% (by value) of the shares. Although the law in this regard is not entirely clear, we treat the variable
interest entities as being owned by us for U.S. federal income tax purposes because we impose control over them and we are entitled to their economic benefits and, as a
result, we consolidate their results of operations in our combined and consolidated financial statement. If it were determined, however, that we are not the owner of the
variable interest entities for U.S. federal income tax purposes, we would likely be treated as a PFIC for our taxable year ended December 31, 2022 and for subsequent
taxable years.
Assuming we are the owner of the variable interest entities in mainland China for U.S. federal income tax purposes, based on our current and expected income
and assets and the current market value of our ADSs, we do not presently expect to be a PFIC for the 2023 taxable year or the foreseeable future. However, given the
lack of authority applying the PFIC rules to our particular circumstances, and the highly factual nature of the analysis, no assurance can be given. The determination as
to whether we are a PFIC must be made annually after the end of each taxable year based on that year’s composition of income and assets, and consequently, our PFIC
status may change. While we do not anticipate becoming a PFIC, changes in the nature of our income or assets or the value of our ADSs may cause us to become a
PFIC for the current or any subsequent taxable year. In particular, because the value of certain of our assets for purposes of the asset test is generally determined by
reference to the market price of the ADSs, our PFIC status may depend in part on the market price of the ADSs, which may fluctuate considerably. The composition of
our income and assets may also be affected by how, and how quickly, we use our liquid assets. In addition, there are uncertainties in the application of the PFIC rules to
our particular circumstances. It is possible that the IRS may challenge our classification of certain income and assets or our valuation of our tangible and intangible
assets, each of which may result in our becoming a PFIC for the current or subsequent taxable years.
If we are a PFIC for any year during which you hold the ADSs or the Class A ordinary shares we will generally continue to be treated as a PFIC for all
succeeding years during which you hold such ADSs or Class A ordinary shares. However, if we cease to be a PFIC, provided that you have not made a mark-to-market
election, as described below, you may avoid some of the adverse effects of the PFIC regime by making a purging election with respect to such ADSs or Class A ordinary
shares, as applicable. One type of purging election creates a deemed sale of such shares at their fair market value. Any gain recognized in this deemed sale will be
subject to tax as an excess distribution, as described below. As a result of this election, you will have additional basis (to the extent of any gain recognized on the
deemed sale) and, solely for purposes of the PFIC rules, a new holding period in your shares.
If we are a PFIC for any taxable year during which you hold the ADSs or the Class A ordinary shares you will be subject to special tax rules with respect to any
“excess distribution” that you receive and any gain you realize from a sale or other disposition (including a pledge) of the ADSs or Class A ordinary shares, unless you
make a mark-to-market election as discussed below. Distributions you receive in a taxable year that are greater than 125% of the average annual distributions you
received during the shorter of the three preceding taxable years or your holding period for the ADSs or Class A ordinary shares will be treated as an excess distribution.
Under these special tax rules:
•the excess distribution or gain would be allocated ratably over your holding period for the ADSs or Class A ordinary shares;
•the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we became a PFIC, would be treated as ordinary
income; and
•the amount allocated to each of the other taxable years would be subject to tax at the highest rate of tax in effect for you for such year and would be increased by
an additional tax equal to interest on the resulting tax deemed deferred with respect to each such other taxable year.
The tax liability for amounts allocated to years prior to the year of disposition or “excess distribution” cannot be offset by any net operating losses for such years,
and gains (but not losses) realized on the sale of the ADSs or Class A ordinary shares cannot be treated as capital, even if you hold the ADSs or Class A ordinary shares
as capital assets.
Alternatively, a U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election for such stock of a PFIC to elect out of the
tax treatment discussed in the two preceding paragraphs. 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 least 15 days during each calendar quarter, or “regularly traded,” on a qualified exchange or other market, as defined in applicable Treasury
Regulations. We expect that the ADSs will continue to be listed on the Nasdaq Global Select Market which is a qualified exchange for these purposes.
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Consequently, assuming that the ADSs are regularly traded, if you are a holder of ADSs, it is expected that the mark-to-market election would be available to you were
we to become a PFIC. However, a mark-to-market election may not be made with respect to our Class A ordinary shares as they are not marketable stock. If you make a
valid mark-to-market election for the ADSs, you will include in income each year an amount equal to the excess, if any, of the fair market value of the ADSs as of the
close of your taxable year over your adjusted basis in such ADSs. You are allowed a deduction for the excess, if any, of the adjusted basis of the ADSs over their fair
market value as of the close of the taxable year. Such deductions, however, are allowable only to the extent of any net mark-to-market gains on the ADSs included in
your income for prior taxable years. Amounts included in your income under a mark-to-market election, as well as gain on the actual sale or other disposition of the
ADSs in a year in which we are a PFIC, are treated as ordinary income. Ordinary loss treatment also applies to the deductible portion of any mark-to-market loss on the
ADSs, as well as to any loss realized on the actual sale or disposition of the ADSs, to the extent that the amount of such loss does not exceed the net mark-to-market
gains previously included for such ADSs. Your basis in the ADSs will be adjusted to reflect any such income or loss amounts. If you make such a mark-to-market
election, tax rules that apply to distributions by corporations which are not PFICs would apply to distributions by us (except that the lower applicable capital gains rate
would not apply).
Because, as a technical matter, a mark-to-market election cannot be made for any lower-tier PFICs that we may own, a U.S. Holder may continue to be subject to
the general PFIC rules described above with respect to such U.S. Holder’s indirect interest in certain investments held by us that are treated as an equity interest in a
PFIC for U.S. federal income tax purposes.
Alternatively, a U.S. Holder may avoid the PFIC tax consequences described above in respect to its ADSs and Class A ordinary shares by making a timely
“qualified electing fund,” or QEF, election. To comply with the requirements of a QEF election, a U.S. Holder must receive certain information from us. Because we do
not intend to provide such information, however, such election will not be available to you with respect to the ADSs or Class A ordinary shares.
If you hold ADSs or Class A ordinary shares in any year in which we are a PFIC, you will generally be required to file an annual information report containing
such information as the U.S. Treasury may require.
You are urged to consult your tax advisor regarding the application of the PFIC rules to your investment in the ADSs or Class A ordinary shares.
F.DIVIDENDS AND PAYING AGENTS
Not Applicable.
G.STATEMENT BY EXPERTS
Not Applicable.
H.DOCUMENTS ON DISPLAY
We previously filed with the SEC our registration statement on Form F-1 (Registration No. 333-223263), as amended, including the prospectus contained therein,
to register our Class A ordinary shares in relation to our initial public offering. We have also filed with the SEC a related registration statement on F-6 (Registration No.
333-223709) to register the ADSs.
We are subject to the periodic reporting and other informational requirements of the Exchange Act. Under the Exchange Act, we are required to file reports and
other information with the SEC. Specifically, we are required to file annually a Form 20-F within four months after the end of each fiscal year, which is December 31.
Copies of reports and other information, when so filed, may be inspected without charge and may be obtained at prescribed rates at the public reference facilities
maintained by the Securities and Exchange Commission at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain information regarding the
Washington, D.C. Public Reference Room by calling the Commission at 1 -800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports,
proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system. As a foreign private
issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and
principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.
We will furnish JPMorgan Chase Bank, N.A., the depositary of our ADSs, with our annual reports, which will include a review of operations and annual audited
consolidated financial statements prepared in conformity with U.S. GAAP, and all notices of shareholders’ meetings and other reports and communications that are made
generally available to our shareholders. The depositary
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will make such notices, reports and communications available to holders of ADSs and, upon our request, will mail to all record holders of ADSs the information
contained in any notice of a shareholders’ meeting received by the depositary from us.
In accordance with Nasdaq Stock Market Rule 5250(d), we will post this annual report on our website ir.iqiyi.com. In addition, we will provide hardcopies of our
annual report to shareholders, including ADS holders, free of charge upon request.
I.SUBSIDIARY INFORMATION
Not applicable.
J.ANNUAL REPORT TO SECURITY HOLDERS
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange Risk
Our revenues and expenses are mainly denominated in Renminbi. Although our exposure to foreign exchange risks should be limited in general, the value of your
investment in our ADSs will be affected by the exchange rate between U.S. dollar and Renminbi because the value of our business is effectively denominated in RMB,
while our ADSs will be traded in U.S. dollars.
The conversion of Renminbi into foreign currencies, including U.S. dollars, is based on rates set by the People’s Bank of China. The Renminbi has fluctuated
against the U.S. dollar, at times significantly and unpredictably. The value of the Renminbi against the U.S. dollar and other currencies is affected by changes in
mainland China’s political and economic conditions and by China’s foreign exchange policies, among other things. It is difficult to predict how market forces or PRC or
U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future.
To date, we have not entered into any material hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. To the extent that we
need to convert U.S. dollars into Renminbi for our operations or capital expenditures, appreciation of the Renminbi against the U.S. dollar would have an adverse effect
on the Renminbi amount we would receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments
for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the
U.S. dollar amount available to us.
The RMB depreciated by 8.23% against the U.S. dollar in 2022. As of December 31, 2022, we had RMB-denominated cash and cash equivalents, restricted cash,
short-term investments and long-term restricted cash included in prepayments and other assets of RMB3,638.6 million, and U.S. dollar-denominated cash and cash
equivalents and restricted cash of US$729.7 million. Assuming we had converted RMB3,638.6 million into U.S. dollars at the exchange rate of RMB6.8972 for US$1.00
as of the end of 2022, our U.S. dollar cash balance would have been US$1,257.2 million. If the RMB had depreciated by 10% against the U.S. dollar, our U.S. dollar
cash balance would have been US$1,209.3 million instead. Assuming we had converted US$729.7 million into RMB at the exchange rate of RMB6.8972 for US$1.00 as
of the end of 2022, our RMB cash balance would have been RMB8,671.5 million. If the RMB had appreciated by 10% against the U.S. dollar, our RMB cash balance
would have been RMB8,168.2 million instead. In addition, we had U.S. dollar-denominated convertible senior notes of US$2,587.0 million as of December 31, 2022. A
hypothetical 10% increase in the exchange rate of the U.S. dollar against the RMB would have resulted in an increase of RMB1,784.3 million (US$258.7 million) in the
value of our U.S. dollar-denominated convertible senior notes as of December 31, 2022.
Interest Rate Risk
Our exposure to interest rate risk primarily relates to the interest income generated by excess cash, which is mostly held in interest-bearing bank deposits.
Interest-earning instruments carry a degree of interest rate risk. We have not been exposed to material risks due to changes in interest rates, and we have not used any
derivative financial instruments to manage our interest risk exposure. However, our future interest income may fall short of expectations due to changes in market
interest rates.
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ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A.DEBT SECURITIES
Not applicable.
B.WARRANTS AND RIGHTS
Not applicable.
C.OTHER SECURITIES
Not applicable.
D.AMERICAN DEPOSITARY SHARES
Fees and Charges Our ADS holders May Have to Pay
The depositary may charge each person to whom ADSs are issued, including, without limitation, issuances against deposits of shares, issuances in respect of
share distributions, rights and other distributions, issuances pursuant to a stock dividend or stock split declared by us or issuances pursuant to a merger, exchange of
securities or any other transaction or event affecting the ADSs or deposited securities, and each person surrendering ADSs for withdrawal of deposited securities or
whose ADRs are canceled or reduced for any other reason, US$5.00 for each 100 ADSs (or any portion thereof) issued, delivered, reduced, canceled or surrendered, as
the case may be. The depositary may sell (by public or private sale) sufficient securities and property received in respect of a share distribution, rights and/or other
distribution prior to such deposit to pay such charge.
The following additional charges shall be incurred by the ADR holders, by any party depositing or withdrawing shares or by any party surrendering ADSs and/or
to whom ADSs are issued (including, without limitation, issuance pursuant to a stock dividend or stock split declared by us or an exchange of stock regarding the ADRs
or the deposited securities or a distribution of ADSs), whichever is applicable:
•a fee of up to US$0.05 per ADS for any cash distribution made pursuant to the deposit agreement;
•an aggregate fee of US$0.05 per ADS per calendar year (or portion thereof) for services performed by the depositary in administering the ADRs (which fee may
be charged on a periodic basis during each calendar year and shall be assessed against holders of ADRs as of the record date or record dates set by the depositary
during each calendar year and shall be payable in the manner described in the next succeeding provision);
•a fee for reimbursement of such fees, charges and expenses as are incurred by the depositary and/or any of the depositary’s agents (including, without limitation,
the custodian and expenses incurred on behalf of holders in connection with compliance with foreign exchange control regulations or any law or regulation
relating to foreign investment) in connection with the servicing of the shares or other deposited securities, the sale of securities (including, without limitation,
deposited securities), the delivery of deposited securities or otherwise in connection with the depositary’s or its custodian’s compliance with applicable law, rule
or regulation (which fees and charge shall be assessed on a proportionate basis against holders as of the record date or dates set by the depositary and shall be
payable at the sole discretion of the depositary by billing such holders or by deducting such charge from one or more cash dividends or other cash distributions);
•a fee for the distribution of securities (or the sale of securities in connection with a distribution), such fee being in an amount equal to the fee for the execution
and delivery of ADSs which would have been charged as a result of the deposit of such securities (treating all such securities as if they were shares) but which
securities or the net cash proceeds from the sale thereof are instead distributed by the depositary to those holders entitled thereto;
•stock transfer or other taxes and other governmental charges;
•SWIFT, cable, telex and facsimile transmission and delivery charges incurred at your request in connection with the deposit or delivery of shares, ADRs or
deposited securities;
•transfer or registration fees for the registration of transfer of deposited securities on any applicable register in connection with the deposit or withdrawal of
deposited securities;
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•in connection with the conversion of foreign currency into U.S. dollars, JPMorgan Chase Bank, N.A. shall deduct out of such foreign currency the fees,
expenses and other charges charged by it and/or its agent (which may be a division, branch or affiliate) so appointed in connection with such conversion; and
•fees of any division, branch or affiliate of the depositary utilized by the depositary to direct, manage and/or execute any public and/or private sale of securities
under the deposit agreement.
JPMorgan Chase Bank, N.A. and/or its agent may act as principal for such conversion of foreign currency.
We will pay all other charges and expenses of the depositary and any agent of the depositary (except the custodian) pursuant to agreements from time to time
between us and the depositary. The charges described above may be amended from time to time by agreement between us and the depositary.
Fees and Other Payments Made by the Depositary to Us
The depositary has agreed to reimburse us for certain expenses we incur that are related to establishment and maintenance of the ADS program upon such terms
and conditions as we and the depositary may agree from time to time. In 2022, we received US$2.6 million from the depository for expenses incurred in connection with
the establishment and maintenance of the ADS program.
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PART II.
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Material Modifications to the Rights of Security Holders
See “Item 10. Additional Information—B. Memorandum and Articles of Association—Ordinary Shares” for a description of the rights of securities holders,
which remain unchanged.
Use of Proceeds
The following “Use of Proceeds” information relates to: the Registration Statement on Form F-3, as amended (File No. 333-251359) that became effective
immediately upon filing on December 15, 2020, and (i) the applicable prospectus supplements filed in December 2020 in relation to our offering of 40,000,000 ADSs,
each representing seven Class A ordinary shares of our company, at a price to public of US$17.50 per ADS (the “2020 Follow-On Offering”), and US$800 million in
aggregate principal amount of 4.00% senior notes due 2026, or the 2026 Notes (the “2026 Notes Offering”), and (ii) the prospectus supplement filed in January 2023 in
relation to our offering of 76,500,000 ADSs, each representing seven Class A ordinary shares of our company, at a price to public of US$5.90 per ADS (the “2023
Follow-On Offering”).
Goldman Sachs (Asia) L.L.C., BofA Securities, Inc. and J.P. Morgan Securities LLC were the representatives of the underwriters for the 2020 Follow-On
Offering and 2026 Notes Offering. The underwriters exercised their option in full to purchase an additional US$100 million aggregate principal amount of the 2026
Notes and their option in part to purchase 4,594,756 additional ADSs at the price of US$17.5 per ADS for the Follow-On Offering, which were closed on January 8,
2021. We received net proceeds of US$759.0 million from the 2020 Follow-On Offering, and net proceeds of US$884.3 million from 2026 Notes Offering, including the
exercise of the underwriters’ option to purchase additional notes and ADSs, each after deducting the underwriters’ discounts and commissions.
BofA Securities, Inc., Goldman Sachs (Asia) L.L.C. and J.P. Morgan Securities LLC act were the representatives of the underwriters for the 2023 Follow-On
Offering. The underwriters exercised their option in part to purchase 9,975,000 additional ADSs at the price of US$5.90 per ADS for the 2023 Follow-On Offering. We
received net proceeds of US$500.0 million from the 2023 Follow-On Offering, including the exercise of the underwriters’ option to purchase additional ADSs, after
deducting the underwriters’ discounts and commissions.
As of December 31, 2022, we had used all net proceeds of RMB10,740.7 million from the 2020 Follow-On Offering and the 2026 Notes Offering to expand and
enhance our content offerings, strengthen our technologies and for working capital and other general corporate purposes, as disclosed in the applicable prospectus
supplements to the Registration Statement on Form F-3.
ITEM 15. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, has performed an evaluation of the effectiveness of our
disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this annual report.
Based upon that evaluation, our management has concluded that, as of December 31, 2022, our disclosure controls and procedures were effective in ensuring
that the information required to be disclosed by us in the reports that we file and furnish under the Exchange Act was recorded, processed, summarized and reported,
within the time periods 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 the
Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions
regarding required disclosure.
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Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15 (f) and 15d-15(f)
under the Securities Exchange Act of 1934, as amended.
Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the
preparation of financial statements for external purposes in accordance with Generally Accepted Accounting Principles (GAAP) in the United States of America and
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of our company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial
statements in accordance with GAAP, and that receipts and expenditures of our company are being made only in accordance with authorizations of our management and
directors; and (3) provide reasonable assurance regarding prevention or timely detection of the unauthorized acquisition, use or disposition of our company’s assets that
could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance 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, our management
including our Chief Executive Officer and Chief Financial Officer assessed the effectiveness of internal control over financial reporting as of December 31, 2022 using
the criteria set forth in the report “Internal Control-Integrated Framework (2013)” published by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2022.
Attestation Report of the Independent Registered Public Accounting Firm
Our independent registered public accounting firm, Ernst & Young Hua Ming LLP, has audited the effectiveness of our company’s internal control over financial
reporting as of December 31, 2022, as stated in its report, which appears on page F-4 of this annual report on Form 20-F.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the year ended December 31, 2022 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
ITEM 16. [RESERVED]
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that members including Sam Hanhui Sun and Conor Chia-hung Yang, independent directors and member of our audit
committee, are audit committee financial experts.
ITEM 16B. CODE OF ETHICS
Our board of directors has adopted a code of ethics that applies to all of the directors, officers and employees of us and our subsidiaries, whether they work for us
on a full-time, part-time, consultative, or temporary basis. Certain provisions of the code apply specifically to our chief executive officer, chief financial officer, senior
finance officer, controller, senior vice presidents, vice presidents and any other persons who perform similar functions for us. We have posted a copy of our code of
business conduct and ethics on our website at http://ir.iqiyi.com.
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ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate fees by the categories specified below in connection with certain professional services rendered by Ernst & Young
Hua Ming LLP, our independent registered public accounting firm, for the periods indicated. We did not pay any other fees to our auditors during the periods indicated
below.
(1)
Audit fees
Audit related fees
(2)
2021
RMB
2022
RMB
(in thousands)
15,005
8,476
16,068
6,139
Notes:
(1)“Audit fees” means the aggregate fees billed for professional services rendered by Ernst & Young Hua Ming LLP for the audit of our annual financial statements.
(2)“Audit-related fees” means, for the years ended December 31, 2021 and 2022, the aggregate fees billed for professional services in connection with the offering of the ADSs/Notes and review of
interim financial statements, respectively.
The policy of our audit committee is to pre-approve all audit and non-audit services provided by Ernst & Young Hua Ming LLP, including audit services and
audit-related services as described above, other than those for de minimis services which are approved by the Audit Committee prior to the completion of the audit.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
We rely on the exemption provided by Rule 10A-3(b)(1)(iv)(D) under the Exchange Act. Fei Qi and Weijian Shan are non-voting members of our audit
committee and only have observer status on our audit committee. Based on our assessment, such reliances do not materially adversely affect the ability of the audit
committee to act independently or to satisfy the other requirements of Rule 10A-3 under the Exchange Act.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
None.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
Not applicable.
ITEM 16G. CORPORATE GOVERNANCE
As a Cayman Islands company listed on the Nasdaq Global Select Market, we are subject to the Nasdaq Stock Market Rules corporate governance listing
standards. However, Nasdaq Stock Market Rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain
corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from the Nasdaq Stock Market Rules. We rely on the
exemption available to foreign private issuers for the requirement under Nasdaq Rule 5605(c)(2)(A)(i) that each member of the audit committee must be an independent
director as defined under Nasdaq Rule 5605(a)(2). Fei Qi and Weijian Shan, who are non-voting members of our audit committee, are not independent directors as
defined under Nasdaq Rule 5605(a)(2).
In addition, Nasdaq Rule 5620 requires each issuer to hold an annual meeting of shareholders no later than one year after the end of the issuer’s fiscal year-end.
However, Nasdaq Rule 5615(a)(3) permits foreign private issuers like us to follow “home country practice” in certain corporate governance matters. We followed home
country practice and did not hold an annual meeting of shareholders in 2022. If we continue to rely on these and other exemptions available to foreign private issuers in
the future, our shareholders may be afforded less protection than they otherwise would under the Nasdaq corporate governance listing standards applicable to U.S.
domestic issuers. Furthermore, Nasdaq Rule 5635(c) requires shareholder approval prior to the issuance of securities when a stock option or purchase plan is to be
established or materially amended or other equity compensation arrangement made or materially amended, pursuant to which stock may be acquired by officers,
directors, employees, or consultants. We elected to follow our home country practice and did not obtain shareholder approval the amendment to our 2021 Plan.We may,
however, hold annual shareholders meetings in the future.
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We also rely on exemptions afforded to controlled companies. We are a “controlled company” as defined under the Nasdaq Stock Market Rules because Baidu
beneficially owns more than 50% of our total voting power. For so long as we remain a controlled company under that definition, we are permitted to elect to rely, and
currently rely, on certain exemptions from corporate governance rules, including:
•an exemption from the rule that a majority of our board of directors must be independent directors;
•an exemption from the rule that the compensation of our chief executive officer must be determined or recommended solely by independent directors; and
•an exemption from the rule that our director nominees must be selected or recommended solely by independent directors.
A majority of the members of our board of directors are not independent directors. Not all members of our compensation committee are independent directors,
and we do not have a nomination and corporate governance committee. As a result, you will not have the same protection afforded to shareholders of companies that are
subject to these corporate governance requirements.
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
ITEM 16I. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
On December 16, 2021, the PCAOB issued a report to notify the SEC of its determination that the PCAOB was unable to inspect or investigate completely
registered public accounting firms headquartered in mainland China and Hong Kong, and our auditor was subject to that determination.
In April 2022, iQIYI, Inc. was conclusively listed by the SEC as a Commission-Identified Issuer under the HFCAA following the filing of our annual report on
Form 20-F for the fiscal year ended December 31, 2021.
On December 15, 2022, the PCAOB removed mainland China and Hong Kong from the list of jurisdictions where it is unable to inspect or investigate
completely registered public accounting firms. For this reason, we do not expect to be identified as a Commission-Identified Issuer under the HFCAA after we file this
annual report.
To the best of our knowledge, no Cayman Islands governmental entities owns any shares of iQIYI, Inc. and no governmental entities in mainland China own
shares of any of the variable interest entities in mainland China, as of the date of this annual report.
To the best of our knowledge, no mainland China governmental entities owns any shares of iQIYI, Inc. or the variable interest entities as of the date of this
annual report. Therefore, the mainland China governmental entities do not have a controlling financial interest in iQIYI, Inc. or the variable interest entities as of the
date of this annual report.
None of the members of the board of directors of iQIYI, Inc. or our operating entities, including the variable interest entities, is an official of the Chinese
Communist Party as of the date of this annual report.
The currently effective memorandum and articles of association of iQIYI, Inc. and equivalent organizing documents of our operating entities, including the
variable interest entities, do not contain any charter of the Chinese Communist Party.
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ITEM 17. FINANCIAL STATEMENTS
We have elected to provide financial statements pursuant to Item 18.
PART III
ITEM 18. FINANCIAL STATEMENTS
The consolidated financial statements of iQIYI, Inc. and its subsidiaries are included at the end of this annual report.
ITEM 19. EXHIBITS
Exhibit
Number
1.1
2.1
2.2
2.3
2.4
2.5
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
Description
Ninth Amended and Restated Memorandum and Articles of Association of the Registrant (incorporated herein by reference to Exhibit 3.2 to
the registration statement on Form F-1 (File No. 333-223263), as amended, initially filed with the SEC on February 27, 2018)
Registrant’s Specimen American Depositary Receipt (included in Exhibit 2.3)
Registrant’s Specimen Certificate for Class A ordinary shares (incorporated herein by reference to Exhibit 4.2 to the registration statement on
Form F-1 (File No. 333-223263), as amended, initially filed with the SEC on February 27, 2018)
Deposit Agreement, among the Registrant, the depositary and holder of the American Depositary Receipts (incorporated herein by reference
to Exhibit 4.3 to the registration statement on Form S-8 (File No. 333-225165) filed with the SEC on May 24, 2018)
Shareholders Agreement between the Registrant and other parties thereto dated October 26, 2017 (incorporated herein by reference to Exhibit
4.4 to the registration statement on Form F-1 (File No. 333-223263), as amended, initially filed with the SEC on February 27, 2018)
Description of Securities (incorporated herein by reference to Exhibit 2.5 to the annual report on Form 20-F (File No. 001-38431) filed with
the SEC on March 12, 2020)
Third Amended and Restated 2010 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the registration statement on
Form F-3 (File No. 333-251359), filed with the SEC on December 16, 2020)
2017 Share Incentive Plan (incorporated herein by reference to Exhibit 10.2 to the registration statement on Form F-1 (File No. 333-223263),
as amended, initially filed with the SEC on February 27, 2018)
Form of Indemnification Agreement between the Registrant and its directors and executive officers (incorporated herein by reference to
Exhibit 10.3 to the registration statement on Form F-1(File No. 333-223263), as amended, initially filed with the SEC on February 27, 2018)
Form of Employment Agreement between the Registrant and its executive officers (incorporated herein by reference to Exhibit 10.4 to the
registration statement on Form F-1 (File No. 333-223263), as amended, initially filed with the SEC on February 27, 2018)
Master Business Cooperation Agreement between Baidu Holdings and iQIYI, Inc. dated January 19, 2018 (incorporated herein by reference
to Exhibit 10.5 to the registration statement on Form F-1 (File No. 333-223263), as amended, initially filed with the SEC on February 27,
2018)
English translation of the amended and restated Shareholder Voting Rights Trust Agreement between Beijing QIYI Century and Mr. Xiaohua
Geng dated January 30, 2013 (incorporated herein by reference to Exhibit 10.7 to the registration statement on Form F-1 (File No. 333-
223263), as amended, initially filed with the SEC on February 27, 2018)
English translation of the amended and restated Share Pledge Agreement between Beijing QIYI Century and Mr. Xiaohua Geng dated
January 30, 2013 (incorporated herein by reference to Exhibit 10.8 to the registration statement on Form F-1 (File No. 333-223263), as
amended, initially filed with the SEC on February 27, 2018)
English translation of the Commitment Letter from iQIYI, Inc. and Beijing QIYI Century to Beijing iQIYI dated January 30, 2013
(incorporated herein by reference to Exhibit 10.9 to the registration statement on Form F-1 (File No. 333223263), as amended, initially filed
with the SEC on February 27, 2018)
English translation of the amended and restated Exclusive Purchase Option Agreement among iQIYI, Inc., Beijing QIYI Century, Beijing
iQIYI and Mr. Xiaohua Geng dated January 30, 2013 (incorporated herein by
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Exhibit
Number
4.10
4.11
4.12
4.13
4.14
4.15
4.16
4.17
4.18
4.19
4.20
4.21
4.22
4.23
4.24
Description
reference to Exhibit 10.10 to the registration statement on Form F-1 (File No. 333-223263), as amended, initially filed with the SEC on
February 27, 2018)
English translation of the amended and restated Loan Agreement between Beijing QIYI Century and Mr. Xiaohua Geng dated January 30,
2013 (incorporated herein by reference to Exhibit 10.11 to the registration statement on Form F-1 (File No. 333-223263), as amended,
initially filed with the SEC on February 27, 2018)
English translation of the amended and restated Business Operation Agreement among Beijing QIYI Century, Beijing iQIYI and Mr.
Xiaohua Geng dated January 30, 2013 (incorporated herein by reference to Exhibit 10.12 to the registration statement on Form F-1 (File No.
333-223263), as amended, initially filed with the SEC on February 27, 2018)
English translation of Power of Attorney by Beijing QIYI Century to iQIYI, Inc. dated January 30, 2013 (incorporated herein by reference to
Exhibit 10.13 to the registration statement on Form F-1 (File No. 333-223263), as amended, initially filed with the SEC on February 27,
2018)
English translation of Spousal Consent Letter of Ms. Ying Zhang dated September 26, 2016 (incorporated herein by reference to Exhibit
10.14 to the registration statement on Form F-1 (File No. 333-223263), as amended, initially filed with the SEC on February 27, 2018)
English translation of Loan Agreement among Beijing QIYI Century, Mr. Xiaohua Geng and Dr. Yu Gong dated October 25, 2013
(incorporated herein by reference to Exhibit 10.15 to the registration statement on Form F-1 (File No. 333-223263), as amended, filed with
the SEC on February 27, 2018)
English translation of Exclusive Purchase Option Agreement among iQIYI, Inc., Beijing QIYI Century, Shanghai iQIYI, Mr. Xiaohua Geng
and Dr. Yu Gong dated October 25, 2013 (incorporated herein by reference to Exhibit 10.16 to the registration statement on Form F-1 (File
No. 333-223263), as amended, filed with the SEC on February 27, 2018)
English translation of Share Pledge Agreement among Beijing QIYI Century, Mr. Xiaohua Geng and Dr. Yu Gong dated October 25, 2013
(incorporated herein by reference to Exhibit 10.17 to the registration statement on Form F-1 (File No. 333-223263), as amended, filed with
the SEC on February 27, 2018)
English translation of Shareholder Voting Rights Trust Agreement among Mr. Xiaohua Geng, Dr. Yu Gong and Beijing QIYI Century dated
October 25, 2013 (incorporated herein by reference to Exhibit 10.18 to the registration statement on Form F-1 (File No. 333-223263), as
amended, filed with the SEC on February 27, 2018)
English translation of Business Operation Agreement among Beijing QIYI Century, Shanghai iQIYI, Mr. Xiaohua Geng and Dr. Yu Gong
dated October 25, 2013 (incorporated herein by reference to Exhibit 10.19 to the registration statement on Form F-1 (File No. 333-223263),
as amended, filed with the SEC on February 27, 2018)
English translation of Exclusive Technology Consulting and Service Agreement among Beijing QIYI Century and Shanghai iQIYI dated
October 25, 2013 (incorporated herein by reference to Exhibit 10.20 to the registration statement on Form F-1 (File No. 333-223263), as
amended, filed with the SEC on February 27, 2018)
English translation of Commitment Letter between iQIYI, Inc. and Shanghai iQIYI dated October 25, 2013 (incorporated herein by reference
to Exhibit 10.21 to the registration statement on Form F-1 (File No. 333-223263), as amended, filed with the SEC on February 27, 2018)
English translation of Spousal Consent Letter of Ms. Yihong Mou dated September 26, 2016 (incorporated herein by reference to Exhibit
10.22 to the registration statement on Form F-1 (File No. 333-223263), as amended, initially filed with the SEC on February 27, 2018)
English translation of Spousal Consent Letter of Ms. Ying Zhang dated September 26, 2016 (incorporated herein by reference to Exhibit
10.23 to the registration statement on Form F-1 (File No. 333-223263), as amended, initially filed with the SEC on February 27, 2018)
English translation of Business Operation Agreement among Beijing QIYI Century, Shanghai Zhong Yuan and Dr. Yu Gong dated January
14, 2014 (incorporated herein by reference to Exhibit 10.24 to the registration statement on Form F1 (File No. 333-223263) filed with the
SEC on February 27, 2018)
English translation of Loan Agreement between Beijing QIYI Century and Dr. Yu Gong dated January 14, 2014 (incorporated herein by
reference to Exhibit 10.25 to the registration statement on Form F-1 (File No. 333-223263), as amended, filed with the SEC on February 27,
2018)
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Exhibit
Number
4.25
4.26
4.27
4.28
4.29
4.30
4.31
4.32
4.33
4.34
4.35
4.36
4.37
4.38
4.39
4.40
Description
English translation of Commitment Letter from iQIYI, Inc. to Shanghai Zhong Yuan dated January 14, 2014 (incorporated herein by
reference to Exhibit 10.26 to the registration statement on Form F-1 (File No. 333-223263), as amended, filed with the SEC on February 27,
2018)
English translation of Exclusive Technology Consulting and Service Agreement between Beijing QIYI Century and Shanghai Zhong Yuan
dated January 14, 2014 (incorporated herein by reference to Exhibit 10.27 to the registration statement on Form F-1 (File No. 333-223263),
as amended, filed with the SEC on February 27, 2018)
English translation of Exclusive Purchase Option Agreement among iQIYI, Inc., Beijing QIYI Century, Dr. Yu Gong and Shanghai Zhong
Yuan dated January 14, 2014 (incorporated herein by reference to Exhibit 10.28 to the registration statement on Form F-1 (File No. 333-
223263), as amended, filed with the SEC on February 27, 2018)
English translation of Shareholder Voting Rights Trust Agreement between Beijing QIYI Century and Dr. Yu Gong dated January 14, 2014
(incorporated herein by reference to Exhibit 10.29 to the registration statement on Form F-1 (File No. 333-223263), as amended, filed with
the SEC on February 27, 2018)
English translation of Share Pledge Agreement between Beijing QIYI Century and Dr. Yu Gong dated January 14, 2014 (incorporated herein
by reference to Exhibit 10.30 to the registration statement on Form F-1 (File No. 333-223263), as amended, filed with the SEC on February
27, 2018)
English translation of Spousal Consent Letter of Ms. Yihong Mou dated September 26, 2016 (incorporated herein by reference to Exhibit
10.31 to the registration statement on Form F-1 (File No. 333-223263), as amended, initially filed with the SEC on February 27, 2018)
English translation of Exclusive Management Consulting and Business Cooperation Agreement among iQIYI New Media, Beijing iQIYI
Cinema, Dr. Yu Gong and Mr. Xianghua Yang dated July 27, 2017 (incorporated herein by reference to Exhibit 10.32 to the registration
statement on Form F-1 (File No. 333-223263), as amended, filed with the SEC on February 27, 2018)
English translation of Exclusive Share Purchase Agreement among iQIYI New Media, Dr. Yu Gong, Mr. Xianghua Yang and Beijing iQIYI
Cinema dated July 27, 2017 (incorporated herein by reference to Exhibit 10.33 to the registration statement on Form F-1 (File No. 333-
223263), as amended, filed with the SEC on February 27, 2018)
English translation of Loan Agreement between iQIYI New Media and Mr. Xianghua Yang dated July 27, 2017 (incorporated herein by
reference to Exhibit 10.34 to the registration statement on Form F-1 (File No. 333-223263), as amended, filed with the SEC on February 27,
2018)
English translation of Loan Agreement between iQIYI New Media and Dr. Yu Gong dated July 27, 2017 (incorporated herein by reference to
Exhibit 10.35 to the registration statement on Form F-1 (File No. 333-223263), as amended, filed with the SEC on February 27, 2018)
English translation of Share Pledge Agreement among iQIYI New Media, Dr. Yu Gong and Beijing iQIYI Cinema dated July 27, 2017
(incorporated herein by reference to Exhibit 10.36 to the registration statement on Form F-1 (File No. 333-223263), as amended, filed with
the SEC on February 27, 2018)
English translation of Share Pledge Agreement among iQIYI New Media, Mr. Xianghua Yang and Beijing iQIYI Cinema dated July 27,
2017 (incorporated herein by reference to Exhibit 10.37 to the registration statement on Form F-1 (File No. 333-223263) filed with the SEC
on February 27, 2018)
English translation of Power of Attorney by Mr. Xianghua Yang to iQIYI New Media dated July 27, 2017 (incorporated herein by reference
to Exhibit 10.38 to the registration statement on Form F-1 (File No. 333-223263), as amended, filed with the SEC on February 27, 2018)
English translation of Power of Attorney by Dr. Yu Gong to iQIYI New Media dated July 27, 2017 (incorporated herein by reference to
Exhibit 10.39 to the registration statement on Form F-1 (File No. 333-223263), as amended, filed with the SEC on February 27, 2018)
English translation of Spousal Consent Letter of Ms. Congyu Lin dated July 27, 2017 (incorporated herein by reference to Exhibit 10.40 to
the registration statement on Form F-1 (File No. 333-223263), as amended, filed with the SEC on February 27, 2018)
English translation of Spousal Consent Letter of Ms. Yihong Mou dated July 27, 2017 (incorporated herein by reference to Exhibit 10.41 to
the registration statement on Form F-1 (File No. 333-223263), as amended, filed with the SEC on February 27, 2018)
150
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Exhibit
Number
4.41
4.42
4.43
4.44
4.45
4.46
4.47
4.48
4.49
4.50
4.51
4.52
4.53
4.54
4.55
Description
English translation of Power of Attorney by iQIYI New Media to QIYI, Inc. dated July 27, 2017 (incorporated herein by reference to Exhibit
10.42 to the registration statement on Form F-1 (File No. 333-223263), as amended, filed with the SEC on February 27, 2018)
English translation of Commitment Letter by QIYI, Inc. to Beijing iQIYI Cinema dated July 27, 2017 (incorporated herein by reference to
Exhibit 10.43 to the registration statement on Form F-1 (File No. 333-223263), as amended, filed with the SEC on February 27, 2018)
English translation of Exclusive Management Consulting and Business Cooperation Agreement among iQIYI New Media, iQIYI Pictures,
Dr. Yu Gong and Mr. Ning Ya dated August 30, 2017 (incorporated herein by reference to Exhibit 10.44 to the registration statement on
Form F-1 (File No. 333-223263), as amended, filed with the SEC on February 27, 2018)
English translation of Exclusive Share Purchase Agreement among iQIYI New Media, iQIYI Pictures, Dr. Yu Gong and Mr. Ning Ya dated
August 30, 2017 (incorporated herein by reference to Exhibit 10.45 to the registration statement on Form F-1 (File No. 333-223263), as
amended, filed with the SEC on February 27, 2018)
English translation of Loan Agreement between iQIYI New Media and Mr. Ning Ya dated August 30, 2017 (incorporated herein by reference
to Exhibit 10.46 to the registration statement on Form F-1 (File No. 333-223263), as amended, filed with the SEC on February 27, 2018)
English translation of Loan Agreement between iQIYI New Media and Dr. Yu Gong dated August 30, 2017 (incorporated herein by
reference to Exhibit 10.47 to the registration statement on Form F-1 (File No. 333-223263), as amended, filed with the SEC on February 27,
2018)
English translation of Share Pledge Agreement among iQIYI New Media, Mr. Ning Ya and iQIYI Pictures dated August 30, 2017
(incorporated herein by reference to Exhibit 10.48 to the registration statement on Form F-1 (File No. 333-223263), as amended, filed with
the SEC on February 27, 2018)
English translation of Share Pledge Agreement among iQIYI New Media, Dr. Yu Gong and iQIYI Pictures dated August 30, 2017
(incorporated herein by reference to Exhibit 10.49 to the registration statement on Form F-1 (File No. 333-223263), as amended, filed with
the SEC on February 27, 2018)
English translation of Power of Attorney by Mr. Ning Ya to iQIYI New Media dated August 30, 2017 (incorporated herein by reference to
Exhibit 10.50 to the registration statement on Form F-1 (File No. 333-223263), as amended, filed with the SEC on February 27, 2018)
English translation of Power of Attorney by Dr. Yu Gong to iQIYI New Media dated August 30, 2017 (incorporated herein by reference to
Exhibit 10.51 of the registration statement on Form F-1 (File No. 333-223263), as amended, filed with the SEC on February 27, 2018)
English translation of Spousal Consent Letter of Ms. Yihong Mou dated August 30, 2017 (incorporated herein by reference to Exhibit 10.52
to the registration statement on Form F-1 (File No. 333-223263), as amended, filed with the SEC on February 27, 2018)
English translation of Exclusive Technology Consulting and Service Agreement between Beijing QIYI Century and Beijing Xinlian Xinde
Advertisement Media Co., Ltd. dated December 1, 2011 (incorporated herein by reference to Exhibit 10.53 to the registration statement on
Form F-1 (File No. 333-223263), as amended, filed with the SEC on February 27, 2018)
English translation of Software Licensing Agreement between Beijing QIYI Century and Beijing Xinlian Xinde Advertisement Media Co.,
Ltd. dated December 1, 2011 (incorporated herein by reference to Exhibit 10.54 to the registration statement on Form F-1 (File No. 333-
223263), as amended, filed with the SEC on February 27, 2018)
English translation of Trademark Licensing Agreement between Beijing QIYI Century and Beijing Xinlian Xinde Advertisement Media Co.,
Ltd. dated December 1, 2011 (incorporated herein by reference to Exhibit 10.55 to the registration statement on Form F-1 (File No. 333-
223263), as amended, filed with the SEC on February 27, 2018)
English translation of Business Cooperation Agreement between Beijing QIYI Century and Beijing Xinlian Xinde Advertisement Media Co.,
Ltd. dated December 1, 2011 (incorporated herein by reference to Exhibit 10.56 to the registration statement on Form F-1 (File No. 333-
223263), as amended, filed with the SEC on February 27, 2018)
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Exhibit
Number
4.56
4.57
4.58
4.59
4.60
4.61
4.62
4.63
4.64
4.65
4.66*
4.67*
4.68*
4.69*
4.70*
4.71*
4.72*
4.73*
8.1*
11.1
12.1*
Description
English translation of Loan Agreement between Baidu Online Network Technology (Beijing) Co., Ltd. and Beijing QIYI Century dated
January 19, 2018 (incorporated herein by reference to Exhibit 10.67 to the registration statement on Form F-1 (File No. 333-223263), as
amended, filed with the SEC on February 27, 2018)
Share Purchase Agreement dated February 12, 2018 by and between iQIYI, Inc. and Baidu Holdings (incorporated herein by reference to
Exhibit 10.68 to the registration statement on Form F-1 (File No. 333-223263), as amended, filed with the SEC on February 27, 2018)
English translation of Ticket Business Cooperation Agreement dated February 12, 2018 by and between Baidu Holdings and iQIYI, Inc.
(incorporated herein by reference to Exhibit 10.69 to the registration statement on Form F-1 (File No. 333-223263), as amended, filed with
the SEC on February 27, 2018)
English translation of Share Purchase Agreement among Beijing iQIYI Technology Co., Ltd., iQIYI, Inc., Yunpeng He, Pu Zhang, Xingyou
Zhou, Wei Du, Kun Meng, Skymoons (BVI) Group Limited, Chengdu Skymoons Digital Entertainment Co., Ltd. and Skymoons Inc., dated
July 10, 2018 (incorporated herein by reference to Exhibit 4.66 to the annual report on Form 20-F (File No. 001-38431) filed with the SEC on
March 15, 2019)
English translation of form Confirmation Letter executed by Beijing QIYI Century, dated December 21, 2020 (incorporated herein by
reference to Exhibit 4.60 to the annual report on Form 20-F (File No. 001-38431) filed with the SEC on March 9, 2021)
English translation of Confirmation Letter executed by the Registrant, dated December 21, 2020 (incorporated herein by reference to Exhibit
4.61 to the annual report on Form 20-F (File No. 001-38431) filed with the SEC on March 9, 2021)
Indenture, dated December 4, 2018 constituting $750 million 3.75% Convertible Senior Notes due 2023 (incorporated herein by reference to
Exhibit 4.67 to the annual report on Form 20-F (File No. 001-38431) filed with the SEC on March 15, 2019)
Indenture, dated March 29, 2019 constituting $1.2 billion 2.00% Convertible Senior Notes due 2025 (incorporated herein by reference to
Exhibit 4.61 to the annual report on Form 20-F (File No. 001-38431) filed with the SEC on March 12, 2020)
Indenture, dated December 21, 2020, between the Registrant and Citibank, N.A., as trustee (incorporated herein by reference to Exhibit 4.64
to the annual report on Form 20-F (File No. 001-38431) filed with the SEC on March 9, 2021)
First Supplemental Indenture, dated December 21, 2020, between the Registrant and Citibank, N.A., as trustee (incorporated herein by
reference to Exhibit 4.65 to the annual report on Form 20-F (File No. 001-38431) filed with the SEC on March 9, 2021)
Amended and Restated 2021 Share Incentive Plan
Investment Agreement, dated August 30, 2022, between the Registrant, PAGAC IV-1 (Cayman) Limited and PAG Pegasus Fund LP
Deed of Amendment to the Investment Agreement, by and among the Registrant, PAGAC IV-1 (Cayman) Limited, and PAG Pegasus Fund
LP, dated as of December 30, 2022
Indenture, dated December 30, 2022, between the Registrant and Citicorp International Limited, as trustee
English translation of form Confirmation Letters executed by Beijing QIYI Century, dated February 10, 2023
English translation of form Confirmation Letters executed by the Registrant, dated February 10, 2023
English translation of Supplementary Agreement to the Trademark Licensing Agreement between Beijing QIYI Century and Beijing iQIYI
(formerly known as “Beijing Xinlian Xinde Advertisement Media Co., Ltd.”) dated February 10, 2023
Indenture, dated March 7, 2023, between the Registrant and Citicorp International Limited, as trustee
Principal Subsidiaries and Variable Interest Entities of the Registrant
Code of Business Conduct and Ethics of the Registrant (incorporated herein by reference to Exhibit 99.1 to the registration statement on Form
F-1 (File No. 333-223263), as amended, filed with the SEC on February 27, 2018)
CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
152
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Exhibit
Number
12.2*
13.1**
13.2**
15.1*
15.2*
15.3*
101.INS*
101.SCH*
101.CAL*
101.DEF*
101.LAB*
101.PRE*
104*
* Filed herewith.
* * Furnished herewith.
Description
CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Consent of Walkers (Hong Kong)
Consent of Jingtian & Gongcheng
Consent of Ernst & Young Hua Ming LLP, Independent Registered Public Accounting Firm
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded
within the Inline XBRL document
Inline XBRL Taxonomy Extension Schema Document
Inline XBRL Taxonomy Extension Calculation Linkbase Document
Inline XBRL Taxonomy Extension Definition Linkbase Document
Inline XBRL Taxonomy Extension Label Linkbase Document
Inline XBRL Taxonomy Extension Presentation Linkbase Document
Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Exhibit 101 Inline XBRL document set
Instruments defining the rights of holders of certain issues of long-term debt of the Registrant and of certain consolidated subsidiaries, for which financial
statements are required to be filed with this annual report, including (i) standard terms of the asset-backed debt securities securitized by certain of our payables to our
suppliers issued to third-party investors, which raised gross proceeds of RMB446.0 million, and (ii) standard terms of asset-backed debt securities securitized by certain
of our payables to our suppliers issued to third-party investors, which raised gross proceeds of RMB500.0 million, have not been filed as exhibits to this annual report
because the authorized principal amount of any one of such issues does not exceed 10% of the total assets of the Registrant and our subsidiaries on a consolidated basis.
The Registrant agrees to furnish a copy of each of such instrument to the SEC upon request.
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SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing its annual report on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.
iQIYI, INC.
By:
/s/ Yu Gong
Name: Yu Gong
Title:
Director and Chief Executive Officer
Date: March 22, 2023
154
Table of Contents
iQIYI, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm (PCAOB ID:1408)
Consolidated Balance Sheets as of December 31, 2021 and 2022
Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2020, 2021 and 2022
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 2020, 2021 and 2022
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2021 and 2022
Notes to Consolidated Financial Statements
F-1
page
F-2
F-5
F-8
F-10
F-11
F-13
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of iQIYI, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of iQIYI, Inc. (the Company) as of December 31, 2021 and 2022, the related consolidated statements of
comprehensive loss, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively
referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position
of the Company at December 31, 2021 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022,
in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control
over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework) and our report dated March 22, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based
on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable
basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be
communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially
challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial
statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the
accounts or disclosures to which they relate.
Impairment of Mainland China film group content assets
Description of the Matter
At December 31, 2022, the carrying value of the Company’s licensed copyrights and produced content, net of accumulated
impairment charges, were RMB7,586,687 thousands (US$1,099,966 thousands) and RMB13,001,904 thousands
(US$1,885,099 thousands), respectively. As discussed in Note 2 to the consolidated financial statements, the majority of the
Company’s content assets (licensed copyrights and produced content) are predominantly monetized together with other
content assets. Film groups are reviewed for impairment when there are events or changes in circumstances that indicate the
fair value of a film group may be less than its unamortized costs and an impairment charge is recognized for the amount by
which the unamortized capitalized costs exceed the film group’s fair value. As a result of the impairment assessment, there is
no impairment charge recognized during the year ended December 31, 2022.
Auditing management’s estimated fair value of the Mainland China film group required complex auditor judgment due to the
significant estimation required by management in forecasting the amount and timing of expected future cash flows and the
underlying assumptions used in the
F-2
Table of Contents
discounted cash flow approach. In particular, the fair value estimate was sensitive to significant assumptions such as
forecasted future revenues, costs and operating expenses attributable to the film group, and the discount rate. These
significant assumptions are forward looking and could be materially affected by future economic and market conditions,
changes in user traffic on the Company’s platform, and changes in viewership trends of its content.
How We Addressed the Matter in
Our Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s
film group impairment review process, including controls over management’s review of the significant assumptions
described above.
Description of the Matter
To test impairment of the China Mainland film group, we performed audit procedures that included, among others, evaluating
the significant assumptions used to estimate fair value and tested the completeness and accuracy of underlying data used in
the assessment. We involved our valuation specialists to assist in assessing the Company’s valuation methodology and
evaluating the discount rate by comparing it to a discount rate that was independently developed using observable market
information. We assessed the reasonableness of the significant assumptions described above by comparing them to the
Company’s business plans, historical trends, and current industry and economic outlook.
Amortization of content assets
For the year ended December 31, 2022, amortization expenses related to licensed copyrights and produced content were
RMB7,780,928 thousands (US$1,128,129 thousands) and RMB5,292,129 thousands (US$767,286 thousands), respectively.
As discussed in Note 2 to the consolidated financial statements, based on factors including historical and estimated future
viewership consumption patterns, the Company’s content assets are amortized using an accelerated method by content
categories over the shorter of their respective contractual periods or estimated useful lives within ten years, beginning with
the month of first availability.
Auditing the amortization of the Company’s content assets required complex and subjective auditor judgment due to the
judgment required by management in estimating future viewership consumption patterns for different content categories. If
actual viewership consumption patterns differ from these estimates, the pattern and/or period of amortization would be
changed and could materially affect the timing of recognition of content amortization. These assumptions are forward looking
and can be affected by changes in user traffic on the Company’s platform and changes in viewership trends of its content.
How We Addressed the Matter in
Our Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s
content assets amortization assessment process. For example, we tested controls over management’s review of the
amortization method and the significant assumptions, including the historical and forecasted video views used to develop its
estimated future viewership consumption patterns by content categories.
To test the amortization of content assets, we performed audit procedures that included, among others, evaluating the
amortization method and testing the completeness and accuracy of the underlying data from the systems used in determining
estimated viewership consumption patterns. We assessed management’s estimated viewership consumption patterns by
considering historical and current viewing trends, including comparing previous estimates of consumption patterns to latest
available data.
/s/ Ernst & Young Hua Ming LLP
We have served as the Company’s auditor since 2017.
Beijing, The People’s Republic of China
March 22, 2023
F-3
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of iQIYI, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited iQIYI, Inc.’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, iQIYI, Inc. (the
Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets
of the Company as of December 31, 2021 and 2022, the related consolidated statements of comprehensive loss, changes in shareholders' equity and cash flows for each
of the three years in the period ended December 31, 2022, and the related notes and our report dated March 22, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
/s/ Ernst & Young Hua Ming LLP
Beijing, The People’s Republic of China
March 22, 2023
F-4
Table of Contents
iQIYI, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2021 AND 2022
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
ASSETS
Current assets:
Cash and cash equivalents
Restricted cash
Short-term investments
Accounts receivable, net of allowance of RMB240,326
and RMB130,148 (US$18,870) as of
December 31, 2021 and 2022, respectively
Prepayments and other assets
Amounts due from related parties
Licensed copyrights, net
Total current assets
Non-current assets:
Fixed assets, net
Long-term investments
Deferred tax assets, net
Licensed copyrights, net
Intangible assets, net
Produced content, net
Prepayments and other assets
Operating lease assets
Goodwill
Amounts due from related parties
Total non-current assets
Total assets
Note
2021
RMB
As of December 31,
2022
RMB
2022
US$
3
5
6
23
7
11
4
15
7
8
9
6
12
10
23
2,997,212
77,652
1,348,255
7,097,938
13,618
818,265
2,747,774
3,266,523
155,512
931,189
11,524,117
1,344,784
3,035,155
31,351
7,258,042
545,305
10,951,078
2,905,690
907,297
3,888,346
81,000
30,948,048
42,472,165
2,402,675
2,602,927
104,154
746,058
13,785,635
1,104,721
2,453,644
—
6,840,629
436,685
13,001,904
3,865,133
673,971
3,826,147
59,880
32,262,714
46,048,349
1,029,104
1,974
118,637
348,355
377,390
15,101
108,168
1,998,729
160,169
355,745
—
991,798
63,313
1,885,099
560,392
97,717
554,739
8,682
4,677,654
6,676,383
F-5
Table of Contents
iQIYI, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS’ EQUITY
Current liabilities (including current liabilities of the
consolidated VIEs without recourse to the primary
beneficiary of RMB13,941,720 and RMB12,234,786
(US$1,773,876) as of December 31, 2021 and 2022,
respectively):
Accounts and notes payable
Amounts due to related parties
Customer advances and deferred revenue
Short-term loans
Convertible senior notes, current portion
Operating lease liabilities, current portion
Accrued expenses
Other liabilities
Total current liabilities
Non-current liabilities (including non-current liabilities
of the consolidated VIEs without recourse to the
primary beneficiary of RMB919,082 and
RMB1,750,258 (US$253,764) as of
December 31, 2021 and 2022, respectively):
Convertible senior notes
Deferred tax liabilities
Amounts due to related parties
Operating lease liabilities
Other non-current liabilities
Total non-current liabilities
Total liabilities
Commitments and contingencies
F-6
Note
2021
RMB
As of December 31,
2022
RMB
2022
US$
8,896,460
2,634,089
3,484,509
4,117,774
—
171,541
2,280,322
891,775
22,476,470
5,993,416
3,521,646
4,232,110
3,347,638
8,305,447
103,517
1,839,671
786,573
28,130,018
868,964
510,591
613,598
485,362
1,204,177
15,009
266,727
114,041
4,078,469
12,652,172
3,127
780,615
625,737
260,931
14,322,582
36,799,052
9,568,279
1,832
100,941
508,571
1,395,269
11,574,892
39,704,910
1,387,270
266
14,635
73,736
202,295
1,678,202
5,756,671
23
13
14
12
14
15
23
12
17
Table of Contents
iQIYI, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
Mezzanine equity:
Redeemable noncontrolling interests
Shareholders’ equity:
Class A ordinary shares (US$0.00001 par value; 94,000,000,000
shares authorized as of December 31, 2021 and 2022, respectively;
2,940,101,566 and 3,246,481,443 shares issued as of December 31,
2021 and 2022, respectively; 2,722,361,459 and 3,047,568,900
shares outstanding as of December 31, 2021 and 2022,
respectively)
Class B ordinary shares (US$0.00001 par value; 5,000,000,000
shares authorized as of December 31, 2021 and 2022,
respectively; 2,876,391,396 and 3,041,097,278 shares
issued and outstanding as of December 31, 2021 and
2022, respectively)
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive income
Noncontrolling interests
Total shareholders’ equity
Total liabilities, mezzanine equity and shareholders’ equity
Note
2021
RMB
As of December 31,
2022
RMB
2022
US$
18
397,385
—
—
19
173
194
28
19
20
25
183
49,642,014
(47,163,773 )
2,709,002
88,129
5,275,728
42,472,165
193
50,885,688
(46,498,897 )
1,863,454
92,807
6,343,439
46,048,349
28
7,377,731
(6,741,706 )
270,175
13,456
919,712
6,676,383
The accompanying notes are an integral part of the consolidated financial statements.
F-7
Table of Contents
iQIYI, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS), and per share (or ADS) data)
Note
2020
RMB
Year ended December 31,
2021
RMB
2022
RMB
2022
US$
Revenues:
Membership services (including related party
amounts of RMB25,571, RMB3,766 and
RMB56,379 (US$8,174) for the years ended
December 31, 2020, 2021 and 2022,
respectively)
Online advertising services (including related
party amounts of RMB206,624, RMB296,920
and RMB279,774 (US$40,564) for the years
ended December 31, 2020, 2021 and 2022,
respectively)
Content distribution (including related
party amounts of RMB176,227,
RMB297,304 and RMB190,398
(US$27,605) for the years ended
December 31, 2020, 2021 and
2022, respectively)
Others (including related party amounts of
RMB54,064, RMB59,685 and RMB55,310
(US$8,019) for the years ended December
31, 2020, 2021 and 2022, respectively)
Total revenues
Operating costs and expenses:
Cost of revenues (including related party
amounts of RMB1,111,729, RMB1,239,044
and RMB884,333 (US$128,216) for the
years ended December 31, 2020, 2021
and 2022, respectively)
Selling, general and administrative (including
related party amounts of RMB5,045,
RMB24,343 and RMB69,628 (US$10,095)
for the years ended December 31, 2020,
2021 and 2022, respectively)
Research and development (including related
party amounts of RMB7,412, nil
and RMB3,953 (US$573) for the years ended December 31,
2020, 2021 and 2022, respectively)
Total operating costs and expenses
Operating (loss)/income
16,491,030
16,713,664
17,710,830
2,567,829
6,822,115
7,066,751
5,331,697
773,023
2,660,074
2,855,602
2,469,771
358,083
3,733,996
29,707,215
3,918,342
30,554,359
3,485,250
28,997,548
505,314
4,204,249
(27,884,395 )
(27,513,497 )
(22,319,315 )
(3,235,996 )
(5,187,835 )
(4,725,142 )
(3,466,579 )
(502,607 )
(2,675,494 )
(35,747,724 )
(6,040,509 )
(2,794,927 )
(35,033,566 )
(4,479,207 )
(1,899,233 )
(27,685,127 )
1,312,421
(275,363 )
(4,013,966 )
190,283
F-8
Table of Contents
iQIYI, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS), and per share (or ADS) data)
Other income/(expenses):
Interest income (including related party amounts of RMB1,247,
nil and nil for the years ended December 31, 2020,
2021 and 2022, respectively)
Interest expenses
Foreign exchange gain/(loss), net
Share of losses from equity method investments
Others, net
Total other expenses, net
(Loss)/Income before income taxes
Income tax expense
Net loss
Less: Net income attributable to noncontrolling interests
Net loss attributable to iQIYI, Inc.
Accretion of redeemable noncontrolling interests
Net loss attributable to ordinary shareholders
Net loss per Class A and Class B ordinary share:
Basic
Diluted
Net loss per ADS (1 ADS equals 7 Class A ordinary
shares):
Basic
Diluted
Shares used in net loss per Class A and Class B ordinary share
computation:
Basic
Diluted
Other comprehensive income/(loss):
Foreign currency translation adjustments
Unrealized losses on available-for-sale debt securities
Total other comprehensive income/(loss), net of tax
Comprehensive loss
Less: Comprehensive income attributable to noncontrolling interests
Comprehensive loss attributable to iQIYI, Inc.
Note
2020
RMB
Year ended December 31,
2022
RMB
2021
RMB
2022
US$
157,477
118,615
(1,066,320 )
43,274
(224,489 )
146,690
(943,368 )
(6,983,877 )
(23,276 )
(7,007,153 )
31,208
(7,038,361 )
(7,087 )
(7,045,448 )
(1.36 )
(1.36 )
(9.52 )
(9.52 )
(1,349,544 )
54,555
(446,323 )
89,916
(1,532,781
)
(6,011,988 )
(96,545 )
(6,108,533 )
61,051
(6,169,584 )
(20,336 )
(6,189,920 )
(1.11 )
(1.11 )
(7.77 )
(7.77 )
69,577
(715,081
)
(167,857 )
(213,409 )
(319,427 )
(1,346,197
)
(33,776 )
(84,000 )
(117,776 )
18,436
(136,212 )
—
(136,212 )
(0.02 )
(0.02 )
(0.16 )
(0.16 )
10,088
(103,677
)
(24,337 )
(30,941 )
(46,313 )
(195,180 )
(4,897 )
(12,179 )
(17,076 )
2,673
(19,749 )
—
(19,749 )
(0.00 )
(0.00 )
(0.02 )
(0.02 )
5,176,180,057
5,176,180,057
5,570,736,706
5,570,736,706
5,988,021,425
5,988,021,425
5,988,021,425
5,988,021,425
433,497
(98 )
433,399
(6,573,754 )
28,645
(6,602,399 )
168,079
(2,851 )
165,228
(5,943,305 )
59,957
(6,003,262 )
(844,725
)
(21,091 )
(865,816 )
(983,592 )
23,106
(1,006,698 )
(122,474
)
(3,058 )
(125,532 )
(142,608 )
3,350
(145,958 )
15
18
21
21
25
25
25
The accompanying notes are an integral part of the consolidated financial statements.
F-9
Table of Contents
Balances as of January 1, 2020
Cumulative effect of adopting ASU 2016-13
Net loss
Issuance of ordinary shares upon follow-on offering,
net of issuance costs
Equity component of convertible senior notes,
net of issuance costs
Exercise of share-based awards
Other comprehensive income
Issuance of subsidiaries' shares to noncontrolling
interest holders
Accretion of redeemable noncontrolling interests
Dividends paid and payable by a subsidiary
Share-based compensation
Others
Balances as of December 31, 2020
Net loss
Issuance of ordinary shares upon follow-on offering,
net of issuance costs
Equity component of convertible senior notes,
net of issuance costs
Exercise of share-based awards
Other comprehensive income
Issuance of subsidiaries' shares to noncontrolling
interest holders
Accretion of redeemable noncontrolling interests
Dividends paid and payable by subsidiaries
Share-based compensation
Balances as of December 31, 2021
Cumulative effect of adopting ASU 2020-06
Reversal of accretion of redeemable
noncontrolling interests upon deconsolidation
of subsidiaries
Net loss
Issuance of ordinary shares to third parties upon
private placement
Issuance of Class B ordinary shares to Baidu
upon private placement
Exercise of share-based awards
Other comprehensive loss
Issuance of subsidiaries' shares to noncontrolling
interest holders
Dividends paid and payable by subsidiaries
Share-based compensation
Acquisition of noncontrolling interests in subsidiaries
Balances as of December 31, 2022
Balances as of December 31, 2022, in US$
iQIYI, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares)
Attributable to iQIYI, INC.
Ordinary shares
Number of
shares
Amount
RMB
Additional
paid-in
capital
RMB
Accumulated
other
comprehensive
income
RMB
Accumulated
deficit
RMB
Noncontrolling
interests
RMB
Total
shareholders' equity
RMB
41,298,328
2,106,718
5,135,516,521
—
—
280,000,000
—
70,684,420
—
—
—
—
—
—
325
—
—
18
—
5
—
—
—
—
—
—
5,486,200,941
—
348
—
32,163,292
—
80,388,622
—
—
—
—
—
5,598,752,855
—
—
—
304,705,874
164,705,882
20,501,567
—
—
—
—
—
6,088,666,178
2
—
6
—
—
—
—
—
356
—
—
—
20
10
1
—
—
—
—
—
387
56
—
—
4,451,951
394,956
193,097
—
(918 )
—
—
1,370,095
(20,026 )
47,687,483
—
505,416
48,793
181,159
—
—
—
—
1,219,163
49,642,014
(1,432,986 )
—
—
1,170,070
634,460
63,229
—
—
—
811,441
(2,540 )
50,885,688
7,377,731
—
—
—
—
—
435,962
—
—
—
—
—
2,542,680
—
—
—
—
166,322
—
—
—
—
2,709,002
24,938
—
—
—
—
—
(870,486 )
—
—
—
—
(33,834,357 )
(94,048 )
(7,038,361 )
—
—
—
—
—
(7,087 )
—
—
—
(40,973,853 )
(6,169,584 )
—
—
—
—
—
(20,336 )
—
—
(47,163,773 )
772,123
28,965
(136,212 )
—
—
—
—
—
—
—
—
1,863,454
270,175
(46,498,897 )
(6,741,706 )
42,376
—
31,208
—
—
—
(2,563 )
10,527
—
(22,563 )
—
20,026
79,011
61,051
—
—
—
(1,094 )
37
—
(50,876 )
—
88,129
—
—
18,436
—
—
—
4,670
1,000
(16,878 )
—
(2,550 )
92,807
13,456
9,613,390
(94,048 )
(7,007,153 )
4,451,969
394,956
193,102
433,399
9,609
(7,087 )
(22,563 )
1,370,095
—
9,335,669
(6,108,533 )
505,418
48,793
181,165
165,228
37
(20,336 )
(50,876 )
1,219,163
5,275,728
(635,925 )
28,965
(117,776 )
1,170,090
634,470
63,230
(865,816 )
1,000
(16,878 )
811,441
(5,090 )
6,343,439
919,712
The accompanying notes are an integral part of the consolidated financial statements.
F-10
Table of Contents
iQIYI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”))
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used for operating
activities
Depreciation of fixed assets
Amortization and impairment of intangible assets
Amortization and impairment of licensed copyrights
Amortization and impairment of produced content
Impairment of long-lived assets
Provision/(reversal) of credit losses
Unrealized foreign exchange (gain)/loss
Gain on disposal of fixed assets
Gain on disposal of subsidiaries
Accretion on convertible senior notes and
asset-backed debt securities
Barter transaction revenue
Share-based compensation
Share of losses from equity method investments
Fair value change and impairment of long-term investments
Interest and other investment expense/(income)
Deferred income tax (benefit)/expense
Amortization of deferred income
Other non-cash (income)/expenses
Changes in operating assets and liabilities
Accounts receivable
Amounts due from related parties
Licensed copyrights
Produced content
Prepayments and other assets
Accounts payable
Amounts due to related parties
Customer advances and deferred revenue
Accrued expenses and other liabilities
Other non-current liabilities
Net cash used for operating activities
Cash flows from investing activities:
Acquisition of fixed assets
Acquisition of intangible assets
Purchase of long-term investments
Proceeds from disposal of long-term investments
Acquisition of business, net of cash acquired
Film investments made as passive investor
Proceeds from film investments as passive investor
Note
2020
RMB
Year ended December 31,
2021
RMB
2022
RMB
2022
US$
(7,007,153 )
(6,108,533 )
(117,776 )
(17,076 )
4
480,396
317,579
11,863,521
4,534,116
143,534
265,540
(51,819 )
(20,991 )
—
501,033
(1,376,912 )
1,370,095
224,489
33,928
49,622
(41,979 )
(14,969 )
(67,750 )
8,841
144,423
(10,527,700 )
(6,728,467 )
1,166,105
(605,394 )
77,049
429,510
(580,615 )
2,897
(5,411,071 )
(240,750 )
(144,978 )
(1,050,810 )
40,000
(5,798 )
—
1,612
F-11
400,241
162,182
10,082,541
6,121,035
—
(45,228 )
15,534
(25,611 )
(44,861 )
618,393
(1,243,562 )
1,219,163
446,323
82,447
(5,134 )
18,535
(12,674 )
(46,400 )
644,924
(56,029 )
(9,731,462 )
(10,491,647 )
96,000
1,438,676
658,173
39,592
(216,064 )
31,599
(5,951,847 )
(261,536 )
(139,199 )
(386,383 )
—
—
(21,850 )
3,600
337,423
177,019
7,780,928
5,359,648
—
25,855
107,595
(34,901 )
(367,717 )
146,079
(876,109 )
811,441
213,409
823,806
(5,537 )
30,056
(11,760 )
23,185
312,776
49,434
(6,143,075 )
(7,387,666 )
222,399
(2,911,022 )
204,774
750,799
(615,479 )
1,023,847
(70,569 )
(174,263 )
(95,506 )
(78,273 )
20,145
—
(59,650 )
30,200
48,922
25,665
1,128,129
777,075
—
3,749
15,600
(5,060 )
(53,314 )
21,179
(127,024 )
117,649
30,941
119,440
(803 )
4,358
(1,705 )
3,362
45,348
7,167
(890,662 )
(1,071,111 )
32,245
(422,059 )
29,689
108,856
(89,236 )
148,444
(10,232 )
(25,266 )
(13,847 )
(11,349 )
2,921
—
(8,648 )
4,379
Table of Contents
iQIYI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”))
Note
2020
RMB
Year ended December 31,
2021
RMB
2022
RMB
2022
US$
Loans provided to related parties
Loans provided to third parties
Repayment of loans provided to related parties
Repayment of loans provided to third parties
Purchases of held-to-maturity debt securities
Maturities of held-to-maturity debt securities
Purchases of available-for-sale debt securities
Maturities of available-for-sale debt securities
Other investing activities
Net cash provided by investing activities
Cash flows from financing activities:
Proceeds from short-term loans
Repayments of short-term loans
Repayments of long-term loans and borrowings from third
party investors
Proceeds from issuance of convertible senior notes, net
of issuance costs
Repayments of convertible senior notes
Proceeds from issuance of subsidiaries' shares
Proceeds from issuance of ordinary shares in the follow-on offering, net of
issuance costs
Proceeds from issuance of ordinary shares to third parties upon
private placement
Proceeds from issuance of Class B ordinary shares to Baidu upon private
placement
Proceeds from exercise of share options
Finance lease payments
Dividends paid by subsidiaries
Other financing activities
Net cash provided by/(used for) financing activities
Effect of exchange rate changes on cash, cash
equivalents and restricted cash
Net increase/(decrease) in cash, cash equivalents
and restricted cash
Cash, cash equivalents and restricted cash at the
beginning of the year
Cash, cash equivalents and restricted cash
at the end of the year
Supplemental disclosures of cash flow information:
Cash paid for interest
Cash paid for income taxes
Acquisition of fixed assets included in accounts payable
Reconciliation of cash and cash equivalents and restricted cash:
Cash and cash equivalents
Restricted cash
Long-term restricted cash
6
—
(9,655 )
100,000
—
(3,367,103 )
5,202,271
(11,813,599 )
11,431,950
16,156
159,296
(1,000 )
(813,000 )
1,000
813,030
(6,419,905 )
8,518,768
(13,555,195 )
13,468,301
55,719
1,262,350
—
—
—
3,182
(727,943 )
769,766
(3,731,634 )
4,260,759
49,197
265,980
3,559,525
(3,219,083 )
4,437,033
(3,296,979 )
4,277,653
(5,033,931 )
(709,192 )
(880,861 )
—
5,150,888
—
9,609
4,457,007
—
—
196,597
(9,020 )
(62,425 )
—
9,373,906
632,369
(4,751,022 )
268,457
3,448,551
—
1,000
500,380
—
—
—
180,002
(14,473 )
(27,827 )
(6,534 )
(2,959,455 )
1,172,732
634,470
51,850
(38,132 )
(64,240 )
18,910
4,468,863
(91,293 )
(216,696 )
122,418
4,030,838
(7,865,648 )
4,786,692
6,909,674
10,940,512
3,074,864
—
—
—
461
(105,542 )
111,606
(541,036 )
617,752
7,133
38,564
620,201
(729,851 )
—
499,993
—
145
—
170,030
91,990
7,518
(5,529 )
(9,314 )
2,742
647,925
17,748
694,005
445,813
10,940,512
3,074,864
7,861,556
1,139,818
502,985
97,863
30,341
10,915,282
25,230
—
670,916
108,436
68,110
2,997,212
77,652
—
524,484
56,153
3,751
7,097,938
13,618
750,000
76,043
8,141
544
1,029,104
1,974
108,740
Total cash and cash equivalents and restricted cash shown in the
statements of cash flows
10,940,512
3,074,864
7,861,556
1,139,818
The accompanying notes are an integral part of the consolidated financial statements.
F-12
Table of Contents
iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
1.ORGANIZATION
iQIYI, Inc. (the “Company”) was incorporated under the laws of the Cayman Islands on November 27, 2009.
The Company, its wholly-owned subsidiaries, variable interest entities (“VIEs”) and VIEs’ subsidiaries are hereinafter collectively referred to as the “Group”.
The Group is an innovative platform in China offering a diverse collection of high-quality internet video content, including professionally produced content licensed
from professional content providers and self-produced content, on its platform. The Group provides membership services, online advertising services, content
distribution services, live broadcasting services and online games services. The Group’s principal geographic market is in the People’s Republic of China (“PRC”). The
Company does not conduct any substantive operations of its own but conducts its primary business operations through its wholly-owned subsidiaries, VIEs and VIEs’
subsidiaries in the PRC.
As of December 31, 2022, the Company’s major subsidiaries, VIEs and VIEs’ subsidiaries are as follows:
Subsidiaries:
Beijing QIYI Century Science & Technology Co., Ltd.
(“Beijing QIYI Century”)
iQIYI HK Limited
(“iQIYI HK”, formerly known as Qiyi.com HK Limited)
iQIYI Media Limited
iQIYI Film Group HK Limited
Beijing iQIYI Interactive Technology Co., Ltd.
iQIYI International Singapore Pte, Ltd.
VIEs and VIEs’ subsidiaries:
Beijing iQIYI Science & Technology Co., Ltd.
(“Beijing iQIYI”, formerly known as Beijing
Xinlian Xinde Advertisement Media Co., Ltd.)
Shanghai iQIYI Culture Media Co., Ltd.
(“Shanghai iQIYI”)
Shanghai Zhong Yuan Network Co., Ltd.
(“Shanghai Zhong Yuan”)
Chengdu Skymoons Interactive Network Game Co., Ltd.
(“Skymoons Interactive”)
Hainan iQIYI Culture Media Co., Ltd.
Place of
Incorporation
Date of
Establishment/Acquisition
Effective
interest held
Mainland China
March 8, 2010
Hong Kong
Cayman
Hong Kong
Mainland China
Singapore
April 14, 2011
May 26, 2017
June 12, 2017
January 31, 2019
February 11, 2020
Mainland China
Acquired on November 23, 2011
Mainland China
December 19, 2012
Mainland China
Acquired on May 11, 2013
Mainland China
Mainland China
Acquired on July 17, 2018
February 17, 2017
100 %
100 %
100 %
100 %
100 %
100 %
Nil
Nil
Nil
Nil
Nil
In July 2018, the Company and its subsidiaries Beijing iQIYI and Shanghai Zhong Yuan acquired a controlling equity interest in Skymoons Inc, Chengdu
Skymoons Digital Entertainment Co., Ltd. and their subsidiaries (collectively referred to as “Skymoons”).
PRC laws and regulations prohibit or restrict foreign ownership of companies that engage in internet audio-video program services, value-added
telecommunication services, radio and television program production and operation services, and certain other services. To comply with these foreign ownership
restrictions, the Group operates its platforms and primarily conducts its business in the PRC through the VIEs. The paid-in capital of the VIEs was mainly funded by the
Company or its subsidiaries through loans extended to the authorized individuals who were the shareholders of the VIEs. The Company has entered into certain
agreements with the shareholders of the VIEs through the Company or its wholly-owned subsidiaries in the PRC, including loan agreements for the paid-in capital of the
VIEs and share pledge agreements for the equity interests in the VIEs held by the shareholders of the VIEs. In addition, the Company or its wholly-owned subsidiaries
have entered into shareholder voting rights trust agreements, powers of
F-13
Table of Contents
iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
attorney and exclusive purchase option agreements with the VIEs and nominee shareholders of the VIEs, which give the Company or its wholly-owned subsidiaries the
power to direct the activities that most significantly affect the economic performance of the VIEs and to acquire the equity interests in the VIEs when permitted by the
PRC laws, respectively. Commitment letters have been entered into which obligate the Company to absorb losses of the VIEs that could potentially be significant to the
VIEs and certain exclusive agreements have been entered into that entitle the Company or its wholly-owned subsidiaries to receive economic benefits from the VIEs
that potentially could be significant to the VIEs.
Despite the lack of equity ownership, as a result of a series of contractual arrangements (the “Contractual Arrangements”), the shareholders of the VIEs
effectively assigned all of their voting rights underlying their equity interests in the VIEs to the Company, which gives the Company the power to direct the activities
that most significantly impact the VIEs’ economic performance. In addition, through the other exclusive agreements, which consist of the business operation
agreements/exclusive management consulting and business cooperation agreements, exclusive technology consulting and services agreements, trademark license
agreements and software usage license agreements and business cooperation agreement, the Company, through its wholly-owned subsidiaries in the PRC, has the right
to receive economic benefits from the VIEs that potentially could be significant to the VIEs. Lastly, through the commitment letters, the Company has the obligation to
absorb losses of the VIEs that could potentially be significant to the VIEs. Therefore, the Company is considered the primary beneficiary of the VIEs and consolidates
the VIEs and their subsidiaries as required by Accounting Standards Codification (“ASC”) topic 810 (“ASC 810”), Consolidation.
The principal terms of the Contractual Arrangements are further described below:
Loan Agreements
Pursuant to the loan agreement amongst Beijing QIYI Century and the shareholder of Beijing iQIYI, amended and restated on January 30, 2013, Beijing QIYI
Century provided a RMB27 million interest-free loan to the shareholder of Beijing iQIYI solely for funds necessary for the capital injection to Beijing iQIYI. The loan
can be repaid only with the proceeds from the sale of all of the equity interests in Beijing iQIYI to the Company or its designated representative(s) if permitted under
PRC laws. The term of the loan agreement expires on June 23, 2021 originally, which was extended for another ten years to June 23, 2031, and can be further extended
upon the written notification from Beijing QIYI Century.
The loan agreement entered into between Beijing QIYI Century and the shareholders of Shanghai iQIYI dated October 25, 2013, contains terms similar to the
terms described above, except that the total amount of loans extended to the shareholders of Shanghai iQIYI is RMB10 million. The original term of the loan agreement
expires on October 25, 2023,which was extended for another ten years to October 25, 2033 and can be further extended upon the written notification from Beijing QIYI
Century.
The loan agreement entered into between Beijing QIYI Century and the shareholder of Shanghai Zhong Yuan, amended on January 14, 2014, contains terms
similar to the terms described above, except that the total amount of the loan to the shareholder of Shanghai Zhong Yuan is RMB20 million. The original term of the
loan agreement expires on January 14, 2024, which was extended for another ten years to January 14, 2034 and can be further extended upon the written notification
from Beijing QIYI Century.
Each of the loan agreements amongst Beijing QIYI Century or other subsidiaries and the respective shareholders of Beijing iQIYI or other VIEs contains
substantially the same terms as those described above, except that the amount of the loans and the contract expiration date vary.
F-14
Table of Contents
iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
Exclusive Purchase Option Agreements
Pursuant to the exclusive purchase option agreement amongst the Company, Beijing QIYI Century, Beijing iQIYI and its shareholder, amended and restated on
January 30, 2013, the shareholder granted the Company an exclusive irrevocable option to purchase, all or part of the equity interests held by its shareholder, when and
to the extent permitted under PRC law, at an amount equal to the cost of the initial contributions to the registered capital or the minimum amount of consideration
permitted by applicable PRC law. In addition, Beijing iQIYI’s shareholder granted the Company an exclusive right to designate one or more persons to purchase all the
equity interests in Beijing iQIYI. Without the prior written consent of the Company, Beijing iQIYI may not: (i) amend its articles of association, (ii) increase or decrease
the registered capital, (iii) sell or otherwise dispose of its assets or beneficial interest, (iv) create or allow any encumbrance on its assets or other beneficial interests, (v)
extend any loans to third parties, (vi) enter into any material contract with a value of more than RMB300 (except those contracts entered into in the ordinary course of
business), (vii) merge with or acquire any other persons or make any investments, or (viii) distribute dividends to its shareholders. Beijing iQIYI’s shareholder also
agrees that he will not dispose of the equity interests in Beijing iQIYI nor create or allow any encumbrance on the equity interests and extend any loans to individuals
without the prior written consent of the Company. The shareholder should remit to the Company any amount that is paid by the Company or its designated person(s) in
connection with the purchased equity interest. Any and all dividends and other capital distributions from Beijing iQIYI to its shareholders should be repaid to the
Company. The agreement will terminate when Beijing iQIYI’s shareholder transfers all of his equity interests in Beijing iQIYI to the Company or its designated
person(s) or upon expiration of the term of business of the Company or Beijing iQIYI. The original term of the agreement is ten years, which was extended for another
ten years to November 22, 2032 and may be further renewed at the discretion of the Company.
The exclusive purchase option agreement amongst the Company, Beijing QIYI Century, Shanghai iQIYI and its shareholders dated October 25, 2013, the
exclusive purchase option agreement amongst the Company, Beijing QIYI Century, Shanghai Zhong Yuan and its shareholder, amended on January 14, 2014, and each
of the exclusive purchase option agreements amongst the Company, Beijing QIYI Century or other subsidiaries, Beijing iQIYI or other VIEs and the respective
shareholders, contain terms similar to the terms described above. The original terms of the exclusive purchase option agreement of Shanghai iQIYI and Shanghai Zhong
Yuan expires on October 25, 2023 and January 14, 2024, which were extended to October 25, 2033 and January 14, 2034, respectively, and may be further renewed at
the discretion of the Company.
Commitment Letters
Pursuant to the commitment letter dated January 30, 2013, under the condition that Beijing iQIYI remains as a variable interest entity of the Company under
United States generally accepted accounting principles (“U.S. GAAP”) and the relevant contractual arrangements remain in effect, the Company commits to provide
unlimited financial support to Beijing iQIYI, if Beijing iQIYI requires any form of reasonable financial support for its normal business operations. If Beijing iQIYI
incurs any losses and as a result cannot repay its loans from the Company and Beijing QIYI Century, the Company and Beijing QIYI Century would unconditionally
forgive their loans to Beijing iQIYI, if Beijing iQIYI provides sufficient proof for its loss and incapacity to repay.
The commitment letters executed by the Company for other VIEs including Shanghai iQIYI and Shanghai Zhong Yuan, contain terms similar to the terms
described above.
Shareholder Voting Rights Trust Agreements and Powers of Attorney
Pursuant to the shareholder voting rights trust agreement amongst Beijing QIYI Century and Beijing iQIYI’s shareholder, amended and restated on January 30,
2013, Beijing iQIYI’s shareholder agreed to entrust all the rights to exercise its voting power and any other rights as Beijing iQIYI’s shareholder to the person(s)
designated by Beijing QIYI Century. Beijing iQIYI’s shareholder agreed to irrevocably appoint the person(s) designated by Beijing QIYI Century as his attorney-in-fact
to represent him to exercise all the voting rights and other shareholders’ rights on his behalf on all matters requiring shareholder approval. The agreement will remain
effective for as long as the shareholder remains the shareholder of Beijing iQIYI unless Beijing QIYI Century unilaterally terminates the agreement by written notice.
Pursuant to an irrevocable power of attorney, Beijing QIYI Century granted all of its rights under the shareholder voting rights trust agreement to the Company.
F-15
Table of Contents
iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
The shareholder voting rights trust agreement amongst Beijing QIYI Century and Shanghai iQIYI’s shareholders dated October 25, 2013, and the shareholder
voting rights trust agreement amongst Beijing QIYI Century and Shanghai Zhong Yuan’s shareholder, amended on January 14, 2014, contain terms similar to the terms
described above except under the shareholder voting rights trust agreement, the person designated by Beijing QIYI Century as the attorney-in-fact to represent the
shareholders of Shanghai iQIYI and Shanghai Zhong Yuan must be approved by the Company.
Each of the shareholder voting rights trust agreements amongst Beijing QIYI Century or other subsidiaries and the respective shareholders of Beijing iQIYI or
other VIEs contains substantially the same terms as those described above. Each of the powers of attorney amongst the Company, Beijing QIYI Century or other
subsidiaries and the respective shareholders of Beijing iQIYI or other VIEs are substantially the same as terms discussed above.
Exclusive Technology Consulting and Services Agreements
Pursuant to the exclusive technology consulting and services agreement amongst Beijing QIYI Century and Beijing iQIYI effective November 23, 2011, Beijing
QIYI Century has the sole and exclusive right to provide to Beijing iQIYI specified technology consulting and services in return for service fees. Beijing iQIYI agrees to
accept such services and, without the prior written consent of Beijing QIYI Century, may not accept the same or similar technology consulting and services provided by
any third party during the term of the agreement. Beijing iQIYI agrees to pay specified service fees to Beijing QIYI Century on a quarterly basis. Beijing QIYI Century
has the right to unilaterally adjust the amount of the service fee through written confirmation, without prior consent from Beijing iQIYI. All the benefits and interests
generated from the agreement, including but not limited to software copyrights, intellectual property rights, know-how and trade secrets, become the sole and exclusive
rights of Beijing QIYI Century. The agreement has a term of ten years originally, which was extended for another ten years to November 23, 2031, unless Beijing QIYI
Century unilaterally terminates the agreement by giving written notification at least thirty days prior to the expiration of the agreement. The agreement can also be
further renewed at the discretion of Beijing QIYI Century.
The exclusive technology consulting and services agreement amongst Beijing QIYI Century and Shanghai iQIYI on October 25, 2013, the exclusive technology
consulting and services agreement amongst Beijing QIYI Century and Shanghai Zhong Yuan, amended on January 14, 2014, and each of the exclusive technology
consulting and service agreements amongst Beijing QIYI Century or other subsidiaries and Beijing iQIYI or other VIEs, contain terms similar to the terms described
above. The original terms of the exclusive technology consulting and services agreement of Shanghai iQIYI and Shanghai Zhong Yuan expires on October 25, 2023 and
January 14, 2024, which were extended to October 25, 2033 and January 14, 2034, respectively, and may be further renewed at the discretion of Beijing QIYI Century.
Share Pledge Agreements
Pursuant to the share pledge agreement amongst Beijing QIYI Century and Beijing iQIYI’s shareholder, amended and restated on January 30, 2013, Beijing
iQIYI’s shareholder has pledged all of his equity interests in Beijing iQIYI to guarantee his and Beijing iQIYI’s performance of their obligations under, the exclusive
technology consulting and services agreement and the amended and restated loan agreement. During the term of the share pledge agreement, Beijing QIYI Century has
the right to receive all of the dividends and profits distributed on the pledged equity. If Beijing iQIYI or its shareholder breaches its respective contractual obligations,
Beijing QIYI Century, as the pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests. The shareholder of Beijing iQIYI agrees
not to dispose of the pledged equity interests, create or allow any encumbrance on the pledged equity interests or take any actions that would prejudice Beijing QIYI
Century’s interest. The share pledge agreement will expire after Beijing iQIYI and its shareholder has completed all their obligations under the exclusive technology
consulting and services agreement and the amended and restated loan agreement unless otherwise unilaterally terminated by Beijing QIYI Century.
The share pledge agreement amongst Beijing QIYI Century and Shanghai iQIYI’s shareholders dated October 25, 2013, the share pledge agreement amongst
Beijing QIYI Century and Shanghai Zhong Yuan’s shareholder, amended on January 14, 2014, and the share pledge agreements amongst Beijing QIYI Century or other
subsidiaries and Beijing iQIYI or other VIEs, contain terms similar to the terms described above except that the pledged equity interest is only to guarantee performance
of their obligations under the loan agreements.
F-16
Table of Contents
iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
Business Operation Agreements / Exclusive Management Consulting and Business Cooperation Agreements
Pursuant to the business operation agreement amongst Beijing QIYI Century, Beijing iQIYI and its shareholder, amended and restated on January 30, 2013,
Beijing iQIYI agrees to accept the proposal provided by Beijing QIYI Century from time to time relating to employment, daily business and financial management. This
agreement can only be unilaterally revoked/amended by Beijing QIYI Century. The agreement has a term of ten years originally, which was extended for another ten
years to January 30, 2033 and is further renewable at the discretion of Beijing QIYI Century.
The business operation agreement amongst Beijing QIYI Century and Shanghai iQIYI’s shareholders dated October 25, 2013, the business operation agreement
amongst Beijing QIYI Century and Shanghai Zhong Yuan’s shareholder, amended on January 14, 2014, and the business operation agreements or the exclusive
management consulting and business cooperation agreements amongst Beijing QIYI Century or other subsidiaries and Beijing iQIYI or other VIEs, contain terms
similar to the terms described above. The original term of the business operation agreement of Shanghai iQIYI and Shanghai Zhong Yuan expires on October 25, 2023
and January 14, 2024, which were extended to October 25, 2033 and January 14, 2034, respectively, and may be further renewed at the discretion of Beijing QIYI
Century.
Trademark License Agreement and Software Usage License Agreement
Pursuant to the trademark license agreement and the software usage license agreement amongst Beijing QIYI Century and Beijing iQIYI effective November 23,
2011, Beijing QIYI Century granted a non-exclusive and non-transferable license, without sublicensing rights, to Beijing iQIYI to use its trademarks and software.
Beijing iQIYI may only use the licenses in its own business operations. Beijing QIYI Century has the right to adjust the service fees at its sole discretion. The initial
term of the two agreements is five years and the software usage license agreement may be extended upon the written consent of Beijing QIYI Century. The trademark
license agreement is automatically extended for successive one-year periods after its expiration unless Beijing QIYI Century early terminates the agreement in
accordance with the provisions of the agreement. The software usage license agreement was extended for another five years after its initial term, and was extended for
another ten years to December 1, 2031 and is further renewable at the discretion of Beijing QIYI Century.
Business Cooperation Agreement
Pursuant to the business cooperation agreement amongst Beijing QIYI Century and Beijing iQIYI effective November 23, 2011, Beijing iQIYI agrees to provide
Beijing QIYI Century with services, including internet information services, online advertising and other services reasonably necessary within the scope of Beijing QIYI
Century’s business. Beijing iQIYI agrees to use technology services provided by Beijing QIYI Century on its platform, including but not limited to, P2P download and
video on-demand systems. Beijing QIYI Century agrees to pay specified service fees to Beijing iQIYI as consideration for the internet information services and other
services provided by Beijing iQIYI. Beijing iQIYI has the right to waive the service fees at its discretion. The original term of this agreement is ten years, which was
extended for another ten years to November 23, 2031 and can be further renewed at Beijing QIYI Century’s discretion.
In the opinion of the Company’s legal counsel, (i) the ownership structure relating to the VIEs of the Company is in compliance with existing PRC laws and
regulations; (ii) each of the contractual arrangements with the VIEs and their shareholders are valid and legally binding upon each party to such agreement under PRC
laws; and (iii) the execution, delivery and performance of the contractual arrangements do not result in any violation of the provisions of the articles of association and
business licenses of the VIEs, and any violation of any explicit provisions of the current PRC laws and regulations.
On January 1, 2020, the Foreign Investment Law came into effect and became the principal laws and regulations governing foreign investment in the PRC. The
Foreign Investment Law requires compliance with a negative industry catalog (“Negative List”), which sets forth the business that are restricted and prohibited from
foreign investment. The Foreign Investment Law does not explicitly classify contractual arrangements as a form of foreign investment, but it contains a catch-all
provision which includes investments made by foreign investors through means stipulated in laws or administrative regulations or other methods prescribed by the State
Council. There are uncertainties regarding the interpretation of the Foreign Investment Law with respect to the contractual arrangements as a form of foreign investment.
The VIEs’ internet audio-video program services, value-added telecommunication services, radio and television program production and operation services, and certain
other services are included in the Negative List. If any of the contractual arrangements would be deemed as a foreign investment that is prohibited by the Foreign
Investment Law or any other current or future laws, regulations or interpretations, the Company’s ability, through its wholly- owned subsidiaries in the PRC, to enforce
its rights under these contractual arrangements with the VIEs and the Company’s ability to conduct business through the VIEs could be severely limited.
F-17
Table of Contents
iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
In addition, if the current organizational structure or any of the contractual arrangements were found to be in violation of any existing and/or future PRC laws or
regulations, the Company may be subject to penalties, which may include but not be limited to: the cancellation or revocation of the Company’s business and operating
licenses, being required to restructure the Company’s operations or discontinue the Company’s operating activities. The imposition of any of these or other penalties may
cause the Company to lose its right to direct the activities that most significantly impact the VIEs and/or the right to receive economic benefits that could potentially be
significant to the VIEs based on the contractual arrangements, which may result in the Company no longer being able to consolidate the financial results of the VIEs in
the consolidated financial statements.
Furthermore, shareholders of the VIEs may have interests that are different with those of the Company, which could potentially increase the risk that they would
seek to breach the existing terms of the aforementioned agreements.
The carrying amounts of the assets, liabilities and the results of operations of the VIEs and VIEs’ subsidiaries included in the Company’s consolidated balance
sheets and statements of comprehensive loss are as follows:
ASSETS
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Licensed copyrights, net
Prepayments and other assets
Total current assets
Non-current assets:
Fixed assets, net
Long-term investments
Licensed copyrights, net
Produced content, net
Operating lease assets
Goodwill
Others
Total non-current assets
Total assets
LIABILITIES
Third-party liabilities
Current liabilities:
Accounts payable
Customer advances and deferred revenue
Short-term loans (i)
Operating lease liabilities, current portion
Accrued expenses and other liabilities
Total current liabilities
Non-current liabilities:
Operating lease liabilities
Other non-current liabilities
Total non-current liabilities
Amounts due to the Company and its subsidiaries
Total liabilities
2021
RMB
As of December 31,
2022
RMB
2022
US$
950,267
595,754
2,613,546
669,672
3,027,691
7,856,930
726,115
1,987,678
2,288,848
10,425,514
697,965
2,412,989
919,713
19,458,822
27,315,752
5,068,907
3,370,582
2,292,899
108,059
3,101,273
13,941,720
579,844
339,238
919,082
20,835,196
35,695,998
1,882,877
529,411
2,316,961
527,792
2,366,445
7,623,486
649,690
1,941,014
1,952,497
12,534,227
578,937
2,350,790
712,697
20,719,852
28,343,338
3,315,976
4,125,789
2,381,846
95,603
2,315,572
12,234,786
502,687
1,247,571
1,750,258
22,808,971
36,794,015
272,992
76,757
335,928
76,523
343,102
1,105,302
94,196
281,421
283,085
1,817,292
83,938
340,833
103,331
3,004,096
4,109,398
480,771
598,183
345,335
13,861
335,726
1,773,876
72,883
180,881
253,764
3,306,990
5,334,630
F-18
Table of Contents
iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
Total revenues
Net (loss)/income
Net cash provided by operating activities
Net cash (used for )/provided by investing activities
Net cash (used for)/provided by financing activities
2020
RMB
27,412,800
(1,360,562 )
980,975
(625,675 )
(380,298 )
For the year ended December 31,
2021
RMB
28,947,480
(1,688,711 )
160,904
(540,018 )
515,423
2022
RMB
26,966,013
334,414
275,422
547,231
79,733
2022
US$
3,909,704
48,485
39,933
79,341
11,560
(i) In accordance with the arrangement as described in Note 13, the Group consolidates the securitization vehicle as it is a VIE for which the Group considers
itself the primary beneficiary given the Group has the power to govern the activities that most significantly impact its economic performance and is obligated to absorb
losses that could potentially be significant to the VIE. As of December 31, 2021 and 2022, RMB708,195 and nil, respectively, of the loan is repayable within one year
and is included in “Short-term loans”, in the carrying amounts of the liabilities of the VIEs and VIEs' subsidiaries.
The carrying amounts of the assets, liabilities and the results of operations of the VIEs and their subsidiaries are presented in aggregate due to the similarity of the
purpose and design of the VIEs and their subsidiaries, the nature of the assets in these VIEs and their subsidiaries and the type of the involvement of the Company in
these VIEs and their subsidiaries.
Unrecognized revenue-producing assets held by the VIEs include certain internet content provisions and other licenses, domain names and trademarks. The
internet content provisions and other licenses, which are held by the VIEs that provide the relevant services, are required under relevant PRC laws, rules and regulations
for the operation of Internet businesses in the PRC, and therefore are integral to the Company’s operations. The VIEs and VIEs’ subsidiaries contributed an aggregate of
92%, 94% and 92% of the Group’s consolidated revenues for the years ended December 31, 2020, 2021 and 2022, respectively, after elimination of inter-company
transactions. As of December 31, 2022, there was no pledge or collateralization of the VIEs and VIEs’ subsidiaries’ assets that can only be used to settled obligations of
the VIEs and VIEs’ subsidiaries, other than the aforementioned in the share pledge agreements, business operation agreements and collateralization of a VIE’s office
building as described in Note 13.
The VIEs’ third-party creditors did not have recourse to the general credit of the Company in the normal course of business. The Company did not provide or
intend to provide financial or other support not previously contractually required to the VIEs and VIEs’ subsidiaries during the years presented.
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Going concern
As disclosed in the Group's consolidated financial statements as of December 31, 2021, there was substantial doubt regarding its ability to continue as a going
concern as it did not have sufficient funds to repurchase all or a significant portion of the outstanding 2025 Notes if redeemed by noteholders on April 1, 2023 (Note 14)
without securing additional financing. The Group has implemented plans and improved its financial position by reducing discretionary capital expenditures and
operational expenses (the "Plans") and secured additional financing. In March 2022, the Group issued ordinary shares for a total cash purchase price of US$285 million
(equivalent to RMB1,807.2 million) in a private placement transaction (Note 19). In December 2022, the Group issued US$500.0 million (equivalent to RMB3,448.6
million) convertible senior notes (Note 14) to certain investors. In January 2023, the Group completed a registered follow-on public offering of ADSs and received net
proceeds of US$500 million (equivalent to RMB3,448.6 million). In February 2023, certain investors exercised their option to subscribe for an additional amount of
US$50.0 million (equivalent to RMB344.9 million) convertible senior notes (Note 26). In March 2023, the Group issued US$600 million (equivalent to RMB4,138.3
million) convertible senior notes. Concurrently with and shortly after the offering, the Group also entered into separate and individually privately negotiated agreements
with certain holders of the 2026 Notes to repurchase US$340 million (equivalent to RMB2,345.0 million) principal amount of such notes (Note 26).
The Group has incurred net losses since inception and had an accumulated deficit of RMB46,498,897 (US$6,741,706) as of December 31, 2022 and negative
cash flow from operations of RMB70,569 (US$10,232) for the year ended December 31, 2022. As of December 31, 2022, the Group had cash, cash equivalents,
restricted cash and short-term investments of RMB7,929,821 (US$1,149,715), unused credit lines of RMB1,635,644 (US$237,146) and a working capital deficit of
RMB14,344,383 (US$2,079,740). However, net loss decreased from RMB6,108,533 for the year ended December 31, 2021 to RMB117,776 (US$17,076) for the year
ended December 31, 2022, which led to improved operating cash flows.
F-19
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iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
As a result of the cash generated from operations, coupled with the Plans and funds raised above, the substantial doubt regarding the Group's ability to continue
as a going concern has been resolved.
Convenience translation
Translations of amounts from RMB into US$ for the convenience of the readers have been calculated at the exchange rate of RMB6.8972 per US$1.00 on
December 31, 2022, the last business day in fiscal year 2022, as published on the website of the United States Federal Reserve Board. No representation is made that the
RMB amounts could have been, or could be, converted into U.S. dollars at such rate.
Basis of presentation and principles of consolidation
The consolidated financial statements have been prepared in accordance with U.S. GAAP. The consolidated financial statements of the Group include the
financial statements of the Company, its subsidiaries, VIEs and VIEs’ subsidiaries in which the Company is the primary beneficiary. The results of the subsidiaries are
consolidated from the date on which the Group obtains control and continues to be consolidated until the date that such control ceases. A controlling financial interest is
typically determined when a company holds a majority of the voting equity interest in an entity. However, if the Company demonstrates its ability to control the VIEs
through power to govern the activities which most significantly impact its economic performance and is obligated to absorb losses of the VIEs that could potentially be
significant to the VIEs or the right to receive benefits from the VIEs that could potentially be significant to the VIEs, then the entity is consolidated. All intercompany
balances and transactions between the Company, its subsidiaries, VIEs and VIEs’ subsidiaries have been eliminated on consolidation.
Use of estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the period. Management evaluates estimates, including those related to the standalone selling prices of performance obligations of revenue contracts,
accrued sales rebates for online advertising revenues, the allowance for credit losses of accounts receivable, contract assets, receivables from online payment agencies,
amounts due from related parties and debt securities, liabilities associated with financial guarantees, future viewership consumption patterns and useful lives of licensed
copyrights and produced content, future revenues generated by the broadcasting and sublicensing rights of content assets (licensed and produced), useful lives of certain
finite-lived intangible assets, fair values of certain debt and equity investments, recoverability and useful lives of long-lived assets, recoverability of indefinite-lived
intangible assets and goodwill, ultimate revenue of produced content predominantly monetized on its own, fair values of licensed copyrights and produced content
monetized as a film group or individually, fair value of share options to purchase the Company’s ordinary shares, fair value of nonmonetary content exchanges, fair
value of financial instruments, forfeiture rates for share options granted, valuation allowances on deferred tax assets and income tax uncertainties, among others.
Management bases these estimates on its historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis
for making judgments about the carrying values of assets and liabilities. Actual results could differ from these estimates.
Foreign currency translation and transactions
The Company’s functional currency is the US$ and its reporting currency is the RMB. The Company’s subsidiaries, VIEs and subsidiaries of the VIEs determine
their functional currencies based on the criteria of ASC topic 830, Foreign Currency Matters (“ASC 830”). The functional currency of the subsidiaries in the Cayman
Islands and Hong Kong is the U.S. dollar. The functional currencies of the subsidiaries, VIEs and VIEs’ subsidiaries in Mainland China are the RMB. The Company
uses the monthly average exchange rate and the exchange rate at the balance sheet date to translate the operating results and financial position to its reporting currency,
respectively. Translation differences are recorded in accumulated other comprehensive income, a component of shareholders’ equity.
F-20
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iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
Transactions denominated in foreign currencies are re-measured into the functional currency at the exchange rates prevailing on the transaction dates. Financial
assets and liabilities denominated in foreign currencies are re-measured into the functional currency at the exchange rates prevailing at the balance sheet date.
Cash and cash equivalents
Cash and cash equivalents primarily consist of cash, money market funds, investments in interest bearing demand deposit accounts, time deposits, and highly
liquid investments with original maturities of three months or less from the date of purchase and are stated at cost which approximates their fair value.
Restricted Cash
Cash that is restricted as to withdrawal or for use or pledged as security is reported separately on the consolidated balance sheets. The Group’s restricted cash
mainly represents restricted deposits used as security against short-term loans, convertible senior notes and certain lawsuits.
In the event that the obligation to maintain such deposits is expected to be terminated within the next twelve months, these deposits are classified as current
assets, included in "Restricted cash" in the consolidated balance sheets. Otherwise, they are classified as non-current assets, included in "Prepayments and other assets"
in the consolidated balance sheets.
Short-term investments
All highly liquid investments with maturities of greater than three months, but less than twelve months, are classified as short-term investments.
Investments that are expected to be realized in cash during the next twelve months are also included in short-term investments. The Group accounts for short-
term investments in accordance with ASC topic 320, Investments—Debt and Equity Securities (“ASC 320”). The Group classifies the short-term investments in debt
securities as “held-to-maturity”, “trading” or “available-for-sale”, whose classification determines the respective accounting methods stipulated by ASC 320. Interest
income, including amortization of the premium and discount arising at acquisition, for all categories of investments in securities are included in earnings.
The securities that the Group has the positive intent and the ability to hold to maturity are classified as held-to-maturity securities and stated at amortized cost.
The Group determines realized gains or losses on sale of held-to-maturity securities on a specific identification method, and records such gains or losses in earnings.
The securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and measured at fair value.
Unrealized holding gains and losses for trading securities are included in earnings.
Investments not classified as trading or as held-to-maturity are classified as available-for-sale securities. Available-for-sale securities are reported at fair value,
with unrealized gains and losses recorded in accumulated other comprehensive income. Realized gains or losses are included in earnings during the period in which the
gain or loss is realized.
Measurement of credit losses
The Group maintains an allowance for credit losses for accounts receivable, contract assets and receivables from online payment agencies, which is recorded as
an offset to accounts receivable, contract assets and receivables from online payment agencies, respectively, and the estimated credit losses charged to the allowance is
classified as “Selling, general and administrative” in the consolidated statements of comprehensive loss. When similar risk characteristics exist, the Group assesses
collectability and measure expected credit losses on a collective basis for a pool of assets, whereas if similar risk characteristics do not exist, the Group assesses
collectability and measures expected credit losses on an individual asset basis. In determining the amount of the allowance for credit losses, the Group considers historic
collection experience, the age of the accounts receivable, contract assets balances and receivables from online payment agencies, credit quality of the Group’s
customers, current economic conditions, reasonable and supportable forecasts of future economic conditions, and other factors that may affect the customer’s ability to
pay.
For debt securities, the allowance for credit losses reflects the Group's estimated expected losses over the contractual lives of the debt securities and is recorded as
a charge to “Others, net” in the consolidated statements of comprehensive loss. Estimated allowances of credit losses are determined by considering reasonable and
supportable forecasts of future economic conditions in
F-21
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iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
addition to information about past events and current conditions.
Accounts Receivable, net
Accounts receivable are recognized and carried at the original invoiced amount less an allowance for credit losses. An estimate for the allowance for credit losses
is discussed above in “Measurement of credit losses”. The receivable balances are written off when they are deemed uncollectible. The Group generally does not require
collateral from its customers.
Receivables from Online Payment Agencies, net
Receivables from online payment agencies are cash due from the third-party online payment service providers for clearing transactions and are included in
“Prepayments and other assets” on the consolidated balance sheets. The cash was paid or deposited by customers or users through these online payment agencies for
services provided by the Group. The Group carefully considers and monitors the credit worthiness of the third-party payment service providers used and provides an
allowance for credit losses as discussed in “Measurement of credit losses”. Receivable balances are written off when they are deemed uncollectible. As of December 31,
2021 and 2022, allowance for credit losses provided for the receivables from online payment agencies were insignificant.
Fixed assets, net
Fixed assets are stated at cost and are depreciated using the straight-line method over the shorter of the estimated useful lives of the assets or the term of the
related lease, as follows:
Computer equipment
Office furniture and equipment
Leasehold improvements
3 to 5 years
3 to 5 years
over the shorter of lease terms or estimated useful lives of the assets
Office building
Others
43 years
5 years
Repair and maintenance costs are expensed as incurred, whereas the cost of renewals and betterments that extend the useful lives of the assets are capitalized
as additions to the related assets. Retirements, sales and disposals of assets are recorded by removing the cost and accumulated depreciation from the asset and
accumulated depreciation accounts with any resulting gain or loss reflected in the consolidated statements of comprehensive loss.
All direct and indirect costs that are related to the construction of fixed assets and incurred before the assets are ready for their intended use are capitalized as
construction in progress. Construction in progress is transferred to specific fixed assets items and depreciation of these assets commences when ready for their intended
use.
Long-term investments
The Group’s long-term investments consist of equity securities without readily determinable fair values, equity method investments, available-for-sale debt
securities accounted for at fair value and equity securities with readily determinable fair value.
Equity investments, except for those accounted for under the equity method, those that result in consolidation of the investee and certain other investments, are
measured at fair value in accordance with ASC topic 321, Investments—Equity Securities (“ASC 321”) and any changes in fair value are recognized in earnings. For
equity securities without readily determinable fair values and do not qualify for the existing practical expedient in ASC topic 820, Fair Value Measurements and
Disclosures (“ASC 820”) to estimate fair value using the net asset value per share (or its equivalent) of the investment, the Group elected to use the measurement
alternative to measure those investments at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical
or similar investments of the same issuer, if any. Equity securities with readily determinable fair values are measured at fair value, and any changes in fair value are
recognized in earnings.
F-22
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iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
Investments in entities in which the Group can exercise significant influence and holds an investment in voting common stock or in-substance common stock (or
both) of the investee but does not own a majority equity interest or control are accounted for using the equity method of accounting in accordance with ASC topic 323,
Investments—Equity Method and Joint Ventures (“ASC 323”). Under the equity method, the Group initially records its investment at cost and the difference between the
cost of the equity investee and the amount of the underlying equity in the net assets of the equity investee is accounted for as if the investee was a consolidated
subsidiary. The Group subsequently adjusts the carrying amount of the investments to recognize the Group’s proportionate share of each equity investee’s net income or
loss into earnings after the date of investment. When calculating its proportionate share of each equity investee’s net income or loss, the Group adjusts the net income or
loss of equity investee to include accretion of preferred stock that is classified in temporary equity in the equity investee’s financial statements. Intra-entity profits and
losses shall be eliminated until realized by the Group or investee as if the investee was consolidated. The Group will discontinue applying the equity method if an
investment (plus additional financial support provided to the investee, if any) has been reduced to zero. When the Group has other investments in its equity-method
investee and is not required to advance additional funds to the investee, the Group would continue to report its share of equity method losses in its consolidated
statements of comprehensive loss after its equity-method investment in ordinary shares has been reduced to zero, to the extent of and as an adjustment to the adjusted
basis of the Group’s other investments in the investee. The Group evaluates the equity method investments for impairment under ASC 323. An impairment loss on the
equity method investments is recognized in the consolidated statements of comprehensive loss when the decline in value is determined to be other-than-temporary.
Available-for-sale debt securities are convertible debt instruments issued by private companies and investments in equity securities that are redeemable at the
Company’s option, which are measured at fair value, with interest income recorded in earnings and unrealized gains or losses recorded in accumulated other
comprehensive income.
Produced content, net
The Group produces original content in-house and collaborates with external parties. Produced content primarily consists of films, episodic series, variety shows
and animations. The costs incurred in the physical production of original content include direct production costs, production overhead and acquisition costs. Produced
content also includes cash expenditures made to acquire a proportionate share of certain rights to films including profit sharing, distribution and/or other rights.
Exploitation costs are expensed as incurred. Participation costs are accrued using the individual-film-forecast-computation method, which recognizes the costs in the
same ratio as the associated ultimate revenue. Production costs for original content that are predominantly monetized in a film group are capitalized. Production costs for
original content predominantly monetized on its own are capitalized to the extent that they are recoverable from total revenues expected to be earned (“ultimate
revenue”); otherwise, they are expensed as cost of revenues. Ultimate revenue estimates include revenue expected to be earned from all sources, including exhibition,
licensing, or exploitation of produced content if the Group has demonstrated a history of earning such revenue. The Group estimates ultimate revenue to be earned
during the estimated useful lives of produced content based on anticipated release patterns and historical results of similar produced content, which are identified based
on various factors, including cast and crew, target audience and popularity. The capitalized production costs are reported separately as noncurrent assets with caption of
“Produced content, net” on the consolidated balance sheets.
Based on factors including historical and estimated future viewership consumption patterns, the Group amortizes film costs for produced content that is
predominantly monetized in a film group. For produced content that is monetized on its own, the Group considers historical and estimated usage patterns to determine
the pattern of amortization for film costs. Based on the estimated patterns, the Group amortizes produced content using an accelerated method over its estimated useful
lives within ten years, beginning with the month of first availability and such costs are included in “Cost of revenues” in the consolidated statements of comprehensive
loss.
Licensed copyrights, net
Licensed copyrights consist of professionally produced content such as films, television series, variety shows and other video content acquired from external
parties. The license fees are capitalized and, unless prepaid, a corresponding liability is recorded when the cost of the content is known, the content is accepted by the
Group in accordance with the conditions of the license agreement and the content is available for its first showing on the Group’s platforms. Licensed copyrights are
presented on the consolidated balance sheets as current and non-current based on estimated time of usage.
F-23
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iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
The Group’s licensed copyrights include the right to broadcast and, in some instances, the right to sublicense. The broadcasting right, refers to the right to
broadcast the content on its own platforms and the sublicensing right, refers to the right to sublicense the underlying content to external parties. When licensed
copyrights include both broadcasting and sublicensing rights, the content costs are allocated to these two rights upon initial recognition, based on the relative proportion
of the estimated total revenues that will be generated by each right over its estimated useful lives.
For the right to broadcast the contents on its own platforms that generates online advertising and membership services revenues, based on factors including
historical and estimated future viewership patterns, the content costs are amortized using an accelerated method by content categories over the shorter of each content's
contractual period or estimated useful lives within ten years, beginning with the month of first availability. Content categories accounting for most of the Group’s content
include newly released drama series, newly released movies, animations, library drama series and library movies. Estimates of future viewership consumption patterns
and estimated useful lives are reviewed periodically, at least on an annual basis and revised, if necessary. Revisions to the amortization patterns are accounted for as a
change in accounting estimate prospectively in accordance with ASC topic 250, Accounting Changes and Error Corrections (“ASC 250”). For the right to sublicense the
content to external parties that generates direct content distribution revenues, the content costs are amortized based on its estimated usage pattern and recorded as cost of
revenues.
Impairment of licensed copyrights and produced content
The Group’s business model is mainly subscription and advertising based, as such the majority of the Group’s content assets (licensed copyrights and produced
content) are predominantly monetized with other content assets, whereas a smaller portion of the Group’s content assets are predominantly monetized at a specific title
level such as variety shows and investments in a proportionate share of certain rights to films including profit sharing, distribution and/or other rights. Because the
identifiable cash flows related to content launched on the Group’s Mainland China platform are largely independent of the cash flows of other content launched on the
Group’s overseas platform, the Group has identified two separate film groups. The Group reviews its film groups and individual content for impairment when there are
events or changes in circumstances that indicate the fair value of a film group or individual content may be less than its unamortized costs. Examples of such events or
changes in circumstances include, a significant adverse change in technological, regulatory, legal, economic, or social factors that could affect the fair value of the film
group or the public's perception of a film or the availability of a film for future showings, a significant decrease in the number of subscribers or forecasted subscribers, or
the loss of a major distributor, a change in the predominant monetization strategy of a film that is currently monetized on its own, actual costs substantially in excess of
budgeted costs, substantial delays in completion or release schedules, or actual performance subsequent to release failing to meet expectations set before release such as a
significant decrease in the amount of ultimate revenue expected to be recognized.
When such events or changes in circumstances are identified, the Group assesses whether the fair value of an individual content (or film group) is less than its
unamortized film costs, determines the fair value of an individual content (or film group) and recognizes an impairment charge for the amount by which the unamortized
capitalized costs exceed the individual content’s (or film group’s) fair value. The Group mainly uses a discounted cash flow approach to determine the fair value of an
individual content or film group, for which the most significant inputs include the forecasted future revenues, costs and operating expenses attributable to an individual
content or the film group and the discount rate. An impairment loss attributable to a film group is allocated to individual licensed copyrights and produced content within
the film group on a pro rata basis using the relative carrying values of those assets as the Group cannot estimate the fair value of individual contents in the film group
without undue cost and effort.
Partner-generated content (“PGC”)
The Group collaborates with a large number of selected partners to supplement its video content portfolio with PGC, and incentivizes them to submit high-quality
content through the Group’s revenue-sharing mechanism. Under such arrangements, the Group shares with the partners a portion of the revenues derived from either
online advertising services or membership services based on various factors agreed upon. As the Group is the primary obligor of online advertising services and
membership services, such revenues are recorded on a gross basis. Revenue sharing costs incurred and payable to partners are recognized as cost of revenues when the
criteria of those pre-agreed factors are met.
F-24
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iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
Goodwill and intangible assets
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the identifiable net assets acquired in a business combination. The Group assesses
goodwill for impairment in accordance with ASC subtopic 350-20, Intangibles—Goodwill and Other: Goodwill (“ASC 350-20”), which requires that goodwill be tested
for impairment at the reporting unit level at least annually and more frequently upon the occurrence of certain events, as defined by ASC 350-20.
A reporting unit is defined as an operating segment or one level below an operating segment referred to as a component. The Group determines its reporting units
by first identifying its operating segments, and then assesses whether any components of these segments constituted a business for which discrete financial information
is available and where the Company’s segment manager regularly reviews the operating results of that component. The Group determined that it has one reporting unit
because components below the consolidated level either did not have discrete financial information or their operating results were not regularly reviewed by the segment
manager.
The Group has the option to assess qualitative factors first to determine whether it is necessary to perform the quantitative impairment test in accordance with
ASC 350-20. If the Group believes, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value of the reporting unit is less than its carrying
amount, the quantitative impairment test described above is required. Otherwise, no further testing is required. In the qualitative assessment, the Group considers primary
factors such as industry and market considerations, overall financial performance of the reporting unit, and other specific information related to the operations. The
quantitative goodwill impairment test, used to identify both the existence of impairment and the amount of impairment loss, compares the fair value of a reporting unit
with its carrying amount, including goodwill. If the carrying amount of a reporting unit is greater than zero and its fair value exceeds its carrying amount, goodwill of the
reporting unit is considered not impaired.
On disposal of a portion of reporting unit that constitutes a business, the attributable amount of goodwill is included in the determination of the amount of gain or
loss recognized upon disposal. When the Group disposes of a business within the reporting unit, the amount of goodwill disposed is measured on the basis of the relative
fair value of the business disposed and the portion of the reporting unit retained. This relative fair value approach is not used when the business to be disposed was not
integrated into the reporting unit after its acquisition, in which case the current carrying amount of the acquired goodwill should be included in the carrying amount of
the business to be disposed.
Intangible assets
Intangible assets with finite lives are carried at cost less accumulated amortization and impairment loss, if any. Intangible assets with finite lives are amortized
using the straight-line method over the estimated economic lives.
Intangible assets have estimated economic lives as follows:
Traffic acquisition agreement
Intellectual property rights
Online literature
Trademarks
User list
Domain names
Published mobile games
Technology
Others
1-2 years
1-10 years
1-10 years
10-22 years
5 years
10-22 years
2-4 years
5 years
2 to 20 years
Impairment of Long-Lived Assets Other Than Goodwill
The Group evaluates long-lived assets, such as fixed assets and purchased or acquired intangible assets with finite lives other than licensed copyrights and
produced content, for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable in accordance with ASC
subtopic 360-10, Property, Plant and Equipment: Overall (“ASC 360-10”). When such events occur, the Group assesses the recoverability of the long-lived assets based
on the undiscounted future cash flows the long-lived assets are expected to generate at the lowest level of identifiable cash flows. The Group recognizes an
F-25
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iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
impairment loss when the estimated undiscounted future cash flow expected to result from the use of the long-lived assets plus net proceeds expected from the eventual
disposition of the long-lived assets, if any, is less than their carrying values. If the Group identifies an impairment, the Group reduces the carrying value of the long-
lived assets to its estimated fair value based on a discounted cash flow approach or, when available and appropriate, to comparable market values. The Group uses
estimates and judgments in its impairment tests and if different estimates or judgments had been utilized, the timing or the amount of any impairment charges could be
different.
Revenue Recognition
The Group’s revenues are derived principally from membership services, online advertising services and content distribution. Revenue is recognized when
control of promised goods or services is transferred to the Group’s customers in an amount of consideration to which an entity expects to be entitled to in exchange for
those goods or services. Value added taxes (“VAT”) are presented as a reduction of revenues.
The Group’s revenue recognition policies are set forth as follows:
Membership services
The Group offers membership services to subscribing members with various privileges, which primarily include access to exclusive and ad-free streaming of
premium content 1080P/4K high-definition video, Dolby Audio, and accelerated downloads and others. When the receipt of membership fees is for services to be
delivered over a period of time, the receipt is initially recorded as “Customer advances and deferred revenue” on the consolidated balance sheets and revenue is
recognized ratably over the membership period as services are rendered. Membership services revenue also includes fees earned from subscribing members for on-
demand content purchases and early access to premium content. The Group is the principal in its relationships where partners, including consumer electronics
manufacturers (TVs and cell phones), mobile operators, internet service providers and online payment agencies, provide access to the membership services or payment
processing services as the Group retains control over its service delivery to its subscribing members. Typically, payments made to the partners are recorded as cost of
revenues. For the sale of the right to other membership services through strategic cooperation with other parties, the Group recognizes revenue on a net basis when the
Group does not control the specified services before they are transferred to the customer.
Online advertising services
The Group sells advertising services primarily to third-party advertising agencies and a small portion is sold directly to advertisers. Advertising contracts are
signed to establish the price and advertising services to be provided. Pursuant to the advertising contracts, the Group provides advertisement placements on its platforms
in different formats, including but not limited to video, banners, links, logos, brand placement and buttons. The Group performs a credit assessment of the customer to
assess the collectability of the contract price prior to entering into contracts. For contracts where the Group provides customers with multiple performance obligations,
primarily for advertisements to be displayed in different spots, placed under different forms and occur at different times, the Group would evaluate all the performance
obligations in the arrangement to determine whether each performance obligation is distinct. Consideration is allocated to each performance obligation based on its
standalone selling price and revenue is recognized as each performance obligation is satisfied through the Group’s display of the advertisements in accordance with the
revenue contracts.
The Group provides various sales incentives to its customers for meeting certain cumulative purchase volume requirements, including cash rebates to certain
third-party advertising agencies and non-cash credits which can be used to acquire future online advertising services in certain bundled arrangements, which are
negotiated on a contract-by-contract basis with customers. The Group accounts for cash rebates granted to customers as variable consideration which is measured based
on the most likely amount of incentive to be provided to customers. Non-cash credits granted to customers are considered options to acquire additional services that
provide customers with a material right. The contract consideration related to these customer options to acquire additional services are deferred and recognized as
revenue when future services are transferred or when the options expire.
Content distribution
The Group generates revenues from sub-licensing content assets for cash or through nonmonetary exchanges mainly with other online video broadcasting
companies. The exclusive licensing agreements the Group enters into with the vendors have a specified license period and provide the Group rights to sub-license these
content assets to other parties. The Group enters into a non-exclusive sub-license agreement with a sub-licensee for a period that falls within the original exclusive
license period. For cash sub-licensing
F-26
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iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
transactions, the Group is entitled to receive the sub-license fee under the sub-licensing arrangements and does not have any future obligation once it has provided the
underlying content to the sub-licensee (which is provided at or before the beginning of the sub-license period). The sub-licensing of content assets represents a license of
functional intellectual property which grants a right to use the Group’s content assets and is recognized at the point in time when the content asset is made available for
the customer’s use and benefit.
The Group also enters into nonmonetary transactions to exchange online broadcasting rights of content assets with other online video broadcasting companies
from time to time. The exchanged content assets provide rights for each party to broadcast the content assets received on its own platform only. Each transferring party
retains the right to continue broadcasting the exclusive content on its own platform and/or sublicense the rights to the content it surrendered in the exchange. The Group
accounts for these nonmonetary exchanges based on the fair value of the asset received. Barter sublicensing revenues are recognized in accordance with the same revenue
recognition criteria above. The Group estimates the fair value of the content assets received using a market approach based on various factors, including the purchase
price of similar non-exclusive and/or exclusive contents, broadcasting schedule, cast and crew, theme, popularity and box office. The transaction price of barter
transaction revenues is calculated on the individual content asset basis. For a significant barter sublicensing transaction, the Company further reviews the fair value by
analyzing against the cost of the content assets bartered out and/or engages a third-party valuation firm to assess the reasonableness of its fair value. The attributable cost
of sublicensing transactions, whether for cash or through nonmonetary exchanges, is recognized as cost of revenues through the amortization of the sublicensing right
component of the exclusive content asset.
Others
Other revenues mainly include revenues from online games, live broadcasting and other licensing.
Online games
The Group operates mobile games including both self-developed and licensed mobile games and generates mobile game revenues from the sale of in-game virtual
items, including items, avatars, skills, privileges or other in-game consumables, features or functionality, within the games.
The Group records revenue generated from mobile games on a gross basis if the Group acts as the principal in the mobile game arrangements under which the
Group controls the specified services before they are provided to the customer. In addition, when the Group acts as the principal, it is primarily responsible for fulfilling
the promise to provide maintenance services and has discretion in setting the price for the services to the customer. Otherwise, the Group records revenue on a net basis
based on the ratios pre-determined with the online game developers when all the revenue recognition criteria set forth in ASC topic 606, Revenue from Contracts with
Customers (“ASC 606”) are met, which is generally when the user purchases virtual currencies issued by the game developers.
For transactions where the Group is the principal, the Group determines that the in-game virtual items are identified as performance obligations. The Group
provides on-going services to the end-users who purchase virtual items to gain an enhanced game-playing experience. For the sale of durable virtual items, the Group
recognizes revenues ratably over the estimated average playing period of these paying players, starting from the point in time when durable virtual items are delivered to
the players’ accounts. For the sale of consumable virtual items, the Group recognizes revenue as the items are consumed.
Live broadcasting
The Group operates a live broadcasting platform, iQIYI Show, whereby users can follow their favorite hosts and shows in real time through live broadcasting.
Users can purchase virtual currency for usage in iQIYI Show to acquire consumable virtual gifts, which are simultaneously presented to hosts to show their support or
time-based virtual items, which enables users to enjoy additional functions and privileges for a specified time period.
The Group operates the live broadcasting platform and determines the price of virtual items sold. Therefore, revenues derived from the sale of virtual items are
recorded on a gross basis as the Group acts as the principal in the transaction. Costs incurred from services provided by the hosts are recognized as cost of revenues. To
facilitate the sale of virtual items, the Group bundles special privileges and virtual items as a package at a discounted price and the Group allocates the arrangement
consideration to each performance obligation based on their relative standalone selling prices. Revenue from the sale of consumable virtual gifts is recognized when
consumed by the user, or, in the case of time-based virtual items, recognized ratably over the period each virtual item is made available to the user. Virtual currency sold
but not yet consumed by the purchasers is recorded as “Customer advances and deferred revenue” on the consolidated balance sheets.
F-27
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Other licensing
iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
The Group grants rights to its customers to re-create short-form videos for selected content assets from its existing content library over a fixed license period.
The transaction price is allocated based on the estimated standalone selling prices of the identified performance obligations, which consists of (i) the licensing of rights
related to selected content assets in the existing content library; and (ii) future unspecified updates to the existing content library during the license period. The Group
records revenue when the customer obtains the rights for the selected content assets from its existing content library at the commencement of the license period and as
the updated contents are made available to the customer over the license period.
Contract balances
When either party to a revenue contract has performed, the Group presents the contract in the consolidated balance sheets as a contract asset or a contract
liability, depending on the relationship between the entity’s performance and the customer’s payment.
Contract assets mainly represent unbilled amounts related to the Group's rights to consideration for advertising services delivered and are included in
“Prepayments and other assets” on the consolidated balance sheets. As of December 31, 2021 and 2022, contract assets were RMB1,591,152 and RMB1,490,656
(US$216,125), respectively, net of an allowance for credit losses of RMB14,721 and RMB12,409 (US$1,799), respectively. The decrease in the balance of contract
assets was primarily due to less outstanding advertising contracts as of December 31, 2022 compared to the prior year for which the Group had commenced to provide
advertisement placements but had not completed all specified advertising services in the contract, which corresponds to when the Group has the right to bill its
customers.
Contract liabilities are the Group’s obligation to transfer goods or services to customers for which the Group has received consideration from customers, which
are comprised of: i) payments received for membership fees and other services; ii) virtual currency sold for which the corresponding services have not yet been provided
to customers; and iii) non-cash credits granted to customers. Contract liabilities are primarily presented as “Customer advances and deferred revenue” on the
consolidated balance sheets. Balances of contract liabilities were RMB4,416,413 and RMB5,053,031 (US$732,621) as of December 31, 2021 and December 31, 2022,
respectively. The increase in contract liabilities is a result of the increase in consideration received from the Group’s customers. Revenue recognized for the year ended
December 31, 2022 that was included in contract liabilities as of January 1, 2022 was RMB3,398,774 (US$492,776).
As of December 31, 2022, total transaction price allocated to performance obligations that were unsatisfied or partially unsatisfied for contracts with an original
expected length of more than one year was RMB3,465,946 (US$502,515), which is expected to be recognized over the next three years.
Practical Expedients and Exemptions
The Group does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii)
contracts for which the Group recognizes revenue at the amount to which it has the right to invoice for services performed.
Cost of Revenues
Cost of revenues consists primarily of content costs, bandwidth costs and others.
Advertising expenses
Advertising expenses, primarily marketing spend in channel coverage and content related promotion are included in “Selling, general and administrative” and are
expensed when incurred. Advertising expenses for the years ended December 31, 2020, 2021 and 2022 were RMB2,304,782, RMB2,383,257 and RMB1,809,118
(US$262,297), respectively.
Research and development expenses
Research and development expenses consist primarily of personnel-related expenses (including share-based compensation cost) incurred for the development and
enhancement to the Group’s platforms as well as costs associated with new product development
F-28
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iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
and enhancement. Depreciation expenses and other operating costs are also included in research and development expenses. The Group recognizes research and
development costs as expenses when incurred.
Government subsidies
Government subsidies primarily consist of financial subsidies received from provincial and local governments for operating a business in their jurisdictions and
compliance with specific policies promoted by the local governments. There are no defined rules and regulations to govern the criteria necessary for companies to
receive such benefits, and the amount of financial subsidy is determined at the discretion of the relevant government authorities. The government subsidies with certain
conditions are recorded as “Other liabilities” or “Other non-current liabilities” when received and will be recognized as income in “Others, net” or as a reduction of
specific operating costs and expenses when the conditions are met. The government subsidies with no further conditions to be met are recognized as income in “Others,
net” or as a reduction of specific operating costs and expenses for which the grants are intended to subsidize. If the government subsidies are related to an asset, it is
recognized as a deduction of the carrying amount of the asset when the conditions are met and then recognized ratably over the expected useful life of the related asset as
a reduction to the related amortization or depreciation in the consolidated statements of comprehensive loss.
Leases
The Group has lease agreements with lease and non-lease components, which are generally accounted for separately. For leases of IDC facilities, the Group
accounts for the lease and non-lease components as a single lease component. Lastly, the Group elected the short-term lease exemption for all contracts with lease terms
of 12 months or less.
The Group determines if an arrangement is a lease or contains a lease at lease inception in accordance with ASC topic 842, Leases (“ASC 842”). For operating
leases, the Group recognizes a right-of-use asset (“ROU asset”) and a lease liability based on the present value of the lease payments over the lease term in the
consolidated balance sheets at commencement date. For finance leases, assets are included in “Fixed assets, net” in the consolidated balance sheets. Finance lease
liabilities are included in "Other liabilities" and "Other non-current liabilities" in the consolidated balance sheets. As most of the Company’s leases do not provide an
implicit rate, the Company estimates its incremental borrowing rate based on the information available at the commencement date in determining the present value of
lease payments. The incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments, and in the
economic environment where the leased asset is located. Renewal options are included in the lease term if the Group is reasonably certain to exercise those options
while options to terminate the lease are only included in the lease term if the Group is reasonably certain not to exercise those options. Lease expense is recorded on a
straight-line basis over the lease term.
Income Taxes
The Group follows the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the
difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are
expected to reverse. The Group records a valuation allowance to offset deferred tax assets if, based on the weight of available evidence, it is more-likely-than-not that
some portions, or all, of the deferred tax assets will not be realized. The effect of a change in tax rate is recognized in tax expense in the period that includes the
enactment date of the change in tax rate. The Group has elected to classify interest and penalties related to an uncertain tax position, if and when required, as part of
income tax expense in the consolidated statements of comprehensive loss.
The Group applies the provisions of ASC topic 740, Accounting for Income Taxes (“ASC 740”), to account for uncertainty in income taxes. ASC 740 prescribes a
recognition threshold that a tax position is required to meet before being recognized in the financial statements. The Group elects to classify interest and penalties related
to an uncertain tax position, if and when required, as part of income tax expense in the consolidated statements of comprehensive loss. In general, the PRC tax
authorities have up to five years to conduct examinations of the tax filings of the Group’s PRC subsidiaries. Accordingly, the PRC subsidiaries’ tax filings from 2017
through 2022 remain open to examination by the respective tax authorities. The Group may also be subject to the examinations of the tax filings in other jurisdictions,
which are not material to the consolidated financial statements.
(Loss)/earnings per share
The Company computes (loss)/earnings per Class A and Class B ordinary shares in accordance with ASC topic 260, Earnings per Share (“ASC 260”) using the
two-class method. Under the two-class method, net income is allocated between ordinary shares and
F-29
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iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
participating securities based on dividends declared (or accumulated) and participating rights in undistributed earnings as if all the earnings for the reporting period had
been distributed. The Company adjusts for the accretion of the redeemable noncontrolling interests in the calculation of income available to ordinary shareholders of the
Company used in the (loss)/earnings per share calculation. The participating rights (liquidation and dividend rights) of the holders of the Company’s Class A and Class
B ordinary shares are identical, except with respect to voting and conversion (Note 19). As a result, and in accordance with ASC 260, the undistributed (loss)/income is
allocated based on the contractual participation rights of the Class A and Class B ordinary shares, respectively. As the liquidation and dividend rights are identical, the
undistributed (loss)/income is allocated on a proportionate basis.
Diluted (loss)/earnings per share is computed using the weighted average number of ordinary shares and, if dilutive, potential ordinary shares outstanding during
the period. Potential ordinary shares consist of ordinary shares issuable upon the conversion of convertible senior notes using the if-converted method and ordinary
shares issuable upon the exercise of share options and vesting of restricted share units, using the treasury stock method. Potential ordinary shares are excluded from the
computation of diluted (loss)/earnings per share if their effects are anti-dilutive. The computation of the diluted (loss)/earnings per Class A ordinary share assumes the
conversion of Class B ordinary shares to Class A ordinary shares, while diluted (loss)/earnings per Class B ordinary share does not assume the conversion of such shares.
The Company adjusts for the securities issued by subsidiaries and equity method investees in the calculation of (loss)/income available to ordinary shareholders of the
Company used in the diluted (loss)/earnings per share calculation.
Share-based compensation
The Company accounts for share-based compensation in accordance with ASC topic 718, Compensation-Stock Compensation (“ASC 718”).
The Company has elected to recognize share-based compensation using the straight-line method for all share-based awards granted with graded vesting based on
service conditions. For awards with performance conditions, compensation cost is recognized on an accelerated basis if it is probable that the performance condition will
be achieved. If required vesting conditions are not met and the share-based awards are forfeited, previously recognized compensation expenses relating to those awards
are reversed. The Company elects to estimate forfeitures at the time of grant and revised, if necessary, in the subsequent period if actual forfeitures differ from initial
estimates. Forfeiture rates are estimated based on historical experience and future expectations of employee turnover rates and are periodically reviewed. To the extent
the Company revises these estimates in the future, the share-based payments could be materially impacted in the period of revision, as well as in following periods.
Share-based compensation expense was recorded net of estimated forfeitures such that expense was recorded only for those share-based awards that are expected to vest.
The Company, with the assistance of an independent third-party valuation firm, determined the fair value of share-based awards granted to employees and non-
employees, if applicable.
Fair Value Measurements
Accounting guidance defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value,
the Group considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing
the asset or liability.
Accounting guidance establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the
fair value measurement. Accounting guidance establishes three levels of inputs that may be used to measure fair value:
Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets
Level 2—Include 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) income approach and (3)
cost approach. The market approach uses prices and other relevant information generated from
F-30
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iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present
value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount
that would currently be required to replace an asset.
Financial assets and liabilities of the Group primarily consist of cash and cash equivalents, restricted cash, short-term investments, accounts receivable,
receivables from online payment agencies, amounts due from related parties, prepayments and other assets, long-term investments, accounts and notes payable, short-
term loans, income tax payable, amounts due to related parties, accrued expenses, other liabilities and convertible senior notes. The carrying amounts of these financial
instruments, except for long-term equity investments without readily determinable fair values, long-term equity method investments, long-term available-for-sale debt
security and convertible senior notes, approximate their fair values because of their generally short maturities.
Commitments and contingencies
In the normal course of business, the Group is subject to contingencies, such as legal proceedings and claims arising out of its business, which cover a wide
range of matters. Liabilities for contingencies are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably
estimated.
If the assessment of a contingency indicates that it is probable that a loss is incurred and the amount of the liability can be estimated, then the estimated liability
is accrued in the Group’s consolidated financial statements. If the assessment indicates that a potential loss contingency is not probable, but is reasonably possible, or is
probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss, if determinable and material, would
be disclosed.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee would be disclosed.
Concentration of risks
Concentration of credit risks
Financial instruments that potentially subject the Group to significant concentration of credit risk primarily consist of cash and cash equivalents, restricted cash,
short-term investments, accounts receivable, contract assets, amounts due from related parties, receivables from online payment agencies and long-term restricted cash
included in prepayments and other assets. The carrying amounts of these assets represent the Group’s maximum exposure to credit risk. As of December 31, 2022, the
Group has RMB7,861,556 (US$1,139,818) in cash, cash equivalents, restricted cash and long-term restricted cash included in prepayments and other assets, which is
held in cash and demand deposits with several financial institutions in the PRC and international financial institutions outside of the PRC, respectively. In the event of
bankruptcy of one of these financial institutions, the Group may not be able to claim its cash and demand deposits back in full. The Group continues to monitor the
financial strength of the financial institutions.
Accounts receivable, contract assets, amounts due from related parties and receivables from online payment agencies are typically unsecured and denominated in
RMB, derived from revenue earned from customers and agencies in the PRC, which are exposed to credit risk. The risk is mitigated by credit evaluations the Group
performs on its customers and its ongoing monitoring process of outstanding balances. The Group maintains an allowance for credit losses and the Group had no single
customer with a balance exceeding 10% of the total accounts receivable and contract asset balance as of December 31, 2021 and 2022.
Business and economic risks
The Group participates in a dynamic high technology industry and believes that changes in any of the following areas could have a material adverse effect on the
Group’s future financial position, results of operations or cash flows: changes in the overall demand for services and products; changes in business offerings; competitive
pressures due to new entrants; advances and new trends in new technologies and industry standards; changes in bandwidth suppliers; changes in certain strategic
relationships or customer relationships; regulatory considerations; copyright regulations; cybersecurity regulations; risks associated with the Group’s ability to anticipate
user preferences and provide high-quality content in a cost-effective manner; and risks associated with the Group’s ability to attract and retain employees necessary to
support its growth. The Group’s operations could be adversely affected by significant political, economic and social uncertainties in the PRC.
F-31
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iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
Currency convertibility risk
Substantially all of the Group’s operating activities are transacted in RMB, which is not freely convertible into foreign currencies. All foreign exchange
transactions take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the
People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other regulatory institutions requires submitting a payment
application form together with suppliers’ invoices, shipping documents and signed contracts.
Foreign currency exchange rate risk
The functional currency and the reporting currency of the Company are the US$ and the RMB, respectively. The Company’s exposure to foreign currency
exchange rate risk primarily relates to cash and cash equivalents, restricted cash, short-term investments, long-term held-to-maturity debt securities, convertible senior
notes and accounts and notes payable denominated in U.S. dollars. On June 19, 2010, the People’s Bank of China announced the end of the RMB’s de facto peg to the
US$, a policy which was instituted in late 2008 in the face of the global financial crisis, to further reform the RMB exchange rate regime and to enhance the RMB’s
exchange rate flexibility. On March 15, 2014, the People’s Bank of China announced the widening of the daily trading band for RMB against US$. The appreciation of
the US$ against RMB was approximately 8.23% in 2022. Most of the Company’s revenues and costs are denominated in RMB, while a portion of cash and cash
equivalents, restricted cash, short-term investments, long-term held-to-maturity debt securities, accounts and notes payable and all the amount of convertible senior
notes are denominated in U.S. dollars. Any significant fluctuation of RMB may materially and adversely affect the Company’s cash flows, revenues, earnings and
financial position in U.S. dollars.
Segment reporting
In accordance with ASC subtopic 280-10, Segment Reporting: Overall, the Group’s chief operating decision maker (“CODM”) has been identified as the Chief
Executive Officer, who reviews the consolidated results of operations when making decisions about allocating resources and assessing performance of the Group as a
whole; hence, the Group has only one operating segment. The Group does not distinguish between markets or segments for the purpose of internal reporting. Because
substantially all of the Group’s long-lived assets and revenues are located in and derived from the PRC, geographical segments are not presented.
Comprehensive loss
Comprehensive loss is defined as the changes in equity of the Group during a period from transactions and other events and circumstances excluding transactions
resulting from investments by owners and distributions to owners. Among other disclosures, ASC topic 220, Comprehensive Income, requires that all items that are
required to be recognized under current accounting standards as components of comprehensive loss be reported in a financial statement that is displayed with the same
prominence as other financial statements. For each of the years presented, the Company’s comprehensive loss includes net loss, foreign currency translation adjustments
and unrealized losses on available-for-sale debt securities and is presented in the consolidated statements of comprehensive loss.
Impact of COVID-19
Although the Group’s businesses have resumed, there is still continuing adverse impact on the Group’s online advertising revenues as a result of the challenging
macroeconomic environment and the COVID-19 pandemic resurgence in 2022. Uncertainties still exist as it relates to the impact of COVID-19’s on the Group’s
businesses, and the extent of the impact will depend on a number of factors, including the duration and severity of the pandemic; possibility of Delta and Omicron
outbreak, the development and progress of distribution of COVID-19 vaccine and other medical treatment, the potential change in user behavior, especially on internet
usage due to the prolonged impact of COVID-19, the uneven impact to certain industries, and the macroeconomic impact of government measures to contain the spread
of COVID-19 and related government stimulus measures, almost all of which are beyond the Group's control. As a result, certain of the Group’s estimates and
assumptions, including the fair value of the Group’s film groups, allowance for credit losses, the fair value of non-marketable equity securities and fair value of financial
assets or long-lived assets subject to impairment assessments, require increased judgment and carry a higher degree of variability and volatility that could result in
material changes to the Group’s estimates in future periods.
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iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
3.SHORT-TERM INVESTMENTS
As of December 31, 2021 and 2022, the Group’s short-term investments consist of held-to-maturity debt securities and available-for-sale debt securities with
maturities of less than one year purchased from commercial banks and other financial institutions.
4.LONG-TERM INVESTMENTS
The Group’s long-term investments primarily consist of equity investments without readily determinable fair value, equity method investments and available-for-
sale debt investments.
Equity investments without readily determinable fair value
As of December 31, 2021 and 2022, the carrying amounts of the Group’s equity investments without readily determinable fair value were as follows:
Initial cost basis
Cumulative unrealized gains
Cumulative unrealized losses (including impairment)
Total carrying amount
As of December 31,
2021
RMB
2,285,439
329,768
(270,421 )
2022
RMB
2,286,171
87,226
(710,476 )
2022
US$
331,464
12,647
(103,009 )
2,344,786
1,662,921
241,102
Impairment charges recognized on equity investments measured using the measurement alternative were RMB73,199, RMB168,079 and RMB458,559
(US$66,485) for the years ended December 31, 2020, 2021 and 2022, respectively.
Total realized and unrealized gains and losses for equity securities without readily determinable fair values for the years ended December 31, 2020, 2021 and
2022 are as follows:
Gross unrealized gains (upward adjustments)
Gross unrealized losses (downward adjustments excluding impairment)
Net unrealized gains on equity securities held
Net realized gains on equity securities sold
Total net gains recognized in other income, net
Equity method investments
2020
RMB
For the year ended December 31,
2021
RMB
2022
RMB
2022
US$
38,595
(495 )
38,100
—
94,510
—
31,295
—
94,510
—
31,295
—
38,100
94,510
31,295
4,537
—
4,537
—
4,537
In July 2018, the Group acquired a 32% outstanding equity interest amounting to RMB796,000 in Beijing Xin’ai Sports Media Technology Co., Ltd (or “Xin’ai”)
that is engaged in the operation of a sports content platform. The Group has significant influence over the investee and therefore accounts for its equity interest as an
equity method investment. The excess of the carrying value of the investment over the proportionate share of Xin’ai’s net assets of RMB609,502 was recognized as basis
differences and investment goodwill. As of December 31, 2021 and 2022, the Group’s equity interest in Xin’ai was diluted to 23% and 23%, respectively, due to
subsequent rounds of equity financing.
Strawbear Entertainment Group (or “Strawbear”), a company that is listed on the Hong Kong Stock Exchange (“HKSE”), is a major drama series producer and
distributor in the PRC, covering the investment, development, production and distribution of TV series and web series. In November 2018 and May 2020, the Group
acquired a total of 19.57% equity interest for a total cash
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iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
consideration of US$55,139 in Strawbear and accounted for the investment using the measurement alternative as the shares held by the Group are not considered in-
substance common stock. Upon the completion of the initial public offering of Strawbear on January 15, 2021, the shares held by the Group were automatically
converted to common stock, and the Group’s equity interest in Strawbear was diluted to 14.68%. The Group can actively participate in the significant operation and
financing decisions of Strawbear through its two seats on Strawbear’s board of directors with a total of nine members. Accordingly, the Group is considered to have
significant influence over Strawbear and accounts for such investment as an equity method investment with an initial carrying value amounting to RMB443,670. The
excess of the carrying value of the investment over the proportionate share of Strawbear’s net assets of RMB225,336 was recognized as basis differences and investment
goodwill. In 2022, the market value of Strawbear had significantly declined and remained below the carrying value of the investment for a prolonged period of time.
Therefore, the Group concluded that the decline in market value of the investment in Strawbear was other-than-temporary and an impairment charge of RMB382,715
(US$55,488) was recorded for the year ended December 31, 2022. As of December 31, 2022, the Group’s equity interest in Strawbear was 13.97%, which had a fair
value of RMB88,652 (US$12,853) based on the closing share price.
In January 2022, the Group entered into an amended shareholder agreement with other investors of Beijing Dreamagic Science and Technology Co., Ltd. (or
“Dreamagic”), a subsidiary of the Group in the business of producing virtual reality equipment for which the Group held an 81.95% interest in Dreamagic’s common
stock while other investors hold preferred stock (44.6% on a fully diluted basis). The amended shareholder agreement included substantive changes to (i) increase the
number of votes to 60% of the outstanding voting interests for significant decisions of Dreamagic that are made in the ordinary course of business; and (ii) reduce the
number of seats on Dreamagic's board of directors to three seats with a total of seven members. As a result, the Group lost control and deconsolidated Dreamagic but can
still participate in the significant operation and financing decisions of Dreamagic, and is considered to have significant influence over Dreamagic and accounts for its
common stock investment as an equity method investment with an initial carrying value amounting to RMB250,502 (US$36,319). The excess of the carrying value of
the investment over the proportionate share of Dreamagic's net assets of RMB208,084 (US$30,169) was recognized as basis differences and investment goodwill. In
addition, the preferred stock investment of 7.28% held by the Group, on a fully diluted basis, contains substantive liquidation and redemption preference and is not
considered in-substance common stock and accounted for using the measurement alternative. The Group recognized a total gain of RMB367,717 (US$53,314) from the
transaction in "Others, net" in the consolidated statement of comprehensive loss for the year ended December 31, 2022, of which substantially all of the gain relates to
the re-measurement of the Group's retained investment in Dreamagic. The fair value of the retained investment was determined by estimating the total equity value of
Dreamagic using an option pricing model based on the observable transaction price of a recent round of financing and then allocating the total estimated equity value to
each class of equity based on their different rights and obligations. Dreamagic is considered a related party after deconsolidation. Upon deconsolidation, a financial
liability with a maximum potential amount of RMB140,044 (US$20,304) was recognized for the Group’s obligation to guarantee payments to certain guaranteed
preferred shareholders if Dreamagic is unable to pay the redemption price of the preferred shares in full upon the occurrence of redemption or liquidation event, which
partially offset the disposal gain. As of December 31, 2022, the Group’s equity interests of common stock were diluted to 42.66% on a fully diluted basis, due to a
subsequent issuance of preferred equity financing.
As of December 31, 2021 and 2022, the Group also held several other equity method investments through its subsidiaries or VIEs, all of which the Group can
exercise significant influence but does not own a majority equity interest in or has control over. The other equity method investments were not significant. The carrying
amounts of the Group’s equity method investments including Xin’ai and Strawbear were RMB580,776 and RMB279,095 (US$40,465) as of December 31, 2021 and
2022, respectively.
F-34
Table of Contents
iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
Available-for-sale debt investments
Available-for-sale debt investments are measured at fair value and consist of convertible debt instruments issued by private companies and investments in equity
securities that are redeemable at the Company’s option with no contractual maturity date.
December 31,
2021
RMB
As of
December 31,
2022
RMB
76,500
3,780
(2,425 )
77,855
December 31,
2022
US$
46,392
25,549
(1,576 )
70,365
319,975
176,219
(10,870
)
485,324
Cost or Amortized cost
Gross unrealized gains
Gross unrealized losses
Fair value
5.ACCOUNTS RECEIVABLE, NET
Accounts receivable
Allowance for credit losses
Accounts receivable, net
The following table presents movement of the allowance for credit losses:
Balance at the beginning of the year
Cumulative effect of adopting ASU 2016-13
Provisions/(Reversal)
Write-offs
Balance at the end of the year
6.PREPAYMENTS AND OTHER ASSETS
2021
RMB
2,988,100
(240,326 )
2,747,774
As of December 31,
2022
RMB
2,532,823
(130,148 )
2,402,675
2022
US$
367,225
(18,870 )
348,355
2020
RMB
144,574
72,366
202,108
(58,749 )
360,299
As of December 31,
2021
RMB
2022
RMB
360,299
—
(62,267 )
(57,706 )
240,326
240,326
—
(41,943 )
(68,235 )
130,148
2022
US$
34,844
—
(6,081 )
(9,893 )
18,870
The current and non-current portions of prepayments and other assets consist of the following:
Current portion:
Contract assets (i)
VAT prepayments
Prepaid licensed copyrights
Receivables from online payment agencies
Advances to suppliers
Prepaid expenses
Deposits and prepaid rental fees
Others (ii)
2021
RMB
As of December 31,
2022
RMB
2022
US$
1,591,152
711,114
152,596
324,327
219,605
61,594
21,485
184,650
3,266,523
1,490,656
335,350
136,656
369,734
128,065
21,101
13,220
108,145
2,602,927
216,125
48,621
19,813
53,606
18,568
3,059
1,917
15,681
377,390
F-35
Table of Contents
iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
Non-current portion:
Prepaid licensed copyrights
Licensed copyrights prepaid assets (iii)
Deposits and prepaid rental fees
Long-term restricted cash (iv)
Others (ii)
2021
RMB
As of December 31,
2022
RMB
2022
US$
2,193,285
571,518
46,635
—
94,252
2,905,690
2,525,282
469,259
25,308
750,000
95,284
3,865,133
366,131
68,036
3,669
108,740
13,816
560,392
(i)The allowance for credit losses on contract assets was RMB14,721 and RMB12,409 (US$1,799) as of December 31, 2021 and 2022, respectively. The reversals
charged against the allowance were RMB9,310 and RMB2,311 (US$335) for the years ended December 31, 2020 and 2022, respectively. The provision charged against
the allowance were RMB5,446 for the year ended December 31,2021. No write-offs were charged against the allowance for the years ended December 31, 2020, 2021
and 2022.
(ii)The allowance for credit losses on other current and non-current assets were RMB93,217 and RMB133,644 (US$19,377) as of December 31, 2021 and 2022,
respectively. The provision charged against the allowance were RMB73,688, RMB19,529, and RMB57,115 (US$8,281) for the years ended December 31, 2020, 2021
and 2022, respectively. The write-offs charged against the allowance were nil, nil and RMB16,688 (US$2,420) for the years ended December 31, 2020, 2021 and 2022,
respectively.
(iii)Licensed copyrights prepaid assets are recognized when the Group has yet to receive the content copyrights from the counterparty under nonmonetary exchanges but
the counterparty has already received the content copyrights from the Group.
(iv)Long-term restricted cash represents collateral to repayments of PAG Notes (Note 14).
7.LICENSED COPYRIGHTS, NET
Licensed copyrights
—Broadcasting rights
—Sublicensing rights
Less: current portion
—Broadcasting rights
—Sublicensing rights
Licensed copyrights—non-current
—Broadcasting rights
—Sublicensing rights
Gross carrying
value
RMB
Accumulated
amortization
RMB
Impairment
amount
RMB
As of December 31, 2021
Net carrying value
RMB
41,489,049
7,072,190
48,561,239
8,591,506
7,072,190
15,663,696
32,897,543
—
32,897,543
F-36
(33,016,890 )
(7,043,743 )
(40,060,633 )
(7,662,016 )
(7,043,743 )
(14,705,759 )
(25,354,874 )
—
(25,354,874 )
(311,375 )
—
(311,375 )
(26,748
)
—
(26,748 )
(284,627 )
—
(284,627 )
8,160,784
28,447
8,189,231
902,742
28,447
931,189
7,258,042
—
7,258,042
Table of Contents
iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
Gross carrying
value
RMB
Accumulated
amortization
RMB
As of December 31, 2022
Impairment
amount
RMB
Net carrying value
RMB
US$
Licensed copyrights
—Broadcasting rights
—Sublicensing rights
Less: current portion
—Broadcasting rights
—Sublicensing rights
Licensed copyrights—non-current
—Broadcasting rights
—Sublicensing rights
43,217,278
7,399,172
50,616,450
8,213,434
7,399,172
15,612,606
35,003,844
—
35,003,844
(35,369,335 )
(7,399,172 )
(42,768,507 )
(7,448,077 )
(7,399,172 )
(261,256 )
—
(261,256 )
7,586,687
—
7,586,687
1,099,966
—
1,099,966
(19,299 )
—
746,058
—
(14,847,249 )
(19,299 )
746,058
(27,921,258 )
—
(27,921,258 )
(241,957 )
—
(241,957 )
6,840,629
—
6,840,629
108,168
—
108,168
991,798
—
991,798
Amortization expense of RMB11,473,222, RMB10,082,541 and RMB7,780,928 (US$1,128,129) for the years ended December 31, 2020, 2021 and 2022,
respectively, was recognized as cost of revenues.
Estimated amortization expense relating to the existing licensed copyrights for each of the next three years is as follows:
Within 1 year
Between 1 and 2 years
Between 2 and 3 years
8.INTANGIBLE ASSETS, NET
Finite-lived intangible assets
Intellectual property rights (i)
Traffic acquisition agreement
Published mobile games
Trademarks
Online literature
Domain names
Technology
Others
RMB
US$
3,028,318
1,525,280
1,067,625
439,065
221,145
154,791
As of December 31, 2021
Accumulated
amortization
and
impairment
RMB
Gross carrying
value
RMB
Net carrying
value
RMB
505,546
546,150
514,664
165,292
155,085
188,388
101,730
31,738
2,208,593
(223,358 )
(546,150 )
(491,614 )
(116,589 )
(76,433 )
(116,239 )
(70,342 )
(22,563 )
(1,663,288 )
282,188
—
23,050
48,703
78,652
72,149
31,388
9,175
545,305
F-37
Table of Contents
iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
Intellectual property rights (i)
Published mobile games
Trademarks
Online literature
Domain names
Technology
Others
As of December 31, 2022
Gross carrying
value
RMB
Accumulated
amortization
and
impairment
RMB
Net carrying
value
RMB
Net carrying
value
US$
532,184
514,664
165,404
141,758
185,558
101,730
17,738
1,659,036
(252,647 )
(514,664 )
(120,809 )
(110,109 )
(123,491 )
(90,688 )
(9,943 )
(1,222,351 )
279,537
—
44,595
31,649
62,067
11,042
7,795
436,685
40,529
—
6,466
4,589
8,999
1,601
1,129
63,313
(i)Intellectual property rights include various rights the Company acquires either individually or in a bundle to broadcast, operate, publish, translate, distribute and/or
adapt various forms of media, including but not limited to online games, literature and films.
RMB15,391, nil and nil of impairment charges were recognized on intangible assets and are included in “Cost of revenues” in the consolidated statements of
comprehensive loss for the years ended December 31, 2020, 2021 and 2022, respectively.
Amortization expense was RMB302,188, RMB162,182 and RMB177,019 (US$25,665) for the years ended December 31, 2020, 2021 and 2022, respectively.
Estimated amortization expense relating to the existing intangible assets for each of the next five years is as follows:
Within 1 year
Between 1 and 2 years
Between 2 and 3 years
Between 3 and 4 years
Between 4 and 5 years
9.PRODUCED CONTENT, NET
Released, less amortization and impairment
— Predominantly monetized with other contents
— Predominantly monetized on its own
In production, less impairment
— Predominantly monetized with other contents
— Predominantly monetized on its own
In development, less impairment
— Predominantly monetized with other contents
— Predominantly monetized on its own
RMB
US$
91,448
65,791
59,113
56,732
51,975
13,259
9,539
8,571
8,225
7,536
2021
RMB
As of December 31,
2022
RMB
2022
US$
2,850,114
29,782
2,879,896
6,338,582
503,515
6,842,097
1,134,351
94,734
1,229,085
10,951,078
3,725,252
89,987
3,815,239
7,581,415
660,197
8,241,612
910,235
34,818
945,053
13,001,904
540,110
13,047
553,157
1,099,202
95,720
1,194,922
131,972
5,048
137,020
1,885,099
Amortization expense of RMB3,023,628, RMB4,641,353, RMB4,556,960 (US$660,697) and RMB1,095,325, RMB1,318,693, RMB735,169 (US$106,589) was
recognized as “Cost of revenues” in the consolidated statements of comprehensive loss for the years ended December 31, 2020, 2021 and 2022, for produced content
predominantly monetized with other content assets and for produced
F-38
Table of Contents
iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
content predominantly monetized on its own, respectively. As of December 31, 2022, approximately RMB192,040 (US$27,843) of accrued participation cost liabilities
will be paid during the upcoming operating cycle.
Estimated amortization expense relating to the existing produced content for each of the next three years is as follows:
Within 1 year
Between 1 and 2 years
Between 2 and 3 years
10.GOODWILL
RMB
US$
1,446,955
588,109
423,182
209,789
85,268
61,356
The Company has one reporting unit and the changes in the carrying amount of goodwill from 2021 to 2022 was as follows:
Balance at December 31, 2020 and 2021
Deconsolidation of subsidiaries (Note 4)
Balance at December 31, 2022
Balance at December 32, 2022, in US$
RMB
3,888,346
(62,199 )
3,826,147
554,739
The fair value of the Group exceeded its carrying value as of December 31, 2021 and 2022, respectively, and therefore the Group’s goodwill was not impaired.
11.FIXED ASSETS, NET
Fixed assets consist of the following:
Computer equipment
Office building
Leasehold improvements
Office furniture and equipment
Others
Less: Accumulated depreciation
Construction in progress
2021
RMB
2,285,185
588,685
194,336
158,784
27,786
3,254,776
(1,916,807 )
6,815
1,344,784
As of December 31,
2022
RMB
2022
US$
1,960,884
588,685
162,653
147,766
29,211
2,889,199
(1,793,614 )
9,136
1,104,721
284,301
85,351
23,582
21,424
4,235
418,893
(260,050 )
1,326
160,169
Impairment charges in the amount of RMB95,111, nil and nil were recognized on fixed assets for the years ended December 31, 2020, 2021 and 2022,
respectively.
Depreciation expense was RMB480,396, RMB400,241 and RMB337,423 (US$48,922) for the years ended December 31, 2020, 2021 and 2022, respectively.
12.LEASES
The Group’s operating leases mainly related to office facilities, land use rights and IDC facilities.
As of December 31, 2021 and 2022, the weighted average remaining lease term for the Group’s operating leases were 8.9 years and 9.4 years, respectively, and
the corresponding weighted average discount rates were 5.55% and 5.59%, respectively. As of
F-39
Table of Contents
iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
December 31, 2021 and 2022, the weighted average remaining lease term for the Group’s finance leases were 2.2 years and 1.2 years, respectively, and the
corresponding weighted average discount rates were 5.50% and 5.50%, respectively.
Finance lease
Computer equipment
Accumulated depreciation
Computer equipment, net
Finance lease liabilities, current portion
Finance lease liabilities
Total finance lease liabilities
The components of lease costs were as follows:
Operating lease costs
(i)
Finance lease costs
Amortization of finance lease assets
Interest on lease liabilities
Total finance lease costs
2021
RMB
As of December 31,
2022
RMB
2022
US$
118,997
(23,215 )
95,782
42,853
43,058
85,911
118,997
(46,127 )
72,870
30,862
16,507
47,369
17,253
(6,688 )
10,565
4,475
2,393
6,868
2020
RMB
For the year ended December 31,
2022
RMB
2021
RMB
2022
US$
173,815
202,862
155,408
22,532
25,010
4,251
29,261
12,856
1,866
14,722
22,912
3,463
26,375
3,322
502
3,824
(i)Excludes short-term lease contract costs of RMB451 million, RMB328 million and RMB310 million (US$45 million) for the years ended December 31, 2020, 2021
and 2022, respectively.
Finance lease costs were recorded as cost of revenues and interest expenses. Variable lease costs were immaterial for the years ended December 31, 2020, 2021
and 2022. For the years ended December 31, 2020, 2021 and 2022, no lease costs for operating and finance leases were capitalized.
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash payments for operating leases
Operating cash payments for finance leases
Financing cash payments for finance leases
Lease assets obtained in exchange for lease obligations:
Operating leases
Finance leases
For the year ended December 31,
2020
RMB
208,493
662
9,020
2021
RMB
190,407
1,004
14,473
2022
RMB
129,803
3,872
38,132
2022
US$
18,820
561
5,529
2020
RMB
359,168
15,208
For the year ended December 31,
2021
RMB
2022
RMB
36,515
75,693
6,868
—
2022
US$
996
—
F-40
Table of Contents
iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
Future lease payments under lease liabilities as of December 31, 2022 were as follows:
Year ending December 31,
2023
2024
2025
2026
2027
Thereafter
Total future lease payments
Less: Imputed interest
Total lease liability balance
13.LOANS PAYABLE
Short-term Loans
Operating leases
Finance leases
RMB
US$
RMB
US$
102,756
79,602
74,799
70,441
69,881
385,191
782,670
(170,582 )
612,088
14,898
11,541
10,845
10,213
10,132
55,848
113,477
(24,732 )
88,745
31,533
27,954
—
—
—
—
59,487
(12,118 )
47,369
4,572
4,053
—
—
—
—
8,625
(1,757 )
6,868
Short-term loans as of December 31, 2021 and 2022 amounted to RMB4,117,774 and RMB3,347,638 (US$485,362), respectively, which primarily consisted of
secured RMB denominated borrowings from financial institutions in the PRC that are repayable within one year. As of December 31, 2021 and 2022, the repayments of
primarily all of the short-term loans are guaranteed by subsidiaries within the Group and either collateralized by an office building of one of the Group’s VIEs with a
carrying amount of RMB535,432 and RMB522,390 (US$75,739), respectively, or collateralized by restricted cash balances totaling US$5,300 and nil, respectively.
Certain of the Group’s outstanding short-term loan agreements contain financial and other covenants, which depend on the financial position or performance of the
Group's subsidiaries, VIEs and VIEs’ subsidiaries. One of the Group’s VIEs did not satisfy certain financial covenants for 2022, based on which the commercial bank
has the right to suspend the issuance of credit lines, and/or cause all outstanding amounts totaling RMB600,000 (US$86,992) with original maturity dates in 2023 to be
due and repayable immediately. On February 6, 2023, the commercial bank has waived its right to demand immediate repayment. Therefore, this did not constitute an
Event of Default with respect to the convertible senior notes as of December 31, 2022 (Note 14).
Structured payable arrangements
In 2020, 2021 and 2022, the Group entered into structured payable arrangements with banks or other financial institutions (“factoring arrangements”). Under the
factoring arrangements, the suppliers’ receivables collection process was accelerated through selling its receivables from the Group to the banks or other financial
institutions at a discount. For the years ended December 31, 2020, 2021 and 2022, the Group was legally obligated to pay the banks or other financial institutions in the
amount totaling RMB395,943, RMB1,058,619 and RMB1,497,423 (US$217,106), respectively, which will mature within one year.
As a result of the factoring arrangements, the payment terms of the Group’s original accounts payables were substantially modified and considered extinguished
as the nature of the original liability has changed from accounts payables to loan borrowings from banks or other financial institutions. The proceeds from borrowings
from banks or other financial institutions is a financing activity and is reported as “Proceeds from short-term loans” on the consolidated statements of cash flows. As of
December 31, 2021 and 2022, the outstanding borrowings from the factoring arrangements were RMB750,067 and RMB754,581 (US$109,404), respectively, which are
repayable within one year and are included in “Short-term loans” on the consolidated balance sheets.
Borrowings from third-party investors
Asset-backed debt securities
In July 2021 and November 2021, the Group entered into a series of transactions (“reverse factoring arrangement”) in order to re-finance certain payables due to
its suppliers. In the reverse factoring arrangement, the Group's suppliers sold certain receivables due from the Group (the "2021 factored receivables") amounting to
RMB231,573 and RMB633,938, respectively, to the financial institutions at a discount. The 2021 factored receivables were recorded as accounts payable in the Group’s
consolidated balance
F-41
Table of Contents
iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
sheets. The 2021 factored receivables were further transferred to a securitization vehicle and used to securitize debt securities issued to third-party investors with a stated
interest of 5.5% and 4.5% for gross proceeds of RMB200,000 and RMB570,000, respectively. Concurrently, the Group also entered into an agreement with the financial
institutions to extend the repayment of the underlying payables to mirror the repayment terms for the corresponding asset-backed debt securities which matured in July
2022 and November 2022, respectively. Under such arrangement, the payable obligation between the Group and the suppliers was considered settled and the Group was
legally obligated to pay the financial institutions thereafter. As the 2021 factored receivables were purchased by the financial institutions using the proceeds raised from
issuance of the asset-backed debt securities and used to factor the suppler invoices to securitize the debt securities, the factored receivables are viewed as collateral for
raising loans through the issuance of the corresponding asset-backed debt securities. The borrowings have an effective interest rate of 8.40% and 8.26%, respectively.
Accounting for asset-backed debt securities
The securitization vehicle was designed by the Group with the sole purpose to acquire receivable balances from the Group’s suppliers in order to securitize the
senior asset-backed securities with guaranteed returns sold to third-party investors. The Group has a variable interest in the securitization vehicle through its interest in
the subordinated asset-backed securities issued by the securitization vehicle which bear the residual loss. As a result, the Group considers itself the primary beneficiary
and consolidates the securitization vehicle given the Group has (i) the power to govern the activities that most significantly impact its economic performance, and (ii) is
obligated to absorb losses that could potentially be significant to the securitization vehicle.
As a result of the series of transactions described above, the payment terms of the Group’s original trade payables were substantially modified and considered
extinguished as the nature of the original liability has changed from that of a trade payable to loan borrowings from third-party investors. The proceeds from borrowings
from third-party investors is a financing activity and reported as “Proceeds from long-term loans and borrowings from third party investors, net of issuance costs” or
“Proceeds from short-term loans” on the consolidated statements of cash flows depending on its maturities.
RMB200,000 (US$28,997) and RMB570,000 (US$82,642) of 2021 asset-backed debt securities was repaid when it became due in July 2022 and November
2022. The 2021 asset-backed debt securities were fully repaid as of December 31, 2022. As of December 31, 2021 and 2022, the outstanding borrowings from asset-
backed debt securities in “Short-term loans” in the consolidated balance sheets were RMB762,717 and nil, respectively.
The weighted average interest rate for all of the outstanding short-term borrowings mentioned above as of December 31, 2021 and 2022 was 4.80% and 3.95%,
respectively. As of December 31, 2021 and 2022, the aggregate amounts of unused lines of credit for short-term loans were RMB2,754,099 and RMB1,635,644
(US$237,146), respectively.
14.CONVERTIBLE SENIOR NOTES
2023 Convertible Senior Notes
On December 4, 2018, the Company issued US$750 million convertible senior notes (the “2023 Notes”). The 2023 Notes are senior, unsecured obligations of the
Company, and interest is payable semi-annually in cash at a rate of 3.75% per annum on June 1 and December 1 of each year, beginning on June 1, 2019. The 2023
Notes will mature on December 1, 2023 unless redeemed, repurchased or converted prior to such date.
The initial conversion rate of the 2023 Notes is 37.1830 of the Company’s ADS per US$1,000 principal amount of the 2023 Notes (which is equivalent to an
initial conversion price of approximately US$26.89 per ADS). Prior to June 1, 2023, the 2023 Notes will be convertible at the option of the holders only upon the
following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on March 31, 2019, if the last reported sale price of ADSs for at
least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately
preceding calendar quarter is greater than or equal to 130% of the conversion price; (2) during the five business day period after any ten consecutive trading day period in
which the trading price per US$1,000 principal amount of notes was less than 98% of the product of the last reported sale price of the ADSs and the conversion rate on
each such trading day; (3) if the Company calls the notes for a tax redemption; or (4) upon the occurrence of specified corporate events. Thereafter, the 2023 Notes will
be convertible at the option of the holders at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. The
conversion rate is subject to adjustment in some events but is not adjusted for any accrued and unpaid interest. In addition, following a make-whole fundamental change
that occurs prior to the maturity date or following the Company’s delivery of a notice of
F-42
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iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
a tax redemption, the Company will increase the conversion rate for a holder who elects to convert its notes in connection with such a corporate event or such tax
redemption. Upon conversion, the Company will pay or deliver to such converting holders, as the case may be, cash, ADSs, or a combination of cash and ADSs, at its
election.
The holders may require the Company to repurchase all or a portion of the 2023 Notes for cash on December 1, 2021, or upon a fundamental change, at a
repurchase price equal to 100% of the principal amount, plus accrued and unpaid interest. In 2021, the Company repurchased US$746.8 million aggregate principal
amount of the 2023 Notes as requested by the holders. Following settlement of the repurchase, the repurchase amount which was fully accreted was derecognized and
US$3.2 million (equivalent to RMB22.1 million) aggregate principal amount of the 2023 Notes remained outstanding and was included in “Convertible senior notes,
current portion” as of December 31, 2022 as it will mature on December 1, 2023.
In connection with the issuance of the 2023 Notes, the Company purchased capped call options (the “2023 Capped Call”) on the Company’s ADS with certain
counterparties at a price of US$67.5 million. The counterparties agreed to sell to the Company up to approximately 27.9 million of the Company’s ADSs upon the
Company’s exercise of the 2023 Capped Call. The exercise price is equal to the 2023 Notes’ initial conversion price and the cap price is US$38.42 per ADS, subject to
certain adjustments under the terms of the capped call transactions. The capped call transactions are expected to reduce potential dilution to existing holders of the
ordinary shares and ADSs of the Company upon conversion of the 2023 Notes and/or offset any potential cash payments that the Company is required to make in excess
of the principal amount of any converted notes, as the case may be, with such reduction and/or offset subject to a cap.
2025 Convertible Senior Notes
On March 29, 2019, the Company issued US$1,200 million convertible senior notes (the “2025 Notes”). The 2025 Notes are senior, unsecured obligations of the
Company, and interest is payable semi-annually in cash at a rate of 2.00% per annum on October 1 and April 1 of each year, beginning on October 1, 2019. The 2025
Notes will mature on April 1, 2025 unless redeemed, repurchased or converted prior to such date.
The initial conversion rate of the 2025 Notes is 33.0003 of the Company’s ADS per US$1,000 principal amount of the 2025 Notes (which is equivalent to an
initial conversion price of approximately US$30.30 per ADS). Prior to October 1, 2024, the 2025 Notes will be convertible at the option of the holders only upon the
following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2019, if the last reported sale price of ADSs for at
least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately
preceding calendar quarter is greater than or equal to 130% of the conversion price; (2) during the five business day period after any ten consecutive trading day period in
which the trading price per US$1,000 principal amount of notes was less than 98% of the product of the last reported sale price of the ADSs and the conversion rate on
each such trading day; (3) if the Company calls the notes for a tax redemption; or (4) upon the occurrence of specified corporate events. Thereafter, the 2025 Notes will
be convertible at the option of the holders at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. The
conversion rate is subject to adjustment in some events but is not adjusted for any accrued and unpaid interest. In addition, following a make-whole fundamental change
that occurs prior to the maturity date or following the Company’s delivery of a notice of a tax redemption, the Company will increase the conversion rate for a holder
who elects to convert its notes in connection with such a corporate event or such tax redemption. Upon conversion, the Company will pay or deliver to such converting
holders, as the case may be, cash, ADSs, or a combination of cash and ADSs, at its election.
The holders may require the Company to repurchase all or a portion of the 2025 Notes for cash on April 1, 2023, or upon a fundamental change, at a repurchase
price equal to 100% of the principal amount, plus accrued and unpaid interest.
In connection with the issuance of the 2025 Notes, the Company purchased capped call options (the “2025 Capped Call”) on the Company’s ADS with certain
counterparties at a price of US$84.5 million. The counterparties agreed to sell to the Company up to approximately 39.6 million of the Company’s ADSs upon the
Company’s exercise of the 2025 Capped Call. The exercise price is equal to the 2025 Notes’ initial conversion price and the cap price is US$40.02 per ADS, subject to
certain adjustments under the terms of the capped call transactions. The capped call transactions are expected to reduce potential dilution to existing holders of the
ordinary shares and ADSs of the Company upon conversion of the 2025 Notes and/or offset any potential cash payments that the Company is required to make in excess
of the principal amount of any converted notes, as the case may be, with such reduction and/or offset subject to a cap.
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iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
2026 Convertible Senior Notes
On December 21, 2020, the Company issued US$800 million convertible senior notes and offered an additional US$100 million principal amount
simultaneously, pursuant to the underwriters’ option to purchase additional notes. On January 8, 2021, the additional US$100 million principal amount was issued
pursuant to the underwriters’ exercise of their option. The convertible senior notes issued on December 21, 2020 and January 8, 2021 (collectively referred to as the
“2026 Notes”) are senior, unsecured obligations of the Company, and interest is payable semi-annually in cash at a rate of 4.00% per annum on June 15 and December
15 of each year, beginning on June 15, 2021. The 2026 Notes will mature on December 15, 2026 unless redeemed, repurchased or converted prior to such date.
The initial conversion rate of the 2026 Notes is 44.8179 of the Company’s ADS per US$1,000 principal amount of the 2026 Notes (which is equivalent to an
initial conversion price of approximately US$22.31 per ADS). Prior to June 15, 2026, the 2026 Notes will be convertible at the option of the holders only upon the
following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on March 31, 2021, if the last reported sale price of ADSs for at
least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately
preceding calendar quarter is greater than or equal to 130% of the conversion price; (2) during the five business day period after any ten consecutive trading day period in
which the trading price per US$1,000 principal amount of notes was less than 98% of the product of the last reported sale price of the ADSs and the conversion rate on
each such trading day; (3) if the Company calls the notes for a tax redemption; or (4) upon the occurrence of specified corporate events. Thereafter, the 2026 Notes will
be convertible at the option of the holders at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. The
conversion rate is subject to adjustment in some events but is not adjusted for any accrued and unpaid interest. In addition, following a make-whole fundamental change
that occurs prior to the maturity date or following the Company’s delivery of a notice of a tax redemption, the Company will increase the conversion rate for a holder
who elects to convert its notes in connection with such a corporate event or such tax redemption. Upon conversion, the Company will pay or deliver to such converting
holders, as the case may be, cash, ADSs, or a combination of cash and ADSs, at its election.
The holders may require the Company to repurchase all or a portion of the 2026 Notes for cash on August 1, 2024, or upon a fundamental change, at a repurchase
price equal to 100% of the principal amount, plus accrued and unpaid interest.
PAG Convertible Senior Notes
On December 30, 2022, the Company issued US$500 million convertible senior notes (the “PAG Notes”), pursuant to the definitive agreements entered into with
PAGAC IV-1 (Cayman) Limited, PAG Pegasus Fund LP and/or their affiliates (collectively, the "Investors") in August 2022. The PAG Notes are senior, secured
obligations of the Company by certain collateral arrangements, and interest is payable quarterly in cash at a rate of 6.00% per annum on January 1, April 1, July 1 and
October 1 of each year, beginning on April 1, 2023. The PAG Notes will mature on the fifth anniversary of the issuance date unless redeemed, repurchased or converted
prior to such date. The Company offered an additional US$50 million principal amount of the PAG Notes simultaneously, pursuant to the Investors’ option to purchase
additional notes.
The PAG Notes will be convertible at the holder's option at any time prior to the close of business on the second scheduled trading day immediately preceding the
maturity date and subject to the terms of the PAG Notes, at an initial conversion rate of 216.9668 ADS per US$ 1,000 principal amount of the PAG Notes (which is
equivalent to an initial conversion price of approximately US$4.61 per ADS). Following a make-whole fundamental change that occurs prior to the maturity date, the
Company will increase the conversion rate for a holder who elects to convert its notes in connection with such make-whole fundamental change.
Holders of the PAG Notes have the right to require the Company to repurchase for cash all or part of their Notes, at a repurchase price equal to 120% and 130%
of the principal amount of the PAG Notes on or shortly after the third anniversary of the issuance date and the fifth anniversary of the issuance date, respectively. Upon
the closing of the transaction, the Investors have appointed the executive chairman of PAG, as a member to the board of directors, a member of the compensation
committee and a non-voting member of the audit committee of the Company pursuant to their rights in the definitive agreements. The repayments of PAG Notes are
guaranteed by equity interests of certain subsidiaries within the Group and collateralized by all the cash consideration related to certain contracts for which RMB750,000
(US$108,740) cash consideration has been received as of December 31, 2022 and reported as long-term restricted cash balances (Note 6).
F-44
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iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
Under the terms of the indentures governing the 2023 Notes, 2025 Notes, 2026 Notes and PAG Notes, events of default include:
(i) default in any payment of interest or additional amounts as defined under the respective indenture for a period of 30 days;
(ii) default in the payment of principal of the 2023 Notes, 2025 Notes and 2026 Notes when due and payable, or repurchase amount for the PAG Notes when due;
(iii) failure by the Company to comply with its obligation to convert the notes upon exercise of a holder’s conversion right for a period of five business days;
(iv) failure by the Company to issue a Fundamental Change Company Notice or a Make-Whole Fundamental Change as defined under the respective indenture or
a specified corporate event when due for a period of five business days;
(v) failure by the Company to comply with its obligations relating to consolidation, merger, sale, conveyance and lease under article 11 of the respective
indenture;
(vi) failure by the Company for 60 days after written notice from the trustee or by the trustee at the request of the holders of at least 25% in aggregate principal
amount of the respective notes then outstanding has been received by the Company to comply with any of other agreements contained in the respective notes or the
indenture;
(vii) default by the Company or its significant subsidiaries (as defined in Article 1, Rule 1-02 of Regulation S-X), with respect to any mortgage, agreement or
other instrument under which there may be outstanding, secured or evidenced any indebtedness in excess of US$60 million (or an equivalent amount in foreign
currency) for the 2023 Notes, 2025 Notes and 2026 Notes or in excess of US$100 million (or an equivalent amount in foreign currency) for the PAG Notes, resulting in
accelerated maturity or a failure to pay principal or interest when due, and such indebtedness is not discharged, or such acceleration is not otherwise cured or rescinded,
within 30 days;
(viii) a delay in payment or discharge of a final judgment for the payment of US$60 million (or an equivalent amount in foreign currency) for the 2023 Notes,
2025 Notes and 2026 Notes or the payment of US$100 million (or an equivalent amount in foreign currency) for the PAG Notes rendered against the Company or any of
its significant subsidiaries;
(ix) the Company or any of its significant subsidiaries shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief;
and
(x) an involuntary case or other proceeding shall be commenced against the Company or its significant subsidiaries seeking liquidation, reorganization or other
relief, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 30 consecutive days.
The indentures for the 2023 Notes, 2025 Notes, 2026 Notes and PAG Notes (collectively as the “Notes”) define a “fundamental change” to include, among other
things: (i) any person or group gaining control of the Company, (ii) any recapitalization, reclassification or change of the Company’s ordinary shares or ADSs as a result
of which these securities would be converted into, or exchanged for, stock, other securities, other property or assets; (iii) the shareholders of the Company approving any
plan or proposal for the liquidation or dissolution of the Company; (iv) the Company’s ADSs ceasing to be listed on Nasdaq Stock Market; or (v) any change in or
amendment to the laws, regulations and rules of the PRC resulting in the Group being legally prohibited from operating substantially all of the business operations
conducted by the Group being unable to continue to derive substantially all of the economic benefits from the business operations conducted by these entities.
Upon the occurrence of an event of default which includes default on principal payment of the 2025 Notes when due on April 1, 2023, the trustee or the holders
of at least 25% in aggregate principal amount may declare the whole principal of (or, in the case of the PAG notes, 120% or 130% of the principal amount for such
notes, as the case may be, depending on the date of occurrence of the event of default), and accrued and unpaid interest on, all the outstanding convertible senior notes to
be due and payable immediately, subject to certain exceptions and conditions under the respective indenture. The Company may also be required to pay additional
interest. Upon the occurrence of a fundamental change, holders of the notes will have the right, at their option, to require the Company to repurchase all of their notes or
any portion of the principal amount (or, in the case of the PAG notes, 120% or 130% of the principal amount for such notes, as the case may be, depending on the date of
occurrence of the fundamental change), and accrued and unpaid
F-45
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iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
interests. In the event of a fundamental change, the Company may also be required to issue additional ADSs upon conversion of its convertible notes. As of December
31, 2022, there was no such event of default or fundamental change.
Accounting for Convertible Senior Notes
Adoption of ASU 2020-06
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2020-06, Accounting for Convertible
Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which focuses on amending the legacy guidance on convertible instruments and the derivatives
scope exception for contracts in an entity’s own equity. ASU 2020-06 simplifies an issuer’s accounting for convertible instruments by reducing the number of
accounting models that require separate accounting for embedded conversion features. The Group adopted ASU 2020-06 on January 1, 2022, using a modified
retrospective transition method, which resulted in a cumulative-effect adjustment to decrease the opening balance of additional paid-in capital and accumulated deficit on
January 1, 2022 by RMB1,432,986 (US$207,763) and RMB772,123 (US$111,947), respectively, and increase the opening balance of convertible senior notes on
January 1, 2022 by RMB635,925 (US$92,200), with remaining impact shown in accumulated other comprehensive income. For the year ended December 31, 2022, the
adoption of ASU 2020-06 caused a decrease in net loss of RMB393,298 (US$57,023), a decrease of RMB0.07 (US$0.01) and RMB0.46 (US$0.07) in net loss per
ordinary share and net loss per ADS, respectively, due to lower effective interest rates.
Prior to the adoption of ASU 2020-06, as the conversion option may be settled in cash at the Company’s option, the Company separated the 2023 Notes, the 2025
Notes and the 2026 Notes into liability and equity components in accordance with ASC subtopic 470-20, Debt with Conversion and Other Options (“ASC 470-20”). The
carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated conversion feature. The
carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the initial
proceeds and recorded as additional paid-in capital. The difference between the principal amount of each of the Notes and the liability component was considered debt
discount and was amortized using the effective interest method to accrete the discounted carrying value of the Notes to its face value on the respective put dates of the
Notes. Debt issuance costs were allocated to the liability and equity components based on the same proportion as the recognized amounts of liability and equity
components determined aforementioned.
After the adoption of ASU 2020-06, as the Notes were not issued at a substantial premium, all of the proceeds received from the issuance of the Notes are
recorded as a liability on the consolidated balance sheet in accordance with ASC 470-20. That is, no portion of the proceeds from issuing the Notes are attributed to the
conversion option at inception. The difference between the principal amount of each of the Notes and net proceeds from the issuance is considered debt discount and is
amortized at their respective effective interest rates to accrete the carrying value of the Notes to its face value (120% of the principal amount for PAG Notes) on the
respective put dates of the Notes. For the years ended December 31, 2020, 2021 and 2022, the effective interest rates of the Notes were as follows:
The 2023 Notes
The 2025 Notes
The 2026 Notes
The PAG Notes
2020
%
7.04%
6.01%
6.94%
N/A
For the years ended December 31,
2021
%
7.04%
6.01%
6.94%
N/A
2022
%
4.41%
2.48%
4.53%
12.27%
The cost of the 2023 Capped Call and 2025 Capped Call of US$67.5 million and US$84.5 million were recorded as a reduction of the Company’s additional
paid-in capital on the consolidated balance sheets with no subsequent changes in fair value recorded.
The net proceeds from the issuance of the 2023 Notes, the 2025 Notes, the 2026 Notes and the PAG Notes were US$736.7 million, US$1,179.0 million,
US$884.3 million and US$491.9 million, after deducting underwriting discounts and offering expenses of US$13.3 million, US$21.0 million, US$15.7 million and
US$8.1 million from the initial proceeds of US$750 million, US$1,200 million, US$900 million and US$500 million, respectively.
F-46
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iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
The carrying amount of the Notes as of December 31, 2021 and 2022 were as follows:
Liability component:
Principal
Less: unamortized debt discount
Net carrying amount
Equity component:
Carrying amount
As of December 31, 2021
RMB
As of December 31, 2022
RMB
US$
13,402,897
750,725
12,652,172
17,985,817
112,091
17,873,726
2,607,698
16,251
2,591,447
1,793,011
360,025
52,199
For the years ended December 31, 2020, 2021 and 2022, the amounts of interest cost recognized were as follows:
Contractual interest expense
Amortization of the discount and issuance costs
Total
For the years ended December 31,
2020
RMB
364,922
434,317
799,239
2021
RMB
556,382
559,332
1,115,714
2022
RMB
2022
US$
404,120
65,475
469,595
58,592
9,493
68,085
As of December 31, 2022, the liability component of the 2025 Notes, the 2026 Notes and the PAG Notes will be accreted up to the principal amount of US$1,200
million, US$900 million and US$600 million (120% of the principal amount of PAG Notes) over a remaining period of 0.25 years, 1.59 years and 3.00 years,
respectively. The amount repayable within the next twelve months are classified as “Convertible senior notes, current portion” on the consolidated balance sheets.
The aggregate amounts upon scheduled maturities of RMB22.1 million (US$3.2 million), RMB8,290.9 million (US$1,202.1 million), RMB6,218.2 million
(US$901.6 million) and RMB4,490.9 million (US$651.1 million) of the 2023 Notes, the 2025 Notes, the 2026 Notes and the PAG Notes will be repaid when they
become due in 2023, 2025, 2026 and 2028, respectively, assuming there is no conversion of the Notes, no redemption of the Notes prior to their maturities, the
convertible senior notes bondholders hold the Notes until their maturities and the Company elects to fully settle the Notes in cash.
15.INCOME TAXES
Cayman Islands
Under the current laws of the Cayman Islands, the Company is not subject to tax on income or capital gains. Additionally, upon payment of dividends by the
Company to its shareholders, no Cayman Islands withholding tax will be imposed.
Hong Kong
Under the Hong Kong tax laws, subsidiaries in Hong Kong are subject to the Hong Kong profits tax rate at 16.5% and they may be exempted from income tax on
their foreign-derived income and there are no withholding taxes in Hong Kong on remittance of dividends.
Singapore
Under the Singapore tax laws, subsidiaries in Singapore are subject to a unified 17% tax rate, except for certain entities that are entitled to preferential tax
treatments, and there are no withholding taxes in Singapore on remittance of dividends. iQIYI International Singapore Pte, Ltd. was granted a five-year Development and
Expansion Incentive (“DEI”) commencing from September 15, 2020, which awards a concessionary tax rate of 10% on qualifying income, subject to certain terms and
conditions imposed. An entity could re-apply for DEI upon the expiry of prior one, subject to the terms and conditions and amendments thereof.
F-47
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Mainland China
iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
Effective from January 1, 2008, the statutory Enterprise Income Tax (“EIT”) rate in Mainland China is 25%. In accordance with the implementation rules of EIT
Law, a qualified “High and New Technology Enterprise” (“HNTE”) is eligible for a preferential tax rate of 15% with HNTE certificate effective for a period of three
years and a “Software Enterprise” (“SE”) is entitled to a two-year income tax exemption starting from the first profit making year, followed by a reduction of half the
applicable tax rate for the subsequent three years. An entity must file required supporting documents with the tax authority and ensure fulfillment of the relevant HNTE
criteria before using the preferential rate. An entity could re-apply for the HNTE certificate when the prior certificate expires. The SE is subject to relevant governmental
authorities’ annual assessment based on self-assessment supporting documents filed with the tax authorities each year.
Certain PRC subsidiaries and VIEs, including Beijing QIYI Century, Shanghai Zhong Yuan , Beijing iQIYI and Skymoons Interactive are qualified HNTEs and
enjoy a reduced tax rate of 15% for the years presented, which will expire in 2024 and 2025.
The other subsidiaries and consolidated VIEs and VIE’s subsidiaries in Mainland China are subject to the 25% EIT rate.
According to the current EIT Law and its implementation rules, foreign enterprises, which have no establishment or place in Mainland China but derive
dividends, interest, rents, royalties and other income (including capital gains) from sources in Mainland China or which has an establishment or place in Mainland China
but the aforementioned incomes are not connected with the establishment or place shall be subject to withholding tax (“WHT”) at 10% (a further reduced WHT rate
may be available according to the applicable double tax treaty or arrangement provided that the foreign enterprise is the tax resident of the jurisdiction where it is located
and it is the beneficial owner of the dividends, interest and royalties income).
The Group’s loss or income before income taxes consists of:
Non-Mainland China
Mainland China
For the year ended December 31,
2020
RMB
(1,130,036 )
(5,853,841 )
(6,983,877 )
2021
RMB
(2,024,738 )
(3,987,250 )
(6,011,988 )
2022
RMB
(505,068 )
471,292
(33,776 )
Income tax expense for the years ended December 31, 2020, 2021 and 2022 consists of:
Current income tax expense
Deferred income tax (benefit)/expense
2020
RMB
65,255
(41,979 )
23,276
For the year ended December 31,
2021
RMB
2022
RMB
78,010
18,535
96,545
53,944
30,056
84,000
F-48
2022
US$
(73,228 )
68,331
(4,897 )
2022
US$
7,821
4,358
12,179
Table of Contents
iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
The reconciliation of total tax expense computed by applying the respective statutory income tax rate to pre-tax loss or income is as follows:
Income tax benefit at PRC statutory rate
Effect of differing tax rates in different jurisdictions
Non-deductible expenses
Research and development super-deduction
Effect of PRC preferential tax rates and tax holiday
Other adjustments
Change in valuation allowance
Income tax expense
For the year ended December 31,
2020
RMB
(1,745,969 )
291,884
238,899
(159,919
)
281,437
(73,027 )
1,189,971
23,276
2021
RMB
(1,502,997 )
377,604
181,972
(162,103
)
269,585
(2,151 )
934,635
96,545
2022
RMB
2022
US$
(8,444 )
184,999
(119,094 )
(115,975
)
23,564
(41,940 )
160,890
84,000
(1,224 )
26,822
(17,267 )
(16,815 )
3,416
(6,080 )
23,327
12,179
The tax effects of temporary differences that give rise to the deferred tax balances at December 31, 2021 and 2022 are as follows:
Deferred tax assets:
Accrued expenses and others
Bad debt provision
Net operating losses carried forward
Recorded cost relating to capitalized assets
Fixed assets depreciation
Valuation allowance
Deferred tax assets, net
Deferred tax liabilities:
Long-lived assets arising from acquisitions
Classification in the consolidated balance sheets:
Deferred tax assets, net
Deferred tax liabilities
2021
RMB
As of December 31,
2022
RMB
2022
US$
208,030
77,053
1,756,698
3,902,201
18,630
(5,876,461 )
86,151
455,724
71,811
1,737,385
3,799,494
15,979
(6,037,351 )
43,042
66,074
10,412
251,897
550,875
2,317
(875,334 )
6,241
57,927
44,874
6,507
2021
RMB
As of December 31,
2022
RMB
2022
US$
31,351
3,127
—
1,832
—
266
Valuation allowances have been provided on the net deferred tax assets where, based on all available evidence, it was considered more likely than not that some
portion or all of the recorded deferred tax assets will not be realized in future periods.
Realization of the net deferred tax assets is dependent on factors including future reversals of existing taxable temporary differences and adequate future taxable
income, exclusive of reversing deductible temporary differences and tax loss or credit carry forwards. The Group evaluates the potential realization of deferred tax assets
on an entity-by-entity basis. As of December 31, 2021 and 2022, valuation allowances were provided against deferred tax assets in entities where it was determined it
was more likely than not that the benefits of the deferred tax assets will not be realized.
F-49
Table of Contents
iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
As of December 31, 2021 and 2022, the Group had tax losses of RMB11,067,133 and RMB11,252,629 (US$1,631,478) deriving from entities in Mainland
China, Hong Kong and Singapore. The tax losses in the Mainland China can be carried forward for five years to offset future taxable income and the period was extended
to ten years for entities qualified as HNTE in 2022 and thereafter. The tax losses in Hong Kong and Singapore can be carried forward without an expiration date.
The Group did not record any dividend withholding tax, as there were no taxable outside basis differences noted as of the end of the periods presented. As of the
years ended December 31, 2020, 2021 and 2022, there was no significant impact from tax uncertainties on the Group’s financial position and result of operations. And
the Group did not record any interest and penalties related to an uncertain tax position for each of the years ended December 31, 2020, 2021 and 2022. The Group does
not expect the amount of unrecognized tax benefits would increase significantly in the next 12 months.
16.EMPLOYEE DEFINED CONTRIBUTION PLAN AND EMPLOYEE OPTIMIZATION PROGRAM
Full-time employees of the Company’s subsidiaries, VIEs and VIE’s subsidiaries in the PRC participate in a government mandated defined contribution plan
pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees.
Chinese labor regulations require that the subsidiaries, VIEs and VIE’s subsidiaries of the Company make contributions to the government for these benefits based on
certain percentages of the employees’ salaries. The Group has no legal obligation for the benefits beyond the contributions made. The total amount for such employee
benefits which are expensed as incurred were RMB490,245, RMB668,457 and RMB482,988 (US$70,027) for the years ended December 31, 2020, 2021 and 2022,
respectively.
In 2021, the Company initiated an Employee Optimization Program, which took on certain performance improvement actions which included downsizing its
workforce to further enhance its cost structure and improve efficiency. The recognition of employee severance costs requires that the Company make certain judgments
and estimates regarding the nature, timing and amount of costs associated with the initiative. To the extent the Company’s actual results differ from the estimates and
assumptions, the Company may be required to revise the estimated liabilities, requiring the recognition of additional severance costs or the reduction of liabilities already
recognized.
Severance payments made under a one-time benefit arrangement are generally recorded upon communication to the affected employees. As for statutorily
required minimum benefits for involuntary terminations, the Company recognizes the liability for these arrangements when it is probable that the employee would be
entitled to the benefits and the amounts can be reasonably estimated.
Total employee severance costs expected to be incurred in connection with the Employee Optimization Program was RMB178,732 in 2021, for which
RMB25,709, RMB54,334, RMB98,689 were recognized as cost of revenues, selling, general and administrative expenses and research and developments expenses for
the year ended December 31, 2021, respectively. As of December 31, 2021, the Employee Optimization Program was substantially completed and the Company has
paid out substantially all of the severance costs to the affected employees. The remaining accrued severance liabilities as of December 31, 2021 was immaterial and paid
in 2022.
17.COMMITMENTS AND CONTINGENCIES
Commitments for property management fees
Future minimum payments under non-cancelable agreements for property management fees consist of the following as of December 31, 2022:
Commitments for property management fees
2023
2024
2025
2026
2027 and thereafter
F-50
RMB
US$
2,240
6,112
5,351
3,752
28,851
46,306
325
886
776
544
4,183
6,714
Table of Contents
iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
Commitments for Licensed Copyrights and Produced Content
Future minimum payments under non-cancelable agreements for licensed copyrights and produced content consist of the following as of December 31, 2022:
Commitments for Licensed Copyrights and Produced Content
2023
2024
2025
2026
2027 and thereafter
RMB
5,156,032
3,622,346
2,636,024
1,260,792
306,984
12,982,178
US$
747,554
525,191
382,188
182,798
44,508
1,882,239
Capital commitment
As of December 31, 2022, commitments for the purchase of fixed assets are immaterial.
Litigation, claims and assessments
The Group is involved in a number of claims pending in various courts, in arbitration, or otherwise unresolved as of December 31, 2021. These claims are
substantially related to alleged copyright infringement as well as routine and incidental matters to its business, with certain restricted deposits used as security against
certain lawsuits, among others. Adverse results in these claims may include awards of damages and may also result in, or even compel, a change in the Group’s business
practices, which could impact the Group’s future financial results. The Group has accrued RMB55,474 and RMB31,511 (US$4,569) in “Accrued expenses” in the
consolidated balance sheets as of December 31, 2021 and 2022.
Starting in April 2020, the Group and certain of its current and former officers and directors were named as defendants in several putative securities class actions
filed in federal court, which were purportedly brought on behalf of a class of persons who allegedly suffered damages as a result of alleged misstatements and omissions
in the Group’s public disclosure documents. In May 2021, these actions were consolidated under one case. In June 2021, lead plaintiffs filed the operative amended
complaint. In July 2021, defendants filed motion to dismiss the case. Briefing on the motion to dismiss was completed on September 29, 2021. However, in light of the
common questions of law and fact at issue in this case and a related action against Baidu, the Court terminated the motion to dismiss without prejudice and ordered a
motion-to-dismiss briefing for the two cases to be completed by March 2023 under a new briefing schedule. The coordinated motion-to-dismiss briefing has now been
completed under the new schedule, and the Group await a decision from the court on these motions. As the case remain in its preliminary stages, the likelihood of any
unfavorable outcome or the amount or range of any potential loss cannot be reasonably estimated at the issuance date of the consolidated financial statements. As a
result, as of December 31, 2022, the Group did not record any liabilities for the loss contingencies pertaining to the cases described above.
The Group is unable to estimate the reasonably possible loss or a range of reasonably possible losses for proceedings in the early stages or where there is a lack of
clear or consistent interpretation of laws specific to the industry-specific complaints among different jurisdictions. Although the results of unsettled litigations and claims
cannot be predicted with certainty, the Group does not believe that, as of December 31, 2022, there was at least a reasonable possibility that the Group may have
incurred a material loss, or a material loss in excess of the accrued expenses, with respect to such loss contingencies. The losses accrued include judgments made by the
court and out-of-court settlements after December 31, 2022, but related to cases arising on or before December 31, 2022. The Group is in the process of appealing
certain judgments for which losses have been accrued.
18.REDEEMABLE NONCONTROLLING INTERESTS
In 2021, Dreamagic, one of the Group’s VIE’s subsidiary completed several rounds of preferred shares financing from third-party preferred shareholders. As the
preferred shares could be redeemed by such shareholders upon the occurrence of certain events
F-51
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iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
that are not solely within the control of the Group, these preferred shares are accounted for as redeemable noncontrolling interests. As of December 31, 2022, the amount
of redeemable noncontrolling interests was nil due to the deconsolidation of the subsidiary (Note 4).
The Group accounts for the changes in accretion to the redemption value in accordance with ASC topic 480, Distinguishing Liabilities from Equity. The Group
elects to use the effective interest method to account for the changes of redemption value over the period from the date of issuance to the earliest redemption date of the
noncontrolling interests.
The movement in the carrying value of the redeemable noncontrolling interests is as follows:
Balance as of January 1
Issuance of subsidiary shares
Accretion of redeemable noncontrolling interests
Deconsolidation of subsidiaries
Balance as of December 31
19.ORDINARY SHARES
2020
RMB
2021
RMB
101,542
—
7,087
—
108,629
108,629
268,420
20,336
—
397,385
2022
RMB
397,385
—
—
(397,385 )
—
2022
US$
57,615
—
—
(57,615 )
—
The authorized share capital of the Company was 100,000,000,000 shares comprising of (i) 94,000,000,000 Class A ordinary shares; (ii) 5,000,000,000 Class B
ordinary shares; and (iii)1,000,000,000 reserved shares at par value of US$0.00001 per share. The rights of the holders of Class A and Class B ordinary shares are
identical, except with respect to voting and conversion rights. Each share of Class A ordinary shares is entitled to one vote per share and is not convertible into Class B
ordinary shares under any circumstances. Each share of Class B ordinary shares is entitled to ten votes per share and is convertible into one Class A ordinary share at
any time by the holder thereof. Upon any transfer of Class B ordinary shares by the holder thereof to any person or entity that is not an affiliate of such holder, such
Class B ordinary shares would be automatically converted into an equal number of Class A ordinary shares.
On August 14, 2020 and October 27, 2022, 10,917,811 and 971,042 Class A ordinary shares were issued to certain key employees in relation to the acquisition of
Skymoons.
280,000,000 Class A ordinary shares (40,000,000 ADS equivalent) were issued on December 21, 2020, and 32,163,292 Class A ordinary shares (4,594,756 ADS
equivalent) were issued on January 8, 2021 pursuant to the underwriters’ partial exercise of their option to purchase additional ADSs.
164,705,882 Class B ordinary shares and 304,705,874 Class A ordinary shares were issued in March 2022 pursuant to the subscription agreements with Baidu
and a consortium of financial investors, respectively.
As of December 31, 2022, there were 3,047,568,900 and 3,041,097,278 Class A and Class B ordinary shares outstanding, and 198,912,543 Class A ordinary
shares are deemed issued but not outstanding as they have not been transferred to grantees.
20.PROFIT APPROPRIATION AND RESTRICTED NET ASSETS
The Company’s subsidiaries, VIEs and the VIEs’ subsidiaries in China are required to make appropriations to certain non-distributable reserve funds. In
accordance with the laws applicable to China’s WFOE, its subsidiaries have to make appropriations from its after-tax profit (as determined under Generally Accepted
Accounting Principles in the PRC (“PRC GAAP”) to non-distributable reserve funds including (i) general reserve fund, (ii) enterprise expansion fund, and (iii) staff
bonus and welfare fund. General reserve fund is 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 respective company. The appropriations of the enterprise
expansion fund and staff bonus and welfare fund are at the Company’s discretion. At the same time, the Company’s VIEs, in accordance with the China Company Laws,
must make appropriations from its after-tax profit (as determined under PRC GAAP) to non-distributable reserve funds including (i) statutory surplus fund, and (ii)
discretionary surplus fund. Statutory surplus fund is at least 10% of the after-tax profits calculated in accordance with PRC GAAP.
F-52
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iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
General reserve fund and statutory surplus fund are restricted for set off against losses, expansion of production and operation or increase in register capital of the
respective company. These reserves are not transferable to the Company in the form of cash dividends, loans or advances. These reserves are therefore not available for
distribution except in liquidation.
As of December 31, 2021 and 2022, the Company's PRC subsidiaries, VIEs and VIEs’ subsidiaries had appropriated RMB 42,781 and RMB49,061 (US$7,113),
respectively, in its statutory reserves.
Under the PRC laws and regulations, the subsidiaries, VIEs and the VIEs’ subsidiaries incorporated in the PRC are restricted in their ability to transfer a portion
of their net assets to the Group either in the form of dividends, loans or advances of the combined and consolidated net assets as of December 31, 2022. Even though the
Group currently does not require any such dividends, loans or advances from the PRC subsidiaries, VIEs and VIEs’ subsidiaries for working capital and other funding
purposes, the Company may in the future require additional cash resources from its PRC subsidiaries, VIEs and VIEs’ subsidiaries due to changes in business conditions,
to fund future acquisitions and development, or merely declare and pay dividends to or distribution to its shareholders. Amounts of net assets restricted include paid-in
capital of the Company’s PRC subsidiaries and the net assets of the VIEs and VIEs’ subsidiaries in which the Company has no legal ownership, totaling
RMB19,329,865 (US$2,802,567) as of December 31, 2022.
21.LOSS PER SHARE
Basic loss per share is computed using the weighted average number of the ordinary shares outstanding during the period. Diluted loss per share is computed
using the weighted average number of ordinary shares and potential ordinary shares outstanding during the period under the if-converted method and the treasury stock
method. The effect of the convertible senior notes, share options and restricted share units were excluded from the computation of diluted net loss per share for the years
ended December 31, 2020, 2021 and 2022, as their effect would be anti-dilutive.
Basic and diluted loss per Class A and Class B ordinary share for the years ended December 31, 2020, 2021 and 2022 are calculated as follows:
Numerator:
Net loss attributable to
iQIYI, Inc.
Accretion of redeemable
noncontrolling interests
Net loss attributable to
iQIYI, Inc.'s ordinary
shareholders
Denominator:
Weighted average number of
ordinary shares outstanding,
basic
Weighted average number of
ordinary shares outstanding,
diluted
Net loss per share, basic
Net loss per share, diluted
2020
Class A
RMB
Class B
RMB
2021
Class A
RMB
Class B
RMB
2022
Class A
2022
Class B
RMB
US$
RMB
US$
Year ended December 31,
(3,127,160 )
(3,911,201 )
(2,983,984 )
(3,185,600 )
(67,733 )
(9,820 )
(68,479 )
(3,149 )
(3,938 )
(9,836 )
(10,500 )
—
—
—
(9,929 )
—
(3,130,309 )
(3,915,139 )
(2,993,820 )
(3,196,100 )
(67,733 )
(9,820 )
(68,479 )
(9,929 )
2,299,788,661
2,876,391,396
2,694,345,310
2,876,391,396
2,977,609,078
2,977,609,078
3,010,412,347
3,010,412,347
2,299,788,661
2,876,391,396
2,694,345,310
2,876,391,396
2,977,609,078
2,977,609,078
3,010,412,347
3,010,412,347
(1.36 )
(1.36 )
(1.36 )
(1.36 )
(1.11 )
(1.11 )
(1.11 )
(1.11 )
(0.02 )
(0.02 )
(0.00 )
(0.00 )
(0.02 )
(0.02 )
(0.00 )
(0.00 )
22.SHARE-BASED COMPENSATION
2010 Equity Incentive Plan
On October 18, 2010, the Company adopted its 2010 Equity Incentive Plan (the “2010 Plan”), which permits the grant of restricted shares, options and share
appreciation rights to the employees, directors, officers and consultants of the Company. Under the plan, a total of 58,875,478 ordinary shares were initially reserved for
issuance and subsequently increased to 589,729,714 ordinary shares. The 2010 Plan is valid and effective for an original term of ten years, and further extended to twenty
years on September 15, 2020 commencing from its adoption. Except for service conditions, there were no other vesting conditions for all the awards under the 2010
Plan. Any unvested portion of the options will be forfeited upon the termination of the grantee’s service for any reason. In the
F-53
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iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
event the grantee’s service is terminated for cause other than death or permanent disability, the vested portion of the options will expire upon 90 days following such
termination.
The Company has granted share options under the 2010 Plan to its employees and directors. Options granted to employees and directors vest over a four-year
period.
2021 Equity Incentive Plan
On December 2, 2021, the Company adopted its 2021 Equity Incentive Plan (the “2021 Plan”), which permits the grant of restricted shares units and options to
the directors, employees, consultants and other individuals of the Company. Under the 2021 Plan, the maximum aggregate number of ordinary shares which may be
issued pursuant to all awards shall initially be 364,000,000 ordinary shares, provided that if restricted share units or options with US$0 exercise price are granted, each
restricted share unit and option with US$0 exercise price (that entitles the holder to one ordinary share) granted shall reduce the number of ordinary shares under the
2021 Plan available for future grants by 1.3 ordinary shares. The 2021 Plan is valid and effective for a term of ten years commencing from its adoption. Except for
service conditions, there were no other vesting conditions for all the awards under the 2021 Plan. Any unvested portion of the restricted shares units and options will be
forfeited upon the termination of the grantee’s service for any reason. In the event the grantee’s service is terminated for cause other than death or permanent disability,
the vested portion of the options will be expired upon 90 days following such termination.
In 2022, the Company has granted options under the 2021 Plan to its employees and directors. All options vest over a four-year period.
The following table sets forth the summary of option activity for the year ended December 31, 2022:
Outstanding, December 31, 2021
Granted (i)
Forfeited/Expired
Exercised
Outstanding, December 31, 2022
Vested and expected to vest as of December 31, 2022
Exercisable as of December 31, 2022
Options
Outstanding
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life
(US$)
(In years)
Aggregate
Intrinsic Value
(US$ in
thousands)
341,665,534
174,961,521
(17,625,428 )
(19,530,525 )
479,471,102
450,152,110
276,887,892
0.49
0.11
0.26
0.48
0.35
0.37
0.48
6.78
6.63
5.25
193,032
173,988
76,753
(i)It consists a total of 138,649,623 options granted with an exercise price of US$0 each that will reduce the number of ordinary shares under the 2021 Plan
available for future grants by 1.3 ordinary shares.
As of December 31, 2022, the unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested share options granted to the Group’s
employees and directors was RMB925,415 (US$134,173). Total unrecognized compensation cost is expected to be recognized over a weighted-average period of 2.32
years and may be adjusted for future changes in estimated forfeitures.
The weighted average grant date fair value of the share options granted during the years ended December 31, 2020, 2021 and 2022 were US$2.37, US$1.88 and
US$0.60, respectively. The total fair value of options vested during the years ended December 31, 2020, 2021 and 2022 were RMB1,222,571, RMB1,072,572 and
RMB765,284 (US$110,956), respectively. Total intrinsic value of options exercised for the years ended December 31, 2020, 2021 and 2022 were RMB888,668,
RMB95,024 and RMB36,011 (US$5,221), respectively.
F-54
Table of Contents
iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
The Company uses the binomial tree option pricing model to estimate the fair value of share options with the assistance of an independent third-party valuation
firm. The assumptions used to value the share options granted to employees and non-employees were as follows:
Fair value of ordinary shares (US$)
Risk-free interest rate (%)
Expected volatility (%)
Expected dividend yield
Expected exercise multiple
2020
Year Ended December 31,
2021
2022
2.60~3.42
0.60~0.78
48.2~50.4
—
2.2~2.8
2.14~3.13
0.93~1.57
47.2~48.0
—
2.2~2.8
0.40~0.72
1.72~2.00
51.1~51.2
—
2.2~2.8
The estimated fair value of the Company’s ordinary shares is based on the Company’s share price. The risk-free interest rate for periods within the contractual life
of the options is based on the U.S. treasury yield curve in effect at the time of grant for a term consistent with the contractual term of the awards. Expected volatility is
estimated based on the historical volatility of the Company’s share price. The dividend yield is estimated based on our expected dividend policy over the expected term
of the options. The expected exercise multiple is based on management’s estimation, which the Company believes is representative of the future.
The following table sets forth the amount of share-based compensation expense included in each of the relevant financial statement line items:
Cost of revenues
Selling, general and administrative
Research and development
2020
RMB
201,970
851,416
316,709
1,370,095
Year ended December 31,
2022
2021
RMB
RMB
173,263
718,377
327,523
1,219,163
147,045
425,209
239,187
811,441
2022
US$
21,320
61,650
34,679
117,649
F-55
Table of Contents
iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
23.RELATED PARTY TRANSACTIONS
a)The table below sets forth the major related parties and their relationships with the Group:
Name of related parties
Baidu and its subsidiaries (“Baidu Group”)
Others
Controlling shareholder of the Company
Equity investees that the Group or Baidu has significant influence over
Relationship with the Group
b)The Group had the following related party transactions with the major related parties:
2020
RMB
For the year ended December 31,
2021
RMB
2022
RMB
2022
US$
Membership services
Membership services revenue earned from
memberships sold to Baidu Group
Membership services revenue earned from
memberships sold by Others
Online advertising revenues
Advertising services provided to Baidu Group
Advertising services provided to Others
Content distribution revenues
Content licensed to Others (i)
Other revenues
Other services provided to Baidu Group
Others
Interest income
Loans due from Others
Cost of revenues
License fees to Baidu Group
Bandwidth fees to Baidu Group
Others (ii)
Selling, general and administrative
Advertising services provided by Baidu Group
Others
Research and development
Cloud services provided by Baidu Group
Others
19,799
—
54,401
5,772
3,766
1,978
113,934
92,690
122,919
174,001
55,664
224,110
176,227
297,304
190,398
14,496
45,189
—
657,675
13,894
918,758
306,392
13,354
10,989
1,789
53,521
—
581,861
8,183
653,001
223,149
47,617
22,011
15,430
38,634
1,247
463,733
13,691
1,007,461
90,577
2,466
2,579
7,412
—
1,124,186
7,887
287
8,071
32,493
27,605
259
7,760
—
84,362
1,186
94,676
32,354
6,904
3,191
—
—
1,263,387
—
3,953
957,914
—
573
138,884
(i)The transactions mainly represent revenues derived from content distributed to Investee A and Investee B.
(ii)The transactions mainly represent revenue sharing arrangements with various equity investees. The Group entered into a significant revenue sharing arrangement in
2021 and 2022 to become the exclusive sales agent for an equity investee and provided a minimum guarantee of RMB100,000 and RMB60,000 of annual sales for a
given period, respectively. Nil, RMB125,052 and RMB23,639 (US$3,427) were recognized as cost of revenues for the years ended December 31, 2020, 2021 and 2022,
respectively.
For the years ended December 31, 2020, 2021 and 2022, the Group purchased content from equity investees in an amount of RMB1,455,933, RMB2,358,680
and RMB1,513,683 (US$219,463), respectively.
F-56
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iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
c)The Group had the following related party balances with the major related parties:
Except for the non-trade balances disclosed below, amounts due from/due to related parties as of December 31, 2021 and 2022 relate to transactions arising from
the ordinary and usual course of business of the Group and were trade in nature.
Amounts due from related parties, current:
Due from Baidu Group (i)
Due from Others (ii)
Amounts due from related parties, non-current:
Due from Others (iii)
Amounts due to related parties, current:
Loans due to Baidu Group (iv)
Due to Baidu Group (v)
Deferred revenue in relation to services to be provided
to an equity investee (vi)
Due to Others (vii)
Amounts due to related parties, non-current:
Loans due to Baidu Group (iv)
Due to Baidu Group (v)
Deferred revenue in relation to services to be provided
to an equity investee (vi)
Due to Others
2021
RMB
As of December 31,
2022
RMB
2022
US$
34,894
120,618
155,512
81,000
81,000
19,986
84,168
104,154
59,880
59,880
2,898
12,203
15,101
8,682
8,682
2021
RMB
As of December 31,
2022
RMB
2022
US$
50,000
1,402,493
211,802
969,794
2,634,089
650,000
2,989
127,591
35
780,615
700,000
1,877,298
21,186
923,162
3,521,646
—
1,828
97,715
1,398
100,941
101,490
272,183
3,072
133,846
510,591
—
265
14,167
203
14,635
(i)The balance mainly represents amounts due from Baidu Group for advertising, membership and other services.
(ii)The balance mainly represents amounts due from or advances made to equity investees for content distribution services and other services.
(iii)The balance represents prepayments for licensed copyrights to be received from the Group’s equity investees.
(iv)The total outstanding balance represents a non-trade interest-free loan of RMB50,000, which is due on demand and a non-trade interest-free loan of RMB650,000
which was provided by Baidu in January 2018 and fully repaid in March 2023.
(v)The balance mainly represents amounts owed to Baidu for bandwidth and cloud services provided to the Group.
(vi)The balance represents deferred revenue in relation to content distribution, licenses of intellectual property and traffic support services to be provided to Investee A.
(vii)The balance mainly represents amounts owed to the Group’s equity investees for acquisition of licensed copyrights and advances made for online advertising
services.
F-57
Table of Contents
iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
24.FAIR VALUE MEASUREMENTS
The following table sets forth the financial instruments measured or disclosed at fair value on a recurring basis by level within the fair value hierarchy as of
December 31, 2021 and 2022 and non-recurring fair value measurements as of December 31, 2021 and 2022:
Quoted Prices
in Active Market
for Identical
Assets
(Level 1)
RMB
Fair Value Measurements
Significant
Other
Observable
Inputs
(Level 2)
RMB
Significant
Unobservable
Inputs
(Level 3)
RMB
Total Gain/ (Losses)
RMB
US$
Recurring
As of December 31, 2021:
Cash equivalents
Time deposits (i)
Short-term investments
Available-for-sale debt securities (i)
Long-term investments
Available-for-sale debt securities (ii)
Equity investments at fair value with readily determinable fair value
31,738
Convertible senior notes, non-current portion (iii)
As of December 31, 2022:
Cash equivalents
Time deposits (i)
Short-term investments
Available-for-sale debt securities (i)
Long-term investments
Available-for-sale debt securities (ii)
Equity investments at fair value with readily determinable fair value
26,303
Convertible senior notes, current portion (iii)
Convertible senior notes, non-current portion (iii)
Non-recurring
As of December 31, 2021:
Produced content monetized on its own (iv)
Long-term investments (v)
Equity investments without readily determinable fair value (vi)
As of December 31, 2022:
Produced content monetized on its own (iv)
Long-term investments (v)
Equity investments without readily determinable fair value (vi)
Recurring
98,807
301,904
1,348,255
9,547,453
470,568
818,265
6,755,975
7,253,289
77,855
485,324
29,782
423,161
110,760
85,466
669,007
216,308
(160,989 )
(169,828 )
94,510
(67,519 )
(841,489 )
31,295
(9,789 )
(122,004 )
4,537
(i)The fair value of time deposits is determined based on the prevailing interest rates in the market. Due to maturities of less than one year, the carrying values of short-
term investments approximate their fair values.
F-58
Table of Contents
iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
(ii)Long-term available-for-sale debt securities are convertible debt instruments issued by private companies and investment in equity securities that is redeemable at the
Company’s option, which do not have readily determinable market values. The fair values of these investments were categorized as Level 3 in the fair value hierarchy.
The Group uses a combination of valuation methodologies, including market and income approaches based on the Group’s best estimate, which is determined by using
information including but not limited to the pricing of recent rounds of financing, future cash flow forecasts and liquidity factors.
Balance as of January 1,
Addition
Reclassification
Accrued interest
Net unrealized fair value change recognized in other comprehensive income
Balance as of December 31
2021
RMB
2022
RMB
2022
US$
10,807
66,500
—
2,973
(2,425 )
77,855
77,855
10,000
413,863
4,697
(21,091 )
485,324
11,288
1,450
60,004
681
(3,058 )
70,365
(iii)The Company carries the convertible senior notes at face value less unamortized debt discount and issuance costs on its consolidated balance sheets, and presents the
fair value for disclosure purposes only. The fair values of the convertible senior notes are classified as Level 2 fair value measurements based on dealer quotes. For
further information on the convertible senior notes, see Note 14.
Non-recurring
(iv)Due to adverse changes in the expected performance of certain produced content and the reduced amount of ultimate revenue expected to be recognized, the Group
performed an assessment to determine whether the fair value was less than unamortized content costs. The Group uses a discounted cash flow approach to estimate the
fair value of the produced content titles predominantly monetized on its own. The significant unobservable inputs (level 3) include forecasted future revenues,
production costs required to complete the content and exploitation and participation costs. The Group considers the historical performance of similar content, the
forecasted performance and/or preliminary actual performance subsequent to the release of the produced content in estimating the fair value. Based on the above
assessment, certain produced content predominantly monetized on its own were determined to be impaired and re-measured to the fair value as of each quarter end.
Impairment charges of RMB205,462, RMB160,989 and RMB67,519 (US$9,789) were recognized for produced content predominantly monetized on its own and was
recognized as cost of revenues in the consolidated statements of comprehensive loss for the years ended December 31, 2020, 2021 and 2022, respectively. The outbreak
of COVID-19 during the first quarter of 2020 negatively impacted the Group’s operations and financial performance and resulted in a downward adjustment to
forecasted advertising revenues for the Mainland China film group that resulted in the fair value of the Mainland China film group being less than its corresponding
carrying amount. As a result, an impairment charge of RMB390,299 related to licensed copyrights (Note 7) and RMB209,701 related to produced content (Note 9),
respectively, was recognized as cost of revenues for the year ended December 31, 2020.
(v)The Group measures certain financial assets, including equity method investments at fair value on a non-recurring basis only if an impairment charge recognized. The
fair values of the Group’s investments in publicly listed companies are measured using quoted market prices. For estimating the fair value of investments without
observable market prices, the Group uses valuation methodologies, primarily the market approach, which requires management to use unobservable inputs (Level 3)
such as selection of comparable companies and multiples, expected volatility, discount for lack of marketability and probability of exit events as it relates to liquidation
and redemption preferences when applicable. When there is impairment of equity securities accounted for under the measurement alternative and equity method
investments, the non-recurring fair value measurements are measured at the date of impairment. As a result of the above assessment, certain long-term investments were
determined to be impaired, and the impairment charges were recognized in the consolidated statements of comprehensive loss during the year ended December 31, 2021
and 2022.
(vi)For equity investments accounted for under the measurement alternative, the equity investment is measured at fair value on a non-recurring basis when there is an
orderly transaction for identical or similar investments of the same issuer. The fair values of these investments were categorized as Level 3 in the fair value hierarchy.
The fair values of the Group’s privately held
F-59
Table of Contents
iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
investments as disclosed are determined based on the observable transaction price of recent rounds of financing and a price adjustment for the different rights and
obligations between a similar instrument of the same issuer with an observable price change in an orderly transaction and the investment held by the Group. These non-
recurring fair value measurements were measured as of the observable transaction dates. As a result of the above assessment, certain equity investments accounted for
under the measurement alternative were re-measured to their fair values, and the total net unrealized gains (Note 4) were recognized in "Others, net" in the consolidated
statements of comprehensive loss for the years ended December 31, 2021 and 2022.
25.ACCUMULATED OTHER COMPREHENSIVE INCOME
The changes in accumulated other comprehensive income by component, net of tax, were as follows:
Balance at December 31, 2019
Other comprehensive income before reclassification
Amounts reclassified from accumulated other
comprehensive income
Net current-period other comprehensive income/(loss)
Other comprehensive loss/(income) attributable to
noncontrolling interests and redeemable noncontrolling interests
Balance at December 31, 2020
Other comprehensive income/(loss) before reclassification
Amounts reclassified from accumulated other
comprehensive income
Net current-period other comprehensive income/(loss)
Other comprehensive loss attributable to
noncontrolling interests
Balance at December 31, 2021
Other comprehensive loss before reclassification
Amounts reclassified from accumulated other
comprehensive income
Net current-period other comprehensive loss
Cumulative effect of adopting ASU 2020-06
Other comprehensive loss attributable to
noncontrolling interests
Balance at December 31, 2022
Balance at December 31, 2022 in US$
Foreign currency
translation
adjustment
RMB
Unrealized gains/(losses) on
available-for-sale
debt securities
RMB
Total
RMB
2,106,219
433,497
—
433,497
2,571
2,542,287
168,079
—
168,079
1,062
2,711,428
(844,725 )
—
(844,725 )
24,938
(4,670 )
1,886,971
273,585
499
14,071
(14,169 )
(98 )
(8 )
393
(2,426 )
(425 )
(2,851 )
32
(2,426 )
(21,091 )
—
(21,091 )
—
—
(23,517 )
(3,410 )
2,106,718
447,568
(14,169 )
433,399
2,563
2,542,680
165,653
(425 )
165,228
1,094
2,709,002
(865,816 )
—
(865,816 )
24,938
(4,670 )
1,863,454
270,175
The amounts reclassified out of accumulated other comprehensive income represent realized gains on the available-for-sale debt securities upon their maturity.
The amounts reclassified were determined on the basis of specific identification.
Losses in the amount of RMB1,232,683, RMB536,924 and gains in the amount of RMB2,054,601 (US$297,889) on intracompany foreign currency transactions
that are of a long-term-investment nature are included in the foreign currency translation adjustment for the years ended December 31, 2020, 2021 and 2022,
respectively.
F-60
Table of Contents
iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
26.SUBSEQUENT EVENTS
In January 2023, the Company issued 535,500,000 Class A ordinary shares (76,500,000 ADS equivalent) upon the completion of a registered follow-on public
offering and 69,825,000 Class A ordinary shares (9,975,000 ADS equivalent) pursuant to the underwriters’ partial exercise of their option to purchase additional ADSs,
respectively. The net proceeds received by the Company for this offering amounted to US$500.0 million (equivalent to RMB3,448.6 million), after deducting
underwriting discounts and commissions but not considering the offering expenses in connection with the offering.
In February 2023, the convertible senior noteholder of PAG Notes exercised their option to purchase additional convertible senior notes under the same terms
and conditions for US$50.0 million (equivalent to RMB344.9 million).
In March 2023, the Company issued an aggregate principal amount of US$600 million (equivalent to RMB4,138.3 million) convertible senior notes (the "2028
Notes") for cash. The net proceeds of the 2028 Notes (after deducting the initial purchasers' discounts, taking into account the estimated reimbursement from the initial
purchasers for certain expenses incurred by the Company, but without deducting other estimated offering expenses payable by the Company) amounted to
approximately US$591 million (equivalent to RMB4,076.2 million). The 2028 Notes are senior, unsecured obligations of the Company, and interest is payable quarterly
in cash at a rate of 6.50% per annum in arrears on March 15, June 15, September 15 and December 15 of each year, beginning on June 15, 2023. The 2028 Notes will
mature on March 15, 2028 unless repurchased, redeemed or converted prior to such date. The 2028 Notes may be convertible into the Company's ADS at the holder's
option and subject to the terms of the 2028 Notes, at an initial conversion rate of 101.4636 ADS per US$1,000 principal amount of the 2028 Notes (which is equivalent
to an initial conversion price of approximately US$9.86 per ADS). Upon conversion, the Company will pay or deliver to such converting holders, as the case may be,
cash, ADSs, or a combination of cash and ADSs, at its election. On March 16, 2026 or in the event of certain fundamental changes, the holders of the 2028 Notes will
have the right to require the Company to repurchase for cash all or part of their notes at a repurchase price equal to 100% of the principal amount of the 2028 Notes to be
repurchased, plus accrued and unpaid interest. Concurrently with and shortly after the offering of the 2028 Notes, the Company also entered into separate and
individually privately negotiated agreements with certain holders of the 2026 Notes to repurchase US$340 million (equivalent to RMB2,345.0 million) principal amount
of such notes for cash.
F-61
Table of Contents
iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
27.CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
Condensed Balance Sheets
Note
As of December 31,
2021
RMB
2022
RMB
2022
US$
ASSETS
Current assets:
Cash and cash equivalents
Prepayments and other assets
Amounts due from entities within the Group
Total current assets
Total non-current assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Convertible senior notes
Accrued expenses and other liabilities
Total current liabilities
Non-current liabilities
Convertible senior notes
Other non-current liabilities
Total non-current liabilities
Total liabilities
Commitments and contingencies
Shareholders’ equity:
Class A ordinary shares (US$0.00001 par value; 94,000,000,000
shares authorized as of December 31, 2021 and 2022, respectively;
2,940,101,566 and 3,246,481,443 shares issued as of December 31,
2021 and 2022, respectively; 2,722,361,459 and 3,047,568,900
shares outstanding as of December 31, 2021 and 2022,
respectively)
Class B ordinary shares (US$0.00001 par value; 5,000,000,000
shares authorized as of December 31, 2021 and 2022,
respectively; 2,876,391,396 and 3,041,097,278 shares
issued and outstanding as of December 31, 2021 and
2022, respectively)
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive income
Total shareholders’ equity
Total liabilities and shareholders’ equity
1,615,953
12,350
16,285,294
4,334,968
20,751
19,925,446
17,913,597
24,281,165
—
—
628,511
3,009
2,888,918
3,520,438
—
17,913,597
24,281,165
3,520,438
—
70,823
70,823
12,652,172
3,003
8,305,447
156,807
8,462,254
9,568,279
—
12,655,175
9,568,279
12,725,998
18,030,533
1,204,177
22,735
1,226,912
1,387,270
—
1,387,270
2,614,182
173
194
28
183
49,642,014
(47,163,773 )
2,709,002
193
50,885,688
(46,498,897 )
1,863,454
28
7,377,731
(6,741,706 )
270,175
5,187,599
6,250,632
906,256
17,913,597
24,281,165
3,520,438
14
17
19
19
20
25
F-62
Table of Contents
iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
Condensed Statements of Comprehensive Loss
Operating costs and expenses:
Selling, general and administrative
Operating loss
2020
RMB
Year ended December 31,
2021
RMB
2022
RMB
2022
US$
(36,408 )
(26,658 )
(66,883 )
(9,697 )
Share of (losses)/income of subsidiaries, VIEs and VIEs’ subsidiaries
Interest income
Interest expenses
Foreign exchange gain/(loss), net
Other income, net
(7,320,787 )
24,343
(642,718 )
913,974
23,235
(5,807,189 )
19,026
(889,263 )
496,669
37,831
2,076,676
12,845
(234,870 )
(1,954,314 )
30,334
301,090
1,862
(34,053 )
(283,349 )
4,398
Net loss
(7,038,361 )
(6,169,584 )
(136,212 )
(19,749 )
Accretion of redeemable noncontrolling interests
(7,087 )
(20,336 )
—
—
Net loss attributable to ordinary shareholders
(7,045,448 )
(6,189,920 )
(136,212 )
(19,749 )
Other comprehensive income/(loss):
Foreign currency translation adjustments
Unrealized losses on available-for-sale debt securities
436,068
(106 )
169,141
(2,819 )
(849,395 )
(21,091 )
(123,151 )
(3,058 )
Total other comprehensive income/(loss), net of tax
435,962
166,322
(870,486 )
(126,209 )
Comprehensive loss
(6,602,399 )
(6,003,262 )
(1,006,698 )
(145,958 )
F-63
Table of Contents
iQIYI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 AND 2022—continued
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
Condensed Statements of Cash Flows
Net cash used for operating activities
Net cash (used for)/provided by investing activities
Net cash provided by/(used for) financing activities
Effect of exchange rate changes on cash, cash equivalents and
restricted cash
Net increase/(decrease) in cash, cash equivalents and
restricted cash
Cash, cash equivalents and restricted cash at the beginning of
the year
Cash, cash equivalents and restricted cash at the end of the year
Basis of presentation
2020
RMB
(281,636 )
(7,189,640 )
9,804,491
Year ended December 31,
2022
2021
RMB
RMB
(360,187 )
483,685
(3,441,602 )
(157,273 )
(2,462,807 )
5,307,603
2022
US$
(22,802 )
(357,073 )
769,530
(6,203 )
(167,636 )
31,492
4,565
2,327,012
(3,485,740 )
2,719,015
394,220
2,774,681
5,101,693
5,101,693
1,615,953
1,615,953
4,334,968
234,291
628,511
For the presentation of the parent company only condensed financial information, the Company records its investments in subsidiaries and VIEs under the equity
method of accounting as prescribed in ASC 323. The subsidiaries, VIEs and VIEs’ subsidiaries losses are reported as “Share of losses/income of subsidiaries, VIEs and
VIEs’ subsidiaries” on the condensed statements of comprehensive loss. Under the equity method of accounting, the Company’s carrying amount of its investment in
subsidiaries for its share of the subsidiaries, VIEs and VIEs’ subsidiaries cumulative losses was reduced to nil as of December 31, 2021 and 2022, respectively and the
carrying amount of “Amounts due from entities within the Group” was further adjusted as the Company committed to provide financial support to its VIEs as disclosed
in Note 1.
The subsidiaries did not pay any dividends to the Company for the periods presented.
The Company does not have significant commitments or long-term obligations as of the period end other than those presented.
The parent company only financial statements should be read in conjunction with the Company’s consolidated financial statements.
F-64
Exhibit 4.66
IQIYI, INC.
2021 SHARE INCENTIVE PLAN
ARTICLE 1
PURPOSE
The purpose of the iQIYI, Inc. 2021 Share Incentive Plan (the “Plan”) is to promote the success and enhance the value of iQIYI,
Inc., a company formed under the laws of the Cayman Islands (the “Company”), by linking the personal interests of Directors,
Employees, Consultants and other individuals as the Committee may authorize and approve, to those of the Company’s shareholders
and, by providing such individuals with an incentive for outstanding performance, to generate superior returns to the Company’s
shareholders. The Plan is further intended to provide flexibility to the Company in its ability to motivate, attract, and retain the services
of recipients of share incentives hereunder upon whose judgment, interest, and special effort the successful conduct of the Company’s
operation is largely dependent.
ARTICLE 2
DEFINITIONS AND CONSTRUCTION
Wherever the following terms are used in the Plan they shall have the meanings specified below, unless the context clearly
indicates otherwise. The singular pronoun shall include the plural where the context so indicates.
2.1“Applicable Laws” means the legal requirements relating to the Plan and the Awards under applicable provisions of the
corporate, securities, tax and other laws, rules, regulations and government orders, and the rules of any applicable stock exchange or
national market system, of any jurisdiction applicable to Awards granted to residents therein.
2.2“Award” means an Option or Restricted Share Unit award granted to a Participant pursuant to the Plan.
2.3“Award Agreement” means any written agreement, contract, or other instrument or document evidencing an Award,
including through electronic medium.
2.4“Board” means the Board of Directors of the Company.
2.5“Cause” with respect to a Participant means (unless otherwise expressly provided in the applicable Award Agreement, or
another applicable contract with the Participant that defines such term for purposes of determining the effect that a “for cause”
termination has on the Participant’s Awards) a termination of employment or service based upon a finding by the Service Recipient,
acting in good faith and based on its reasonable belief at the time, that the Participant:
assigned duties or is incompetent in or (other than by reason of a disability or analogous condition) incapable of performing those duties;
(a)has been negligent in the discharge of his or her duties to the Service Recipient, has refused to perform stated or
unauthorized disclosure or use of inside information, customer lists, trade secrets or other confidential information;
(b)has been dishonest or committed or engaged in an act of theft, embezzlement or fraud, a breach of confidentiality, an
(c)has breached a fiduciary duty, or willfully and materially violated any other legal duty, law, administrative order,
rule, regulation, public policy, public order and morality standards; or has been convicted of, or plead guilty or nolo contendere to, a
felony or misdemeanor (other than minor traffic violations or similar offenses);
(d)has materially breached any of the provisions of any agreement with the Service Recipient, or materially violated
any Service Recipient’s internal discipline, employee handbook, anti-corruption requirement or other applicable governance rules of the
Service Recipient;
business or assets of, the Service Recipient; or
(e)has engaged in unfair competition with, or otherwise acted intentionally in a manner injurious to the reputation,
induced a principal for whom the Service Recipient acts as agent to terminate such agency relationship.
(f)has improperly induced a vendor or customer to break or terminate any contract with the Service Recipient or
A termination for Cause shall be deemed to occur (subject to reinstatement upon a contrary final determination by the
Committee) on the date on which the Service Recipient first delivers written notice to the Participant of a finding of termination for
Cause.
2.6“Code” means the Internal Revenue Code of 1986 of the United States, as amended.
2.7“Committee” has the meaning described in ARTICLE 9.
2.8“Consultant” means any consultant or adviser if: (a) the consultant or adviser renders bona fide services to a Service
Recipient; (b) the services rendered by the consultant or adviser are not in connection with the offer or sale of securities in a capital-
raising transaction and do not directly or indirectly promote or maintain a market for the Company’s securities; and (c) the consultant or
adviser is a natural person who has contracted directly with the Service Recipient to render such services.
2
2.9“Corporate Transaction”, unless otherwise defined in an Award Agreement, means any of the following transactions,
provided, however, that the Committee shall determine under (d) and (e) whether multiple transactions are related, and its determination
shall be final, binding and conclusive:
(a)an amalgamation, arrangement or consolidation or scheme of arrangement (i) in which the Company is not the
surviving entity, except for a transaction the principal purpose of which is to change the jurisdiction in which the Company is
incorporated or (ii) following which the holders of the voting securities of the Company do not continue to hold more than 50% of the
combined voting power of the voting securities of the surviving entity;
(b)the sale, transfer or other disposition of all or substantially all of the assets of the Company;
(c)the complete liquidation or dissolution of the Company;
(d)any reverse takeover or series of related transactions culminating in a reverse takeover (including, but not limited to,
a tender offer followed by a reverse takeover) in which the Company is the surviving entity but (A) the Company’s equity securities
outstanding immediately prior to such takeover are converted or exchanged by virtue of the takeover into other property, whether in the
form of securities, cash or otherwise, or (B) in which securities possessing more than fifty percent (50%) of the total combined voting
power of the Company’s outstanding securities are transferred to a person or persons different from those who held such securities
immediately prior to such takeover or the initial transaction culminating in such takeover, but excluding any such transaction or series of
related transactions that the Committee determines shall not be a Corporate Transaction; or
(e)acquisition in a single or series of related transactions by any person or related group of persons (other than the
Company or by a Company-sponsored employee benefit plan) of beneficial ownership (within the meaning of Rule 13d-3 of the
Exchange Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Company’s outstanding
securities but excluding any such transaction or series of related transactions that the Committee determines shall not be a Corporate
Transaction.
2.10“Director” means a member of the Board or a member of the board of directors of any Subsidiary of the Company.
2.11 “Disability”, unless otherwise defined in an Award Agreement, means that the Participant qualifies to receive long-term
disability payments under the Service Recipient’s long-term disability insurance program (if any), as it may be amended from time to
time, to which the Participant provides services . If the Service Recipient to which the Participant provides service does not have a long-
term disability plan in place, “Disability” means that a Participant is unable to carry out the responsibilities and functions of the position
held by the Participant by reason of any medically determinable physical or mental impairment for a period of not less than ninety (90)
consecutive days. A Participant will not be considered to have incurred a Disability unless he or she furnishes proof of such impairment
sufficient to satisfy the Service Recipient in its discretion.
2.12“Effective Date” shall have the meaning set forth in ARTICLE 10.1.
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2.13“Employee” means any person, including an officer or a Director, who is in the employment of a Service Recipient, subject
to the control and direction of the Service Recipient as to both the work to be performed and the manner and method of performance.
The payment of a director’s fee by a Service Recipient shall not be sufficient to constitute “employment” by the Service Recipient.
2.14“Exchange Act” means the Securities Exchange Act of 1934 of the United States, as amended.
2.15“Fair Market Value” means, as of any date, the value of Shares determined as follows:
(a)If the Shares are listed on one or more established stock exchanges or national market systems, including without
limitation, the New York Stock Exchange or the Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such
shares (or the closing bid, if no sales were reported) as quoted on the principal exchange or system on which the Shares are listed (as
determined by the Committee) on the date of determination (or, if no closing sales price or closing bid was reported on that date, as
applicable, on the last trading date such closing sales price or closing bid was reported), as reported on the website maintained by such
exchange or market system or such other source as the Committee deems reliable;
(b)If the Shares are regularly quoted on an automated quotation system (including the OTC Bulletin Board) or by a
recognized securities dealer, its Fair Market Value shall be the closing sales price for such shares as quoted on such system or by such
securities dealer on the date of determination, but if selling prices are not reported, the Fair Market Value of a Share shall be the mean
between the high bid and low asked prices for the Shares on the date of determination (or, if no such prices were reported on that date, on
the last date such prices were reported), as reported in The Wall Street Journal or such other source as the Committee deems reliable; or
(c)In the absence of an established market for the Shares of the type described in (a) and (b), above, the Fair Market
Value thereof shall be determined by the Committee in good faith and in its discretion by reference to (i) the placing price of the latest
private placement of the Shares and the development of the Company’s business operations and the general economic and market
conditions since such latest private placement, (ii) other third party transactions involving the Shares and the development of the
Company’s business operation and the general economic and market conditions since such transaction, (iii) an independent valuation of
the Shares, or (iv) such other methodologies or information as the Committee determines to be indicative of Fair Market Value.
2.16“Group Entity” means any of the Company and Subsidiaries of the Company.
2.17“Incentive Share Option” means an Option that is intended to meet the requirements of Section 422 of the Code or any
successor provision thereto.
2.18“Independent Director” means (i) if the Shares or other securities representing the Shares are not listed on a stock
exchange, a Director of the Company who is a Non-Employee Director; and (ii) if the Shares or other securities representing the Shares
are listed on one or more stock exchange, a Director of the Company who meets the independence standards under the applicable
corporate governance rules of the stock exchange(s).
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2.19“Non-Employee Director” means a member of the Board who qualifies as a “Non-Employee Director” as defined in Rule
16b-3(b)(3) of the Exchange Act, or any successor definition adopted by the Board.
2.20“Non-Qualified Share Option” means an Option that is not intended to be an Incentive Share Option.
2.21“Option” means a right granted to a Participant pursuant to ARTICLE 5 of the Plan to purchase a specified number of
Shares at a specified price during specified time periods. An Option may be either an Incentive Share Option or a Non-Qualified Share
Option.
2.22“Participant” means a person who, as a Director, Consultant or Employee has been granted an Award pursuant to the Plan.
2.23“Parent” means a parent corporation under Section 424(e) of the Code.
2.24“Plan” means this 2021 Share Incentive Plan, of iQIYI, Inc., as amended and/or restated from time to time.
2.25“Related Entity” means any business, corporation, partnership, limited liability company or other entity in which the
Company, a Parent or Subsidiary of the Company holds a substantial ownership interest, directly or indirectly, or controls through
contractual arrangements and consolidates the financial results according to applicable accounting standards, but which is not a
Subsidiary and which the Board designates as a Related Entity for purposes of the Plan.
2.26“Restricted Share Unit” means an Award granted to a Participant pursuant to ARTICLE 6.
2.27“Securities Act” means the Securities Act of 1933 of the United States, as amended.
2.28“Service Recipient” means the Company, or Subsidiary of the Company, to which a Participant provides services as an
Employee, a Consultant, or a Director.
2.29“Share” means Class A ordinary shares of the Company, par value US$0.00001 per share, and such other securities of the
Company that may be substituted for Shares pursuant to ARTICLE 8.
2.30“Subsidiary” means, any corporation or other entity of which a majority of the outstanding voting shares or voting power is
beneficially owned or controlled directly or indirectly by the Company.
2.31“Trading Date” means the closing of the first sale to the general public of the Shares pursuant to a registration statement
filed with and declared effective by the U.S. Securities and Exchange Commission under the Securities Act.
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ARTICLE 3
SHARES SUBJECT TO THE PLAN
3.1Number of Shares.
(a)Subject to the provisions of ARTICLE 8 and ARTICLE 3.1(b), the maximum aggregate number of Shares which
may be issued pursuant to all Awards (including Incentive Share Options) (the “Award Pool”) under the Plan shall initially be
364,000,000 Shares, provided that if Restricted Share Units are granted, each Restricted Share Unit (that entitles the holder to one Share)
granted shall reduce the number of Shares in the Award Pool available for future grants by 1.3 Shares.
(b)To the extent that an Award terminates, expires, or lapses for any reason, any Shares subject to the Award shall
again be available for the grant of an Award pursuant to the Plan. To the extent permitted by Applicable Laws, Shares issued in
assumption of, or in substitution for, any outstanding awards of any entity acquired in any form or combination by a Group Entity shall
not be counted against Shares available for grant pursuant to the Plan. Shares delivered by the Participant or withheld by the Company
upon the exercise of any Award under the Plan, in payment of the exercise price thereof or tax withholding thereon, may again be
optioned, granted or awarded hereunder, subject to the limitations of ARTICLE 3.1(a). Notwithstanding the provisions of this
ARTICLE 3.1(b), no Shares may again be optioned, granted or awarded if such action would cause an Incentive Share Option to fail to
qualify as an incentive share option under Section 422 of the Code.
3.2Shares Distributed. Any Shares distributed pursuant to an Award may consist, in whole or in part, of authorized and
unissued Shares, treasury Shares (subject to Applicable Laws) or Shares purchased on the open market. Additionally, at the discretion of
the Committee, any Shares distributed pursuant to an Award may be represented by American Depositary Shares. If the number of
Shares represented by an American Depositary Share is other than on a one-to-one basis, the limitations of ARTICLE 3.1 shall be
adjusted to reflect the distribution of American Depository Shares in lieu of Shares.
ARTICLE 4
ELIGIBILITY AND PARTICIPATION
4.1Eligibility. Persons eligible to participate in this Plan include Employees, Consultants, and Directors, as determined by the
Committee.
4.2Participation. Subject to the provisions of the Plan, the Committee may, from time to time, select from among all eligible
individuals, those to whom Awards shall be granted and shall determine the nature and amount of each Award. No individual shall have
any right to be granted an Award pursuant to this Plan.
4.3Jurisdictions. In order to assure the viability of Awards granted to Participants employed in various jurisdictions, the
Committee may provide for such special terms as it may consider necessary or appropriate to accommodate differences in local law, tax
policy, or custom applicable in the jurisdiction in which the Participant resides, is employed, operates or is incorporated. Moreover, the
Committee may approve such supplements to, or amendments, restatements, or alternative versions of, the Plan as it may consider
necessary or appropriate
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for such purposes without thereby affecting the terms of the Plan as in effect for any other purpose; provided, however, that no such
supplements, amendments, restatements, or alternative versions shall increase the share limitations contained in ARTICLE 3.1 of the
Plan. Notwithstanding the foregoing, the Committee may not take any actions hereunder, and no Awards shall be granted, that would
violate any Applicable Laws.
ARTICLE 5
OPTIONS
5.1General. The Committee is authorized to grant Options to Participants on the following terms and conditions:
(a)Exercise Price. The exercise price per Share subject to an Option shall be determined by the Committee and set
forth in the Award Agreement which may be a fixed price or variable price. The exercise price per Share subject to an Option may be
amended or adjusted in the absolute discretion of the Committee, the determination of which shall be final, binding and conclusive. For
the avoidance of doubt, to the extent not prohibited by Applicable Laws or any exchange rule, a downward adjustment of the exercise
prices of Options mentioned in the preceding sentence shall be effective without the approval of the Company’s shareholders or the
approval of the affected Participants.
(b)Time and Conditions of Exercise. The Committee shall determine the time or times at which an Option may be
exercised in whole or in part, including exercise prior to vesting; provided that the term of any Option granted under the Plan shall not
exceed ten years, except as provided in ARTICLE 11.1. The Committee shall also determine any conditions, if any, that must be
satisfied before all or part of an Option may be exercised.
(c)Payment. The Committee shall determine the methods by which the exercise price of an Option may be paid, the
form of payment, including, without limitation (i) cash or check denominated in U.S. Dollars, (ii) to the extent permissible under the
Applicable Laws, cash or check in Chinese Renminbi, (iii) cash or check denominated in any other local currency as approved by the
Committee, (iv) Shares held for such period of time as may be required by the Committee in order to avoid adverse financial accounting
consequences and having a Fair Market Value on the date of delivery equal to the aggregate exercise price of the Option or exercised
portion thereof, (v) after the Trading Date the delivery of a notice that the Participant has placed a market sell order with a broker with
respect to Shares then issuable upon exercise of the Option, and that the broker has been directed to pay a sufficient portion of the net
proceeds of the sale to the Company in satisfaction of the Option exercise price; provided that payment of such proceeds is then made to
the Company upon settlement of such sale, (vi) other property acceptable to the Committee with a Fair Market Value equal to the
exercise price, or (vii) any combination of the foregoing. Notwithstanding any other provision of the Plan to the contrary, no Participant
who is a member of the Board or an “executive officer” of the Company within the meaning of Section 13(k) of the Exchange Act shall
be permitted to pay the exercise price of an Option in any method which would violate Section 13(k) of the Exchange Act. The
Committee may prescribe any other method of payment (including in respect of the applicable cash currency) that it determines to be
consistent with Applicable Laws and the purpose of the Plan.
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Participant. The Award Agreement shall include such additional provisions as may be specified by the Committee.
(d)Evidence of Grant. All Options shall be evidenced by an Award Agreement between the Company and the
following effects on Options granted to the Participants:
(e)Effects of Termination of Employment or Service on Options. Termination of employment or service shall have the
or service to the Service Recipient is terminated by the Service Recipient for Cause, the Participant’s Options will terminate upon such
termination, whether or not the Option is then vested and/or exercisable;
(i)Dismissal for Cause. Unless otherwise provided in the Award Agreement, if a Participant’s employment by
or service to the Service Recipient terminates as a result of the Participant’s death or Disability:
(ii)Death or Disability. Unless otherwise provided in the Award Agreement, if a Participant’s employment by
(1)the Participant (or his or her legal representative or beneficiary, in the case of the Participant’s Disability
or death, respectively), will have until the date that is 180 days after the Participant’s termination of
Employment to exercise the Participant’s Options (or portion thereof) to the extent that such Options were
vested and exercisable on the date of the Participant’s termination of Employment on account of death or
Disability;
(2)the Options, to the extent not vested and exercisable on the date of the Participant’s termination of
Employment or service, shall terminate upon the Participant’s termination of Employment or service on
account of death or Disability; and
(3)the Options, to the extent exercisable for the 180-day period following the Participant’s termination of
Employment or service and not exercised during such period, shall terminate at the close of business on the
last day of the 180-day period.
Participant’s employment by or service to the Service Recipient terminates for any reason other than a termination by the Service
Recipient for Cause or because of the Participant’s death or Disability:
(iii)Other Terminations of Employment or Service. Unless otherwise provided in the Award Agreement, if a
(1)the Participant will have until the date that is 90 days after the Participant’s termination of Employment or
service to exercise his or her Options (or portion thereof) to the extent that such Options were vested and
exercisable on the date of the Participant’s termination of Employment or service;
(2)the Options, to the extent not vested and exercisable on the date of the Participant’s termination of
Employment or service, shall terminate upon the Participant’s termination of Employment or service; and
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(3)the Options, to the extent exercisable for the 90-day period following the Participant’s termination of
Employment or service and not exercised during such period, shall terminate at the close of business on the
last day of the 90-day period.
5.2Incentive Share Options. Incentive Share Options may be granted to Employees of the Company or a Subsidiary of the
Company. Incentive Share Options may not be granted to employees of a Related Entity or to Independent Directors or Consultants. The
terms of any Incentive Share Options granted pursuant to the Plan, in addition to the requirements of ARTICLE 5.1, must comply with
the following additional provisions of this ARTICLE 5.2:
(a)Individual Dollar Limitation. The aggregate Fair Market Value (determined as of the time the Option is granted) of
all Shares with respect to which Incentive Share Options are first exercisable by a Participant in any calendar year may not exceed
$100,000 or such other limitation as imposed by Section 422(d) of the Code, or any successor provision. To the extent that Incentive
Share Options are first exercisable by a Participant in excess of such limitation, the excess shall be considered Non-Qualified Share
Options.
(b)Exercise Price. The exercise price of an Incentive Share Option shall be equal to the Fair Market Value on the date
of grant. However, the exercise price of any Incentive Share Option granted to any individual who, at the date of grant, owns Shares
possessing more than ten percent of the total combined voting power of all classes of shares of the Company or any Parent or Subsidiary
of the Company may not be less than 110% of Fair Market Value on the date of grant and such Option may not be exercisable for more
than five years from the date of grant.
(c)Transfer Restriction. The Participant shall give the Company prompt notice of any disposition of Shares acquired
by exercise of an Incentive Share Option within (i) two years from the date of grant of such Incentive Share Option or (ii) one year after
the transfer of such Shares to the Participant.
after the tenth anniversary of the Effective Date.
(d)Expiration of Incentive Share Options. No Award of an Incentive Share Option may be made pursuant to this Plan
Participant.
(e)Right to Exercise. During a Participant’s lifetime, an Incentive Share Option may be exercised only by the
ARTICLE 6
RESTRICTED SHARE UNITS
6.1Grant of Restricted Share Units. The Committee, at any time and from time to time, may grant Restricted Share Units to
Participants as the Committee, in its sole discretion, shall determine. The Committee, in its sole discretion, shall determine the number
of Restricted Share Units to be granted to each Participant.
6.2Restricted Share Units Award Agreement. Each Award of Restricted Share Units shall be evidenced by an Award
Agreement that shall specify any vesting conditions, the number of Restricted Share Units granted, and such other terms and conditions
as the Committee, in its sole discretion, shall determine.
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6.3Form and Timing of Payment of Restricted Share Units. At the time of grant, the Committee shall specify the date or dates
on which the Restricted Share Units shall become fully vested and nonforfeitable. Upon vesting, the Committee, in its sole discretion,
may pay Restricted Share Units in the form of cash, Shares or a combination thereof.
6.4Forfeiture/Repurchase. Except as otherwise determined by the Committee at the time of the grant of the Award or thereafter,
upon termination of employment or service during the applicable restriction period, Restricted Share Units that are at that time unvested
shall be forfeited or repurchased in accordance with the Award Agreement; provided, however, the Committee may (a) provide in any
Restricted Share Unit Award Agreement that restrictions or forfeiture and repurchase conditions relating to Restricted Share Units will be
waived in whole or in part in the event of terminations resulting from specified causes, and (b) in other cases waive in whole or in part
restrictions or forfeiture and repurchase conditions relating to Restricted Share Units.
ARTICLE 7
PROVISIONS APPLICABLE TO AWARDS
7.1Award Agreement. Awards under the Plan shall be evidenced by Award Agreements that set forth the terms, conditions and
limitations for each Award which may include the term of an Award, the provisions applicable in the event the Participant’s employment
or service terminates, and the Company’s authority to unilaterally or bilaterally amend, modify, suspend, cancel or rescind an Award.
7.2No Transferability; Limited Exception to Transfer Restrictions.
and by the Award Agreement, as the same may be amended:
7.2.1Limits on Transfer. Unless otherwise expressly provided in (or pursuant to) this ARTICLE 7.2, by applicable law
(a)all Awards are non-transferable and will not be subject in any manner to sale, transfer, anticipation,
alienation, assignment, pledge, encumbrance or charge;
(b)Awards will be exercised only by the Participant; and
(c)amounts payable or shares issuable pursuant to an Award will be delivered only to (or for the account of),
and, in the case of Shares, registered in the name of, the Participant.
In addition, the shares shall be subject to the restrictions set forth in the applicable Award Agreement.
to:
7.2.2Further Exceptions to Limits on Transfer. The exercise and transfer restrictions in ARTICLE 7.2.1 will not apply
(a)transfers to the Company or a Subsidiary;
(b)transfers by gift to “immediate family” as that term is defined in SEC Rule 16a-1(e) promulgated under the
Exchange Act;
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(c)the designation of a beneficiary to receive benefits if the Participant dies or, if the Participant has died,
transfers to or exercises by the Participant’s beneficiary, or, in the absence of a validly designated beneficiary,
transfers by will or the laws of descent and distribution; or
(d)if the Participant has suffered a disability, permitted transfers or exercises on behalf of the Participant by
the Participant’s duly authorized legal representative; or
(e)subject to the prior approval of the Committee or an executive officer or director of the Company
authorized by the Committee, transfer to one or more natural persons who are the Participant’s family
members or entities owned and controlled by the Participant and/or the Participant’s family members,
including but not limited to trusts or other entities whose beneficiaries or beneficial owners are the Participant
and/or the Participant’s family members, or to such other persons or entities as may be expressly approved by
the Committee, pursuant to such conditions and procedures as the Committee or may establish. Any
permitted transfer shall be subject to the condition that the Committee receives evidence satisfactory to it that
the transfer is being made for estate and/or tax planning purposes and on a basis consistent with the
Company’s lawful issue of securities.
Notwithstanding anything else in this ARTICLE 7.2.2 to the contrary, but subject to compliance with all
Applicable Laws, Incentive Share Options and Restricted Share Units will be subject to any and all transfer
restrictions under the Code applicable to such Awards or necessary to maintain the intended tax consequences
of such Awards. Notwithstanding clause (b) above but subject to compliance with all Applicable Laws, any
contemplated transfer by gift to “immediate family” as referenced in clause (b) above is subject to the
condition precedent that the transfer be approved by the Committee or an executive officer or director of the
Company authorized by the Committee in order for it to be effective.
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7.3Beneficiaries. Notwithstanding ARTICLE 7.2, a Participant may, in the manner determined by the Committee, designate a
beneficiary to exercise the rights of the Participant and to receive any distribution with respect to any Award upon the Participant’s death.
A beneficiary, legal guardian, legal representative, or other person claiming any rights pursuant to the Plan is subject to all terms and
conditions of the Plan and any Award Agreement applicable to the Participant, except to the extent the Plan and Award Agreement
otherwise provide, and to any additional restrictions deemed necessary or appropriate by the Committee. If the Participant is married
and resides in a community property state, a designation of a person other than the Participant’s spouse as his or her beneficiary with
respect to more than 50% of the Participant’s interest in the Award shall not be effective without the prior written consent of the
Participant’s spouse. If no beneficiary has been designated or survives the Participant, payment shall be made to the person entitled
thereto pursuant to the Participant’s will or the laws of descent and distribution. Subject to the foregoing, a beneficiary designation may
be changed or revoked by a Participant at any time provided the change or revocation is filed with the Committee or an executive officer
or director of the Company authorized by the Committee.
7.4Performance Objectives and Other Terms. The Committee, in its discretion, shall set performance objectives or other vesting
criteria which, depending on the extent to which they are met, will determine the number or value of the Awards that will be granted or
paid out to the Participants.
7.5Share Certificates. Notwithstanding anything herein to the contrary, the Company shall not be required to issue or deliver any
certificates evidencing the Shares pursuant to the exercise of any Award, unless and until the Committee has determined, with advice of
counsel, that the issuance and delivery of such certificates is in compliance with all Applicable Laws, regulations of governmental
authorities and, if applicable, the requirements of any exchange on which the Shares are listed or traded. All Share certificates delivered
pursuant to the Plan are subject to any stop-transfer orders and other restrictions as the Committee deems necessary or advisable to
comply with all Applicable Laws, and the rules of any national securities exchange or automated quotation system on which the Shares
are listed, quoted, or traded. The Committee may place legends on any Share certificate to reference restrictions applicable to the
Shares. In addition to the terms and conditions provided herein, the Committee may require that a Participant make such reasonable
covenants, agreements, and representations as the Committee, in its discretion, deems advisable in order to comply with any such laws,
regulations, or requirements. The Committee shall have the right to require any Participant to comply with any timing or other restrictions
with respect to the settlement or exercise of any Award, including a window-period limitation, as may be imposed in the discretion of the
Committee.
7.6Paperless Administration. Subject to Applicable Laws, the Committee may make Awards, provide applicable disclosure and
procedures for exercise of Awards by an internet website or interactive voice response system for the paperless administration of
Awards.
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7.7Foreign Currency. A Participant may be required to provide evidence that any currency used to pay the exercise price of any
Award was acquired and taken out of the jurisdiction in which the Participant resides in accordance with Applicable Laws, including
foreign exchange control laws and regulations. In the event the exercise price for an Award is paid in Chinese Renminbi or other foreign
currency, as permitted by the Committee, the amount payable will be determined by conversion from U.S. dollars at the official rate
promulgated by the People’s Bank of China for Chinese Renminbi, or for jurisdictions other than the People's Republic of China, the
exchange rate as selected by the Committee on the date of exercise.
ARTICLE 8
CHANGES IN CAPITAL STRUCTURE
8.1Adjustments. In the event of any dividend, share split, combination or exchange of Shares, amalgamation, arrangement or
consolidation, spin-off, recapitalization or other distribution (other than normal cash dividends) of Company assets to its shareholders, or
any other change affecting the number of Shares or the share price of a Share, the Committee shall make such proportionate adjustments,
if any, as the Committee in its discretion may deem appropriate to reflect such change with respect to (a) the aggregate number and type
of shares that may be issued under the Plan (including, but not limited to, adjustments of the limitations in ARTICLE 3.1); (b) the terms
and conditions of any outstanding Awards (including, without limitation, any applicable performance targets or criteria with respect
thereto); and (c) the grant or exercise price per Share for any outstanding Awards under the Plan.
8.2Corporate Transactions. Except as may otherwise be provided in any Award Agreement or any other written agreement
entered into by and between the Company and a Participant, if the Committee anticipates the occurrence, or upon the occurrence, of a
Corporate Transaction, the Committee may, in its sole discretion, provide for (i) any and all Awards outstanding hereunder to terminate
at a specific time in the future and shall give each Participant the right to exercise the vested portion of such Awards during a period of
time as the Committee shall determine, or (ii) the purchase of any Award for an amount of cash equal to the amount that could have been
attained upon the exercise of such Award (and, for the avoidance of doubt, if as of such date the Committee determines in good faith that
no amount would have been attained upon the exercise of such Award, then such Award may be terminated by the Company without
payment), or (iii) the replacement of such Award with other rights or property selected by the Committee in its reasonable discretion or
the assumption of or substitution of such Award by the successor or surviving corporation, or a Parent or Subsidiary thereof, with
appropriate adjustments as to the number and kind of Shares and prices, or (iv) payment of such Award in cash based on the value of
Shares on the date of the Corporate Transaction plus reasonable interest on the Award through the date as determined by the Committee
when such Award would otherwise be vested or have been paid in accordance with its original terms, if necessary to comply with Section
409A of the Code.
8.3Outstanding Awards – Other Changes. In the event of any other change in the capitalization of the Company or corporate
change other than those specifically referred to in this ARTICLE 8, the Committee may, in its absolute discretion, make such
adjustments in the number and class of shares subject to Awards outstanding on the date on which such change occurs and in the per
share grant or exercise price of each Award as the Committee may reasonably consider appropriate to prevent dilution or enlargement of
rights.
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8.4No Other Rights. Except as expressly provided in the Plan, no Participant shall have any rights by reason of any subdivision
or consolidation of Shares of any class, the payment of any dividend, any increase or decrease in the number of shares of any class or any
dissolution, liquidation, merger, or consolidation of the Company or any other corporation. Except as expressly provided in the Plan or
pursuant to action of the Committee under the Plan, and no issuance by the Company of shares of any class, or securities convertible into
shares of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number of Shares subject to an
Award or the grant or exercise price of any Award.
ARTICLE 9
ADMINISTRATION
Committee. The Plan shall be administered by the Board or a committee (the “Committee”) of one or more members of the
Board to whom the Board may delegate any or all of the authority to grant or amend Awards to Participants other than any of the
Committee members. Reference to the Committee shall refer to the Board in absence of the Committee. Notwithstanding the foregoing,
the full Board, acting by majority of its members in office, shall conduct the general administration of the Plan if required by Applicable
Laws, and with respect to Awards granted to the Committee members and for purposes of such Awards the term “Committee” as used in
the Plan shall be deemed to refer to the Board.
9.1Action by the Committee. A majority of the Committee shall constitute a quorum. The acts of a majority of the members
present at any meeting at which a quorum is present, and acts approved unanimously in writing all members of the Committee in lieu of
a meeting, shall be deemed the acts of the Committee. Each member of the Committee is entitled to, in good faith, rely or act upon any
report or other information furnished to that member by any officer or other employee of a Group Entity, the Company’s independent
certified public accountants, or any executive compensation consultant or other professional retained by the Company to assist in the
administration of the Plan.
9.2Authority of the Committee. Subject to any specific designation in the Plan, the Committee has the exclusive power,
authority and discretion to:
(a)designate Participants to receive Awards;
(b)determine the type or types of Awards to be granted to each Participant;
(c)determine the number of Awards to be granted and the number of Shares to which an Award will relate;
(d)determine the terms and conditions of any Award granted pursuant to the Plan, including, but not limited to, the
exercise price, grant price, or purchase price, any restrictions or limitations on the Award, any schedule for lapse of forfeiture restrictions
or restrictions on the exercisability of an Award, and accelerations or waivers thereof, and any provisions related to non-competition and
recapture of gain on an Award, based in each case on such considerations as the Committee in its sole discretion determines;
(e)determine whether, to what extent, and pursuant to what circumstances an Award may be settled in, or the exercise
price of an Award may be paid in, cash, Shares, other Awards, or other property, or an Award may be canceled, forfeited, or surrendered;
14
(f)prescribe the form of each Award Agreement, which need not be identical for each Participant;
(g)decide all other matters that must be determined in connection with an Award;
(h)establish, adopt, or revise any rules and regulations as it may deem necessary or advisable to administer the Plan;
(i)interpret the terms of, and any matter arising pursuant to, the Plan or any Award Agreement;
(j)amend terms and conditions of Award Agreements; and
(k)make all other decisions and determinations that may be required pursuant to the Plan or as the Committee deems
necessary or advisable to administer the Plan, including design and adopt from time to time new types of Awards that are in compliance
with Applicable Laws.
9.3Decisions Binding. The Committee’s interpretation of the Plan, any Awards granted pursuant to the Plan, any Award
Agreement and all decisions and determinations by the Committee with respect to the Plan are final, binding, and conclusive on all
parties.
ARTICLE 10
EFFECTIVE AND EXPIRATION DATE
10.1Effective Date. The Plan shall become effective as of the date on which the Board adopts the Plan (the “Effective Date”).
10.2Expiration Date. The Plan will expire on, and no Award may be granted pursuant to the Plan after the tenth anniversary of
the Effective Date. Any Award that is outstanding on the tenth anniversary of the Effective Date shall remain in force according to the
terms of the Plan and the applicable Award Agreement.
ARTICLE 11
AMENDMENT, MODIFICATION, AND TERMINATION
11.1Amendment, Modification, and Termination. At any time and from time to time, the Board may terminate, amend or
modify the Plan; provided, however, that (a) to the extent necessary and desirable to comply with Applicable Laws or stock exchange
rules, the Company shall obtain shareholder approval of any Plan amendment in such a manner and to such a degree as required, unless
the Company decides to follow home country practice, and (b) unless the Company decides to follow home country practice,
shareholder approval is required for any amendment to the Plan that (i) increases the number of Shares available under the Plan (other
than any adjustment as provided by ARTICLE 8), or (ii) permits the Committee to extend the term of the Plan or the exercise period for
an Option beyond ten years from the date of grant
11.2Awards Previously Granted. Except with respect to amendments made pursuant to ARTICLE 11.1, no termination,
amendment, or modification of the Plan shall
15
adversely affect in any material way any Award previously granted pursuant to the Plan without the prior written consent of the
Participant.
ARTICLE 12
GENERAL PROVISIONS
12.1No Rights to Awards. No Participant, employee, or other person shall have any claim to be granted any Award pursuant to
the Plan, and neither the Company nor the Committee is obligated to treat Participants, employees, and other persons uniformly.
12.2No Shareholders Rights. No Award gives the Participant any of the rights of a shareholder of the Company unless and until
Shares are in fact issued to such person in connection with such Award.
12.3Taxes. No Shares shall be delivered under the Plan to any Participant until such Participant has made arrangements
acceptable to the Committee for the satisfaction of any income and employment tax withholding obligations under Applicable Laws.
The Company or any Subsidiary shall have the authority and the right to deduct or withhold, or require a Participant to remit to the
Company, an amount sufficient to satisfy all applicable taxes (including the Participant’s payroll tax obligations) required or permitted
by Applicable Laws to be withheld with respect to any taxable event concerning a Participant arising as a result of this Plan. The
Committee may in its discretion and in satisfaction of the foregoing requirement allow a Participant to elect to have the Company
withhold Shares otherwise issuable under an Award (or allow the return of Shares) having a Fair Market Value equal to the sums
required to be withheld. Notwithstanding any other provision of the Plan, the number of Shares which may be withheld with respect to
the issuance, vesting, exercise or payment of any Award (or which may be repurchased from the Participant of such Award after such
Shares were acquired by the Participant from the Company) in order to satisfy any income and payroll tax liabilities applicable to the
Participant with respect to the issuance, vesting, exercise or payment of the Award shall, unless specifically approved by the Committee,
be limited to the number of Shares which have a Fair Market Value on the date of withholding or repurchase equal to the aggregate
amount of such liabilities based on the minimum statutory withholding rates for the applicable income and payroll tax purposes that are
applicable to such supplemental taxable income.
12.4No Right to Employment or Services. Nothing in the Plan or any Award Agreement shall interfere with or limit in any way
the right of the Service Recipient to terminate any Participant’s employment or services at any time, nor confer upon any Participant any
right to continue in the employment or services of any Service Recipient.
12.5Unfunded Status of Awards. The Plan is intended to be an “unfunded” plan for incentive compensation. With respect to
any payments not yet made to a Participant pursuant to an Award, nothing contained in the Plan or any Award Agreement shall give the
Participant any rights that are greater than those of a general creditor of the relevant Group Entity.
12.6Indemnification. To the extent allowable pursuant to Applicable Laws, each member of the Committee or of the Board
shall be indemnified and held harmless by the Company from any loss, cost, liability, or expense that may be imposed upon or
reasonably incurred by such member in connection with or resulting from any claim, action, suit, or proceeding to which he or she may
be a party or in which he or she may be involved by reason of any action or failure to act pursuant to the Plan and against and from any
and all amounts
16
paid by him or her in satisfaction of judgment in such action, suit, or proceeding against him or her; provided he or she gives the
Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or
her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such
persons may be entitled pursuant to the Company’s Memorandum of Association and Articles of Association, as a matter of law, or
otherwise, or any power that the Company may have to indemnify them or hold them harmless.
12.7Relationship to Other Benefits. No payment pursuant to the Plan shall be taken into account in determining any benefits
pursuant to any pension, retirement, savings, profit sharing, group insurance, welfare or other benefit plan of any Group Entity except to
the extent otherwise expressly provided in writing in such other plan or an agreement thereunder.
12.8Expenses. The expenses of administering the Plan shall be borne by the Group Entities.
12.9Titles and Headings. The titles and headings of the Sections in the Plan are for convenience of reference only and, in the
event of any conflict, the text of the Plan, rather than such titles or headings, shall control.
12.10Fractional Shares. No fractional Shares shall be issued and the Committee shall determine, in its discretion, whether cash
shall be given in lieu of fractional Shares or whether such fractional Shares shall be eliminated by rounding up or down as appropriate.
12.11Limitations Applicable to Section 16 Persons. Notwithstanding anything herein to the contrary, the Plan, and any Award
granted or awarded to any Participant who is then subject to Section 16 of the Exchange Act, shall be subject to any additional limitations
set forth in any applicable exemptive rule under Section 16 of the Exchange Act (including any amendment to Rule 16b-3 of the
Exchange Act) that are requirements for the application of such exemptive rule. To the extent permitted by the Applicable Laws, the
Plan and Awards granted or awarded hereunder shall be deemed amended to the extent necessary to conform to such applicable
exemptive rule.
12.12Government and Other Regulations. The obligation of the Company to make payment of awards in Shares or otherwise
shall be subject to all Applicable Laws, and to such approvals by government agencies as may be required. The Company shall be under
no obligation to register any of the Shares paid pursuant to the Plan under the Securities Act or any other similar law in any applicable
jurisdiction. If the Shares paid pursuant to the Plan may in certain circumstances be exempt from registration pursuant to the Securities
Act or other Applicable Laws, the Company may restrict the transfer of such Shares in such manner as it deems advisable to ensure the
availability of any such exemption.
12.13Governing Law. The Plan and all Award Agreements shall be construed in accordance with and governed by the laws of
the Cayman Islands.
12.14Section 409A. To the extent that the Committee determines that any Award granted under the Plan is or may become
subject to Section 409A of the Code, the Award Agreement evidencing such Award shall incorporate the terms and conditions required
by Section 409A of the Code. To the extent applicable, the Plan and the Award Agreements shall be interpreted in accordance with
Section 409A of the Code and the U.S. Department of Treasury regulations and other interpretative guidance issued thereunder,
including without
17
limitation any such regulation or other guidance that may be issued after the Effective Date. Notwithstanding any provision of the Plan
to the contrary, in the event that following the Effective Date the Committee determines that any Award may be subject to Section 409A
of the Code and related Department of Treasury guidance (including such Department of Treasury guidance as may be issued after the
Effective Date), the Committee may adopt such amendments to the Plan and the applicable Award agreement or adopt other policies and
procedures (including amendments, policies and procedures with retroactive effect), or take any other actions, that the Committee
determines are necessary or appropriate to (a) exempt the Award from Section 409A of the Code and/or preserve the intended tax
treatment of the benefits provided with respect to the Award, or (b) comply with the requirements of Section 409A of the Code and
related U.S. Department of Treasury guidance.
12.15Appendices. Subject to ARTICLE 12.1, the Committee may approve such supplements, amendments or appendices to the
Plan as it may consider necessary or appropriate for purposes of compliance with Applicable Laws or otherwise and such supplements,
amendments or appendices shall be considered a part of the Plan; provided, however, that no such supplements shall increase the share
limitation contained in ARTICLE 3.1 of the Plan without the approval of the Board.
This Plan was duly adopted and approved by the Board of Directors of the Company on December 2, 2021 and was amended and
restated on November 2, 2022.
18
Exhibit 4.67
INVESTMENT AGREEMENT
by and among
iQIYI, Inc
and
PAGAC IV-1 (Cayman) Limited
and
PAG Pegasus Fund LP
Dated as of August 30, 2022
Table of Contents
Page
ARTICLE I DEFINITIONS
Section 1.1.
Section 1.2.
Definitions.
General Interpretive Principles.
ARTICLE II SALE AND PURCHASE OF THE NOTES
Section 2.1.
Section 2.2.
Sale and Purchase of the Notes.
Closing
ARTICLE III REPRESENTATIONS AND WARRANTIES
Section 3.1.
Section 3.2.
Representations and Warranties of the Company
Representations and Warranties of the Investors.
ARTICLE IV COVENANTS
Section 4.1.
Section 4.2.
Section 4.3.
Section 4.4.
Section 4.5.
Section 4.6.
Section 4.7.
Section 4.8.
Section 4.9.
Section 4.10.
Oversubscription.
Exclusive Financing Right.
Preferred Financing Partnership.
Payment of Arrangement Fees.
Governance Rights.
Information Rights.
Financing Cooperation.
HKSE Listing
Collateral Arrangement.
Security Documents and Change in Law Event.
ARTICLE V ADDITIONAL AGREEMENTS
Taking of Necessary Action.
Conduct of Business.
Use of Proceeds.
Securities Laws.
FPI Status.
Conversion Price Matters
Termination of Covenants.
Section 5.1.
Section 5.2.
Section 5.3.
Section 5.4.
Section 5.5.
Section 5.6.
Section 5.7.
ARTICLE VI INDEMNIFICATION
Indemnification.
Section 6.1.
Third Party Action.
Section 6.2.
ARTICLE VII MISCELLANEOUS
Section 7.1.
Section 7.2.
Section 7.3.
Section 7.4.
Section 7.5.
Section 7.6.
Section 7.7.
Section 7.8.
Termination.
Effect of Termination.
Survival.
Notices.
Entire Agreement; Third Party Beneficiaries; Amendment.
Counterparts.
Confidentiality; Public Announcements.
Expenses.
1
1
9
9
9
9
11
11
17
19
19
20
20
21
21
22
22
23
24
24
25
25
26
26
26
27
27
27
27
27
28
29
29
30
30
30
31
32
32
33
Section 7.9.
Section 7.10.
Section 7.11.
Section 7.12.
Section 7.13.
Section 7.14.
Schedule I:
Schedule II:
Schedule III:
Schedule IV:
Exhibit A:
Exhibit B:
Successors and Assigns.
Governing Law; Arbitration.
Severability
Specific Performance.
Headings
Non-Recourse.
List of Investor
Registration Rights
Collateral Arrangements
2025 Note Repurchase
Form of Indenture
Form of Joinder
34
35
35
35
36
36
This INVESTMENT AGREEMENT (this “Agreement”), dated as of August 30, 2022, is by and among:
(i)iQIYI, Inc, a Cayman Islands incorporated company listed on NASDAQ under the ticker IQ (the “Company”);
(ii)PAGAC IV-1 (Cayman) Limited, an exempted company incorporated in Cayman Islands, with the registered address at P.O.
Box 472, Harbour Place, 2nd Floor, 103 South Church Street, George Town, Grand Cayman KY1-1106, Cayman Islands (“PAG
Asia”); and
(iii)PAG Pegasus Fund LP, an exempted limited partnership established and registered under the laws of the Cayman Islands, with
the registered address at P.O. Box 472, Harbour Place, 2nd Floor, 103 South Church Street, George Town, Grand Cayman KY1-1106,
Cayman Islands (“PAG Pegasus”, together with PAG Asia, collectively referred to as the “Investors”, and individually, an “Investor”).
Each a “Party”, and collectively, the “Parties”. Capitalized terms not otherwise defined where
used shall have the meanings ascribed thereto in Article I.
WHEREAS, each Investor desires to purchase from the Company, and the Company desires to issue and sell to each Investor, such
Investor’s applicable portion of US$500,000,000 principal amount of the 6% convertible senior notes issued by the Company (referred to herein
as the “Note” or the “Notes”), convertible into Class A Ordinary Shares (or ADSs representing Class A Ordinary Shares), in the form attached
to the Indenture and to be issued in accordance with the terms and conditions of the Indenture and this Agreement; and
NOW, THEREFORE, in consideration of the premises and the representations, warranties and agreements herein contained and
intending to be legally bound hereby, the Parties hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1. Definitions.
As used in this Agreement, the following terms shall have the meanings set forth below:
“2025 Notes” shall mean the convertible senior notes issued by the Company on March 29, 2019 pursuant to the
indenture dated March 29, 2019 by and between the Company and Citicorp International Limited.
“Action” shall mean claim, suit, action, arbitration, cause of action, complaint, allegation, criminal prosecution,
investigation, demand letter or proceeding.
“ADS” means an American Depositary Share issued pursuant to the Deposit Agreement, each representing seven
Class A Ordinary Shares of the Company as of the date of this Agreement, and deposited with the ADS Custodian.
1
“ADS Custodian” means JPMorgan Chase Bank, N.A., with respect to the ADSs delivered pursuant to the Deposit
Agreement, or any successor entity thereto.
“Affiliate” shall mean, with respect to any Person, any other Person which directly or indirectly controls or is
controlled by or is under common control with such Person, excluding, with respect to the Investors, portfolio companies of
PAG Asia IV LP, Baidu’s competitors, the Companies’ competitors and any Persons controlled by Baidu’s competitors or the
Company’s competitors; “control” (including its correlative meanings, “controlled by” and “under common control with” and
including when used in the term “controlled Affiliates”) shall mean possession, directly or indirectly, of power or authority to
direct or cause the direction of management and policies (whether through ownership of securities or partnership or other
ownership interests, by contract or otherwise).
“Agreement” shall have the meaning set forth in the preamble hereto.
“Applicable Laws” shall mean with respect to any Person, any transactional, domestic or foreign, state or local law (statutory,
common or otherwise), constitution, treaty, convention, ordinance, code, rule, regulation, order, injunction, judgment, decree, ruling or other
similar requirement enacted, adopted, promulgated or applied by a Governmental Entity that is binding upon or applicable to such Person, as
amended unless expressly specified otherwise.
“Articles of Association” shall mean the Ninth Amended and Restated Memorandum of Association of the Company and the Ninth
Amended and Restated Articles of Association of the Company, as each may be amended and/or restated from time to time.
“Audit Committee” shall mean the Audit Committee of the Board of Directors of the Company.
“Baidu” shall mean Baidu Inc., and all of its Subsidiaries and controlled Affiliates.
“Beneficially Own,” “Beneficially Owned,” “Beneficial Ownership” or “Beneficial Owner” shall have the meaning set forth in Rule
13d-3 of the rules and regulations promulgated under the Exchange Act, except that for purposes of this Agreement the words “within sixty
days” in Rule 13d- 3(d)(1)(i) shall not apply, to the effect that a person shall be deemed to be the Beneficial Owner of a security if that person
has the right to acquire beneficial ownership of such security at any time; provided, however, for purposes of this Agreement, the holders of the
Notes shall at all times be deemed to have Beneficial Ownership of Company Ordinary Shares issuable upon conversion of the Notes held by
them.
“Board of Directors” shall mean the board of directors of the Company.
“Business Day” shall mean any day, other than a Saturday, Sunday or a day on which banking institutions in The City of New York,
New York, the PRC, Hong Kong or the Cayman Islands are authorized or obligated by law or executive order to remain closed.
“Capital Raising” shall have the meaning set forth in Section 4.2(a)(ii).
2
“Change in Law Event” shall mean a Change in Law (as defined in the Indenture) that negatively and materially affects the
enforceability of the Security Documents with material impact on the Investors’ economic interest or the Investors’ right to receive amounts
due under the Indenture and the Notes.
“Class A Ordinary Shares” shall have the meaning set forth in Section 3.1(d)(i).
“Class B Ordinary Shares” shall have the meaning set forth in Section 3.1(d)(i).
“Closing” shall have the meaning set forth in Section 2.2(a).
“Closing Date” shall have the meaning set forth in Section 2.2(a).
“Collateral Arrangement” shall have the meaning set forth in Section 4.9(a).
“Collateral Package” shall mean those contracts identified on Schedule III, with a value not lower than (i) 130% of the total principal
amount of the convertible notes held by the Investors or their Affiliates, prior to the Investors’ exercise of the Oversubscription Right, and (ii)
120% of the total principal amount of the convertible notes held by the Investors or their Affiliates, after the exercise of the Oversubscription
Right ((i) and (ii), the “Value Thresholds”).
“Company” shall have the meaning set forth in the preamble hereto.
“Company Disclosure Documents” shall have the meaning set forth in Section 3.1.
“Company Ordinary Shares” shall have the meaning set forth in Section 3.1(d)(i).
“Compliance Laws” shall have the meaning set forth in Section 3.1(p)(i).
“Compensation Committee” shall mean the Compensation Committee of the Board of Directors of the Company.
“Confidential Information” shall have the meaning set forth in Section 7.7(a). “Conversion Price” shall have the
meaning set forth in the Indenture. “Conversion Rate” shall have the meaning set forth in the Indenture.
“Conversion Shares” shall mean Class A Ordinary Shares (including in the form of ADSs) issued or issuable upon conversion of the
Notes.
“Debt Financing Transaction” shall mean one or more debt financing or similar transactions (including swap or repurchase
transactions solely for the purpose of providing liquidity and leverage) that may be entered into by any Investor or its Affiliates with a lender or
counterparty prior to or
3
after the Closing, which may or may not be secured by a mortgage, charge or pledge of the Notes and/or the Company Ordinary Shares
(directly or in the form of ADSs) issuable or issued upon conversion of the Notes.
“Deposit Agreement” shall mean the deposit agreement dated as of March 28, 2018, by and among the Company, the ADS Custodian
and the holders and beneficial owners of the ADSs delivered thereunder or, if amended or supplemented as provided therein, as so amended or
supplemented.
“Director Indemnification Agreement” shall mean the indemnification agreement to be entered into between the Company and the
PAG Asia Director in the form reasonably satisfactory to the Investors at or prior to Closing.
“Dispute” shall have the meaning set forth in Section 7.10(b).
“DTC” means The Depository Trust Company, a New York corporation. “Enforceability Exceptions” shall have the
meaning set forth in Section 3.1(d).
“Exchange Act” shall mean the U.S. Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated
thereunder.
“Exclusivity Period” shall have the meaning set forth in Section 4.2(a)(i).
“Extinguishment Event” shall have the meaning set forth in Section 4.9(c).
“Fundamental Adverse Regulatory Change” shall have the meaning set forth under the Indenture.
“Form F-3” shall mean such respective form of registration statement under the Securities Act or any successor registration form
under the Securities Act subsequently adopted by the SEC which permits inclusion or incorporation of substantial information by reference to
other documents filed by the Company with the SEC.
“Fundamental Warranties” shall mean any representations and warranties of the Company contained in Section 3.1(a) to Section
3.1(g)(i).
“GAAP” shall mean U.S. generally accepted accounting principles.
“Governmental Entity” shall mean any court, administrative agency or commission, stock exchange or other governmental authority
or instrumentality, whether federal, state, local or foreign, and any applicable industry self-regulatory organization.
“Governmental Order” shall mean the judgment, injunction, order, ruling, verdict, decree or other similar determinations or findings
of any Governmental Entity.
“Group Companies” or the “Group” shall mean the Company and all of its Subsidiaries, and “Group Company” shall mean any of
them.
4
“HKSE” shall mean the Hong Kong Stock Exchange.
“HKSE Listing” shall mean a secondary listing of Class A Ordinary Shares on the Main Board of the HKSE.
“HK NewCo” means a limited liability company to be formed in Hong Kong by the Company or its Subsidiaries.
“Hong Kong” shall mean the Hong Kong Special Administrative Region of the PRC.
“Initial Conversion Rate” shall have the meaning set forth in Section 5.6. “Indemnification Notice” shall have the meaning set forth in
Section 6.2(a). “Indemnitee” shall have the meaning set forth in Section 6.1(a).
“Indenture” shall mean an indenture in the form attached hereto as Exhibit A, as amended, supplemented or otherwise modified from
time to time with the consent of the Investors and the Company prior to the Closing, it being agreed that the Company and the Investors shall
consent to any changes required by the Trustee that do not adversely affect the Company or the Investor, or the Investor’s financing sources,
including with respect to timing and mechanics of transfers and exchanges of securities and interests therein, in any material respect.
“Initial Conversion Rate” shall have the meaning set forth in Section 5.6.
“Intellectual Property” shall mean (A) all trademarks, service marks, brand names, trade names, logos, designs, slogans, taglines,
domain names, rights to social media accounts, the registrations in any jurisdiction of, and applications in any jurisdiction to register, the
foregoing together with all good-will associated therewith; (B) patents, applications for patents, and any renewals, extensions or reissues
thereof, in any jurisdiction; (C) nonpublic information, know-how, trade secrets, technology and inventions (whether patentable or not) and
confidential information; (D) copyrights, works of authorship, registrations or applications for registration of copyrights in any jurisdiction, and
any renewals or extensions thereof, mask works and copyrightable works; (E) software (including source code and object code), data,
databases, and documentation thereof; and (F) other intellectual property, industrial property and proprietary rights.
“Investor” or “Investors” shall have the meaning set forth in the preamble hereto.
“Issuer Agreement” shall have the meaning set forth in Section 4.7(a).
“Joinder” shall mean, with respect to any Person permitted to sign such document in accordance with the terms hereof, a joinder
executed and delivered by such Person, providing such Person to have all or a portion of the rights and obligations of an Investor under this
Agreement, in the form and substance substantially as attached hereto as Exhibit B or such other form as may be agreed to by the Company and
the Investors.
“Knowledge” shall mean the actual knowledge, after due and reasonable inquiry within the Group, of the Company’s executive
officers (as defined under Rule 405) and general counsel (or equivalent officer).
5
“Lien” shall mean any claim, charge, easement encumbrance, lease, covenants, security interest, lien, option, mortgage, pledge, rights
of others, or restriction (whether on voting, sale, transfer, disposition or otherwise), whether imposed by contract, law, equity or otherwise.
“Long Stop Date” shall mean December 31, 2022.
“Losses” shall mean all losses, claims, damages, liabilities, costs, expenses (including reasonable expenses of investigation and
reasonable attorneys’ fees and expenses), judgments, fines, penalties, charges and amounts paid in settlement.
“Match Notice” shall have the meaning set forth in Section 4.3(b).
“Material Adverse Effect” shall mean any event, fact, condition or circumstance or any combination of them that, individually or in
the aggregate with any other events, facts, conditions or circumstances, has had or would reasonably be expected to have, a material adverse
effect on any of the following: (i) the business, assets, financial condition, results of operation or prospects of the Group Companies, taken as a
whole; or (ii) the ability of the Group Companies to perform their material obligations under any of the Transaction Documents; other than any
event, fact, condition or circumstance resulting from (A) changes in general economic, financial market, business, social or geopolitical
conditions; (B) changes or developments in any of the industries in which the Company or any other Group Company operates; (C) changes in
any Applicable Laws or applicable accounting regulations or principles, or the interpretation or enforcement thereof, other than any
Fundamental Adverse Regulatory Change (as defined in the Indenture) and any Change in Law Event; (D) any change in the price or trading
volume of the ADS or any failure to meet any financial projections, forecasts or forward-looking statements (it being understood that this clause
(D) shall not prevent or otherwise affect a determination that the underlying cause of any such change or failure referred to therein (to the extent
not otherwise falling within any of the exceptions provided for under clauses (A) through (H) hereof) is a Material Adverse Effect); (E) any
pandemic, epidemic, disease outbreak or other public health emergency (including the Coronavirus Disease 2019 (COVID 19)) or any
lockdowns imposed pursuant thereto, natural disaster, or any outbreak or escalation of hostilities or war or any act of terrorism; (F) the
announcement of and performance of this Agreement or the other Transaction Documents by the Company or the other Group Companies, the
pendency or consummation of the transactions contemplated hereunder, or the identity of the Investors or any of their Affiliates; or (H) any
action taken, or failure to take action, by the Company or another Group Company that the Investors have consented to or requested in writing;
provided, however, that any event, fact, condition or circumstance in clauses (A), (B), (C) and (E) may be taken into account in determining
whether there has been, or would reasonably be expected to be, individually or in the aggregate, a Material Adverse Effect to the extent such
event, fact, condition or circumstance has a disproportionate adverse effect on the business, assets, financial condition, results of operation or
prospects of the Group Companies, taken as a whole, as compared to other participants in the industry or the market in which the Group
Companies operate.
“Nasdaq” shall mean The Nasdaq Global Select Market.
“Note” or “Notes” shall have the meaning set forth in the preamble hereto.
“Note Acceleration Repayment Price” shall have the meaning set forth in the Indenture. “Offer” shall have the meaning set forth in
Section 4.3(a).
6
“Offer Notice” shall have the meaning set forth in Section 4.3(a). “Oversubscription Period” shall have the
meaning set forth in Section 4.1. “Oversubscription Right” shall have the meaning set forth in Section 4.1. “PAG
Asia” shall have the meaning set forth in the preamble hereto.
“PAG Asia Change of Control” shall have the meaning set forth in Section 7.9(c).
“PAG Asia Director” shall have the meaning set forth in Section 4.5(a). “PAG Pegasus” shall have the meaning
set forth in the preamble hereto. “Party” or “Parties” shall have the meaning set forth in the preamble hereto.
“Permits” shall have the meaning set forth in Section 3.1(i).
“Person” or “person” shall mean an individual, corporation, limited liability or unlimited liability company, association, partnership,
trust, estate, joint venture, business trust or unincorporated organization, or a government or any agency or political subdivision thereof, or
other entity of any kind or nature.
“Permitted Financing” shall have the meaning set forth in Section 4.2(b).
“PRC” means the People’s Republic of China, solely for the purpose of this Agreement, excluding Hong Kong,
Macau Special Administrative Region and Taiwan.
“Preferred Financing Partnership Period” shall have the meaning set forth in Section 4.3(a).
“Prohibited Person” shall have the meaning set forth in Section 3.1(p). “Public Officials” shall have the meaning
set forth in Section 3.1(p). “Purchase Price” shall have the meaning set forth in Section 2.1. “Registrable
Securities” shall have the meaning set forth in Schedule II. “Registration Requirements” shall have the meaning
set forth in Schedule III. “RMB” shall mean the renminbi, the official currency of the PRC.
“Rule 144” shall mean Rule 144 promulgated by the SEC pursuant to the Securities Act, as such rule may be amended from time to
time, or any similar rule or regulation hereafter adopted by the SEC having substantially the same effect as such rule.
7
“Rule 144A” shall mean Rule 144A promulgated by the SEC pursuant to the Securities Act, as such rule may be amended from time
to time, or any similar rule or regulation hereafter adopted by the SEC having substantially the same effect as such rule.
“Rule 405” shall mean Rule 405 promulgated by the SEC pursuant to the Securities Act, as such rule may be amended from time to
time, or any similar rule or regulation hereafter adopted by the SEC having substantially the same effect as such rule.
“SEC” shall mean the U.S. Securities and Exchange Commission.
“Securities Act” shall mean the U.S. Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
“Security Documents” shall have the meaning set forth in Schedule III. “Specified Persons” shall have the
meaning set forth in Section 7.14. “Strategy Committee” shall have the meaning set forth in Section 4.5(c).
“Subsidiary” shall mean, with respect to any Person, any other Person of which 50% or more of the shares of the voting securities or
other voting interests are owned or controlled, or the ability to select or elect 50% or more of the directors is held, directly or indirectly, by such
first Person or one or more of its Subsidiaries, or by such first Person, or by such first Person and one or more of its Subsidiaries. For the
avoidance of doubt, Subsidiaries of the Company shall include the VIE Entities and their respective Subsidiaries.
“Transaction Documents” shall mean this Agreement, the Indenture, the Security Documents, the Director Indemnification
Agreement and all other documents, certificates or agreements executed in connection with the transactions contemplated by the
aforementioned documents.
“Trustee” shall mean an institutional trustee to be appointed by the Company and the Investors.
“United States” or “U.S.” shall mean the United States of America.
“US$” shall mean the United States dollar, the official currency of the United States.
“VIE Entities” shall mean the variable interest entities of the Company or any of its Subsidiaries, including (i) Beijing IQIYI Science
& Technology Co., Ltd. (“北京爱奇艺科技有限公司”), a limited liability company organized under the laws of the PRC, (ii) Shanghai IQIYI
Culture Media Co., Ltd. (“上海爱奇艺文化传媒有限公司”), a limited liability company organized under the laws of the PRC, and (iii)
Shanghai Zhong Yuan Network Co., Ltd. (“上海众源网络有限公司”), a limited liability company organized under the laws of the PRC.
8
Section 1.2. General Interpretive Principles.
Whenever used in this Agreement, except as otherwise expressly provided or unless the context otherwise requires, any noun or pronoun
shall be deemed to include the plural as well as the singular and to cover all genders. The name assigned to this Agreement and the section
captions used herein are for convenience of reference only and shall not be construed to affect the meaning, construction or effect hereof.
Whenever the words “include,” “includes,” or “including” are used in this Agreement, they shall be deemed to be followed by the words
“without limitation.” Unless otherwise specified, the terms “hereto,” “hereof,” “herein” and similar terms refer to this Agreement as a
whole (including the exhibits, schedules and disclosure statements hereto), and references herein to Articles or Sections refer to Articles or
Sections of this Agreement. The “transactions contemplated hereby”, “transactions contemplated hereunder” and similar terms are not
intended to include potential future transactions that may be pursued by the Parties. For the avoidance of doubt, notwithstanding anything
in this Agreement to the contrary, none of the Notes will have any right to vote, or except as otherwise provided in the Indenture any right
to receive any dividends or other distributions that are made or paid to the holders of the Company Ordinary Shares (directly or in the form
of ADSs).
Section 2.1. Sale and Purchase of the Notes.
ARTICLE II
SALE AND PURCHASE OF THE NOTES
Subject to the terms and conditions of this Agreement, at the Closing the Company shall issue and sell to each Investor, and each Investor
shall purchase and acquire from the Company, the Notes with the applicable principal amount set forth opposite such Investor’s name
under Schedule I hereto for a purchase price equal to the principal amount of the Notes (the “Purchase Price”). The obligations of each
Investor to purchase its portion of the Notes are several and not joint.
Section 2.2. Closing.
(a)The closing of the issuance and purchase of the Notes (the “Closing”) shall take place remotely via the exchange of documents and
signatures on the fifteenth (15th) Business Day after the satisfaction (or, where permissible, waiver) of all the conditions to the closing set
forth in Section 2.2(c) and Section 2.2(d) (other than those conditions that by their nature are to be satisfied at the Closing, but subject to
the satisfaction or waiver of such conditions) or such other date as agreed by the Parties in writing, but in any event prior to the Long Stop
Date. The date and time of the Closing are referred to herein as the “Closing Date”.
(b)To effect the purchase and sale of Notes, upon the terms and subject to the conditions set forth in this Agreement, at the Closing:
(i)The Company shall:
(A)deliver the fully executed Indenture to each Investor dated as of the Closing Date;
(B)issue the Notes as set forth in Section 2.1 registered in the name of DTC or its nominee; and
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(C)deliver to each Investor such other documents or deliverables that should be but have not yet been delivered as set forth in
Section 2.2(c);
(ii)Each Investor shall:
(B)against the issuance and delivery of the items as set forth in Section 2.2(b)(i), cause a wire transfer of immediately
available funds in United States dollars an amount equal to such Investor’s respective Purchase Price to the account
designated (notified at least three (3) Business Days prior to the Closing Date) by the Company;
(C)deliver to the Company such other documents or deliverables that should be but have not yet been delivered as set forth in
Section 2.2(d).
(c)The obligations of each Investor to purchase the Notes are subject to the satisfaction or waiver by the Investor of the following
conditions as of the Closing:
(ii)no Governmental Order by, before or under the supervision of any Governmental Entity, no law or regulation that would have the
effect of prohibiting the Closing shall be in effect and no lawsuit commenced by any Governmental Entity seeking to prohibit the
Closing shall be pending;
(iii)(A) each of the Fundamental Warranties shall be true and accurate in all respects, (B) each of the representations and warranties of
the Company set forth in Section 3.1 (other than the Fundamental Warranties) that contain any “materiality”, “material adverse
effect”, “Material Adverse Effect” or similar qualifiers therein shall be true and accurate in all respects, and (C) any other
representations and warranties of the Company set forth in Section 3.1 shall be true and accurate in all material respects, in each case
of (A), (B) and (C), as of the date hereof and as of the Closing Date as if made on such Closing Date with reference to facts and
circumstances existing on the Closing Date (except for such representations and warranties that speak as of a specified date, which
representations and warranties shall be true and accurate in such respects as described above as of such specified date);
(iv)The Group Companies shall have performed and complied with, and not be in breach or default under, agreements, covenants,
conditions and obligations contained in the Transaction Documents that are required to be performed or complied with by the Group
Companies on or before the Closing Date in all material respects;
(v)There shall have been no Material Adverse Effect from the date of this Agreement;
(vi)Each of the Company and the relevant Group Companies shall have duly executed each Transaction Document to which it is a
party and delivered to each Investor at or prior to Closing;
(vii)The Pre-Closing Collateral Related Activities (as defined in Schedule III) shall have been completed; and
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(viii)The Investors shall have received a certificate, dated the Closing Date, duly executed by an executive officer of the Company on
behalf of the Company, certifying that the conditions specified in Section 2.2(c)(i) to Section 2.2(c)(iv), and (vi) have been satisfied.
(d)The obligations of the Company to sell the Notes to each Investor are subject to the satisfaction or waiver of the following conditions as
of the Closing:
(ii)No Governmental Order by, before or under the supervision of any Governmental Entity, no law or regulation that would have the
effect of prohibiting the Closing shall be in effect and no lawsuit commenced by any Governmental Entity seeking to prohibit the
Closing shall be pending;
(iii)The representations and warranties of the Investor set forth in Section 3.2 that contain any “materiality”, “material adverse effect”
or similar qualifiers therein shall be true and correct in all respects, and any other representations and warranties of the Investor set forth
in Section 3.2 shall be true and correct in all material respects, in each case as of the date hereof and as of the Closing Date;
(iv)The Investor shall have performed and complied with, and not be in breach or default under, agreements, covenants, conditions and
obligations contained in the Transaction Documents that are required to be performed or complied with by the Investor on or before the
Closing Date in all material respects;
(v)The Investor shall have duly executed each Transaction Document to which it is a party and delivered to the Company at or prior to
Closing; and
(vi)the Company shall have received a certificate, dated the Closing Date, duly executed by an authorized signatory of the Investor on
behalf of such Investor, certifying that the conditions specified in Section 2.2(d)(i) to (iii) have been satisfied.
Section 3.1. Representations and Warranties of the Company.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Except as disclosed in the documents filed with or furnished to the SEC and publicly available prior to the date hereof (excluding in each
case, any disclosures set forth in the risk factors or “forward-looking statements” sections of such reports, and any other disclosures
included therein to the extent they are predictive or forward-looking in nature, other than specific factual information contained therein)
(the “Company Disclosure Documents”), the Company hereby represents and warrants to the Investors, as of the date hereof and as of the
Closing Date (except for the representations and warranties that speak as of a specific date, which shall be made as of such date), as
follows:
(a)Due Formation and Qualification. The Company is a company duly incorporated as an exempted company with limited liability, validly
existing and in good standing under the laws of the Cayman Islands. The Company has all requisite power and authority to carry on its
business as it is currently being conducted. Each Subsidiary of the Company has been
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duly organized, is validly existing and in good standing (with respect to jurisdictions that recognize the concept of good standing) under
the laws of its jurisdiction of organization, and has the requisite corporate power and authorization to own, lease and operate its properties
and to carry on its business as now being conducted. Each of the Company and each of its Subsidiaries is duly qualified or licensed to do
business in each jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such
qualification or licensing necessary, except where the failure to be so qualified or licensed does not and would not have a Material Adverse
Effect. None of the Company or its Subsidiaries is in violation of any of the provisions of its constitutional documents in any material
respects.
(b)Authority. Each relevant Group Company has full power and authority to enter into, execute and deliver this Agreement and each other
Transaction Document to be executed and delivered by such Group Company and to perform its obligations hereunder. Save for actions
specified as post-Closing obligations in the Transaction Documents, the execution and delivery by the relevant Group Companies of this
Agreement and the other Transaction Documents and the performance by them of their obligations hereunder and thereunder have been, or
will be prior to the Closing, duly authorized by all requisite actions on its part.
(c)Valid Agreement. Each Transaction Document has been, or will be prior to the Closing, duly executed and delivered by the relevant
Group Companies and assuming the due authorization, execution and delivery by the Investors, constitute the legal, valid and binding
obligation of such Group Companies, enforceable against such Group Companies in accordance with its terms, except (i) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors’
rights generally and (ii) as limited by the availability of specific performance, injunctive relief, or other equitable remedies ((i) and (ii),
collectively, the “Enforceability Exceptions”), or (iii) for any limitation set out in Schedule III with respect to certain document(s) that
were entered as part of the Collateral Package.
(d)Capitalization.
(i)As of the date of this Agreement, the authorized share capital of the Company is US$1,000,000 divided into 100,000,000,000
shares comprising (i) 94,000,000,000 Class A Ordinary Shares of a par value of US$0.00001 each (the “Class A Ordinary Shares”),
(ii) 5,000,000,000 Class B Ordinary Shares of a par value of US$0.00001 each (the “Class B Ordinary Shares”, together with the
Class A Ordinary Shares, the “Company Ordinary Shares”) and (iii) 1,000,000,000 shares of a par value of US$0.00001 each of such
class or classes (however designated) as the Board of Directors may determine in accordance with the Articles of Association. As of
February 28 , 2022, there were (i) 2,722,823,893 Class A Ordinary Shares (excluding 217,740,107 Class A ordinary shares issued
to our depositary bank for bulk issuance
of ADSs reserved for future issuances upon the exercise or vesting of awards under our share incentive plans) and
2,876,391,396 Class B Ordinary Shares outstanding and no undesignated shares of the Company issued and outstanding.
(ii)All outstanding shares of capital stock of the Company and all outstanding shares of capital stock of each of the Company’s
Subsidiaries have been issued and granted in compliance with (x) all Applicable Laws and (y) all requirements set forth in
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applicable plans or contracts, without violation of any preemptive rights, rights of first refusal or other similar rights.
(iii)The Group Companies (other than the Company) are owned or controlled directly or indirectly by the Company (including
control by the Company through contractual arrangements over the VIE Entities).
(e)Due Issuance of the Indenture. On the Closing Date, the Indenture will be duly executed and delivered by the Company and, assuming
the Indenture will be a valid and binding obligation of the Trustee, the Indenture will be a valid and binding obligation of the Company
enforceable against the Company in accordance with its terms, subject to the Enforceability Exceptions. The Company has available for
issuance the maximum number of Company Ordinary Shares initially issuable upon conversion of the Notes into Company Ordinary
Shares (including in the form of ADSs) if such conversion were to occur immediately following Closing.
(f)Due Issuance of the Conversion Shares. The Conversion Shares, when issued to the Investors upon the conversion of the Notes, will be
duly authorized, validly issued, fully paid and non-assessable, and will be issued in compliance with the registration and qualification
requirements of all Applicable Laws (assuming the accuracy of the representations and warranties of the Investors set forth in Section 3.2)
and free and clear of any pledge, mortgage, security interest, encumbrance, lien, charge, assessment, right of first refusal, right of pre-
emption, third party right or interest, claim or restriction of any kind or nature, except for restrictions arising under the Securities Act or
expressly created by virtue of this Agreement, and upon delivery and entry into the register of members of the Company will transfer to
the Investors good and valid title to the Conversion Shares.
(g)Non-contravention. Neither the execution and the delivery of the Transaction Documents (except for any limitation set out in Schedule
III agreed as part of the collateral arrangement), nor the consummation of the transactions and performance of the obligations contemplated
hereby by the relevant Group Companies, will (i) violate any provision of the organizational documents of the Company or its Subsidiaries
or violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge, or other restriction of any
government, governmental entity or court to which the Company or its Subsidiaries is subject, (ii) conflict with, result in a breach of,
constitute a default under, result in the acceleration of or creation of an encumbrance under, or create in any party the right to accelerate,
terminate, modify, or cancel, any agreement, contract, lease, license, instrument, or other arrangement to which the Company or its
Subsidiaries is a party or by which the Company or its Subsidiaries is bound or to which any of the Company’s or its Subsidiaries’
assets are subject, or (iii) result in a material violation of any Applicable Laws applicable to the Company or its Subsidiaries or by
which any property or asset of the Company or any of its Subsidiaries is bound or affected. There is no action, suit or proceeding,
pending or threatened against the Company or its Subsidiaries that questions the validity of the Transaction Documents or the right
of the Company to enter into these Transaction Documents or to consummate the transactions contemplated hereby.
(h)Consents and Approvals. Except for any limitation set out in Schedule III agreed as part of
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the collateral arrangement, neither the execution and delivery by the relevant Group Companies of the Transaction Documents, nor the
consummation by the relevant Group Companies of any of the transactions contemplated hereby, nor the performance by the relevant
Group Companies of the Transaction Documents in accordance with their terms requires the consent, approval, order or authorization of, or
registration with, or the giving notice to, any governmental or public body or authority or any third party, except for (i) those that have been
or will have been obtained, made or given on or prior to the Closing Date, (ii) any required filings pursuant to the Exchange Act or the
rules of the SEC or the Nasdaq, and (iii) the Registration Requirements.
(i)Compliance with Laws; Permits. The business of the Company or its Subsidiaries is not being conducted, and has not been conducted at
any time during the three years prior to the date hereof, in violation of any Applicable Laws except for violations that do not and would
not have a Material Adverse Effect. Except in each case as do not and would not have a Material Adverse Effect, (A) except as disclosed
in the Company Disclosure Documents and any limitation set out in Schedule III agreed as part of collateral arrangement for this
transaction, the Company and each of its Subsidiaries have, and have been in compliance with, all permits, licenses, authorizations,
consents, orders and approvals (collectively, “Permits”) that are required in order to carry on their business as presently conducted, (B)
neither the Company nor any of its Subsidiaries has received any written notice of any violation of or failure to comply with any Permit or
any actual or possible suspension or cancellation of any Permit and (C) each such Permit has been validly issued or obtained and is in full
force and effect.
(j)SEC Documents; Compliance with Listing Rules. The Company has timely filed or furnished, as applicable, all reports, schedules,
forms, statements and other documents required to be filed or furnished by it with the SEC pursuant to the Applicable Laws. As of their
respective filing or furnishing dates, the Company Disclosure Documents complied in all material respects with the requirements of the
Sarbanes-Oxley Act of 2002, the Securities Act or the Exchange Act, as the case may be, and the rules and regulations promulgated
thereunder, as applicable, to the respective Company Disclosure Documents, and, none of the Company Disclosure Documents, at the
time they were filed or furnished, contained any untrue statement of a material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.
The information contained in the Company Disclosure Documents, considered as a whole and as amended as of the date hereof, do not as
of the date hereof, and will not as of the Closing Date, contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading. There are no contracts, agreements, arrangements,
transactions or documents which are required to be described or disclosed in the Company Disclosure Documents or to be filed as
exhibits to the Company Disclosure Documents which have not been so described, disclosed or filed. The Company is in compliance
with the applicable listing and corporate governance rules and regulations of the Nasdaq. The Company and its Subsidiaries have
taken no action designed to, or reasonably likely to have the effect of, delisting the ADSs from the Nasdaq. The Company has not
received any notification that the SEC or the Nasdaq is contemplating suspending or terminating such listing (or the applicable
registration under the Exchange Act related thereto). The Company is not in violation of any listing requirements of the
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Nasdaq and has no Knowledge of any facts that would reasonably be expected to lead to delisting of its ADSs from the Nasdaq in the
foreseeable future, except (i) as otherwise disclosed in the Company Disclosure Documents and (ii) for legal and regulatory
developments related to the Holding Foreign Companies Accountable Act of the United States. The Company is in compliance with
the Sarbanes-Oxley Act of 2002 in all material respects. The Company filed a Registration Statement on Form F-3 under the
Securities Act as a “well-known seasoned issuer” on December 15, 2020, which became automatically effective upon filing and
remains effective as of the date of this Agreement.
(k)Financial Statements.
(i)The financial statements (including any related notes) contained in the Company Disclosure Documents (collectively, the
“Financial Statements”): (A) were prepared in accordance with U.S. GAAP applied on a consistent basis throughout the periods
covered thereby (except (a) as may be otherwise indicated in such financial statements or the notes thereto, or (b) in the case of
unaudited interim statements, if and to the extent they may exclude footnotes or may be condensed to summary statements) and
(B) fairly present in all material respects the consolidated financial position of the Company and the Subsidiaries as of the
respective dates thereof and the consolidated results of operations and cash flows of the Company and the Subsidiaries for the
periods covered thereby, in each case except as disclosed therein or in the Company Disclosure Documents and as permitted
under the Exchange Act.
(ii)The Company has established and maintains a system of internal control over financial reporting (as defined in Rule 13a-15 or
15d-15, as applicable, under the Exchange Act) sufficient to provide reasonable assurance regarding the reliability of financial
reporting, including policies and procedures that (A) mandate the maintenance of records that in reasonable detail accurately and
fairly reflect the material transactions and dispositions of the assets of the Company, (B) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts
and expenditures of the Company are being made only in accordance with appropriate authorizations of management and the board of
directors of the Company and (C) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of the assets of the Company. There are no material weaknesses in the Company’s internal controls.
(l)Regulation S. No directed selling efforts (as defined in Rule 902 of Regulation S under the Securities Act) have been made by any of
the Company, any of its affiliates or any person acting on its behalf with respect to any Notes that are not registered under the Securities
Act; and none of such persons has taken any actions that would result in the sale of the Notes to the Investors under this Agreement
requiring registration under the Securities Act; and the Company is a “foreign issuer” (as defined in Regulation S).
(m)Events Subsequent to Most Recent Fiscal Period. Since June 30, 2022 until the date hereof and to the Closing Date, except for the
transactions contemplated under this Agreement, there have not been any events that would have a Material Adverse Effect.
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(n)Litigation. Except as disclosed in the Company’s Form 20-F filed with the SEC on March 28, 2022, there are no suits, litigations,
arbitrations, proceedings, hearings, inquiries, audits, examinations, claims, actions or investigations of any nature by or against the
Company or its Subsidiaries or any directors or officers thereof as a party, or affecting the business or any of the assets of the Company or
its Subsidiaries pending before any Governmental Entity, or, to the Company’s Knowledge, threatened to be brought by or before any
Governmental Entity, that would have a Material Adverse Effect.
(o)No Other Issuances. The Company has not entered into any definitive transaction document, side letter, undertaking letter, or other
similar agreement or instrument with any investors for the issuance of Company Ordinary Shares or any securities convertible into or
exchangeable for Company Ordinary Shares or ADSs prior to the Closing Date.
(p)Anti-Bribery and Anti-Corruption; Money Laundering Laws; Economic Sanctions.
(i)The Company and its Subsidiaries and their respective directors, officers, employees, and to the Knowledge of the Company,
agents and other persons acting on their behalf are and have been in compliance with all Applicable Laws relating to anti-bribery,
anti- corruption, anti-money laundering, record keeping and internal control laws (collectively, the “Compliance Laws”).
Furthermore, no Public Official (i) holds an ownership or other economic interest, direct or indirect, in any of the Company or its
Subsidiaries or in the contractual relationship formed by this Agreement, or (ii) serves as an officer, director or employee of any of
the Company or its Subsidiaries.
(ii)None of the Company or its Subsidiaries or any of their respective directors, officers, employees, or to the Knowledge of the
Company, agents and other persons acting on their behalf has been found by a Governmental Entity to have violated any criminal or
securities law or is subject to any indictment or any government investigation for bribery. None of the beneficial owners of a
substantial portion of equity securities or other interest in any of the Company or its Subsidiaries or the current or former directors,
officers or employees of any of the Company and its Subsidiaries, or to the Knowledge of the Company, agents or other persons
acting on the Company’s or its Subsidiaries’ behalf, are or were Public Officials.
(iii)None of the Company or its Subsidiaries or any of their respective directors, officers, employees, or to the Knowledge of the
Company, agents and other persons acting on
their behalf is a Prohibited Person, and no Prohibited Person will be given an offer to become an employee, officer, consultant
or director of any of the Company or its Subsidiaries. None of the Company or its Subsidiaries has conducted or agreed to
conduct any business, or entered into or agreed to enter into any transaction with a Prohibited Person.
In this Section 3.1(p),
“Prohibited Person” means any Person that is (1) a national or resident of any U.S. embargoed or restricted country, (2) included on,
or affiliated with any Person on, the United States Commerce Department’s Denied Parties List, Entities and Unverified Lists; the
U.S. Department of Treasury’s Specially Designated Nationals, Specially Designated
16
Narcotics Traffickers or Specially Designated Terrorists, or the Annex to Executive Order No. 13224; the Department of State’s
Debarred List; UN Sanctions, (3) a member of any PRC military organization, or (4) a Person with whom business transactions,
including exports and re- exports, are restricted by a U.S. governmental authority, including, in each clause above, any updates or
revisions to the foregoing and any newly published rules; and
“Public Official” means any executive, official, or employee of a governmental authority, political party or member of a political
party, political candidate; executive, employee or officer of a public international organization; or director, officer or employee or
agent of a wholly owned or partially state-owned or controlled enterprise, including a PRC state-owned or controlled enterprise.
(q)Investment Company. The Company is not and, after giving effect to the issuance of Notes in the transactions contemplated hereby and
the application of the proceeds hereof, will not be an “investment company”, as such term is defined in the Investment Company Act of
1940, as amended.
(r)Intellectual Property. Except as, in the aggregate, has not had and would not reasonably be expected to have a Material Adverse Effect,
the Group Companies own or possesses sufficient rights to use Intellectual Property used in or necessary for the conduct of their business.
(s)Tax. The Company believes the Company is not a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an
enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation.
(t)No Additional Representation. The Company acknowledges that each Investor makes no representations or warranties as to any matter
whatsoever except as expressly set forth in this Agreement or in any certificate delivered by such Investor to the Company in accordance
with the terms hereof and thereof. Nothing herein shall be deemed to limit any of the Company’s claims relating to fraud, intentional
concealment of material facts or other willful misconduct.
Section 3.2. Representations and Warranties of the Investors.
Each Investor, severally and not jointly, represents and warrants to the Company, as of the date hereof and as of the Closing Date, as
follows:
(a)Due Formation. Such Investor is duly formed, validly existing and in good standing in the jurisdiction of its organization. Such Investor
has all requisite power and authority to carry on its business as it is currently being conducted.
(b)Authority. Such Investor has full power and authority to enter into, execute and deliver the Transaction Documents and each agreement,
certificate, document and instrument to be executed and delivered by such Investor and to perform its obligations thereunder. The
execution and delivery by such Investor of the Transaction Documents and the performance by such Investor of its obligations thereunder
have been, or will be prior to the Closing, duly authorized by all requisite actions on its part.
17
(c)Valid Agreement. The Transaction Documents have been, or will be prior to the Closing, duly executed and delivered by such Investor
and, assuming the due authorization, execution and delivery by the Company, constitute the legal, valid and binding obligation of such
Investor, enforceable against such Investor in accordance with its terms, except as limited by the Enforceability Exceptions.
(d)Non-contravention. Neither the execution and the delivery of the Transaction Documents, nor the consummation of the transactions
contemplated thereby, will (i) violate any provision of the organizational documents of such Investor or violate any constitution, statute,
regulation, rule, injunction, judgment, order, decree, ruling, charge, or other restriction of any government, governmental entity or court to
which such Investor is subject, or (ii) conflict with, result in a breach of, constitute a default under, result in the acceleration of or creation
of an encumbrance under, or create in any party the right to accelerate, terminate, modify, or cancel, any agreement, contract, lease,
license, instrument, or other arrangement to which such Investor is a party or by which such Investor is bound or to which any of such
Investor’s assets are subject. There is no action, suit or proceeding, pending or, threatened against such Investor that questions the validity
of the Transaction Documents or the right of such Investor to enter into the Transaction Documents or to consummate the transactions
contemplated thereby.
(e)Consents and Approvals. Neither the execution and delivery by such Investor of the Transaction Documents, nor the consummation by
such Investor of any of the transactions contemplated thereby, nor the performance by such Investor of the Transaction Documents in
accordance with their terms requires the consent, approval, order or authorization of, or registration with, or the giving notice to, any
governmental or public body or authority or any third party, except such as have been or will have been obtained, made or given on or
prior to the Closing Date.
(f)Securities Law Representations. The Investor acknowledges that the Notes (and the underlying ADSs issuable upon the conversion of
the Notes and the Class A Ordinary Shares represented thereby) are “restricted securities” that have not been registered under the
Securities Act or any applicable state securities law. The Investor further acknowledges that, absent an effective registration under the
Securities Act, the Notes (and the underlying ADSs
issuable upon the conversion of the Notes and the Class A Ordinary Shares represented thereby) may only be offered, sold or
otherwise transferred (1) to the Company or its Subsidiaries, (2) outside the United States in compliance with Regulation S of the
Securities Act, (3) to a person you reasonably believe is a “qualified institutional buyer” that is purchasing for its own account or for
the account of another “qualified institutional buyer” in reliance on Rule 144A of the Securities Act, or (4) pursuant to another
exemption from registration under the Securities Act, such as Rule 144 of the Securities Act (if applicable). Such Investor is either
(1) not a “U.S. person” (as defined in Regulation S of the Securities Act) or (2) an accredited investor (as defined in Rule 501 of the
Securities Act). Such Investor is aware that the sale of the Notes is being made in reliance on a private placement exemption from
registration under the Securities Act. Such Investor is acquiring the Notes (and any ADSs issuable upon conversion of the Notes and
the Class A Ordinary Shares represented thereby) for its own account, and not with a view toward, or for sale in connection with, any
distribution thereof in violation of any federal or state securities or
18
“blue sky” law, or with any present intention of distributing or selling such Notes (or any ADSs issuable upon conversion of the
Notes) in violation of the Securities Act.
(g)Sufficient Experience. The Investor has sufficient knowledge and experience in financial and business matters so as to be capable of
evaluating the merits and risks of its investment in such Notes (and any ADSs issuable upon conversion of the Notes and the Class A
Ordinary Shares represented thereby) and is capable of bearing the economic risks of such investment. The Investor acknowledges and
affirms that, with the assistance of its advisors, it has conducted and completed its own investigation, analysis and evaluation related to the
investment in such Notes (and any ADSs issuance upon conversion of the Notes and the Class A Ordinary Shares represented thereby).
(h)Sufficient Funds. As of the Closing Date, such Investor will have access to immediately available funds necessary to consummate the
Closing with respect to such Investor on the terms and conditions contemplated by this Agreement.
(i)Brokers and Finders. Such Investor has not retained, utilized or been represented by, or otherwise become obligated to, any broker,
placement agent, financial advisor or finder in connection with the transactions contemplated by this Agreement whose fees the Company
would be required to pay.
Section 4.1. Oversubscription.
ARTICLE IV
COVENANTS
Within two (2) months from the Closing Date (the “Oversubscription Period”), the Investors shall have the right to subscribe for
additional convertible notes in a total principal amount of up to 10% of the Purchase Price paid by the Investors under the same terms and
conditions as the Notes (such right to subscription, the “Oversubscription Right”). If the Investors exercise such right, the Company shall,
and shall cause its Subsidiaries to, enter into transaction documents with the Investors that are substantially the same as the Transaction
Documents and
issue such convertible notes to the Investors or their designees (which shall be the Investors’ Affiliates), provided that no additional
collateral will be provided to secure such additional convertible notes as long as the value of the Collateral Package is above 120% of the
total principal amount of the convertible notes held by the Investors or their Affiliates. Notwithstanding anything to the contrary, after
one (1) month from the Closing Date, the Company shall have the right to, by sending a written notice to the Investors, accelerate the
Oversubscription Period by any number of days, or declare the Oversubscription Period expire as of a day that is no earlier than the fifth
(5th) Business Day after the date of the notice, to the extent required to allow the Company to file Form A1 on the planned filing date
established by the Company in good faith based on the requirements of HKSE. Prior to sending the written notice, the Company and the
Investors (or their counsel) will use commercially reasonable efforts to first discuss with the HKSE and confirm to HKSE that the timing,
terms and pricing of the oversubscription is not contingent upon or connected with the proposed offering for the HKSE Listing.
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Section 4.2. Exclusive Financing Right.
(a)Subject to Section 4.2(b),
(i)for a six-month period starting from the Closing Date (the “Exclusivity Period”), the Investors shall have the exclusive right to
negotiate the subscription of up to US$1,300,000,000 convertible notes (or other equity or equity-linked securities as agreed
between the Parties) privately placed by the Company (excluding the total principal amount of the Notes), subject to the terms and
conditions to be agreed upon between the Investors and the Company; and
(ii)during the Exclusivity Period, the Company shall not, and shall cause its Subsidiaries and controlled Affiliates and its and their
respective directors, officers and representatives acting on their behalf not to, discuss or engage with any Persons other than the
Investors or their Affiliates with respect to any capital raising conducted on a privately placed or negotiated basis (“Capital Raising”).
(b)Nothing in this Section 4.2 shall restrict the Company or its Subsidiaries or controlled Affiliates from or affect such entities’ ability to
(i) pursue transactions with Baidu, (ii) obtain RMB denominated financing for working capital (including for content production needs)
that does not negatively impact the Investors’ rights under the Collateral Package, and (iii) discuss and accept proposals for investment (in
RMB) in the relevant Group Companies as specifically required by Applicable Laws or Governmental Order in the PRC (collectively,
“Permitted Financing”).
Section 4.3. Preferred Financing Partnership.
(a)For a period of eighteen (18) months after the Closing Date (the “Preferred Financing Partnership Period”), if the Company or any of its
Subsidiaries or controlled Affiliates receives any bona fide offer to subscribe for any equity or equity linked securities issued by any Group
Company on a privately placed or negotiated basis, excluding any Permitted Financing (an “Offer”), the Company shall promptly send a
written notice (“Offer Notice”)
to the Investors setting out all of the material terms and conditions of the Offer, together with a copy of the Offer. The Investors shall
have the right to match the terms of any such Offer in all material respects as set forth in Section 4.3(b).
(b)To exercise such right, the Investors must deliver a written notice (“Match Notice”) to the Company within twenty (20) Business Days
following receiving the Offer Notice and if their terms deviate from the Offer, setting forth in reasonable details such deviations and the
expected impacts of such deviations. If the Investors timely deliver the Match Notice, and the terms proposed by the Investors match the
Offer in all material respects or, solely with respect to the Offer from a financial investor, are no less favorable to the Company in terms of
price and in terms of all other terms taken as a whole than the terms under the Offer, the Company shall, and shall cause its Subsidiaries to,
complete the issuance to the Investors in preference to the offeror of the Offer or any other third party, except for Baidu.
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(c)During the Preferred Financing Partnership Period, if the Company issues convertible bonds or any equity or equity-linked securities
through a public offering, the Investors shall have the preferred right to participate in such public offering, with the manner of such
preference to be mutually agreed by the Investors and the Company.
Section 4.4. Payment of Arrangement Fees.
The Company agrees and undertakes to pay an arrangement fee of two percent (2%) of the gross amount of any financing raised by the
Company or its Subsidiaries during the Preferred Financing Partnership Period from any Investor or its Affiliates or third parties that are
arranged by any Investor or its Affiliates.
Section 4.5. Governance Rights.
For so long as the Notes or Class A Ordinary Shares issued upon conversion of the Notes Beneficially Owned by PAG Asia and its
Affiliates represent no less than 50% of the aggregate principal amount of the Notes:
(a)The Company shall take all necessary or desirable actions as may be required under the Applicable Laws and in accordance with the
Articles of Association to cause one (1) individual designated by PAG Asia to be appointed as a director (the “PAG Asia Director”) on or
prior to the Closing Date. PAG Asia shall be entitled to appoint, remove and replace the PAG Asia Director. The PAG Asia Director shall
have the right to designate an alternate director or proxy to attend board meetings.
(b)The Company shall take all necessary or desirable actions as may be required under the Applicable Law and in accordance with the
Articles of Association to cause the PAG Asia Director to be elected as a non-voting member of the Audit Committee and a voting member
of the Compensation Committee of the Board of Directors. The Company’s obligations under Section 4.5(a) and this Section 4.5(b) are
subject to PAG Asia’s designee for the PAG Asia Director meeting the requirements for directors and members of the Audit Committee
and Compensation Committee under Applicable Laws and of the securities exchange on which the shares of the Company are listed or
traded.
(c)The Company shall set up a strategy committee (the “Strategy Committee”), which (i) shall consist of three (3) members, including one
member appointed by PAG Asia, and (ii) shall review and advise on the Group’s overall strategy, capital expenditure, and capital raising.
Matters deliberated and reviewed by the Strategy Committee will be subject to the review and approval of the Board of Directors. The
Strategy Committee shall meet at least once every quarter with the management.
(d)For the avoidance of doubt, for the purpose of this Section 4.5 and Section 4.6, the “aggregate principal amount of the Notes” shall
mean the whole US$500,000,000 principal amount initially subscribed by the Investors.
Section 4.6. Information Rights.
(a)For so long as the Notes or Class A Ordinary Shares issued upon conversion of the Notes
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Beneficially Owned by PAG Asia and its Affiliates represent no less than 25% of the aggregate principal amount of the Notes, the
Company shall provide PAG Asia with a consolidated balance sheet of the Company at the end of each quarter of each fiscal year, and
consolidated statements of income and cash flows of the Company for the period then ended, as soon as available, and in any event within
sixty (60) days after the end of such period, prepared in conformity with GAAP applied on a consistent basis, except as otherwise noted
therein, and subject to the absence of footnotes and to year-end adjustments; provided, that as long as the Company stays as a public
company and the Company makes the information available through public filings on the EDGAR system or any successor or replacement
system of the SEC, or through public filings on the HKEXnews system or any successor or replacement system of the HKEX, the delivery
of such information shall be deemed satisfied by such public filings.
(b)The Company shall not provide the above documents or disclose any material non-public information concerning the Group to PAG
Pegasus or its representatives, unless PAG Pegasus otherwise notifies the Company. Representatives from PAG Pegasus shall identify
themselves as not from PAG Asia when communicating with representatives with the Company and shall immediately delete and notify
the Company if they receive any documents or material non-public information that are not meant to be sent to them.
Section 4.7. Financing Cooperation.
(a)If requested by either Investor, the Company will use commercially reasonable efforts to provide the following cooperation in
connection with such Investor obtaining any Debt Financing Transaction: (i) entering into an issuer agreement (an “Issuer Agreement”)
with each lender or counterparty in customary form in connection with the Debt Financing Transaction, and subject to the consent of the
Company (which will not be unreasonably withheld, conditioned or delayed), with such changes thereto as are reasonably requested by
such lender or counterparty, (ii) if so requested by such lender or counterparty, as applicable, re-registering the pledged Notes and/or
Company Ordinary Shares to be issued upon conversion of the Notes, as applicable, in the name of the relevant lender, counterparty,
custodian or similar party to a Debt Financing Transaction, as securities intermediary and to the extent such Investor or its Affiliates
continues to Beneficially Own such pledged Notes
and/or Company Ordinary Shares and such re-registration does not remove any restrictions that would have remained applicable to
such Notes or shares had such re-registration not occurred, (iii) entering into customary triparty agreements with each lender or
counterparty and any Investor relating to the delivery of the Notes and/or Company Ordinary Shares to the relevant lender or
counterparty for crediting to the relevant collateral accounts upon funding of the loan and payment of the purchase price, and/or (iv)
such other cooperation and assistance as the Investor may reasonably request and subject to the consent of the Company (which will
not be unreasonably withheld, conditioned or delayed), provided that none of the foregoing shall unreasonably disrupt the operation
of the Company’s business or prejudice any of its rights hereunder.
(b)Notwithstanding anything to the contrary, the Company’s obligation to deliver an Issuer Agreement in connection with a Debt
Financing Transaction is conditioned on the relevant Investor certifying to the Company in writing (A) that the counterparty to such Debt
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Financing Transaction is a bank or broker-dealer that is engaged in the business of financing debt securities and similar instruments, (B)
that the execution of such Debt Financing Transaction and the terms thereof do not violate the terms of this Agreement, (C) that such
Investor has pledged the Notes and/or the Company Ordinary Shares as collateral to the lenders or counterparties under such Debt
Financing Transactions, (D) to the extent applicable, whether the registration rights under Schedule II are being assigned to the lenders or
counterparties under the Debt Financing Transaction, and (E) that such Investor acknowledges and agrees that the Company will be relying
on such certificate when entering into the Issuer Agreement and any material inaccuracy in such certificate will be deemed a breach of this
Agreement. Each Investor acknowledges and agrees that the statements and agreements of the Company in an Issuer Agreement are solely
for the benefit of the applicable lenders or counterparties and that in any dispute between the Company and such Investor under this
Agreement, such Investor shall not be entitled to use the statements and agreements of the Company in an Issuer Agreement against the
Company.
Section 4.8. HKSE Listing.
(a)In the event that the HKSE requires in writing (including through public rules and guidance) that any of the special rights of the
Investors under this Agreement be terminated or amended in connection with the Company’s application for an HKSE Listing, the
Company shall use all reasonable efforts to assist the Investors in preserving those special rights, and shall facilitate direct discussions
and/or submissions between the Investors (and their legal counsel) and the HKSE if possible.
(b)If the HKSE nevertheless requires any of the special rights of the Investors to be terminated or amended after such discussions and/or
submissions, the Parties shall use their reasonable efforts to explore alternative arrangements to preserve the existing rights of the
Investors. Subject to such alternative arrangements being reasonably acceptable to the Investors, the Investors’ special rights will be
terminated or amended to the extent required in connection with Company’s application for the HKSE Listing.
(c)In the event that the Parties agree to any termination or amendment of the special rights of the Investors, the Investors shall have the
right to require such special rights to be restored if the HKSE Listing is not completed within 12 months after the first submission of the
Company’s listing application, and the Company shall take all necessary or desirable actions to restore such special rights.
Section 4.9. Collateral Arrangement.
(a)The performance by the Company and other Group Companies of their obligations to make any payments to the Investors (i) under the
Indentures, the Notes, the Security Documents and Section 4.4 and Schedule IV of this Agreement, and (ii) pursuant to Article VI of this
Agreement as a result of a breach of its obligations under Section 4.5, Section 4.6 and Section4.8 of this Agreement as well as their other
obligations under the Security Documents, shall be secured pursuant to the collateral arrangement set forth on Schedule III (the “Collateral Arrangement”) and
under the Security Documents.
(b)The Company shall, and shall cause the applicable Group Companies to take all the actions
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that are required to be taken by the Group Companies upon Closing as set forth under Schedule III, and complete the Post-Closing
Collateral Related Activities (as defined in Schedule III) as soon as practicable after the Closing, and in any event within thirty (30) days
after the Closing as long as the Investors provide timely cooperation. The Investors shall reasonably cooperate with the Company to
complete such activities, including by providing necessary documents or taking necessary actions where applicable.
(c)If the value of the Collateral Package falls below the applicable Value Threshold, the Company shall, and shall cause its Subsidiaries to,
provide additional collateral under the Collateral Arrangement such that the total value of the Collateral Package is increased to such
threshold, unless the decline in value of the Collateral Package is solely attributable to fluctuations in US$/RMB exchange rates and the
remaining value of the Collateral Package is at least 90% of the applicable Value Threshold.
(d)The Parties shall cooperate with each other to timely release a portion of the collateral if the principal amount of Notes held by the
Investors and their Affiliates substantially reduces. Following the repayment in full of all amounts due under the Notes, the conversion of
all of the Notes held by the Investors and their Affiliates to Class A Ordinary Shares (including in the form of ADSs) or the Investors and
its Affiliates otherwise ceasing to hold any portion of the Notes (each, a “Extinguishment Event”), the Collateral Arrangement shall
terminate and the Investors shall release and discharge the collateral described in the Security Documents or to execute such other
appropriate instrument evidencing such release and discharge (at the expense of the Company) within ten (10) days after the
Extinguishment Event.
Section 4.10. Security Documents and Change in Law Event.
(a)Upon the occurrence of:
(i)any default by the Company or any Subsidiary of the Company under the Security Documents in any of its obligations under the
Security Documents, which, per opinion of counsel of the Parties, materially and adversely affects the enforceability, validity or
priority of the applicable Lien on the Collateral or which materially and adversely affects the condition or value of the Collateral or
the security interest under the Security Documents, taken as a whole, in each case, which, is either not curable or has not been
remedied within thirty (30) days after written notice from any Investor; other than any limitation set out in Schedule III agreed as
part of the Collateral Arrangement; or
(ii)assertion by the Company or any Subsidiary of the Company under the Security Documents, in any pleading in any court of
competent jurisdiction, that any such security interest is invalid or unenforceable;
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any Investor shall be entitled to exercise all and any applicable remedies and rights that would be available to the Holders (as provided in
the Indenture) and/or the Trustee (as provided in the Indenture) in connection with the occurrence of an event under Section 6.01 of the
Indenture, against the Company under the Indenture (including the right to accelerate and demand payment of the Note Acceleration
Repayment Price (as provided in the Indenture) and interest on the Notes under Section 6.02 of the Indenture) and, if applicable, other
Transaction Documents, as if the relevant provisions of such Transaction Documents (other than this Agreement) have been incorporated
herein by reference, mutatis mutandis, and the Company shall comply with such applicable terms in the Indenture and other Transaction
Documents.
(b)The Parties agree that a Change in Law Event shall have the same effect as a “Fundamental Adverse Regulatory Change” under the
Indenture. Upon the occurrence of a Change in Law Event, any Investor shall be entitled to exercise all and any applicable remedies and
rights that would be available to the Holders (as provided in the Indenture) and/or the Trustee (as provided in the Indenture) in connection
with the occurrence of a Fundamental Adverse Regulatory Change, against the Company under the Indenture (including the right to
repurchase the Notes under Section 15.02(a) of the Indenture) and, if applicable, other Transaction Documents, as if the relevant
provisions of such Transaction Documents (other than this Agreement) have been incorporated herein by reference, mutatis mutandis, and
the Company shall comply with such applicable terms in the Indenture and other Transaction Documents.
Section 5.1. Taking of Necessary Action.
ARTICLE V
ADDITIONAL AGREEMENTS
Each Party agrees to use its reasonable efforts promptly to take or cause to be taken all action, and promptly to do or cause to be done all
things necessary, proper or advisable under Applicable Laws (other than waive such party’s rights hereunder) to consummate and make
effective the sale and purchase of the Notes hereunder, subject to the terms and conditions hereof and compliance with Applicable Laws.
In case at any time before or after the Closing any further
action is necessary or desirable to carry out the purposes of the sale and purchase of the Notes, each Party shall cause the proper officers,
managers and directors of such Party to take all such necessary action as may be reasonably requested by the requesting Party. The
Company shall promptly notify the Investors of any event, condition or circumstance occurring prior to the Closing Date that would
constitute a material breach of any terms and conditions contained in this Agreement.
Section 5.2. Conduct of Business.
Prior to the earlier of the Closing Date and the termination of this Agreement pursuant to Section 7.1, except as contemplated or required
by the Transaction Documents, the Company shall, and the Company shall cause each of its Group Companies to (i) conduct its business
and operations in the ordinary course of business consistent with past practice, including customary financing arrangements and facilities;
and (ii) take all actions necessary to continue the listing and trading
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of its ADSs on the Nasdaq and shall comply with the Company’s reporting, filing and other obligations under the rules of Nasdaq. From
the date hereof through the Closing Date, except pursuant to the Transaction Documents or as disclosed in the Company Disclosure
Documents as of the date of this Agreement, the Company shall not (i) issue, approve or agree to the issuance of any Company Ordinary
Shares, or any securities convertible into or exchangeable or exercisable for the Company Ordinary Shares other than issuance of shares
to employees upon the exercise of options or restricted share units granted or issuance to holders of convertible securities in compliance
with the terms thereof, (ii) reserve for issuance any Company Ordinary Shares, (iii) repurchase or redeem, or approve or agree to the
repurchase or redemption of, any Company Ordinary Shares or any securities convertible into or exchangeable or exercisable for
Company Ordinary Shares, other than the 2025 Notes, or (iv) declare or pay any dividends or other distributions on the Company
Ordinary Shares; in each case, unless for the period from the date hereof through the Closing Date, the Company provides to the Investors
the same rights they have under Sections 4.2 and 4.3.
Section 5.3. Use of Proceeds.
The Company undertakes to reserve and dedicate the proceeds from the issue and sale of the Notes for the purchase or repurchase of the
2025 Notes, general and corporate purposes as approved by the Investors from time to time, and/or any other purposes as approved by the
Investors from time to time. The Company agrees to comply with Schedule IV to this Agreement in connection with the purchase or
repurchase of the 2025 Notes.
Section 5.4. Securities Laws.
Each Investor acknowledges and agrees that, as of the Closing Date, the Notes (and the ADSs representing Company Ordinary Shares
that are issuable upon conversion of the Notes) have not been registered under the Securities Act and that they may be sold or otherwise
disposed of only in one or more transactions registered under the Securities Act or as to which an exemption from the registration
requirements of the Securities Act is available. In addition to, and without prejudice to, any applicable rights set forth in the sixth
amended and restated shareholders agreement of the Company dated October 26, 2017 (the “Shareholders Agreement”), the Company
hereby grants to the Investors such registration rights as set forth in Schedule II to this
Agreement. To the extent the grant of the registration rights under Schedule II to this Agreement to the Investors requires any consent by
any Person, including any shareholder of the Company, the Company shall obtain such consent prior to the Closing (including such
Person’s acknowledgement and consent with respect to their right to participate in any registration pursuant to this Agreement and the
Shareholders Agreement on a pro rata basis with the Investors).
Section 5.5. FPI Status.
Without limiting the generality of the foregoing, the Company shall promptly after the date hereof and reasonably prior to Closing take
all necessary or desirable actions required to duly and validly rely on the exemption for foreign private issuers from applicable rules and
regulations of the Nasdaq with respect to corporate governance to rely on “home country practice” in connection with the transactions
contemplated hereunder (including an exemption
26
from any Nasdaq rules that would otherwise require seeking shareholder approval in respect of such transactions), including without
limitation, to the extent necessary, making disclosures, notices and filings to or with the SEC and Nasdaq and obtaining an adequate
opinion of counsel in respect of the home country practice exemption.
Section 5.6. Conversion Price Matters.
The Conversion Rate on the Closing Date (the “Initial Conversion Rate”) shall be the quotient (rounded to four decimal places) of $1,000
divided by the Conversion Price on the Closing Date; provided, that if any event shall occur between the date hereof and the Closing
Date (inclusive) that would have resulted in an adjustment to the Conversion Rate pursuant to Section 14.04 of the Indenture if the Notes
had been issued and outstanding since the date hereof, the Initial Conversion Rate shall be adjusted as would have been required by
Section 14.04 of the Indenture and the share amounts and ADS prices in the table set forth in Section 14.03(e) of the Indenture shall be
adjusted as would have been required by Section 14.03(d) of the Indenture in each case if the Notes had been issued and outstanding
since the date hereof.
Section 5.7. Termination of Covenants.
Notwithstanding anything to the contrary, ARTICLE IV and ARTICLE V shall terminate automatically upon the Investors and its
Affiliates ceasing to hold any portion of the Notes or any of the Class A Ordinary Shares (including in the form of ADS) to which the
Notes converted.
Section 6.1. Indemnification.
ARTICLE VI
INDEMNIFICATION
(a)Subject to the limitations set forth in this Section 6.1, the Investors, their Affiliates and their respective officers, directors employees and
agents (each an “Indemnitee”) shall be indemnified by the Company for any and all Losses suffered by such Indemnitee as a result of or
arising from (i) any breach of any representation or warranty made by the Company in Section 3.1; or (ii) any breach of any covenant or
agreement by the Company contained in this Agreement. Notwithstanding anything to the contrary, other than with respect to fraud, in no
event shall the Company be liable for or have an obligation to indemnify the Indemnitees for Losses in connection with (A) the
Fundamental Warranties, in excess of 100% of the Purchase Price paid to the Company by the Investors pursuant to this Agreement, and
(B) the other representations and warranties made by the Company in Section 3.1 in excess of 50% of the Purchase Price paid to the
Company by the Investors pursuant to this Agreement.
(b)In calculating the amount of any Losses hereunder, there shall be subtracted the amount of any insurance proceeds and third-party
payments received by the Indemnitees with respect to such Losses, if any, net of any actual costs or expenses incurred in connection with
securing or obtaining such proceeds or payments. No Party shall have any liability under any Transaction Document for any punitive,
incidental, consequential or indirect damages, (including loss of profits or diminution in value), in each case, that are not a reasonably
foreseeable result or consequence of the underlying breach by the relevant breaching Party,
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it being understood that the foregoing shall not exclude any damages suffered by the Investors from any failure to receive the full amounts
payable under the Transaction Documents, to realize the value of Company Ordinary Shares and/or ADSs issued or issuable upon
conversion of the Notes or to benefit from any rights and protection provided under the Transaction Documents.
Section 6.2. Third Party Action.
(a)Each Indemnitee shall give the Company prompt written notice (an “Indemnification Notice”) of any third party Action it has actual
knowledge of that might give rise to Losses, which notice shall set forth a description of those elements of such Action of which such
Indemnitee has knowledge; provided, that any delay or failure to give such Indemnification Notice shall not affect the indemnification
obligations of the Company hereunder except to the extent the Company is materially prejudiced by such delay or failure.
(b)The Company shall have the right, exercisable by written notice to the applicable Indemnitee(s) within thirty (30) days of receipt of the
applicable Indemnification Notice, to select counsel to defend and control the defense of any third party claim set forth in such
Indemnification Notice; provided, that the Company shall not be entitled to so select counsel or control the defense of any claim if (i) such
claim seeks primarily non-monetary or injunctive relief against the Indemnitee or alleges any violation of criminal law, (ii) the Company
does not, subsequent to its assumption of such defense in accordance with this Section 6.2(b), conduct the defense of such claim actively
and diligently, (iii) such claim includes as the named parties both the Company and the applicable Indemnitee(s) and such Indemnitees
reasonably determine upon the advice of counsel that representation of all such Indemnitees by the same counsel would be prohibited by
applicable codes of professional conduct, or (iv) in the event that, based on the reasonable advice of counsel for the applicable
Indemnitee(s), there are one or more material defenses available to the applicable Indemnitee(s) that are not available to the Company. If
the Company does not assume the defense of any third party claim in accordance with this Section 6.2(b), the applicable Indemnitee(s)
may continue to defend such claim at the sole cost of the Company and the Company may still participate in, but not control, the defense
of such third party claim at the Company’s sole cost and expense. In no event shall the Company, in connection with any Action or
separate but substantially similar Actions arising out of the same general allegations, be liable for the fees and expenses of more than one
separate firm of attorneys at any time for all Indemnitees chosen by the Investors and/or its Affiliates, except to the extent that local
counsel, in addition to regular counsel, is required in order to effectively defend the Action.
(c)No Indemnitee shall consent to a settlement of, or the entry of any judgment arising from, any claim for which such Indemnitee is
indemnified pursuant to this Section 6.2 without the prior written consent of the Company (such consent not to be unreasonably withheld,
conditioned or delayed). Except with the prior written consent of the applicable Indemnitee(s), the Company, in the defense of any such
claim, shall not consent to the entry of any judgment or enter into any settlement that (i) provides for injunctive or other nonmonetary
relief affecting any Indemnitee or (ii) does not include as an unconditional term thereof the giving by each claimant or plaintiff to each
such Indemnitee(s) of an unconditional release of such Indemnitee(s) from all liability with respect to such Action. In any such third party
claim where the Company has assumed control of the defense thereof
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pursuant to Section 6.2(b), the Company shall keep the applicable Indemnitee(s) reasonably informed as to the status of such claim at all
stages thereof (including all settlement negotiations and offers), promptly submit to such Indemnitee(s) copies of all pleadings, responsive
pleadings, motions and other similar legal documents and paper received or filed in connection therewith, permit such Indemnitee(s) and
their respective counsels to confer with the Company and its counsel with respect to the conduct of the defense thereof, and permit such
Indemnitee(s) and their respective counsel(s) a reasonable opportunity to review all legal papers to be submitted prior to their submission.
Section 7.1. Termination.
ARTICLE VII MISCELLANEOUS
This Agreement may be terminated at any time prior to the Closing Date:
(a)By the mutual written consent of the Parties;
(b)By either the Company or any Investor upon written notice to the other, if the Closing has not occurred on or prior to the Long Stop
Date; provided that the right to termination under this Section 7.1(b) shall not be available to any Party if the breach by such Party of its
representations and warranties set forth in this Agreement or the failure of such Party to perform any of its obligations under this
Agreement has been a principal cause of or primarily resulted in the events specified in this Section 7.1(b);
(c)By either the Company or any Investor if any Governmental Order enjoining or otherwise prohibiting the consummation of the
transactions as contemplated under the Transaction Documents shall be in effect and shall have become final and non-appealable prior to
the
Closing Date; provided that the right to termination under this Section 7.1(c) shall not be available to any Party if the breach by such
Party of its representations and warranties set forth in this Agreement or the failure of such Party to perform any of its obligations
under this Agreement has been a principal cause of such Governmental Order;
(d)at the election of any Investor, if there has been a material breach of any representation, warranty, covenant or agreement on the part of
the Company contained in this Agreement or the other Transaction Documents that if continuing on the Closing Date will result in the
failure of the conditions set forth in Section 2.2(c) to be satisfied, which breach has not been cured within twenty (20) Business Days after
delivery of written notice to the Company of such breach; or
(e)at the election of the Company, with respect to any Investor, if there has been a material breach of any representation, warranty,
covenant or agreement on the part of such Investor contained in this Agreement or the other Transaction Documents that if continuing on
the Closing Date will result in the failure of the conditions set forth in Section 2.2(d) to be satisfied, which breach has not been cured
within twenty (20) Business Days after delivery of written notice to such Investor of such breach.
Section 7.2. Effect of Termination.
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If this Agreement is terminated pursuant to Section 7.1, (a) this Agreement shall become void and of no further force and effect, except
for the provisions of Section 7.4 to Section 7.14, which shall survive the termination of this Agreement indefinitely or until the latest date
permitted by law, (b) none of the Parties shall have any liability in respect of a termination of this Agreement pursuant to Section 7.1(a) to
Section 7.1(c)(other than the Party whose breach of a representation, warranty, covenant or agreement under this Agreement precipitated
a termination pursuant to Section 7.1(b)), (c) nothing shall relieve any of the Parties from liability for Losses resulting from the
termination of this Agreement pursuant to Section 7.1(d) or Section 7.1(e), and (d) each Party’s right of termination under Section 7.1 is
in addition to any other right it may have under this Agreement or otherwise, and the exercise of a party’s right of termination will not
constitute an election or waiver of remedies.
Section 7.3. Survival.
All covenants or other agreements of the Parties shall survive until fully performed or fulfilled, unless and to the extent that non-
compliance with such covenants or agreements is waived in writing by the relevant Party entitled to such performance. All Fundamental
Warranties shall survive for five (5) years after the Closing. All other representations and warranties of the Company contained in this
Agreement shall survive the Closing Date until eighteen (18) months after the Closing Date. Notwithstanding the foregoing, nothing
herein shall relieve any Party of liability for any inaccuracy or breach of such representation or warranty to the extent that any good faith
allegation of such inaccuracy or breach is made in writing prior to such expiration.
Section 7.4. Notices.
All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered personally,
by facsimile, sent by overnight courier or sent via email (with receipt confirmed) as follows:
(a)If to PAG Asia, to:
Address:
33/F, Three Pacific Place, 1 Queen’s Road East, Admiralty,
Hong Kong
Contact:
***
If to PAG Pegasus, to:
Address:
33/F, Three Pacific Place, 1 Queen’s Road East, Admiralty,
Hong Kong
Contact:
***
(b)If to the Company, to:
30
Address:
Attention:
Jun Wang
9/F, iQIYI Innovation Building
No. 2 Haidian North First Street, Haidian District,
Beijing 100080, People’s Republic of China
Jun Wang
***
or to such other address or addresses as shall be designated in writing. All notices shall be deemed effective (i) when delivered personally
(with written confirmation of receipt, by other than automatic means, whether electronic or otherwise), (ii) when sent by facsimile (with
written confirmation of receipt, by other than automatic means, whether electronic or otherwise) one (1) Business Day following the day
sent by overnight courier, or (iii) when sent by electronic mail, upon such electronic mail being sent unless the sending party
subsequently learns that such electronic mail was not successfully delivered.
Section 7.5. Entire Agreement; Third Party Beneficiaries; Amendment.
This Agreement, together with other Transaction Documents, sets forth the entire agreement between the parties with respect to the
subject matters hereof and thereof. Nothing contained in this Agreement, expressed or implied, is intended to confer or shall confer upon
any person other than the expressed parties hereto, any benefit, right or remedies, provided that (i) ARTICLE VI shall be for the benefit
of and fully enforceable by each of the Indemnitees, and (ii) Section 7.14 shall be for the benefit of and fully enforceable by each of the
Specified Persons. Any provision of this Agreement may be amended or modified in whole or in part at any time by an agreement in
writing between the Parties executed in the same manner as this Agreement. No failure on
the part of any Party to exercise, and no delay in exercising, any right shall operate as a waiver thereof nor shall any single or partial
exercise by any party of any right preclude any other or future exercise thereof or the exercise of any other right.
Section 7.6. Counterparts.
This Agreement may be executed in one or more counterparts by wet-ink or other means (including by means of telecopied signature
pages or electronic transmission in portable document format (pdf) or any electronic signature complying with the U.S. federal ESIGN
Act of 2000, e.g., www.docusign.com), each of which shall be deemed to constitute any original, but all of which together shall constitute
one and the same document. Signatures to this Agreement transmitted by facsimile transmission, by electronic mail in “portable
document format” (“.pdf”) form, or by any other electronic means intended to preserve the original graphic and pictorial appearance of a
document will have the same effect as physical delivery of the paper document bearing the original signature.
Section 7.7. Confidentiality; Public Announcements.
(a)Each Party shall keep confidential any nonpublic material or information with respect to the business, technology, financial conditions,
and other aspects of the other Parties which it is aware of, or have access to, in signing or performing the Transaction Documents
(including written or oral information, hereinafter the “Confidential Information”). Confidential
31
Information shall not include any information that is (a) previously known on a non- confidential basis by the receiving Party, (b) in the
public domain through no fault of such receiving Party, its Affiliates or its or its Affiliates’ officers, directors or employees, (c) received
from a party other than the Company or the Company’s representatives or agents, so long as such party was not, to the knowledge of the
receiving Party, subject to a duty of confidentiality to the Company or (d) developed independently by the receiving Party without
reference to confidential information of the disclosing Party. No Party shall disclose such Confidential Information to any third party other
than in accordance with the provisions set forth herein. Either Party may use the Confidential Information only for the purpose of, and to
the extent necessary for performing this Agreement or any other Transaction Documents, and shall not use such Confidential Information
for any other purposes. The Parties hereby agree, for the purpose of this Section 7.7, that the existence and terms and conditions of this
Agreement and other Transaction Documents and schedule hereof shall be deemed as Confidential Information until such Transaction
Document has been duly filed with the SEC.
(b)No press release or public announcement related to this Agreement or the transactions contemplated herein shall be issued or made by
any Party or its Affiliates without the prior written approval of the other Parties, unless required by Applicable Laws in which case such
other Party shall have the right to review, comment on and have reasonable comments incorporated on such press release, announcement
or communication prior to issuance, distribution or publication. Notwithstanding the foregoing, the Investors and its Affiliates shall not be
restricted from communicating with their respective investors and potential investors in connection with informational or reporting
activities; provided that the recipient
of such information is subject to a customary obligation to keep such information confidential. The Company may file this
Agreement with the SEC and may provide information about the subject matter of this Agreement in connection with equity or debt
issuances, share repurchases, or marketing, informational or reporting activities; provided that any description of the subject matter of
this Agreement or the Investors or their Affiliates (if not previously approved by the Investors) shall be approved by the Investors in
advance.
(c)Each Party may disclose the Confidential Information to its Affiliates and its and its Affiliates’ partners, officers, directors, employees,
agents, professional advisors and other representatives on a need-to-know basis in the performance of the Transaction Documents;
provided that, such Party shall procure such persons are made aware of and will comply with the confidentiality obligations hereunder. A
Party may disclose Confidential Information if such disclosure is required by (i) an order of any court of competent jurisdiction or any
regulatory, judicial, governmental or similar body or any taxation authority of competent jurisdiction, (ii) the rules of any listing authority
or stock exchange on which its shares are listed or traded, or (iii) by Applicable Law, provided that in such case, such Party shall (1) to the
extent permitted by law, promptly provide the other Parties with written notice of that fact so that such other Parties may seek a protective
order, confidential treatment or other appropriate remedy and (2) shall furnish only that portion of the information that is legally required
and shall exercise reasonable efforts to obtain reliable assurance that confidential treatment will be accorded such information.
32
(d)Without the prior written consent of the Investor, the Company shall not, and shall cause its Affiliates not to, use in advertising,
publicity, announcements, or otherwise, the name of any Investor or any Affiliate of any Investor, either alone or in combination with any
company name, trade name, trademark, service mark, domain name, device, design, symbol or any abbreviation, contraction or simulation
thereof owned or used by any Investor or any of its Affiliates; provided that the Company and its Affiliates may refer to the Investors as
holders of the Notes or holders of shares or ADS of the Company in the filings or disclosure required to be made by Applicable Laws or
the rules of the stock exchange on which its shares are listed or traded.
(e)The confidentiality obligations of each Party hereunder shall survive the termination of this Agreement. Each Party shall continue to
abide by the confidentiality clause hereof and perform the obligation of confidentiality it undertakes until the other Party approves release
of that obligation or until a breach of the confidentiality clause hereof will no longer result in any prejudice to the other Party.
Section 7.8. Expenses.
(a)Upon the Closing, the Company shall reimburse the Investors for its reasonable documented out-of-pocket fees and expenses incurred
in connection with the negotiation, preparation, execution and performance of this Agreement and other Transaction Documents and the
transactions contemplated hereby and thereby (excluding any transactions that may be agreed under Section 4.2 or 4.3), including fees and
expenses of attorneys, accountants, consultants, up to an aggregate amount of US$5,000,000.
(b)Each Party shall bear its own costs and expenses incurred in connection with the Transaction Documents and the transaction
contemplated thereunder if this Agreement is terminated pursuant to Section 7.1.
(c)For the avoidance of doubt, the Company shall be responsible for the payment of any fees of the transfer agent, Trustee, DTC or other
administrative agents, relating to or arising out of the issuance and sale of the Notes by the Company as contemplated hereby.
Section 7.9. Successors and Assigns.
(a)Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the Company’s
successors and assigns and the Investors’ successors and assigns, and no other person.
(b)Neither the Company nor the Investors may assign its respective rights or delegate its respective obligations under this Agreement
(including the rights and obligations under Section 4.9), whether by operation of law or otherwise, and any assignment by the Company or
the Investors in contravention hereof shall be null and void; provided, that (i) prior to the Closing, each Investor may assign all of its rights
and obligations under this Agreement or any portion thereof to one or more Affiliates who execute and deliver a Joinder without the prior
consent of the Company, and such Affiliate shall be deemed an Investor hereunder and shall have all rights and obligations of an Investor
or any portion thereof (as set forth in the Joinder); provided further that no such assignment will relieve the Investor of its obligations
33
hereunder prior to the Closing, (ii) any Affiliate of the Investor who after the Closing Date executes and delivers a Joinder and is a
permitted transferee of any Notes or Company Ordinary Shares shall be deemed an Investor hereunder and have all the rights and
obligations of an Investor or any portion thereof (as set forth in the Joinder), (iii) the rights of a holder of Registrable Securities under
Schedule II may be transferred but only together with the Notes or Registrable Securities in a transfer of such Notes or Registrable
Securities to an Affiliate of the transferor that executes and delivers to the Company a Joinder.
(c)Section 4.5 and Section 4.6(a) shall terminate automatically upon a PAG Asia Change of Control. “PAG Asia Change of Control” shall
mean (A) the acquisition, directly or indirectly, by any person or group (within the meaning of Section 13(d)(3) of the Securities Exchange
Act of 1934, as amended) of (1) the beneficial ownership of securities of PAG Asia possessing more than fifty percent (50%) of the total
combined voting power of all outstanding securities of PAG Asia or (2) control (as defined in the definition of Affiliate) of PAG Asia; (B)
a merger, consolidation, recapitalization or reorganization involving PAG Asia, unless securities representing more than 50% of the total
voting power of the successor company is immediately thereafter beneficially owned, directly or indirectly, by the Persons who
beneficially owned PAG Asia’s outstanding voting securities immediately prior to such transaction; or (C) the acquisition, directly or
indirectly, by any of Baidu’s competitors or the Companies’ competitors (each based on a list of competitors provided by Baidu or the
Company (by action of Board of Directors) to the Investors prior to the Closing Date, which list may be updated by Baidu or the Company
(by action of Board of Directors) by written notice to PAG Asia every 6 month after the Closing) of more than 10% of the beneficial
ownership of equity securities of PAG Asia. For the avoidance of doubt, references to PAG Asia in this Section mean PAG Asia or
its Affiliate that has the rights under Section 4.5 or Section 4.6(a) at the time of the relevant change of control event.
Section 7.10. Governing Law; Arbitration.
(a)This Agreement shall be governed by and its provisions construed and enforced in accordance with the laws of Hong Kong without
regard to the conflict of laws principles thereof.
(b)Any dispute arising out of or relating to this Agreement, including any question regarding its existence, validity or termination
(“Dispute”) shall be referred to and finally resolved by arbitration at the Hong Kong International Arbitration Centre in accordance with
the Hong Kong International Arbitration Centre Administered Arbitration Rules then in force. There shall be three arbitrators. Each of the
Parties has the right to appoint one arbitrator and the third arbitrator shall be appointed by the Hong Kong International Arbitration Centre.
The language to be used in the arbitration proceedings shall be English. The seat of arbitration shall be in Hong Kong.
(c)Each of the Parties irrevocably waives any immunity to jurisdiction to which it may be entitled or become entitled (including without
limitation sovereign immunity, immunity to pre-award attachment, immunity to post-award attachment or otherwise) in any arbitration
proceedings and/or enforcement proceedings against it arising out of or based on this Agreement or the transactions contemplated hereby.
34
Section 7.11. Severability.
If any provision of this Agreement is determined to be invalid, illegal or unenforceable, the remaining provisions of this Agreement shall
remain in full force and effect provided that the economic and legal substance of, any of the transactions contemplated under the
Transaction Documents is not affected in any manner materially adverse to any Party. In the event of any such determination, the Parties
agree to negotiate in good faith to modify this Agreement to fulfill as closely as possible the original intent and purpose hereof. To the
extent permitted by law, the Parties hereby to the same extent waive any provision of law that renders any provision hereof prohibited or
unenforceable in any respect.
Section 7.12. Specific Performance.
The Parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. Accordingly, each Party agrees that in the event of any breach or
threatened breach by any other Party of any covenant or obligation contained in this Agreement, the non-breaching Party shall be entitled
(in addition to any other remedy that may be available to it, whether in law or equity) to obtain (i) a decree or order of specific
performance to enforce the observance and performance of such covenant or obligation, and (ii) an injunction restraining such breach or
threatened breach. Each of the Parties agrees that it will not oppose the granting of an injunction, specific performance and other
equitable relief on the basis that any other Party has
an adequate remedy at law or that any award of specific performance is not an appropriate remedy for any reason at law or in equity. Any
Party seeking an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of
this Agreement shall not be required to provide any bond or other security in connection with any such order or injunction.
Section 7.13. Headings.
The headings of Articles and Sections contained in this Agreement are for reference purposes only and are not part of this Agreement.
Section 7.14. Non-Recourse.
This Agreement may only be enforced against, and any claim or cause of action based upon, arising out of, or related to this Agreement
or the transactions contemplated hereby may only be brought against the entities that are expressly named as Parties and their respective
successors and assigns (including any Person that executes and delivers a Joinder). Except as set forth in the immediately preceding
sentence, no past, present or future director, officer, employee, incorporator, member, partners, stockholder, Affiliate, agent, attorney,
advisor or representative of any Party (collectively, the “Specified Persons”) shall have any liability for any obligations or liabilities of
any Party or for any claim based on, in respect of, or by reason of, the transactions contemplated hereby.
[Remainder of page intentionally left blank.]
35
36
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the duly authorized officers of the parties hereto as
of the date first herein above written.
COMPANY:
iQIYI, Inc.
By:
Name:
Title:
/s/ Yu Gong
Yu Gong
Director
[Signature Page to Investment Agreement]
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the duly authorized officers of the parties hereto as of the
date first herein above written.
INVESTOR:
PAGAC IV-1 (CAYMAN) LIMITED
By:
Name:
Title:
/s/ Koichi Ito
Koichi Ito
Director
[Signature Page to Investment Agreement]
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the duly authorized officers of the parties hereto as
of the date first herein above written.
INVESTOR:
PAG PEGASUS FUND LP
/s/ JON ROBERT LEWIS
By:
Name: JON ROBERT LEWIS
Title: Director of PAG Pegasus GP Limited, acting as
a General Partner of PAG Pegasus Fund LP
[Signature Page to Investment Agreement]
SCHEDULE I
LIST OF INVESTORS
SCHEDULE II
REGISTRATION RIGHTS
SCHEDULE III
COLLATERAL ARRANGEMENTS
SCHEDULE IV
2025 NOTES REPURCHASE
Exhibit A
Form of Indenture
Exhibit B
Form of Joinder
The undersigned is executing and delivering this Joinder dated [●] pursuant to that certain Investment Agreement, dated as of August [●], 2022 (as
amended, restated, supplemented or otherwise modified in accordance with the terms thereof, the “Investment Agreement”), by and among iQIYI,
Inc, PAGAC IV-1 (Cayman) Limited (“PAG Asia”), PAG Pegasus Fund LP (“PAG Pegasus”) and any other Persons who become a party thereto
in accordance with the terms thereof. Capitalized terms used but not defined in this Joinder shall have the respective meanings ascribed to such
terms in the Investment Agreement.
The undersigned, an Affiliate of [assignor to be specified] (“Transferring Investor”), entered into [agreement to be described] with the
Transferring Investor, pursuant to which the Transferring Investor [describe the rights transferred and obligations delegated].
By executing and delivering this Joinder to the Investment Agreement, the undersigned hereby adopts and approves the Investment Agreement
and agrees, effective commencing on the date hereof, to become a party to, and to be bound by and comply with the provisions of, the Investment
Agreement applicable to the transferring Investor in the same manner as if the undersigned were an original Investor signatory to the Investment
Agreement and had executed the Investment Agreement as “PAG Asia” or “PAG Pegasus”, as applicable, depending on the identity of such
Transferring Investor.
The contact information of the undersigned for the purpose of Section 7.4 of the Investment Agreement is set forth below:
[contact info to be included]
[Remainder of page intentionally left blank]
Exhibit 4.68
This DEED OF AMENDMENT (this “Deed”) is dated December 30, 2022 by and among:
DEED OF AMENDMENT
(i)iQIYI, Inc, a Cayman Islands incorporated company listed on NASDAQ under the ticker IQ (the “Company”);
(ii)PAGAC IV-1 (Cayman) Limited, an exempted company incorporated in Cayman Islands, with the registered address
at P.O. Box 472, Harbour Place, 2nd Floor, 103 South Church Street, George Town, Grand Cayman KY1-1106,
Cayman Islands (“PAG Asia”); and
(iii)PAG Pegasus Fund LP, an exempted limited partnership established and registered under the laws of the Cayman
Islands, with the registered address at
P.O. Box 472, Harbour Place, 2nd Floor, 103 South Church Street, George Town, Grand Cayman KY1-1106, Cayman
Islands (“PAG Pegasus”).
Each of the parties to this Deed is referred herein individually as a “Party”, and collectively as the “Parties”.
RECITALS
A.The Parties hereto entered into an investment agreement dated August 30, 2022 (the “Investment Agreement”).
B.PAG Pegasus intends to transfer all of its rights and obligations under the Investment Agreement to PAG Asia.
C.The Parties also intend to enter into this Deed to effect certain amendments to the Investment Agreement.
NOW, THEREFORE, the Parties intending to be legally bound hereto, hereby agree as follows and intend that this Deed shall take
effect as a deed:
1.Definitions
All capitalized terms used herein and not otherwisedefined shall have the meaning ascribed to such terms in the Investment
Agreement.
2.Novation
Effective from the date hereof:
2.1.PAG Pegasus transfers all its rights and obligations under the Investment Agreement to PAG Asia;
2.2.PAG Asia assumes all the rights, benefits, obligations and responsibilities of PAG Pegasus under the Investment Agreement;
1
2.3.PAG Pegasus ceases to be party to the Investment Agreement, and all obligations and responsibilities of PAG Pegasus
towards the Company thereunder and all obligations and responsibilities of the Company towards PAG Pegasus thereunder are
released.
3.Amendment to Investment Agreement
3.1.Each Party agrees that the following definitions of the Investment Agreement shall be amended and restated in its entirety as
follows, for the purposes of the Transaction Documents:
a.“Security Documents” means the list of documents as set forth in Schedule 1 of this Deed, as may be amended,
restated and supplemented from time to time.
b.“Collateral Arrangements” shall mean all the arrangements in relation to the Collateral Package as set forth in the
Security Documents.
c.“Collateral Package” shall mean the guarantee and security interests created by and constituted under the Security
Documents, with a value not lower than
(i) 130% of the total principal amount of the Notes held by the Investor or its Affiliates, prior to the exercise of the
Oversubscription Right, and (ii) 120% of the total principal amount of the Notes held by the Investor or its
Affiliates, after the exercise of the Oversubscription Right (the thresholds under clause (i) and (ii), the “Value
Thresholds”).
3.2.Each Party agrees that Section 4.10(a)(i) of the Investment Agreement shall be amended and restated in its entirety as follows:
Any default by the Company or any Subsidiary of the Company under the Security Documents in any of its
obligations under the Security Documents, which, per opinion of counsel, materially and adversely affects the
enforceability, validity or priority of the applicable Lien on the Collateral Package or which materially and
adversely affects the condition or value of the Collateral Package or the security interest under the Security
Documents, taken as a whole, in each case, which, is either not curable or has not been remedied within thirty (30)
days after written notice from the Investor; other than any limitation set out in Schedule III agreed as part of the
Collateral Arrangement.
3.3.Each Party agrees that Section 4.6(b) of the Investment Agreement is no longer applicable and shall be deleted in its entirety.
4.Miscellaneous
4.1.This Deed shall have legal and binding effect on the Parties immediately upon the execution of this Deed by each Party.
4.2.This Deed is supplemental to and amends the Investment Agreement. With effect from the date hereof, all references to “this
Agreement” in the Investment Agreement shall be deemed as references to such Investment Agreement as amended and modified
hereby. Other than as amended by this Deed, the Investment Agreement shall remain in full force and effect.
4.3.This Deed shall be governed by and its provisions construed and enforced in accordance with the laws of Hong Kong without
regard to the conflict of laws principles thereof.
2
4.4.Section 1.2 (General Interpretative Principles) and Article VII (Miscellaneous) of the Investment Agreement shall apply
mutatis mutandis to this Deed as if references therein to “this Agreement” were references to this Deed.
[Signature pages to follow]
3
IN WITNESS WHEREOF, this Deed has been executed as a deed by or on behalf of the parties and is intended to be and is hereby delivered as a
deed on the date first above written.
EXECUTED AND DELIVERED AS A DEED by
iQIYI, Inc
a company incorporated in the Cayman Islands,
by
being a person who, in accordance with the laws of that jurisdiction, is acting under the
authority of the company
in the presence of:
)
)
)
)
)
)
)
)
)
)
)
/s/ Yu Gong
Signature of authorized person
Director
Office held
Yu Gong
Name of authorized person
Signature of witness:
Name of witness:
Address:
Occupation:
/s/ Yuwei Sui
Yuwei Sui
3F, iQIYI Youth Center Yoolee Plaza, No. 21, North Road of Workers Stadium,
Chaoyang District, Beijing, PRC
Legal Manager
[Signature Page to Deed of Amendment]
IN WITNESS WHEREOF, this Deed has been executed as a deed by or on behalf of the parties and is intended to be and is hereby delivered as a
deed on the date first above written.
EXECUTED AND DELIVERED AS A DEED by
PAGAC IV-1 (CAYMAN) LIMITED
a company incorporated in the Cayman Islands,
by
being a person who, in accordance with the laws of that jurisdiction, is acting under the
authority of the company
in the presence of:
)
)
)
)
)
)
)
)
)
)
)
/s/ Koichi Ito
Signature of authorized person
Director
Office held
Koichi Ito
Name of authorized person
Signature of witness:
Name of witness:
Address:
Occupation:
/s/ Yuki Kobayashi
Yuki Kobayashi
Toranomon Towers Office 20F, 4-1-28 Toranomon, Minato-ku, Tokyo 105-0001
JAPAN
Executive Assistant
[Signature Page to Deed of Amendment]
IN WITNESS WHEREOF, this Deed has been executed as a deed by or on behalf of the parties and is intended to be and is hereby delivered as a
deed on the date first above written.
EXECUTED AND DELIVERED AS A DEED by
PAG PEGASUS FUND LP
a company incorporated in the Cayman Islands,
by
being a person who, in accordance with the laws of that jurisdiction, is acting under the
authority of the company
in the presence of:
)
)
)
)
)
)
)
)
)
)
)
/s/ JON ROBERT LEWIS
Signature of authorized person
DIRECTOR
Office held
JON ROBERT LEWIS
Name of authorized person
Signature of witness:
Name of witness:
Address:
/s/ AGNES IP
AGNES IP
33F., THREE PACIFIC PLACE, 1 QUEEN’s ROAD EAST, HONG KONG
Occupation:
EXECUTIVE ASSISTANT
[Signature Page to Deed of Amendment]
Schedule 1 List of Security Documents
Exhibit 4.69
Execution Version
IQIYI, INC.
AND
CITICORP INTERNATIONAL LIMITED,
as Trustee
INDENTURE
Dated as of December 30, 2022
6.00% Convertible Senior Notes due 2028
Section 1.01.
Section 1.02.
Definitions
References to Interest
TABLE OF CONTENTS
ARTICLE 1
DEFINITIONS
ARTICLE 2
ISSUE, DESCRIPTION, EXECUTION, REGISTRATION AND EXCHANGE OF NOTES
Section 2.01.
Section 2.02.
Section 2.03.
Section 2.04.
Section 2.05.
Section 2.06.
Section 2.07.
Section 2.08.
Section 2.09.
Section 2.10.
Section 2.11.
Designation and Amount
Form of Notes
Date and Denomination of Notes; Payments of Interest and Defaulted Amounts
Execution, Authentication and Delivery of Notes
Exchange and Registration of Transfer of Notes; Restrictions on Transfer; Depositary
Mutilated, Destroyed, Lost or Stolen Notes
Temporary Notes
Cancellation of Notes Paid, Converted, Etc
CUSIP Numbers
Additional Notes; Repurchases
Appointment of Authenticating Agent
ARTICLE 3
SATISFACTION AND DISCHARGE
Section 3.01.
Satisfaction and Discharge
ARTICLE 4
PARTICULAR COVENANTS OF THE COMPANY
Section 4.01.
Section 4.02.
Section 4.03.
Section 4.04.
Section 4.05.
Section 4.06.
Section 4.07.
Section 4.08.
Section 4.09.
Section 4.10.
Payment of Principal and Interest
Maintenance of Office or Agency
Appointments to Fill Vacancies in Trustee’s Office
Provisions as to Paying Agent
Existence
Rule 144A Information Requirement and Annual Reports
Additional Amounts
Stay, Extension and Usury Laws
Compliance Certificate; Statements as to Defaults
Further Instruments and Acts
i
PAGE
1
13
13
13
14
15
16
22
23
23
24
24
24
25
25
25
26
26
27
27
29
31
32
32
LISTS OF HOLDERS AND REPORTS BY THE COMPANY AND THE TRUSTEE
ARTICLE 5
Section 5.01.
Section 5.02.
Lists of Holders
Preservation and Disclosure of Lists
Section 6.01.
Section 6.02.
Section 6.03.
Section 6.04.
Section 6.05.
Section 6.06.
Section 6.07.
Section 6.08.
Section 6.09.
Section 6.10.
Section 6.11.
Section 7.01.
Section 7.02.
Section 7.03.
Section 7.04.
Section 7.05.
Section 7.06.
Section 7.07.
Section 7.08.
Section 7.09.
Section 7.10.
Section 7.11.
Section 7.12.
ARTICLE 6
DEFAULTS AND REMEDIES
Events of Default
Acceleration; Rescission and Annulment
Additional Interest
Payments of Notes on Default; Suit Therefor
Application of Monies Collected by Trustee
Proceedings by Holders
Proceedings by Trustee
Remedies Cumulative and Continuing
Direction of Proceedings and Waiver of Defaults by Majority of Holders
Notice of Defaults and Events of Default
Undertaking to Pay Costs
ARTICLE 7
CONCERNING THE TRUSTEE
Duties and Responsibilities of Trustee
Reliance on Documents, Opinions, Etc
No Responsibility for Recitals, Etc
Trustee, Paying Agents, Conversion Agents or Note Registrar May Own Notes
Monies and ADSs to Be Held in Trust
Compensation and Expenses of Trustee
Officer’s Certificate as Evidence
Eligibility of Trustee
Resignation or Removal of Trustee
Acceptance by Successor Trustee
Succession by Merger, Etc
Trustee’s Application for Instructions from the Company
ARTICLE 8
CONCERNING THE HOLDERS
Section 8.01.
Section 8.02.
Section 8.03.
Section 8.04.
Section 8.05.
Action by Holders
Proof of Execution by Holders
Who Are Deemed Absolute Owners
Company-Owned Notes Disregarded
Revocation of Consents; Future Holders Bound
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ARTICLE 9
HOLDERS’ MEETINGS
Section 9.01.
Section 9.02.
Section 9.03.
Section 9.04.
Section 9.05.
Section 9.06.
Section 9.07.
Purpose of Meetings
Call of Meetings by Trustee
Call of Meetings by Company or Holders
Qualifications for Voting
Regulations
Voting
No Delay of Rights by Meeting
ARTICLE 10
SUPPLEMENTAL INDENTURES
Section 10.01.
Section 10.02.
Section 10.03.
Section 10.04.
Section 10.05.
Supplemental Indentures Without Consent of Holders
Supplemental Indentures with Consent of Holders
Effect of Supplemental Indentures
Notation on Notes
Evidence of Compliance of Supplemental Indenture to Be Furnished Trustee
ARTICLE 11
CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE
Section 11.01.
Section 11.02.
Section 11.03.
Company May Consolidate, Etc. on Certain Terms
Successor Corporation to Be Substituted
Opinion of Counsel to Be Given to Trustee
IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS
ARTICLE 12
Section 12.01.
Indenture and Notes Solely Corporate Obligations
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ARTICLE 13
INTENTIONALLY OMITTED
ARTICLE 14
CONVERSION OF NOTES
Section 14.01.
Section 14.02.
Section 14.03.
Section 14.04.
Section 14.05.
Section 14.06.
Section 14.07.
Section 14.08.
Section 14.09.
Section 14.10.
Section 14.11.
Section 14.12.
Section 14.13.
Conversion Privilege
Conversion Procedure; Settlement Upon Conversion
Increased Conversion Rate Applicable to Certain Notes Surrendered in Connection with Make-Whole
Fundamental Changes
Adjustment of Conversion Rate
Adjustments of Prices
Class A Ordinary Shares to Be Fully Paid
Effect of Recapitalizations, Reclassifications and Changes of the Class A Ordinary Shares
Certain Covenants
Responsibility of Trustee
Notice to Holders Prior to Certain Actions. In case of any
Stockholder Rights Plans
Limit on Issuance of ADSs Upon Conversion
Termination of Depositary Receipt Program
ARTICLE 15
REPURCHASE OF NOTES AT OPTION OF HOLDERS
Section 15.01.
Section 15.02.
Section 15.03.
Section 15.04.
Section 15.05.
Repurchase at Option of Holders
Repurchase at Option of Holders Upon a Fundamental Change
Withdrawal of Repurchase Notice or Fundamental Change Repurchase Notice
Deposit of Third Anniversary Repurchase Price or Fundamental Change Repurchase Price
Covenant to Comply with Applicable Laws Upon Repurchase of Notes
ARTICLE 16
OPTIONAL REDEMPTION
Section 16.01.
Optional Redemption for Changes in the Tax Law of the Relevant Taxing Jurisdiction
ARTICLE 17
MISCELLANEOUS PROVISIONS
Section 17.01.
Section 17.02.
Section 17.03.
Section 17.04.
Section 17.05.
Provisions Binding on Company’s Successors
Official Acts by Successor Corporation
Addresses for Notices, Etc
Governing Law; Jurisdiction
Submission to Jurisdiction; Service of Process
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Section 17.06.
Section 17.07.
Section 17.08.
Section 17.09.
Section 17.10.
Section 17.11.
Section 17.12.
Section 17.13.
Section 17.14.
Section 17.15.
Section 17.16.
Section 17.17.
EXHIBIT
Exhibit A
Evidence of Compliance with Conditions Precedent; Certificates and Opinions of Counsel to Trustee
Legal Holidays
No Security Interest Created
Benefits of Indenture
Table of Contents, Headings, Etc
Execution in Counterparts
Severability
Waiver of Jury Trial
Force Majeure
Calculations
USA PATRIOT Act
HKMA Stay Rules
Form of Note
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A-1
INDENTURE dated as of December 30, 2022 between IQIYI, INC., a Cayman Islands exempted company, as issuer (the “Company,”
as more fully set forth in Section 1.01) and CITICORP INTERNATIONAL LIMITED, a private company limited by shares incorporated in
Hong Kong, as trustee (the “Trustee,” as more fully set forth in Section 1.01).
W I T N E S S E T H:
WHEREAS, for its lawful corporate purposes, the Company has duly authorized the issuance of its 6.00% Convertible Senior Notes
due 2028 (the “Notes”), initially in an aggregate principal amount not to exceed US$500,000,000 (as increased by an amount equal to the
aggregate principal amount of any additional Notes purchased by Investors (as defined in the Investment Agreement) pursuant to Section 4.1 of
the Investment Agreement), and in order to provide the terms and conditions upon which the Notes are to be authenticated, issued and delivered,
the Company has duly authorized the execution and delivery of this Indenture; and
WHEREAS, the Form of Note, the certificate of authentication to be borne by each Note, the Form of Notice of Conversion, the Form
of Fundamental Change Repurchase Notice, the Form of Repurchase Notice and the Form of Assignment and Transfer to be borne by the Notes
are to be substantially in the forms hereinafter provided; and
WHEREAS, all acts and things necessary to make the Notes, when executed by the Company and authenticated and delivered by the
Trustee, as in this Indenture provided, the valid, binding and legal obligations of the Company, and this Indenture a valid agreement according to
its terms, have been done and performed, and the execution of this Indenture and the issuance hereunder of the Notes have in all respects been
duly authorized.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
That in order to declare the terms and conditions upon which the Notes are, and are to be, authenticated, issued and delivered, and in
consideration of the premises and of the purchase and acceptance of the Notes by the Holders thereof, the Company covenants and agrees with
the Trustee for the equal and proportionate benefit of the respective Holders from time to time of the Notes (except as otherwise provided
below), as follows:
Section 1.01. Definitions
ARTICLE 1
DEFINITIONS
The terms defined in this Section 1.01 (except as herein otherwise expressly provided or unless the context otherwise requires) for all
purposes of this Indenture and of any indenture supplemental hereto shall have the respective meanings specified in this Section 1.01. The words
“herein,” “hereof,” “hereunder” and words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other
subdivision. The terms defined in this Article include the plural as well as the singular.
“Additional ADSs” shall have the meaning specified in Section 14.03(a).
“Additional Amounts” shall have the meaning specified in Section 4.07(a).
1
“Additional Interest” means all amounts, if any, payable pursuant to Section 4.06(d), Section 4.06(e) and Section 6.03, as applicable.
“ADS” means an American Depositary Share, issued pursuant to the Deposit Agreement, representing seven Class A Ordinary Shares
of the Company as of the date of this Indenture, and deposited with the ADS Custodian.
“ADS Custodian” means JPMorgan Chase Bank, N.A., with respect to the ADSs delivered pursuant to the Deposit Agreement, or any
successor entity thereto.
“ADS Depositary” means JPMorgan Chase Bank, N.A., as depositary for the ADSs, or any successor entity thereto.
“ADS Price” shall have the meaning specified in Section 14.03(c).
“Affiliate” of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person. For the purposes of this definition, “control,” when used with respect to any specified Person means
the power to direct or cause the direction of the management and policies of such Person, directly or indirectly, whether through the ownership of
voting securities, by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing.
Notwithstanding anything to the contrary herein, the determination of whether one Person is an “Affiliate” of another Person for purposes of this
Indenture shall be made based on the facts at the time such determination is made or required to be made, as the case may be, hereunder.
“Affiliate Notes” means Rule 144A Notes or Regulation S Notes that are held or beneficially owned by one or more entities that are
Affiliates of the Company.
“Agent Parties” shall have the meaning specified in Section 7.02(l).
“Agents” means the Paying Agent, the Transfer Agent, the Note Registrar and the Conversion Agent, in each case, unless the Company
is acting in such capacity.
“Applicable PRC Rate” means (i) in the case of deduction or withholding of PRC income tax, 10%,
(ii) in the case of deduction or withholding of PRC value added tax (including any related local levies), 6.72%, or (iii) in the case of deduction or
withholding of both PRC income tax and PRC value added tax (including any related local levies), 16.72%.
“Applicable Redemption Price” shall mean the Third Anniversary Repurchase Price, the Fundamental Change Repurchase Price, the
Tax Redemption Price or the Maturity Date Repayment Price, as applicable.
“Appointment Letter” means the appointment letter, dated the date of this Indenture, by which the Agents are appointed to, and accept
their appointment as, Agents.
“Authenticating Agent” shall have the meaning specified in Section 2.11.
“Board of Directors” means the board of directors of the Company or a committee of such board duly authorized to act for it hereunder.
2
“Board Resolution” means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly
adopted by the Board of Directors, and to be in full force and effect on the date of such certification, and delivered to the Trustee.
“Business Day” means, with respect to any Note, each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which
banking institutions in the State of New York, the Cayman Islands or, in the case of a payment under the Indenture, place of payment are
authorized or obligated by law or executive order to close.
“Capital Stock” means, for any entity, any and all shares, interests, rights to purchase, warrants, options, participations or other
equivalents of or interests in (however designated) stock issued by that entity.
“Change in Law” shall have the meaning specified in clause (e) of the definition of “Fundamental Change” below.
“Change in Tax Law” shall have the meaning specified in Section 16.01(b).
“Class A Ordinary Shares” means the Class A ordinary shares of the Company, par value US$0.00001 per share, at the date of this
Indenture, subject to Section 14.07.
“Class B Ordinary Shares” means the Class B ordinary shares of the Company, par value US$0.00001 per share, at the date of this
Indenture, subject to Section 14.07.
“Clause A Distribution” shall have the meaning specified in Section 14.04(c)(A).
“Clause B Distribution” shall have the meaning specified in Section 14.04(c)(B).
“Clause C Distribution” shall have the meaning specified in Section 14.04(c).
“close of business” means 5:00 p.m. (New York City time).
“Code” means the U.S. Internal Revenue Code of 1986, as amended.
“Commission” means the U.S. Securities and Exchange Commission.
“Common Equity” of any Person means Capital Stock of such Person that is generally entitled (a) to vote in the election of directors
of such Person or (b) if such Person is not a corporation, to vote or otherwise participate in the selection of the governing body, partners,
managers or others that will control the management or policies of such Person.
“Company” shall have the meaning specified in the first paragraph of this Indenture, and subject to the provisions of Article 11, shall
include its successors and assigns.
“Company Group” shall have the meaning specified in clause (e) of the definition of “Fundamental Change” below.
“Company Notice” shall have the meaning specified in Section 15.01(a).
“Company Order” means a written order of the Company, signed by an Officer and delivered to the Trustee.
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“Conversion Agent” means Citibank, N.A., the conversion agent with respect to the Notes appointed pursuant to the Appointment
Letter and, subject to the provisions of the Appointment Letter, shall also include any successor conversion agent.
“Conversion Date” shall have the meaning specified in Section 14.02(c).
“Conversion Obligation” shall have the meaning specified in Section 14.01(a).
“Conversion Price” means as of any time, US$1,000, divided by the Conversion Rate as of such
time.
“Conversion Rate” shall have the meaning specified in Section 14.01(a).
“Corporate Trust Office” means the designated office of the Trustee at which at any time this Indenture shall be administered, which
office at the date hereof is located at 20/F, Citi Tower, One Bay East, 83 Hoi Bun Road, Kwun Tong, Hong Kong, Attention: Agency and Trust,
Facsimile: + 852 2323 0279, or such other address as the Trustee may designate from time to time by notice to the Holders and the Company, or
the designated corporate trust office of any successor trustee (or such other address as such successor trustee may designate from time to time by
notice to the Holders and the Company).
“Daily VWAP” means, for any Trading Day, the per ADS volume-weighted average price as displayed under the heading “Bloomberg
VWAP” on Bloomberg page “IQ
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