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(Mark One)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
o REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE
ACT OF 1934
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
o SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
Commission file number: 001-38279
SOGOU 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)
Level 15, Sohu.com Internet Plaza
No. 1 Unit Zhongguancun East Road, Haidian District
Beijing 100084
People’s Republic of China
+86 10-5689-9999
(Address of principal executive offices)
Joe Zhou
Chief Financial Officer
Level 15, Sohu.com Internet Plaza
No. 1 Unit Zhongguancun East Road, Haidian District
Beijing 100084
People’s Republic of China
Telephone: (86 10) 5689-9999
Email: IR@sogou-inc.com
(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 one Class A
ordinary share, par value US$0.001 per share
(Trading Symbol(s))
SOGO
(Name of each exchange on which registered)
New York Stock Exchange LLC
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
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Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual
report: 109,973,265 Class A Ordinary Shares, par value $0.001 per share, and 278,757,875 Class B Ordinary Shares, par value $0.001 per share, as of
December 31, 2019.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o Yes x 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.
o Yes x 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.
x Yes o 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).
x Yes o 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
the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
Emerging growth company o
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. o
† 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 which basis of accounting the registrant has used to prepare the financial statements included in this filing.
U.S. GAAP x
International Financial Reporting Standards as issued
by the International Accounting Standards Board o
Other o
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.
o Item 17 o 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).
o Yes x 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.
o Yes o No
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TABLE OF CONTENTS
INTRODUCTION
FORWARD-LOOKING INFORMATION
PART I
Item 1.
Item 2.
Item 3.
Item 4.
Item 4A.
Item 5.
Item 6.
Item 7.
Item 8.
Item 9.
Item 10.
Item 11.
Item 12.
PART II
Item 13.
Item 14.
Item 15.
Item 16A.
Item 16B.
Item 16C.
Item 16D.
Item 16E.
Item 16F.
Item 16G.
Item 16H.
PART III
Item 17.
Item 18.
Item 19.
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
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 Accountants
Corporate Governance
Mine Safety Disclosure
Financial Statements
Financial Statements
Exhibits
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Number
3
3
3
30
64
64
79
84
88
88
88
97
98
100
100
100
101
101
101
101
102
102
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103
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INTRODUCTION
In this annual report, except where the context otherwise requires and for purposes of this annual report only:
· “ADSs” refers to American depositary shares;
· “Amended and Restated Articles of Association” refers to our Third Amended and Restated Articles of Association;
· “Amended and Restated Memorandum of Association” refers to our Seventh Amended and Restated Memorandum of Association;
· “China” or the “PRC” refers to the People’s Republic of China, and for the purpose of this annual report, excludes Hong Kong, Macau, and
Taiwan;
· “Class A Ordinary Shares” refers to our Class A Ordinary Shares, par value of $0.001 per share, carrying one vote per share;
· “Class B Ordinary Shares” refers to our Class B Ordinary Shares, par value of $0.001 per share, carrying ten votes per share;
· “China Literature” refers to China Literature Limited, a leading online literature platform in China, and its subsidiaries and variable interest
entities (“VIEs”);
· “DAU” for active users quoted from iResearch for any given month refers to the average number of active users per day during that month. A
user who uses the applicable product more than once in a day is counted as one active user for that day. Each distinguishable device or
application is treated as a separate user for purposes of calculating DAU;
· “MAU” for active users quoted from iResearch for any given month refers to the number of active users during that month. A user who uses the
applicable product more than once in a month is counted as one active user for that month. Each distinguishable device or application is treated
as a separate user for purposes of calculating MAU;
· “Mobile DAU” for our Sogou Mobile Keyboard (the mobile application of Sogou Input Method) for any given month refers to the average
number of active users per day during that month. A user who uses Sogou Mobile Keyboard more than once in a day is counted as one active
user for that day. We treat each distinguishable device as a separate user for purposes of calculating Mobile DAU for our Sogou Mobile
Keyboard, although it is possible that some people may use more than one device and that multiple people may share one device;
· “Mobile MAU” for our Sogou Mobile Keyboard for any given period refers to the number of active users during the last month of the period. A
user who uses Sogou Mobile Keyboard more than once in a month is counted as one active user for that month. We treat each distinguishable
device as a separate user for purposes of calculating Mobile MAU for our Sogou Mobile Keyboard, although it is possible that some people may
use more than one device and that multiple people may share one device;
· “Paid clicks” refers to the number of paid clicks, including clicks by our users on advertisers’ promotional links displayed on our search result
pages and other Internet properties and on third parties’ Internet properties;
· “PC DAU” for our Sogou Input Method for any given month refers to the average number of active users per day during that month. A user who
uses Sogou Input Method more than once in a day is counted as one active user for that day. We treat each distinguishable device as a separate
user for purposes of calculating PC DAU for our Sogou Input Method, although it is possible that some people may use more than one device
and that multiple people may share one device;
· “Pre-IPO Class A Ordinary Shares” refers to our Class A ordinary shares, carrying one vote per share, that were authorized and outstanding prior
to the completion of our initial public offering;
· “Pre-IPO Class B Ordinary Shares” refers to our Class B ordinary shares, without voting rights, that were authorized and outstanding prior to the
completion of our initial public offering;
· “Pre-IPO Ordinary Shares” refers to our Pre-IPO Class A Ordinary Shares and our Pre-IPO Class B Ordinary Shares, collectively;
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· “Pre-IPO Series A Preferred Shares” refers to our Series A preferred shares, carrying one vote per share, that were authorized and outstanding
prior to the completion of our initial public offering, and are categorized as “mezzanine equity” in our consolidated financial statements
appearing elsewhere in this annual report;
· “Pre-IPO Series B Preferred Shares” refers to our Series B preferred shares, carrying one vote per share, that were authorized and outstanding
prior to the completion of our initial public offering, and are categorized as “mezzanine equity” in our consolidated financial statements
appearing elsewhere in this annual report;
· “Pre-IPO Preferred Shares” refers to our Pre-IPO Series A Preferred Shares and our Pre-IPO Series B Preferred Shares, collectively;
· “RMB” refers to Renminbi, or Yuan, the official currency of the PRC;
· “Sogou” refers to Sogou Inc., a Cayman Islands company, and unless the context requires otherwise, includes its subsidiaries and VIEs;
· “Sohu.com Limited” refers to our ultimate parent and controlling shareholder, whose ADSs representing Sohu.com Limited’s ordinary shares are
listed on the Nasdaq Global Select Market under the symbol “SOHU”;
· “Sohu” refers to Sohu.com Limited and its subsidiaries and VIEs, not including Sogou and its subsidiaries and VIEs;
· “Sohu Group” refers to Sohu.com Limited and its subsidiaries and VIEs, including Sogou and its subsidiaries and VIEs;
· “Tencent” or “Tencent group” refers to Tencent Holdings Limited and its subsidiaries under International Financial Reporting Standards;
· “we,” “us,” “our company,” and “our” refer to Sogou Inc. and, unless the context requires otherwise, include its subsidiaries and VIEs;
· “Weixin Official Accounts” refers to Weixin/WeChat accounts where individuals and enterprises, as account owners, provide content and
services to subscribers; and
· “Zhihu” refers to Zhihu Technology Limited and its affiliates, the leading online knowledge-sharing platform in China.
This annual report on Form 20-F includes our audited consolidated statements of comprehensive income for the years ended December 31, 2017,
2018, and 2019 and audited consolidated balance sheets as of December 31, 2018 and 2019.
We completed an initial public offering of our ADSs on November 13, 2017. Our ADSs are traded on the New York Stock Exchange under the
symbol “SOGO.”
FORWARD-LOOKING INFORMATION
This annual report on Form 20-F contains “forward looking statements.” These statements are made under the “safe harbor” provisions of the U.S.
Private Securities Litigation Reform Act of 1995. Whenever you read a statement that is not simply a statement of historical fact (such as when we describe
what we “believe,” “expect,” or “anticipate” will occur, and other similar statements), you must remember that our expectations may not be correct, even
though we believe that they are reasonable. We do not guarantee that any future transactions and events described in this annual report will happen as
described or that they will happen at all. You should read this annual report completely, with the understanding that actual future results may be materially
different from what we expect. See “Item 3 - Key Information—Risk Factors.”
The forward-looking statements made in this annual report relate only to circumstances as of the date on which the statements are made. We
undertake no obligation, beyond that required by law, to update any forward-looking statement to reflect events or circumstances after the date on which
the statement is made, even though our situation will change in the future.
Whether actual results will conform with our expectations and predictions is subject to a number of risks and uncertainties, many of which are
beyond our control, and reflect future business decisions that are subject to change. Some of the assumptions, future results, and levels of performance
expressed or implied in the forward-looking statements we make inevitably will not materialize, and unanticipated events may occur which will affect our
results.
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These forward-looking statements include:
· our ability to maintain and strengthen our position as a leader in China’s Internet industry and an innovator in AI;
· our expected development and launch, and market acceptance, of our products and services;
· our various initiatives to implement our business strategies to expand our business;
· our future business development, results of operations, and financial condition;
· the expected growth of and change in the online search industry in China; and
· PRC laws, regulations, and policies relating to the Internet and Internet content providers, including online search and search-related services
providers.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable.
ITEM 3. KEY INFORMATION
Selected Consolidated Financial Data
The following selected consolidated statements of comprehensive income data and selected consolidated statements of cash flow data for the years
ended December 31, 2017, 2018 and 2019 and selected consolidated balance sheet data as of December 31, 2018 and 2019 have been derived from our
audited consolidated financial statements included in this annual report beginning on page F-1. The selected consolidated statements of comprehensive
income data for the years ended December 31, 2015 and 2016 and our consolidated balance sheet data as of December 31, 2015, 2016 and 2017 have been
derived from audited consolidated financial statements that are not included in this annual report. Our consolidated financial statements are prepared and
presented in accordance with U.S. GAAP. You should read the following information in conjunction with our consolidated financial statements and related
notes and “Item 5. Operating and Financial Review and Prospects” below. Our historical results do not necessarily indicate results to be expected for any
future period.
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Selected Consolidated Statements of Comprehensive (Loss)/Income Data
2015
For the Year Ended December 31,
2016
2017
(US$ in thousands, except for per ADS data)
2018
Revenues:
Search and search-related advertising revenues
Other revenues
Total revenues
Cost of revenues
Gross profit
Operating expenses:
(1)
Research and development
Sales and marketing
General and administrative
(1)
(1)
(1)
Total operating expenses
Operating (loss)/income
Interest income
Foreign currency exchange gain/(loss)
Other income/(expenses), net
Income before income tax expenses
Income tax expenses
Net income
Net (loss)/income per ADS—basic
Net (loss)/income per ADS—diluted
(1)
Share-based compensation expense included in:
Cost of revenues
Research and development
Sales and marketing
General and administrative
539,521
52,282
591,803
248,279
343,524
131,072
93,998
16,666
241,736
101,788
5,332
667
1,142
108,929
9,430
99,499
(0.04)
(0.04)
330
6,862
943
2,244
10,379
597,213
63,195
660,408
302,736
357,672
138,364
123,119
24,567
286,050
71,622
5,198
5,346
(26,027)
56,139
27
56,112
0.12
0.11
171
5,615
1,816
5,259
12,861
801,551
106,806
908,357
457,401
450,956
172,829
156,420
27,821
357,070
93,886
9,126
(7,082)
692
96,622
14,422
82,200
0.22
0.20
540
16,470
4,299
2,414
23,723
1,023,132
101,026
1,124,158
693,470
430,688
201,739
146,194
38,072
386,005
44,683
8,037
5,725
41,489
99,934
1,153
98,781
0.25
0.25
669
10,313
1,327
1,895
14,204
2019
1,073,173
99,079
1,172,252
738,454
433,798
190,402
138,291
40,670
369,363
64,435
4,443
1,849
21,126
91,853
2,748
89,105
0.23
0.23
473
10,697
3,726
1,005
15,901
Cash and cash equivalents
Total current assets
Total assets
Total current liabilities
Total liabilities
Total mezzanine equity
Total shareholders’ (deficit)/equity
(1)
(1)
Selected Consolidated Balance Sheet Data
2015
2016
244,484
306,444
413,971
300,909
300,909
244,426
(131,364)
286,078
359,924
524,818
358,556
358,556
244,404
(78,142)
As of December 31,
2017
(US$ in thousands)
694,207
1,121,242
1,321,036
412,795
412,795
—
908,241
2018
2019
185,175
1,222,118
1,462,844
456,339
456,339
—
1,006,505
142,464
1,304,722
1,522,402
453,213
458,899
—
1,063,503
(1)
Presented giving effect to the redesignation on a one-for-one basis upon the completion of our initial public offering of all Pre-IPO Series A Preferred
Shares into Class A Ordinary Shares and all Pre-IPO Series B Preferred Shares into Class B Ordinary Shares.
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Risk Factors
Risks Related to Our Business
The online search industry in China is extremely competitive, and if we are unable to compete successfully, it will be difficult for us to maintain or
increase our revenues and profitability.
We operate our business in an extremely competitive industry. We face intense competition in every aspect of our business, including competition
for users, advertisers, technology, and talent. We face competition for our search and search-related services in China primarily from Baidu Inc. (“Baidu”)
and ShenMa, operated by UCWeb Inc. (“UCWeb”), which is a subsidiary of Alibaba Group Holding Limited (“Alibaba”). Both Baidu and Alibaba have
considerably greater financial and technical resources available to them than we do. We also face competition for both users and advertisers from websites
and mobile applications that provide specialized search services in China, including travel services and information platforms such as Ctrip and Qunar;
group-buy platforms such as Meituan Dianping; online classified advertisement platforms such as 58.com; and short video platforms such as Douyin of
Bytedance and Kuaishou. We compete for advertisers not only with Internet companies, but also with other types of advertising media such as newspapers
and magazines, billboards and bus advertisements, television, and radio. It is also possible that multinational businesses with considerably greater financial
and other resources than ours could expand their offerings in China, making it harder for us to gain market share.
Our existing and potential competitors compete with us for users and advertisers on the basis of the quality and quantity of search results; the
features, availability, and ease of use of products and services; and the number and quality of advertising distribution channels. They also compete with us
for talent with technological expertise, which is critical to the sustained development of our products and services. If we are unable to differentiate
ourselves from our competitors in each of these areas, we may not be able to maintain or increase our user and advertiser base, which would have an
adverse impact on our business, results of operations, and growth potential. In addition, we may have difficulty in successfully promoting and
differentiating our new products, services, and features as a result of the market power of our competitors.
We must expand our user base to grow our business, and we must continually innovate and adapt our business in an evolving online search
industry in order to do so. If we fail to continue to innovate and introduce products and services to enhance user experience, we may not be able to
generate sufficient user traffic to remain competitive.
The Internet industry in general and the online search industry in particular have been undergoing rapid changes in technology and in user
preferences. Our future success in expanding our user base will depend on our ability to respond to, as well as anticipate and apply, rapidly evolving
technologies. We must adapt our existing products and services and develop new products and product areas that will meet the evolving demands of users,
deliver attractive experiences for our users that enhance user engagement, and cause our users to return to our services and increase the frequency of their
searches on our platforms. Our development and introduction of new products, features, and services are subject to additional risks and uncertainties.
Unexpected technical, operational, distribution, or other problems could delay or prevent the development and introduction of one or more of our currently
planned and any future new products and services. There are constant innovations in the market regarding search services, search and search-related
advertising, and providing information to users. If we are unable to predict user preferences or industry changes, or if we are unable to modify our products
and services on a timely basis, we may lose users. Our operating results will also suffer if our innovations are not responsive to the needs of our users, are
not appropriately timed with market opportunity, or are not effectively brought to market. As search technology continues to develop, there may be offered
in the China market products and services that are, or that are perceived to be, substantially similar to or better than those generated by our search services.
As worldwide focus on the development of AI technologies has intensified, it has become increasingly important to apply AI technologies to online search
products and features in order to attract and retain users, and we cannot be sure that we will be able to apply such technologies successfully.
Our competitors may develop and offer new products, services, and features that are similar to ours, and such new offerings from our competitors
may be found by users to be more attractive than ours. Moreover, our competitors may introduce new products, services, and features to the market before
we can, and we cannot be sure that any of our new products, services, and features will attract additional users and lead to the generation of incremental
revenue.
As users increasingly use mobile devices to access search services and other Internet services in China, we will need to continue to design,
develop, promote, and operate new products and services tailored for mobile devices. Our design and development of new products and services that are
optimized for mobile devices may not be successful. We may encounter difficulties with the installation and delivery of such new products and services,
and they may not function smoothly. As new mobile devices are released or updated, we may encounter problems in developing and upgrading our
products and services for the new releases and updates, and we may need to devote significant resources to such development and upgrades. If we are not
successful in so adapting our offerings for mobile devices, maintenance and growth of our business will be impeded.
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If our collaboration with Tencent is terminated or curtailed, our business and prospects for growth will be adversely affected.
We have extensive collaboration with Tencent, one of our largest shareholders. We are the default general search engine in various Tencent
products that provide general search offerings, such as Mobile QQ Browser, qq.com, and the PC Web directories daohang.qq.com and hao.qq.com.
Approximately 35% of our total search traffic, measured by page views, was contributed by Tencent’s Internet properties in December 2019. Sogou Weixin
Search is currently the sole general search engine with access to all content published on Weixin Official Accounts, but it is possible that Tencent will grant
such access to other general search engines. We cannot assure you that we will be able to maintain the current level of cooperation with Tencent in the
future. If our collaborative relationship with Tencent is terminated or curtailed due to Tencent’s initiating its own general search service or partnering with
other search engine companies, or if any of the commercial terms were to be revised or made less favorable to us, or if Tencent does not continue to deliver
to us an adequate level of access to its platforms or adequately promote our products and services, our business and prospects will be adversely affected.
For a detailed discussion of our collaborative arrangements with Tencent, see “Related Party Transactions - Business Collaboration with Tencent.”
Our efforts to expand our collaboration with Tencent may not be successful.
In September 2018, we and Tencent agreed to extend until September 2023 the period during which Sogou Search will be the default general
search engine for Tencent’s products that provide general search offerings in accordance with our existing business collaboration arrangements with
Tencent. In addition, we and Tencent have agreed to continue from September 2019 until September 2020 our initiative for the integration into the existing
Weixin/WeChat search service of a search function powered by Sogou Search that allows Weixin/WeChat users to access Internet information outside
Weixin/WeChat and have agreed that Sogou Search will be the preferred third-party search function to power such a Weixin/WeChat search function for
that period provided Sogou Search meets “Tencent’s requirements for user experience,” and that the arrangement may be extended for additional successive
one-year periods through September 2023 if offering Sogou Search will not “harm the user experience.” See “Related Party Transactions—Business
Collaboration with Tencent.” It is difficult for us to predict the potential impact of the integration of Sogou Search to power such a Weixin/WeChat search
function measured under the standards of “Tencent’s requirements for user experience” and/or “harm the user experience.” The potential for growth of our
business through such integration will be limited if Tencent does not make Sogou Search the preferred search function or decides not to extend the
arrangement for such integration and a Tencent search function or a search function of one of our competitors is given priority over ours in Weixin/WeChat.
Our existing business and our expansion strategy depend on certain additional key collaborative arrangements, and any inability to maintain or
develop such relationships could have an adverse effect on our business and prospects for growth.
Our existing business, and our strategy for developing our business, involve maintaining and developing various types of collaborations with third
parties, which provide us with access to additional user traffic, search services, products, and technology. For example, our Sogou Wise Doctor delivers
healthcare information, and receives healthcare data, through partnerships that provide us with access to articles written by physicians and to a PRC-
government sponsored healthcare encyclopedia; our partnership with Zhihu provides us with access to a knowledge-sharing platform; our partnership with
Microsoft’s Bing provides us with the technology to provide our users with English content on the Internet that we translate to Chinese in connection with
our cross-language search service; and our partnership with China Literature enables our users to access literature from a large online collection. In
addition, our various partnerships with third-party Internet properties provide our advertisers significant exposure to users beyond our core search user
base. We consider these collaborations to be important to our ability to deliver attractive service, product, and content offerings to our users, in order to
maintain and expand our user and advertiser bases, and we believe that it will continue to be important for us to develop similar partnerships in the future.
Our inability to maintain and grow such relationships could have an adverse impact on our existing business and our growth prospects.
We also have existing, and hope to develop additional, relationships with mobile device manufacturers for pre-installation of our search, input
method, and related applications. If we are unable to maintain and expand such relationships, the quality and reach of delivery of our services will be
adversely affected, and it may also be difficult for us to maintain and expand our user base and enhance awareness of our brand. In addition, our
competitors may establish the same relationships as those we have, which would tend to diminish any advantage we might otherwise gain from these
relationships.
If we fail to maintain and expand our collaborations with third-party operators of Internet properties, our revenues and growth may be adversely
affected.
We place certain of our advertisers’ promotional links on the Internet properties of third parties, thereby expanding the base of users accessing the
advertisements beyond our own user base, and increasing our pay-for-click revenues. If these third parties decide to use a competitor’s or their own online
search services, or do not prominently display our advertisements in comparison to those of other advertisers on their properties, or if we fail to attract
additional third-party operators of Internet properties, our advertising revenues and growth may be adversely affected.
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We may not be able to sustain our historical growth or successfully manage any future growth.
We have experienced growth in recent years. Our revenues grew from US$908.4 million for the year ended December 31, 2017, to US$1.124
billion for the year ended December 31, 2018, and to US$1.172 billion for the year ended December 31, 2019. Our 2016 revenues were affected by
tightened PRC regulation of the online advertising industry during 2016, which had an adverse impact on the search and search-related advertising market
in China in general. The growth in our revenues during 2018 and 2019 was affected by slower growth in the mobile search market in China in 2018 and
2019, coupled with unfavorable macroeconomic conditions that impacted the online advertising industry in general, and regulatory headwinds in certain
sectors such as online games. In addition, although our traffic acquisition costs as a percentage of revenue moderated during 2019, if our traffic acquisition
costs trend higher in the future, as they had prior to 2019 due to intensifying competition for channel partnerships, it could be difficult for us to sustain
expenditures for traffic acquisition at the same level as our competitors, which could result in slower or flat growth, or even a reduction, in our user traffic,
which would have a negative impact on our revenues and revenue growth prospects. We may not be able to sustain a rate of growth in future periods
similar to that we experienced in the past, and our revenues may even decline. Accordingly, you should not rely on the results of any prior period as an
indication of our future financial and operating performance.
We are exploring and implementing, and expect to continue to explore and implement in the future, new business initiatives, including in
industries in which we have limited or no experience, as well as new business models. Developing new businesses and initiatives requires significant
investments of time and resources, and may present new and difficult technological, operational, and legal challenges, as well as subject us to additional
regulatory risks. Any failure to effectively manage these risks may limit our future growth and hamper our business strategy.
We depend on online advertising for a significant majority of our revenues. If we fail to retain existing advertisers or attract new advertisers for
our online advertising services, our business and growth prospects could be harmed.
We earn most of our revenues from our search and search related advertising services. Advertisers will not use our services if they do not find
them to be effective in producing a sufficient volume of click-throughs and desired results for advertisers. Our advertisers are generally able to terminate
their relationships with us at any time without penalty if they are not satisfied with our services, choose our competitors for similar services, or advertise in
media channels other than Internet search. Therefore, it could be difficult for us to maintain or increase our advertiser base, and our revenues and profits
could decline or fail to increase.
We rely on third-party advertising agencies for most of our online advertising revenues.
We rely heavily on third-party advertising agencies for our sales to our advertisers. It is important that we maintain good relationships with these
agencies. We do not enter into long-term agreements with any of the advertising agencies and cannot assure that we will continue to maintain favorable
relationships with them. Further, we provide various types of discounts and rebates to advertising agencies in order to incentivize them to maximize the
volume of advertising business that they bring to us. In order to retain or properly incentivize our advertising agencies, it may become necessary in the
future for us to increase the levels of such rebates and discounts, which could have an adverse effect on our results of operations.
If we fail to maintain and enhance awareness of and loyalty to our brand, it will be difficult for us to maintain and increase our user and
advertiser bases.
It is critical for us to maintain and further enhance our brand if we are to succeed in expanding our user and advertiser bases. Our success in
promoting and enhancing our brand, and our ability to remain competitive, will depend on our success in delivering superior user experience and on our
marketing efforts. Enhancing our brand awareness may require substantial marketing and promotion expenses. If we are unable to maintain and enhance
our brand, or incur significant marketing and promotion expenses that do not achieve anticipated business growth, or are subject to negative publicity that
harms our brand, our business and results of operations may be adversely affected.
Our success depends on the continuing efforts of our senior management team and key employees, and our business may be harmed if we lose
their services.
Our business heavily depends upon the services of our key executives, particularly Xiaochuan Wang, our Chief Executive Officer. If any of our
key executives is unable or unwilling to continue in his or her present position, joins a competitor, or forms a competing company, our business may be
severely disrupted. Although our executive officers have entered into employment agreements, confidentiality agreements, and non-competition
agreements with us, the degree of protection afforded to an employer pursuant to confidentiality and non-competition undertakings by persons employed in
the PRC may be more limited when compared to the degree of protection afforded with respect to employees in some other jurisdictions. We do not
maintain key-man life insurance for any of our key executives.
We also rely on key highly-skilled personnel for our business. Given the competitive nature of the industry, and in particular our competitors’
increasingly aggressive efforts to provide competitive compensation packages to attract talent in the markets where we operate, it may be difficult for us to
recruit and retain qualified personnel, and the risk of members of our key staff leaving us is high. Any such departure could have a disruptive impact on our
operations, and if we are unable to recruit, retain and motivate key personnel, we may not be able to grow effectively.
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Our strategy of investments in and acquiring complementary businesses and assets may fail, which could result in impairment losses.
In addition to organic growth, we may take advantage of opportunities to invest in or acquire additional businesses, services, assets or
technologies. However, we may fail to select appropriate investment or acquisition targets, or we may not be able to negotiate optimal arrangements,
including arrangements to finance any acquisitions. Acquisitions and the subsequent integration of new assets and businesses into our own could require
significant management attention and could result in a diversion of resources away from our existing business. Investments and acquisitions could result in
the use of substantial amounts of cash, increased leverage, potentially dilutive issuances of equity securities, goodwill impairment charges, amortization
expenses for other intangible assets and exposure to potential liabilities of the acquired business, and the invested or acquired assets or businesses may not
generate the financial results we expect. For example, the private companies that we have invested in could be adversly affected by the COVID-19
outbreak, which may lead to impairment in the fair values of our investments and in turn adversely affect our financial condition and operating results.
Moreover, the costs of identifying and consummating these transactions may be significant. In addition to obtaining the necessary corporate governance
approvals, we may also need to obtain approvals and licenses from relevant governmental authorities for the acquisitions to comply with applicable laws
and regulations, which could result in increased costs and delays.
Requirements of U.S. GAAP regarding the recognition of share-based compensation expense may adversely affect our results of operations and
our competitiveness in the employee marketplace.
Our performance is largely dependent on talented and highly-skilled individuals. Our future success depends on our continuing ability to identify,
develop, motivate, and retain highly-skilled personnel. We have a history of using low or nominally-priced employee share options as an important
component of competitive pay packages, in order to align our employees’ interests with the interests of our company and our shareholders and to encourage
quality employees to join and remain with us. We have adopted guidance on accounting for share-based compensation that requires the measurement and
recognition of compensation expense for all share-based compensation based on estimated fair values. As a result, our operating results contain charges for
share-based compensation expense related to employee share options. The historical and future recognition of share-based compensation in our statements
of comprehensive income has had and will have an impact on our results of operations. On the other hand, if we alter our employee share incentive plans to
minimize the corresponding share-based compensation expense, it may limit our ability to continue to use share-based awards as a tool to attract and retain
our employees, and it may adversely affect our operations. In addition, there may be future changes in the U.S. GAAP requirements for recognition of
share-based compensation expense, which could have similar effects on our results operations and our competitiveness in the market for key employees.
Our user metrics and other estimates are subject to inherent challenges in measuring our operating performance, which may harm our
reputation.
We regularly review DAU, MAU, number of advertisers, page views, and other operating metrics to evaluate growth trends, measure our
performance, and make strategic decisions. These metrics are calculated using internal company data, have not been validated by an independent third
party, and may not be indicative of our future financial results. While these numbers are based on what we believe to be reasonable estimates for the
applicable period of measurement, there are inherent challenges in measuring how our platforms are used across a large population in China. For example,
we may not be able to distinguish individual users who have multiple accounts.
Errors or inaccuracies in our metrics or data could result in incorrect business decisions and inefficiencies. For instance, if a significant
understatement or overstatement of active users were to occur, we might expend resources to implement unnecessary business measures or fail to take
required actions to remedy an unfavorable trend. If partners or investors do not perceive our user, geographic, or other operating metrics to accurately
represent our user base, or if we discover inaccuracies in our user, geographic, or other operating metrics, our reputation may be harmed.
We have not independently verified the accuracy or completeness of data, estimates, and projections in this annual report that we obtained from
third party sources, and such information involves assumptions and limitations.
Certain facts, forecasts, and other statistics relating to the industries in which we compete contained in this annual report have been derived from
various public data sources and commissioned third-party industry reports. In connection with our preparation of this annual report, we commissioned
CVSC TNS Research (“CTR”) to update market research concerning the online search and AI industries in China, and we also referred to market research
reports of iResearch and IDC that we had previously commissioned concerning the same industries in the United States. In deriving the market size of these
industries, these industry consultants may have adopted different assumptions and estimates for certain metrics. While we generally believe such reports to
be reliable, we have not independently verified the accuracy or completeness of such information. Such reports may not be prepared on a comparable basis
or may not be consistent with other sources.
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Industry data and projections involve a number of assumptions and limitations. Our industry data and market share data should be interpreted in
the light of the defined industries in which we operate. Any discrepancy in the interpretation of such data could lead to different measurements and
projections, and actual results could differ from the projections.
We may not be able to prevent others from making unauthorized use of our intellectual property, which could harm our business and competitive
position.
We regard our patents, copyrights, trademarks, trade secrets, and other intellectual property as critical to our business. Unauthorized use of our
intellectual property by third parties may adversely affect our business and reputation. We rely on a combination of intellectual property laws and
contractual arrangements to protect our proprietary rights. It is often difficult to register, maintain, and enforce intellectual property rights in the PRC.
Statutory laws and regulations are subject to judicial interpretation and enforcement and may not be applied consistently due to the lack of clear guidance
on statutory interpretation in the PRC. In addition, contractual agreements may be breached by counterparties, and there may not be adequate remedies
available to us for any such breach. Accordingly, we may not be able to effectively protect our intellectual property rights or to enforce our contractual
rights in China. Policing any unauthorized use of our intellectual property is difficult and costly and the steps we have taken may be inadequate to prevent
the misappropriation of our intellectual property. In the event that we resort to litigation to enforce our intellectual property rights, such litigation could
result in substantial costs and a diversion of our managerial and financial resources. We can provide no assurance that we will prevail in such litigation. In
addition, our trade secrets may be leaked or otherwise become available to, or be independently discovered by, our competitors.
Pending or future litigation could have an adverse impact on our financial condition and results of operations.
From time to time, we have been, and may in the future be, subject to lawsuits brought by our competitors, individuals, or other entities against us.
We are currently involved in several lawsuits in PRC courts where our competitors instituted proceedings or asserted counterclaims against us and we
instituted proceedings or asserted counterclaims against our competitors. For example, there are various legal proceedings currently pending between us
and Baidu in which we allege that Baidu’s input method infringes certain of our patents relating to Sogou Input Method and seek monetary damages, while
Baidu has asserted in counterclaims or in legal proceeding that it has initiated against us that Sogou Input Method infringes certain of its patents, and seeks
monetary damages. There is also a lawsuit pending against us in which Shanghai Cishu Publications Ltd. has alleged that we used vocabulary content
without permission and seeks monetary damages. In addition, we are subject to ongoing unfair competition claims against us brought by Baidu and UC
Web, separately, as to which a PRC lower court has issued initial judgments against us that both we and Baidu have appealed, in which they allege that
certain functions of our Sogou Input Method unfairly divert users to us, and seek monetary damages and cessation of the alleged unfair competitive
practices. There are also two putative class action lawsuits that have been filed against us in the United States, one in a State court in the State of California
and one in the United States District Court for the Southern District of New York, that allege violations of U.S. securities laws in connection with our IPO
in 2017.
Where we can make a reasonable estimate of the liability relating to pending litigation against us and determine that an adverse liability resulting
from such litigation is probable we record a related contingent liability. As additional information becomes available, we assess the potential liability and
revise estimates as appropriate. However, due to the inherent uncertainties relating to litigation, the amount of our estimates may be inaccurate, in which
case our financial condition and results of operation may be adversely affected. In addition, the outcomes of actions we institute may not be successful or
favorable to us. Lawsuits against us may also generate negative publicity that significantly harms our reputation, which may adversely affect our user and
advertiser base. In addition to the related cost, managing and defending litigation and related indemnity obligations can significantly divert our
management’s and Board of Directors’ attention from operating our business. We may also need to pay damages or settle lawsuits with a substantial
amount of cash. While we do not believe that any currently pending proceedings are likely to have a material adverse effect on our business, financial
condition, results of operations, and cash flows, if there were adverse determinations in legal proceedings against us, we could be required to pay
substantial monetary damages or adjust our business practices, which could have an adverse effect on our financial condition and results of operations, and
cash flows.
We are currently subject to, and in the future may from time to time face, intellectual property infringement claims, which could be time-
consuming and costly to defend, and could have an adverse impact on our financial position and results of operations, particularly if we are
required to pay significant damages or cease offering any of our products or curtail any key features of our products.
We cannot be certain that the products, services and intellectual property used in our normal course of business do not or will not infringe valid
patents, copyrights or other intellectual property rights held by third parties. We currently are, and may in the future be, subject to claims and legal
proceedings relating to the intellectual property of others in the ordinary course of our business, and may in the future be required to pay damages or to
agree to restrict our activities. See “—Pending or future litigation could have an adverse impact on our financial condition and results of operations.” In
particular, if we are found to have violated the intellectual property rights of others, we may be enjoined from using such intellectual property, may be
ordered to pay damages, and may incur licensing fees or be forced to develop alternatives. We may incur substantial expense in defending against third-
party infringement claims, regardless of their merit. Successful infringement claims against us may result in substantial monetary liability or may materially
disrupt the conduct of our business by restricting or prohibiting our use of the intellectual property in question.
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We may not have exclusive rights to technology, trademarks, and designs that are crucial to our business.
We have applied for various patents relating to our business. While we have succeeded in obtaining some patents, some of our patent applications
are still under examination by the State Intellectual Property Office of the PRC. Approvals of our patent applications are subject to determinations by the
State Intellectual Property Office of the PRC and relevant overseas authorities that there are no prior rights in the applicable territory. In addition, we have
applied for initial registrations in the PRC and overseas, and/or changes in registrations relating to transfers of our Sogou logos and other of our key
trademarks in the PRC, and the corresponding Chinese versions of the trademarks, so as to establish and protect our exclusive rights to these trademarks.
While we have succeeded in registering the trademarks for most of these marks in the PRC under certain classes, the applications for initial registration,
and/or changes in registrations relating to transfers, of some marks and/or of some of trademarks under other classes are still under examination by the
Trademark Office of the State Administration for Industry and Commerce (the “SAIC”), and relevant overseas authorities. Approvals of our initial
trademark registration applications, and/or of changes in registrations relating to such transfers, are subject to determinations by the Trademark Office of
the SAIC and relevant overseas authorities that there are no prior rights in the applicable territories. We cannot assure you that these patent and trademark
applications will be approved. Any rejection of these applications could adversely affect our rights to the affected technology, marks, and designs. In
addition, even if these applications are approved, we cannot assure you that any issued patents or registered trademarks will be sufficient in scope to
provide adequate protection of our rights.
If our search results contain information that is inaccurate or harmful to our users, our business and reputation may be adversely affected.
We could be exposed to liability arising from our search results listings if information accessed through our services contains errors, and third
parties may make claims against us for losses incurred in reliance on that information. Investigating and defending such claims could be expensive even if
they did not result in liability, and we do not carry any liability insurance against such risks.
In addition, if users do not perceive information that they access through our search services to be authoritative, useful, and trustworthy, we may
not be able to retain these users or attract additional users, and our reputation, business, and results of operation may be harmed. In addition, if such content
contains inaccuracies, it is possible that users will seek to hold us liable for damages, because we provide links to such content, even though such content is
provided by third parties and any negative publicity regarding the accuracy of such content could harm our reputation, and reduce user traffic. In addition,
any negative publicity or incident involving our peer companies could have an adverse impact on our industry as a whole, which in turn could harm our
reputation and reduce our user traffic. For example, in early 2016 it was widely reported that an unsuccessful experimental cancer treatment had been
promoted in a sponsored search listing on a third party’s Internet property. Even though our search results listings were not involved, we believe that the
broad negative publicity surrounding the incident adversely affected the reputation of the online search industry in China in general with an adverse impact
on our user traffic and results of operations in 2016.
We may be subject to regulatory investigations and sanctions for inappropriate or illegal content that is accessed through our search results.
The online search industry in China is subject to extensive regulation. If content accessed through our search services includes information that
PRC governmental authorities find illegal or inappropriate, we may be required to curtail or even shut down our search services, and we may be subject to
other penalties. Although we seek to prevent fraudulent or otherwise illegal or inappropriate websites and information from being included in our search
results, such measures may not be effective. For example, we suspended part of our advertising services for 10 days in July 2018 in order to implement
remedial measures to ensure compliance with government regulations following a government investigation into certain non-compliant advertisements
created by a third party unrelated to us and displayed on our platform in June 2018. See “—Risks Related to China’s Regulatory and Economic
Environment—Regulation and censorship of information distribution in China may have an adverse effect on our business”; and “—Risks Related to
China’s Regulatory and Economic Environment—The PRC government may prevent us from distributing, and we may be subject to liability for, content
that it believes is inappropriate.”
We may be subject to potential liability for claims that search results violate the intellectual property rights of third parties.
It is possible that content that is made available by us through our search results may violate the intellectual property rights of third parties. PRC
laws and regulations are evolving, and uncertainties exist with respect to the legal standards for determining the potential liability of online search service
providers for search results that provide links to content on third-party websites that infringes copyrights of third parties. In December 2012, the Supreme
People’s Court of the PRC promulgated a judicial interpretation providing that PRC courts will place the burden on Internet service providers to remove not
only links or content that has been specifically-mentioned in notices of infringement from persons and entities claiming copyright in such content, but also
links or content that the providers “should have known” contained infringing content. This interpretation could subject us to significant administrative
burdens and might expose us to civil liability and penalties. Further, we rely on content provided by professional researchers and writers, either developed
by the outlets themselves or adapted from content of parties separate from such outlets, and it is difficult for us to fully monitor such content, which could
make us more vulnerable to potential infringement claims.
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We may be subject to legal liability associated with online activities on our platforms.
We host and provide a wide variety of products and services that enable advertisers to advertise products and services, and users to exchange
information and engage in various online activities. We may be subject to claims, investigations, or negative publicity relating to such activities. PRC laws
and regulations relating to the liability of providers of online products and services for activities of their users are not fully developed, and their current and
future reach is unclear. Also see “—We may be subject to regulatory investigations and sanctions for inappropriate or illegal content that is accessed
through our search results.” We also place advertisements on third-party Internet properties, and we offer products and services developed or created by
third parties. We may be subject to claims concerning these products and services based on our involvement in providing access to them, even if we do not
offer the products and services directly. We could be required to spend considerable financial and managerial resources defending any such claims, and they
could result in our having to pay monetary damages or penalties or ceasing certain aspects of our business, which could have an adverse effect on our
business and results of operations.
Privacy concerns or security breaches relating to our platforms could damage our reputation, deter current and potential users and advertisers
from using our products and services, and expose us to legal penalties and liability.
We collect, process, and store on our servers significant amounts of data concerning our users. While we have taken steps to protect our user data,
our security measures could be compromised, because techniques used to sabotage or obtain unauthorized access to systems change frequently and
generally are not recognized until they are launched against a target, and we may be unable to anticipate these techniques or to implement adequate
preventative measures. In addition, we are subject to various regulatory requirements relating to the security and privacy of such data, including restrictions
on the collection and use of personal information of users and steps we must take to prevent personal data from being divulged, stolen, or tampered with.
Regulatory requirements regarding the protection of such data are constantly evolving and can be subject to significant change, making the extent of our
responsibility in that regard uncertain. For example, the PRC Cybersecurity Law became effective in June 2017, but it is unclear as to the circumstances
and standard under which the law would apply and violations would be found, and there are great uncertainties as to the interpretation and application of
the law. It is possible that our data protection practice is or will be inconsistent with regulatory requirements. See “PRC Regulation—Provision of Internet
Content—Information Security and Censorship.” In addition, the PRC government may promulgate new laws or regulations regarding the protection of
personal data. For example, on May 28, 2019, the Cyberspace Administration of China issued for public comment draft Administrative Measures for Data
Security (the “Draft Data Security Law”), which purport to regulate the collection, storage, transmission, processing, and usage of data and other related
data activities within China, but it is unclear whether and/or when the Draft Data Security Law will be enacted. If current or future laws and regulations are
interpreted and applied in a manner that limits or prohibits any of our current practices, or if additional or different requirements are imposed by these laws
and regulations, complying with such interpretations, applications, and requirements could cause us to incur substantial expenses or require us to alter our
practices in a manner that could harm our business. We cannot assure you that our existing user information protection systems and technical measures will
be considered sufficient under current and future applicable laws and regulations. Any systems failure or compromise of our security, including through
employee error, that results in the release of our user data could seriously harm our reputation and brand, impair our ability to retain and attract users and
advertisers, expose us to liability to users whose data is released, and subject us to sanctions and penalties from governmental authorities. We also could be
liable for any security breaches of our advertisers’ confidential information. Any security breaches exposing such information could damage our reputation
and deter current and potential users and advertisers from using our services.
Our network operations may be vulnerable to hacking and viruses, which may reduce the use of our products and services and expose us to
liability.
Our user traffic may decline if any well-publicized compromise of security occurs. “Hacking” involves efforts to gain unauthorized access to
information or systems or to cause intentional malfunctions or loss or corruption of data, software, hardware, or other computer equipment. Techniques
used by hackers to obtain unauthorized access or sabotage systems change frequently and often are not recognized until launched against a target, which
means that we may be unable to anticipate new hacking methods or implement adequate security measures. Hackers, if successful, could misappropriate
proprietary information or cause disruptions in our service. We may be required to expend capital and other resources to protect our Internet platforms
against hackers, and measures we may take may not be effective. In addition, the inadvertent transmission of computer viruses could expose us to a risk of
loss or litigation and possible liability, as well as damage our reputation and decrease our user traffic.
Our business may be adversely affected by third-party software applications or practices that interfere with our receipt of information from, or
provision of information to, our users, which may impair our users’ experience.
Our business may be adversely affected by third-party software applications, which may be unintentional or malicious, that make changes to our
users’ PCs or mobile devices and interfere with our products and services. These software applications may change our users’ experience by hijacking
queries, altering or replacing our search results, or otherwise interfering with our ability to connect with our users. Such interference can occur without
disclosure to or consent from users, and users may associate any resulting negative experience with our products and services. Such software applications
are often designed to be difficult to remove, block, or disable. Further, software loaded on or added to mobile devices on which our search or other
applications, such as Sogou Input Method, are pre-installed may be incompatible with or interfere with or prevent the operation of such applications, which
might deter the owners of such devices from using our services.
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In addition, third-party website owners, content providers, and developers may implement applications and systems that interfere with our ability
to crawl and index their webpages and content, which is critical to the operation of our search services. If we are unable to successfully prevent or limit any
such applications or systems that interfere with our products and services, or if a significant number of third-party website owners, content providers, and
developers prevent us from indexing and including their webpages and content in our search results, our ability to deliver high-quality search results and a
satisfactory user experience will be impeded.
Adoption of Internet advertisement blocking technologies may have an adverse impact on our business and results of operations.
The development of software that blocks Internet advertisements before they appear on a user’s screen may hinder the growth of online
advertising. Since our advertising revenues are generally based on user click-throughs, the expansion of advertisement-blocking on the Internet may
decrease our advertising revenues, because when advertisements are blocked they are not downloaded from the server, which means such advertisements
will not be tracked as a delivered advertisement. In addition, advertisers may choose not to advertise on the Internet or on or through our sites because of
the use by third parties of Internet advertisement blocking measures. In addition, increasing numbers of browsers include technical barriers designed to
prevent Internet information service providers such as us to track the browsing history of their Internet users, which is also likely to adversely affect the
growth of online advertising and hence our business and growth prospects.
If we fail to detect click-through fraud, we could lose the confidence of our advertisers and our revenues could decline.
Our business is exposed to the risk of click-through fraud on our paid search results. Click-through fraud occurs when a person clicks paid search
results for a reason other than to view the underlying content of search results. If we fail to detect significant fraudulent clicks or otherwise are unable to
prevent significant fraudulent activity, the affected search advertisers may experience a reduced return on their investment in our pay-for-click services and
lose confidence in the integrity of our pay-for-click service systems, and we may have to issue refunds to our advertisers and may lose their future business.
If this happens, we may be unable to retain existing advertisers and attract new advertisers for our pay-for-click services, and our search revenues could
decline. In addition, affected advertisers may also file legal actions against us claiming that we have over-charged or failed to refund them. Any such claims
or similar claims, regardless of their merit, could be time-consuming and costly for us to defend against and could also adversely affect our brand and our
search advertisers’ confidence in the integrity of our pay-for-click services and systems.
Web spam and content farms, as well as our attempts to block them, could decrease the quality of our search results, and could deter our current
and potential users from using our products and services.
The proliferation of search engine spam websites, commonly referred to as Web spam, which attempt to manipulate search indexing to cause them
to appear higher in search results ranking hierarchies than they would without such manipulation, can have the effect of weakening the integrity of our
search results and causing users to lose confidence in our search products and services. “Content farm” websites, which commission very large amounts of
content, often of low quality, for the purpose, similar to that of Web spam, of causing such content farms’ links to obtain relatively high ranking in Internet
providers’ search results, can have similar adverse effects.
While we use, and continually improve, technology designed to detect and block Web spam, the algorithms we apply may nevertheless result in
excessive filtering that blocks desirable websites from our search results. Therefore, both the existence of Web spam and content farms, and our attempts to
block them, could deter our current and potential users from using our products and services. In addition, as some of our third-party Internet-property
collaborators could include Web spam or content farm websites, our advertising revenues could be reduced by our efforts to filter such websites. If our
efforts to combat these and other types of index spamming are unsuccessful, our reputation for delivering relevant information could be diminished. This
could result in a decline in user traffic, which would damage our business.
The successful operation of our business depends upon the performance and reliability of the Internet infrastructure in China.
Our growth will depend in part on the PRC government and state-owned telecommunications services providers maintaining and expanding
Internet and telecommunications infrastructure, standards, protocols, and complementary products and services to facilitate our reaching a broader base of
Internet users in China.
Almost all access to the Internet in China is maintained through China Mobile, China Unicom and China Telecom under the administrative control
and regulatory supervision of the Ministry of Industry and Information Technology, or MIIT. We rely on this infrastructure and China Mobile, China
Unicom, and China Telecom to provide data communications capacity primarily through local telecommunications lines. Although the government has
announced aggressive plans to develop the national information infrastructure, this infrastructure may not be developed and the Internet infrastructure in
China may not be able to support the continued growth of Internet usage. In addition, we will be unlikely to have access to alternative networks and
services on a timely basis, if at all, in the event of any infrastructure disruption or failure.
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Interruption or failure of our information technology and communications systems may result in reduced user traffic and harm to our reputation
and business.
Interruption or failure of any of our information technology and communications systems or those of the operators of third-party Internet
properties with which we collaborate could impede or prevent our ability to provide our search and search-related services. In addition, our operations are
vulnerable to natural disasters and other events. Our disaster recovery plan for our servers cannot fully ensure safety in the event of damage from fire,
floods, typhoons, earthquakes, power loss, telecommunications failures, hacking, and similar events. If any of the foregoing occurs, we may experience a
partial or complete system shutdown. Furthermore, our servers, which are hosted at third-party Internet data centers, are also vulnerable to break-ins,
sabotage and vandalism. Some of our systems are not fully redundant, and our disaster recovery planning does not account for all possible scenarios. The
occurrence of a natural disaster or a closure of an Internet data center by a third-party provider without adequate notice could result in lengthy service
interruptions.
Any system failure or inadequacy that causes interruptions in the availability of our services, or increases the response time of our services, could
have an adverse impact on our users’ experience and reduce our users’ satisfaction, our attractiveness to users and advertisers, and future user traffic and
advertising on our platform.
Furthermore, we do not carry any business interruption insurance. To improve the performance and to prevent disruption of our services, we may
have to make substantial investments to deploy additional servers or one or more copies of our Internet platforms to mirror our online resources.
We face risks related to natural disasters, terrorist attacks, and health epidemics, such as the recent outbreak of COVID-19, a novel strain of the
coronavirus.
Our business has been and could in the future be adversely affected by natural disasters, such as earthquakes, floods, landslides, and tsunamis;
terrorist attacks and other acts of violence or war; social instability; recurrences of outbreaks of previous health epidemics such as avian influenza, severe
acute respiratory syndrome (or “SARS”), the Zika virus, and the Ebola virus; or new outbreaks of health epidemics. The novel coronavirus disease
COVID-19 emerged as an epidemic in December 2019 and has spread rapidly to become a worldwide pandemic. In response to the emergence of the
COVID-19 virus, the Chinese government extended the Chinese New Year holiday beyond its original ending date of January 30, 2020, has limited travel
within China, and has encouraged employees of companies in Beijing, where we have our headquarters, and other Chinese cities to work from home until
the epidemic can been brought under control. The COVID-19 outbreak has had, and is likely to continue to have, a significant negative impact on the
Chinese economy, and on the worldwide economy as a whole, and, in particular, on advertiser spending in the China market in which we operate, which
has caused, and could continue to cause, an adverse impact on our advertising revenues by causing our advertisers to curtail their spending on online
advertising. Although we believe that one effect during the first quarter of 2020 of measures taken to control the COVID-19 virus have been an increase in
our user traffic as individuals confined to their homes spent more time online than they would have otherwise, which trend may continue, our traffic
acquisition costs also increased significantly during the first quarter of 2020, and they may continue at a relatively higher level while control measures for
COVID-19 remain in effect, which would have an adverse impact on our results of operations. In addition, our advertising customers may require
additional time to pay us or fail to pay us at all, which could require us to record additional allowances for any potential uncollectible amounts. The extent
to which COVID-19 impacts our results will depend on future developments, including the possibility of a resurgence of the COVID-19 outbreak in China,
which remain uncertain and difficult to predict.
Risks Related to Our Corporate Structure
In order to comply with PRC regulatory requirements, we operate a portion of our business through our primary VIE, Beijing Sogou Information
Service Co., Ltd. (“Sogou Information”), a company with which we have contractual relationships but in which we do not have an actual
ownership interest, and its three direct and indirect wholly-owned subsidiaries. If these contractual arrangements and our current ownership
structure were found to be in violation of current or future PRC laws and regulations we could be subject to severe penalties.
Various regulations in the PRC restrict or prohibit foreign-owned companies from operating in specified industries, such as the provision of
Internet information, online games, mobile applications, Internet access, and certain other industries. As we are a Cayman Islands company and our direct
and indirect wholly-owned subsidiaries Sogou (BVI) Limited, or Sogou BVI, Sogou Hong Kong Limited, or Sogou HK, and Vast Creation Advertising
Media Services Limited, or Vast Creation, are incorporated in the British Virgin Islands and Hong Kong, our indirect wholly-owned PRC subsidiaries,
Beijing Sogou Technology Development Co., Ltd. (“Sogou Technology”), and Beijing Sogou Network Technology Co., Ltd. (“Sogou Network”), are
wholly foreign-owned enterprises (“WFOEs”) under PRC law and are considered to be foreign-owned. In order to comply with PRC regulatory
requirements, we conduct certain of our Internet and other value-added telecommunication operations in the PRC through our VIE Sogou Information,
which is incorporated in the PRC and is owned 10% by our Chief Executive Officer, 45% by our controlling shareholder Sohu, and 45% by a Tencent
group entity; and through three direct and indirect subsidiaries of Sogou Information, which are also considered to be our VIEs. Through a series of
contractual arrangements, Sogou Information, of which we are the primary beneficiary, and Sogou Information’s three direct and indirect subsidiaries are
effectively controlled by our subsidiary Sogou Technology. Revenues generated by our VIEs represented 28.3%, 37.7%, and 42.8%, respectively, of our
total revenues for the years ended December 31, 2017, 2018, and 2019.
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In addition, pursuant to Circular 6 and the Ministry of Commerce (the “MOFCOM”) Security Review Rules, a security review is required for
mergers and acquisitions by foreign investors having “national defense and security” concerns and mergers and acquisitions by which foreign investors
may acquire “de facto control” of domestic enterprises with “national security” concerns and prohibit foreign investors from bypassing the security review
requirement by structuring transactions through proxies, trusts, indirect investments, leases, loans, control through contractual arrangements, or offshore
transactions. These national security review-related regulations are relatively new and there is a lack of clear statutory interpretation regarding the
implementation of the rules. PRC governmental authorities may interpret these regulations to mean that the transactions implementing our VIE structures
should have been submitted for review. For a discussion of these PRC national security review requirements, see “PRC Regulation—Regulation of M&A
and Overseas Listings.”
In the opinion of Commerce & Finance Law Offices, our PRC legal counsel, our current ownership structure, the ownership structure of our PRC
subsidiaries and VIEs (excluding the Consolidated Trust), and the contractual arrangements between our PRC subsidiaries and VIEs (excluding the
Consolidated Trust) and their shareholders are not in violation of existing PRC laws, rules, and regulations. Our PRC legal counsel also advises us that
there are uncertainties regarding the interpretation and application of current or future PRC laws and regulations. Accordingly, we and our PRC legal
counsel cannot assure you that PRC governmental authorities will not ultimately take a view contrary to that of our PRC legal counsel. If we were found to
be in violation of any existing or future PRC laws or regulations relating to foreign ownership of value-added telecommunications businesses, online search
services, online games, other online information and content services, and security reviews of foreign investments in such businesses, governmental
authorities with jurisdiction over the operation of our business would have broad discretion in dealing with such a violation, including levying fines,
confiscating our income, revoking the business or operating licenses of our PRC subsidiaries and/or VIEs, requiring us to restructure our ownership
structure or operations, requiring us to discontinue or divest ourselves of all or any portion of our operations or assets, restricting our right to collect
revenues, blocking our Internet platforms, or imposing additional conditions or requirements with which we may not be able to comply. Any of these
actions could cause significant disruption to our business operations and have an adverse impact on our business, financial condition, and results of
operations. Further, if changes were required to be made to our ownership structure, our ability to consolidate our VIEs’ assets and operating results into
our consolidated financial statements could be adversely affected.
We depend upon contractual arrangements with our VIE Sogou Information and its shareholders for the success of our business and these
arrangements may not be as effective in providing operational control as direct ownership of the entities and may be difficult to enforce.
Due to the restrictions or prohibitions on foreign ownership over online search services, online games operations and other value-added
telecommunication business in the PRC, we depend on our VIEs, in which we have no direct ownership interest, to provide those services through
contractual agreements with our VIE Sogou Information and to hold some of our assets, including some of the domain names and trademarks relating to
our business. These arrangements may not be as effective in providing control over our business operations as would direct ownership of our VIEs. For
example, if we had direct ownership of our VIEs, we would be able to exercise our rights as a shareholder to effect changes in their boards of directors,
which in turn could effect changes at the management level. Due to our VIE structure, we have to rely on contractual rights to affect control and
management of our VIEs, which exposes us to the risk of potential breach of VIE contracts by the VIEs or their shareholders, such as their failing to use the
domain names and trademarks held by them, or failing to maintain our Internet platforms, in an acceptable manner or taking other actions that are
detrimental to our interests. In addition, as our VIE Sogou Information is jointly owned by its shareholders, it may be difficult for us to change our
corporate structure if such shareholders refuse to cooperate with us. In addition, some of our subsidiaries and VIEs could fail to take actions required for
our business, such as entering into business contracts with potential suppliers or failing to maintain the necessary permits for the business. Furthermore, if
the shareholders of Sogou Information were involved in proceedings that had an adverse impact on their shareholder interests in Sogou Information or on
our ability to enforce relevant contracts related to the VIE structure, our overall business, financial condition, and results of operations could be adversely
affected.
The shareholders of Sogou Information may breach, or cause Sogou Information to breach, the VIE contracts for a number of reasons. For
example, their interests as shareholders of Sogou Information and the interests of our subsidiaries may conflict and we may fail to resolve such conflicts;
the shareholders may believe that breaching the contracts will lead to greater economic benefit for them; or the shareholders may otherwise act in bad faith.
If any of the foregoing were to happen, we may have to rely on legal or arbitral proceedings to enforce our contractual rights. In addition, disputes may
arise among the shareholders of Sogou Information with respect to their ownership of Sogou Information, which could lead them to breach their
agreements with us. Such arbitral and legal proceedings and disputes may cost us substantial financial and other resources, and result in disruption of our
business, and the outcome might not be in our favor. For example, a PRC court or arbitration panel could conclude that our VIE contracts violate PRC laws
or are otherwise unenforceable. If the contractual arrangements with Sogou Information were found by PRC governmental authorities with appropriate
jurisdiction to be unenforceable, we could lose control over the assets owned by Sogou Information and our other VIEs and lose our ability to consolidate
such VIEs’ results of operations, assets, and liabilities in our consolidated financial statements and/or to transfer the revenues of our VIEs to our
corresponding PRC subsidiary Sogou Technology. In addition, such a finding of unenforceability by PRC authorities could cause more than 75% of our
gross income or more than 50% of our assets to be passive in the year that this finding was made or in subsequent years, which, in a given year for which
we otherwise did not expect to be classified as a passive foreign investment company (“PFIC”) for United States federal income tax purposes, could cause
us to be classified as a PFIC for years in which we would not otherwise be so classified. See “Taxation—United States Federal Income Taxation—Passive
Foreign Investment Company” in Item 10 of this annual report.
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As all of the contractual arrangements with Sogou Information and its shareholders are governed by PRC laws and provide for the resolution of
disputes through either arbitration or litigation in the PRC, they would be interpreted in accordance with PRC laws and any disputes would be resolved in
accordance with PRC legal procedures. We would have to rely for enforcement on legal remedies under PRC laws, including specific performance,
injunctive relief, or damages, which might not be effective. For example, if we sought to enforce the equity interest purchase right agreement for the
transfer of equity interests in Sogou Information, if the transferee was a foreign company the transfer would be subject to approval by PRC governmental
authorities such as the MIIT and the MOFCOM, and the transferee would be required to comply with various requirements, including qualification and
maximum foreign shareholding percentage requirements. As these PRC governmental authorities have wide discretion in granting such approvals, we
could fail to obtain such approvals. In addition, our VIE contracts might not be enforceable in China if PRC governmental authorities, courts or arbitral
tribunals took the view that such contracts contravened PRC laws or were otherwise not enforceable for public policy reasons.
Furthermore, the legal environment in the PRC is not as developed as in other jurisdictions, such as the United States. As a result, uncertainties in
the PRC legal system could further limit our ability to enforce these contractual arrangements. In the event we were unable to enforce these contractual
arrangements, we would not be able to exert effective control over our VIEs, and our ability to conduct our business, and our financial condition and results
of operation would be severely adversely affected.
The contractual arrangements between our subsidiary Sogou Technology and our VIE Sogou Information may result in adverse tax consequences
to us.
PRC laws and regulations emphasize the requirement of an arm’s-length basis for transfer pricing arrangements between related parties. The laws
and regulations also require enterprises with related party transactions to prepare transfer pricing documentation to demonstrate the basis for determining
pricing, the computation methodology and detailed explanations. Related party arrangements and transactions may be subject to challenge or tax inspection
by PRC tax authorities.
Under a tax inspection, if our transfer pricing arrangements between our China-based subsidiary Sogou Technology and our VIE Sogou
Information are judged as tax avoidance, or related documentation does not meet the requirements for such arrangements, Sogou Information and Sogou
Technology may be subject to adverse tax consequences, such as a transfer pricing adjustment. A transfer pricing adjustment could result in a reduction, for
PRC tax purposes, of adjustments recorded by Sogou Information, which could adversely affect us by (i) increasing Sogou Information’s tax liabilities
without reducing Sogou Technology’s tax liabilities, which could further result in interest and penalties being levied on us for unpaid taxes or (ii) limiting
the ability of our PRC companies to maintain preferential tax treatment and other financial incentives. In addition, if for any reason we need to cause the
transfer of any of the shareholders’ equity interest in any Sogou Information to a different nominee shareholder, we might be required to pay individual
income tax, on behalf of the transferring shareholder, on any gain deemed to have been realized by such shareholder on such transfer.
If one or more of our VIEs declare bankruptcy or become subject to a dissolution or liquidation proceeding, we may lose the ability to use and
enjoy assets held by those VIEs.
Our VIEs hold assets, such as our core intellectual property, licenses, and permits, that are critical to our business operations. Although the equity
interest purchase rights agreement among our PRC subsidiaries, our VIE Sogou Information, and the shareholders of Sogou Information contains terms that
specifically obligate such shareholders to ensure the valid existence of Sogou Information and our other VIEs, in the event these shareholders breached
their obligations and voluntarily liquidated our VIEs, or if any of our VIEs declared bankruptcy and all or part of its assets became subject to liens or rights
of third-party creditors, we might be unable to continue some or all of our business operations. Furthermore, if any of our VIEs were to undergo a voluntary
or involuntary liquidation proceeding, their shareholders or unrelated third-party creditors might claim rights to some or all of such VIEs’ assets and their
rights could be senior to our rights under the VIE contracts with Sogou Information, which could hinder our ability to operate our business.
Risks Related to China’s Regulatory and Economic Environment
PRC regulations relating to sponsored search have had, and may continue to have, an adverse effect on our results of operations.
On April 13, 2016, the SAIC and sixteen other PRC government agencies jointly issued a Notice of Campaign to Crack Down on Illegal Internet
Finance Advertisements and Other Financial Activities in the Name of Investment Management, or the Campaign Notice, pursuant to which a campaign
was conducted between April 2016 and January 2017 targeting, among other things, online advertisements for Internet finance and other financial activities
posted on online search portals such as ours. The Cyberspace Administration of China, or the CAOC, issued the Measures for the Administration of Online
Information Search Services, which became effective on August 1, 2016 and require that providers of online search services verify the credentials of pay-
for-click advertisers, specify a maximum percentage that pay-for-click search results may represent of results on a search page, and require that providers
of search services conspicuously identify pay-for-click search results as such. The SAIC issued the Interim Measures for the Administration of Online
Advertising, or (the “SAIC Interim Measures”), which became effective on September 1, 2016 and treat pay-for-click search results as advertisements
subject to PRC laws governing advertisements, require that pay-for-click search results be conspicuously identified on search result pages as
advertisements and subject revenues from such advertisements to a 3% PRC tax that is applied to advertising revenues. In order to comply with these
regulations, we have established more stringent standards for selecting advertisers for our pay-for-click services and have turned down certain existing
advertisers, and have lowered the percentage that pay-for-click search results represent of results on our search pages, which had an adverse impact on our
search and search-related revenues and overall results of operations for 2016 and, along with the tax on advertising, are likely to continue to have such an
impact. We cannot assure you that PRC governmental authorities will not issue new laws or regulations specifically regulating sponsored search services,
which could further impact our revenues.
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Political, economic, and social policies of the PRC government could affect our business.
Substantially all of our business, operating assets, fixed assets and operations are located in China, and substantially all of our revenues are
derived from our operations in China. Accordingly, our business may be adversely affected by changes in political, economic or social conditions in China,
adjustments in PRC government policies or changes in laws and regulations.
The economy of China differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development
in a number of respects, including:
· structure;
· level of government involvement;
· level of development;
· level of capital reinvestment;
· growth rate;
· control of foreign exchange; and
· methods of allocating resources.
Since 1949, China has been primarily a planned economy subject to a system of macroeconomic management. Although the PRC government still
owns a significant portion of the productive assets in China, economic reform policies since the late 1970s have emphasized decentralization, autonomous
enterprises and the utilization of market mechanisms. We cannot predict the future effects of the economic reform and macroeconomic measures adopted
by the PRC government on our business or results of operations. Furthermore, the PRC government began to focus more attention on social issues in recent
years and has promulgated or may promulgate additional laws or regulations in this area, which could affect our business in China.
While the Chinese economy has grown significantly over the past 30 years, the growth has been uneven geographically among various sectors of
the economy, and during different periods. The Chinese economy may not continue to grow, and if there is growth, such growth may not be steady and
uniform; if there is a slowdown, such a slowdown may have a negative effect on our business. The Chinese economy experienced high inflation in 2010
and 2011, and to curb the accelerating inflation the PBOC, China’s central bank, raised benchmark interest rates three times in 2011. The level of exports
from the PRC also declined significantly recently. According to the National Bureau of Statistics of China, the growth rate of China’s gross domestic
product, compared to that of the same period in the previous year, slowed from 7.4% in 2014, to 6.9% in 2015, to 6.7% in 2016, to 6.9% in 2017, to 6.6%
in 2018, and to 6.1% in 2019. Various macroeconomic measures and monetary policies adopted by the PRC government to guide economic growth and
manage inflation and the allocation of resources may not be effective in sustaining the growth rate of the Chinese economy. In addition, such measures,
even if they benefit the overall Chinese economy in the long run, may have an adverse effect on us if they reduce the amount of money that our existing or
future advertisers devote to online advertising.
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The PRC legal system embodies uncertainties that could limit the legal protections available to us and you, or could lead to penalties on us.
The PRC legal system is a civil law system based on written statutes and regulations. Unlike common law systems, it is a system in which decided
legal cases have little precedential value. In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing
economic matters in general. Our PRC operating subsidiaries Sogou Technology and Sogou Network are WFOEs that are incorporated in China and wholly
owned by our indirect offshore subsidiaries. As WFOEs, Sogou Technology and Sogou Network are subject to laws and regulations applicable to foreign
investment in China. All of our subsidiaries and VIEs incorporated in China are also subject to all other applicable PRC laws and regulations. Because of
the relatively short period for enacting such a comprehensive legal system, it is possible that the laws, regulations and legal requirements are relatively
recent, and their interpretation and enforcement involve uncertainties. These uncertainties could limit the legal protections available to us and other foreign
investors, including you. Such uncertainties may also make it easier for others to infringe our intellectual property without significant cost, and new
entrants to the market may tend to use gray areas to compete with us. In addition, uncertainties in the PRC legal system may lead to penalties imposed on
us because of a difference in interpretation of the applicable laws between the relevant PRC governmental authorities and us. For example, under current
tax laws and regulations, we are responsible for paying value-added tax. However, since there is no clear guidance as to the applicability of certain areas of
preferential tax treatment, we may be found to be in violation of the tax laws and regulations based on the interpretation of competent PRC tax authorities
with regard to the scope of taxable services and the applicable tax rates, and therefore might be subject to penalties, including monetary penalties. In
addition, we cannot predict the effect of future developments in the PRC legal system, particularly with regard to the Internet, including the promulgation
of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws.
The enforcement of the PRC Labor Contract Law and other labor-related regulations in the PRC may adversely affect our business and results of
operations.
The Standing Committee of the National People’s Congress enacted the Labor Contract Law in 2007, 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, 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 condition 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.
If we are found to be in violation of current or future PRC laws and regulations regarding Internet-related services and telecom-related activities,
we could be subject to penalties or restrictions on our business activities.
The PRC has enacted laws and regulations that apply to Internet-related services and telecom-related activities. While many aspects of these
regulations remain unclear, they purport to require licenses on various aspects of the provision of Internet information and content, such as online video and
music, online games, online publishing, and newsfeed services.
Although we do not directly provide video and music content, our video and music link-aggregation services may be considered to be the
provision of Internet audio-visual programs, which would require us to obtain an Internet audio-visual program transmission license. None of our VIEs
currently holds such a license. In addition, current PRC laws and regulations require an applicant for an Internet audio-visual program transmission license
to be a wholly state-owned or state-controlled entity unless the applicant had been operating a business involving transmission of Internet audio-visual
programs prior to December 20, 2007. None of our VIEs currently is an eligible applicant for such a license, as none of them was operating Internet audio-
visual services prior to December 20, 2007. If our video and music link-aggregation services were found to violate the applicable laws and regulations, we
could be subject to fines, forced to remove all of the audio-visual links from our platform, and subject to a penalty equal to one to two times our total
investment in the affected business. As of the date of this annual report, we are in the process of negotiating to acquire an entity that holds a valid Internet
audio-visual program transmission license. Such negotiation is at a preliminary stage, and there is no assurance that we will be able to reach a deal on
commercially reasonable terms in a timely manner, or at all. Furthermore, there is no assurance that such a practice will not be restricted or prohibited by
future laws and regulations.
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Current PRC laws and regulations require us to obtain an Internet publishing license for our online literature services and Sogou Ask. An Internet
publishing license may also be required for our image search services and the distribution of online games through our Sogou Game Center, as these
services may be considered to be “online publication services,” which require an Internet publishing license under current PRC laws and regulations. None
of our VIEs currently holds such a license. In addition, none of our VIEs currently holds an online news service license, which is required for our news
search and newsfeed services. Operating without an Internet publishing license and an online news service license may subject us to various administrative
sanctions, including fines and suspension of our relevant services. We are in the process of preparing an application for an Internet publishing license as of
the date of this annual report. While PRC laws and regulations require relevant governmental authorities to decide on an application for the Internet
publishing license within 60 days after receiving a completed application, and we believe that we meet the qualifications for obtaining such a license, the
approval process may take longer in practice, and we may not be able to receive approval for the license in a timely manner, or at all. As of the date of this
annual report, we are also in the process of preparing applications for an online news search license. However, it appears that the competent governmental
authority may not currently be accepting new applications for online news search licenses, except applications for the renewal of licenses previously
obtained. We plan to submit an application for an online news search license as soon as it becomes clear that the competent governmental authority is
accepting new applications. However, uncertainties remain as to when the relevant governmental authority will begin to accept new applications for online
news search licenses and, even after we have submitted an application if and when the governmental authority begins to accept applications, there is no
assurance that we will be granted the license in a timely manner, or at all.
Although we are committed to complying with the above-described PRC laws and regulations applicable to Internet-related service and telecom-
related activities, we cannot guarantee that we are now or will in the future be in full compliance with any such laws and regulations that apply to our
services and activities. In the past, PRC governmental authorities have imposed warnings and fines on us for conducting business without the
aforementioned licenses. We cannot guarantee that PRC governmental authorities will not impose similar or greater penalties on us in the future, which
may include warnings, fines, mandates to remedy any violations, and/or cease providing all services and activities for which the licenses are required. The
PRC government may also promulgate new laws and regulations that require additional licenses, permits and/or approvals for the operation of any of our
existing and/or future businesses. If we are unable to obtain such licenses, permits, and/or approvals in a timely fashion, we could be subject to further
penalties and operational disruption and our financial condition and results of operations could be adversely affected.
Our efforts to develop an online lending and microcredit program could be limited by PRC regulation of the microcredit industry.
PRC laws, rules, regulations, and governmental policies governing the online lending industry and microcredit businesses are at a relatively early
stage, and can be expected to continue to evolve.
Although we are implementing measures intended to comply with applicable PRC laws and regulations regarding the online lending industry and
microcredit businesses, due to the lack of clear interpretation and rules regarding the implementation of such laws and regulations, the measures we take
may not be sufficient to ensure such compliance. In addition, as PRC regulations governing the online lending industry and microcredit businesses are
evolving and further regulations regarding certain aspects of the online lending industry and microcredit companies may be implemented, we could be
required to make changes to our existing practices. Failure to comply with such laws and regulations could result in our being subject to, among other
things, regulatory warnings, fines, or criminal penalties, and we could also be prohibited from conducting our current online lending business in the future.
See “PRC Regulation-Regulation of Online Lending and Microcredit Services.”
The Notice on Regulating and Rectifying the “Cash Loan” Business (“Circular 141”), issued jointly by the Head Office for Special Rectification
against Internet Finance Risks and the Head Office for Special Rectification against Peer-to-Peer Online Lending Risks on December 1, 2017, stipulates
that a banking financial institution that offers cash loans through loan facilitation is prohibited from (i) accepting credit enhancement or other similar
services from third parties that lack requisite licenses to provide guarantees; (ii) outsourcing credit assessment, risk control, and other key functions to a
loan facilitation operator; and (iii) allowing the loan facilitation operator to charge any interest or fees from the borrower. On October 9, 2019, the China
Banking and Insurance Regulatory Commission, together with other eight governmental authorities, promulgated the Notice of the Promulgation of
Supplementary Provisions for the Supervision and Administration of Financing Guarantee Companies (“CBIRC Circular 37”), which states that
institutions that provide services such as customer recommendations and evaluation of credit to lending institutions may not provide financial guarantee
services without approval of regulatory authorities. Based on our understanding of industry practice, we do not believe that our operation of our online
lending and microcredit loan facilitation business should be deemed to be operation of a financial guarantee business. However, due to a lack of sufficient
interpretation of Circular 141 and CBIRC Circular 37, the exact definition and scope of operating a financial guarantee business remain unclear. If we were
deemed to be operating a financial guarantee business in violation of Circular 141 and CBIRC Circular 37, we could be subject to penalties, sanctions, and
other liabilities, and we could be required to adjust our collaboration model with our financial institution partners, which could have an adverse effect on
the development of our online lending and microcredit program.
In addition, the Provisions Applicable to Private Lending Cases, which were issued by the Supreme People’s Court effective September 1, 2015,
(i) prohibit loans with interest rates exceeding 36% per annum, and provide that any excess paid must be returned to the borrower and (ii) provide that
loans with interest rates between 24% and 36% per annum are generally permissible as long as they do not damage the interests of the state, the community,
or any third parties other than the borrower. Accordingly, if we make or facilitate any loans that PRC governmental authorities or PRC courts calculate as
having interest rates exceeding 36%, we may be required to return the excess and could be subject to fines or even criminal liability, and we may not be
able to collect interest rates between 24% and 36% per annum on loans with such interest rates that become delinquent if a PRC court determines that such
interest rates damaged the state, the community, or any such third parties.
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The approval of the China Securities Regulatory Commission (the “CSRC”) may have been required in connection with our corporate structure
and our initial public offering, and the failure to obtain any required approval could have an adverse effect on our business and results of
operations and the trading price of our ADSs.
In 2006, six PRC regulatory agencies, including the MOFCOM and the CSRC, jointly adopted the Rules on Mergers and Acquisitions of
Domestic Enterprises by Foreign Investors, or the M&A Rules, which became effective on September 8, 2006 and were amended on June 22, 2009. See
“PRC Regulation—Regulation of M&A and Overseas Listings.” Under the M&A Rules, the prior approval of the CSRC is required for the overseas listing
of offshore special purpose vehicles that are directly or indirectly controlled by PRC companies or individuals and used for the purpose of listing PRC
onshore interests on an overseas stock exchange. The application of the M&A Rules remains unclear. Currently, there is no consensus among the leading
PRC law firms regarding the scope and applicability of the CSRC approval requirement. Our PRC legal counsel, Commerce & Finance Law Offices, has
advised us that based on its understanding of the current PRC laws, rules and regulations and the M&A Rules, prior approval from the CSRC was not
required under the M&A Rules for the listing and trading of our ADSs because, among other reasons, (i) Sogou Technology and Sogou Network were
incorporated as wholly foreign-owned enterprises by means of direct investment rather than by merger or acquisition of equity interest or assets of a PRC
domestic company owned by PRC companies or individuals as defined under the M&A Rules that are the beneficial owners of the Company; and (ii) no
provision in the M&A Rules clearly classifies contractual arrangements as a type of transaction subject to the M&A Rules. Although we did not apply for
approval from the CSRC for our initial public offering based on the advice of our PRC legal counsel, we and our PRC legal counsel cannot assure you that
the relevant PRC government agencies, including the MOFCOM and the CSRC, would not reach a different conclusion.
Commerce & Finance Law Offices has further advised us that uncertainties still exist as to how the M&A Rules will be interpreted and
implemented and its opinions summarized above are subject to any current or future laws, rules and regulations or detailed implementations and
interpretations in any form relating to the M&A Rules. If the CSRC or other PRC regulatory agency subsequently determines that we needed to obtain
CSRC approval for our initial public offering, either by interpretation, clarification, or amendment of the M&A Rules or by any new rules, regulations, or
directives promulgated after the date of this annual report, we may face sanctions by the CSRC or other PRC regulatory agency. These sanctions may
include fines and penalties on our operations in China, limitations on our operating privileges in China, delays or restrictions on the repatriation of the
proceeds from our initial public offering into the PRC, restrictions on or prohibition of the payment or remittance of dividends by our China-based
subsidiaries, or other actions that could have an adverse effect on our business and results of operations, as well as the trading price of our ADSs. We
cannot predict when the CSRC will promulgate additional rules or other guidance. Moreover, additional rules or guidance, to the extent issued, may fail to
resolve ambiguities under the M&A Rules. Uncertainties or negative publicity regarding the M&A Rules also could have an adverse effect on the trading
price of our ADSs.
PRC laws and regulations mandate complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it
more difficult for us to make acquisitions in China.
PRC laws and regulations, such as the M&A Rules, and other relevant rules, established additional procedures and requirements that are expected
to make merger and acquisition activities in China by foreign investors more time-consuming and complex, including requirements in some instances that
the MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise, or that
the approval from the MOFCOM be obtained in circumstances where overseas companies established or controlled by PRC enterprises or residents acquire
affiliated domestic companies. PRC laws and regulations also require certain merger and acquisition transactions to be subject to a merger control security
review. In August 2011, the MOFCOM promulgated the Rules on Implementation of Security Review System, or MOFCOM Security Review Rules,
effective from September 1, 2011, further provide that, when deciding whether a specific merger or acquisition of a domestic enterprise by foreign
investors is subject to a security review by the MOFCOM, the principle of substance over form should be applied and foreign investors are prohibited from
bypassing the security review requirement by structuring transactions through proxies, trusts, indirect investments, leases, loans, control through
contractual arrangements of offshore transaction. Factors that the MOFCOM considers in its review are whether (i) an important industry is involved,
(ii) such transaction involves factors that have had or may have an impact on national economic security and (iii) such transaction will lead to a change in
control of a domestic enterprise that holds a well-known PRC trademark or a time-honored PRC brand. If a business of any target company that we plan to
acquire falls into the ambit of security review, we may not be able to successfully acquire such company. Complying with the requirements of the relevant
regulations to complete any such transaction could be time-consuming, and any required approval process, including approval from the MOFCOM, may
delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business.
We entered into a series of transactions with Tencent in 2013 that resulted in Tencent being our largest shareholder and a Tencent group entity also
holding a 45% interest in Sogou Information. If Tencent’s investment in us ended due to competitive or regulatory reasons, our collaboration with Tencent
may also be adversely affected.
The PRC government may prevent us from distributing, and we may be subject to liability for, content that it believes is inappropriate.
The PRC has enacted regulations governing Internet access and the distribution of news and other information. In the past, the PRC government
has stopped the distribution of information over the Internet that it believes to violate PRC laws, including content that is obscene, incites violence,
endangers national security, is contrary to the national interest or is defamatory. In addition, we may not publish certain news items, such as news relating
to national security, without permission from the PRC government. Furthermore, the Ministry of Public Security has the authority to make any local
Internet service provider block any Website maintained outside the PRC at its sole discretion. Even if we comply with PRC governmental regulations
relating to licensing and foreign investment prohibitions, if the PRC government were to take any action to limit or prohibit the distribution of information
through our network or to limit or regulate any current or future content or services available to users on our network, our business would be harmed.
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We are also subject to potential liabilities for content delivered through our services that is deemed inappropriate and for any unlawful actions of
users of our products and services under regulations promulgated by the MIIT, such potential liabilities including the imposition of fines or even the
shutting down of the Internet platforms.
Furthermore, we are required to delete content that clearly violates PRC laws and report content that may violate PRC laws. We may have
difficulty determining the type of content that may result in liability for us and, if we are wrong, we may be prevented from operating our Internet
platforms.
Dividends we receive from our operating subsidiaries located in the PRC are subject to PRC profit appropriation and PRC withholding tax.
PRC legal restrictions permit payment of dividends by our PRC subsidiaries only out of their accumulated profits, if any, determined in
accordance with PRC accounting standards and regulations. Under PRC law, our PRC subsidiaries are also required to set aside 10% of their after-tax
profits each year to fund certain reserve funds until these reserves equal 50% of the amount of registered capital. These reserves are not distributable as
cash dividends.
Furthermore, the PRC Corporate Income Tax Law, or the CIT Law, provides that a withholding tax at a rate of up to 10% may be applicable to
dividends payable to non-PRC investors that are “non-resident enterprises,” to the extent that such dividends are derived from sources within the PRC.
Under the Arrangement Between the PRC and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of
Fiscal Evasion with Respect to Taxes on Income (the “China-HK Tax Arrangement”), which became effective on January 1, 2007, the dividend
withholding tax rate may be reduced to 5% if a Hong Kong resident enterprise is considered a non-PRC resident enterprise and holds at least 25% of the
equity interests in the PRC enterprise distributing the dividends, subject to approval of the competent PRC tax authorities. However, if the Hong Kong
resident enterprise is not considered to be the beneficial owner of such dividends under applicable PRC tax regulations, such dividends may remain subject
to withholding tax at a rate of 10%. In addition, on February 20, 2009, the State Administration of Taxation (the “SAT”) issued the Circular on Issues in
Tax Treaties Regarding Distribution of Dividends, which stipulates that a company that is established primarily for purposes of tax evasion will not be
regarded as a beneficial owner and will not qualify for treaty benefits such as preferential dividend withholding tax rates. The SAT issued an Announcement
on Issues in Tax Treaties Relating to “Beneficial Owner” (“SAT Announcement 9”), effective April 1, 2018, which provides guidance on determining
whether an enterprise is a “beneficial owner” of dividends under China’s tax treaties and tax arrangements. SAT Announcement 9 provides that, in order to
be a beneficial owner, an entity generally must be a direct owner of, and have the right to control, the income of the enterprise that is paying the dividends
or must be a direct owner of, and have the right to control, the tangible or intangible assets generating such income, and also specifies that a company that
is not organized for the purpose of engaging in substantive business activities may not be regarded as a beneficial owner. If any of our Hong Kong
subsidiaries is, in the light of SAT Announcement 9, determined by the SAT to not be a beneficial owner for purposes of the China-HK Tax Arrangement,
any dividends paid to it by any of our PRC subsidiaries would not qualify for the preferential dividend withholding tax rate of 5%, but rather would be
subject to the regular withholding tax rate of 10% under the CIT Law.
Our offshore entities may need to rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash requirements
those offshore entities may have. Our offshore entities may not be able to obtain cash from distributions because our subsidiaries and VIEs in
China are subject to restrictions imposed by PRC law on paying such dividends and making other payments.
Sogou Inc. is a holding company with no operating assets other than investments in Chinese operating entities through our intermediate holding
companies, our subsidiaries in the PRC, and our VIEs. Our offshore entities may need to rely on dividends and other distributions on equity paid by our
PRC subsidiaries for their cash requirements in excess of any cash raised from investors and retained by us or our other offshore entities. The primary
source of any dividend payments to our offshore entities would need to be our PRC subsidiaries. It is possible that our PRC subsidiaries will not continue to
receive payments in accordance with our VIE contracts with Sogou Information if such payments become subject to restrictions imposed by PRC laws. If
our 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
distributions to us through the intermediate companies. In addition, dividends paid out of the PRC are generally subject to a withholding tax of 10%.
The PRC government also imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of
currencies out of the PRC. We may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currencies. If
we or any of our subsidiaries are unable to receive the revenues from our operations through these service agreements and other arrangements, we may be
unable to effectively fund any cash requirements we may have.
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Regulation and censorship of information distribution in China may have an adverse effect on our business.
China has enacted regulations governing Internet access and the distribution of news and other information. Furthermore, the Propaganda
Department of the Chinese Communist Party takes the responsibility to censor news published in China to ensure, supervise, and control a particular
political ideology. In addition, the MIIT has published implementing regulations that subject online information providers to potential liability for content
included in websites and the actions of users of their systems, including liability for violation of PRC laws prohibiting the distribution of content deemed to
be socially destabilizing. Furthermore, because many PRC laws, regulations, and legal requirements with regard to the Internet are relatively new and
untested, their interpretation and enforcement may involve significant uncertainties. As a result, in many cases an Internet platform operator may have
difficulty determining the type of content that may subject it to liability.
Periodically, the Ministry of Public Security has stopped the distribution over the Internet of information which it believes to be socially
destabilizing. Meanwhile, the Ministry of Public Security also has the authority to require any local Internet service provider to block any Website
maintained outside China at its sole discretion. If the PRC government were to take action or exercise its authority to limit or eliminate our provision of
access to information or to limit or regulate current or future applications available to our users, our business would be adversely affected.
The State Secrecy Bureau, which is directly responsible for the protection of state secrets of all PRC government and Chinese Communist Party
organizations, is authorized to block any Website it deems to be leaking state secrets or failing to meet the relevant regulations relating to the protection of
state secrets in the distribution of online information. Under the applicable regulations, we may be held liable for any content transmitted by us.
Furthermore, where the transmitted content clearly violates the PRC laws, we will be required to delete it. Moreover, if we consider transmitted content
suspicious, we are required to report such content. We must also undergo computer security inspections, and if we fail to implement required safeguards
against security breaches, we may be shut down. As the implementing rules of these new regulations have not been issued, we do not know how or when
we will be expected to comply, or how our business will be affected by the application of these regulations.
We may be subject to the PRC government’s ongoing crackdown on Internet pornographic content.
The PRC government has stringent prohibitions on online pornographic information and has launched several crackdowns on Internet
pornography recently. On December 4, 2009, the MIIT and other three PRC governmental authorities jointly issued the Incentives Measures for Report of
Pornographic, Obscene and Vulgar Messages on Internet and Mobile Media, or the Anti-Pornography Notice, to further crack down on online pornography.
Pursuant to this Anti-Pornography Notice, monetary rewards will be provided to Internet users who report websites that feature pornography. On April 13,
2014, the National Working Group on Anti-Pornography and three other PRC governmental authorities jointly issued the Anti-Pornography Proclamation,
under which Internet service providers, including search companies such as us, must put in place software or other filters to prevent from appearing in
search results, and immediately remove texts, images, video, advertisements, and other information that contain pornographic content. The relevant PRC
governmental authorities may order enterprises or individuals who flagrantly produce or disseminate pornographic content to stop conducting business, and
may revoke relevant administrative permits. It is possible that our users may engage in obscene conversations or activities on our platform that may be
deemed illegal under PRC laws and regulations, and there is no assurance that content considered vulgar by PRC governmental authorities will not appear
through our search services in the future. We may be subject to fines or other disciplinary actions, including in serious cases suspension or revocation of the
licenses necessary to operate our platform, if we are deemed under PRC laws and regulations to have facilitated the accessing of inappropriate content
through on our platform. In addition, if we are alleged by the government of providing access to vulgar content, our reputation could be adversely affected.
PRC regulations relating to offshore investment activities by PRC residents may limit our PRC subsidiaries’ ability to increase their registered
capital or distribute profits to us, limit our ability to inject capital into our PRC subsidiaries, or otherwise expose us to liability and penalties
under PRC laws.
In July 2014, SAFE promulgated Circular 37, which replaced Circular 75, promulgated by SAFE in October 2005. Circular 37 requires PRC
residents, including PRC institutions and individuals, to register with the local SAFE office in connection with their direct establishment or indirect control
of an offshore entity, referred to in Circular 37 as a “special purpose vehicle,” for the purpose of holding domestic or offshore assets or interests. PRC
residents must also file amendments to their registrations in the event of any significant changes with respect to the special purpose vehicle, such as
increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division, or other material event. In February 2015,
SAFE promulgated the Circular for Further Simplifying and Improving Policies of Foreign Exchange Administration Applicable to Direct Investment,
which provides that effective June 2015 designated local banks are delegated authority under Circular 37 to review and process PRC residents’ applications
for their initial foreign exchange registrations or amendments to their registrations in connection with their overseas direct investments. Under these
regulations, PRC residents’ failure to comply with specified registration procedures may result in restrictions being imposed on the foreign exchange
activities of the relevant PRC entities, including the payment of dividends and other distributions to its offshore parent, as well as restrictions on capital
inflows from the offshore entity to the PRC entities, including restrictions on the ability to contribute additional capital to the PRC entities.
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We have requested all of our current shareholders and/or beneficial owners to disclose whether they or their shareholders or beneficial owners fall
within the scope of Circular 37 and other related rules, and requested such shareholders and beneficial owners, upon learning they are PRC residents, to
make the necessary applications, filings and amendments as required under Circular 37 and other related rules prior to our initial public offering. However,
we may not be informed of the identities of all the PRC residents holding indirect interest in our company, and we cannot provide any assurances that these
PRC residents will comply with our request to make or obtain any applicable registrations or comply with other requirements required by Circular 37 or
related rules.
Failure by any of our current or future shareholders or beneficial owners who are PRC residents to comply with the SAFE regulations may subject
us to fines or other legal sanctions, or limit our ability to contribute additional capital to our PRC subsidiaries, or limit our PRC subsidiaries’ ability to
make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects. It is possible that some or
all of our shareholders who are PRC residents will not comply with all the requirements required by Circular 37 or related rules. Any future failure by any
of our shareholders who is a PRC resident, or controlled by a PRC resident, to comply with relevant requirements under these regulations could subject us
to fines or legal sanctions imposed by the PRC government, including restrictions on our subsidiaries’ ability to pay dividends or make distributions to us
and our ability to increase our investment in these subsidiaries and restrict our cross-border investment activities, which could in turn limit our ability to
distribute dividends to holders of our ordinary shares and ADSs.
PRC regulatory requirements with respect to transfers by offshore holding companies, such as us, to their PRC subsidiaries and VIEs and
governmental control of currency conversion may limit or delay our ability to transfer the net proceeds of our initial public offering to our PRC
subsidiaries and VIEs, which could have an adverse effect on our ability to fund and expand our business.
As a holding company incorporated in the Cayman Islands, we will need to comply with applicable PRC laws and regulations in order to transfer
the net proceeds of our initial public offering to our PRC subsidiaries, Sogou Technology and Sogou Network, which are WFOEs under PRC law and are
treated as FIEs, or to our VIEs in the PRC. We may contribute some or all of the net proceeds of our initial public offering to our PRC subsidiaries, and
convert the contributed net proceeds into RMB. In order to make a capital contribution to either of our PRC subsidiaries, and convert the contributed
amount from U.S. dollars into RMB, we will need to increase the PRC subsidiary’s registered capital by registering and/or filing the increase with the
MOFCOM or one of its local branches, the SAFE or one of its local branches, or an authorized bank. If we transfer any of the proceeds of our initial public
offering to one of our PRC subsidiaries or VIEs through loans, under current PRC law we will also need to register such loans with the SAFE or one of its
local branches, and the amount that we may convert into RMB and loan to one of these entities will be limited by applicable SAFE regulations, in the case
of a loan to one of our PRC subsidiaries, to the greater of (i) the difference between the subsidiary’s approved total investment and the subsidiary’s total
registered capital and (ii) two times the PRC subsidiary’s net assets and, in the case of one of our VIEs, to two times the VIE’s net assets.
The need to comply with such requirements could prevent us from making timely transfers of the net proceeds of our initial public offering to our
PRC subsidiaries and, in the event we wish to make such transfers through loans to our PRC subsidiaries or VIEs, will limit the amounts of the net
proceeds that we may transfer, which could limit our ability to fund or expand our business in accordance with our intended use of the proceeds of our
initial public offering. The amounts of total investment and registered capital of Sogou Technology as of December 31, 2019 were approximately US$100.0
million and US$40.0 million, and two times its net assets was equal to US$781.9 million, meaning that the limit on the proceeds of our initial public
offering that we would be permitted to loan to Sogou Technology as of December 31, 2019 would be US$781.9 million. The amounts of total investment
and registered capital of Sogou Network as of December 31, 2019 were both approximately US$0.8 million, and two times its net assets was equal to
US$36.5 million, meaning that amount of the proceeds of our initial public offering that we would be permitted to loan to Sogou Network would be
US$36.5 million. Two times the net assets of our three principal VIEs was equal to negative US$66.8 million (Sogou Information), negative US$22.7
million (Shi Ji Si Su), and US$7.8 million (Chengdu Easypay), respectively, as of December 31, 2019, which represent the respective statutory limits on the
amounts of loans we would be permitted to make to them as of December 31, 2019.
On March 30, 2015, SAFE promulgated the Circular on Reforming Management of the Settlement of Foreign Exchange Capital of Foreign-
Invested Enterprises, or Circular 19, which replaced previous regulations limiting a foreign-invested company’s use of its RMB-settled registered capital.
Although Circular 19 has lifted certain restrictions on the use by a foreign-invested enterprise of its RMB registered capital converted from foreign
currencies, it continues to apply certain limits, including that such registered capital must be used only for purposes within the foreign-invested enterprise’s
approved business scope, and provides that violations of the regulations can result in severe penalties, including large fines. These regulations may limit
our ability to transfer the net proceeds of our initial public offering through contributions or loans to our PRC subsidiaries and VIEs to invest in or acquire
other businesses or establish additional VIEs as it is unclear whether the SAFE would consider such uses to be within the respective scopes of business of
our PRC subsidiaries and VIEs.
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We may be subject to fines and legal sanctions if we or our employees who are PRC citizens fail to comply with PRC regulations relating to
employee share options.
Under the Administration Measures on Individual Foreign Exchange Control issued by the PBOC and the related Implementation Rules issued the
SAFE, all foreign exchange transactions by a PRC citizen involving an employee incentive plan of an overseas publicly-listed company may be conducted
only with the approval of the SAFE. Under the Notice of Issues Related to the Foreign Exchange Administration for Domestic Individuals Participating in
Stock Incentive Plan of Overseas Listed Company, or the Offshore Share Incentives Rules, issued by the SAFE on February 15, 2012, PRC citizens who
are granted share options, restricted share units or restricted shares by an overseas publicly-listed company under such employee share incentive plans are
required to register with the SAFE or its local offices and comply with a series of other requirements. The Offshore Share Incentives Rules also specify
requirements for registration of share incentive plans, the opening and use of special accounts for the purpose of participation in incentive plans, and the
remittance of funds for exercising options and gains realized from such exercises and sales of such options or the underlying shares, both outside and inside
the PRC. We, and any of our PRC employees or members of our board of directors who have been granted share options or other share-based awards, are
subject to the Administration Measures on Individual Foreign Exchange Control, the related Implementation Rules, and the Offshore Share Incentives
Rules. In addition, pursuant to Circular 37, a privately-held special purpose vehicle’s grant of equity incentives to a PRC citizen is subject to foreign
exchange registration and, prior to making an investment in or receiving a grant of a share-based award in such an entity, a PRC citizen is required to apply
with the relevant PRC governmental authorities for foreign exchange registration of the investment. Our PRC employees who have been granted share-
based awards or held shares have not made the required registrations. We have registered our 2017 Share Incentive Plan with the SAFE, and we are in in
process of applying for such registration of our 2010 Share Incentive Plan. If our 2010 Share Incentive Plan is not accepted for registration by the SAFE,
we may not be able to grant further share-based awards to our PRC employees, we and those who have received awards may be subject to fines and legal
sanctions, and our ability to contribute additional capital to our PRC subsidiaries and our PRC subsidiaries’ ability to distribute dividends to us may be
limited.
If the status of certain of our PRC subsidiaries and VIEs as “High and New Technology Enterprises,” “Key National Software Enterprises,” or
“Software Enterprises” is revoked or expires, we may have to pay additional taxes or make up any previously unpaid taxes and may be subject to
a higher tax rate, which would adversely affect our results of operations.
The CIT Law generally imposes a uniform income tax rate of 25% on all enterprises, but grants preferential treatment to “High and New
Technology Enterprises,” or HNTEs, pursuant to which HNTEs are instead subject to an income tax rate of 15%, subject to a requirement that they re-apply
for HNTE status every three years. During this three-year period, an HNTE must conduct a qualification self-review each year to ensure it meets the HNTE
criteria, and will be subject to the regular 25% income tax rate for any year in which it does not meet the criteria. The CIT Law and its implementing
rules provide that a “Software Enterprise” is entitled to an income tax exemption for two years beginning with its first profitable year before December 31,
2017 and a 50% reduction to a rate of 12.5% for the subsequent three years. An entity that qualifies as a “Key National Software Enterprise,” or KNSE, is
entitled to a further reduced preferential income tax rate of 10%. Enterprises wishing to enjoy the status of Software Enterprises or KNSEs must perform a
self-assessment each year to ensure they meet the relevant criteria for qualification. If at any time during the preferential tax treatment years an enterprise
uses the preferential CIT rates but the relevant PRC governmental authorities determine that it failed to meet applicable criteria for qualification, PRC
governmental authorities may revoke the enterprise’s Software Enterprise or KNSE status, as applicable.
There are uncertainties regarding future interpretation and implementation of the CIT Law and its implementing regulations. It is possible that the
HNTE, Software Enterprise, and KNSE qualifications of our operating entities currently qualified as such, or their entitlement to an income tax exemption
or refund of their value-added tax, or VAT, will be challenged by higher-level tax authorities and be repealed, or that there will be future implementing
regulations that are inconsistent with current interpretation of the CIT Law. For example, in 2016 the SAT issued a circular with new criteria for certifying a
Software Enterprise. Therefore, it is possible that the qualification of one or more of our PRC Subsidiaries or VIEs as a Software Enterprise will be
challenged in the future or that such companies will not be able to take any further actions, such as re-application for Software Enterprise qualification, to
enjoy such preferential tax treatment. If those operating entities cannot qualify for such preferential income tax status, our effective income tax rate will be
increased significantly and we may have to pay additional income taxes to make up the previously unpaid taxes, which would reduce our net income.
We may be deemed a PRC resident enterprise under the CIT Law and be subject to PRC taxation on our worldwide income.
The CIT Law provides that enterprises established outside of the PRC whose “de facto management bodies” are located within the PRC are
considered “resident enterprises” and are generally subject to the uniform 25% enterprise income tax rate on their worldwide income (including dividend
income received from subsidiaries). Under the Implementing Regulations for the Corporate Income Tax Law, “de facto management body” is defined as a
body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and
treasury, and acquisition and disposition of properties and other assets of an enterprise. Since substantially all of our operational management is currently
based in the PRC, it is unclear whether PRC tax authorities would require us to be treated as a PRC-resident enterprise. If we are treated as a resident
enterprise for PRC tax purposes, we will be subject to PRC taxes on our worldwide income at the 25% uniform tax rate, which could have an impact on our
effective tax rate and an adverse effect on our net income and the results of operations, even though dividends distributed from our PRC Subsidiaries to us
could be exempted from Chinese dividend withholding tax under the CIT Law for PRC-resident recipients.
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Dividends paid by us to our foreign investors and profits on the sale of our shares or ADSs may be subject to tax under PRC tax laws.
Under the Implementing Regulations for the Corporate Income Tax Law, PRC income tax at the rate of 10% is applicable to dividends paid to
investors that are “non-resident enterprises,” without an establishment or place of business in the PRC, or which do have such establishment or place of
business but the relevant income is not effectively connected with the establishment or place of business, to the extent that such dividends have their
sources within the PRC. In addition, any profits realized through the transfer of shares by such investors are subject to 10% PRC income tax if such profits
are regarded as income derived from sources within the PRC. It is unclear whether dividends we pay with respect to our shares, or the profits you may
realize from the transfer of our shares, would be treated as income derived from sources within the PRC and be subject to PRC taxes if we were treated as a
PRC resident enterprise under the CIT Law. Non-resident individual investors may be liable for PRC income tax at a rate of 20% on dividend payments or
in respect of profits on transfer of ADSs if such amounts are deemed to arise from sources within the PRC. In the case of dividend payments, we would be
required to withhold the tax at source. Any PRC tax liability may be reduced under applicable tax treaties. If we are required under the Implementing
Regulations for the Corporate Income Tax Law to withhold PRC income tax on dividends paid to our non-PRC investors that are “non-resident
enterprises,” or if you are required to pay PRC income tax on the transfer of our ADSs, the value of your investment in our ADSs may be adversely
affected.
Restrictions on currency exchange may limit our ability to use our revenues effectively.
Substantially all of our revenues and operating expenses are denominated in RMB. The RMB is not freely tradable in “capital account”
transactions, which include foreign direct investment. Foreign exchange transactions classified as capital account transactions are subject to limitations and
require approval from the SAFE. This could affect our China-based subsidiaries’ ability to obtain foreign exchange through debt or equity financing,
including by means of loans or capital contributions from us.
Further, the RMB is at present freely convertible in “current account” transactions, which include dividends, and trade and service-related foreign
exchange transactions, and our China-based subsidiaries may purchase and retain foreign exchange for settlement of such transactions, including payment
of dividends, without the approval of the SAFE. However, the relevant PRC governmental authorities may limit or eliminate our ability to purchase and
retain foreign currencies in the future.
Since a significant amount of our future revenues are likely to be in the form of RMB, these existing restrictions, and any future restrictions, on
currency exchange may limit our ability to use revenues generated in RMB to fund our business activities outside of the PRC, or to make expenditures
denominated in foreign currencies.
We may suffer currency exchange losses if the RMB depreciates relative to the U.S. dollar, which could reduce the value on an investment in our
ADSs.
Our reporting currency is the U.S. dollar. However, substantially all of our revenues are denominated in RMB. If the RMB depreciates relative to
the U.S. dollar, our revenues and assets as expressed in our U.S. dollar financial statements will decline in value. In addition, to the extent that we need to
convert U.S. dollars we receive from our initial public offering into RMB for our operations, appreciation of the RMB against the U.S. dollar would have
an adverse effect on the RMB amount we would receive from the conversion. Conversely, if we decide to convert our RMB into U.S. dollars for the
purpose of paying dividends on our ordinary shares or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative
effect on the U.S. dollar amount available to us.
Risks Related to Our Class A Ordinary Shares and ADSs
We are a Cayman Islands company and, because judicial precedent regarding the rights of shareholders is more limited under Cayman Islands
law than that under U.S. law, our shareholders may have less protection for their shareholder rights than they would under U.S. law.
Our corporate affairs are governed by our Amended and Restated Memorandum of Association and Amended Restated Articles of Association and
we are governed by the Companies Law of the Cayman Islands (the “Companies Law”) and the common law of the Cayman Islands. The rights of
shareholders to take legal action against our directors and us, actions by minority shareholders, and the fiduciary responsibilities of our directors to us under
Cayman Islands law are to a large extent governed by 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 well as from English common law, which has persuasive, but not binding, authority
on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as
clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States, such as the State of Delaware where
many United States-based corporations are organized. In particular, the Cayman Islands has a less developed body of securities laws as compared to the
United States, and provides significantly less protection to investors. In addition, shareholders of Cayman Islands companies may not have standing to
initiate a shareholder derivative action in U.S. federal courts. As a result, our public shareholders may have more difficulty in protecting their interests
through actions against us, our management, our directors, or our major shareholders than would shareholders of a corporation incorporated in a
jurisdiction in the United States such as Delaware.
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It may be difficult to enforce any civil judgments against us or our Board of Directors or officers, because most of our operating and/or fixed
assets are located outside the United States.
Although we are incorporated in the Cayman Islands, most of our operating and fixed assets are located in the PRC. As a result, it may be difficult
for investors to enforce judgments outside the United States obtained in actions brought against us in the United States, including actions predicated upon
the civil liability provisions of the federal securities laws of the United States or of the securities laws of any state of the United States. In addition, certain
of our directors and officers (principally based in the PRC) and all or a substantial portion of their assets are located outside the United States. As a result, it
may not be possible for investors to effect service of process within the United States upon those directors and officers, or to enforce against them or us
judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the federal securities laws of the United
States or of the securities laws of any state of the United States. We have been advised by our PRC legal counsel that, in their opinion, there are substantial
uncertainties as to the enforceability in the PRC, in original actions or in actions for enforcement of judgments of United States courts, of civil liabilities
predicated solely upon the federal securities laws of the United States or the securities laws of any state of the United States.
From time to time, press reports in the United States questioning the VIE structure used by us and various Chinese companies publicly traded in
the United States may create concern among investors that may cause our ADS price to fluctuate.
In recent years various prominent Western news outlets have questioned the use by Chinese companies that are publicly traded in the United States
of VIE structure as a means of complying with PRC laws prohibiting or restricting foreign ownership of certain businesses in China, including businesses
we are engaged in such as sponsored search, Internet information and content, online advertising, online game, and value-added telecommunication
services. Some of such news reports have also sought to draw a connection between widely-reported accounting issues at certain Chinese companies and
the use of VIE structure. Such news reports appear to have had the effect of causing concern among investors in several Chinese companies that are
publicly traded in the United States. While we are not aware of any causal connection between the reported accounting scandals and the use of VIE
structure, it is possible that investors in our ADSs will believe that such a connection exists. Any of such circumstances could lead to further loss of
investor confidence in Chinese companies such as ours and cause fluctuations in the market prices of our ADSs and, if such prices were to drop sharply,
could subject us to shareholder litigation, which could cause the price for our ADSs to drop further.
Proceedings instituted by the Securities and Exchange Commission (the “SEC”) against PRC affiliates of the “big four” accounting firms,
including our independent registered public accounting firm, could result in our financial statements being determined to not be in compliance
with the requirements of the Securities Exchange Act of 1934 (the “Exchange Act”).
Starting in 2011, the PRC affiliates of the “big four” accounting firms, including our independent registered public accounting firm, were affected
by a conflict between U.S. and PRC law. Specifically, for certain U.S.-listed companies operating and audited in mainland China, the SEC and the U.S.
Public Company Accounting Oversight Board (the “PCAOB”) sought to obtain from the PRC big four affiliate firms access to their audit work papers and
related documents. The firms were, however, advised and directed that under PRC law they could not respond directly to the U.S. regulators on those
requests, and that requests by foreign regulators for access to such papers in China had to be channeled through the CSRC. On December 7, 2018, the SEC
and the PCAOB issued a joint statement highlighting continued challenges faced by these U.S. regulators in their oversight of financial statement audits of
U.S.-listed companies with significant operations in China. However, it remains unclear what further actions the SEC and PCAOB will take to address the
problem.
In late 2012, the impasse led the SEC to commence administrative proceedings under Rule 102(e) of its Rules of Practice and under the Sarbanes-
Oxley Act of 2002 against the PRC big four affiliate accounting firms, including our independent registered public accounting firm. A first instance trial of
the proceedings in July 2013 in the SEC’s internal administrative court resulted in an adverse judgment against the firms. The administrative law judge
proposed penalties on the firms, including a temporary suspension of their right to practice before the SEC, although that proposed penalty did not take
effect pending review by the Commissioners of the SEC. On February 6, 2015, before a review by the Commissioners had taken place, the firms reached a
settlement with the SEC. Under the settlement, the SEC accepted that future requests by the SEC for the production of documents would normally be made
to the CSRC. The firms were to receive matching requests, and were required to abide by a detailed set of procedures with respect to such requests, which
in substance required them to facilitate production via the CSRC. If they failed to meet specified criteria, during a period of four years starting from the
settlement date, the SEC retained authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure. Under
the terms of the settlement, the underlying proceeding against the four China-based accounting firms was deemed dismissed with prejudice four years after
entry of the settlement. The four-year mark occurred on February 6, 2019. However, we cannot predict if the SEC will further challenge the four China-
based accounting firms’ compliance with U.S. law in connection with U.S. regulatory requests for audit work papers or if the results of such a challenge
would result in the SEC imposing penalties, such as suspensions of the right to practice. If additional remedial measures are imposed on the Chinese
affiliates of the “big four” accounting firms, including our independent registered public accounting firm, we could be unable to timely file future financial
statements in compliance with the requirements of the Exchange Act.
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In the event the Chinese affiliates of the “big four” become subject to additional legal challenges by the SEC or the PCAOB, depending upon the
final outcome, listed companies in the United States with major PRC operations could find it difficult or impossible to retain auditors in respect of their
operations in China. If our independent registered public accounting firm was denied, even temporarily, the ability to practice before the SEC and we were
unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be
determined not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delisting of our ADSs
and Class A Ordinary Shares from the New York Stock Exchange or termination of the registration of our ADSs and Class A Ordinary Shares under the
Exchange Act, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States.
If we fail to maintain an effective system of internal control over financial reporting, we may lose investor confidence in the reliability of our
financial statements.
We are subject to reporting obligations under the U.S. securities laws. The SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002,
adopted rules requiring every public company to include a management report on the company’s internal control over financial reporting in its annual
report, which contains management’s assessment of the effectiveness of our internal control over financial reporting. In addition, an independent registered
public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting.
If we fail to maintain effective internal control over financial reporting in the future, our management and our independent registered public
accounting firm may not be able to conclude that we have effective internal control over financial reporting at a reasonable assurance level. This could in
turn result in loss of investor confidence in the reliability of our financial statements and negatively impact the trading price of our ADSs. Furthermore, we
have incurred and anticipate that we will continue to incur considerable costs, management time and other resources in our efforts to comply with
Section 404 and other requirements of the Sarbanes-Oxley Act.
We are a “controlled company” within the meaning of the New York Stock Exchange Listed Company Manual and as a result we are entitled to,
and do, rely on exemptions from certain corporate governance requirements that provide protection to shareholders of other companies. We also
have invoked one of the “home country practice” exceptions to the corporate governance requirements of the New York Stock Exchange Listed
Company Manual that are available to foreign private issuers such as us, and we may invoke additional such exceptions in the future.
Sohu, through its ownership of Class B Ordinary Shares and the Voting Agreement with Tencent, will have the power to appoint a majority of our
board of directors. As a result, we will be a “controlled company” under the New York Stock Exchange Listed Company Manual. We will rely on certain
exemptions that are available to controlled companies from NYSE corporate governance requirements, including the following, which we do not intend to
meet voluntarily:
· that we have a majority of independent directors on our board;
· that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s
purpose and responsibilities; and
· for an annual performance evaluation of the nominating/corporate governance committee and the compensation committee.
We are not required to and will not voluntarily meet these requirements. If we are no longer a “controlled company,” we may in the future invoke
“home country” exceptions available to foreign private issuers, such as us, under the New York Stock Exchange Listed Company Manual which are similar
to the exemptions for controlled companies, and also include the possibility of additional exceptions from the New York Stock Exchange Listed Company
Manual, such as the requirement that equity-compensation plans be approved by shareholders. As a result of our use of the “controlled company”
exemptions, and any future use by us of the “home country” exceptions, holders of our ADSs will not have the same protection afforded to shareholders of
companies that are subject to all of NYSE corporate governance requirements.
Sohu, through its ownership of Class B Ordinary Shares and a voting agreement with Tencent, has the power to appoint a majority of our board
of directors and Sohu and Tencent together have the voting power to control the outcome of shareholder actions in our company.
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 10 votes per share. Sohu, through its ownership of Class B Ordinary Shares and a
voting agreement with Tencent, has the power to appoint a majority of our board of directors. Sohu and Tencent together have indirect shareholdings
totaling approximately 73.0% of the total of our outstanding Class A and Class B Ordinary Shares and totaling approximately 96.4% of the total voting
power of the combined total of our outstanding Class A and Class B ordinary shares as of March 31, 2020, due to the additional voting power of the
Class B Ordinary Shares. Sohu’s and Tencent’s combined voting power gives them the power to control actions that require shareholder approval under
Cayman Islands law, our Amended and Restated Memorandum of Association and Amended and Restated Articles of Association, and the New York Stock
Exchange Listed Company Manual, including significant mergers and acquisitions and other business combinations, changes to our Amended and Restated
Memorandum of Association and Amended and Restated Articles of Association, the number of shares available for issuance under share incentive plans,
and the issuance of significant amounts of our ordinary shares in private placements.
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Due to the disparate voting powers attached to the two classes of our ordinary shares, Sohu and Tencent will continue to have this power even if,
at some point in the future, they hold considerably less than a majority of the combined total of our outstanding Class A and Class B ordinary shares.
Sohu’s and Tencent’s voting control may cause transactions to occur that might not be beneficial to the holders of our ADSs, and may prevent
transactions that would be beneficial to them. For example, Sohu’s and Tencent’s voting control may prevent a transaction involving a change of control of
us, including transactions in which a holder of our ADSs might otherwise receive a premium for such securities over the then-current market price. In
addition, Sohu and Tencent are not prohibited from selling their interests in us to a third party. Subject to certain limitations, if Sohu or Tencent is acquired
or otherwise undergoes a change of control, or sells a controlling interest in us, any acquirer or successor will be entitled to exercise the voting control and
contractual rights of Sohu or Tencent, as applicable, and may do so in a manner that could vary significantly from that of Sohu or Tencent.
We may have conflicts of interest with Sohu and Tencent, and such conflicts may not be resolved in our favor.
Conflicts of interest may arise between Sohu and Tencent, on the one hand, and us, on the other hand, in a number of areas relating to our past and
ongoing relationships. Potential conflicts of interest that we have identified include the following:
· Employee recruiting and retention. Because Sohu, Tencent, and we operate primarily in China and the main focus of the businesses of each of
us is Internet services, we may compete with Sohu and Tencent in the hiring of new employees, in particular with respect to technology research
and development. We have non-solicitation arrangements with Sohu and Tencent that would restrict either Sohu or Tencent, on the one hand, or
us, on the other hand from hiring any of the other’s employees.
· Our board members and executive officers may have conflicts of interest. Dr. Charles Zhang, who is our Chairman of the Board, is currently
also serving as Sohu’s chairman and chief executive officer. By virtue of the high-vote Class B Ordinary Shares held by Sohu and Tencent and
the voting agreement between Sohu and Tencent, Sohu will have the power and right to appoint a majority of our Board of Directors and Tencent
will have the right to appoint two of the member of our Board of Directors. These relationships could create, or appear to create, conflicts of
interest when these persons are faced with decisions with potentially different implications for Sohu or Tencent and us.
· Sale of shares in our company. Although there are restrictions in the Voting Agreement among us, Sohu, and Tencent on transfers by Sohu or
Tencent to competitors of ours, if the Voting Agreement were to terminate, Sohu or Tencent would no longer be subject to such transfer
restrictions and may decide to sell all or a portion of our shares that it holds to one of our competitors, thereby giving that third party substantial
influence over our business and our affairs. Such a sale could be contrary to the interests of certain of our shareholders, including our employees
and holders of our ADSs.
· Allocation of business opportunities. Business opportunities may arise that both we and Sohu or Tencent find attractive, and which would
complement our respective businesses. Sohu or Tencent may decide to take the opportunities itself, which would prevent us from taking
advantage of the opportunity ourselves.
· Developing business relationships with competitors of Sohu and Tencent. For so long as Sohu retains the power to appoint a majority of our
Board of Directors and Sohu and Tencent voting together retain the power to decide all other matters put to a vote of our shareholders, we may
be limited in our ability to do business with the competitors of either of them, such as other providers of various Internet services in China. This
may limit our ability to enter into business relationships that might be in our best interests and those of our shareholders other than Sohu or
Tencent.
Although we are a stand-alone entity separate from Sohu and Tencent, we expect to operate, for as long as Sohu has the right to appoint a majority
of our Board of Directors, as a part of the Sohu Group. Sohu 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. Sohu’s decisions
with respect to us or our business may be resolved in ways that favor Sohu and therefore Sohu’s own shareholders, which may not coincide with the
interests of shareholders other than Sohu. We may not be able to resolve any potential conflicts, and even if we do so, the resolution may be less favorable
to us than if we were dealing with an unaffiliated shareholder. Even if both Sohu and we and Tencent seek to transact business on terms intended to
approximate those that could have been achieved among unaffiliated parties, this may not succeed in practice.
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The market price for our ADSs may fluctuate.
The trading price of our ADSs has been and may continue to be subject to fluctuations. During the period from November 9, 2017, the first day of
trading of our ADSs on the New York Stock Exchange, until March 31, 2020, the trading price of our ADSs ranged from US$ 3.00 to US$15.50 per ADS,
and the closing sale price on March 31, 2020 was US$3.36 per ADS. Among the factors that could affect the price of our ADSs are the various risk factors
described in this annual report and other factors, including:
· announcements of competitive developments by our competitors;
· regulatory developments in our target markets affecting us, our customers or our competitors;
· actual or anticipated fluctuations in our operating results;
· failure of our financial and operating results to meet market expectations or failure to meet our previously announced guidance;
· changes in financial estimates by securities research analysts;
· changes in the economic performance or market valuations of other Internet companies;
· additions or departures of our executive officers and other key personnel;
· announcements regarding litigation involving us or any of our directors and officers;
· fluctuations in the exchange rates between the U.S. dollar and the RMB;
· release or expiration of transfer restrictions on our outstanding ordinary shares and ADSs;
· sales of our ordinary shares or ADSs in the market by Sohu or Tencent;
· sales or perceived sales of additional shares or ADSs; and
· our ADS repurchase program, including variations in the amounts and frequency of our repurchases under the program.
In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are not related to the
operating performance of particular industries or companies. For example, the actual and perceived worldwide economic effect of the COVID-19 pandemic
has caused a significant drop in prices on global stock markets, and appears to have similarly had an adverse impact on the market price of our ADSs.
Our dual-class ordinary share structure could have an adverse effect on the market price of our ADSs
Our dual-class ordinary share structure, and the consequent concentration of voting power in Sohu and Tencent as a result of their ownership of
our Class B Ordinary Shares, could adversely affect perceptions of us in the equity capital markets and could result in a lower market price for our ADSs.
For example, apparently as a result of public criticism by commentators and shareholder advisory firms of companies with classes of shares with disparate
voting rights, certain providers of indexes of publicly-traded equity shares, including FTSE Russell, S&P Dow Jones, and MSCI, have recently announced
that they have either implemented, or are considering implementing, policies excluding companies with certain types of multiple-class voting structures
from some of their published equity indexes. If our ADSs were to be excluded from such indexes, the market price of our ADSs could be adversely
affected.
Holders of our ADSs may be subject to limitations on transfer of their ADSs.
While Our ADSs are transferable on the books of the depositary, the depositary may close its transfer books at any time or from time to time when
it deems it expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of
ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deem it 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.
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Holders of ADSs have limited voting rights and may not receive voting materials in time to be able to exercise their right to vote.
Except as described in this annual report and in the Deposit Agreement, holders of our ADSs will not be able to exercise voting rights attaching to
the shares represented by our ADSs on an individual basis. Holders of our ADSs may instruct the depositary how to exercise the voting rights attaching to
the shares represented by the ADSs. You may not receive voting materials in time to instruct the depositary to vote, however, and it is possible that direct
holders of ADSs, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a vote. In
addition, due to the different voting powers attached to the two classes of our ordinary shares and a voting agreement between Sohu and Tencent, Sohu, our
controlling shareholder, has the right to appoint a majority of our Board of Directors, Tencent has the right to appoint two of our directors, and Sohu and
Tencent together control all other matters put to a shareholder vote. As a result, as a holder of our ADSs you will have no ability to affect the outcome of
any matter subject to shareholder vote.
ADS holders’ right to participate in any future rights offerings may be limited, which may cause dilution to their holdings and ADS holders may
not receive cash dividends if it is impractical to make them available to such holders.
We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights
available to ADS holders in the United States unless we register the securities to which the rights relate under the Securities Act of 1933, or the Securities
Act, or an exemption from registration requirements is available. Also, under the Deposit Agreement, the depositary bank will not make rights available to
ADS holders unless the distribution to ADS holders of both the rights and any related securities are either registered under the Securities Act or exempt
from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to
endeavor to cause such a registration statement to be declared effective. Moreover, we may not be able to establish an exemption from registration under
the Securities Act. Accordingly, holders of our ADSs may be unable to participate in any rights offerings by us and may experience dilution in their
holdings.
In addition, the depositary bank for our ADSs has agreed to pay to ADS holders the cash dividends or other distributions it or the custodian
receives on our ordinary shares or other deposited securities after deducting its fees and expenses. ADS holders will receive these distributions in
proportion to the number of ordinary shares such holders’ ADSs represent. However, the depositary bank may, at its discretion, decide that it is inequitable
or impractical to make a distribution available to any holders of ADSs. For example, the depositary may determine that it is not practicable to distribute
certain property through the mail, or that the value of certain distributions may be less than the cost of mailing them, or that the distribution requires certain
governmental approvals, such as requirements for registration or approval of currency conversions. In these cases, the depositary may decide not to
distribute that property and ADSs holders will not receive that distribution.
You will experience dilution as outstanding share options are exercised.
You will experience dilution to the extent that additional Class A Ordinary Shares are issued upon settlement of outstanding share options or other
share-based awards that we may grant from time to time. As of March 31, 2020 there were options outstanding exercisable for the purchase of an aggregate
of 9,841,737 Class A Ordinary Shares.
We may need additional capital and may sell additional ADSs or other equity securities or incur indebtedness, which could result in additional
dilution to our shareholders or increase our debt service obligations.
We may require additional cash resources due to changed business conditions or other future developments, including any investments or
acquisitions we may decide to pursue. If our cash resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt
securities or obtain a credit facility. The sale of additional equity securities or equity-linked debt securities could result in additional dilution to our
shareholders. The incurrence of indebtedness would result in debt service obligations and could result in operating and financing covenants that would
restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.
Substantial future sales of our ADSs or ordinary shares in the public market, or the perception that these sales could occur, could cause the price
of our ADSs to decline.
Additional sales of our ADSs or Class A ordinary shares in the public market, or the perception that these sales could occur, could cause the
market price of our ADSs to decline. As of December 31, 2019 there were 109,973,265 Class A ordinary shares and 278,757,875 Class B ordinary shares
outstanding. The ordinary shares held by our officers and directors and certain shareholders are available for sale, subject to volume and other restrictions
as applicable under Rule 144 under the Securities Act.
In addition, Sohu, Tencent, and Photon Group Limited (“Photon”), a British Virgin Islands company of which Dr. Charles Zhang, the Chairman of
or Board of Directors may be deemed to be the beneficial owner, which held approximately 33.8%, 39.2%, and 6.4% of the combined total of our
outstanding Class A and Class B Ordinary Shares as of March 31, 2020, are parties to a registration rights agreement that gives them rights that, if
exercised, will permit them to sell some or all of their shares freely in the open market without regard to the restrictions of Rule 144 under the Securities
Act. As of March 31, 2020, there were options outstanding exercisable for the purchase of an aggregate of 9,841,737 Class A Ordinary Shares. We also
may grant or issue additional share options, restricted share units, or other share-based awards in the future under our share incentive plan to our
management, employees and other persons, the settlement and sale of which may further dilute our shares and drive down the price of our ADSs.
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We believe that we may be classified as a passive foreign investment company, or PFIC, for the 2019 taxable year, which would likely result in adverse
United States federal income tax consequences to U.S. holders of our ADSs or Class A ordinary shares.
We believe that we may have been classified as a PFIC for United States federal income tax purposes for our 2019 taxable year ended
November 30, 2019. There can be no assurance that we will not continue to be classified as a PFIC in the current taxable year or in any future taxable year.
The determination of whether we would continue to be treated as a PFIC is based in significant part on our operations and the composition of our earnings
and assets (including goodwill) for a given taxable year, including the valuation of our assets based on the market price of our ADSs.
If we are treated as a PFIC for any taxable year during which a U.S. holder (as defined under “Taxation—United States Federal Income Taxation—
Passive Foreign Investment Company”) held an ADS or a Class A ordinary share, certain adverse United States federal income tax consequences likely
would apply to such U.S. holder. See “Taxation—United States Federal Income Taxation—Passive Foreign Investment Company”.
If we are a PFIC, a U.S. holder of our ADSs or Class A ordinary shares could make a variety of elections that might alleviate certain of the tax
consequences referred to above, and certain of these elections may be made retroactively. However, it is expected that the conditions necessary for making
certain of such elections will not apply in the case of our ADSs or Class A ordinary shares. See “Taxation—United States Federal Income Taxation—
Passive Foreign Investment Company”.
U.S. holders and prospective holders of our ADSs or Class A Ordinary Shares are urged to consult their own tax advisors regarding the application
of the PFIC rules to an investment in our ADSs or Class A Ordinary Shares.
ITEM 4. INFORMATION ON THE COMPANY
Sogou Inc. was incorporated in the Cayman Islands in December 2005 by Sohu.
History and Development of the Company
Prior to February 2006, our search and search-related businesses were operated by various entities owned or controlled by Sohu. In February 2006,
Sohu undertook a reorganization of its search and search-related businesses, whereby most of the business was transferred to us. As part of the
reorganization, Sohu established Sogou BVI, Sogou Technology, and Sogou HK.
In October 2010, Sohu undertook another reorganization in preparation for our issuance of Pre-IPO Series A Preferred Shares in a financing
transaction, and transferred other businesses and employees related to the search and search-related businesses to us. We then issued and sold 24,000,000,
14,400,000, and 38,400,000 Pre-IPO Series A Preferred Shares to Alibaba, China Web Search (HK) Limited (“China Web”), and Photon. In June 2012,
Sohu repurchased the 24,000,000 Pre-IPO Series A Preferred Shares held by Alibaba.
In September 2013, Tencent invested US$448.0 million in cash in us and transferred its Soso search-related businesses and certain other assets to
us, in exchange for which we issued 65,431,579 Pre-IPO Series B Preferred Shares and 79,368,421 Pre-IPO Class B Ordinary Shares to Tencent.
In connection with Tencent’s investment, we also entered into (i) a repurchase option agreement with Sohu, exercisable commencing on March 16,
2014, granting us the right to repurchase 24,000,000 Pre-IPO Series A Preferred Shares held by Sohu for an aggregate purchase price of US$78.8 million;
(ii) a repurchase option agreement with Photon, also exercisable commencing on March 16, 2014, granting us the right to repurchase 6,400,000 Pre-IPO
Series A Preferred Shares held by Photon for an aggregate purchase price of US$21.0 million; and (iii) a repurchase/put option agreement with China Web,
granting us the right to repurchase at any time from March 16, 2014 to July 31, 2014, and granting China Web the right to put to us at any time prior to
July 31, 2014, 14,400,000 Pre-IPO Series A Preferred Shares held by China Web for an aggregate purchase price of US$47.3 million.
Also in connection with Tencent’s investment, Sohu, Photon, our Chief Executive Officer Xiaochuan Wang, certain other members of our
management, and Tencent entered into a shareholders’ agreement, which terminated upon the completion of our initial public offering. Sohu, Photon,
Xiaochuan Wang, certain other members of our management, and we also entered into a voting agreement in which Photon, Xiaochuan Wang, and the other
members of our management agreed to vote their Pre-IPO Series A Preferred Shares and Pre-IPO Class A Ordinary Shares to appoint Sohu’s designees to
our Board of Directors. This voting agreement remained in effect following the completion of our initial public offering as to the Class A Ordinary Shares
that were issued to the parties upon redesignation of their Pre-IPO Series A Preferred Shares and Pre-IPO Class A Ordinary Shares, but does not cover
Class A Ordinary Shares that were acquired by Xiaochuan Wang in the public market following the completion of our initial public offering.
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In September 2013, also in connection with Tencent’s investment, we paid a special dividend to the three holders of Pre-IPO Series A Preferred
Shares in the aggregate amount of US$300.9 million, of which Sohu received US$161.2 million, Photon received US$43.0 million, and China Web
received US$96.7 million.
Also in connection with its investment in us, in December 2013, Tencent acquired a 45% equity interest in our VIE Sogou Information for US$1.5
million, and Sohu also acquired a 45% equity interest in Sogou Information for US$1.5 million.
In December 2013, Tencent purchased 6,757,875 Pre-IPO Class A Ordinary Shares from various shareholders, a majority of whom were our
employees.
In March 2014, we repurchased 14,400,000 Pre-IPO Series A Preferred Shares from China Web for an aggregate purchase price of US$47.3
million pursuant to the repurchase/put option agreement we had entered into in September 2013 with China Web.
During the year ended December 31, 2014, we repurchased 4,185,800 Pre-IPO Class A Ordinary Shares from various shareholders, a majority of
whom were our employees, for an aggregate purchase price of US$41.9 million.
In September 2015, we repurchased from Sohu and Photon, pursuant to the repurchase option agreements we had entered into in September 2013,
24,000,000 and 6,400,000 Pre-IPO Series A Preferred Shares of Sogou, for aggregate purchase prices of US$78.8 million and US$21.0 million,
respectively.
In August 2017, in preparation for our initial public offering, Sohu, Tencent, and we entered into a voting agreement that provided for the
redesignation of all of our authorized and outstanding equity shares outstanding immediately prior to the completion of our initial public offering into either
Class A Ordinary Shares or Class B Ordinary Shares effective upon the completion of our initial public offering and also provides, among things, that,
effective upon the completion of such offering, subject to certain conditions, for so long as Sohu and Tencent together hold a majority of the combined
voting power of our Class A Ordinary Shares and Class B Ordinary Shares, Sohu will continue to have the right to appoint a majority of our Board of
Directors. The Class A Ordinary Shares are entitled to one vote per share, and the Class B Ordinary Shares, which are held solely by Sohu and Tencent, are
entitled to 10 votes per share. As a result, Sohu and Tencent together have the power to decide all matters that are put to a vote of our shareholders. See
“Related Party Transactions—Voting Agreement Between Sohu and Tencent.”
We completed an initial public offering of our ADSs on November 13, 2017. Our ADSs are traded on the New York Stock Exchange under the
symbol “SOGO.”
Our principal executive offices are located at Level 15, Sohu.com Internet Plaza, No. 1 Unit Zhongguancun East Road, Haidian District, Beijing
100084, People’s Republic of China. Our telephone number at this address is +86 10-5689-9999. Our registered office in the Cayman Islands is located at
the offices of Vistra (Cayman) Limited at P.O. Box 31119 Grand Pavilion, Hibiscus Way, 802 West Bay Road, Grand Cayman, KY1-1205 Cayman Islands.
Our agent for service of process in the United States is CT Corporation System, 111 Eighth Avenue, New York, New York 10011.
Our mission is to make it easy to communicate and get information.
Business Overview
We are an innovator in search and a leader in China’s Internet industry. Our Sogou Search is the second largest search engine in China by mobile
queries, according to CTR, and we are the fourth largest Internet company in China based on MAU in December 2019, according to iResearch. Our
differentiated search services, our industry-leading Sogou Input Method, the robust ecosystem we have built and shared with Tencent and other strategic
partners, and significant breakthroughs in AI uniquely position us to capture opportunities in China’s search and Internet industry.
Sogou Search had an 18.3% market share in China based on mobile queries in December 2019, according to CTR. We strengthened our content
and service ecosystem during 2019. On the content front, we are committed to building a more efficient and knowledgeable search platform that provides
high-quality content, particularly in healthcare search and intelligent question answering (“Q&A”). On the services front, we enhanced our offerings,
starting to explore opportunities in AI healthcare. With the ongoing integration of AI technology, Sogou Search continued to evolve into an intelligent
Q&A engine.
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In addition, we have built and share a robust ecosystem with Tencent and other strategic partners. We deliver differentiated content to our users,
including search access to the vast content from Tencent’s Weixin/WeChat Official Accounts. Sogou Search is the default search engine for a range of
Tencent products that offer general search functions. Sogou Search also continues to be the preferred search engine on Weixin/WeChat for third-party
search services to access external Internet content. We intend to extend this partnership year to year until 2023 as part of the overall framework agreement
that Sogou and Tencent entered into in September 2018.
Sogou Input Method is the largest Chinese language input software by both mobile and PC MAUs in December 2019, according to iResearch, and
is the first cloud-based Chinese language input software. Sogou Mobile Keyboard is the third largest mobile app in China in December 2019, according to
iResearch, and is China’s largest and most popular voice recognition app, based on our internal data. In December 2019, Sogou Mobile Keyboard had 464
million mobile DAUs, and processed up to 802 million daily voice requests. Sogou Mobile Keyboard interfaces with virtually all applications that involve
Chinese language input, generating massive and high-quality data that is critical to our big data capabilities. Sogou Mobile Keyboard has the ability to
anticipate users’ search intentions in real-time and allows users to search directly with Sogou Search through its embedded search function, generating a
significant portion of our organic search traffic. It also provides targeted recommendations to address users’ variety of needs for informaction discovery
while they are typing. Thanks to a number of product innovations, Sogou Mobile Keyboard continues to evolve from a utility software to an AI-enabled
communication assistant.
With a large user base from both Search and Mobile Keyboard, as well as our advanced big data capabilities, we have gradually built up our
Recommendation Service. The service consists of feed that leverages our various search-related assets and recommendations on Mobile Keyboard.
We have been dedicated to the upgrade of our Smart Hardware business by better leveraging Sogou’s AI capabilities. In 2019, our major product
lines included Sogou AI, our voice-enabled hardware products that are empowered by AI technogy, and Teemo, our smart hardware products for children.
In 2019, we launched a variety of upgraded products to the market. We aim to further diversify our product matrix and strengthen the pipeline.
We are at the forefront of AI development with a clear roadmap. Focusing on natural interaction and knowledge computing, we have become a
leader in language-centered AI capabilities, including speech, computer vision, machine translation, dialogue, and Q&A. In addition to empowering our
core Search, Mobile Keyboard, and Smart Hardware businesses, we also integrated the technologies into industry-leading solutions, including AI-powered
Vocational Avatars and Simultaneous Interpretation, and expanded their use into multiple sectors. Our proven AI capabilities will facilitate our launch of
more disruptive products and services, such as virtual personal assistants (“VPAs”), to serve users anytime, anywhere.
We have recorded solid revenue growth, with an increase from US$908.4 million in 2017, to US$1.124 billion in 2018, and US$1.172 billion in
2019. We generate revenues primarily from search and search-related advertising services, which represented 92% of our total revenues in the year ended
December 31, 2019.
Our Business
Products and Services for Users
Our suite of products and services for users focuses on search and search-related services that cover a wide variety of use cases, from online
search to input methods. Through our products and services, we have built a massive and engaged user base.
Sogou Search
We make information easily accessible for Chinese Internet users. Through Sogou Search, we enable our users to conveniently find relevant, high-
quality, and comprehensive information anytime, anywhere. We offer users general and vertical search services through our website sogou.com and our
mobile search application. In addition, Sogou Search is the default general search engine for popular Internet portals such as qq.com and sohu.com, and
popular browsers such as the Mobile QQ Browser and Sogou Browser. Sogou Search was the second largest search engine in China with an 18.3% market
share by mobile queries in December 2019, according to CTR.
General Search
Our general search is the core product of our search services. After a user types in a query in the search box, our search engine quickly returns a
list of ranked search results (appearing as hypertexts), snippets, and sometimes direct answers in response to the user query. In many cases, the search
snippets appearing underneath the hypertexts, or the direct answers appearing at the top of the search result page, provide users with the desired
information. In other cases, users click on the hypertexts to visit the linked websites.
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Search Features
To help users find the information they desire more quickly and conveniently, Sogou Search offers the following features:
· Query Suggestion: As the user is typing in the search box, a drop-down list will appear under the search box, offering dynamic predictions and
recommendations of search queries based on the words that the user is typing. Users can select the desired search query from the drop-down list
to avoid typing in additional characters.
· Query Correction: Many search queries contain errors. Erroneous search queries often produce fewer and/or inaccurate or less relevant search
results, thereby adversely affecting the user experience. Our query correction identifies and corrects apparent errors in search queries to help
deliver a high-quality search experience.
· Rich Search Snippets: Rich search snippets displayed on search result pages present content from webpages in the form of structured data to
help users better understand the content and find the desired information directly in the snippet. For example, when a user searches a restaurant,
our search engine will return structured data such as the address of the restaurant and reviews.
· Webpage Translation: Chinese language information accounts for only a small fraction of the information available on the Internet. A
tremendous amount of high-quality information, such as academic publications, is in English. To allow Chinese users to read English webpages,
Sogou Search applies our machine translation technology to translate the content of English-language webpages into Chinese with just one click.
· Search Result Recommendations: Using big data analytics and sophisticated algorithms, we recommend relevant and interesting products and
services to users based on search queries and display the recommendations on search result pages.
Key Mobile Search Features
Given the growing use of mobile devices, we have developed additional features that are optimal for mobile search to enhance user experience,
such as:
· Direct Answers: Within the limited screen space on mobile devices, we offer direct and easy-to-read answers and recommendations in response
to queries submitted by users in question form by leveraging our Q&A technology.
· Multi-Modal Inputs: In addition to inputting search queries by typing, users can input queries by voice and image. For example, users can
upload an image of an item to search for where to buy it. Such input options give users a convenient and interactive mobile search experience.
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· Audio Response: In response to search queries submitted through voice input, we can provide answers through audio response.
· Local Services Information: We have integrated a wide range of third-party vertical services, such as travel information from Ctrip, into our
general search to build a comprehensive service system that fully and accurately meets users’ search needs in verticals such as entertainment,
sports, and travel.
Vertical Search Services
We strive to offer differentiated content in our search products and services in order to improve our search results and provide an enhanced search
experience for our users. Through collaborations with industry-leading content providers, we offer the following vertical search services:
· Sogou Weixin Search: Weixin/WeChat is China’s largest mobile community. With over 20 million accounts covering a wide range of topics,
Weixin Official Accounts have become a key information platform for Chinese users. Sogou Weixin Search is the sole general search engine
with access to search all content published on Weixin Official Accounts.
· Sogou Healthcare Search: A large number of online searches in China relate to healthcare. Sogou Healthcare Search provides reliable and
trustworthy healthcare information through collaboration with national healthcare authorities and third-party healthcare information platforms.
Through these partnerships, we can provide users with comprehensive information on such important topics as diseases, symptoms, and
hospitals. We have also integrated a vast amount of interactive Q&A content from reputable doctors into our healthcare search results.
· Sogou English: Supported by the technology of Microsoft’s Bing, Sogou English is our cross-language search service that enables Chinese
users to discover English content on the Internet by querying in Chinese and reading content that we have translated into Chinese.
· Sogou Zhihu: Zhihu is the leading online knowledge-sharing platform in China, according to iResearch. Through our collaboration with Zhihu,
we provide users with up-to-date knowledge, experience, and insights shared within the Zhihu community.
· Sogou Encyclopedia: Sogou Encyclopedia is an Internet-based encyclopedia compiled by netizens, offering search, browsing, editing, and other
services to help users obtain information. It integrates rich forms of content, such as texts, audio, images, and videos.
· Sogou Ask: Sogou Ask is a platform open to the general public for Q&A. Users ask each other questions and help other users solve problems.
Sogou Ask also connects users with professionals.
· Sogou Image Search: Sogou Image Search allows users to search for images by entering text, and provides users with advanced search
capabilities to filter search results of images by color, file formats, and file sizes. Users can also upload an image or enter an image URL to
search for an image’s source or search for similar images on the Internet. Sogou Image Search can automatically recognize certain elements
embedded in online images and search for similar elements in its image library.
· Sogou Shopping Search: Sogou Shopping Search collects product data from e-commerce platforms in China. Users can search for products by
entering the product brand, category, or model and can view product specifications and price. Sogou Shopping Search also provides users with
real-time product comparisons based on price, sales volume, reviews, and shipping information to help users make better purchasing decisions.
· Sogou Video Search: We collect the metadata of videos from multiple Chinese video platforms to allow users to search from a large collection
of online videos by title, actor, or genre and to filter search results by length, upload date, or source.
· Sogou News Search: Sogou News Search allows users to search for the most up-to-date news by aggregating news from various online news
portals.
Sogou Input Method
The Chinese language is a logographic language, while traditional keyboards are designed for alphabetic languages. Due to the complexities of
inputting Chinese characters using alphabetic keyboards, Chinese language input software allows users to input Chinese using alphabetical letters based on
the Chinese pronunciation and select the correct Chinese character from a list of Chinese characters with the same pronunciation.
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We launched Sogou Input Method, the first cloud-based Chinese language input software, in 2006. Sogou Input Method has become an
indispensable Chinese language input software tool for PC and mobile users. According to iResearch, as of December 31, 2019, Sogou Input Method was
the most widely used PC software in China by DAU and the number one Chinese language input software for PC users in terms of MAU in
December 2019, with 230 million PC MAU, and had achieved a penetration rate of 99% among PC Internet users in China.
According to iResearch, as of December 31, 2019, Sogou Mobile Keyboard, the mobile application for Sogou Input Method, was the third most
widely used mobile application in China by DAU, and the number one Chinese language input application for mobile users in terms of MAU, with 617
million mobile MAU, and had achieved a penetration rate of over 66% among mobile users of third-party Chinese language input applications.
The diagrams below illustrate how Sogou Mobile Keyboard has made Chinese language input easy and efficient for mobile users.
As Sogou Input Method has made Chinese language input easy and efficient for users, we also provide a suite of differentiated features to enrich
user interactions and expressions, including a music-enabled keyboard, a font library, and an emoticon store, to allow more personalized user experience.
Our core AI technologies, including voice, translation, and dialogue, have driven product innovation for Sogou Mobile Keyboard by providing more
intelligent user interactions and expressions. Sogou Mobile Keyboard processed as many as up to 802 million voice inputs in the fourth quarter of 2019,
handled millions of translation requests per day, and provided many AI-enabled functions. The SmartShare function generates a diverse range of automated
personalized response options for user chats. The Voice Conversion function allows users to convert their voices to a selection of characters, such as
celebrities and animated characters, as well as dialects. Most recently, we launched an AI assistant named “Smart Wangzai,” which recommends to users an
array of emoticons and expressions in chats. This innovative function helps evolve our Mobile Keyboard from a utility software to an AI-enabled
communication assistant.
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The diagrams below illustrate how Sogou Mobile Keyboard has made Chinese language input more intelligent for mobile users.
Illustration of Smart Wangzai
In addition, Sogou Mobile Keyboard possesses a large library of language data, with over 120 billion Chinese character inputs per day that our
users have generated across a wide variety of Internet use cases, such as social media, news, entertainment, shopping, travel, and financial services. We are
able to leverage such massive data to more accurately and rapidly predict user intent, which enables us to continually enhance and innovate our products
and services.
Recommendation Service
With large user bases for both Search and Mobile Keyboard, we have gradually built up our recommendation service. The service consists of feed
that leverages our various search related assets and recommendations within Mobile Keyboard.
· Feed: Through Sogou Search and Sogou Browser, we provide personalized feed containing up-to-the-minute information and content
tailored to users’ demographics and interests. Our feed service leverages our AI and big data capabilities and complements our search and
other offerings.
· Recommendation on Mobile Keyboard: We enhanced content and service distribution capabilities for Mobile Keyboard, which is becoming
another driver for our recommendation service. We intend to tap into additional uses for recommendation, better fulfilling users’ various
needs for information discovery while they are typing.
Other Products
Sogou Browser
Sogou Browser is designed to make web navigation fast and easy. We continually upgrade the browser to expand functionality from a browsing
tool to a content distribution platform for an enriched user experience. In addition to a range of vertical services, we also provide personalized newsfeeds
leveraging our big data capabilities based on users’ browsing habits and history.
Sogou Web Directory
Sogou Web Directory, a content aggregation and distribution platform, is a one-stop shop for navigation of the Chinese Web. The platform consists
of a variety of services, including news aggregation, video content aggregation, and shopping assistance.
Sogou Maps
Sogou Maps provides Internet-based map and navigation services related to traffic options, routing optimization, and positioning calculation
across PCs, mobile devices, and smart wearables. Sogou Maps has been pre-installed on third-party mobile devices and smart wearables for the Chinese
market, including Google’s Android Wear smartwatch. Sogou Maps also supports a variety of car-smartphone connectivity protocols that allow users to
stay connected to their smartphone apps while driving. Sogou Smart Driving Assistant is an application that provides full voice-enabled in-vehicle services,
and has been built into in-vehicle assistant systems for industry partners such as automakers and map service providers.
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Sogou Mobile Assistant
Sogou Mobile Assistant provides users with access to a large selection of mobile applications and mobile games, which are authenticated by us in
order to ensure the safety of the content for users’ phones. Using big data and AI technologies, we have built an intelligent recommendation system in
Sogou Mobile Assistant to help users find mobile applications and games related to their interests.
Sogou Game Center
The Sogou Game Center, our gaming platform, offers web and mobile games developed by third parties.
Sogou Translation
Sogou Translation is a multi-language translation solution that incorporates neural machine translation technology and a massive linguistic
database to deliver language translation. It is web-based and also available as a mobile application. In addition to written text translation, the Sogou
Translation mobile application supports speech, document, optical character recognition (“OCR”), and augmented reality translation.
Sogou Dictation
Sogou Dictation is a full-service transcription solution that enables consumers to easily transcribe, store, and edit voice recordings for users on
mobile devices and PCs. It provides highly accurate and efficient speech-to-text conversion by integrating Sogou’s advanced voice recognition technology
and significant language database derived from the Sogou Input Method. By applying Sogou’s proprietary Adaptive Attention-based modeling technique
and industry-leading Transformer-based voice recognition technology, the Sogou Dictation service can achieve a 97% transcription accuracy rate. Sogou
Dictation also supports AI-enabled error detection and correction service for transcribed texts.
Smart Hardware
In 2019, we continued to upgrade our smart hardware strategy to better leverage Sogou’s AI capabilities and improve product competitiveness.
Our major product lines include Sogou AI, our voice-enabled hardware products that are empowered by AI technogy, and Teemo, our smart hardware
products for children. In 2019, we launched a variety of upgraded products to the market. We aim to further diversify our product matrix and strengthen the
pipeline.
Sogou AI
Since we launched a series of smart translation devices in 2018, we have further expanded our Sogou AI product line and launched a new product
category - AI Smart Recorder. Our AI devices integrate our latest AI competencies in voice and translation. In particular, our AI Smart Recorder has
redefined the traditional recorder with a variety of innovative functions including real-time transcription with a 97% accuracy rate and simultaneous
translation between multiple languages. In addition, we have devoted R&D efforts to high-end AI-enabled recording products for more sophisticated use
cases, which will further expand our AI product lines.
Teemo
Our Teemo product line, which is expanded from our Teemo smartwatch for children, includes a full suite of smart hardware for children. In 2019,
we launched JOY2, a new generation of children’s smartwatch that integrates multiple AI-enabled functions, such as intelligent Q&A, simulation of
parents’ bedtime storytelling and smart evaluation of children’s spoken English levels. Leveraging the Teemo brand, we intend to launch new categories of
smart hardware for children in the future.
Monetization
We generate revenue primarily from our search and search-related advertising services. Search and search-related advertising services enable
advertisers’ promotional links to be displayed on our search result pages and other properties and third parties’ Internet properties where the links are
relevant to search queries and such properties. Our large user base and big data capabilities allow us to enhance the effectiveness of our targeted advertising
services, thereby strengthening our monetization capabilities.
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We also generate revenue from other business by offering Internet value-added services, or IVAS, primarily with respect to our operation of games
developed by third parties, as well as by offering other products and services, including smart hardware products and online lending and microcredit
services.
Online Advertising
Search and Search-Related Advertising Products and Services
Search and search-related advertising services consist primarily of auction-based pay-for-click services, for which we charge advertisers on a per
click basis when users click on the advertisers’ promotional links displayed on our and third parties’ Internet properties. Revenue generated from our
auction-based pay-for-click services accounted for 83.0%, 83.8%, and 88.1%, respectively, of the total revenue derived from our search and search-related
advertising services in 2017, 2018, and 2019. The following are the types of advertising products and services that we offer:
· Rising Sun Advertising: A majority of our auction-based pay-for-click advertising services are managed through our Rising Sun system.
Advertisers choose and bid on keywords and set other parameters or criteria for when they want their advertisements to be triggered.
Advertisers’ promotional links will be ranked and displayed on our search results page according to our system’s computation, which takes into
account the keywords, price, and other information that advertisers have entered into the Rising Sun system.
We have widely applied deep learning and reinforcement learning technologies in all aspects of search advertising. By applying such
technologies, we can retrieve relevant ads from hundreds of millions of ads in real time to generate more traffic for advertisers while ensuring a
quality user experience, select more appealing ads to improve click through rate, and automatically match advertising materials, combined with
accurate user profiling based on Sogou’s big data capabilities, to interpret user behaviors in real time and recommend tailored dynamic
advertising content.
· Rising Sun One-Stop Advertising Platform: Our Rising Sun system is a one-stop advertising platform that provides pay-for-click advertising
management and related supporting services for Sogou’s entire commercial product line. Advertisers can log onto the platform through a single
account and use the same account to pay for various advertising products, such as search and newsfeed advertisements. Clients can introduce
content such as images, text links, and telephone numbers onto the platform, which is then automatically consolidated into Sogou’s various
advertising products, thus boosting client’s advertising efficiency and reducing their maintenance costs.
· Advertising on Third-Party Internet Properties: We work with a large number of third-party websites and mobile application providers to
provide additional high-quality avenues for our advertisers to market themselves. Under this advertising service, we typically charge our
advertisers when users click on the advertisers’ promotional links displayed on such third parties’ Internet properties. The price per click is
typically auction based. We share a portion of the revenue with the applicable third parties.
· Milky Way Advertising: Milky Way Advertising is an online marketing solution that we offer to advertisers of certain vertical sectors such as
online games, e-commerce, financial services, and education. This advertising service provides various advertisement formats, organized and
customized according to the advertisers’ industries in order to enhance the effectiveness of their advertisements. Milky Way advertisements
usually appear in the center of our search result pages. We charge advertisers on an auction-based pay-for-click basis.
· Web Directory Advertising: We also offer advertising space on Sogou Web Directory. We charge advertisers based on the duration of the
placement of their advertisements or on a per-click basis.
· Brand Advertising: Our brand advertising services primarily consist of Special Brand Zone, where advertisements are displayed in a prominent
designated space on our search result pages; Brand Start Line, where advertisements appear in Sogou Input Method and on our search result
pages; and Brand Landmark, where advertisements appear on the right side of our search result pages. Advertisers pay for such services based on
the duration of the placement of their advertisements on our search result pages.
Advertisers and Sales Network
Our advertisers consist of small and medium-sized enterprises, or SMEs, in China; and large domestic Chinese companies and multinational
companies, or Key Accounts. Our advertisers are from a broad range of industries, including healthcare, online games, e-commerce, merchant services, and
business services.
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Most of our advertisers are represented by third-party advertising agencies. We generally require the agencies representing SMEs to pre-pay for
our advertising services, but we offer them discounts to incentivize their marketing efforts. For agencies representing Key Accounts, we ask for pre-
payment on a case-by-case basis and offer discounts depending on the industry practice, the account, and our marketing goals at the time.
Other Monetization Models
Games
We operate third-party games on Sogou Game Center and Sogou Mobile Assistant. We generate revenue by charging players for virtual items that
they purchase in such games, and share a portion of the revenue with the game developers. We also operate third-party web-based games on third-party
online game platforms. These platforms charge players directly for virtual items and share a portion of the revenue with us.
Smart Hardware
We generate revenue from sales of Sogou’s various smart devices. We have established a nationwide online and offline distribution network in
China that includes third-party e-commerce platforms and retail stores.
Online Lending and Microcredit Services
We offer our online lending and microcredit services through mobile applications. We extend loans to qualified borrowers using our own funds and
generate revenues through interest and fees. We also provide loan facilitation services, connecting qualified borrowers with established institutional funding
partners, and generate revenues through service fees.
Search Technologies
Our search technologies consist primarily of the following:
Technology
· Large-Scale System (Cluster, Storage, Distributed Computation, and Index): With large-scale cluster management capabilities, our cluster
reaches over 10,000 servers and supports massive petabyte-level distributed data storage, 100 terabytes of daily data increments, and hundreds of
thousands of computational analysis tasks. Leveraging our large-scale system, we can access, store, and index information on the Chinese
Internet and serve hundreds of millions of page views per day.
· Webpage Crawling, Page Analysis, and Link Analysis: Our intelligent and efficient distributed crawling system can crawl and index the
Chinese Internet. It also allows us to index new Internet content within a few minutes after it is generated, and update all indexes in a few weeks.
By adopting big data and AI technologies, our page quality analysis algorithm can identify junk and spam and other low-quality webpages. In
addition, we can evaluate the authority of webpages using link analysis technology in order to enhance the authenticity of search results.
· Open Data Platform: Through input from website developers and owners, our open data platform allows certain previously unsearchable
information on the Web to be picked up by our search engine, thereby providing users with additional sources of information and generating
more valuable traffic for these websites.
· Information Extraction: Information extraction can accurately analyze the content, structures, and styles of webpages and then extract
structured and unstructured data from them, including text, links, images, and other multimedia material. Besides the static content, our
information extraction technology can also quickly and accurately access and analyze the dynamic content of webpages through large-scale
webpage rendering technology.
· Natural Language Processing: Our natural language processing technology applies computational linguistics, machine learning, data mining,
and other algorithms to process, analyze, and understand natural language text, especially in users’ search queries and webpage content. Our
technology includes word segmentation, part-of-speech tagging, name entity recognition, entity linking, syntax and semantic analysis, sentiment
analysis, and text generation. In search scenarios, natural language processing can enhance the understanding of user queries and webpages, such
as query classification, webpage classification, topic modeling, and semantic matching, and consequently, improve user satisfaction of search
results. For Q&A, natural language processing helps us to understand user questions submitted in natural language and to extract concise
answers from webpages. Based on our accurate and robust classification system, we are able to precisely understand user intent and provide
more specific results that fit our users’ needs. During 2019, we applied many state-of-the-art deep learning technologies, including
BERT, IRGAN, and Distillation. With these fine-tuned machine learning models, we can better understand users’ queries and build our search
system more intelligently.
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· Search Ranking: We rank search results according to our evaluation of how relevant and useful they are to a user’s query. Many factors are
considered, such as matches between queries and webpages, freshness, and authority. In order to meet different user’s needs, we also deploy
several vertical search engines that focus on specific classes of results, such as pictures, videos, and music. We will mix these results based on
user intent so that we can enrich our results and provide more attractive results for users. Our rank strategies for this mix process are realized
through a learning to rank model we call “merge LTR.” Each category of result is pushed into a queue and pre-processed in order to give the
most prominence to the best results in each category. All these processes run in parallel and finally merge together through the merge model. We
also introduced Zhihu and WeChat articles to meet innovative and unique demands. Machine learning algorithms are employed to integrate these
factors to return a list of search results. We have applied dozens of models with different algorithms, including Logistic Regression, SVM, Naïve
Bayes, Random Forest, and LSTM. These machine learning algorithms not only help us to rank the result lists to better match the users’ needs,
but also provide webpages that are fresh, authoritative, clean, and abundant.
Artificial Intelligence
We are at the forefront of AI development with a clear roadmap for future developments. Focusing on natural interaction and knowledge
computing, we have become a leader in language-centered AI capabilities, including speech, computer vision, machine translation, dialogue, and Q&A. In
addition to empowering our core Search, Mobile Keyboard, and Smart Hardware businesses with AI, we also integrated the technologies into industry-
leading solutions, including AI-powered Vocational Avatars and Simultaneous Interpretation, and expanded their use into multiple sectors.
Below are further details of our key AI technologies and solutions:
Natural Interaction
Natural interaction refers to a series of technologies that include speech, computer vision, machine translation, and dialogue.
· Speech Technology: Speech is the core technology enabling voice-based human-machine interaction. We have advanced speech recognition and
synthesis technology. In the fourth quarter of 2019, we processed up to 802 million voice inputs through Sogou Mobile Keyboard per day. We
received first place in the Word Error Rate and Speech Pause subcategories at the Blizzard Challenge 2018, a prominent global competition for
speech synthesis.
· Computer Vision: Image is the core technology enabling vision-based human-machine interaction. Through deep learning and massive data
generated from our core products, we have developed capabilities in handwriting recognition, OCR, image search, and facial recognition. We set
a new world record in the Object Detection subcategory at Pascal VOC 2018, a prominent global challenge for computer vision. Our facial
recognition technology also ranked first in the 2018 MegaFace Million-Scale Face Recognition Challenge. Most recently, we set several new
world records in the ICDAR 2019 Robust Reading Challenge on Arbitrary-Shaped Text, a prominent global challenge for OCR.
· Machine Translation: We have developed advanced machine translation technology. We successfully applied deep neural network technology to
optimize and commercialize real-time machine translation technology, with the ability to simultaneously recognize voice inputs and enable
multilingual translation. We ranked first in the Baseline Model task during the 2018 International Workshop on Spoken Language Translation
(IWSLT), a top-tier international machine interpretation competition.
· Dialogue System: Dialogue is the key to human-machine interaction. With natural language processing and dialogue modeling techniques, we
enable machines to understand the intentions in users’ text, voice, and image inputs. We were the champion of the Spoken Language
Understanding Challenge at the International Conference on National Language Processing and Chinese Computing in 2018.
Knowledge Computing
Knowledge computing refers to a series of technologies that include the representation, storage, retrieval, and reasoning of knowledge. We have
developed question answering, or Q&A, technology to answer complex natural language questions from users.
· Question Answering: Our Q&A technology finds answers to questions posed in natural language. Instead of limiting their search queries to
keywords, users can search using natural language, and in response, get direct answers in addition to a list of Web links. Since Q&A technology
improves the efficiency of user access to information, we believe Q&A is an increasingly prevalent form of search. In January 2019, we came in
first in the Conversational Question Answering (“CoQA”) Challenge and set new records for all evaluation metrics. Our Q&A technology has
narrowed the gap between the average reading comprehension level of a machine and a human. Leveraging our Q&A technology, we are able to
deliver a more efficient search experience to users, with our top, direct answer results fulfilling a significant portion of our overall search results
with a high level of accuracy. The Q&A technology is also applied in our proprietary smart triage platform, which we believe may foster our
future development in AI healthcare. In 2019, we also partnered with third parties, including Tencent, Huawei, Oppo, and Samsung, to integrate
our intelligent Q&A services into some of their products.
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Industry-Leading Solutions
· Vocational Avatar: By integrating the latest advances in image detection, speech synthesis and reconstruction, and best-in-class algorithms, Sogou
Vocational Avatar can present a lifelike resemblance to a human being, providing a highly-dynamic and seamless experience for users. Since its
debut in 2018, Sogou Vocational Avatars has developed into its fourth generation and achieved a major upgrade to empower the virtual Avatars
with realistic real-time human interactions. We have made substantial progress in expanding the application of our Vocational Avatar solution in
various sectors, including AI News Anchors in news broadcasting, AI Virtual Judge in legal services, and AI Customer Service Avatar in the
financial services industry.
· Simultaneous Interpretation: As a critical component of our use of AI technology in cross-language communication, Sogou Simultaneous
Interpretation has undergone three upgrades since it was first unveiled in 2016 at the World Internet Conference in Wuzhen, China. The latest
upgrade, Sogou Simultaneous Interpretation 3.0, significantly enhances the efficiency and accuracy of machine translation by combining computer
vision and AI self-learning capabilities that enable the instant capture and comprehension of multimodal information presented by the speaker. It is
the first machine interpretation system that can “see” and “think” in real-time as the presenter speaks.
Big Data Capabilities
Hundreds of millions of users of our products and services have generated a vast amount of data across a wide variety of use cases. Our big data
capabilities include:
· Data Integration and Management: We research and develop a multi-level and highly-reliable data access system and data warehouse to
address the technological challenges in data acquisition, data preprocessing, and distributed storage of massive heterogeneous data; and to
address real-time streaming data access and processing, as well as data security management.
· Data Mining and Analytics: We continue to build and strengthen our user profile label system from massive data mined from multiple
platforms and multiple scenarios that allow such information to be effectively used under different application scenarios. Our user profile labels
can be sorted and applied to targeted advertising and personalized content recommendations.
· Data Application and Services: We continue to improve and innovate our existing products by leveraging our big data capabilities. We develop
a variety of data analysis products for individuals and business customers, such as targeted marketing analytics products for advertisers. We also
apply our big data capabilities in our recommendation service and in risk control modeling for certain businesses.
Intellectual Property
We regard our patents, copyrights, service marks, trademarks, trade secrets, and other intellectual properties as critical to our success. We rely on
patents, trademarks, and copyrights; trade secret protection; and non-competition, confidentiality, and license agreements with our employees, customers,
partners, and others to protect our intellectual property rights. Before we launch any new products or services, we apply for registration of related patents,
trademarks, and software copyrights. Despite our precautions, it may be possible for third parties to obtain and use our intellectual properties without
authorization. Furthermore, the validity, enforceability, and scope of protection of intellectual property rights in Internet-related industries are uncertain and
still evolving. The laws of the PRC do not protect intellectual properties to the same extent as do the laws of the United States.
As of December 31, 2019, we have been issued 1,145 patents in China and 66 patents in countries and regions outside of China covering
inventions, utility models, and designs; we have 1,216 patent applications currently pending in China and 79 patent applications currently pending in
countries and regions outside of China; we have submitted 85 international patent applications through the procedures under the Patent Cooperation Treaty,
or PCT; and we intend to apply for more patents to protect our core technologies and intellectual properties. As of December 31, 2019, we have registered
804 trademarks with the Trademark Office of the State Administration for Industry and Commerce in China, including our company’s name “Sogou,”
Sogou logos, trademarks relating to our products such as Sogou Input Method, Sogou Map and Teemo, and their corresponding Chinese version marks; and
we are in the process of applying for the registration of 408 other trademarks. We also have registered trademarks in various countries and regions,
including Taiwan, Hong Kong, Macau, Germany, Myanmar, Saudi Arabia, India, the United Arab Emirates, Australia ,the African Regional Intellectual
Property Organization, and the United Kingdom, and we are in the process of applying for the registration of trademarks in the United States, Australia, the
European Union, Macau, Russia, Indonesia, Vietnam, South Korea, Japan, Ukraine, Thailand, Philippines, Turkey, Pakistan, Canada, Hong Kong, and
Taiwan. As of December 31, 2019, we have 114 trademarks registered outside of Mainland China and we are in the process of applying for registration of
247 trademarks. As of December 31, 2019, we are the registered owner of 209 software copyrights in China, each of which we have registered with the
State Copyright Bureau of China. As of December 31, 2019, we own the rights to 157 domain names that we use in connection with the operation of our
business, including our Sogou website sogou.com.
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Many parties are actively developing search and AI technologies. We expect these parties to continue to take steps to protect these technologies,
including seeking patent protection. There may be patents issued or pending that are held by others and cover significant parts of our technology, business
methods, or services. We cannot be certain that our products do not or will not infringe valid patents, copyrights, and other intellectual property rights held
by third parties. We may be subject from time to time to legal proceedings and claims relating to the intellectual property of others in the ordinary course of
our business. See “—Legal Proceedings”; and “Risk Factors—Risks Related to Our Business—We are currently subject to, and in the future may from time
to time face, intellectual property infringement claims, which could be time-consuming and costly to defend, and could have an adverse impact our
financial position and results of operations, particularly if we are required to pay significant damages or cease offering any of our products or curtail any
key features of our products.”
We have licensed 234 patents from Tencent and intend to continue to license technology from Tencent and other third parties. The market is
evolving and we may need to license additional technologies to remain competitive. We may not be able to license these technologies on commercially
reasonable terms, or at all. In addition, we may fail to successfully integrate any licensed technology into our services. Our inability to obtain or integrate
any of these licenses could delay product and service development until alternative technologies can be identified, licensed, and integrated.
Technology Infrastructure
We have built what we believe is a reliable and secure network infrastructure that will fully support our operations. As of December 31, 2019, we
owned approximately 27,552 servers located in eight Internet data centers in China. We have also obtained what we believe is a sufficient amount of
connectivity bandwidth to meet the current and anticipated needs of our operations, and have established a large-scale GPU service cluster to provide
computing power for our AI technologies.
As of December 31, 2019, we had 41 technical support employees to maintain our current technology infrastructure and develop new software
features to further enhance the functionality of our management and security systems. We monitor the operation of our server network 24 hours a day,
seven days a week. Our remote control system allows us to discover and fix problems in the operation of hardware and software in our server network in a
timely fashion.
Marketing
We focus on delivering superior user experience through better products and services, which we believe can expand our user base and enhance our
brand. Since inception, our user base has grown primarily through word-of-mouth referrals; thus, we have built our brand with modest marketing costs.
While we have benefitted significantly from word-of-mouth marketing, we have also launched marketing campaigns designed to further promote
our brand, products, and technologies. In 2019, we focused on marketing our technology through industry-specific applications. This was designed to
demonstrate our technological advantages and enhance Sogou’s brand image as a leading AI-based solution provider. For example, Sogou has expanded the
application of its AI Vocational Avatar technology in various sectors, including AI News Anchors in news broadcasting, AI Virtual Judge in legal services,
and AI Customer Service Avatar in financial services. Our proprietary AI Vocational Avatar served as a hostess at various industry summits and our AI
Simultaneous Interpretation solution supported a number of conferences in such areas as technology, finance, and sports.
Competition
Our business consists primarily of search and search-related services. We face intense competition in these areas for both users and advertisers
primarily from Baidu, Toutiao of Bytedance, and ShenMa of Alibaba. We also face competition from vertical search service providers, including travel
services and information platforms such as Ctrip and Qunar; group-buy platforms such as Meituan Dianping; online classified advertisement platforms
such as 58.com, and short video platforms such as Douyin of Bytedance and Kuaishou. We compete for advertisers not only with Internet companies, but
also with other types of advertising media such as newspapers and magazines, billboards, bus advertisements, television, and radio.
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Our existing and potential competitors compete with us for users and advertisers on the basis of the quality and quantity of search results; the
features, availability, and ease of use of products and services; and the number and quality of advertising distribution channels. They also compete with us
for talent with technological expertise, which is critical to the sustained development of our products and services.
Employees
We had 2,295, 2,789, and 2,738 employees as of December 31, 2017, 2018, and 2019, respectively. We also employ independent contractors to
support our research and development, product development, sales and marketing departments, and had approximately 196 independent contractors on
average during the 2019 fiscal year. As of December 31, 2019, 41% of our employees held Master’s degrees or Ph.D.s, and 74% of our employees worked
in the research and development department. None of our employees is represented under collective bargaining agreements. The table below sets forth the
number of our employees in each functional area as of December 31, 2019.
Business operations
Research and development
Sales and marketing
General and administrative
Total
Employee
110
463
136
2,029
2,738
We have entered into standard employment agreements with our employees, including our executive officers. These agreements may be
terminated by either party, and a terminated employee may be entitled to certain severance benefits upon termination, pursuant to the Labor Contract Law
of the PRC. Under the Labor Contract Law, we must pay severance to all employees who are Chinese nationals and who are terminated without cause or
terminate their employment with us for good reason, or whose employment agreements expire and we do not continue their employment. The severance
benefits required to be paid under the Labor Contract Law equal the average monthly compensation paid to the terminated employee (including any
bonuses or other payments made in the twelve months prior to the employee’s termination) multiplied by the number of years the employee has been
employed with us, plus an additional month’s salary if 30 days’ prior notice of such termination is not given. However, if the average monthly
compensation to be received by the terminated employee exceeds three times the average monthly salary in the employee’s local area as determined and
published by the local government, such average monthly compensation is capped at three times the average monthly salary in the employee’s local area.
In addition, our employees have entered into standard confidentiality and non-competition agreements with us. Under the confidentiality
agreements, the employees agree not to disclose or otherwise use our confidential information while employed and indefinitely thereafter. Under the non-
competition agreements the employees agree not to compete with us during and up to 24 months after the termination of employment with us as long as we
pay additional compensation during the non-competition period. The non-competition agreements also provide that the employees’ work product is
assigned to us.
We believe the dedication and talent of our employees are critical for our business, and retention of employees is our priority. As part of our
retention strategy, we are committed to offering employees an attractive opportunity to work with us as a leading and reputable technology company,
providing many opportunities for employees to participate in the development of our new technologies and products, and offering employees competitive
salaries and performance-based cash bonuses and equity incentives.
Facilities
We currently lease from Sohu, on an arms-length basis, approximately 18,228 square meters of office space at Sohu.com Internet Plaza in Beijing,
China under a lease that expires on December 31, 2022 and may be renewed subject to terms agreed to by Sohu and us. In addition to the office space
leased from Sohu, we lease a total of approximately 18,744 square meters of office space in Beijing, Hangzhou, Chengdu, Shantou Hefei, and Tianjin,
China from other third parties.
Legal Proceedings
From time to time, we become subject to legal proceedings and claims in the ordinary course of our business. We are currently involved in several
lawsuits in PRC courts where our competitors instituted proceedings or asserted counterclaims against us or we instituted proceedings or asserted
counterclaims against our competitors.
While we do not believe that such currently pending proceedings are likely to have a material adverse effect on our business, financial condition,
results of operations, and cash flows, we cannot guarantee that they will be decided or resolved favorably for us, and such pending proceedings or any
future legal proceedings or claims, even if not meritorious, could result in our expenditure of significant financial, legal, and management resources. For a
description of risks relating to litigation, please see “Risk Factors—Risks Related to Our Business—Pending or future litigation could have an adverse
impact on our financial condition and results of operations.”
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PRC Regulation
The following is a summary of certain key laws and regulations relevant to our business activities in China. For a description of legal risks relating
to our ownership structure and business, see “Risk Factors”.
Value-added Telecommunications Services
The Telecommunications Regulations of the People’s Republic of China, or the Telecom Regulations, implemented on September 25, 2000 and
amended on July 29, 2014 and February 6, 2016, are the primary PRC law governing telecommunication services, and set out the general framework for
the provision of telecommunication services by domestic PRC companies. The Telecom Regulations require that telecommunications service providers
procure operating licenses prior to commencing operations. The Telecom Regulations draw a distinction between “basic telecommunications services,”
which we generally do not provide, and “value-added telecommunications services.” The Telecom Regulations define value-added telecommunications
services as telecommunications and information services provided through public networks. The Catalogue of Telecommunications Business, or the
Catalogue, which was issued as an attachment to the Telecom Regulations and updated in February 2003, December 2015, and June 2019, identifies
information services, Internet data centers, Internet access as value-added telecommunications services. We engage in business activities that are value-
added telecommunications services as defined and described by the Telecom Regulations and the Catalogue.
On March 5, 2009, the MIIT issued the Measures on the Administration of Telecommunications Business Operating Permits, or the Telecom
License Measures, which initially became effective on April 10, 2009 and was amended on July 3, 2017, effective on September 1, 2017, to supplement the
Telecom Regulations. The Telecom License Measures confirm that there are two types of telecom operating licenses for operators in China, one for basic
telecommunications services and one for value-added telecommunications services. A distinction is also made as to whether a license is granted for “intra-
provincial” or “trans-regional” (inter-provincial) activities. An appendix to each license granted will detail the permitted activities of the enterprise to
which it was granted. An approved telecommunication services operator must conduct its business (whether basic or value-added) in accordance with the
specifications recorded in its Telecommunications Services Operating License.
On November 28, 2018, the MIIT issued to Sogou Information renewed Value-added Telecommunications Services Operating Licenses which
authorize the provision of Internet data centers, and Internet access, which are classified as value-added telecommunication services. Holders of Value-
added Telecommunications Services Operating Licenses are required to submit reports to the MIIT annually.
Foreign Direct Investment in Value-added Telecommunications Companies
Various PRC regulations currently restrict foreign-invested entities from engaging in value-added telecommunication services, including providing
Internet information services and operating online games. Foreign direct investment in telecommunications companies in China is regulated by the
Regulations for the Administration of Foreign-Invested Telecommunications Enterprises, or the FITE Regulations, which were issued by the PRC State
Council, or State Council, on December 11, 2001, became effective on January 1, 2002 and were amended on September 10, 2008 and February 6, 2016,
respectively. The FITE Regulations stipulate that foreign invested telecommunications enterprises in the PRC (“FITEs”) must be established as Sino-
foreign equity joint ventures. Under the FITE Regulations and in accordance with WTO-related agreements, the foreign party to a FITE engaging in value-
added telecommunications services may hold up to 50% of the equity of the FITE, with no geographic restrictions on the FITE’s operations. On June 30,
2016, the MIIT issued an Announcement of the Ministry of Industry and Information Technology on Issues concerning the Provision of Telecommunication
Services in Mainland China by Service Providers from Hong Kong and Macau, or the MIIT Announcement, which provides that investors from Hong
Kong and Macau may hold more than 50% of the equity in FITEs engaging in certain specified categories of value-added telecommunications services.
For a FITE to acquire any equity interest in a value-added telecommunications business in China, it must satisfy a number of stringent
performance and operational experience requirements, including demonstrating a track record and experience in operating a value-added
telecommunications business overseas. FITEs that meet these requirements must obtain approvals from the MIIT and the MOFCOM or their authorized
local branches, which retain considerable discretion in granting approvals.
On July 13, 2006, the MIIT issued the Notice of the Ministry of Information Industry on Intensifying the Administration of Foreign Investment in
Value-added Telecommunications Services, or the MIIT Notice, which reiterates certain provisions of the FITE Regulations. Under the MIIT Notice, if a
FITE intends to invest in a PRC value-added telecommunications business, the FITE must be established and must apply for a telecommunications
business license applicable to the business. Under the MIIT Notice, a domestic company that holds a license for the provision of Internet information
services, or an ICP license, is considered to be a type of value-added telecommunications business in China, and is prohibited from leasing, transferring or
selling the license to foreign investors in any form, and from providing any assistance, including providing resources, sites or facilities, to foreign investors
to conduct value-added telecommunications businesses illegally in China. Trademarks and domain names that are used in the provision of Internet content
services must be owned by the ICP license holder or its shareholders. The MIIT Notice requires each ICP license holder to have appropriate facilities for its
approved business operations and to maintain such facilities in the regions covered by its license. Our VIEs, rather than our subsidiaries, hold ICP licenses,
own our domain names, and hold or have applied for registration in the PRC of trademarks related to our business and own and maintain facilities that we
believe are appropriate for our business operations.
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In view of these restrictions on foreign direct investment in the value-added telecommunications sector, we established domestic VIEs to engage
in value-added telecommunications services. For a detailed discussion of our VIEs, please refer to “Our History and Corporate Structure” above. Due to a
lack of interpretative materials 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. See
“Risks Related to Our Corporate Structure.” In order to comply with PRC regulatory requirements, we operate a portion of our business through our VIEs,
with which we have contractual relationships but in which we do not have an actual ownership interest. 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 the PRC Internet sector, we could be subject to
severe penalties.
Provision of Internet Content
Internet Information Services
On September 25, 2000, the State Council issued the Measures for the Administration of Internet Information Services (the “ICP Measures”),
which were amended on January 08, 2011. Under the ICP Measures, entities that provide information to online users on the Internet, or ICPs, are obliged to
obtain an operating license from the MIIT or its local branch at the provincial or municipal level in accordance with the Telecom Regulations described
above.
The ICP Measures further stipulate that entities providing online information services regarding news, publishing, education, medicine, health,
pharmaceuticals and medical equipment must procure the consent of the national authorities responsible for such areas prior to applying for an operating
license from the MIIT or its local branch at the provincial or municipal level. Moreover, ICPs must display their operating license numbers in conspicuous
locations on their home pages. ICPs are required to police their Internet platforms and remove certain prohibited content. Many of these requirements
mirror Internet content restrictions that have been announced previously by PRC ministries, such as the MIIT, the Ministry of Culture (the “MOC”), and the
State Administration of Press, Publication, Radio, Film and Television (the “SAPPRFT”), that derive their authority from the State Council.
On October 25, 2017, the Beijing Telecom Administration, or the BTA, issued to Sogou Information a renewed Telecommunications and
Information Services Operating License (“ICP license”). Sogou Information is required to submit a reports to the BTA annually.
In 2000, the MIIT promulgated the Internet Electronic Bulletin Service Administrative Measures, or the BBS Measures. The BBS Measures
required ICPs to obtain specific approvals before they provided BBS services, which included electronic bulletin boards, electronic forums, message boards
and chat rooms. On September 23, 2014, the MIIT abolished the BBS Measures in a Decision on Abolishment and Amendment Certain Regulations and
Rules. However, in practice certain local authorities still require operating companies to obtain approvals or make filings for the operation of BBS services.
The ICP license held by Sogou Information includes such specific approval of the BBS services that we provide.
Online News Search Services
On May 2, 2017, the Administrative Regulations for Internet News Information Services, or the News Regulations, were promulgated by the
Cyberspace Administration of China to replace the previous Administrative Regulations for Internet News Information Services, or the Old News
Regulations, issued by the SCIO and the MIIT on September 25, 2005, pursuant to which Internet news information services include services of collecting,
editing, and releasing Internet news information, reposting such news information, and providing a platform to spread such news information. On May 22,
2017, the Detailed Implementing Rules of Administration of Internet News Information Services Approval, or the Detailed Implementing Rules, were
promulgated by the Cyberspace Administration of China, effective on June 1, 2017. The News Regulations and the Detailed Implementing Rules require
the general Websites of non-news organizations to apply to the SCIO at the national level for approval after securing the consent of the SCIO at the
provincial level before they commence providing news dissemination services. There is uncertainty as to whether the provision of news search services and
aggregation of news links fit within the definition of news dissemination services. Sogou Information is currently in the process of applying for an online
news service license.
Internet Publishing
On February 4, 2016, the SAPPRFT and MIIT jointly issued the Rules for the Administration for Internet Publishing Services (the “Internet
Publishing Rules”), which took effect on March 10, 2016, to replace Tentative Measures for Internet Publishing that had been jointly issued by the
SAPPRFT and the MIIT on June 27, 2002. The Internet Publishing Rules define “Internet publications” as digital works that are edited, produced, or
processed to be published and provided to the public through the Internet, including (a) original digital works, such as pictures, maps, games, and comics;
(b) digital works with content that is consistent with the type of content that, prior to the Internet age, typically was published in media such as books,
newspapers, periodicals, audio-visual products, and electronic publications; (c) digital works in the form of online databases compiled by selecting,
arranging, and compiling other types of digital works; and (d) other types of digital works identified by the SAPPRFT. Under the Internet Publishing
Rules, Internet operators distributing such Internet publications via information network are required to apply for an Internet publishing license with the
relevant governmental authorities and submit the application, if approved, to the SAPPRFT for approval before distributing Internet publications. Sogou
Information plans to apply for an Internet publishing license.
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Internet Audio-visual Program Services
On December 20, 2007, the SAPPRFT and MIIT jointly issued the Administrative Provisions for the Internet Audio- Visual Program Service, or
the Audio-visual Program Provisions, which came into effect on January 31, 2008 and was amended on August 28, 2015. The Audio-visual Program
Provisions define “Internet audio-visual programs services” as the production, edition and integration of audio-video programs, the supply of audio-video
programs to the public via the Internet, and the provision of upload and audio-video programs transmission services to a third party. Entities engaging in
Internet audio-visual programs services must obtain an internet audio-visual program transmission license, which will only be issued to state-owned or
state-controlled entities unless the license applicant has obtained an Internet audio-visual program transmission license prior to the promulgation of the
Audio-visual Program Provisions in accordance with the then-in-effect laws and regulations. According to the Categories of the Internet Audio-Video
Program Services promulgated by SAPPRFT on March 10, 2017, “aggregation of Internet audio-visual programs”, which means “editing and arranging the
Internet audio-visual programs on the same website and providing searching and watching services to public users”, falls into the definition of the
aforementioned “Internet audio-visual programs services.” Sogou information is currently in the process of negotiating with an entity that had obtained an
Internet audio-visual program transmission license in order to acquire all of the equity interests in such entity, which is a common market practice for
companies, such as us, that are not wholly state-owned or state-controlled entities.
Online Cultural Products
On May 10, 2003, the MOC issued the Provisional Regulations for the Administration of Online Culture, or the Online Culture Regulations,
which took effect on July 1, 2003 and were amended on July 1, 2004. On February 17, 2011, the MOC issued the new Provisional Regulations for the
Administration of Online Culture, or the New Online Culture Regulations, which took effect on April 1, 2011, to replace the previous regulations. The New
Online Culture Regulations apply to entities engaging in activities related to “Internet cultural products,” which include those cultural products that are
produced specially for Internet use, such as online music and entertainment, online games, online plays, online performances, online works of art and Web
animations, and those cultural products that, through technical means, produce or reproduce music, entertainment, games, plays and other art works for
Internet dissemination. Pursuant to the New Online Culture Regulations, commercial entities are required to apply to the relevant local branch of the MOC
for an Online Culture Operating Permit if they engage in any of the following types of activities:
· the production, duplication, importation, release or broadcasting of Internet cultural products;
· the dissemination of online cultural products on the Internet or transmission thereof via Internet or mobile phone networks to users’ terminals
such as computers, fixed-line or mobile phones, television sets, gaming consoles and Internet surfing service sites such as Internet cafés for the
purpose of browsing, using or downloading such products; or
· the exhibition or holding of contests related to Internet cultural products.
On July 1, 2016, the MOC issued a Notice on Strengthening the Administration of Online Performance, or the Online Performance Notice and on
December 2, 2016, issued the Measures of Administration of Online Performance Operating Activities, or Online Performance Measures, which became
effective on January 1, 2017. The Online Performance Notice and the Online Performance Measures both stipulate that online performance service
providers must obtain an Online Culture Operating Permit and that online performances must not contain any content that is horrific, cruel, violent, vulgar
or humiliating in nature, mocks persons with disabilities, includes photographs or video clips that infringe third parties’ privacy or other rights, features
animal abuse, or presents characters and other features of online games that have not been registered and approved for publication by applicable PRC
governmental authorities.
On November 3, 2017, the MOC issued a renewed Online Culture Operating Permit to Sogou Information authorizing Sogou Information to
provide relevant online services.
Mobile Internet Applications Information Services
On June 28, 2016, the CAOC issued the Provisions on the Administration of Mobile Internet Applications Information Services, or the APP
Provisions, which became effective on August 1, 2016. Under the APP Provisions, mobile application providers and application store service providers are
prohibited from engaging in any activity that may endanger national security, disturb the social order, or infringe the legal rights of third parties, and may
not produce, copy, issue or disseminate through mobile applications any content prohibited by laws and regulations. The APP Provisions also require
application providers to procure relevant approval to provide services through such applications and require application store service providers to register
with local branches of the CAOC within 30 days after they start providing application store services. Sogou information has filed an application for
registration with the competent local branch of the CAOC with respect to our provision of application store services.
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Internet Map Services
Under the Opinions on Strengthening the Supervision of Internet Map and Geographic Information Services and the Notices on Further
Strengthening the Management of Internet Map Services Permit issued on February 25, 2008 and December 23, 2011, respectively, by the State
Administration of Surveying, Mapping and Geo-information (the “SASMG,” formerly known as the State Bureau of Surveying and Mapping) and the
Administrative Regulations on Maps issued by the State Council on November 26, 2015, effective on January 1, 2016, any provider of Internet map
services must obtain the approval of the SASMG or its local branches and a Surveying and Mapping Qualification Certificate in order to provide such
services. In addition, providers of Internet map services must use maps obtained through government-approved channels and display the SASMG approval
number, the Surveying and Mapping Qualification Certificate number and the Telecommunications Services Operating License number in conspicuous
locations on their Websites.
On July 1, 2014, the SASMG issued the Administrative Regulations on Surveying and Mapping Qualification Certificate and Classification
Standard on Surveying and Mapping Qualification Certificate (the “SASMG Regulations and Standards”) effective on August 1, 2014, to replace previous
regulations issued on April 16, 2004 and March 12, 2009. Under the SASMG Regulations and Standards, there are two types of Surveying and Mapping
Qualification certificates that may be issued to providers of Internet map services. A Class A certificate allows a holder to provide (i) map-location
services, (ii) geo-information uploading and dimension services, and (iii) geo-information database development services, while a holder of a Class B
certificate may only provide the first two types of services.
On July 26, 2016, the SASMG and the Office of the Central Leading Group for Cyberspace Affairs (the “OCLGCA”) jointly issued a Notice on
Standardizing the Usage of Maps by Internet Services Providers (the “Maps Usage Notice”), which stipulates that all the Internet service providers must
review and use maps in accordance with the PRC Surveying and Mapping Law and Administrative Regulations on Maps. The Maps Usage Notice requires
that maps displayed by Internet service providers be obtained through government-approved channels and identify their sources and censor numbers.
Internet service providers are prohibited from using maps obtained from unaccredited sources, including foreign Websites. All maps, other than scenic
maps, block maps, subway maps and other simple maps, must be reviewed by PRC governmental authorities before they are published, and must not
contain any information or content specified as prohibited in the Maps Usage Notice.
On January 1, 2015, Sogou Information obtained a renewed Class A Certificate of Surveying and Mapping Qualification from the SASMG.
Internet Pharmaceuticals Information Dissemination
Under the Measures for the Administration of Internet Pharmaceuticals Information Services (the “Pharmaceuticals Information Services
Measures”) issued on July 8, 2004 and amended on November 17, 2017 by the State Food and Drug Administration (the “SFDA”), approval of the SFDA
or one of its local branches is required before a Website may disseminate information concerning pharmaceuticals.
Under the Pharmaceuticals Information Services Measures, pharmaceutical (including medical equipment) information provided by Websites must
be scientific and accurate. Furthermore, medical and pharmaceutical (including medical equipment) advertisements published by such Websites must be
reviewed and approved by SFDA and must not exaggerate the efficacy or promote the medical uses of such products.
Sogou Information received renewed SFDA approval on October 31, 2017.
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 (the
“New Advertising Law”), which became effective on September 1, 2015 and was amended on October 26, 2018. The New Advertising Law, which was a
major overhaul of an advertising law enacted in 1994, increases the potential legal liability of providers of advertising services, and includes provisions
intended to strengthen identification of false advertising and the power of governmental authorities. On July 4, 2016, the SAIC issued the Interim Measures
for the Administration of Online Advertising (the “SAIC Interim Measures”), effective on September 1, 2016. The New Advertising Law and the SAIC
Interim Measures both provide that advertisements posted or published through the Internet may not affect users’ normal usage of a network, and
advertisements published in the form of pop-up windows on the Internet must display a “close” sign prominently and ensure one-key closing of the pop-up
windows. The SAIC Interim Measures provide that all online advertisements must be marked “Advertisement” so that viewers can easily identify them as
such. Moreover, the SAIC Interim Measures treat pay-for-click search results as advertisements that are subject to PRC advertisement laws, and require that
pay-for-click search results be conspicuously identified on search result pages as advertisements. The New Advertising Law and SAIC Interim Measures
will require us to conduct more stringent examination and monitoring of our advertisers and the content of their advertisements.
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On April 13, 2016, the SAIC and sixteen other PRC government agencies jointly issued a Notice of Campaign to Crack Down on Illegal Internet
Finance Advertisements and Other Financial Activities in the Name of Investment Management (the “Campaign Notice”), pursuant to which a campaign
was conducted between April 2016 and January 2017 targeting, among other things, online advertisements for Internet finance and other financial activities
posted on online search portals, such as ours, and other portal, financial, real estate, P2P, and investment product sales services Websites. The SAIC Interim
Measures treat pay-for-click search results as advertisements subject to PRC laws governing advertisements, require that pay-for-click search results be
conspicuously identified on search result pages as advertisements and subject revenues from such advertisements to a 3% PRC tax that is applied to
advertising revenues. In order to comply with these regulations, we have established more stringent standards for selecting advertisers for our pay-for-click
services, have turned down certain existing advertisers, and have lowered the percentage that pay-for-click search results represent of results on our search
pages.
Search Services
On August 18, 2009, the MOC issued a Notice on Strengthening and Improving the Content Censorship of Online Music Content, or the MOC
Notice, which was abolished by the MOC on August 25, 2016. On October 23, 2015, the MOC issued a Notice on Further Strengthening and Improving the
Administration of Content of Online Music, or the MOC Further Notice, which became effective on January 1, 2016. The MOC Notice and the MOC
Further Notice provide that providing direct links to online music will constitute engaging in the online music business, and that therefore an Online
Culture Operating Permit is required for providing such search services. Sogou Information applied for an Online Culture Operating Permit and received it
on December 31, 2010. The permit was renewed on November 3, 2017.
On June 25, 2016, the CAOC issued Measures for the Administration of Online Information Search Services, or the CAOC Measures, which
became effective on August 1, 2016. The CAOC Measures, like the SAIC Interim Measures, require that providers of online search services verify the
credentials of pay-for-click advertisers, specify a maximum percentage that pay-for-click search results may represent of results on a search page,
conspicuously identify pay-for-click search results as such.
Online Games and Cultural Products
In September 2009, the SAPPRFT, together with the National Copyright Administration (the “NCA”), 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, the SAPPRFT Online Game Notice. The SAPPRFT Online Game Notice states that
foreign investors are not permitted to invest in online game operating businesses in the PRC 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 the VIE structure of Sogou was deemed under the SAPPRFT Online
Game Notice to be an “indirect means” for foreign investors to exercise control over or participate in the operation of a domestic online game business, the
VIE structure of Sogou might be challenged by the SAPPRFT. We are not aware of any online game companies which use the same or similar VIE
contractual arrangements as those Sogou uses having been challenged by the SAPPRFT as using those VIE 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 SAPPRFT Online Game Notice first became effective. However it is unclear whether and how the SAPPRFT Online Game
Notice might be interpreted or implemented in the future.
On February 21, 2008, the SAPPRFT issued the Rules for the Administration of Electronic Publications, or the Electronic Publication Rules,
which were amended on August 28, 2015. The Electronic Publication Rules regulate the production, publishing and importation of electronic publications
in the PRC and outline a licensing system for business operations involving electronic publishing. Under the Electronic Publication Rules and other related
regulations issued by the SAPPRFT, online games are classified as a type of electronic publication or Internet publication that may only be provided by a
licensed electronic publishing entity with a standard publication code, and establishment of an electronic publishing entity must be approved by the
SAPPRFT. Electronic publishing entities are responsible for assuring that the content of electronic publications comply with relevant PRC laws and
regulations, and must obtain the approval of the SAPPRFT before publishing foreign electronic publications. The Tentative Measures for Internet
Publication Administration, or the Internet Publication Measures, which were jointly promulgated by the SAPPRFT and the MIIT and became effective in
2002, impose a license requirement for any company that intends to engage in Internet publishing, which is defined as any act by an ICP to select, edit and
process content or programs and to make such content or programs publicly available on the Internet. As the provision of online games is deemed to be an
Internet publication activity, an online game operator must obtain an Internet publishing license and an authorization code for each of its games in operation
in order to directly make those games publicly available in the PRC. Although the Internet Publication Measures do not specifically authorize such a
practice, an online game operator is generally able to publish its games and obtain authorization codes for those games through third-party licensed
electronic publishing entities and register the games with the SAPPRFT as electronic publications. The Rules for the Administration of Internet Publishing
Services, which were issued by the SAPPRFT and the MIIT effective March 10, 2016 and replaced the Internet Publication Measures, require that entities
in the Internet publishing business must apply for an online publication license and obtain approval from the SAPPRFT prior to the publication of new
online games. In addition, under the Internet Publishing Rules Sino-foreign joint ventures and foreign-invested entities are not permitted to engage in
Internet publication services, and the legal representative of an entity providing Internet publication services may not be a foreigner.
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The MOC issued the New Provisional Regulations for the Administration of Online Culture (the “Online Culture Regulations”), which took effect
on April 1, 2011 and replaced the Provisional Regulations for the Administration of Online Culture. The Online Culture Regulations apply to entities
engaging in activities related to “Internet cultural products,” which include cultural products that are produced specifically for Internet use, such as online
music and entertainment, online games, online plays, online performances, online works of art and Web animation, and other online cultural products that
through technical means, produce or reproduce music, entertainment, games, plays and other art works for Internet dissemination. Under the Online Culture
Regulations, commercial entities are required to apply to the relevant local branch of the MOC for an Online Culture Operating Permit if they engage in the
production, duplication, importation, release or broadcasting of Internet cultural products, the dissemination of online cultural products on the Internet or
the transmission of such products via Internet or mobile phone networks to user terminals, such as computers, phones, television sets and gaming consoles,
or Internet surfing service sites such as Internet cafés; or the holding or exhibition of contests related to Internet cultural products.
The Interim Measures for the Administration of Online Games (the “Online Game Measures”) issued by the MOC, which took effect on August 1,
2010, regulate a broad range of activities related to the online games business, including the development, production and operation of online games, the
issuance of virtual currencies used for online games, and the provision of virtual currency trading services. The Online Game Measures provide that any
entity that is engaged in online game operations must obtain an Online Culture Operating Permit, and require the content of an imported online game to be
examined and approved by the MOC prior to the game’s launch and a domestic online game to be filed with the MOC within 30 days after its launch.
In May 2019, the Ministry of Culture and Tourism (the “MCT”), as a successor agency to the MOC, issued a notice which provides that the MCT
is no longer responsible for regulating the online-game industry and that its local branches are no longer responsible for granting new Online Culture
Operating
Permits, or renewing any existing permits after their expiration, for online games. In July 2019, the MCT abolished the Online Game Measures.
As of the date of this annual report, it is not clear whether another PRC governmental agency will be designated to supervise the online game industry,
whether a new permit or license that is similar to the Online Cultural Operating Permit will be required of online games operators for their games, or
whether imported games will be required to obtain governmental approval before their launch.
The Notice on Strengthening the Approval and Administration of Imported Online Games, or the SAPPRFT Imported Online Game Notice, which
was issued by the SAPPRFT and took effect on July 1, 2009, states that the SAPPRFT is the only governmental department authorized by the State Council
to approve the importation of online games from offshore copyright owners, and that any enterprise which engages in online game publication and
operation services within the PRC must have the game examined and approved by the SAPPRFT and receive from the SAPPRFT an Internet publishing
license.
Administrative Measures for Content Self-Review by Internet Culture Business Entities, or the Content Self-Review Administrative Measure,
which took effect in December 2013, requires Internet culture business entities to review the content of products and services to be provided prior to
providing such content and services to the public. The content management system of an Internet culture 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 local provincial branch
of the MOC.
In January 2014, the SAIC promulgated the Administrative Measures for Online Trading or (the “Online Trading Measures”), which took effect
on March 15, 2014, and replaced the Interim Measures for the Administration of Online Commodities Trading and Relevant Services issued by the SAIC,
which took effect on July 1, 2010. The Online Trading Measures regulate online commodity trading and related activities. The Online Trading Measures
require that when selling commodities or providing services to consumers, online operators must comply with all applicable laws with respect to the
protection of consumer rights and interests, intellectual property rights of others and the prevention of unfair competition. Information provided with
respect to commodities and services provided by online commodity operators or related service operators must be accurate. If they fail to comply with all
requirements of the Online Trading Measures, the local branch of the SAIC or other governmental authorities could impose fines or other penalties on
them.
Information Security and Censorship
Pursuant to the Announcement of Special Supervision Against Illegal Collection and Use of Personal Information through Internet Applications,
which was issued on January 23, 2019, operators of Internet applications must collect and use personal information of users in compliance with the
Cybersecurity Law of the PRC (the “PRC Cybersecurity Law”), which took effect on June 1, 2017, and other laws and regulations, display the terms of
service and privay policy in clear language, and specify the purpose and methods that may be used for data collection, take such technical and other
measures as are necessary to safeguard personal information obtained from users, and not attempt to coerce users to authorize any such collection and use
by way of bundling, suspending the installation of or access to the Internet applications, or other similar means. These requirements were emphasized by a
Notice on the Special Rectification of APPs Infringement of User’s Personal Rights and Interests, which was issued by MIIT on October 31, 2019.
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On October 21, 2019, the Supreme People’s Court of the PRC and the Supreme People’s Procuratorate of the PRC jointly issued an interpretation,
effective on November 1, 2019, which clarifies the definition of Internet service provider and the nature and scope of activities of Internet service providers
that are prohibited, such as the failure to provide adequate Internet security over, and engagement in and assistance with criminal activities through, the
Internet networks and properties such Internet service providers operate.
On November 7, 2016, the Standing Committee of the National People’s Congress promulgated the PRC Cybersecurity Law, which took effect on
June 1, 2017. The PRC Cybersecurity Law applies to the construction, operation, maintenance, and use of networks as well as the supervision and
administration of Internet security in the PRC. The PRC Cybersecurity Law defines “networks” as systems that are composed of computers or other
information terminals and relevant facilities used for the purpose of collecting, storing, transmitting, exchanging, and processing information in accordance
with certain rules and procedures. “Network operators,” who are broadly defined as owners and administrator of networks and network service providers,
are subject to various security protection-related obligations including:
· complying with security protection obligations in accordance with tiered requirements with respect to maintenance of the security of Internet
systems, which include formulating internal security management rules and developing manuals, appointing personnel who will be responsible
for Internet security, adopting technical measures to prevent computer viruses and activities that threaten Internet security, adopting technical
measures to monitor and record status of network operations, holding Internet security training events, retaining user logs for at least six months,
and adopting measures such as data classification, key data backup, and encryption for the purpose of securing networks from interference,
vandalism, or unauthorized visits, and preventing network data from leakage, theft, or tampering;
· verifying users’ identities before signing agreements or providing services such as network access, domain name registration, landline telephone
or mobile phone access, information publishing, or real-time communication services;
· formulating Internet security emergency response plans, timely handling security risks, initiating emergency response plans, taking appropriate
remedial measures, and reporting to governmental authorities; and
· providing technical assistance and support for public security and national security authorities for the protection of national security and in
criminal investigations.
Under the PRC Cybersecurity Law, network service providers must inform users and report to the relevant governmental authorities any known
security defects or bugs, and must provide constant security maintenance services for their products and services. Network products and service providers
may not contain or provide malware. Network service providers who do not comply with the PRC Cybersecurity Law may be subject to fines, suspension
of their businesses, shutdown of their websites, and revocation of their business licenses.
On May 2, 2017, the Cyberspace Administration issued the Measures for Security Review of Cyber Products and Services (for Trial
Implementation), or the Cybersecurity Review Measures, which came into effect on June 1, 2017. Under the Cybersecurity Review Measures, the
following cyber products and services will be subject to cybersecurity review:
· important cyber products and services purchased by networks, and information systems related to national security; and
· the purchase of cyber products and services by operators of critical information infrastructure in key industries and fields, such as public
communications and information services, energy, transportation, water resources, finance, public service, and electronic administration, and
other critical information infrastructure, that may affect national security.
The Cyberspace Administration is responsible for organizing and implementing cybersecurity reviews, while the competent departments in key
industries such as finance, telecommunications, energy, and transport are responsible for organizing and implementing security review of cyber products
and services in their respective industries and fields. There are still substantial uncertainties with respect to the interpretation and implementation of the
Cybersecurity Review Measures.
Internet content in the PRC is also regulated and restricted from a State security standpoint. The Standing Committee of the National People’s
Congress enacted the Decision Regarding the Safeguarding of Internet Security, or the Decision in 2000, and amended it in August, 2009. The Decision
makes it unlawful to: (i) gain improper entry into a computer or system of strategic importance; (ii) disseminate politically disruptive information; (iii) leak
State secrets; (iv) spread false commercial information; or (v) infringe intellectual property rights. The Ministry of Public Security has promulgated
measures that prohibit the use of the Internet in ways which, among other things, result in a leakage of State secrets or distribution of socially destabilizing
content. The Ministry of Public Security has supervision and inspection rights in this regard. If an ICP license holder violates these measures, the PRC
government may revoke its ICP license and shut down its Websites.
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In July 2005, the MOC and the MIIT jointly promulgated the Opinions on the Development and Administration of Online Games emphasizing the
PRC government’s intent to foster and control the development of the online game industry in the PRC and providing that the MOC will censor online
games that “threaten state security,” “disturb the social order,” or contain “obscenity” or “violence.”
Protection of Minors
On April 15, 2007, the MIIT, the SAPPRFT, the Ministry of Education and five other governmental authorities jointly issued a Notice on the
Implementation of Online Game Anti-Fatigue System to Protect the Physical and Psychological Health of Minors, or the Anti-Fatigue Notice. Pursuant to
the Anti-Fatigue Notice, online game operators are required to install an “anti-fatigue system” that discourages game players from playing games for more
than five hours per day. Under the anti-fatigue system, three hours or less of continuous play by minors is considered to be “healthy,” three to five hours to
be “fatiguing,” and five hours or more to be “unhealthy.” Game operators are required to reduce the value of in-game benefits to a game player by half if
the game player has reached “fatiguing” level, and to zero in the case of “unhealthy” level.
To identify whether a game player is a minor and thus subject to the anti-fatigue system, there was adopted a real-name registration system, which
requires online game players to register their real identity information before they play online games and requires us to submit the identity information of
game players to the public security authorities for verification. On July 1, 2011, the SAPPRFT, the MIIT, the Ministry of Education and five other
governmental authorities issued a Notice on Initializing the verification of Real-name Registration for Anti-Fatigue System on Internet Games (the “Real-
name Registration Notice”), which took effect on October 1, 2011, to strengthen the implementation of the anti-fatigue system and real-name registration.
The Real-name Registration Notice’s main focus is to prevent minors from using an adult’s ID to play Internet games and, accordingly, the Real-name
Registration Notice imposes stringent punishments on online game operators that do not implement the required anti-fatigue and real-name registration
measures properly and effectively. The most severe punishment contemplated by the Real-name Registration Notice is to require termination of the
operation of the online game if the game is found to be in violation of the Anti-Fatigue Notice, the Monitor System Circular or the Real-name Registration
Notice. We developed our own anti-fatigue and real-name registration systems for our games, and implemented them beginning in 2007. Under our
systems, game players must use real identification in order to create accounts, and in this way, we are able to tell which of our game players are minors and
thus subject to these regulations. For game players who do not register, we assume that they are minors. In order to comply with the anti-fatigue rules,
game players under 18 years of age only receive half of the experience time they actually earn after three hours of play. And, after five hours of play,
minors receive no experience points. We use this system to disincentivize minors from playing in excess of five hours at a time.
On January 15, 2011, the MOC, the MIIT and six other central governmental authorities jointly issued a circular entitled Implementation of Online
Game Monitor System of the Guardians of Minors, or the Monitor System Circular, aiming to provide specific protection measures to monitor the online
game activities of minors and curb addictive online game playing behaviors of minors. Under the Monitor System Circular, online game operators are
required to adopt various measures to maintain a system to communicate with the parents or other guardians of minors playing online games and online
game operators are required to monitor the online game activities of minors, and must suspend the account of a minor if so requested by the minor’s parents
or guardians. The monitor system was formally implemented commencing March 1, 2011.
In February 2013, 15 PRC governmental authorities, including the SAPPRFT, the Ministry of Education, the MOC and the MIIT, jointly issued
the Work Plan for the Integrated Prevention of Minors Online Game Addiction (“Work Plan”), implementing integrated measures by various authorities
designed to prevent minors from being addicted to online games. Under the Work Plan, the current relevant regulations regarding online games will be
further clarified and additional implementation rules will be issued, and online game operators will be required to implement measures to protect minors.
On July 25, 2014, the SAPPRFT promulgated a Notice on Further Carrying out the Verification of Real-name Registration for Anti-Fatigue
System on Internet Games, or the Verification of Real-name Registration Notice, which took effect on October 1, 2014. The Verification of Real-name
Registration Notice requires local press and publication administrative departments to strengthen their oversight of enterprises engaged in the publication
and operation of online games, and requires such enterprises to strictly abide by anti-fatigue and real-name registration requirements when developing and
promoting online games, excluding, at present, mobile games.
On October 25, 2019, the National Press and Publication Administration issued the Notice on Preventing Minors from Indulging in Online Games
(the “Anti-addiction Notice”), which took effect on October 25, 2019. The Anti-addiction Notice stipulates that online game operators must require real
name registration by their users and must not provide game services to users who have not completed their real -name registrations. The Anti-addiction
Notice also provides restrictions on the types of, time of day and length of the daily use of, and maximum amounts per transaction and per month paid for,
online game services offered by online game operators to minors.
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Virtual Currency
On February 15, 2007, the MOC, the PBOC and other relevant governmental authorities jointly issued the Notice on Further Strengthening the
Administration of Internet Cafés and Online Games, or the Internet Cafés and Online Games Notice. Under the Internet Cafés and Online Games Notice,
the PBOC is directed to strengthen the administration of virtual currency in online games to avoid any adverse impact on the economy and financial
system. The Internet Cafés and Online Games Notice limits the total amount of virtual currency that may be issued by online game operators and the
amount that may be purchased by individual game players, and includes a clear division between virtual transactions and real transactions carried out by
way of electronic commerce. The Internet Cafés and Online Games Notice also provides that virtual currency may only be used to purchase virtual items.
On June 4, 2009, the MOC and the MOFCOM jointly issued the Notice on Strengthening the Administration of Online Game Virtual Currency or
the Virtual Currency Notice to regulate the trading of online game virtual currencies. The Virtual Currency Notice defines the meaning of Online Game
virtual currency and places a set of restrictions on the trading and issuance of virtual currency. The Virtual Currency Notice also states that online game
operators are not allowed to give out virtual items or virtual currency through lottery-based activities, such as lucky draws, betting or random computer
sampling, in exchange for user’s cash or virtual money. The Virtual Currency Notice is mainly targeted at lottery-based activities relating to the “treasure
boxes” found in some online games.
On July 20, 2009, the MOC promulgated the Filing Guidelines for Online Game Virtual Currency Issuing Enterprises and Online Game Virtual
Currency Trading Enterprises, which define the terms “issuing enterprise” and “trading enterprise” and stipulate that a single enterprise may not be both an
issuing enterprise and a trading enterprise.
Regulation of Online Lending and Microcredit Services
Online Lending and Microcredit Services
On July 18, 2015, the Guidelines on Promoting the Healthy Development of the Online Finance Industry (the “Fin-Tech Guidelines”) were jointly
promulgated by ten PRC governmental authorities, including the People’s Bank of China (the “PBOC”), the MIIT, and the China Banking Regulatory
Commission (the “CBRC”). The Fin-Tech Guidelines actively encourage innovation of internet financial platforms, products, and services for the purpose
of increasing market vitality. The Fin-Tech Guidelines also require companies providing Internet finance services to, among other requirements, engage
eligible banking institutions to act as fund depositories for client funds; have adequate procedures for the protection of the personal information of clients;
and to not improperly buy, sell, or disclose such personal information.
Circular 141, which was jointly issued by the Head Office for Special Rectification against Internet Finance Risks and the Head Office for Special
Rectification against Peer-to-Peer Online Lending Risks on December 1, 2017, stipulates general requirements for “cash loan” businesses conducted by
online microcredit companies, banking institutions, and online lending information intermediaries, and specifies general requirements and guidelines with
respect to cash loan businesses, such as governmental pre-approval requirements, limits on interest rates and overall costs to borrowers, “know-your-
customer” requirements, borrower eligibility assessment requirements, a prohibition on collection of loans using violence, and protection of customers’
personal information. In addition, Circular 141 prohibits online microcredit companies from facilitating loans to students, making loans that are not made
with the use of proceeds specified or that are to be used for down payments or speculative trading, and funding loans using illegal sources of funds.
Circular 141 also stipulates that a banking institution that offers cash loans through loan facilitation is prohibited from (i) accepting credit
enhancement or other similar services from third parties that lack requisite licenses to provide guarantees; (ii) outsourcing credit assessment, risk control,
and other key functions to a loan facilitation operator; and (iii) allowing the loan facilitation operator to charge any interest or fees from the borrower. In
addition, CBIRC Circular 37 states that institutions that provide services such as customer recommendations and evaluation of credit to lending institutions
may not provide financial guarantee services without approval of regulatory authorities. Although we believe that our operation of our online lending and
microcredit loan facilitation business should not be deemed to be operation of a financial guarantee business, relevant PRC regulatory authorities might not
share the same view as ours, as the exact definition and scope of operating a financial guarantee business remain unclear. If we were deemed to be
operating a financial guarantee business, we would be subject to PRC laws and regulations, such as Circular 141 and CBIRC Circular 37, concerning the
financial guarantee business.
The Guidance on the Pilot Establishment of Microcredit Companies, jointly promulgated by the CBRC and the PBOC on May 4, 2008 (the “Pilot
Guidance”), provides guidance on capital source and utilization requirements and restrictions and on the management and operation of microcredit
companies. The Pilot Guidance also provides that the establishment of a microcredit company is subject to approval of the competent governmental
authority at the provincial level. The People’s Government of Guangdong Province promulgated the Guidance on the Implementation of Pilot Microcredit
Companies, on January 14, 2009, and the Interim Administrative Measures on Microcredit Companies of Guangdong Province, on January 23, 2009, which
specify the principles, scope, and timeline of a pilot program and pilot joint meeting system; the role of certain governmental authorities; requirements for
the establishment, organization, and management of microcredit companies; and supervision and risk prevention rules with respect to microcredit
companies in Guangdong province. On March 6, 2017, the Financial Work Bureau of the People’s Government of Shantou, which is a city in Guangdong
Province, promulgated the Regulatory Guidance on Online Microcredit Companies Established in Shantou (for Trial Implementation), which sets forth
regulatory requirements for the establishment, business requirements, submission of information, and management of risks of online microcredit companies
established in Shantou.
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Our subsidiary Sogou (Shantou) Internet Microcredit Co., Ltd. (“Sogou Microcredit”) has obtained the key governmental approvals and licenses
required for the conduct of a microcredit business. However, as the regulatory regime and practices with respect to online microcredit companies are
evolving, there is uncertainty as to how the various requirements discussed above will be interpreted and implemented and whether there will be new
rules issued which would establish further requirements and restrictions on microcredit companies.
Loans and Interest Rates
The PRC Contract Law recognizes the validity of loan agreements between natural persons and provides that a loan agreement becomes effective
when an individual lender provides the loan to an individual borrower, but requires interest rates charged under a loan agreement to comply with applicable
PRC laws and regulations. The Provisions on Several Issues Concerning Laws Applicable to Trials of Private Lending Cases (the “Private Lending Judicial
Interpretations”) issued by the Supreme People’s Court in August 2015 and effective in September 2015 specify that loan agreements for loans with annual
interest rates below 24% are valid and enforceable. With respect to a loan with an annual interest rate between 24% and 36%, if the interest on the loan has
already been paid to the lender and such payment has not caused damage to the interests of the state, the community, or any third parties, the Private
Lending Judicial Interpretations indicted that courts will be likely to dismiss a borrower’s demand for return of the interest payments. If the annual interest
rate of a private loan is higher than 36%, the portion of the interest exceeding the maximum interest rate is invalid.
Circular 141 stipulates that with respect to cash loan businesses, the aggregate borrowing costs charged to borrowers in the form of interest and
various fees must not exceed the limits on interest rates applicable to private lending set forth in the Private Lending Judicial Interpretations.
The Pilot Guidance stipulates that microcredit companies may set interest ceilings and floors for their loans. However, an interst ceiling must not
exceed the permited maximum interst specified by the relevant governmental authorities, and an interest floor must not be set below 0.9 times the
benchmark lending rate for loans published by the PBOC.
Laws and Regulations Related to Intellectual Property Protection
China has adopted comprehensive legislation governing intellectual property rights, including copyrights, patents and trademarks.
Copyright
On September 7, 1990, The National People’s Congress promulgated the Copyright Law, which took effect on June 1, 1991 and was amended in
2001 and in 2010. The amended Copyright Law extends copyright protection to Internet activities, products disseminated over the Internet and software
products. In addition, there is a voluntary registration system administered by the China Copyright Protection Center. The amended Copyright Law also
requires registration of the pledge of a copyright.
In order to further implement the Computer Software Protection Regulations, promulgated by the State Council on December 20, 2001 and
amended on January 8, 2011 and January 30, 2013, the NCA issued Computer Software Copyright Registration Procedures on February 20, 2002, which
specify detailed procedures and requirements with respect to the registration of software copyrights.
To address the problem of copyright infringement related to content posted or transmitted over the Internet, on April 29, 2005 the NCA and the
MIIT jointly promulgated the Measures for Administrative Protection of Copyright Related to Internet, which became effective on May 30, 2005. 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 harming 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, which
were amended in 2013. Under these regulations, an owner of the network dissemination rights with respect to written works 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.
We have adopted measures to mitigate copyright infringement risks, such as real-time monitoring and mechanisms for fast removal upon receipt of
notices of infringement. As of December 31, 2019, we had registered 209 software copyrights in the PRC.
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Patent Law
On March 12, 1984, the Standing Committee of the National People’s Congress promulgated the Patent Law, which was amended in 1992, 2000
and 2008. On June 15, 2001, the State Council promulgated the Implementation Regulation for the Patent Law, which was amended on December 28, 2002
and January 9, 2010. According to these laws and regulations, the State Intellectual Property Office is responsible for administering patents in the PRC.
The Chinese patent system adopts a “first to file” principle, which means that where more than one person files a patent application for the same invention,
a patent will be granted to the person who filed the application first. To be patentable, invention or utility models must meet three conditions: novelty,
inventiveness and practical applicability. A patent is valid for 20 years from the date of the filing of the patent application, in the case of an invention, and
10 years from the date of the filing of the patent application, in the case of utility models and designs. A third-party user must obtain consent or a proper
license from the patent owner to use the patent. Otherwise, third-party use constitutes an infringement of patent rights. As of December 31, 2019, we had
been granted 1,145 patents in the PRC.
Trademark Law
On August 23, 1982, the Standing Committee of the National People’s Congress promulgated the Trademark Law (the “Trademark Law”), which
was amended in 1993, 2013 and 2019. On August 3, 2002, the State Council promulgated the Implementation Regulation for the Trademark Law, which
was amended on April 29, 2014. Under the Trademark Law and the implementing regulation, the Trademark Office of the Administration for Industry and
Commerce is responsible for the registration and administration of trademarks. The Administration for Industry and Commerce under the State Council has
established a Trademark Review and Adjudication Board for resolving trademark disputes. As with patents, China has adopted a “first-to-file” principle for
trademark registration. If two or more applicants apply for registration of identical or similar trademarks for the same or similar commodities, the
application that was filed first will receive preliminary approval and will be publicly announced. For applications filed on the same day, the trademark that
was first used will receive preliminary approval and will be publicly announced. Registered trademarks are valid for ten years from the date the registration
is approved. A registrant may apply to renew a registration within twelve months before the expiration date of the registration. If the registrant fails to
apply in a timely manner, a grace period of six additional months may be granted. If the registrant fails to apply before the grace period expires, the
registered trademark shall be deregistered. Renewed registrations are valid for ten years. As of December 31, 2019, we had registered 804 trademarks in the
PRC.
Consumer Protection and Privacy Protection
Consumer Protection
The MIIT sets forth various requirements for consumer protection in a notice, issued on April 15, 2004, which addresses certain problems in the
telecommunications sector, including ambiguity in billing practices for premium services, poor quality of connections and unsolicited SMS messages, all of
which impinge upon the rights of consumers.
On May 26, 2016, the MIIT issued the Measures on the Complaint Settlement of the Telecommunication Services Users, or the “Complaint
Settlement Measures”, which took effect on July 30, 2016. The Complaint Settlement Measures require telecommunication services providers to respond to
their users within fifteen days upon the receipt of any complaint delivered by such users, the failure of which will give the complaining users the right to
file a complaint against the service providers with the provincial branch offices of the MIIT.
We are aware of the increasingly strict legal environment covering consumer protection in the PRC, and we strive to adopt all measures necessary
to ensure that our business complies with these evolving standards.
Privacy Protection
The PRC Constitution states that PRC law protects the freedom and privacy of the communications of citizens and prohibits infringement of such
rights. In recent years, PRC governmental authorities have issued various regulations on the use of the Internet that are designed to protect personal
information from unauthorized disclosure. For example, the ICP Measures prohibit an Internet information services provider from insulting or slandering a
third party or infringing upon the lawful rights and interests of a third party. In addition, PRC regulations authorize PRC telecommunication authorities to
demand rectification of unauthorized disclosure by ICPs.
Chinese law does not prohibit ICPs from collecting and analyzing personal information from their users. The PRC government, however, has the
power and authority to order ICPs to submit personal information of an Internet user if such user posts any prohibited content or engages in illegal activities
on the Internet. In addition, the Several Provisions stipulate that ICPs must not, without the users’ consent, collect information on users that can be used,
alone or in combination with other information, to identify the user, or User Personal Information, and may not provide any User Personal Information to
third parties without prior user consent. ICPs may only collect User Personal Information necessary to provide their services and must expressly inform the
users of the method, content and purpose of the collection and processing of such User Personal Information. In addition, an ICP may use User Personal
Information only for the stated purposes under the ICP’s scope of services. ICPs are also required to ensure the proper security of User Personal
Information, and take immediate remedial measures if User Personal Information is suspected to have been disclosed. If the consequences of any such
disclosure are expected to be serious, the ICP must immediately report the incident to the telecommunications governmental authorities and cooperate with
the authorities in their investigations. We require our users to accept a user agreement whereby they agree to provide certain personal information to us. If
we violate these regulations, the MIIT or its local bureaus may impose penalties and we may be liable for damage caused to our users.
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On December 28, 2012, the Standing Committee of the National People’s Congress enacted the Decision to Enhance the Protection of Network
Information, or the Information Protection Decision, to further enhance the protection of User Personal Information in electronic form. The Information
Protection Decision provides that ICPs must expressly inform their users of the purpose, manner and scope of the ICPs’ collection and use of User Personal
Information, publish the ICPs’ standards for their collection and use of User Personal Information, and collect and use User Personal Information only with
the consent of the users and only within the scope of such consent. The Information Protection Decision also mandates that ICPs and their employees must
keep strictly confidential User Personal Information that they collect, and that ICPs must take such technical and other measures as are necessary to
safeguard the information against disclosure.
On July 16, 2013, the MIIT issued the Order for the Protection of Telecommunication and Internet User Personal Information, or the Order. Most
of the requirements under the Order that are relevant to ICP operators are consistent with the requirements already established under the MIIT provisions
discussed above, except that under the Order the requirements are often more strict and have a wider scope. If an ICP operator wishes to collect or use
personal information, it may do so only if such collection is necessary for the services it provides. Further, it must disclose to its users the purpose, method
and scope of any such collection or use, and must obtain consent from the users whose information is being collected or used. ICP operators are also
required to establish and publish their protocols relating to personal information collection or use, keep any collected information strictly confidential, and
take technological and other measures to maintain the security of such information. ICP operators are required to cease any collection or use of the user
personal information, and de-register the relevant user account, when a given user stops using the relevant Internet service. ICP operators are further
prohibited from divulging, distorting or destroying any such personal information, or selling or providing such information unlawfully to other parties. In
addition, if an ICP operator appoints an agent to undertake any marketing or technical services that involve the collection or use of personal information,
the ICP operator is still required to supervise and manage the protection of the information. The Order states, in broad terms, that violators may face
warnings, fines, and disclosure to the public and, in the most severe cases, criminal liability.
On August 21, 2014, the Supreme People’s Court promulgated the Provisions of the Supreme People’s Court on Application of Laws to Cases
Involving Civil Disputes over Infringement upon Personal Rights and Interests by Using Information Networks , pursuant to which if an ICP operator
discloses genetic information, medical records, health examination data, criminal record, home address, private events and or other personal information of
a natural person online, causing damage to the person, the People’s Court should support a claim by the infringed party for recovery of damages from the
infringing ICP operator.
On January 5, 2015, the SAIC promulgated the Measures on Punishment for Infringement of Consumer Rights, pursuant to which business
operators collecting and using personal information of consumers must comply with the principles of legitimacy, propriety and necessity, specify the
purpose, method and scope of collection and use of the information, and obtain the consent of the consumers whose personal information is to be collected.
Business operators may not: (i) collect or use personal information of consumers without their consent; (ii) unlawfully divulge, sell or provide personal
information of consumers to others; (iii) send commercial information to consumers without their consent or request, or when a consumer has explicitly
declined to receive such information.
On August 22, 2019, the Cyberspace Administration of China promulgated the Provisions on the Cyber Protection of Children’s Personal
Information, which took effect on October 1, 2019, requiring that before collecting, using, transferring, or disclosing the personal information of a child, an
Internet service provider must inform the child’s parents or guardians and obtain their consent. Meanwhile, Internet service providers must take protective
measures, such as encryption, when storing children’s personal information.
Our current security measures and those of the third parties with whom we transact business may not be adequate for the protection of user
personal information. In addition, we do not have control over the security measures of our third-party online payment vendors. Security breaches of our
system and the online payment systems that we use could expose us to litigation and liability for failing to secure confidential customer information and
could harm our reputation, ability to attract customers and ability to encourage customers to purchase virtual items.
Security and Censorship
The principal pieces of PRC legislation concerning information security and censorship are:
· The Law of the People’s Republic of China on the Preservation of State Secrets (1988, as amended in 2010) and related Implementing
Rules (2014);
· The Law of the People’s Republic of China Regarding Anti-spy (2014);
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· Rules of the People’s Republic of China for Protecting the Security of Computer Information Systems (1994, as amended in 2011);
· Regulations for the Protection of State Secrets for Computer Information Systems on the Internet (2000);
· Administrative Measure for the Security Protection of International Connections to Computer Information Networks (1997, as amended in 2011);
· Notice issued by the Ministry of Public Security of the People’s Republic of China Regarding Issues Relating to the Implementation of the
Administrative Measure for the Security Protection of International Connections to Computer Information Networks (2000); and
· The Decision of the Standing Committee of the National People’s Congress Regarding the Safeguarding of Internet Security (2000, as amended
in 2009).
These pieces of legislation specifically prohibit the use of Internet infrastructure where it results in a breach of public security, the provision of
socially destabilizing content or the divulgence of State secrets, as follows:
· “A breach of public security” includes a breach of national security or disclosure of state secrets; infringement on state, social or collective
interests or the legal rights and interests of citizens or illegal or criminal activities.
· “Socially destabilizing content” includes any action that incites defiance or violation of Chinese laws; incites subversion of state power and the
overturning of the socialist system; fabricates or distorts the truth, spreads rumors or disrupts social order; advocates cult activities; spreads
feudal superstition; involves obscenities, pornography, gambling, violence, murder, or horrific acts; or instigates criminal acts.
· “State secrets” are defined as “matters that affect the security and interest of the state.” The term covers such broad areas as national defense,
diplomatic affairs, policy decisions on state affairs, national economic and social development, political parties and “other State secrets that the
State Secrecy Bureau has determined should be safeguarded.”
Under the aforementioned legislation, it is mandatory for Internet companies in the PRC to complete security filing procedures with the local
public security bureau and for them provide regular updates to the local public security bureau regarding information security and censorship systems for
their Websites. In this regard, on October 1, 2004, the Administrative Rules on the Filing of Commercial Websites , or the Commercial Websites Filing
Rules, were promulgated by the Beijing Administration of Industry and Commerce (Beijing AIC), to replace the Detailed Implementing Rules for the
Measures for the Administration of Commercial Website Filings for the Record promulgated by the Beijing AIC on September 1, 2000. The Commercial
Websites Filing Rules state that operators of commercial Websites must comply with the following requirements:
· filing with the Beijing AIC and obtain electronic registration marks for the Websites;
· placing the registration marks on the Websites’ homepages; and
· registering the Website names with the Beijing AIC.
The PRC Cybersecurity Law requires providers of services over Internet networks to keep user information that they have collected in strict
confidence and to establish improved systems for the protection of user information. Such service providers must provide notice of the purpose, methods
and scope of their collection and use of user information, and obtain the consent of each person whose personal information will be collected. Providers of
services over Internet networks may not collect any personal information that is not related to the services they provide, or disclose or tamper with personal
information that they have collected, unless such information is encoded to prevent identification of individuals whose information is so disclosed or
tampered with. Service providers who do not comply with the PRC Cybersecurity Law may be subject to fines, suspension of their businesses, shutdown of
their websites, and revocation of their business licenses
In addition, the State Security Bureau has issued regulations authorizing the blocking of access to any site it deems to be leaking State secrets or
failing to comply with legislation regarding the protection of State secrets in the distribution of information online.
Accordingly, we have established an internal security committee and adopted security maintenance measures, employed a full-time supervisor and
exchanged information on a regular basis with the local public security bureau with regard to sensitive or censored information and Websites.
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Internet Content and Anti-Pornography
The PRC government has promulgated measures relating to Internet content through a number of governmental authorities, including the MIIT,
the MOC, the SAPPRFT and the MPS. These measures specifically prohibit certain Internet activities, including the operation of online games, which
results in the publication of any content which is found to, among other things, propagate obscenity, gambling or violence, instigate crimes, undermine
public morality or the cultural traditions of the PRC, or compromise State security or secrets. If an ICP license holder violates these measures, the PRC
government may revoke its ICP license and shut down its Websites.
In addition, the PRC government has issued several regulations concerning the installation of filter software to filter out unhealthy and vulgar
content from the Internet. In April 1, 2009, the Ministry of Education, the MIIT and certain other PRC ministries and agencies issued a notice requiring
that, by the end of May 2009, all computer terminals connected with the Internet at all elementary and secondary schools be able to include and operate
Green Dam-Youth Escort, which is software aimed at filtering out unhealthy and vulgar content in text and graphics from the Internet and which, according
to the Website for the software, may be used to control time spent on the Internet, prohibit access to computer games, and filter out unhealthy Websites.
The MIIT further expanded the scope of required use of this filter software by issuing a notice on May 19, 2009, effective as of May 19, 2009, requiring
that all computers manufactured and sold in the PRC have the latest available version of Green Dam-Youth Escort preinstalled when they leave the factory
and that all imported computers have the latest available version of Green Dam-Youth Escort preinstalled before being sold in the PRC. Green-Dam Youth
Escort is to be preinstalled on the hard drive of the computer or in the form of a CD accompanying the computer and is also to be included in the backup
partition and system restore CD. However, on June 30, 2009, the MIIT postponed the implementation of this requirement regarding pre-installation of
Green Dam-Youth Escort.
On December 4, 2009, the MIIT and three other PRC governmental authorities jointly issued the Incentives Measures for Report of Pornographic,
Obscene and Vulgar Messages on Internet and Mobile Media, or the Anti-Pornography Notice, to crack down on online pornography. Pursuant to the Anti-
Pornography Notice, monetary rewards will be provided to Internet users who report Websites that feature pornography, and a committee has been
established to review such reports to determine an appropriate award. During a PRC anti-pornography campaign, which continued during 2014, many
Websites (including mobile Websites) that contained pornography were closed down. In addition, China Mobile announced a temporary suspension of
billing for Wireless Application Protocol, or (“WAP”) services, as a means of fighting against Websites providing pornographic content.
On April 13, 2014, the National Working Group on Anti-Pornography and three other PRC governmental authorities jointly issued the
Proclamation of Special Action Regarding Crackdown on Online Pornographic Content, or the Anti-Pornography Proclamation. Under the Anti-
Pornography Proclamation, Internet service providers must immediately remove texts, images, video, advertisements and other information that contain
pornographic content. The relevant governmental authorities may order enterprises or individuals who flagrantly produce or disseminate pornographic
content to stop conducting business, and may revoke relevant administrative permits. Moreover, an enterprise or individual who provides telecom operation
services, network access services, advertising services or payment services to facilitate dissemination of pornographic content may have criminal or civil
penalties imposed under the PRC Criminal Law and other relevant laws and regulations.
Laws and Regulations Related to Unfair Competition
Pursuant to the Anti-Unfair Competition Law, which took effect in 1993 and was amended in 2017 and 2019, a business operator is prohibited
from any of the following unfair activities:
· copying and using the registered trademarks of others;
· using the same or similar names, packages or decorations of well-known brand name products so as to mislead buyers;
· using the names of other enterprises without authorization so as to mislead buyers; and
· forging identification marks, marks indicating good quality and other marks on commodities or falsifying the place of origin or using other false
indicators to mislead people with regard to quality.
In addition, the Supreme People’s Court has promulgated an Interpretation on Several Issues Relating to the Application of the Law in Civil Trials
for Unfair Competition Cases, which became effective as of February 1, 2007. This interpretation provides guidance on how to conduct trials involving
unfair competition, protect the legal rights and interests of business operators and maintain orderly market competition.
Regulation of M&A and Overseas Listings
On August 8, 2006, six PRC regulatory agencies, including the MOC, the State Assets Supervision and Administration Commission, the State
Administration of Taxation, or the SAT, the SAIC, the CSRC, and the SAFE, jointly issued the Regulations on Mergers and Acquisitions of Domestic
Enterprises by Foreign Investors, or the M&A Rule, which became effective on September 8, 2006 and amended on June 22, 2009. The M&A
Rule includes provisions that purport to require that an offshore special purpose vehicle formed for purposes of the overseas listing of equity interests in
PRC companies and controlled directly or indirectly by PRC companies or individuals obtain the approval of the CSRC prior to the listing and trading of
such special purpose vehicle’s securities on an overseas stock exchange.
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On September 21, 2006, the CSRC published on its official Website procedures regarding its approval of overseas listings by special purpose
vehicles. The CSRC approval procedures require the filing of a number of documents with the CSRC. The application of this new PRC regulation remains
unclear, with no consensus currently existing among leading PRC law firms regarding the scope of the applicability of the CSRC approval requirements.
The M&A Rules also establish procedures and requirements that could make some acquisitions of Chinese companies by foreign investors more
time-consuming and complex, including requirements in some instances that the MOFCOM be notified in advance of any change-of-control transaction in
which a foreign investor takes control of a Chinese domestic enterprise.
In February 2011, the General Office of the State Council promulgated a Notice on Establishing the Security Review System for Mergers and
Acquisitions of Domestic Enterprises by Foreign Investors, or Circular 6, which established a security review system for mergers and acquisitions of
domestic enterprises by foreign investors. Under Circular 6, a security review is required for mergers and acquisitions by foreign investors having “national
defense and security” concerns and mergers and acquisitions by which foreign investors may acquire “de facto control” of domestic enterprises with
“national security” concerns. In August 2011, the MOFCOM promulgated the Rules on Implementation of Security Review System, or the MOFCOM
Security Review Rules, to replace the Interim Provisions of the Ministry of Commerce on Matters Relating to the Implementation of the Security Review
System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated by the MOFCOM in March 2011. The MOFCOM Security
Review Rules, which came into effect on September 1, 2011, provide that the MOFCOM will look into the substance and actual impact of a transaction and
prohibit foreign investors from bypassing the security review requirement by structuring transactions through proxies, trusts, indirect investments, leases,
loans, control through contractual arrangements or offshore transactions.
Antitrust
On August 30, 2007, the Standing Committee of the National People’s Congress of the PRC adopted the PRC Anti-Monopoly Law, or the AML,
which became effective on August 1, 2008. In essence, the AML prohibits certain monopolistic acts that result in or could result in the elimination or
restriction of competition. After the promulgation of the AML, the State Council as well as various PRC governmental authorities, including the
MOFCOM, the National Development and Reform Commission, or the NDRC, and the SAIC, promulgated a series of regulations from different
perspectives to interpret and enforce the AML. Under the AML, monopolistic agreements, abuse of a dominant market position, and business combinations
are considered to be monopolistic acts that result in or could result in the elimination or restriction of competition.
Pursuant to the AML, a business operator that possesses a dominant position in a relevant market is prohibited from abusing its dominant market
position through (i) selling commodities at unfairly high prices or buying commodities at unfairly low prices; (ii) without justifiable reasons, selling
commodities at prices below cost; (iii) without justifiable reasons, refusing to enter into transactions with its trading counterparties; (iv) without justifiable
reasons, allowing trading counterparties to make transactions exclusively with itself or with business operators designated by it; (v) without justifiable
reasons, tying commodities or imposing unreasonable trading conditions on transactions; (vi) without justifiable reasons, applying differential prices and
other transaction terms among its trading counterparties who are on an equal footing; (vii) other acts determined to be abuse of dominant market position
by the relevant governmental authorities. If a business operator that possesses a dominant market position in a relevant market is deemed to be abusing its
dominant position, the SAIC and other competent PRC governmental authorities, may, at their discretion, order the business operator to cease the illegal
acts, confiscate any illegal gains, and impose a fine of 1% to 10% of the business operator’s revenues for the preceding financial year.
In addition, pursuant to the AML and related regulations, a proposed business combination is required to be reported to the anti-monopoly
governmental authority by the parties involved prior to its implementation, if the following thresholds, among others, are met:
(i) the combined worldwide turnover in the preceding financial of the parties involved year exceeds RMB10 billion (or approximately US$1.47
billion), and the nationwide turnover in the preceding financial year within the PRC of each of at least two of the parties involved exceeds
RMB400 million (or approximately US$58.8 million); or,
(ii) the combined nationwide turnover in the preceding financial year within the PRC of all the parties involved exceeds RMB2 billion (or
approximately US$294 million), and the nationwide turnover in the preceding financial year within the PRC of each of at least two of the
parties involved exceeds RMB400 million (or approximately US$58.8 million).
“Business Combinations” means any of the following: (i) merger of businesses; (ii) acquisition of control over another business by acquiring
equity or assets; or (iii) acquisition of control over, or exercising decisive influence on, another business by contract or by any other means. Under the
AML and other related regulations, transactions satisfying the thresholds for mandatory notification are not allowed to be implemented without the parties
obtaining approval from the anti-monopoly governmental authority. In case of any non-compliance with the notification and approval requirement, the anti-
monopoly governmental authority may order the parties involved to cease the transactions, dispose of shares or assets, transfer one of the combined
businesses by no later than a specified time, or take any other measures necessary to restore the status quo as of before the business combination. A fine of
up to RMB500,000 (or approximately US$73,000) may also be imposed by the anti-monopoly governmental authority. Furthermore, the parties to the
proposed transactions are subject to liability for any loss suffered by an individual or entity or individual as a result of the business combination.
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Foreign Currency Exchange and Dividend Distribution
The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations, or the FX
Regulations, which were last amended in August 2008. Under the FX Regulations, the RMB is freely convertible for current account items, including the
distribution of dividends, interest payments, trade and service-related foreign exchange transactions, but not for capital account items, such as direct
investments, loans, repatriation of investments and investments in securities outside of the PRC, unless the prior approval of the SAFE is obtained and prior
registration with the SAFE is made. Dividends paid by a PRC subsidiary to its overseas shareholder are deemed income of the shareholder and are taxable
in the PRC. Pursuant to the Administration Rules of the Settlement, Sale and Payment of Foreign Exchange, effective in July, 1996, foreign-invested
enterprises in the PRC may purchase or remit foreign currency, subject to a cap approved by the SAFE, for settlement of current account transactions
without the approval of the SAFE. Foreign currency transactions under the capital account are still subject to limitations and require approvals from, or
registration with, the SAFE and other relevant PRC governmental authorities.
In July 2014, the SAFE promulgated the Circular on Issues Concerning Foreign Exchange Administration Over the Overseas Investment and
Financing and Roundtrip Investment by Domestic Residents Via Special Purpose Vehicles, or Circular 37, which replaced Relevant Issues Concerning
Foreign Exchange Control on Domestic Residents’ Corporate Financing and Roundtrip Investment through Offshore Special Purpose Vehicles, or Circular
75. Circular 37 requires PRC residents, including PRC institutions and individuals, to register with the local SAFE office in connection with their direct
establishment or indirect control of an offshore entity, referred to in Circular 37 as a “special purpose vehicle,” for the purpose of holding domestic or
offshore assets or interests. PRC residents must also file amendments to their registrations in the event of any significant changes with respect to the special
purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material
event. Under these regulations, PRC residents’ failure to comply with such regulations may result in restrictions being imposed on the foreign exchange
activities of the relevant PRC entity, including the payment of dividends and other distributions to its offshore parent, as well as restrictions on capital
inflows from the offshore entity to the PRC entity, including restrictions on the ability to contribute additional capital to the PRC entity. Further, failure to
comply with the various SAFE registration requirements could result in liability under PRC laws for evasion of foreign exchange regulations.
Under Circular 37, if a non-listed special purpose vehicle uses its own equity to grant equity incentives to any directors, supervisors, senior
management or any other employees directly employed by a domestic enterprise which is directly or indirectly controlled by such special purpose vehicle,
or with which such an employee has established an employment relationship, related PRC residents and individuals may, prior to exercising their rights,
apply to the SAFE for foreign exchange registration formalities for such special purpose vehicle. However, in practice, different local SAFE offices may
have different views and procedures on the interpretation and implementation of the SAFE regulations, and since Circular 37 was the first regulation to
regulate the foreign exchange registration of a non-listed special purpose vehicle’s equity incentives granted to PRC residents, there remains uncertainty
with respect to its implementation.
On December 25, 2006, the PBOC issued the Administration Measures on Individual Foreign Exchange Control and related Implementation
Rules were issued by the SAFE on January 5, 2007. Both became effective on February 1, 2007. Under these regulations, all foreign exchange transactions
involving an employee share incentive plan, share option plan, or similar plan participated in by onshore individuals may be conducted only with approval
from the SAFE or its local office.
The principal regulations governing distribution of dividends of foreign holding companies include the Foreign Investment Enterprise Law, which
was promulgated in April 1986 and amended in October 2000 and October, 2016, and the Administrative Rules under the Foreign Investment Enterprise
Law, which was promulgated in October 1990 and amended in April 2001 and February 2014. On March 15, 2019, the National People’s Congress enacted
the Foreign Investment Law (the “Foreign Investment Law”), which took effect on January 1, 2020. The Foreign Investment Law abolished the Foreign
Investment Enterprise Law effective January 1, 2020. Foreign holding companies established in accordance with the Foreign Investment Enterprise Law
before the effectiveness of the Foreign Investment Law may retain their original legal status and form under PRC law for five years following the
effectiveness of the Foreign Investment Law. The State Council is expected to issue implementation measures regarding the Foreign Investment Law, but
as of date of this annual report no such implementation measures have been issued.
Under these regulations, foreign investment enterprises in China may pay dividends only out of their accumulated profits, if any, determined in
accordance with the PRC accounting standards and regulations. In addition, foreign investment enterprises in the PRC are required to allocate at least 10%
of their accumulated profits each year, if any, to fund certain reserve funds unless these reserves have reached 50% of the registered capital of the
enterprises. These reserves are not distributable as cash dividends. Furthermore, under the Corporate Income Tax Law, which became effective on
January 1, 2008, the maximum tax rate for the withholding tax imposed on dividend payments from PRC foreign invested companies to their overseas
investors that are not regarded as “resident” for tax purposes is 20%. The rate was reduced to 10% under the Implementing Regulations for the PRC
Corporate Income Tax Law issued by the State Council, which were last amended on April 23, 2019. However, a lower withholding tax rate of 5% might
be applied if there is a tax treaty between China and the jurisdiction of the foreign holding companies, such as is the case with Hong Kong, and certain
requirements specified by PRC tax authorities are satisfied.
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Employee Share Option Plans
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 participating in any share incentive plan of an overseas publicly-listed company who are PRC citizens or who are non-PRC citizens residing
in China for a continuous period of not less than one year, subject to a few exceptions, are required to register with SAFE through a domestic qualified
agent, which may be a PRC subsidiary of such overseas listed company, and complete certain other procedures.
In addition, the SAT has issued certain circulars concerning employee share options and restricted shares. Under these circulars, employees
working in the PRC who exercise share options or are granted restricted shares will be subject to PRC individual income tax. The PRC subsidiaries of an
overseas listed company are obligated to file documents related to employee share options and restricted shares with relevant tax authorities and to
withhold individual income taxes of employees who exercise their share option or purchase restricted shares. If the employees fail to pay or the PRC
subsidiaries fail to withhold income tax in accordance with relevant laws and regulations, the PRC subsidiaries may face sanctions imposed by the tax
authorities or other PRC governmental authorities.
Employment and Social Insurance
On June 29, 2007, the National People’s Congress promulgated the Employment Contract Law of PRC, or the Employment Contract Law, which
became effective as of January 1, 2008 and amended on December 28, 2012. The Employment Contract Law requires employers to enter into written
contracts with their employees, restricts the use of temporary workers and aims to give employees long-term job security.
Pursuant to the Employment Contract Law, written employment contracts that were entered into prior to the implementation of the Employment
Contract Law and are in effect as of the date of its implementation will remain in effect. Where an employment relationship was established prior to the
implementation of the Employment Contract Law but no written employment contract was entered into, a written contract must be entered into within one
month after the implementation of the Employment Contract Law
On September 18, 2008, the State Council promulgated the Implementing Regulations for the PRC Employment Contract Law which came into
effect immediately. These regulations interpret and supplement the provisions of the Employment Contract Law.
In accordance with the Employment Contract Law, an employer shall control the number of dispatched workers so that they do not exceed a
certain percentage of its total number of workers. An employer that is in violation thereof shall be ordered to make correction by the labor administrative
department. Where no correction is made by the prescribed deadline, the employer shall be fined of not less than RMB 5000 but not more than RMB
10,000 per dispatched worker involved. On January 24, 2014, the Ministry of Human Resources and Social Security issued the Interim Provisions on Labor
Dispatching, which became effective on March 1, 2014. The Interim Provisions on Labor Dispatching provides that the number of dispatched workers used
by an Employer shall not exceed 10% of the total number of its employees.
PRC governmental authorities have passed a variety of laws and regulations regarding social insurance and housing funds from time to time,
including, among others, the PRC Social Insurance Law , the Regulation of Insurance for Labor Injury , the Regulations of Insurance for Unemployment,
and the Provisional Insurance Measures for Maternal Employees. Pursuant to these laws and regulations, PRC companies must make contributions at
specified levels for their employees to the relevant local social insurance and housing fund authorities. Failure to comply with such laws and regulations
may result in various fines and legal sanctions and supplemental contributions to the local social insurance and housing fund governmental authorities.
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Organizational Structure
As of March 31, 2020, Sohu, our ultimate parent company and controlling shareholder; Tencent; and our directors and executive officers together
have shareholdings in us giving them approximately 98.1% of the total voting power of the combined total of our outstanding Class A and Class B ordinary
shares, due to the additional voting power of the Class B Ordinary Shares held by Sohu and Tencent. Sohu, through its ownership of Class B Ordinary
Shares and a voting agreement with Tencent Holdings Limited, has the right to appoint a majority of our Board of Directors. Sohu and Tencent together,
through their ownership of our Class B Ordinary Shares, have the power to decide all matters that are put to a vote of our shareholders.
As of the date of the filing of this annual report, the following are our significant wholly-owned subsidiaries:
· Sogou (BVI) Limited, or Sogou BVI, incorporated in the British Virgin Islands on December 23, 2005.
· Beijing Sogou Technology Development Co., Ltd., or Sogou Technology, incorporated in the PRC on February 8, 2006.
· Sogou Hong Kong Limited, or Sogou HK, incorporated in Hong Kong on December 12, 2007.
· Vast Creation Advertising Media Services Limited, or Vast Creation, a Hong Kong Company ac quired by us on November 30, 2011.
· Beijing Sogou Network Technology Co., Ltd., or Sogou Network, incorporated in the PRC on March 29, 2012.
· Sogou Technology Hong Kong Limited, or Sogou Technology HK, incorporated in Hong Kong on August 25, 2015.
· Tianjin Sogou Network Technology Co., Ltd., or Tianjin Sogou Network, incorporated in the PRC on May 18, 2017.
· Sogou (Shantou) Internet Microcredit Co., Ltd., or Sogou Microcredit, incorporated in the PRC on November 22, 2017.
· Sogou (Hangzhou) Intelligent Technology Co., Ltd., or Sogou Hangzhou, incorporated in the PRC on April 28, 2018.
· Shantou Ying Zhong Bai Fu Financing Guarantee Co.,Ltd., or Sogou Financing Guarantee, incorporated in the PRC on July 24, 2019.
In order to comply with PRC regulatory requirements restricting foreign ownership of Internet information and content, Internet access, value-
added telecommunications, and certain other businesses in China, we conduct a portion of our online search and search-related businesses and other
business in the PRC through our VIE Sogou Information, which is incorporated in the PRC. In order to comply with PRC laws, Sogou Technology, Sogou
Information, and the three shareholders of Sogou Information, which are a VIE of Sohu that is a PRC company, a Tencent group entity that is a PRC
company, and our Chief Executive Officer Xiaochuan Wang, who is a PRC citizen, are parties to a series of contractual arrangements that provide Sogou
Technology with effective control of Sogou Information. Pursuant to these contractual arrangements, we operate a portion our business through Sogou
Information and its subsidiaries as our VIEs in the PRC and a portion of our revenues are earned by and paid to Sogou Information. Under these contractual
arrangements, Sogou Information holds a portion of our assets, including licenses and permits required to operate our search and search-related businesses
and other business, and Sogou Technology provides product development, technical support and marketing services to Sogou Information and holds most
of the intellectual property relating to the technology we use to operate our business. As a result of these contractual arrangements, our VIEs’ results of
operations, assets, and liabilities are included in our consolidated financial statements.
The following is a summary of our significant VIEs:
· Sogou Information
Beijing Sogou Information Service Co., Ltd., or Sogou Information, was incorporated in December 2005. As of December 31, 2019, Beijing
Century High-Tech Investment Co., Ltd., a Sohu Group Company, and Shenzhen Tencent Computer System Co., Ltd., a Tencent group entity, and
Xiaochuan Wang, held 45%, 45%, and 10% equity interests, respectively, in this entity.
· Shi Ji Si Su
Beijing Shi Ji Si Su Technology Co., Ltd., or Shi Ji Si Su, was acquired in April 2015 for nominal consideration. As of December 31, 2019, Sogou
Information held 100% of the equity interest in this entity.
· Chengdu Easypay
Chengdu Easypay Technology Co., Ltd., or Chengdu Easypay, was incorporated in January 2015. As of December 31, 2019, Sogou Information
and Shi Ji Si Su together held 100% of the equity interest in this entity.
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· Consolidated Trust
We established a trust on December 2, 2019 in connection with our online lending and microcredit services (the “Consolidated Trust”), which is
administered by a trust company. As the Consolidated Trust only invests in loans facilitated by us, we have the power to direct the activities of the
Consolidated Trust, and we have the obligation to absorb losses and the right to receive benefits from the Consolidated Trust that could potentially
be significant to the Consolidated Trust. As a result, we are considered the primary beneficiary of the Consolidated Trust and the Consolidated
Trust should be consolidated in our financial statements under U.S. GAAP.
The following is a summary of the VIE agreements currently in effect:
· Loan and share pledge agreements between Sogou Technology and the shareholders of Sogou Information. The loan agreement provides for a
loan to Xiaochuan Wang, who holds 10% of the equity interest in Sogou Information, used by him to make contributions to the registered capital
of Sogou Information in exchange for his equity interest in Sogou Information. The loan is interest free and is repayable on demand, but
Mr. Wang may repay the loan only by transferring to Sogou Technology his equity interest in Sogou Information. Under the pledge agreement,
all of the shareholders of Sogou Information pledge their equity interests to Sogou Technology to secure the performance of their obligations
under certain of the VIE agreements. If any shareholder of Sogou Information breaches any of his or its obligations under any VIE agreements,
Sogou Technology is entitled to exercise its rights as the beneficiary under the share pledge agreement. The share pledge agreement terminates
only after all of the obligations of the shareholders under the various VIE agreements are no longer in effect.
· Equity interest purchase rights agreement between Sogou Technology, Sogou Information, and the shareholders of Sogou Information. Pursuant
to this agreement, Sogou Technology and any third party designated by it have the right, exercisable at any time when it becomes legal to do so
under PRC law, to purchase from the shareholders of Sogou Information all or any part of their equity interests at the lowest purchase price
permissible under PRC law.
· Business operation agreement among Sogou Technology, Sogou Information and the shareholders of Sogou Information. The agreement sets
forth the right of Sogou Technology to control the actions of the shareholders of Sogou Information in their capacity as such and of Sogou
Information. The agreement has a term of 10 years and is renewable at the request of Sogou Technology.
· Powers of attorney executed by the shareholders of Sogou Information in favor of Sogou Technology with a term of 10 years that is extendable at
the request of Sogou Technology. These powers of attorney give Sogou Technology the right to appoint nominees to act on behalf of each of the
three Sogou Information shareholders in connection with all actions to be taken by Sogou Information.
· Technology consulting and service agreement between Sogou Technology and Sogou Information. Pursuant to this agreement Sogou Technology
has the exclusive right to provide technical consultation and other related services to Sogou Information in exchange for a fee. The agreement
has a term of 10 years and is renewable at the request of Sogou Technology.
Commerce & Finance Law Offices, our PRC counsel, has advised us that these agreements became effective upon signing, except for the pledge
under the share pledge agreement, which became effective when the pledge was registered with applicable PRC governmental authorities. In the opinion of
our PRC counsel, Commerce & Finance Law Offices, the ownership structure and the contractual arrangements between Sogou Technology and Sogou
Information and among Sogou Technology, Sogou Information, and the shareholders of Sogou Information comply with current PRC laws and regulations
and each of the these agreements is, and taken as a whole these agreements are, valid and legally binding upon each party to such agreements under the
laws of the PRC, and enforceable in accordance with its and their terms. We do not believe that any of these agreements would be deemed under PRC laws
and regulations to create foreign ownership of the businesses operated through our VIEs (excluding the Consolidated Trust) that would violate PRC laws
and regulations. However, our PRC counsel has also advised us that there are substantial uncertainties regarding the interpretation and application of
current or future PRC laws and regulations. Accordingly, PRC governmental authorities may ultimately take a view that is inconsistent with the opinion of
our PRC counsel and our belief in that regard. See “Risk Factors—Risks Related to Our Corporate Structure.”
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The following diagram summarizes our corporate structure and identifies our principal subsidiaries and VIEs as of the date of this annual report:
(1) The shareholders of Sogou Information are Beijing Century High-Tech Investment Co., Ltd., a VIE of Sohu, Shenzhen Tencent Computer System
Co., Ltd., a Tencent group entity, and Xiaochuan Wang, our Chief Executive Officer, holding a 45%, 45%, and 10% equity interest, respectively,
in this entity, subject to VIE agreements with Sogou Technology.
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ITEM 4A. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS (cid:0)Finance & IR(cid:0)
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the section entitled
“Selected Consolidated Financial Data” and our consolidated financial statements and the related notes included elsewhere in this annual report. The
discussion in this section contains forward-looking statements that involve risks and uncertainties. As a result of various factors, including those set forth
under “Item 3. Key Information—Risk Factors” and elsewhere in this annual report on Form 20-F, our actual future results may be materially different
from what we expect.
Our mission is to make it easy to communicate and get information.
Overview
We are an innovator in search and a leader in China’s Internet industry. Our Sogou Search is the second largest search engine in China by mobile
queries, according to CTR, and we are the fourth largest Internet company in China based on MAU in December 2019, according to iResearch. Our
differentiated search services, our industry-leading Sogou Input Method, the robust ecosystem we have built and shared with Tencent and other strategic
partners, and significant breakthroughs in AI uniquely position us to capture opportunities in China’s search and Internet industry.
Sogou Search had an 18.3% market share in China based on mobile queries in December 2019, according to CTR. We strengthened our content
and service ecosystem during 2019. On the content front, we are committed to building a more efficient and knowledgeable search platform that provides
high-quality content, particularly in healthcare search and intelligent question answering (“Q&A”). On the services front, we enhanced our offerings,
starting to explore opportunities in AI healthcare. With the ongoing integration of AI technology, Sogou Search continued to evolve into an intelligent
Q&A engine.
In addition, we have built and share a robust ecosystem with Tencent and other strategic partners. We deliver differentiated content to our users,
including search access to the vast content from Tencent’s Weixin/WeChat Official Accounts. Sogou Search is the default search engine for a range of
Tencent products that offer general search functions. Sogou Search also continues to be the preferred search engine on Weixin/WeChat for third-party
search services to access external Internet content. We intend to extend this partnership year to year until 2023 as part of the overall framework agreement
that Sogou and Tencent entered into in September 2018.
Sogou Input Method is the largest Chinese language input software by both mobile and PC MAUs in December 2019, according to iResearch, and
is the first cloud-based Chinese language input software. Sogou Mobile Keyboard is the third largest mobile app in China in December 2019, according to
iResearch, and is China’s largest and most popular voice recognition app, based on our internal data. In December 2019, Sogou Mobile Keyboard had 464
million mobile DAUs, and processed up to 802 million daily voice requests. Sogou Mobile Keyboard interfaces with virtually all applications that involve
Chinese language input, generating massive and high-quality data that is critical to our big data capabilities. Sogou Mobile Keyboard has the ability to
anticipate users’ search intentions in real-time and allows users to search directly with Sogou Search through its embedded search function, generating a
significant portion of our organic search traffic. It also provides targeted recommendations to address users’ variety of needs for informaction discovery
while they are typing. Thanks to a number of product innovations, Sogou Mobile Keyboard continues to evolve from a utility software to an AI-enabled
communication assistant.
With a large user base from both Search and Mobile Keyboard, as well as our advanced big data capabilities, we have gradually built up our
Recommendation Service. The service consists of feed that leverages our various search-related assets and recommendations on Mobile Keyboard.
We have been dedicated to the upgrade of our Smart Hardware business by better leveraging Sogou’s AI capabilities. In 2019, our major product
lines included Sogou AI, our voice-enabled hardware products that are empowered by AI technogy, and Teemo, our smart hardware products for children.
In 2019, we launched a variety of upgraded products to the market. We aim to further diversify our product matrix and strengthen the pipeline.
We are at the forefront of AI development with a clear roadmap. Focusing on natural interaction and knowledge computing, we have become a
leader in language-centered AI capabilities, including speech, computer vision, machine translation, dialogue, and Q&A. In addition to empowering our
core Search, Mobile Keyboard, and Smart Hardware businesses, we also integrated the technologies into industry-leading solutions, including AI-powered
Vocational Avatars and Simultaneous Interpretation, and expanded their use into multiple sectors. Our proven AI capabilities will facilitate our launch of
more disruptive products and services, such as virtual personal assistants (“VPAs”), to serve users anytime, anywhere.
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We have recorded solid revenue growth, with an increase from US$908.4 million in 2017, to US$1.124 billion in 2018, and US$1.172 billion in
2019. We generate revenues primarily from search and search-related advertising services, which represented 92% of our total revenues in the year ended
December 31, 2019.
Key Factors Affecting Our Results of Operations
Our business and results of operations are affected by trends in and the development of China’s online search market in general. In addition, as our
reporting currency is the U.S. dollar and almost all of our revenues and costs are denominated in RMB, our results of operations as reported in our
consolidated financial statements are affected by fluctuations in the exchange rate between the RMB and the U.S. dollar.
Trends in China’s online search industry
Growth in the online search market in China slowed in 2019. Although there has been increased demand for industry-specific online search in key
verticals such as education, e-commerce, online games, financial services, and healthcare, advertisers have been increasingly allocating more of their
advertising budgets toward new forms of online advertising platforms, given the significant influx of advertising inventory from feeds and short videos.
Growth in the online search market has also been negatively impacted by the already high penetration of mobile devices and slower growth of mobile
search traffic. Search engines in China have been adapting to such trends by focusing on building search content ecosystems and integrating more AI
capabilities to improve the quality of search services, and leveraging their organic channels on mobile devices for user acquisition. Since the beginning of
2019 competition for mobile traffic acquisition has moderated, which has decelerated earlier trends toward higher traffic acquisition costs. We intend to
continue to attempt to mitigate the risk from competition for mobile traffic acquisition by increasingly focusing on organic channels to generate traffic
growth.
The online search industry has been and may in the future be affected by changes in the macroeconomic and regulatory environment in China. For
example, through 2019 unfavorable macroeconomic conditions in China dampened online advertising sentiment in general, and COVID-19, which
emerged as an epidemic in December 2019 and has spread rapidly to become a worldwide pandemic, could have a significant adverse impact on China’s
economic growth for the full year of 2020.
According to statistics from the National Bureau of Statistics of China, in the first quarter of 2020 China’s GDP shrank by 6.8%, compared to
growth of 6.4% in the first quarter of 2019, demonstrating the pressure COVID-19 put on China’s economy. In addition, according to the International
Monetary Fund, China’s GDP growth is currently projected to be 1.2% for the full year of 2020 as a result of COVID-19, compared to 6.1% for the full
year of 2019.
The macroeconomic slowdown in China from COVID-19 appears to have weighed on growth in the online advertising market during the first
quarter of 2020, and may continue to weigh on such growth for the full year of 2020. Another factor likely to continue affecting growth is regulatory
headwinds for certain sectors, which have also had and may continue to have an adverse effect on advertiser spending in the online search industry.
Ability to expand advertiser base
In order to expand our advertiser base and increase the average revenue per advertiser, or ARPA, we focus on enhancing the effectiveness of our
advertising services. We source our advertisers primarily through our network of advertising agencies. From time to time, we may provide discounts and
rebates to attract and incentivize advertising agencies. In the last three years, the rates of discounts and rebates have remained relatively stable, but may be
subject to change as we respond to market conditions.
Ability to strengthen our technological capabilities, especially AI and big data
The online search business has undergone constant technological evolution in recent years. In particular, AI and big data have been transforming,
and will continue to transform, the search industry. We are dedicated to continually enhancing and applying our technological capabilities to new forms of
search and other applications. To maintain our leadership in technology, we have increased our investments in research and development and expect to
continue to do so.
Ability to broaden user acquisition channels
Through 2019 we actively expanded our user acquisition channels for mobile products and, in particular, increasingly tapped into the potential of
our organic assets, including search app, mobile browser, and mobile keyboard. We continued our partnerships with mobile device manufacturers to ensure
the prevalence of our search engine in mobile browsers pre-installed by mobile device manufacturers, which serve as major traffic acquisition channels for
search engine service providers. Our decision to voluntarily adjust our traffic acquisition strategy, leveraging organic traffic and reducing our reliance on
external channels, allowed us to manage traffic acquisition costs well. In 2019, traffic acquisition costs as a percentage of total revenues increased to 48.0%
from 47.4% in 2018. We intend to continue to attempt to mitigate the risk from competion for mobile traffic acquisition by increasingly focusing on organic
channels to generate traffic growth.
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Our Revenues
Key Components of Results of Operations
We generate revenues primarily from our search and search-related advertising services, which enable advertisers’ promotional links to be
displayed on our search result pages and other Internet properties and third parties’ Internet properties where the links are relevant to the search queries and
such properties. Our advertising services expand distribution of advertisers’ promotional links and advertisements by leveraging traffic on third parties’
Internet properties, including Web content, software, and mobile applications.
Search and search-related advertising services consist primarily of auction-based pay-for-click services, for which we charge advertisers on a per
click basis when users click on the advertisers’ promotional links displayed on our search result pages and other Internet properties and third parties’
Internet properties. Revenues generated from our auction-based pay-for-click services accounted for 83.0%, 83.8%, and 88.1%, respectively, of the total
revenues derived from our search and search-related advertising services in 2017, 2018, and 2019.
We also generate revenues from other business by offering IVAS, primarily with respect to our operation of Web games and mobile games
developed by third parties, as well as by offering other products and services, including smart hardware products and online lending and microcredit
services.
Cost of Revenues
Cost of revenues consists primarily of traffic acquisition costs; bandwidth costs; server and Internet equipment depreciation associated with the
operation of our Internet properties; salary and benefits expenses, and share-based compensation, for our staff employed in network operations; and costs
related to our other business. Traffic acquisition costs represent the most significant portion of our cost of revenues.
Our traffic acquisition costs consist primarily of payments to third parties that direct search queries of their users to our Internet properties or
distribute our advertisers’ promotional links through such third parties’ Internet properties. The traffic acquisitions costs for such arrangements consist
primarily of fees that we pay to the third parties based on an agreed-upon unit price and revenue-sharing payments that we make to the third parties based
on an agreed-upon percentage of revenues generated from users’ clicks.
Operating Expenses
Our operating expenses consist of research and development expenses, sales and marketing expenses, and general and administrative expenses.
Share-based compensation expense is included in each of these categories of expense.
Research and Development Expenses
Research and development expenses consist primarily of salary and benefits expenses and share-based compensation for our research and
development personnel; costs associated with the use of facilities for research and development purposes; and fees for outsourced technical services
associated with our product development; .
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of advertising and promotional expenses; salary and benefits expenses and share-based
compensation for personnel engaged in sales and marketing. Advertising and promotional expenses generally represent the expenses incurred for
promoting our products and services and our brand.
General and Administrative Expenses
General and administrative expenses consist primarily of allowances for doubtful accounts and credit losses, professional service fees, and salary
and benefits expenses and share-based compensation for employees involved in general corporate operations.
Taxation
PRC
PRC Corporate Income Tax
The PRC Corporate Income Tax Law including its implementing regulations, or the CIT Law, generally applies an income tax rate of 25% to all
enterprises incorporated in the PRC, including foreign-invested enterprises, such as our PRC subsidiaries, and domestic companies, such as our VIEs, but
grants preferential tax treatment to “High and New Technology Enterprises,” or HNTEs, qualified Software Enterprises, and “Key National Software
Enterprises,” or KNSEs.
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HNTEs are instead subject to an income tax rate of 15%, subject to a requirement that they re-apply for HNTE status every three years. During
this three-year period, an HNTE must conduct a qualification self-review each year to ensure it meets the HNTE criteria, and will be subject to the regular
25% income tax rate for any year in which it does not meet the criteria. Sogou Technology, Sogou Information, and Sogou Network qualified as HNTEs in
December 31, 2017, 2018, and 2019, respectively, and will need to re-apply for HNTE qualification in 2020 (Sogou Technology), 2021 (Sogou
Information), and 2022 (Sogou Network).
A Software Enterprise is entitled to an income tax exemption for two years beginning with its first profitable year and a 50% reduction to a rate of
12.5% for the subsequent three years. An entity that qualifies as a KNSE is entitled to a further reduced preferential income tax rate of 10%. Enterprises
wishing to enjoy the status of a Software Enterprise or a KNSE must perform a self-assessment each year to ensure they meet the criteria for qualification
and file required supporting documents with the tax authorities before using the preferential CIT rates. These enterprises are subject to the tax authorities’
assessment each year as to whether they are entitled to use the relevant preferential CIT treatments. If at any time during the preferential tax treatment years
an enterprise uses the preferential CIT rates but the relevant authorities determine that it fails to meet applicable criteria for qualification, the relevant
authorities may revoke the enterprise’s Software Enterprise/KNSE status. Sogou Technology qualified in 2017 and 2018 for the preferential income tax rate
of 10% for 2016 and 2017.
If our holding company in the Cayman Islands or any of our subsidiaries outside the PRC is considered as a PRC resident enterprise for tax
purposes, then our global income will be subject to PRC enterprise income tax at the rate of 25%. See “Risk Factors—Risks Related to China’s Regulatory
Environment—We may be deemed a PRC resident enterprise under the CIT Law and be subject to PRC taxation on our worldwide income.”
PRC Withholding Tax on Dividends
Under the CIT Law and its implementation rules, the profits of a foreign-invested enterprise arising in 2008 and thereafter that are distributed to its
immediate holding company outside the PRC are subject to withholding tax at a rate of 10%. A lower withholding tax rate will be applied if there is a
beneficial tax treaty between the PRC and the jurisdiction of the foreign holding company. A holding company in Hong Kong, for example, will be eligible,
with approval of the PRC local tax authority, to be subject to a 5% withholding tax rate under the China-HK Tax Arrangement if such holding company is
considered to be a non-PRC resident enterprise and holds at least 25% of the equity interests in the PRC foreign-invested enterprise distributing the
dividends. However, if such Hong Kong holding company is not considered to be the beneficial owner of such dividends under applicable PRC tax
regulations, such dividend will remain subject to withholding tax at a rate of 10%.
PRC Value-Added Tax
We are subject to VAT at a rate of 6% or 13% depending on the type of service or product that we offer. For the period from May 1, 2018 to
March 31, 2019 we were subject to VAT at a rate of 6% or 16%, also depending on the type of service or product offered, and before May 1, 2018 we were
subject to VAT at a rate of 6% or 17%, also depending on the type of service or product offered.
Cayman Islands
We are not subject to income or capital gains tax under the current laws of the Cayman Islands. There are no other taxes likely to be material to us
levied by the government of the Cayman Islands.
British Virgin Islands
Under the current laws of British Virgin Islands, Sogou BVI is not subject to tax on income or capital gains. There are no other taxes likely to be
material to us levied by the government of the British Virgin Islands.
Hong Kong
Under the current Hong Kong Inland Revenue Ordinance, our Hong Kong subsidiaries Sogou Hong Kong Limited, Vast Creation Advertising
Media Services Limited, and Sogou Technology Hong Kong Limited are subject to income tax at a rate of 16.5%. Hong Kong dose not impose a
withholding tax on dividends.
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Results of Operations
You should read the information set forth and discussed in this section in conjunction with our consolidated financial statements and related notes
included elsewhere in this annual report. The year-to-year comparisons discussed below may not be indicative of our future trends.
The following table summarizes our historical results of operations for the periods indicated:
Revenues:
Search and search-related advertising revenues
Other revenues
Total revenues
Cost of revenues (1)
Gross profit
Operating expenses:
Research and development (1)
Sales and marketing (1)
General and administrative (1)
Total operating expenses
Operating income
Interest income
Foreign currency exchange (loss)/gain
Other income, net
Income before income tax expenses
Income tax expenses
Net income
(1) Share-based compensation expense included in:
Cost of revenues
Research and development
Sales and marketing
General and administrative
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2017
For the Year Ended December 31,
2018
(US$ in thousands)
2019
801,551
106,806
908,357
457,401
450,956
172,829
156,420
27,821
357,070
93,886
9,126
(7,082)
692
96,622
14,422
82,200
540
16,470
4,299
2,414
23,723
1,023,132
101,026
1,124,158
693,470
430,688
201,739
146,194
38,072
386,005
44,683
8,037
5,725
41,489
99,934
1,153
98,781
1,073,173
99,079
1,172,252
738,454
433,798
190,402
138,291
40,670
369,363
64,435
4,443
1,849
21,126
91,853
2,748
89,105
669
10,313
1,327
1,895
14,204
473
10,697
3,726
1,005
15,901
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Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Revenues
Our revenues were US$1.124 billion and US$1.172 billion, respectively, for the years ended December 31, 2018 and 2019, representing a year-
over-year increase of 4.3%.
The following table sets forth the relative percentage of our revenues in 2018 and 2019 generated from search and search-related advertising
services and from other business.
Revenues:
Search and search-related advertising revenues
Other revenues
Total revenues
For the Year Ended December 31
2018
% of
Revenues
2019
% of
Revenues
1,023,132
101,026
1,124,158
(US$ in thousands)
91.0%
9.0%
100.0%
1,073,173
99,079
1,172,252
91.5%
8.5%
100.0%
Revenues generated from our search and search-related advertising services were US$1.023 billion and US$1.073 billion, respectively, for the
years ended December 31 2018, and 2019, representing a year-over-year increase of 4.9%. The increase in our search and search-related advertising
revenues resulted primarily from an increase in revenues generated from our auction-based pay-for-click services, which accounted for 83.8% and 88.1%,
respectively, of our search and search-related advertising revenues in 2018 and 2019. The growth in revenues from auction-based pay-for-click services
resulted primarily from an increase in the number of our advertisers, offset by a decrease in ARPA. The number of our auction-based pay-for-click
advertisers was approximately 139,000 and 175,000, respectively, for the years ended December 31, 2018 and 2019, representing a year-over-year increase
of 25.9%. The ARPA for auction-based pay-for-click services was US$6,168 and US$5,403, respectively, for the years ended December 31 2018 and 2019,
representing a year-over-year decrease of 12.4%. Revenues generated from our mobile auction-based pay-for-click services accounted for 88% and 92%,
respectively, of our total auction-based pay-for-click revenues for the years ended December 31 2018 and 2019.
Other revenues were US$101.0 million and US$99.1 million, respectively, for the years ended December 31, 2018 and 2019, representing a year-
over-year decrease of 1.9%. The decrease in other revenues was primarily attributable to a decrease in IVAS revenues.
Cost of Revenues
Our overall cost of revenues increased from US$693.5 million in 2018 to US$738.5 million in 2019, representing a year-over-year increase of
6.5%. The increase in cost of revenues was primarily attributable to an increase in traffic acquisition costs. We incurred traffic acquisition costs of
approximately US$532.7 million and US$562.2 million, respectively, in 2018 and 2019, representing a year-over-year increase of 5.5%.
Gross Profit
Gross profit increased from US$430.7 million in 2018 to US$433.8 million in 2019, representing a year-over-year increase of 0.7%. Gross
margins were 38.3% and 37.0%, respectively, for the years ended December 31, 2018 and 2019.
Operating Expenses
The following table summarizes the components of our operating expenses for 2018 and 2019:
Operating expenses:
Research and development
Sales and marketing
General and administrative
Total operating expenses
For the Year Ended December 31,
% of
Revenues
2019
% of
Revenues
(US$ in thousands)
17.9%
13.0%
3.4%
34.3%
190,402
138,291
40,670
369,363
16.2%
11.8%
3.5%
31.5%
2018
201,739
146,194
38,072
386,005
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Research and Development Expenses
Our research and development expenses decreased from US$201.7 million in 2018 to US$190.4 million in 2019, representing a year-over-year
decrease of 5.6%. The decrease was primarily attributable to a decrease in outsourced product development fees.
Sales and Marketing Expenses
Our sales and marketing expenses decreased from US$146.2 million in 2018 to US$138.3 million in 2019, representing a year-over-year decrease
of 5.4%. The decrease was mainly attributable to decreased marketing and promotional spending.
General and Administrative Expenses
Our general and administrative expenses increased from US$38.1 million in 2018 to US$40.7 million in 2019, representing a year-over-year
increase of 6.8%. The increase was primarily due to an increase in allowances for doubtful accounts and credit losses and an increase in professional fees.
Other Income, Net
Other income, net decreased from US$41.5 million in 2018 to US$21.1 million in 2019. The decrease was primarily due to gains recognized in
2018 from long-term equity investments under a new accounting standard (ASC321), as well as impairment loss regonized in 2019 for long-term
investments.
Income Tax Expenses
Our income tax expenses increased from US$1.2 million in 2018 to US$2.7 million in 2019. The increase was mainly due to an increase in taxable
income as a result of higher profit earned by our PRC subsidiaries and VIEs.
Net Income
As a result of the foregoing, we had net income of US$98.8 million and US$89.1 million, respectively, for 2018 and 2019.
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
Revenues
Our revenues were US$908.4 million and US$1.124 billion, respectively, for the years ended December 31, 2017 and 2018, representing a year-
over-year increase of 23.8%.
The following table sets forth the relative percentage of our revenues in 2017 and 2018 generated from search and search-related advertising services and
from other business.
Revenues:
Search and search-related advertising revenues
Other revenues
Total revenues
For the Year Ended December 31
2017
% of
Revenues
2018
% of
Revenues
801,551
106,806
908,357
(US$ in thousands)
88.2%
11.8%
100.0%
1,023,132
101,026
1,124,158
91.0%
9.0%
100.0%
Revenues generated from our search and search-related advertising services were US$801.6 million and US$1.023 billion, respectively, for the
years ended December 31 2017, and 2018, representing a year-over-year increase of 27.6%. The increase in our search and search-related advertising
revenues resulted primarily from an increase in revenues generated from our auction-based pay-for-click services, which accounted for 83.0% and 83.8%,
respectively, of our search and search-related advertising revenues in 2017 and 2018. The growth in revenues from auction-based pay-for-click services
resulted primarily from increases in both ARPA, and to a lesser extent, in the number of our advertisers. The ARPA for auction-based pay-for-click services
was US$4,856 and US$6,168, respectively, for the years ended December 31 2017 and 2018, representing a year-over-year increase of 27.0%. The number
of our auction-based pay-for-click advertisers was approximately 137,000 and 139,000, respectively, for the years ended December 31, 2017 and 2018,
representing a year-over-year increase of 1.5%. The increase in ARPA was primarily attributable to a higher cost per click paid by advertisers, which we
believe in turn resulted primarily from enhanced effectiveness of our advertising services, driven by machine learning technologies and big data capabilities
that improved the match between advertising content and users’ search intent. Revenues generated from our mobile auction-based pay-for-click services
accounted for 82% and 88%, respectively, of our total auction-based pay-for-click revenues for the years ended December 31 2017 and 2018.
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Other revenues were US$106.8 million and US$101.0 million, respectively, for the years ended December 31, 2017 and 2018, representing a year-
over-year decrease of 5.4%. The decrease in other revenues was primarily attributable to a decrease in revenues from sales of smart hardware products due
to our phase-out of some legacy products.
Cost of Revenues
Our overall cost of revenues increased from US$457.4 million in 2017 to US$693.5 million in 2018, representing a year-over-year increase of
51.6%. The increase in cost of revenues was primarily attributable to an increase in traffic acquisition costs. We incurred traffic acquisition costs of
approximately US$303.6 million and US$532.7 million, respectively, in 2017 and 2018, representing a year-over-year increase of 75.5%. The increase
outpaced the increase in our search and search-related advertising revenues during the same period, primarily due to price inflation as a result of increased
competition.
Gross Profit
Gross profit decreased from US$451.0 million in 2017 to US$430.7 million in 2018, representing a year-over-year decrease of 4.5%. Gross
margins were 49.6% and 38.3%, respectively, for the years ended December 31, 2017 and 2018. The decrease in our gross margin from 2017 to 2018 was
mainly due to higher traffic acquisition costs as a percentage of our revenues.
Operating Expenses
The following table summarizes the components of our operating expenses for 2017 and 2018:
Operating expenses:
Research and development
Sales and marketing
General and administrative
Total operating expenses
Research and Development Expenses
For the Year Ended December 31,
2017
% of
Revenues
2018
% of
Revenues
(US$ in thousands)
172,829
156,420
27,821
357,070
19.0%
17.2%
3.1%
39.3%
201,739
146,194
38,072
386,005
17.9%
13.0%
3.4%
34.3%
Our research and development expenses increased from US$172.8 million in 2017 to US$201.7 million in 2018, representing a year-over-year
increase of 16.7%. The increase was primarily attributable to an increase in salary and benefits expenses for our research and development staff driven by
higher headcount and increased average salary, as well as increased outsourced product development fees, reflecting our continued efforts to strengthen our
AI and other technological capabilities.
Sales and Marketing Expenses
Our sales and marketing expenses decreased from US$156.4 million in 2017 to US$146.2 million in 2018, representing a year-over-year decrease
of 6.5%. The decrease was mainly attributable to decreased marketing and promotional spending for some of our mobile products.
General and Administrative Expenses
Our general and administrative expenses increased from US$27.8 million in 2017 to US$38.1 million in 2018, representing a year-over-year
increase of 36.8%. The increase was primarily due to an increase in allowances for doubtful accounts and credit losses.
Other Income, Net
Other income, net increased from US$0.7 million in 2017 to US$41.5 million in 2018. The increase was primarily due to increased gains from
short-term investments and gains recognized from long-term equity investments under a new accounting standard (ASC321) that became effective on
January 1, 2018.
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Income Tax Expenses
Our income tax expenses decreased from US$14.4 million in 2017 to US$1.2 million in 2018. The decrease was mainly due to a decrease in
taxable income as a result of increased tax-exempt income and more tax credits allowed under new PRC tax regulations, as well as a relatively larger tax
benefit related to the preferential tax rate that Sogou Technology was entitled to as a KNSE.
Net Income
As a result of the foregoing, we had net income of US$82.2 million and US$98.8 million, respectively, for 2017 and 2018.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP, included elsewhere in this annual report.
The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. 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. Actual results may differ from these estimates under different
assumptions or conditions. When reviewing our financial statements, you should consider (i) our selection of critical accounting policies, (ii) the judgment
and other uncertainties affecting the application of such policies and (iii) the sensitivity of reported results to changes in conditions and assumptions. We
have summarized below the critical accounting policies that we believe reflect the most significant judgments and estimates used in the preparation of our
consolidated financial statements.
Consolidation of VIEs
Our VIE Sogou Information is owned by our Chief Executive Officer, a VIE of Sohu, and a Tencent group entity, each of which acts as our
nominee shareholder, and our other VIEs are wholly-owned subsidiaries of Sogou Information. For our consolidated VIEs, our management made
evaluation of the relationships between us and our VIEs and the economic benefit flow of contractual arrangements with Sogou Information. In connection
with such evaluation, management also took into account the fact that, as a result of such contractual arrangements, we control the shareholders’ voting
interests in these VIEs. As a result of such evaluation, management concluded that we are the primary beneficiary of our consolidated VIEs. We do not
have any VIEs that are not consolidated in our financial statements.
Recognition of Revenues
On January 1, 2018, we adopted ASC 606, using the modified retrospective method applied to contracts that were not completed as of January 1,
2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue
to be reported in accordance with our historic accounting under ASC 605. The adoption did not have a material impact on retained earnings as of January 1,
2018 and our financial statements as of and for the year ended December 31, 2018.
The adoption of ASC 606 mainly resulted in a change to our accounting policy for advertising-for-advertising barter transactions. Under ASC 605,
revenues or expenses from barter transactions were recognized at fair value during the period in which the advertisements were provided only if the fair
value of the advertising services surrendered in the transaction was determinable based on the entity’s own historical practice of receiving cash and cash
equivalents, marketable securities, or other consideration that was readily convertible to a known amount of cash for similar advertising from buyers
unrelated to the counterparty in the barter transaction. If the fair value of the advertising surrendered in the barter transaction was not determinable, the
barter transaction would be recorded based on the carrying amount of the advertising surrendered, which would likely be zero. ASC 606 has suspended the
above guidance of ASC 605 and provides that when the contract consideration from a customer is in forms other than cash, the revenue will be measured at
the fair value of the non-cash consideration, or indirectly measured by reference to the standalone selling price of the goods or services promised to the
customer if the fair value of the non-cash consideration cannot be reasonably estimated.
For the year ended December 31, 2017, we engaged in certain advertising barter transactions for which the fair value was not determinable under
ASC 605 and therefore no revenues or expenses derived from these barter transactions were recognized. For the years ended December 31, 2018 and 2019,
because of the adoption of ASC 606, we estimated the fair value of advertising services received in barter transactions and recognized US$21.8 million and
US$15.7 million in revenues, with a corresponding increase in cost of revenues and sales and marketing expenses. The adoption of ASC 606 did not have a
material impact on our consolidated balance sheet, consolidated statement of cash flows, or consolidated statement of changes in equity as of and for the
years ended December 31, 2018 and 2019.
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Under Topic 606, we recognize revenue when control of the promised goods or services is transferred to our customers, in an amount that reflects
the consideration we expect to be entitled to in exchange for those goods or services.
We determine revenue recognition through the following steps:
Step 1: identification of the contract, or contracts, with a customer;
Step 2: identification of the performance obligations in the contract;
Step 3: determination of the transaction price;
Step 4: allocation of the transaction price to the performance obligations in the contract; and
Step 5: recognition of revenue when, or as, we satisfy a performance obligation.
Our revenues are derived primarily from search and search-related advertising services. We also derive revenues from IVAS, which consists
primarily of our operation of Web games and mobile games developed by third parties, and from other products and services, including smart hardware
products and online lending and microcredit services. The following table presents revenues disaggregated by revenue source, net of VAT.
Search and search-related advertising revenues
Other revenues
Total
2017
(1)
801,551
106,806
908,357
For the Year Ended
December 31,
2018
(US$ in thousands)
(2)
1,023,132
101,026
1,124,158
2019
(2)
1,073,173
99,079
1,172,252
(1)
(2)
As noted above, prior period amounts have not been adjusted, pursuant to the modified retrospective method.
For the years ended December 31, 2018 and 2019, the search and search-related advertising revenues would be US$1.001 billion and US$1.057 billion,
respectively, and total revenues would be US$1.102 billion and US$1.157 billion, respectively, without adoption of ASC 606.
Search and Search-related Advertising Revenues
We procure a majority of our search and search-related advertisers through advertising agencies. Discounts and other cash incentives provided to
the advertising agencies are accounted for as a reduction of revenues.
Pay-for-click Services
Pay-for-click services enable advertisers’ promotional links to be displayed on our search result pages and other Internet properties and third
parties’ Internet properties where the links are relevant to the subject and content of searches and such properties. For pay-for-click services, we introduce
Internet users to our advertisers through our auction-based pay-for-click systems and charge advertisers on a per click basis when the users click on the
displayed links. The performance obligation of pay-for-click services is satisfied at the point in time when the users click on the displayed links, and
revenue for pay-for-click services is recognized on a per click basis.
Other Online Advertising Services
Other online advertising services mainly consist of displaying advertisers’ promotional links on our Internet properties. For time-based advertising
services, the performance obligation is satisfied over time when the advertising links are displayed over the contract periods, and revenue is normally
recognized on a straight-line basis over the contracted displaying period. For performance-based advertising services, for example, the advertisers are
charged based on the times that users download from the displayed links, and the performance obligation is satisfied at the point in time when the promised
performance is completed, and the revenue is recognized at the completion of the promised performance.
Our online advertising services expand distribution of advertisers’ promotional links and advertisements by leveraging traffic on third parties’
Internet properties, including Web content, software, and mobile applications. We are the principal in such arrangements because our promise to advertisers
is to provide the advertising services ourselves rather than arrange for the advertising services to be provided by third parties on their Internet properties.
Payments made to operators of third-party Internet properties are included in the traffic acquisition costs.
Other Revenues
Other revenues consist of IVAS revenues, which are mainly from our operation of Web games and mobile games developed by third parties, as
well as revenues from other products and services, including smart hardware products and online lending and microcredit services. Other revenues are
generally recognized when our performance obligations under the applicable agreements have been satisfied, except for interest revenues from our online
lending and microcredit services, which are recognized using the effective interest method.
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Contract Balances
The timing of revenue recognition may differ from the timing of invoicing to customers. Accounts receivable represent amounts invoiced and
revenue recognized prior to invoicing, when we have satisfied our performance obligations and have the unconditional right to payment. The carrying value
of accounts receivable is reduced by an allowance that reflects management’s best estimate of the amounts that will not be collected. Management makes
estimates of the collectability of accounts receivable. In estimating the general allowance, many factors are considered, including reviewing delinquent
accounts receivable, performing aging analyses and customer credit analyses, and analyzing historical bad debt records and current economic trends.
Additional allowance for specific doubtful accounts might be made if the financial conditions of our customers deteriorate, resulting in their inability to
make payments due to us.
Receipts in advance relate to unsatisfied performance obligations at the end of the year and consist of cash payments received in advance from
customers. The unused cash balances remaining in customers’ accounts are recorded as our liability. Due to the generally short-term duration of our
contracts, the majority of the performance obligations are satisfied in one year. The amount of revenue recognized that was included in receipts in advance
balance at the beginning of the year was US$63.5 million and US$62.2 million for the years ended December 31, 2018 and 2019, respectively.
Revenues recognized in the current year from performance obligations related to prior years were not material.
Practical Expedients
We have used the following practical expedients as allowed under ASC 606:
(i) The transaction price allocated to the performance obligations that are unsatisfied, or partially unsatisfied, has not been disclosed, as
substantially all of our contracts have a duration of one year or less;
(ii) Payment terms and conditions vary by contract type, although terms generally include a requirement of prepayment or payment within one
year or less. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined that our contracts
generally do not include a significant financing component; and
(iii) We generally expense sales commissions when incurred because the amortization period would be one year or less. These costs are recorded
within sales and marketing expenses.
Income Taxes and Uncertain Tax Positions
Income Taxes
Income taxes are accounted for using an asset and liability approach that requires the recognition of income taxes payable or refundable for the
current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in our financial statements or tax
returns. Deferred income taxes are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are
measured using tax rates and tax laws in effect as of the measurement date. Deferred tax assets are reduced by a valuation allowance if, based on available
evidence, it is considered more likely than not that some portion of or all of the deferred tax assets will not be realized. In making such determination, we
consider factors that include (i) future reversals of existing taxable temporary differences, (ii) future profitability, and (iii) tax planning strategies.
Uncertain Tax Positions
In order to assess uncertain tax positions, we apply a more likely than not threshold and a two-step approach for financial statement recognition
and measurement of the tax position. For the two-step approach, the first step is to evaluate the tax position for recognition by determining if the weight of
available evidence indicates that it is more likely than not that the position will be sustained, including resolution of any related litigation processes and
appeals. The second step is to measure the tax benefit as the largest amount that is more likely than not to be realized upon settlement. Significant judgment
is required in evaluating our uncertain tax positions and determining our provision for income taxes.
Long-term Investments
Investments in entities are recorded as equity investments under long-term investments. For entities over which we can exercise significant
influence but do not own a majority equity interest or have control, the equity method is applied. For entities over which we do not have significant
influence, the cost method was applied before the adoption of ASC321 effective as of January 1, 2018; after the adoption of ASC 321, these investments
should generally be measured at fair value, with gains or losses resulting from changes in fair value recognized in earnings. Based on ASC 321, an entity
may elect to record equity investments without readily determinable fair values and not accounted for by the equity method at cost, less impairment,
adjusted for subsequent observable price changes. Entities that elect this measurement alternative will report changes in the carrying values due to re-
measurement based on observable price changes of the equity investments in current earnings. As of December 31, 2019, all of our equity investments were
accounted as equity investments without readily determinable fair values.
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Impairment of Long-lived Assets
The carrying values of long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value
of an asset may not be recoverable. Based on the existence of one or more indicators of impairment, we measure any impairment of long-lived assets using
the projected discounted cash flow method at the asset group level. The estimation of future cash flows requires significant management judgment based on
our historical results and anticipated results and is subject to many factors. The discount rate that is commensurate with the risk inherent in our business
model is determined by us. An impairment charge would be recorded if we were to determine that the carrying value of long-lived assets may not be
recoverable. The impairment to be recognized would be measured by the amount by which the carrying values of the assets exceeded the fair value of the
assets.
Fair Value of Financial Instruments
U.S. GAAP defines fair value as the price that would be received to sell 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, we consider the principal or most advantageous market in which a transaction would be expected to occur and considers assumptions that
market participants would use when pricing the asset or liability.
U.S. GAAP establishes a three-tier hierarchy to prioritize the inputs used in the valuation methodologies in measuring the fair value of financial
instruments. This hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring
fair value. The three-tier fair value hierarchy is:
Level 1—observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2—other inputs that are directly or indirectly observable in the marketplace.
Level 3—unobservable inputs that are supported by little or no market activity.
Our financial instruments primarily include cash equivalents, restricted cash, short-term investments, accounts receivable, loans and interest
receivable, accounts payables, accrued and other short -term liabilities, and amounts due from/to related parties. The carrying values of these balances
approximates their fair values due to the current and short-term nature of the balances.
Share-Based Compensation Expense
Share-based compensation expense arises from share-based awards, including share options for the purchase of our ordinary shares granted by us
to our management and other key employees and granted by Sohu to its management and other key employees who to some extent provide services to us
and certain members of our management and other of our key employees, or Sogou Share-based Awards; restricted share units and options for the purchase
of Sohu ordinary shares granted by Sohu to our employees, or Sohu Share-based Awards; and restricted share units granted by Tencent previously to certain
persons who became our employees when Tencent’s Soso search-related businesses were transferred to us in 2013, or the Tencent Share-based Awards.
In determining the fair value of share options granted, a binomial option-pricing model (the “BP Model”) is applied. The determination of the fair
value is affected by the fair value of the ordinary shares as well as assumptions regarding a number of complex and subjective variables, including risk-free
interest rates, exercise multiples, expected forfeiture rates, the expected share price volatility rates, and expected dividends. Prior to the completion of our
initial public offering, the fair values of the ordinary shares were assessed using the income approach /discounted cash flow method or based on the mid-
point of the estimated IPO price range, in each case with a discount for lack of marketability, given that the shares underlying the awards were not publicly
traded at the time of grant. After the completion of our initial public offering, the fair values of the ordinary shares were determined based on the trading
price of our ADSs in the public market.
Share-based compensation expense for share options granted to our employees was measured based on their grant-date fair values. In
circumstances where the service inception date precedes the grant date, share-based compensation expense is measured beginning on the service inception
date and is re-measured on each subsequent reporting date before the grant date, based on the estimated fair value of the related options. For options with
only a service requirement, share-based compensation expense was recognized on an accelerated basis over the requisite service period. For options with
both a service requirement and a performance target, share-based compensation expense was recognized over the estimated period during which the service
period requirement and performance target will be met, which is usually within one year. For options vesting subject to an initial public offering, share-
based compensation expense was recognized on an accelerated basis over the requisite service period after the completion of our initial public offering on
November 13, 2017. The number of share-based awards for which the service was not expected to be rendered over the requisite period was estimated, and
the related compensation expense was not recorded for the number of awards so estimated.
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Before our adoption of ASU 2018-07 “Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment
Accounting” effective for fiscal years beginning after December 15, 2018, share-based compensation expense for share options granted to non-employees
was measured at fair value at the earlier of the performance commitment date or the date service was completed and recognized over the period during
which the service was provided. We applied the guidance in ASC 505-50 to measure share options granted to non-employees based on the then-current fair
value at each reporting date until the service had been provided and the performance targets have been met. After our adoption of ASU 2018-07, share-
based compensation expense for share options granted to non-employees is recognized in accordance with the requirements of ASC 718 for employee
share-based payment awards.
Share-based awards granted by Sohu are deemed to be share-based compensation made by us in exchange for services rendered to us, and we
recognize share-based compensation expense accordingly. Because we are not required to reimburse Sohu for such share-based compensation expense, the
related amount was recorded as a capital contribution from Sohu.
Liquidity and Capital Resources
Our principal sources of liquidity are cash and cash equivalents, short-term investments, and cash flows generated from our operations. Our cash
and cash equivalents consist of cash, time deposits with original maturities of three months or less, and demand deposits.
As of December 31, 2019, we had cash, cash equivalents, restricted cash, and short-term investments of US$1.14 billion. Of our cash, cash
equivalents, restricted cash, and short-term investments, 53% were held in seventeen financial institutions in mainland China, 27% were held in four
financial institutions in Hong Kong, and 20% were held in one financial institution in Macau. The remaining cash, cash equivalents, restricted cash, and
short-term investments were held in one financial institution in New York. Our VIEs held US$24.7 million of our cash and cash equivalents, restricted cash
and short-term investments, and US$1.12 billion was held outside of our VIEs.
We believe our current liquidity and capital resources are sufficient to meet anticipated working capital needs, commitments, capital expenditures,
and investment activities over the next twelve months.
The following table sets forth a summary of our cash flows for the periods indicated:
Net cash provided by operating activities
Net cash used in investing activities
Net cash (used in)/provided by financing activities
Effect of exchange rate changes on cash, cash
equivalents and restricted cash
Net increase in cash, cash equivalents and restricted
cash
Cash, cash equivalents and restricted cash at beginning
of the year
Cash, cash equivalents and restricted cash at end of
the year or period
Net Cash Provided by Operating Activities
2017
182,376
(407,402)
618,942
14,213
408,129
286,078
694,207
For the Year Ended
December 31,
2018
(US$ in thousands)
144,958
(650,797)
1
(3,194)
(509,032)
694,207
185,175
2019
219,510
(217,551)
(33,414)
(5,886)
(37,341)
185,175
147,834
For the year ended December 31, 2019, US$219.5 million net cash provided by operating activities consisted primarily of our net income of
US$89.1 million, adjusted by the add back of non-cash items consisting of US$65.4 million in depreciation and amortization expense, a US$21.6 million
increase in cash due to changes in working capital, and US$15.9 million of share-based compensation expense.
For the year ended December 31, 2018, US$145.0 million net cash provided by operating activities consisted primarily of our net income of
US$98.8 million, adjusted by (i) the add back of non-cash items consisting of US$61.9 million in depreciation and amortization expense, US$14.2 million
of share-based compensation expense; (ii) offset by non-cash items of US$18.0 million in gains from re-measurement of long-term equity investments, a
US$16.8 million increase in working capital as a result of growth in our revenues.
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For the year ended December 31, 2017, US$182.4 million net cash provided by operating activities consisted primarily of our net income of
US$82.2 million, adjusted by (i) the add back of non-cash items consisting of US$49.6 million in depreciation and amortization expense and US$23.7
million of share-based compensation expense, and a US$31.4 million increase in cash due to changes in working capital; (ii) offset by a non-cash item of
US$4.1 million in deferred tax benefit.
Net Cash Used in Investing Activities
For the year ended December 31, 2019, US$217.6 million net cash used in investing activities consisted primarily of US$2.025 billion for
purchase of short-term investments, which consist of time deposits and financial instruments issued by banks, US$257.4 million for investments in
financing receivables, US$30.1 million for fixed asset purchases, and US$11.5 million for purchase of long-term investments; offset by US$1.879 billion in
proceeds from short-term investments and US$226.1 million from collection of financing receivables.
For the year ended December 31, 2018, US$650.8 million net cash used in investing activities consisted primarily of US$1.678 billion for
purchase of short-term investments, which consist of time deposits and financial instruments issued by banks, US$98.8 million for investments in financing
receivables, US$75.8 million for fixed asset purchases, and US$19.9 million for purchase of long-term investments; offset by US$1.162 billion in proceeds
from short-term investments and US$60.0 million from collection of financing receivables.
For the year ended December 31, 2017, US$407.4 million net cash used in investing activities consisted primarily of US$345.5 million for
purchase of short-term investments, US$64.0 million for fixed asset purchases, and US$7.0 million for purchase of long-term investments.
Net Cash (Used in)/Provided by Financing Activities
For the year ended December 31, 2019, US$33.4 million net cash used in financing activities consisting primarily of US$42.0 used for the
repurchase of Class A Ordinary Shares represented by ADSs, offset by US$8.6 million proceeds received by the consolidated Trust from third-party funder.
For the year ended December 31, 2018, cash movement resulting from financing activities was insignificant.
For the year ended December 31, 2017, US$618.9 million net cash provided by financing activities consisting primarily of US$622.1 million
proceeds from our IPO, offset by US$3.2 million used for the repurchase of Pre-IPO Class A Ordinary Shares from the former president and chief financial
officer of the Sohu Group.
Holding Company Structure and Limitations on Cash Transfers to Sogou Inc.
Sogou Inc. is a holding company with no operating assets other than investments in our Chinese operating entities through our intermediate
holding companies, and our VIEs. Since substantially all of our operations are conducted through our indirect China-based subsidiaries Sogou Technology
and Sogou Network and our VIEs, we may need to rely on dividends, loans, or advances made by our PRC subsidiaries and VIEs for any cash requirements
Sogou Inc. or our other offshore entities may have from time to time in excess of any cash retained by us or our other offshore entities or to pay any
dividends to holders of our ordinary shares, including holders of our ADS.
The ability of Sogou Inc. and our other offshore entities to receive dividends and distributions from our China-based subsidiaries and VIEs, and
the amount of cash available for distribution to, and use by, Sogou Inc., are subject to certain restrictions and limitations related to PRC law and our
subsidiary and VIE structure. See “—PRC Restrictions Related to Our VIE Structure.” We do not expect any of such restrictions or taxes to have a material
impact on our ability to meet our cash obligations.
PRC Regulations Related to Profit Appropriation, Withholding Tax on Dividends, and Foreign Currency Exchange
Regulations in the PRC currently permit payment of dividends of a PRC company only out of accumulated profits as determined in accordance
with accounting standards and regulations in China. Our China-based subsidiaries Sogou Technology and Sogou Network and our VIEs are also required to
set aside each year to their general reserves at least 10% of their after-tax profit based on PRC accounting standards, until the cumulative amount reaches
50% of their paid-in capital. These reserves may not be distributed as cash dividends, or as loans or advances. Our PRC subsidiaries and VIEs may also
allocate a portion of their after-tax profits, at the discretion of their Boards of Directors, to their staff welfare and bonus funds. Any amounts so allocated
would not be available for distribution to Sogou Inc. or our other offshore entities.
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The CIT Law imposes a 10% withholding income tax for dividends distributed by foreign-invested enterprises in the PRC to their immediate
holding companies outside China. A lower withholding tax rate will be applied if there is a tax treaty arrangement between China and the jurisdiction of the
foreign holding company. A holding company in Hong Kong, for example, will be subject to a 5% withholding tax rate under the China-HK Tax
Arrangement if such holding company is considered a non-PRC resident enterprise and holds at least 25% of the equity interests in the PRC foreign
invested enterprise distributing the dividends, subject to approval of the PRC local tax authority. However, if the Hong Kong holding company is not
considered to be the beneficial owner of such dividends under applicable PRC tax regulations, such dividend will remain subject to withholding tax at a
rate of 10%.
In addition, under SAFE regulations, the RMB is not convertible into foreign currencies for capital account items, such as loans, repatriation of
investments, and investments outside of China, unless prior approval of the SAFE is obtained and prior registration with the SAFE is made.
PRC Restrictions Related to Our VIE Structure
Part of our operations are conducted through our VIEs, which generate a portion of our revenues and held certain cash balances as of
December 31, 2018. As our VIE Sogou Information and its subsidiaries (which are also our VIEs) are not owned by Sogou Technology, Sogou Information
is not able to make dividend payments to Sogou Technology. Therefore, in order for Sogou Inc. or our subsidiaries outside of China to receive any
dividends originating from our VIEs, we will need to rely on payments made by Sogou Information to Sogou Technology pursuant to a services contract
between them. Depending on the nature of services provided by Sogou Technology to Sogou Information, certain of these payments will subject to PRC
taxes, such as VAT, that will effectively reduce the amount that Sogou Technology receives from Sogou Information. In addition, the PRC government
could impose restrictions on such payments or change the tax rates applicable to such payments.
Dividend Policy
We intend to retain all available funds and any future earnings for use in the operation and expansion of our business, and do not anticipate paying
any cash dividends on our Class A and Class B Ordinary Shares for the foreseeable future. Future cash dividends distributed by us, if any, will be declared
at the discretion of our Board of Directors and will depend upon our future operations and earnings, capital requirements and surplus, general financial
condition, contractual restrictions, and such other factors as our Board of Directors may deem relevant.
Capital Expenditures
Our capital expenditures include the purchase of fixed assets, consisting primarily of servers, Internet network equipment, and leasehold
improvements. Our expenditures for purchase of fixed assets of US$64.0 million, US$75.8 million, and US$30.1 million, respectively, in 2017, 2018, and
2019 were mainly to support increases in our user traffic and new products and services.
As of December 31, 2019, we had contractual obligation and commercial commitments, relating to operating lease obligations, bandwidth
purchase, content and service purchase, and other obligations, as follows:
Contractual Obligations and Commercial Commitments
2020
2021
2022
2023
2024
Thereafter
Total
Bandwidth
Purchases
Operating
Lease
Obligations
(1)
33,177
306
—
—
—
—
33,483
17,243
15,204
11,456
—
—
—
43,903
Goods
Purchases
(US$ in thousands)
5,633
—
—
—
—
—
5,633
Others
Total
822
440
—
—
—
—
1,262
56,875
15,950
11,456
—
—
—
84,281
Off-balance Sheet Commitments and Arrangements
We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of third parties.We have not entered
into any derivative contracts that are indexed to our shares and classified as shareholders’ equity, or that are not reflected in our consolidated financial
statements. We do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity, or market risk
support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk, or credit support to
us or that engages in leasing, hedging, or product development services with us.
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Impact of Recently Issued Accounting Standards
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326),” which requires entities to measure all expected
credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This
replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. This
guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted
for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We have evaluated the impact of adopting
this standard and do not expect this standard to have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment.” The guidance removes Step 2 of goodwill
impairment tests, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s
carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance is to be adopted on a prospective basis for annual or any
interim goodwill impairment tests beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests
performed on testing dates after January 1, 2017. We do not expect this standard to have a material impact on our consolidated financial statements.
Cloud computing. In 2018, the FASB issued new guidance on a customer’s accounting for implementation, set-up, and other upfront costs
incurred in a cloud computing arrangement that is hosted by the vendor (i.e., a service contract). Under the new guidance, customers will apply the same
criteria for capitalizing implementation costs as they would for an arrangement that has a software license. This standard is effective for annual reporting
periods beginning after December 15, 2019, including interim reporting periods within those fiscal years. The adoption of this standard will not have a
material impact on our consolidated financial statements.
Fair value measurement disclosure requirements. In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820):
Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”) which eliminates, adds and modifies
certain disclosure requirements for fair value measurements. Under the guidance, public companies, such as us, will be required to disclose the range and
weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The guidance is effective for all entities for fiscal
years beginning after December 15, 2019 and for interim periods within those fiscal years, but entities are permitted to early adopt either the entire standard
or only the provisions that eliminate or modify the requirements. We do not expect this standard to have a material impact on our consolidated financial
statements.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Directors and Senior Management
The following table sets forth information regarding our directors and executive officers as of the date of this annual report. The business address
of each of our directors and executive officers is Level 15, Sohu.com Internet Plaza, No. 1 Unit Zhongguancun East Road, Haidian District, Beijing
100084, China.
Directors and Executive
Officers
Charles (Chaoyang) Zhang
Xiaochuan Wang
Yu Yin
Joanna (Yanfeng) Lu
Hongtao Yang
Tao Hong
Joe (Yi) Zhou (1)
Bin Gao (2)
Janice Lee (2)
Jinmei He (2)
Age
Position
Chairman of the Board of Directors
Director and Chief Executive Officer
Director
Director
Chief Technology Officer
Chief Marketing Officer
Chief Financial Officer
Independent Director
Independent Director
Independent Director
55
41
43
49
40
42
43
57
49
50
(1) Mr. Zhou was appointed as our Chief Financial Officer effective January 22, 2018. James Deng, our former Chief Financial Officer, has resumed his
former role at Sohu, our controlling shareholder.
(2) A member of the audit committee of our Board of Directors.
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Charles Zhang is the Chairman of our Board of Directors. Dr. Zhang is the founder of Sohu and has been Chairman of the Board and Chief
Executive Officer of Sohu since August 1996. Dr. Zhang also served as the President of Sohu from August 1996 to July 2004. Dr. Zhang is also the
Chairman of the Board of Directors of Changyou.com Limited, which is a majority-owned subsidiary of Sohu that is listed on Nasdaq. Dr. Zhang has a
Ph.D. in experimental physics from MIT and a Bachelor of Science degree from Tsinghua University in Beijing. Dr. Charles Zhang is a native of the
People’s Republic of China.
Xiaochuan Wang has served as our Chief Executive Officer and a member of our Board of Directors since 2010. Prior to joining Sogou, Mr. Wang
worked at Sohu, serving as the senior vice president of Sohu from 2008 to 2009 and the chief technology officer of Sohu from 2009 to 2013. Mr. Wang
received a Bachelor’s degree and a Master’s degree in computer science and an Executive MBA from Tsinghua University.
Yu Yin joined Tencent in 2006 and currently serves as a Corporate Vice President in charge of all of Tencent’s information feed products and young
people’s entertainment communities. Mr. Yin was in charge of QQ from 2006 to 2018. Before joining Tencent, Mr. Yin worked for Microsoft for eight
years. Mr. Yin received a bachelor’s degree in computer science from Grinnell College in the United States.
Dr. Bin Gao founded Invealth Capital in 2016 and currently serves as its Chief Investment Officer. Dr. Gao served as the head of strategy for
Guard Capital from 2014 to 2015 and as the head of strategy for Bank of America Merrill Lynch’s Asia Pacific Rates from 2005 to 2014. Dr. Gao earned a
Ph.D. in finance from New York University, a Master’s degree in astrophysics from Princeton University, and a Bachelor’s degree in space physics from
the University of Science and Technology of China.
Janice Lee is the Managing Director of PCCW Media Group, a position Ms. Lee has held since 2010. Ms. Lee is in charge of PCCW’s media and
entertainment businesses, including its video streaming services in 17 markets and its pay-TV business in Hong Kong. Prior to serving as the Managing
Director, Ms. Lee was PCCW’s Executive Vice President of TV & New Media. Ms. Lee also serves as a board member of STX Entertainment, a
Hollywood entertainment & film company in the United States. Ms. Lee received a Bachelor’s degree in economics with majors in economics, commercial
law, and accounting from the University of Sydney.
Jinmei He has served as a member of our Board of Directors since October 19, 2018 and as a member of our audit committee since November 3,
2018. Ms. He has been a self-employed investor in the public equity markets and in real estate in the United States since 2005. From 2002 to 2005 Ms. He
served as a Vice President of Sohu.com Inc., where she helped to establish and develop Sohu’s online game business, and from 1997 to 2001 Ms. He held
various marketing and sales positions at Sohu. Ms. He received a Bachelor of Science in Civil Engineering from Southwest Jiaotong University in China,
and attended the Certificate Program in Marketing at the Extension school of the University of California, Berkeley.
Joanna Lu has served as a member of our Board of Directors since 2016. Ms. Lu has been the Chief Financial Officer of Sohu since January 27,
2018. Ms. Lu joined Sohu in August 2000. From July 31, 2016 to January 26, 2018, Ms. Lu was the Acting Chief Financial Officer of Sohu. Prior to
July 31, 2016, Ms. Lu was the Senior Finance Director of Sohu, in charge of day-to-day finance operations, including financial reporting, budget planning
and treasury. Ms. Lu received a Bachelor’s degree in economics from the Capital University of Economics and Business in Beijing and an Executive MBA
from Tsinghua University.
Hongtao Yang has served as our Chief Technology Officer since 2016. Prior to this, Mr. Yang worked as the general manager of Sogou’s desktop
department, with a focus on research and development of software products. Mr. Yang joined Sogou in 2003. Mr. Yang received a Bachelor’s degree and a
Master’s degree in computer science from Tsinghua University.
Tao Hong has served as our Chief Marketing Officer since 2016. Prior to this, Mr. Hong worked as as the general manager of our marketing
department. Mr. Hong joined Sogou in 2005. Mr. Hong received a Bachelor’s degree in electronic engineering from Tsinghua University.
Joe Zhou has served as our Chief Financial Officer since 2018. Previously, Mr. Zhou worked as Sogou’s Deputy Chief Financial Officer and the
General Manager of our Finance Department. Before joining us in 2010, Mr. Zhou held various positions at PricewaterhouseCoopers and two Nasdaq-listed
companies — New Oriental Education and Technology Group and TAL Education Group. Mr. Zhou received a Bachelor’s degree in accounting from
Renmin University of China and is pursuing an Executive MBA at Tsinghua University.
Board of Directors
Our Board of Directors consists of Dr. Charles Zhang, Xiaochuan Wang, Yu Yin, Joanna Lu, Bin Gao, Janice Lee, and Jinmei He. Members of our
Board of Directors are elected by the holders of our ordinary shares and will hold office until our next annual general meeting of shareholders and until
their successors are duly elected or appointed, or until their resignation or removal in accordance with the provisions of our Amended and Restated
Memorandum of Association and Amended and Restated Articles of Association, as amended and restated from time to time. In January 2019, Yuxin Ren,
who had been a member of our Board of Directors since September 2013, resigned as a member of our Board of Directors, and Yu Yin was appointed by
Tencent to serve on our Board of Directors as a Tencent designee pursuant to our Amended and Restated Memorandum of Association and Amended and
Restated Articles of Association. 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 or she is materially interested provided that the nature of such interest is disclosed prior to any
vote thereon. A director may exercise all the powers of our company to borrow money, mortgage or charge our undertakings, property, and uncalled capital
or any part thereof, and issue debentures or other securities whether outright or as security for any debt, liability, or obligation of our company or of any
third party.
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A company of which more than 50% of the voting power is held by a single entity is considered a “controlled company” under the New York
Stock Exchange Listed Company Manual. A controlled company need not comply with the applicable NYSE corporate governance rules requiring its
Board of Directors to have a majority of independent directors and independent compensation and corporate governance/nominating committees. Because
more than 50% of the voting power in the election of directors of our company is held by Sohu, we qualify as a controlled company under the New York
Stock Exchange Listed Company Manual and avail ourselves of the controlled company exception provided under those rules. In the event that we are no
longer a controlled company, a majority of our Board of Directors will be required to be independent and it will be necessary for us to have compensation
and corporate governance/nominating committees that are composed entirely of independent directors, subject to a phase-in period during the first year we
cease to be a controlled company, unless we invoke the home country exception to such requirement available to foreign private issuers, such as us, under
the New York Stock Exchange Listed Company Manual.
Audit Committee
Our audit committee consists of Bin Gao, Janice Lee, and Jinmei He. Our Board of Directors has determined that each of Mr. Gao, Ms. Lee and
Ms. He satisfies the independence requirements of Rule 10A-3 under the Exchange Act, and Section 303A of the New York Stock Exchange Listed
Company Manual. In addition, our Board of Directors has determined that Bin Gao meets the criteria of an audit committee financial expert as set forth in
the applicable SEC rules and has accounting or related financial management expertise as set forth in the New York Stock Exchange Listed Company
Manual. The full responsibilities of our audit committee are set forth in its charter, which will be reviewed and updated annually and approved by our
Board of Directors, and will be posted on our website at www.sogou.com. The audit committee is responsible for, among other things:
· selecting the independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by the independent
auditors;
· overseeing our accounting and financial reporting processes and audits of the financial statements of our company;
· reviewing with the independent auditors 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 and in the
New York Stock Exchange Listed Company Manual;
· discussing the annual audited financial statements with management and the independent auditors;
· reviewing major issues as to the adequacy of our internal control over financial reporting and any special audit steps adopted in the light of any
significant deficiencies or materially weakness in our internal controls; and
· meeting separately and periodically with management and the independent auditors.
Duties of Directors
Under Cayman Islands law, our directors have a fiduciary duty to act honestly in good faith with a view to our best interests. Our directors also
have a duty to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of
care to us, our directors must ensure compliance with our Amended and Restated Memorandum of Association and Amended and Restated Articles of
Association. A shareholder has the right to seek damages if a duty owed by our directors is breached.
The functions and powers of our Board of Directors include, among others:
· conducting and managing the business of our company;
· representing our company in contracts and deals;
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· appointing attorneys for our company;
· selecting senior management such as managing directors and executive directors;
· providing employee benefits and pension;
· managing our company’s finances and bank accounts;
· exercising the borrowing powers of our company and mortgaging the property of our company; and
· exercising any other powers conferred by the shareholders meetings or under our Amended and Restated Memorandum of Association and
Amended and Restated Articles of Association.
Terms of Directors and Officers
Our directors hold office until our next annual general meeting of shareholders and until their successors are duly elected or appointed, or until
their earlier resignation or removal. A director may be removed by ordinary resolution passed by a majority of our shareholders or by way of consent of a
majority of the directors then in office before the expiration of such director’s term. Officers are elected by and serve at the discretion of the Board of
Directors. Sohu, Tencent, and we have entered into a Voting Agreement that, subject to certain exceptions, gives Sohu the power to appoint a majority of
our Board of Directors and for Tencent to appoint two directors. See “Related Party Transactions—Voting Agreement between Sohu and Tencent.”
Employment Agreements with Executive Officers
All of our executive officers have entered into our standard employment agreements and standard confidentiality and non-competition agreements.
See “Business—Employees.”
Share Incentive Plans
We adopted a share incentive plan in October 2010, as amended from time to time and with the last amendment taking effect on August 22, 2014,
or the 2010 Share Incentive Plan. The maximum number of Class A Ordinary Shares issuable under the 2010 Share Incentive Plan is 41,500,000. Share
incentive awards may be granted under the 2010 Share Incentive Plan to our management and employees, and to management and employees of our
present or future parents, subsidiaries, or VIEs. We also adopted a share incentive plan in October 2017, (the “2017 Share Incentive Plan and, together with
the 2010 Share Incentive Plan, the “Share Incentive Plans”). The maximum number of Class A Ordinary Shares issuable under the 2017 Share Incentive
Plan is 28,000,000. Share incentive awards may be granted under the 2017 Share Incentive Plan to our management and employees and management and
employees of any of our present or future parents or subsidiaries. The maximum term of any share incentive award granted under the Share Incentive Plans
is ten years from the grant date.
Plan Administration. Our compensation committee, or our Board of Directors in the absence of such a committee, administers the Share
Incentive Plans. The compensation committee or the Board of Directors, as appropriate, determines the terms and conditions of our awards under the Share
Incentive Plans.
Types of Awards. The following briefly describes the principal features of the various awards that may be granted under the Share Incentive
Plans.
· Options. Options provide for the right to purchase our Class A Ordinary Shares at a specified exercise price subject to vesting according to a
vesting schedule determined by our board or our compensation committee and provided in an award agreement.
· Restricted Shares. A restricted share award is the sale of Class A Ordinary Shares at a price determined by our board or our compensation
committee or a grant of our ordinary shares, in each case subject to vesting terms.
· Restricted Share Units. Restricted share units represent the right to receive our Class A Ordinary Shares, subject to vesting. Restricted share
units will be settled upon vesting, subject to the terms of the award agreement, either by our delivery to the holder of the number of Class A
Ordinary Shares that equals the number of the vested restricted share units or by a cash payment to the holder that equals the then fair market
value of the number of underlying Class A Ordinary Shares.
Award Document. Awards granted under the Share Incentive Plans are evidenced by an award document that sets forth the terms and conditions
applicable to each of the awards, as determined by our Board of Directors or compensation committee in its sole discretion. Unless otherwise determined
by our board or compensation committee in its sole discretion, our award documents for options previously granted under our 2010 Share Incentive Plan
gave us a right to repurchase from a grantee, within a certain time period, up to 50% of a grantee’s Class A Ordinary Shares subject to vested options, upon
such grantee’s death, disability, or voluntary, or involuntary termination of employment with us (other than for “Cause,” as defined in the 2010 Share
Incentive Plan). The repurchase price for such a purchase was equal to the fair market value of our ordinary shares, as determined in an appraisal by an
independent professional appraisal firm chosen by us in our sole discretion. Our repurchase rights under the award documents terminated upon the
completion of our initial public offering.
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Termination of the Share Incentive Plans. Without further action by our Board of Directors, the 2010 Share Incentive Plan will terminate in
October 2020 and the 2017 Share Incentive Plan will terminate in October 2027. Our Board of Directors may amend, suspend, or terminate the Share
Incentive Plans at any time; provided, however, that our Board of Directors must first seek the approval of the participants in the Share Incentive Plans if
such amendment, suspension or termination would adversely affect the rights of participants with respect to any of their existing awards.
As of March 31, 2020, we had contractually granted options for the purchase of 45,656,350 Class A Ordinary Shares under the 2010 Share
Incentive Plan and options for the purchase of 1,287,000 Class A Ordinary Shares under the 2017 Share Incentive Plan.
Compensation of Directors and Executive Officers
During the year ended December 31, 2019, we paid an aggregate of US$2,167,732 in cash compensation to our executive officers, and we did not
grant any options or other equity incentive awards to our directors or our executive officers. None of our directors have service contracts that provide for
benefits upon termination of employment.
Grants of Shares and Options to Directors and Executive Officers
The following table summarizes, as of March 31, 2020, outstanding share options and Class A Ordinary Shares beneficially held by our directors
and executive officers that were granted under our 2010 Share Incentive Plan:
Directors and Executive
Officers
Xiaochuan Wang
Hongtao Yang
Tao Hong
Joe (Yi) Zhou
Class A Ordinary
Shares underlying
outstanding options
and Class A
Ordinary Shares
subject to vesting
4,320,000(1)
600,000(2)
600,000(3)
110,000(4)
Exercise
price
US$0.625
Nominal
Nominal
Nominal
Date of
grant
1/31/2013
6/15/2013
6/15/2013
10/17/2017
Expiration
date
N/A
—
—
10/17/2027
(1) Consists of Class A Ordinary Shares beneficially held by Mr. Wang that were issued in 2013 upon Mr. Wang’s early exercise of share options. Such
Class A Ordinary Shares are subject to vesting in three equal installments upon the second, third, and fourth anniversaries of the completion of our initial
public offering.
(2) Consists of Class A Ordinary Shares beneficially held by Mr. Yang that were issued upon Mr. Yang’s early exercise of share options that carried a
nominal exercise price. Such Class A Ordinary Shares are subject to vesting in two installments upon Mr. Yang’s achievement, as determined by our
Chief Executive Officer, of certain annual performance milestones for 2018 and 2019, respectively, or any subsequent calendar year as determined by our
Chief Executive Officer.
(3) Consists of Class A Ordinary Shares beneficially held by Mr. Hong that were issued upon Mr. Hong’s early exercise of share options that carried a
nominal exercise price. Such Class A Ordinary Shares are subject to vesting in two installments upon Mr. Hong’s achievement, as determined by our
Chief Executive Officer, of certain annual performance milestones for 2018 and 2019, respectively, or any subsequent year as determined by our Chief
Executive Officer.
(4) Consists of options to purchase Class A Ordinary Shares at a nominal exercise price, subject to vesting in two installments upon Mr. Zhou’s
achievement, as determined by our Chief Executive Officer, of certain annual performance milestones for 2019 and 2020, respectively, or any subsequent
calendar year as determined by our Chief Executive Officer. As of the date of this annual report, options for the purchase of 190,000 Class A Ordinary
Shares had vested.
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Employees
As of December 31, 2019, we had approximately 2,738 employees. We also engaged independent contractors to support our research and
development, product development, and sales and marketing departments, and had approximately 196 such independent contractors on average during the
2019 fiscal year. None of our employees are represented under collective bargaining agreements.
Share Ownership
Refer to “Item 7: Major Shareholders and Related Party Transactions” below for a description of the share ownership of our directors and senior
executive officers.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
Major Shareholders
The following table sets forth information with respect to the beneficial ownership of our shares as of March 31, 2020 by:
· each of our directors and executive officers; and
· each person known to us to own beneficially more than 5% of our shares.
Directors and Executive Officers:
Charles Zhang (3)
Xiaochuan Wang (4)
Yu Yin
Joanna Lu
Hongtao Yang
Tao Hong
Joe Zhou
Bin Gao
Janice Lee
Jinmei He
All directors and executive officers as a group
Principal Shareholders:
Sohu (5)
Tencent (6)
Charles Zhang (3)
* Less than 1% of our total outstanding voting securities.
Class A Ordinary
Shares (1)(2)
Class B
Ordinary
Shares (1)
Percentage of
Class A
Ordinary Shares
and Class B
Ordinary Shares
Percentage
of Total Voting
Power
24,686,863
21,216,400
—
*
*
*
*
—
—
—
48,167,576
3,717,250
—
24,686,863
—
—
—
—
—
—
—
—
—
—
—
127,200,000
151,557,875
—
6.4%
5.5%
—
*
*
*
*
—
—
—
12.4%
33.8%
39.2%
6.4%
0.9%
0.7%
—
*
*
*
*
—
—
—
1.7%
44.1%
52.3%
0.9%
(1) Includes the number of ordinary shares and percentage ownership represented by ordinary shares determined to be beneficially owned by a person or
entity in accordance with rules of the SEC. The number of ordinary shares beneficially owned by a person or entity includes ordinary shares subject to
vesting that will vest, and/or vested share options exercisable for the purchase of our ordinary shares, within 60 days of the date of this annual report.
Ordinary shares issuable upon exercise of such vested share options are deemed outstanding for the purpose of computing the percentage of outstanding
ordinary shares owned by that person or entity. Such ordinary shares issuable upon such vesting are not deemed outstanding, however, for the purpose
of computing the percentage ownership of any other person or entity. In addition, such ordinary shares issuable upon such vesting are not deemed
outstanding for the purpose of computing the percentage ownership of all directors and executive officers as a group.
(2) Includes an aggregate of 5,520,000 Class A Ordinary Shares beneficially owned by certain of our executive officers that are considered outstanding for
legal purposes and are subject to forfeiture if vesting conditions are not met, but are treated as treasury stock for accounting purposes.
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(3) Consists of 24,686,863 Class A Ordinary Shares held of record by Photon Group Limited. Dr. Zhang is one of the directors of Photon Group Limited
and may be deemed to beneficially own such 24,686,863 Class A Ordinary Shares. The business address of Photon Group Limited is c/o Level 18,
Sohu.com Media Plaza, No. 2 Kexueyuan South Road, Haidian District, Beijing, China. Dr. Zhang disclaims beneficial ownership of such shares except
to the extent of his pecuniary interest.
(4) Includes (i) 16,896,400 Class A Ordinary Shares, of which 2,016,400 Class A Ordinary Shares are represented by 2,016,400 ADSs, held by Winsor
Glory Limited, a British Virgin Islands company beneficially owned by Mr. Wang, and (ii) 4,320,000 Class A Ordinary Shares held through a British
Virgin Islands trust of which Mr. Wang is the beneficiary, that are subject to vesting in three equal installments upon the second, third and fourth
anniversaries of the completion of our initial public offering. The business address of Winsor Glory Limited is Vistra Corporate Services Centre,
Wickhams Cay II, Road Town, Tortola, VG1110, British Virgin Islands.
(5) Sohu is our controlling shareholder. Consists of shares held by Sohu through an indirect wholly-owned subsidiary, Sohu.com (Search) Limited. The
3,717,250 Class A Ordinary Shares are held by Sohu for the purpose of issuance upon the exercise of outstanding share-based awards and future share-
based awards. The 127,200,000 Class B Ordinary Shares are held by Sohu for its own account. In addition to the share ownership disclosed in the above
table, Sohu may be deemed to have beneficial ownership attributable to (i) shared voting power with respect to 45,578,896 Class B Ordinary Shares
held by Tencent as a result of the voting agreement between Sohu and Tencent, and (ii) shared voting power with respect to 49,976,363 Class A
Ordinary Shares beneficially owned by members of our management as a result of the voting agreement dated September 16, 2013 among Sohu, Photon
Group Limited, and members of our management. Through its ownership of Class B Ordinary Shares and the voting agreement with Tencent, Sohu will
have the right to appoint a majority of our Board of Directors. See “Related Party Transactions—Voting Agreement between Sohu and Tencent.” The
business address of Sohu.com (Search) Limited is P.O. Box 31119, Grand Pavilion, Hibiscus Way, 802 West Bay Road, Grand Cayman, KY1-1205,
Cayman Islands.
(6) Consists of shares held by Tencent through a wholly-owned subsidiary, THL A21 Limited. The business address of THL A21 Limited is Vistra
Corporate Services Centre, Wickhams Cay II, Road Town, Tortola, VG1110, British Virgin Islands. In addition to the share ownership disclosed in the
above table, as a result of the voting agreement between Sohu and Tencent, Tencent may be deemed to have beneficial ownership attributable to shared
voting power with respect to the 3,717,250 Class A Ordinary Shares and 127,200,000 Class B Ordinary Shares held by Sohu.
Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. With respect to matters requiring a shareholder vote,
holders of Class A ordinary shares and holders of Class B ordinary shares vote together as one class. Each Class A ordinary share is entitled to one vote and
each Class B ordinary share is entitled to ten votes. We issued Class A ordinary shares represented by our ADSs in our initial public offering. Holders of
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 B ordinary
shares are only transferable to an affiliate of the holder or to an affiliate of us.
Related Party Transactions
Voting Agreement between Sohu and Tencent
Under a voting agreement, or the Voting Agreement, among Sohu, Tencent, and us, Sohu and Tencent have agreed that, subject to certain
exceptions, (1) within three years following the completion of our initial public offering, Sohu will vote all Class B Ordinary Shares and any Class A
Ordinary Shares held by it and Tencent will vote 45,578,896 of its Class B Ordinary Shares to elect a Board of Directors consisting of seven directors, four
of whom will be appointed by Sohu, two of whom will be appointed by Tencent, and the seventh of whom will be our then chief executive officer, and
(2) after three years following the completion of our initial public offering, Sohu will be entitled to choose to change the size and composition of our Board
of Directors, subject to Tencent’s right to appoint at least one director. The effect of these provisions will be to give Sohu the power to appoint a majority of
our Board of Directors, and to give Tencent the power to appoint two directors within three years following the completion of our initial public offering and
at least one director after three years after the completion of our initial public offering. The Voting Agreement also provides that for so long as Sohu and
Tencent together hold more than 50% of the total voting power of our Class A Ordinary Shares and Class B Ordinary Shares, Sohu or Tencent may remove
and replace any director appointed by it. These provisions of the Voting Agreement are also reflected in our Amended and Restated Memorandum of
Association and Amended and Restated Articles of Association.
Due to the additional voting power of the Class B Ordinary Shares held by Sohu and Tencent, as of March 31, 2020 Sohu holds approximately
33.8% of the total of our outstanding Class A and Class B Ordinary Shares and controls approximately 44.1% of the total voting power of the combined
total of our outstanding Class A and Class B Ordinary Shares; Tencent has an indirect shareholding of approximately 39.2% of the total of our outstanding
Class A and Class B Ordinary Shares and control approximately 52.3% of the total voting power of the combined total of our outstanding Class A and
Class B Ordinary Shares; and Sohu and Tencent together have the power to decide all matters that may be brought to a vote of our shareholders.
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The Voting Agreement and our Amended and Restated Articles of Association also specify that for so long as Sohu or Tencent holds not less than
15% of our issued shares (calculated on a fully diluted basis), consent from the holder of 15% or more (either or both of Sohu or Tencent as the case may
be) will be required (1) to amend our Amended and Restated Memorandum of Association or Amended and Restated Articles of Association, (2) to make
material changes in our principal lines of business, (3) to issue any additional Class B Ordinary Shares, (4) to create any new class or series of shares that is
pari passu with or senior to the Class A Ordinary Shares, (5) for us to approve a liquidation, dissolution or winding up of us, or a merger or consolidation
resulting in a change in control, or any disposition of all or substantially all of our assets, or (6) for us to enter into any transactions with affiliates of Sohu,
other than in the ordinary course of business. Of these corporate actions that are subject to consent of Sohu or Tencent (as applicable), shareholder approval
is required under the Companies Law for any amendment of our Amended and Restated Memorandum of Association or Amended and Restated Articles of
Association, any winding-up of Sogou Inc., or any merger or consolidation with a third-party entity. The Voting Agreement and our Amended and Restated
Articles of Association further provide that if our shareholders have voted in favor of any of these actions requiring the approval of our shareholders but
consent from Sohu or Tencent (as applicable) has not been obtained, then the holders of all classes of our shares who have voted against such action will be
deemed to have such number of votes as are equal to the aggregate number of votes cast in favor of such actions plus one additional vote. Under these
provisions of the Voting Agreement and our Amended and Restated Articles of Association, if an action is proposed for which the consent of either Tencent
or Sohu is required, the failure to obtain the consent of Tencent or Sohu will have the effect of the proposed action’s not being approved, even if our other
shareholders approve it.
The Voting Agreement and our Amended and Restated Articles of Association also specify that if at any time Sohu alone holds more than 50% of
the total voting power of our Class A Ordinary Shares and Class B Ordinary Shares, the voting arrangements with respect to the size and composition of
our Board of Directors will be automatically suspended until such time within five years after the completion of our initial public offering as Sohu’s voting
power again drops to 50% or less, in which case the original voting arrangements will be reinstated, provided that Tencent will only be required to vote the
lower of 45,578,896 Class B Ordinary Shares held by it or such number as would give Sohu combined voting power of 50.1%. If such a suspension
continues after the fifth anniversary of the completion of our initial public offering, the voting arrangements with respect to the size and composition of our
Board of Directors will terminate.
All of the Class B Ordinary Shares held by Sohu will be converted into Class A Ordinary Shares if there is a transaction resulting in change of
control of Sohu that was not approved by Sohu’s board of directors, if specified competitors of Tencent control Sohu, or if a majority of Sohu’s board of
directors consist of nominees of specified competitors of Tencent. The provisions with respect to the size and composition of our Board of Directors set out
in the Voting Agreement and our Amended and Restated Articles of Association will terminate upon occurrence of any such event. Such arrangements will
also terminate (1) if Dr. Charles Zhang, the chairman of the board of directors of Sohu and its chief executive officer, both ceases being the chairman of the
board of directors of Sohu and ceases being the single largest beneficial owner of Sohu’s outstanding shares; (2) if Sohu transfers 30% or more of the
Class B Ordinary Shares that Sohu holds upon the completion of our initial public offering; (3) if we fail to provide irrevocable instructions to the person
maintaining our register of members to accept instructions from Tencent, under certain circumstances, with respect to the conversion of Class B Ordinary
Shares held by Sohu; (4) or we change, without Tencent’s consent, the person that maintains our register of members; (5) or if Tencent ceases to own any
Class B Ordinary Shares.
Under the Voting Agreement, Sohu and Tencent are subject to certain restrictions on transfer of their Class A and Class B Ordinary Shares. In
particular, a transfer of Class B Ordinary Shares by either Sohu or Tencent, respectively, to any person or entity that is not a direct or indirect wholly-owned
subsidiary of Sohu or Tencent, respectively, will cause such Class B Ordinary Shares to be converted into Class A Ordinary Shares.
Business Collaboration with Tencent
Under our business collaboration arrangements with Tencent, Sogou Search is the default search engine on various Tencent products that provide
general search offerings, such as the Mobile QQ Browser, qq.com, and the PC Web directories daohang.qq.com and hao.qq.com. We are entitled to retain
all revenues that we generate from searches conducted on daohang.qq.com and hao.qq.com through our search engine. We are responsible for the design
and operation of the PC Web directories daohang.qq.com and hao.qq.com, bear all costs of their operation, and are required to include an agreed-upon
minimum amount of advertisement placements of links for use by Tencent on these home pages, free of charge. Tencent has also agreed that for its other
products that offer general search functions, Sogou Search will be offered as the default general search engine to users of such products until
September 2023. Our arrangements with Tencent regarding qq.com , the PC Web directories daohang.qq.com and hao.qq.com , the Mobile QQ Browser,
and any other Tencent products that offer general search do not prohibit Tencent’s users from choosing general search engines of our competitors. In
addition, we and Tencent have agreed to continue from September 2019 until September 2020 our initiative, which was started in October 2017, for the
integration into the existing Weixin/WeChat search service of a search function powered by Sogou Search that allows Weixin/WeChat users to access
Internet information outside Weixin/WeChat, that Sogou Search will be the preferred third-party search function to power such a Weixin/WeChat search
function for that period if Sogou Search meets certain requirements for user experience, and that the arrangement may be extended for additional
successive one-year periods through September 2023 if offering Sogou Search will not harm the user experience.
Under our arrangements with Tencent regarding the Mobile QQ Browser, we make revenue-sharing payments to Tencent with respect to our
revenues generated from Mobile QQ Browser traffic.
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Under our arrangements with Tencent, our collaboration regarding the PC Web directories daohang.qq.com and hao.qq.com will continue until
September 2033, and our collaboration regarding the Mobile QQ Browser will continue until September 2023.
Search tools that search and extract information only within a specific online community, website, or product, such as the search function offered
to users of Tencent’s Weixin/WeChat, are excluded from the definition of general search functions and are not required to use Sogou Search as the default
engine.
Tencent has agreed to make the content of Tencent’s Weixin Official Accounts accessible to our users through our search services, free of charge.
We are not permitted, however, to collect, retrieve, or otherwise use any content of Tencent’s Weixin Official Accounts using search spider programs or
other third-party channels. The collaboration period under our agreement with Tencent regarding Weixin Official Accounts expires in February 2021.
For the three years ended December 31, 2017, 2018, and 2019, we recognized revenues of nil, US$21.2 million, and US$15.7 million,
respectively; and total costs and expenses of US$61.6 million, US$108.5 million, and US$86.9 million, respectively, under these business collaboration
arrangements with Tencent.
Voting Agreement with Sohu and Our Management
In September 2013, Sohu, Photon (the investment vehicle of Sohu’s chairman and chief executive officer Dr. Charles Zhang), our Chief Executive
Officer Xiaochuan Wang, and certain other members of our management entered into a voting agreement with us, pursuant to which Photon, Xiaochuan
Wang, and the other members of our management agreed to vote their Class A Ordinary Shares (not including shares acquired by Xiaochuan Wang in the
public market following the completion of our initial public offering) to elect Sohu’s designees to our Board of Directors.
Registration Rights Agreement among Sohu, Tencent, Photon, and Us
Under a registration rights agreement among Sohu, Tencent, Photon, and us, Sohu, Tencent, and Photon are entitled to registration rights,
including demand registration rights, Form F-3 registration rights, and piggyback registration rights at any time after the termination of the underwriters’
lockup period applicable to our initial public offering.
Arrangements with Sohu and Tencent Entered into in the Ordinary Course of Business
We have routinely engaged in a number of customary transactions in the ordinary course of business with Sohu, our controlling shareholder, and
Tencent, our largest shareholder. Related party transactions with Sohu and Tencent consist primarily of online advertising services, joint operation of online
games, and other related services. The financial arrangements and other key terms under these arrangements are substantially similar to those that we have
with unrelated third parties.
As of December 31, 2017, 2018, and 2019, we had US$1.2 million, US$0.1 million, and US$0.1 million, respectively, due to Sohu and its
subsidiaries and VIEs.
As of December 31, 2017, 2018, and 2019, we had US$3.0 million, US$2.2 million, US$2.1 million, respectively, due from Sohu and its
subsidiaries and VIEs.
As of December 31, 2017, 2018, and 2019, we had US$21.9 million, US$38.3 million, US$22.5 million, respectively, due to Tencent.
As of December 31, 2017, 2018, and 2019, we had US$2.3 million, US$2.7 million, US$3.0 million, respectively, due from Tencent.
Contractual Arrangements with our VIE and its Shareholders
See “Business — Organizational Structure.”
Letter Agreement with Former Chief Financial Officer
In connection with the resignation of James Deng as our Chief Financial Officer effective January 21, 2018, we entered into a letter agreement
with Mr. Deng which provides that Mr. Deng would serve as a consultant to us from January 22, 2018 through July 21, 2018 in return for a fee of
RMB480,000 (or approximately US$74 ,800), and that options previously granted by us to Mr. Deng for the purchase of 50,000 Class A Ordinary Shares
for a nominal exercise price would become fully vested on July 21, 2018.
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Other Transactions with Certain Directors, Shareholders and Affiliates
See “Management—Compensation of Directors and Executive Officers.”
Employment Agreements
See “Business—Employees” and “Management—Employment Agreements with Executive Officers.”
See “Management—Share Incentive Plans.”
Not applicable.
ITEM 8. FINANCIAL INFORMATION
Share Incentive Plans
Interests of Experts and Counsel
Consolidated Financial Statements
Please see Item 18 “Financial Statements” for our audited consolidated financial statements filed as a part of this annual report.
Legal Proceedings
We may be subject to legal proceedings, investigations and claims incidental to the conduct of our business from time to time. We are not currently
a party to, nor are we aware of, any legal proceeding, investigation or claim which, in the opinion of our management, is likely to have a material adverse
effect on our business, financial condition or results of operations.
Dividend Policy
Future cash dividends, if any, will be declared at the sole discretion of our Board of Directors and will depend upon our future operations and
earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors as our Board of Directors may deem
relevant.
Holders of ADSs will be entitled to receive dividends, subject to the terms of the deposit agreement, to the same extent as the holders of our
ordinary shares, less the fees and expenses payable under the deposit agreement. Cash dividends will be paid by the depositary to holders of ADSs in U.S.
dollars, subject to the terms of the deposit agreement. Other distributions, if any, will be paid by the depositary to holders of ADSs in any means it deems
legal, fair and practical.
ITEM 9. THE OFFER AND LISTING
Our ADSs are listed on the New York Stock Exchange under the symbol “SOGO.” Trading in our ADSs commenced on November 9, 2017.
ITEM 10. ADDITIONAL INFORMATION
Memorandum and Articles of Association
We incorporate by reference into this annual report the description of our seventh amended and restated memorandum of association and our third
amended and restated articles of association contained in our Registration Statement on Form F-1 (File No. 333-220928) originally filed with the SEC on
October 13, 2017. Our shareholders adopted our seventh amended and restated memorandum of association and our third amended and restated articles of
association by a special resolution on October 13, 2017, which became effective on November 13, 2017.
Differences in Corporate Law—Mergers and Similar Arrangements
The Companies Law is modeled after similar laws in the United Kingdom but does not follow recent statutory enactments in the United Kingdom.
In addition, the Companies Law 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 Law applicable to us and the laws applicable to companies incorporated in the State of
Delaware.
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Mergers and Similar Arrangements
A merger of two or more constituent companies under Cayman Islands law requires a plan of merger or consolidation to be approved by the
directors of each constituent company and authorization by (a) a special resolution of the members of each constituent company and (b) such other
resolution, if any, as may be specified in such constituent company’s articles of association.
A merger between a Cayman parent company and its Cayman subsidiary or subsidiaries does not require authorization by a resolution of
shareholders. For this purpose, a subsidiary is a company in which the parent company holds issued shares that together represent at least ninety percent
(90%) of the votes at a general meeting of the subsidiary.
The consent of each holder of a fixed or floating security interest over a constituent company is required unless this requirement is waived by a
court in the Cayman Islands.
Save in certain circumstances, a dissenting shareholder of a Cayman constituent company is entitled to payment of the fair value of his shares
upon dissenting to a merger or consolidation. The exercise of appraisal rights will preclude the exercise of any other rights save for the right to seek relief
on the grounds that the merger or consolidation is void or unlawful.
In addition, there are statutory provisions that facilitate the reconstruction and amalgamation of companies, provided that the arrangement is
approved by a majority in number of each class of shareholders and creditors with whom the arrangement is to be made, and who must in addition
represent three-fourths in value of each such class of shareholders or creditors, as the case may be, that are present and voting either in person or by proxy
at a meeting, or meetings, convened for that purpose. The convening of the meetings and subsequently the arrangement must be sanctioned by the Grand
Court of the Cayman Islands. While a dissenting shareholder has the right to express to the court the view that the transaction ought not to be approved, the
court can be expected to approve the arrangement if it determines that:
· the statutory provisions as to the required majority vote have been met;
· the shareholders have been fairly represented at the meeting in question and the statutory majority are acting bona fide without coercion of the
minority to promote interests adverse to those of the class;
· the arrangement is such that may be reasonably approved by an intelligent and honest man of that class acting in respect of his interest; and
· the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law.
When a takeover offer is made and accepted by holders of 90% of the shares within four months, the offeror may, within a two-month period
commencing on the expiration of such four-month period, require the holders of the remaining shares to transfer such shares on the terms of the offer. An
objection can be made to the Grand Court of the Cayman Islands but this is unlikely to succeed in the case of an offer which has been so approved unless
there is evidence of fraud, bad faith, or collusion.
If an arrangement and reconstruction is thus approved, the dissenting shareholder would have no rights comparable to appraisal rights, which
would otherwise ordinarily be available to dissenting shareholders of Delaware corporations, providing rights to receive payment in cash for the judicially
determined value of the shares.
Shareholders’ Suits
In principle, we will normally be the proper plaintiff, 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, there are exceptions to the
foregoing principle, including when:
· 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.”
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Indemnification of Directors and Executive Officers and Limitation of Liability
Cayman Islands law does not limit the extent to which a company’s articles of association may provide for indemnification of officers and
directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide
indemnification against civil fraud or the consequences of committing a crime. Our Amended and Restated Memorandum of Association and Amended and
Restated Articles of Association permit indemnification of officers and directors for losses, damages, costs and expenses incurred in their capacities as such
unless such losses or damages arise from fraud or dishonesty of such directors or officers. 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 our directors and
senior executive officers that provide such persons with additional indemnification beyond that provided in our Amended and Restated Memorandum of
Association and Amended and Restated 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 as a matter of United States law.
Anti-Takeover Provisions in the Memorandum of Association and Articles of Association
Some provisions of our Amended and Restated Memorandum of Association and Amended and Restated 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 Amended and Restated
Memorandum of Association and Amended and Restated Articles of Association, as amended and restated from time to time, 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 reasonably believes to be
in the best interests of the corporation. He must not use his 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.
As a matter of Cayman Islands law, a director of a Cayman Islands company is in the position of a fiduciary with respect to the company and
therefore it is considered that he owes the following duties to the company—a duty to act bona fide in the best interests of the company, a duty not to make
a profit based on his position as director (unless the company permits him to do so) and a duty not to put himself in a position where the interests of the
company conflict with his personal interest or his duty to a third party.
A director of a Cayman Islands company owes to the 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.
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, 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 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 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 public corporation to negotiate the terms of any acquisition transaction with the target’s Board of Directors.
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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 the Companies Law and our amended and restated articles
of association, our company may be dissolved, liquidated or wound up by the vote of holders of two-thirds of our shares voting at a meeting or the
unanimous written resolution of all shareholders. Under Cayman Islands law, a company may be wound up by either an order of the courts of the Cayman
Islands or by a special resolution of its shareholders or, if the company is unable to pay its debts as they fall due, by an ordinary resolution of its
shareholders. The court has authority to order winding up in a number of specified circumstances including where it is, in the opinion of the court, just and
equitable to do so. Under the Companies Law and our Amended and Restated Articles of Association, our company may be dissolved, liquidated or wound
up by the vote of holders of two-thirds of our shares voting at a meeting or the unanimous written resolution of all shareholders.
Material Contracts
We have not entered into any material contracts within the past two fiscal years other than in the ordinary course of business, other than those
listed in Item 19 “Exhibits” or described elsewhere in this annual report.
Exchange Controls
China’s government imposes control over the convertibility of RMB into foreign currencies. The conversion of RMB into foreign currencies,
including U.S. dollars, has been based on rates announced by the People’s Bank of China. On July 21, 2005, the PRC government changed its decade-old
policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to fluctuate within a narrow and managed band
against a basket of certain foreign currencies. This change in policy has resulted in significant appreciation of the RMB against the U.S. dollar by the end of
2014. While the international reaction to the RMB revaluation has generally been positive, there remains significant international pressure on the PRC
government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the RMB against the U.S.
dollar.
Pursuant to the Foreign Exchange Administration Regulations issued by the State Council on January 29, 1996, and effective as of April 1, 1996
(and amended on January 14, 1997 and August 5, 2008) and the Regulations on the Administration of Settlement, Sale and Payment of Foreign Exchange
issued by the People’s Bank of China on June 20, 1996 and effective on July 1, 1996, or the FX Regulations, regarding the administration and control of
foreign exchange, conversion of RMB into foreign exchange by foreign investment enterprises for current account items, including the distribution of
dividends and profits to foreign investors in joint ventures, is permissible. Foreign investment enterprises are permitted to remit foreign exchange from
their foreign exchange bank accounts in China on the basis of, inter alia, the terms of the relevant joint venture contracts and the board resolutions declaring
the distribution of the dividend and payment of profits. Each conversion of RMB into a foreign currency and each remittance of a foreign currency for
capital account items, including direct investment, loans and security investment, is subject to the approval of the SAFE.
Under the Foreign Exchange Administration Regulations, foreign investment enterprises are required to open and maintain separate foreign
exchange accounts for capital account items (but not for other items). In addition, foreign investment enterprises may only buy, sell and/or remit foreign
currencies at those banks authorized to conduct foreign exchange business upon the production of valid commercial documents and, in the case of capital
account item transactions, approval of the documents by the SAFE.
Currently, foreign investment enterprises are required to apply to the SAFE for “foreign exchange registration certificates for foreign investment
enterprises” (which are granted to foreign investment enterprises, upon fulfilling specified conditions and which are subject to review and renewal by the
SAFE on an annual basis). With such foreign exchange registration certificates and required underlying transaction documents, or with approval documents
from the SAFE if the transactions are under capital account (which are obtained on a transaction-by-transaction basis), foreign-invested enterprises may
enter into foreign exchange transactions at banks authorized to engage in the foreign exchange business to obtain foreign exchange for their needs.
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Taxation
The following summary of the material Cayman Islands, PRC and United States federal income tax consequences of 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 discuss all possible tax consequences relating to an investment in our ADSs or Class A ordinary shares, such as the tax
consequences under United States state, local and other tax laws.
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 or withholding tax applicable to us or to any holder of our ADSs and ordinary shares. We will not be
subject to Cayman Islands taxation on payments of dividends or upon the repurchase by us of your ADSs or Class A Ordinary Shares, nor will gains
derived from the disposal of ADSs or Class A Ordinary Shares be subject to Cayman Islands income or corporation tax. There are no other taxes likely to
be material to us or holders of our ADSs or ordinary shares levied by the Government of 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. No stamp duty is payable in the Cayman Islands on
transfers of shares of Cayman Islands companies, except those which hold interests in land in the Cayman Islands. The Cayman Islands are a party to a
double tax treaty entered into with the United Kingdom in 2010 but otherwise is not party to any double tax treaties. There are no exchange control
regulations or currency restrictions in the Cayman Islands.
Pursuant to Section 6 of the Tax Concessions Law (1999 Revision) of the Cayman Islands, we have obtained an undertaking from the Clerk of the
Cabinet of the Cayman Islands:
(1) that no law which is enacted in the Cayman Islands imposing any tax to be levied on profits or income or gains or appreciation shall apply to
us or our operations; and
(2) that the aforesaid tax or any tax in the nature of estate duty or inheritance tax shall not be payable on our shares, debentures or other
obligations.
The undertaking for us will be for a period of twenty years from the date of issuance.
PRC Taxation
Under the CIT Law and its implementation rules, an enterprise established outside of the PRC with a “de facto management body” within the PRC
is considered a resident enterprise and will be subject to the 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. On April 22, 2009, the SAT issued a circular, known as Circular 82, which provides certain specific
criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China, which
will be subject to PRC 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 the PRC; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval
by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder
resolutions are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the PRC. Circular
82 applies only to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, rather than those controlled by PRC individuals or
foreigners, like us, but the criteria set forth in the circular may reflect the SAT’s general position on how the “de facto management body” text should be
applied in determining the tax resident status of all offshore enterprises. Although we believe we are not a PRC tax resident enterprise, it is not clear
whether Sogou HK, Vast Creation, and us will be deemed to be PRC tax residents under the CIT Law. If we are considered to be a PRC tax resident under
the CIT law by the PRC tax authorities, our global income will be subject to corporate income tax at a rate of 25%.
The implementation rules of the CIT Law provide that, (i) if an enterprise that distributes dividends is domiciled in the PRC, or (ii) if gains are
realized from transferring equity interests of enterprises domiciled in the PRC, then such dividends or capital gains are treated as PRC-sourced income. It is
not clear how “domicile” may be interpreted under the CIT Law, and it may be interpreted as the jurisdiction where the enterprise is a tax resident.
Therefore, if we are, or Sogou HK is, considered to be a PRC tax resident enterprise for tax purposes, any dividends we pay to our non-PRC resident
shareholders or ADS holders as well as gains realized by such shareholders or ADS holders from the transfer of our shares or ADSs may be regarded as
PRC-sourced income and as a result become subject to PRC tax at the rate up to 10% in the case of enterprises or 20% in the case of individuals. In the
case of dividends, we would be required to withhold any PRC tax at source. See “Risk Factors—Risk Related to China’s Regulatory and Economic
Environment—Dividends paid by us to our foreign investors and profits on the sale of our shares or ADSs may be subject to tax under PRC tax laws.”
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United States Federal Income Taxation
The following is a summary of the material U.S. federal income tax considerations related to the purchase, ownership, and disposition of our
ADSs or Class A Ordinary Shares by U.S. holders (as defined below). This summary applies only to U.S. holders that hold the ADSs or Class A Ordinary
Shares as capital assets and that have the U.S. dollar as their functional currency. This discussion does not address any aspect of the U.S. federal gift, estate,
or Medicare tax, or state, local, or foreign tax, consequences of an investment in our ADSs or Class A Ordinary Shares. This discussion is based on the tax
laws of the U.S. as in effect on the date of this annual report and on U.S. Treasury regulations in effect or, in some cases, proposed, as of the date of this
annual report, as well as judicial and administrative interpretations of such tax laws and regulations available on or before such date. All of the foregoing
authorities are subject to change, which change could apply retroactively and could affect the tax consequences described below.
The following discussion does not describe the tax consequences that may be relevant to any particular investor or to persons in special tax
situations such as:
· banks or certain financial institutions;
· insurance companies;
· broker dealers;
· traders that elect to mark to market;
· tax-exempt entities;
· persons liable for alternative minimum tax;
· persons holding ADSs or Class A Ordinary Shares as part of a straddle, hedging, conversion transaction or other integrated investment;
· regulated investments companies;
· persons who acquired ADSs or Class A Ordinary Shares pursuant to the exercise of any employee share option or otherwise as compensation;
· persons who actually or constructively own 10% or more of the total combined voting power of all classes of our shares entitled to vote or 10%
or more of the total value of all classes of our shares; or
· partnerships or other pass-through entities for U.S. federal income tax purposes or persons holding ADSs or Class A Ordinary Shares through
partnerships or other pass-through entities.
U.S. holders are urged to consult their own tax advisors about the application of U.S. federal tax rules to their particular circumstances as well as
the state, local and foreign tax consequences to them of the purchase, ownership and disposition of our ADSs or Class A Ordinary Shares.
The discussion below of U.S. federal income tax consequences to “U.S. holders” will apply to a beneficial owner of ADSs or Class A Ordinary
Shares as capital assets for purposes of U.S. federal income tax law and who is, for U.S. federal income tax purposes:
· a citizen or individual resident of the U.S.;
· a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) organized under the laws of the U.S., 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 (1) whose administration is subject to the primary supervision of a court within the U.S. and one or more U.S. persons have the authority
to control all substantial decisions of the trust, or (2) that has a valid election in effect under applicable U.S. Treasury regulations to be treated as
a U.S. person.
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For U.S. federal income tax purposes, the tax treatment of a partner in a partnership or other entity taxable as a partnership that holds ADSs or
Class A Ordinary Shares depends on the partner’s status and the activities of the partnership. U.S. holders who hold their ADSs or Class A Ordinary Shares
through a partnership, limited liability company, or other entity taxable as a partnership should consult their tax advisers regarding their tax treatment.
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 have been and will be complied with in accordance with their terms. Holders of ADSs will be treated as the holders
of the underlying Class A Ordinary Shares represented by those ADSs for U.S. federal income tax purposes. Accordingly, deposits of Class A Ordinary
Shares in return for ADSs representing those shares, and surrender of ADSs in return for the underlying Class A Ordinary Shares, will not be subject to
U.S. federal income tax.
The U.S. Treasury has expressed concerns that parties to whom ADSs are released before the underlying shares are delivered to the depositary
(“pre-release”), or intermediaries in the chain of ownership between holders of ADSs and the issuer of the security underlying the ADSs, may be taking
actions that are inconsistent with the claiming of foreign tax credits by holders of ADSs. These actions would also be inconsistent with the claiming of the
reduced rate of tax, described below, applicable to dividends received by certain non-corporate holders. Accordingly, the creditability of PRC taxes, and the
availability of the reduced tax rate for dividends received by certain non-corporate U.S. holders, each described below, could be affected by actions taken
by such parties or intermediaries.
Passive Foreign Investment Company
We believe that we may have been classified as a PFIC for United States federal income tax purposes for our 2019 taxable year ended
November 30, 2019. Our expectation is based on our operations and the composition of our earnings and assets for the 2019 taxable year, including the
valuation of our assets (including goodwill) based on the expected price of our ADSs in the market. We currently hold, and expect to continue to hold, a
substantial amount of cash and cash equivalents, and because the value of our other assets may be based in part on the market price of our ADSs, which has
fluctuated and is likely to continue to fluctuate (and may fluctuate considerably given that market prices of Internet companies historically have been
especially volatile), our PFIC status in the current and future taxable years may depend in large part on the market price of our ADSs. A drop in the market
price of our ADSs and associated decrease in the value of our goodwill would cause a reduction in the value of our non-passive assets for purposes of the
asset test. In addition, the composition of our income and assets will be affected by how, and how quickly, we spend our cash. Furthermore, it is not entirely
clear how the contractual arrangements between us and our consolidated VIEs will be treated for purposes of the PFIC rules. If these contractual
arrangements were found by PRC authorities with appropriate jurisdiction to be unenforceable, such a finding alone could cause more than 75% of our
gross income or more than 50% of our assets to be passive in the year that this finding was made or in subsequent years, which, in a given taxable year for
which we might not otherwise expect to be classified as a PFIC, could cause us to be classified as a PFIC. See “Risk Factors—Risks Related to Our
Corporate Structure—We depend upon contractual arrangements with our VIE Sogou Information and its shareholders for the success of our business and
these arrangements may not be as effective in providing operational control as direct ownership of the entities and may be difficult to enforce.” Also, our
PFIC status for any taxable year will depend upon the character of our income and assets and the value of our assets for such year, cannot be determined
until after the close of the taxable year. Accordingly, there is no guarantee that we will not be a PFIC for any taxable year.
A non-U.S. corporation is considered a PFIC for any taxable year if either:
· at least 75% of its gross income is passive income (such as certain dividends, interest or royalties) (the “income test”), or
· 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 (the “asset test”).
For the purposes of this determination, 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 (or are treated as owing), directly or indirectly, at least 25% (by value) of the shares or equity
interests.
We must make a separate determination each year as to whether we are a PFIC. As a result, our PFIC status may change from one year to the next.
If we are a PFIC for any taxable year during which a U.S. holder holds our ADSs or Class A Ordinary Shares, such U.S. holder will be subject to
special tax rules with respect to any “excess distribution” that such U.S. holder receives and any gain that such U.S. holder realizes from a sale or other
disposition (including, in a certain circumstances, a pledge) of the ADSs or Class A Ordinary Shares, unless the holder makes a “mark-to-market” election
as discussed below. For purpose of these special rules, if we are a PFIC for any year during which a U.S. holder holds ADSs or Class A Ordinary Shares,
we will continue to be treated as a PFIC with respect to such U.S. holder for all succeeding years during which such U.S. holder holds ADSs or Class A
Ordinary Shares, even if we are no longer classified as a PFIC in subsequent years. Under certain attribution rules, if we are a PFIC, a U.S. holder will be
deemed to own such U.S. holder’s proportionate share of any subsidiaries or other entities that are PFICs in which we hold (directly or indirectly through
other PFICs) an equity interest (“subsidiary PFICs”), and will generally be treated for purposes of the PFIC rules as if such U.S. holder directly held the
shares of such subsidiary PFICs.
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Under these rules, distributions that a U.S. holder receives in a taxable year that are greater than 125% of the average annual distributions that
such U.S. holder received during the shorter of the three preceding taxable years or such U.S. holder’s holding period for the ADSs or Class A Ordinary
Shares will be treated as an excess distribution. Under these tax rules:
· the excess distribution or gain will be allocated ratably over the U.S. holder’s 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, will be treated as
ordinary income; and
· the amount allocated to each other taxable year will be subject to the highest tax rate in effect for that taxable year for individuals or corporations,
as applicable, and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such
taxable year.
Gains from the disposition of ADSs or Class A Ordinary Shares will be taxed in the same manner. 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 ADSs or Class A Ordinary Shares cannot be treated as capital, even if the U.S. holder holds the ADSs or Class A Ordinary Shares as capital assets.
A U.S. holder will be subject to the same U.S. federal income tax rules as described above on indirect or constructive distributions that the U.S. holder is
deemed to receive on shares of a subsidiary PFIC and on indirect or constructive dispositions of shares of subsidiary PFICs.
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. A mark-to-market election will not be available, however, with respect to any
subsidiary PFICs. If a U.S. holder makes a mark-to-market election for the ADSs or Class A Ordinary Shares, such U.S. holder will generally include in
income each year an amount equal to the excess, if any, of the fair market value of the ADSs or Class A Ordinary Shares as of the close of such U.S.
holder’s taxable year over such U.S. holder’s adjusted tax basis in such ADSs or Class A Ordinary Shares. The U.S. holder will be allowed a deduction for
the excess, if any, of the adjusted basis of the ADSs or Class A Ordinary Shares over their fair market value as of the close of the taxable year. However,
deductions are allowable only to the extent of any net mark-to-market gains on the ADSs or Class A Ordinary Shares included in the U.S. holder’s income
for prior taxable years. Amounts included in a U.S. holder’s income under a mark-to-market election, as well as gain on the actual sale or other disposition
of the ADSs or Class A Ordinary Shares, will generally be taxed at ordinary income rates. Ordinary loss treatment will also apply to the deductible portion
of any mark-to-market loss on the ADSs or Class A Ordinary Shares, as well as to any loss realized on the actual sale or disposition of the ADSs or Class A
Ordinary Shares, to the extent that the amount of such loss does not exceed the net mark-to-market gains previously included for such ADSs or Class A
Ordinary Shares. A U.S. holder’s basis in the ADSs or Class A Ordinary Shares will be adjusted to reflect any such income or loss amounts. If the U.S.
holder makes a mark-to-market election, tax rules that apply to distributions by corporations which are not PFICs would apply to distributions by us
(however, the lower applicable capital gains rate for “qualified dividend income” discussed above would not apply). The basis adjustment and income or
loss inclusion under this alternate mark-to-market regime will apply only during years in which we are a PFIC.
The mark-to-market election will only be available for “marketable stock” which is stock that is traded in more than de minimis quantities on at
least 15 days during each calendar quarter on a qualified exchange or other market, as defined in applicable Treasury regulations. We expect that the ADSs
will continue to be listed and regularly traded on the New York Stock Exchange, which is a qualified exchange for these purposes, and, consequently, that
the mark-to-market election would be available to U.S. holders of our ADSs if and when we are a PFIC.
Another alternative taxation regime which may be available to some U.S. investors in PFICs, known as “qualified electing fund” (QEF) treatment,
will not be available to U.S. holders of our ADSs or Class A Ordinary Shares. This is because QEF treatment requires the PFIC to supply annually certain
information to U.S. holders of ADSs or Class A Ordinary Shares, and we do not intend to supply such information.
A U.S. holder of ADSs or Class A Ordinary Shares in any year in which we are a PFIC will be required to file Internal Revenue Service
Form 8621 regarding distributions received on the ADSs or Class A Ordinary Shares and any gain realized on the disposition of the ADSs or Class A
Ordinary Shares. In addition, if we are a PFIC for a taxable year in which we pay a dividend, or for the prior taxable year, the lower rate on “qualified
dividend income” discussed below with respect to dividends paid to certain non-corporate U.S. holders would not apply.
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U.S. holders and prospective holders of our ADSs or Class A Ordinary Shares are urged to consult their own tax advisors regarding the application
of the PFIC rules to an investment in ADSs or Class A Ordinary Shares.
Taxation of Dividends and Other Distributions on ADSs or Class A Ordinary Shares
Subject to the PFIC rules discussed above, the gross amount of our distributions to a U.S. holder with respect to ADSs or Class A Ordinary Shares
(including any amount withheld in respect of PRC taxes) generally will be included in a U.S. holder’s gross income as foreign source dividend income on
the date of receipt by the depositary, in the case of ADSs, or by the U.S. holder, 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 (as determined under U.S. federal income tax principles). To the extent, if any,
that the amount of any such distribution exceeds our current and accumulated earnings and profits, it will be treated first as a tax-free return of the U.S.
holder’s tax basis in the ADSs or the Class A Ordinary Shares (thereby increasing the amount of any gain or decreasing the amount of any loss realized on
the subsequent sale or disposition of such ADSs or Class A Ordinary Shares) and thereafter as capital gain. Further, any distributions treated as dividends
generally will not be eligible for the dividends-received deduction allowed to corporations in respect of dividends received from other U.S. corporations.
Certain non-corporate U.S. holders, including individual U.S. holders, may be taxed on dividend payments at a special rate (the applicable capital
gains rate) that is applicable to “qualified dividend income” provided that (1) the ADSs or Class A Ordinary Shares are readily tradable on an established
securities market in the U.S., (2) we are not treated as a PFIC with respect to the U.S. holder (as discussed above) for our taxable year in which the
dividend was paid and we were not a PFIC in the preceding taxable year, and (3) certain holding period requirements are met. Under Internal Revenue
Service authority, our Class A Ordinary Shares, or ADSs representing such shares, will be considered for the purpose of clause (1) above to be readily
tradable on an established securities market in the U.S. if they are listed, (as our ADSs are currently) on the New York Stock Exchange. U.S. holders should
consult their own tax advisors regarding the availability of the lower rate for dividends paid with respect to our ADSs or Class A Ordinary Shares in the
light of their particular circumstances. Dividends will constitute foreign source income for foreign tax credit limitation purposes. If the dividends are taxed
as qualified dividend income (as discussed above), the amount of the dividend taken into account for purposes of calculating the foreign tax credit
limitation will be limited to the gross amount of the dividend, multiplied by the reduced tax rate applicable to qualified dividend income and divided by the
highest tax rate normally applicable to dividends. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes
of income. For foreign tax credit purposes, dividends paid on our Class A Ordinary Shares will generally constitute “passive category income” but could, in
the case of certain U.S. holders, constitute “general category income.”
If PRC withholding taxes apply to dividends paid to a U.S. holder with respect to our ADSs or Class A Ordinary Shares, subject to certain
conditions and limitations, such PRC withholding taxes will be treated as foreign taxes eligible for credit against the U.S. holder’s U.S. federal income tax
liability. The rules governing foreign tax credits are complex and, therefore, U.S. holders should consult their tax advisors regarding the availability of a
foreign tax credit in such U.S. holders’ particular circumstances.
Taxation of Disposition of Shares
Subject to the PFIC rules discussed above, a U.S. holder will recognize taxable 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 the U.S. holder’s
adjusted tax basis in the ADS or Class A Ordinary Share. The gain or loss will be capital gain or loss. A non-corporate U.S. holder, including an individual
U.S. holder, who has held the ADS or Class A Ordinary Share for more than one year will be eligible for reduced capital gains tax rates. The deductibility
of capital losses is subject to limitations. Any such gain or loss that a U.S. holder recognizes will be treated as U.S. source income for foreign tax credit
limitation purposes.
As described above under “Taxation—PRC Taxation,” any gain from the disposition of our ADSs or Class A Ordinary Shares may be subject to
PRC tax. In such event, a U.S. holder that is eligible for the benefits of the income tax treaty between the U.S. and the PRC may elect to treat the gain as
PRC source income for foreign tax credit purposes. U.S. holders should consult their tax advisors regarding their eligibility for benefits under the income
tax treaty between the U.S. and the PRC and their ability to credit any PRC tax withheld in respect of a sale of our ADSs or Class A Ordinary Shares
against their U.S. federal income tax liability.
Information Reporting and Backup Withholding
Dividend payments with respect to ADSs or Class A Ordinary Shares and proceeds from the sale, exchange or redemption of ADSs or Class A
Ordinary Shares may be subject to information reporting to the Internal Revenue Service and possible U.S. backup withholding at a rate of 24% for taxable
years beginning after December 31, 2017 and before January 1, 2026. Backup withholding will not apply, however, to a U.S. holder who furnishes a correct
taxpayer identification number and makes any other required certifications or who is otherwise exempt from backup withholding and demonstrates such
exemption if required. U.S. holders who are required to establish their exempt status must provide such certification on Internal Revenue Service Form W-
9. U.S. holders should consult their tax advisors regarding the application of U.S. information reporting and backup withholding rules.
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Individual U.S. holders who own “specified foreign financial assets” with an aggregate value in excess of US$50,000 are generally required to file
an information statement along with their tax returns, currently on Form 8938, with respect to such assets. “Specified foreign financial assets” include any
financial accounts held at a non-U.S. financial institution, as well as securities issued by a non-U.S. issuer (which would include our Class A Ordinary
Shares) that are not held in accounts maintained by financial institutions. Higher reporting thresholds apply to certain individuals living abroad and to
certain married individuals. Regulations extend this reporting requirement to certain entities that are treated as formed or availed of to hold direct or
indirect interests in specified foreign financial assets based on certain objective criteria. U.S. holders who fail to report the required information could be
subject to substantial penalties. Prospective investors should consult their own tax advisors concerning the application of these rules to their investment in
our ADSs and Class A Ordinary Shares, including the application of the rules to their particular circumstances.
Prospective purchasers of our ADSs or Class A Ordinary Shares should consult their own tax advisor regarding the application of the U.S. federal
income tax law to their particular situations as well as any tax consequences resulting from purchasing, holding or disposing of our ADSs and Class A
Ordinary Shares, including the applicability and effect of the tax laws of any state, local or foreign jurisdiction and including estate, gift and inheritance
laws.
Available Additional Information
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.
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.
As required under Section 203.01 of the New York Stock Exchange Listed Company Manual, we will post our annual reports filed with the SEC
on our Web site at http://ir.sogou.com. We will not furnish hard copies of such reports to holders of our ADSs unless we are requested to do so in writing by
a holder. Upon receipt of such a request, we will provide a hard copy of such reports to such requesting holder free of charge.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Rate Risk
While our reporting currency is the U.S. dollar, to date almost all of our revenues and costs, a majority of our assets, and almost all of our
liabilities are denominated in RMB. As a result, we are exposed to foreign exchange risk, as our revenues and assets may be affected by fluctuations in the
exchange rate between the U.S. dollar and the RMB. If the RMB depreciates against the U.S. dollar, the value of our RMB revenues and assets as
expressed in our U.S. dollar financial statements will decline. For example, our revenues for the year ended December 31, 2019 were US$1.172 billion and
our total assets as of December 31, 2019 were US$1.522 billion, representing revenues of RMB8.178 billion and total assets of RMB10.621 billion at the
exchange rate of RMB6.9762 to $1.00 in effect as of December 31, 2019. If the value of the RMB were to depreciate by 10% against the U.S. dollar, the
value of the same amount of revenues and total assets in U.S. dollars would be US$1.066 billion and US$1.384 billion, respectively.
The RMB is not freely tradable in “capital account” transactions, which include foreign direct investment. Foreign exchange transactions
classified as capital account transactions are subject to limitations and require approval from the SAFE. This could affect our China-based subsidiaries’
ability to obtain foreign exchange through debt or equity financing, including by means of loans or capital contributions from us. Further, the RMB is at
present free convertible in “current account” transactions, which include dividends, trade and service-related foreign exchange transactions, and our China-
based subsidiaries may purchase and retain foreign exchange for settlement of such transactions, including payment of dividends, without the approval of
the SAFE. However, the relevant PRC governmental authorities may limit our ability to purchase or retain foreign currencies in the future. Since a
significant amount of our future revenues are likely to be in the form of RMB, these existing restrictions, and any future restrictions, on currency exchange
may limit our ability to use revenues generated in RMB to fund our business activities outside of China, or to make expenditures denominated in foreign
currencies.
To the extent that we need to convert U.S. dollars into RMB for our operations, appreciation of the RMB against the U.S. dollar would reduce the
RMB amount we would receive from the conversion. Conversely, if we decide to convert RMB into U.S. dollars for the purpose of making payments for
dividends on our ordinary shares or for other business purposes, depreciation of the RMB against the U.S. dollar would reduce the U.S. dollar amounts
available to us.
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As of December 31, 2019, we had RMB-denominated cash and cash equivalents and short-term investments of RMB2.903 billion and U.S. dollar-
denominated cash and cash equivalents of US$721.7 million. Assuming we had converted our US$721.7 million cash and cash equivalents balance into
RMB at the exchange rate of RMB6.9762 to US$1.00 in effect as of December 31, 2019, we would have had a total RMB balance for cash and cash
equivalents and short-term investments of RMB7.938 billion as of that date. An appreciation of the RMB of 10% against the U.S. dollar as of
December 31, 2019 would have caused the total RMB balance for our cash and cash equivalents and short-term investments to be RMB7.434 billion as of
that date after such a hypothetical conversion. Conversely, if we had converted our RMB2.903 billion cash and cash equivalents and short-term investments
balance into U.S. dollars at the exchange rate of RMB6.9762 to US$1.00 in effect as of December 31, 2019, we would have had a total U.S. dollar balance
for cash and cash equivalents and short-term investments of US$1.138 billion as of that date. A depreciation of the RMB of 10% against the U.S. dollar as
of December 31, 2019 would have caused us to have a total U.S. dollar balance for our cash and cash equivalents and short-term investments of US$1.100
billion as of that date after such a hypothetical conversion.
To date, we have not entered into any 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 effectiveness of these hedges may be limited and we may not be able to successfully hedge our
exposure. Accordingly, we may incur economic losses in the future due to foreign exchange rate fluctuations, which could have an adverse impact on our
financial condition and results of operations.
According to the National Bureau of Statistics of China, the consumer price index grew 2.9% in 2019, compared to an increase of 2.1% in 2018.
While the increase in the rate of inflation for 2019 compared to 2018 did not have a significant adverse effect on our business, any additional increases in
the future could have an adverse effect on our business.
Inflation Rate Risk
Interest Rate Risk
Our investment policy limits our investments of excess cash to investments in bank deposits and high-quality corporate securities and limits the
amount of our exposure to any one issuer. We have not been, nor do we expect to be, exposed to material risks due to changes in interest rates on
borrowings because we have not incurred, and do not expect to incur, any significant third-party debt.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
The following table summarizes the fees and charges that a holder of our ADSs may have to pay, directly or indirectly, pursuant to the Deposit
Agreement and the types of services and the amount of the fees or charges paid therefore:
Persons depositing or withdrawing shares or ADS holders must pay:
US$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)
US$0.05 (or less) per ADS
A fee equivalent to the fee that would be payable if securities distributed to
you had been shares and the shares had been deposited for issuance of
ADSs
US$0.05 (or less) per ADS per calendar year
Registration or transfer fees
Expenses of the depositary
Taxes and other governmental charges the depositary or the custodian has to
pay on any ADSs or shares underlying ADSs, such as stock transfer
taxes, stamp duty, or withholding taxes
For:
· Issuance of ADSs, including issuances resulting from a distribution of
shares or rights or other property
· Cancellation of ADSs for the purpose of withdrawal, including if the
Deposit Agreement terminates
· Any cash distribution to ADS holders
· Distribution of securities distributed to holders of deposited securities
(including rights) that are distributed by the depositary to ADS holders
· Depositary services
· Transfer and registration of shares on our share register to or from the
name of the depositary or its agent when you deposit or withdraw shares
· Cable and facsimile transmissions (when expressly provided in the Deposit
Agreement)
· converting non-U.S. currency to U.S. dollars
· As necessary
Any charges incurred by the depositary or its agents for servicing the
· As necessary
deposited securities
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Pursuant to an agreement dated November 8, 2017 between us and the Bank of New York Mellon, the depositary for our ADSs, as of the date of
this annual report, the depositary had reimbursed us in cash for our expenses, including investor relations expenses, legal fees, accounting fees, the New
York Stock Exchange listing application and listing fees, and related expenses, in an aggregate amount of US$8,714,164, which figure was net of U.S.
withholding tax, related to the establishment of our American depositary receipt facility.
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PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not Applicable.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Use of Proceeds
On November 8, 2017, our registration statement on Form F-1 (File No. 333-220928), as amended, was declared effective by the SEC for our
initial public offering, pursuant to which we offered and sold a total of 50,643,856 ADSs, including 5,643,856 ADSs sold upon the exercise by the
underwriters of their over-allotment options, at the public offering price of $13.00 per ADS. The offering was completed in November 2017.
We received net proceeds of approximately US$622.1 million from the offering, after deducting underwriting discounts and commissions of
approximately $32.9 million and other expenses of approximately $3.3 million. None of the underwriting discounts and commissions or other expenses
were paid directly or indirectly to any director, officer, or general partner of ours or to their associates, persons owning ten percent or more of any class of
our equity securities, or to any of our affiliates. J.P. Morgan, Credit Suisse, Goldman Sachs, and CICC acted as joint book runners for our initial public
offering and as the representatives of the underwriters.
As of December 31, 2019, we had used an insignificant amount of the net proceeds of our initial public offering, as the net cash provided by our
operations was sufficient to cover our capital needs, including our ADS repurchase program.
ITEM 15. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our principal executive officer and principal financial officer performed an evaluation of the effectiveness of our disclosure controls and
procedures, as defined and required under Rule 13a-15(e)of the Exchange Act, as of the end of the period covered by this annual report. Based upon that
evaluation, they have concluded that our disclosure controls and procedures were effective in ensuring 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 principal executive officer
and principal financial officer, to allow timely decisions regarding required disclosure. Our principal executive officer and principal financial officer also
concluded that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in by the Securities and Exchange Commission’s rules and regulations.
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 Exchange Act. 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 U.S. GAAP. 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.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we
conducted an assessment of the effectiveness of our internal control over financial reporting based upon criteria established in the “Internal Control—
Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment,
management has concluded that our internal control over financial reporting was effective as of December 31, 2019.
The effectiveness of our internal control over financial reporting as of December 31, 2019 has been audited by PricewaterhouseCoopers Zhong
Tian LLP, our independent registered public accounting firm, as stated in its report included on page F-2.
100
Table of Contents
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15 and
15d-15 under the Exchange Act that occurred during the period covered by this annual report that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our Board of Directors has determined that Bin Gao meets the criteria of an “audit committee financial expert” as set forth in the applicable SEC
rules and has accounting or related financial management expertise as set forth in the New York Stock Exchange Listed Company Manual. Our Board of
Directors has determined that all three members of our audit committee are “independent” under Rule 10A-3 under the Securities Exchange Act of 1934
and the New York Stock Exchange Listed Company Manual.
ITEM 16B. CODE OF ETHICS
Our Board of Directors adopted a code of ethics and conduct that is applicable to all of our directors, officers and employees. A copy of our code
of ethics and conduct was filed as an exhibit to our Registration Statement on Form F-1 (File No. 333-220928) originally filed with the SEC on October 13,
2017, and is also posted on our Website at http://ir.sogou.com under the heading “Corporate Governance.”
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by
PricewaterhouseCoopers Zhong Tian LLP, our principal external auditors, and its affiliates for the periods indicated below.
Audit fees (1)
Tax fees (2)
All other fees (3)
Total
2019
US$
2018
US$
For the year ended
December 31,
(US$ in thousands)
1,059
65
57
1,181
1,116
44
49
1,209
(1) “Audit fees” means the aggregate fees billed in each of the fiscal years listed for professional services rendered by our principal auditors for the audit of
our annual financial statements and our internal controls over financial reporting.
(2) “Tax fees” means the aggregate fees billed in each of the fiscal years listed for professional services rendered by our principal auditors for tax
compliance and tax advice.
(3) “All other fees” means the aggregate fees billed in each of the fiscal years listed for professional services rendered by our principal auditors for other
servcies, such as XBRL services.
Audit Committee Pre-approval Policies and Procedures
Our audit committee has adopted procedures which set forth the manner in which the committee will review and approve all audit and non-audit
services to be provided by PricewaterhouseCoopers Zhong Tian LLP before that firm is retained for such services. The pre-approval procedures are as
follows:
· Any audit or non-audit service to be provided to us by the independent accountant must be submitted to the audit committee for review and
approval, with a description of the services to be performed and the fees to be charged.
· The audit committee in its sole discretion then approves or disapproves the proposed services and documents such approval, if given, through
written resolutions or in the minutes of meetings, as the case may be.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not Applicable.
101
Table of Contents
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
On August 3, 2019, our Board of Directors authorized a repurchase program of up to US$50 million of outstanding Sogou ADSs over a twelve-
month period from August 3, 2019 to August 2, 2020, and authorized our management to purchase ADSs under the ADS repurchase program from time to
time at their discretion at prevailing market prices in accordance with Rule 10b-18 and Rule 10b5-1 under the Exchange Act and to determine the timing
and amount of any purchases of Sogou ADSs based on their evaluation of market conditions, the trading price of Sogou ADSs and other factors. As of the
date of this annual report, we had completed the ADS repurchase program. The table below provides information on our repurchases of Sogou ADSs for
each month of 2019 after the commencement of the ADS repurchase program. All ADSs purchased by us during 2019 were purchased pursuant to the ADS
repurchase program.
2019 Month
August (from August 14 to August 30)
September (from September 6 to
September 30)
October (from October 1 to October 31)
November(from November 1 to
November 29)
December(from December 2 to
December 31)
Total
Number
of ADSs
Purchased
Under the Program
Average
Price
Paid Per
ADS*
Approximate
Dollar Value of
ADSs that May
Yet Be Purchased
Under the Program
(in million)
1,541,834
US$
4.18
US$
2,257,119
1,910,640
US$
US$
4.81
5.05
US$
US$
884,365
US$
5.03
US$
2,096,660
US$
4.94
US$
43.6
32.7
23.0
18.6
8.2
*Cost and average price data exclude trading commissions. There may be some variation in figures due to rounding.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
Not Applicable.
ITEM 16G. CORPORATE GOVERNANCE
Sohu, through its ownership of Class B Ordinary Shares and the Voting Agreement with Tencent, has the power to appoint a majority of our board
of directors. As a result, we are a “controlled company” under the New York Stock Exchange Listed Company Manual. We rely on certain exemptions that
are available to controlled companies from NYSE corporate governance requirements, including the following, which we do not intend to meet voluntarily:
· that we have a majority of independent directors on our board;
· that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s
purpose and responsibilities; and
· for an annual performance evaluation of the nominating/corporate governance committee and the compensation committee.
We are not required to and will not voluntarily meet these requirements. If we are no longer a “controlled company,” we may in the future invoke
“home country” exceptions available to foreign private issuers, such as us, under the New York Stock Exchange Listed Company Manual which are similar
to the exemptions for controlled companies, and also include the possibility of additional exceptions from the New York Stock Exchange Listed Company
Manual, such as the requirement that equity-compensation plans be approved by shareholders. As a result of our use of the “controlled company”
exemptions, and any future use by us of the “home country” exceptions, holders of our ADSs will not have the same protection afforded to shareholders of
companies that are subject to all of NYSE corporate governance requirements.
ITEM 16H. MINE SAFETY DISCLOSURE
Not Applicable.
PART III
ITEM 17. FINANCIAL STATEMENTS
We have elected to provide financial statements pursuant to Item 18.
102
Table of Contents
ITEM 18. FINANCIAL STATEMENTS
The consolidated financial statements of Sogou and its subsidiaries and VIEs are included at the end of this annual report.
103
Table of Contents
ITEM 19. EXHIBITS
Exhibit
Number
1.1
(1)
2.1
2.2
2.3
(2)
(1)
(2)
4.1
4.2
4.3
4.4
4.5
4.6
(1)
(2)
(1)
(1)
(1)
(1)
4.7
4.8
(1)
(1)
(1)
4.9
4.10
(1)
4.11
(1)
4.12
(1)
4.13
(1)
4.14
(1)
4.15
4.16
(1)
†
(1)
4.17 *
4.18
(1)
4.18A
(3)
4.18B*
4.19*
4.20*
4.21*
4.22
(2)
8.1*
11.1
(1)
12.1*
12.2*
13.1*
Description of Document
Seventh Amended and Restated Memorandum of Association and Third Amended and Restated Articles of Association of the
Registrant
Registrant’s Specimen American Depositary Receipt (included in Exhibit 2.3)
Registrant’s Specimen Certificate for Class A ordinary shares
Deposit Agreement, dated November 8, 2017, among the Registrant, the depositary and all registered holders and beneficial owners of
the American Depositary Shares
2010 Share Incentive Plan
2017 Share Incentive Plan, as amended and restated
English Translation of Form of Employment Agreement with Executive Officers
English Translation of Form of Non-Competition Agreement with Executive Officers
English Translation of Form of Confidentiality Agreement with Executive Officers
Voting Agreement dated September 16, 2013 among Sogou Inc., Sohu.com (Search) Limited, Photon, Xiaochuan Wang, and other
members of Sogou Management, as amended as of August 11, 2017
Voting Agreement dated as of August 11, 2017 among Sogou Inc., Sohu.com (Search) Limited, and THL A21 Limited
Registration Rights Agreement dated as of August 11, 2017 among Sogou Inc., Sohu.com (Search) Limited, Photon and THL A21
Limited
English Translation of Loan Agreement, dated December 2, 2013, between Sogou Technology and Xiaochuan Wang
English Translation of Exclusive Equity Interest Purchase Rights Agreement, dated December 2, 2013, among Sogou Technology,
Sogou Information and the shareholders of Sogou Information
English Translation of Share Pledge Agreement, dated December 2, 2013, among Sogou Technology, Sogou Information and the
shareholders of Sogou Information
English Translation of Power of Attorney, dated December 2, 2013, by the shareholders of Sogou Information in favor of Sogou
Technology
English Translation of Business Operation Agreement, dated December 2, 2013, among Sogou Technology, Sogou Information and the
shareholders of Sogou Information
English Translation of Exclusive Technology Consulting and Service Agreement, dated September 26, 2010, between Sogou
Technology and Sogou Information
Form of Indemnification Agreement with the Registrant’s Directors
English Translation of Second Amended and Restated Mobile Browser Cooperation Agreement, dated September 25,2017, between
Shenzhen Tencent Computer Systems Co., Ltd. and Sogou Inc., Sogou Technology, Sogou Network, Sogou Information and Shenzhen
Shi Ji Guang Su Information Technology Co. Ltd.
English Translation of Cooperation Agreement between Weixin Official Platform and Sogou Search, dated December 30, 2019,
between Shenzhen Tencent Computer Systems Co., Ltd. and Sogou Information.
English Translation of Amended and Restated Business Development and Resource Sharing Agreement, dated September 25, 2017,
between Shenzhen Tencent Computer Systems Co., Ltd. and Sogou Inc., Sogou Technology, Sogou Network, Sogou Information,
Shenzhen Shi Ji Guang Su information Technology Co., Ltd., and Sohu.com Limited.
English Translation of Amendment to Amended and Restated Business Development and Resource Sharing Agreement, dated
September 20, 2018, between Shenzhen Tencent Computer Systems Co., Ltd. and Sogou Inc., Sogou Technology, Sogou Network,
Sogou Information, Shenzhen Shi Ji Guang Su Information Technology Co., Ltd., and Sohu.com Limited.
English Translation of the Second Supplemental Agreement to the Amended and Restated Business Development and Resource
Sharing Agreement, dated October 24 2019, between Shenzhen Tencent Computer Systems Co., Ltd. and Sogou Inc., Sogou
Technology, Sogou Network, Sogou Information, Shenzhen Shi Ji Guang Su Information Technology Co. Ltd. and Sohu.com Limited.
English Translation of Sohu.com Internet Plaza Office Building Lease, dated December 25, 2019, between Beijing Sohu New Era
Information Technology Co., Ltd. and Sogou Network.
English Translation of Sohu.com Internet Plaza Office Building Lease, dated December 25, 2019, between Beijing Sohu New Media
Information Technology Co., Ltd. and Sogou Information.
English Translation of Sohu.com Internet Plaza Office Building Lease, dated December 25, 2019, between Beijing Sohu New Media
Information Technology Co., Ltd. and Sogou Technology.
Letter Agreement, dated January 21, 2018, between Sogou Inc. and James Deng
List of significant subsidiaries and VIEs of the Registrant
Code of Ethics and Conduct for Directors, Officers and Employees
Certification of Chief Executive Officer Required by Rule 13a-14(a)
Certification of Chief Financial Officer Required by Rule 13a-14(a)
Certification of Chief Executive Officer Required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States
Code
104
Table of Contents
13.2*
15.1*
15.2*
101.INS*
101.SCH*
101.CAL*
101.DEF*
101.LAB*
101.PRE*
Certification of Chief Financial Officer Required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States
Code
Consent of PricewaterhouseCoopers Zhong Tian LLP, an independent registered public accounting firm
Consent of Commerce & Finance Law Offices
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
(1) Incorporated by reference to our Registration Statement on Form F-1(file no. 333-220928) filed with the Securities and Exchange Commission on
October 13, 2017.
(2) Incorporated by reference to our Annual Report on Form 20-F for the year ended December 31, 2017 filed with the Securities and Exchange
Commission on February 28, 2018.
(3) Incorporated by reference to our Annual Report on Form 20-F for the year ended December 31, 2018 filed with the Securities and Exchange
Commission on March 28, 2019
† Portions of these exhibits have been omitted pursuant to rules of the SEC permitting a registrant to omit confidential information that is not material, the
release of which could cause competitive harm to the registrant.
* Filed or furnished with this Annual Report on Form 20-F.
105
Table of Contents
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.
Date: April 21, 2020
SOGOU INC.
By
Name:
Title:
By
Name:
Title:
106
/s/ Xiaochuan Wang
Xiaochuan Wang
Chief Executive Officer
/s/ Joe Zhou
Joe Zhou
Chief Financial Officer
Table of Contents
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2018, and 2019
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2017, 2018, and 2019
Consolidated Statements of Changes in Shareholders’ (Deficit)/Equity for the Years Ended December 31, 2017, 2018, and 2019
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2018, and 2019
Notes to Consolidated Financial Statements
Page
F-2
F-3
F-4
F-5
F-8
F-9
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Sogou Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Sogou Inc. and its subsidiaries (the “Company”) as of December 31, 2019 and 2018, and
the related consolidated statements of comprehensive income, of changes in shareholders’ (deficit)/equity and of cash flows for each of the three years in
the period ended December 31, 2019, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited
the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of
December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in
conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the COSO.
Changes in Accounting Principles
As discussed in Note 3 and Note 20 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
As discussed in Note 3 to the consolidated financial statements, the Company changed the manner in which it accounts for revenues from contracts with
customers and the manner in which it accounts for financial instruments in 2018.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial reporting, included in the Management’s Annual Report on Internal Control
over Financial Reporting appearing under Item 15. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the
Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) (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 audits to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective
internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated 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 consolidated 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 consolidated financial statements. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing
such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
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 (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii) 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 (iii) 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/ PricewaterhouseCoopers Zhong Tian LLP
Beijing, the People’s Republic of China
April 21, 2020
We have served as the Company’s auditor since 2017.
F-2
SOGOU INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per share data)
Table of Contents
ASSETS
Current assets:
Cash and cash equivalents
Restricted cash
Short-term investments
Account and financing receivables, net
Prepaid and other current assets
Due from related parties
Total current assets
Long-term investments, net
Fixed assets, net
Goodwill
Intangible assets, net
Deferred tax assets, net
Other assets (including due from related parties of US$2,224 and US$2,253, respectively, as of
December 31, 2018 and 2019)
Total assets
LIABILITIES
Current liabilities:
Accounts payable (including accounts payable of consolidated variable interest entities, or “VIEs”, without
As of December 31,
2018
2019
$
$
185,175
—
851,327
142,886
40,122
2,608
1,222,118
63,305
147,495
5,625
1,349
13,793
9,159
1,462,844
$
$
142,464
5,370
995,350
131,813
26,888
2,837
1,304,722
63,345
110,006
5,534
1,514
16,306
20,975
1,522,402
recourse to the Company of US$57,051 and US$66,186, respectively, as of December 31, 2018 and 2019)
$
108,679
$
111,587
Accrued and other short-term liabilities (including accrued and other short-term liabilities of consolidated
VIEs without recourse to the Company of US$49,493 and US$55,694, respectively, as of December 31,
2018 and 2019)
Receipts in advance (including receipts in advance of consolidated VIEs without recourse to the Company of
US$3,647 and US$8,981, respectively, as of December 31, 2018 and 2019)
Accrued salary and benefits (including accrued salary and benefits of consolidated VIEs without recourse to
the Company of US$1,692 and US$1,250, respectively, as of December 31, 2018 and 2019)
Taxes payable (including taxes payable of consolidated VIEs without recourse to the Company of US$6,582
and US$6,084, respectively, as of December 31, 2018 and 2019)
Due to related parties (including due to related parties of consolidated VIEs without recourse to the
Company of US$20,552 and US$108, respectively, as of December 31, 2018 and 2019)
Total current liabilities
Long-term liabilities (including long-term liabilities of consolidated VIEs without recourse to the Company
of nil and US$1,130, respectively, as of December 31, 2018 and 2019)
Total liabilities
Commitments and contingencies (Note 21)
SHAREHOLDERS’ EQUITY
Class A Ordinary Shares (US$0.001 par value, 571,242,125 shares authorized, 123,906,300 and 124,454,683
shares issued, 112,595,500 and 104,453,265 shares outstanding as of December 31, 2018 and 2019)
Class B Ordinary Shares (US$0.001 par value, 278,757,875 shares authorized, issued, and outstanding as of
December 31, 2018 and 2019)
Additional paid-in capital
Treasury stock (US$0.001 par value, 11,310,800 and 20,001,418 shares as of December 31, 2018 and 2019,
respectively)
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
151,399
150,275
65,324
32,079
60,433
38,425
456,339
—
456,339
$
67,902
24,167
76,688
22,594
453,213
5,686
458,899
118
$
119
279
929,818
(27,870)
125,959
(21,799)
1,006,505
1,462,844
$
279
945,719
(69,886)
215,064
(27,792)
1,063,503
1,522,402
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Table of Contents
SOGOU INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, except for per share data)
Revenues:
Search and search-related advertising revenues (including transactions with related
parties of US$10,461, US$32,735, and US$25,447, respectively, for 2017, 2018,
and 2019)
Other revenues (including transactions with related parties of US$5,486, US$9,137,
and US$6,855, respectively, for 2017, 2018, and 2019)
Total revenues
Cost of revenues
(1)
(including transactions with related parties of US$67,653,
US$115,993, and US$95,320, respectively, for 2017, 2018, and 2019)
Gross profit
Operating expenses:
Research and development
(1)
(including transactions with related parties of
US$8,233, US$7,635, and US$6,967, respectively, for 2017, 2018, and 2019)
(including transactions with related parties of US$3,010,
Sales and marketing
(1)
US$2,123, and US$1,869, respectively, for 2017, 2018, and 2019)
General and administrative
(1)
(including transactions with related parties of
US$131, US$367, and US$386, respectively, for 2017, 2018, and 2019)
Total operating expenses
Operating income
Interest income
Foreign currency exchange (loss)/gain
Other income, net
Income before income tax expenses
Income tax expenses
Net income
Net income attributable to Sogou Inc.
Less: Dividends attributable to Preferred Shareholders
Net income attributable to ordinary shareholders
Net income
Other comprehensive income/(loss), net of nil tax:
Foreign currency translation adjustment
Comprehensive income
Net income per ordinary share—basic
Net income per ordinary share—diluted
(1)
Share-based compensation expense included in:
Cost of revenues
Research and development
Sales and marketing
General and administrative
2017
For the Year Ended December 31,
2018
2019
$
801,551
$
1,023,132
$
1,073,173
106,806
908,357
457,401
450,956
172,829
156,420
27,821
357,070
93,886
9,126
(7,082)
692
96,622
14,422
82,200
82,200
24,388
57,812
82,200
13,216
95,416
0.22
0.20
540
16,470
4,299
2,414
23,723
$
$
$
$
$
$
$
101,026
1,124,158
693,470
430,688
99,079
1,172,252
738,454
433,798
201,739
146,194
38,072
386,005
44,683
8,037
5,725
41,489
99,934
1,153
98,781
98,781
—
98,781
98,781
(17,193)
81,588
0.25
0.25
669
10,313
1,327
1,895
14,204
$
$
$
$
$
$
$
190,402
138,291
40,670
369,363
64,435
4,443
1,849
21,126
91,853
2,748
89,105
89,105
—
89,105
89,105
(5,993)
83,112
0.23
0.23
473
10,697
3,726
1,005
15,901
$
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Table of Contents
Balance as of
January 1, 2017
Share issuance upon
initial public
offering (“IPO”),
net of issuance
costs of
US$36,239
Share issuance upon
the redesignation
of 32,000,000 Pre-
IPO Series A
Preferred Shares
into Class A
Ordinary Shares
Share issuance upon
the redesignation
of 65,431,579 Pre-
IPO Series B
Preferred Shares
into Class B
Ordinary Shares
Share issuance from
exercise of options
under Sogou 2010
Share Incentive
Plan
Contribution from
Sohu
Share-based
compensation
expense for Sogou
share-based
awards
Share-based
compensation
related to Soso
search-related
businesses
employees
transferred from
Tencent
Net income
Other comprehensive
income, net of nil
tax: foreign
currency
translation
adjustment
Balance as of
December 31,
2017
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ (DEFICIT)/EQUITY
SOGOU INC.
For the Year Ended December 31, 2017
(In thousands, except for share data)
Ordinary Shares
Shares
Amount
Additional
Paid-in
Capital
Treasury
Stock
(Accumulated
Deficit)/
Retained
Earnings
Accumulated
Other
Comprehensive
(Loss)/Income
Total
Shareholders’
(Deficit)/
Equity
236,594,916
$
241
$
22,330
$
(27,869) $
(55,022) $
(17,822) $
(78,142)
50,643,856
51
622,080
—
—
—
622,131
32,000,000
32
19,968
—
—
—
20,000
65,431,579
65
224,339
2,168,461
—
—
—
—
—
2
—
—
711
—
23,037
—
—
—
682
—
—
—
—
—
—
—
—
—
—
—
—
—
—
224,404
—
—
2
711
—
23,037
—
82,200
—
—
682
82,200
—
13,216
13,216
386,838,812
$
391
$
913,147
$
(27,869) $
27,178
$
(4,606) $
908,241
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Table of Contents
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ (DEFICIT)/EQUITY
SOGOU INC.
For the Year Ended December 31, 2018
(In thousands, except for share data)
Balance as of January 1,
2018
Share issuance from exercise
of options under Sogou
2010 Share Incentive Plan
Contribution from Sohu
Share-based compensation
expense for Sogou share-
based awards
Share-based compensation
related to Soso search-
related businesses
employees transferred from
Tencent
Net income
Other comprehensive loss, net
of nil tax: foreign currency
translation adjustment
Others
Balance as of December 31,
2018
Ordinary Shares
Shares
Amount
Additional
Paid-in
Capital
Treasury
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
Shareholders’
Equity
386,838,812
$
391
$
913,147
$
(27,869) $
27,178
$
(4,606) $
908,241
4,514,563
—
—
—
—
—
—
5
—
—
—
—
—
1
1,797
670
14,116
88
—
—
—
—
—
—
—
—
—
(1)
—
—
—
—
98,781
—
—
—
—
—
1,802
670
14,116
88
98,781
—
—
(17,193)
—
(17,193)
—
391,353,375
$
397
$
929,818
$
(27,870) $
125,959
$
(21,799) $
1,006,505
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Table of Contents
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ (DEFICIT)/EQUITY
SOGOU INC.
For the Year Ended December 31, 2019
(In thousands, except for share data)
Balance as of January 1, 2019
Share issuance from exercise of
options under Sogou 2010
Share Incentive Plan
Share-based compensation
expense for Sogou share-based
awards
Repurchase of Class A Ordinary
Shares, represented by ADSs
Net income
Other comprehensive loss, net of
nil tax: foreign currency
translation adjustment
Balance as of December 31,
2019
Ordinary Shares
Shares
Amount
Additional
Paid-in
Capital
391,353,375
$
397
$
929,818
$
Treasury
Stock
(27,870) $
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
125,959
$
(21,799) $
Total
Shareholders’
Equity
1,006,505
548,383
—
(8,690,618)
—
—
1
—
—
—
—
—
15,901
—
—
—
—
—
—
—
(42,016)
—
—
89,105
—
—
—
—
1
15,901
(42,016)
89,105
—
—
(5,993)
(5,993)
383,211,140
$
398
$
945,719
$
(69,886) $
215,064
$
(27,792) $
1,063,503
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Table of Contents
SOGOU INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
Amortization
Gain on disposal of fixed assets
Allowance for doubtful accounts and credit losses
Provision for inventories
Share-based compensation expense
Research and development expenses undertaken by Sohu
Impairment of long-term investment
Gains from re-measurement of long-term equity investments
Unrealized gain from changes in fair values of short-term investments
Deferred tax benefit
Changes in assets and liabilities:
Accounts receivable
Interest on financing receivables
Prepaid and other current assets
Due from related parties
Other assets
Accounts payable
Accrued and other short-term liabilities
Receipts in advance
Accrued salary and benefits
Taxes payable
Due to related parties
Long-term liabilities
Net cash provided by operating activities
Cash flows from investing activities
Cash received from disposal of fixed assets
Purchase of fixed assets
Purchase of intangible assets
Purchase of long-term investments
Investment in financing receivables
Collection of financing receivables
Purchase of short-term investments
Proceeds from short-term investments
Net cash used in investing activities
Cash flows from financing activities
Proceeds from exercise of options under Sogou 2010 Share Incentive Plan
Proceeds received by the Consolidated Trust from a third-party investor
Repurchase of Pre-IPO Class A Ordinary Shares
Repurchase of Class A Ordinary Shares, represented by ADSs
Proceeds from issuance of Class A Ordinary Shares in IPO, net of issuance costs of
US$36,239
Net cash provided by/(used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase/(decrease) in cash, cash equivalents, and restricted cash
Cash, cash equivalents, and restricted cash at beginning of the year
Cash, cash equivalents, and restricted cash at end of the year
Supplemental cash flow disclosure:
Income tax paid
Supplemental schedule of non-cash investing activity:
Fixed assets in accrued liabilities and accounts payable
Supplemental schedule of non-cash financing activity:
Contribution from Sohu resulting from waived research and development expense
paid by Sohu on behalf of the Sogou Group
Redesignation of 32,000,000 Pre-IPO Series A Preferred Shares into Class A
Ordinary Shares
Redesignation of 65,431,579 Pre-IPO Series B Preferred Shares into Class B
Ordinary Shares
$
$
$
$
$
$
2017
For the Year Ended
December 31,
2018
2019
$
82,200
$
98,781
$
89,105
48,205
1,389
(988)
378
—
23,723
707
230
—
(739)
(4,117)
(26,955)
—
(8,679)
26,807
(816)
22,284
29,079
2,936
5,561
42,808
(61,637)
—
182,376
1,739
(64,025)
(130)
(7,008)
—
—
(345,508)
7,530
(407,402)
1
—
(3,190)
—
622,131
618,942
14,213
408,129
286,078
694,207
6,171
658
707
20,000
224,404
$
$
$
$
$
$
60,690
1,251
(882)
9,119
2,547
14,204
670
2,605
(18,013)
(9,934)
691
(37,301)
(5,828)
(31,390)
(5,634)
(2,613)
40,777
(4,703)
2,920
3,217
6,284
17,500
—
144,958
915
(75,771)
(1,294)
(19,886)
(98,774)
59,967
(1,678,042)
1,162,088
(650,797)
1
—
—
—
—
1
(3,194)
(509,032)
694,207
185,175
14,410
1,409
670
—
—
$
$
$
$
$
$
64,663
705
(1,209)
15,620
6,060
15,901
—
10,965
—
(1,142)
(2,732)
26,948
1,778
4,742
(2,076)
(13,908)
7,567
(6,490)
3,526
(7,796)
16,962
(15,698)
6,019
219,510
1,618
(30,149)
(896)
(11,487)
(257,388)
226,086
(2,024,533)
1,879,198
(217,551)
1
8,601
—
(42,016)
—
(33,414)
(5,886)
(37,341)
185,175
147,834
3,335
233
—
—
—
The accompanying notes are an integral part of these consolidated financial statements.
F-8
Table of Contents
SOGOU INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data, unless otherwise noted)
1. NATURE OF OPERATIONS AND ORGANIZATION
Sogou Inc. (“Sogou” or the “Company”) was incorporated in the Cayman Islands on December 23, 2005 as an indirect wholly-owned subsidiary
of Sohu.com Inc., which was the Company’s ultimate parent company until its dissolution on May 31, 2018. Sohu.com Limited, which was a wholly-
owned subsidiary of Sohu.com Inc., became the Company’s ultimate parent company as the successor-in-interest to Sohu.com Inc. upon Sohu.com Inc.’s
dissolution. Sohu.com Limited (or its predecessor Sohu.com Inc., as applicable), together with its subsidiaries and consolidated VIEs, but, unless the
context requires otherwise, excluding the businesses and the corresponding subsidiaries and VIEs of Sogou, are collectively referred to herein as “Sohu.”
Sohu.com Limited (or its predecessor Sohu.com Inc., as applicable) and its subsidiaries and consolidated VIEs, including the Company and its subsidiaries
and VIEs, are collectively referred to herein as the “Sohu Group.” The Company, together with its subsidiaries and VIEs, are collectively referred to herein
as the “Sogou Group.”
The Sogou Group is principally engaged in offering search and search-related advertising services which enable advertisers’ promotional links to
be displayed on the Sogou Group’s search result pages and other properties and third parties’ Internet properties where the links are relevant to the subject
and content of searches and such properties. The Sogou Group’s advertising services expand distribution of advertisers’ promotional links and
advertisements by leveraging traffic on third parties’ Internet properties, including Web content, software, and mobile applications. The search and search-
related business also benefits from Sogou’s collaboration with Tencent Holdings Limited (together with its subsidiaries, “Tencent,” whose financial
statements are prepared under International Financial Reporting Standards), which provides Sogou access to traffic and content generated from the products
and services provided by Tencent.
The Sogou Group also offers Internet value-added services (“IVAS”), primarily with respect to the operation of Web games and mobile games
developed by third parties, and offers other products and services including smart hardware products and online lending and microcredit services, which are
collectively referred to as the “other business.”
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Table of Contents
As of December 31, 2019, the Sogou Group’s principal subsidiaries and VIEs were as follows.
Name of Entity
Subsidiaries:
Sogou (BVI) Limited (“Sogou BVI”)
Beijing Sogou Technology Development
Co., Ltd. (“Sogou Technology”)
Date of
Incorporation/Acquisition
Incorporated on December 23, 2005
Incorporated on February 8, 2006
Sogou Hong Kong Limited (“Sogou HK”)
Incorporated on December 12, 2007
Vast Creation Advertising Media Services
Acquired on November 30, 2011
Limited (“Vast Creation”)
British Virgin Islands(“BVI”)
The People’s Republic of China
(“PRC”)
Hong Kong Special Administrative
Region (“Hong Kong”)
Hong Kong
Place of
Incorporation/
Acquisition
Effective
Interest held
Beijing Sogou Network Technology Co., Ltd.
Incorporated on March 29, 2012
PRC
(“Sogou Network”)
Sogou Technology Hong Kong Limited
Incorporated on August 25, 2015
Hong Kong
(“Sogou Technology HK”)
Tianjin Sogou Network Technology Co., Ltd.
Incorporated on May 18, 2017
(“Tianjin Sogou Network”)
Sogou (Shantou) Internet Microcredit Co., Ltd.
Incorporated on November 22, 2017
(“Sogou Microcredit”)
Sogou (Hangzhou) Intelligent Technology Co.,
Incorporated on April 28, 2018
Ltd. (“Sogou Hangzhou”)
Shantou Ying Zhong Bai Fu Financing
Guarantee Co., Ltd. (“Sogou Financing
Guarantee”)
VIEs:
Beijing Sogou Information Service Co., Ltd.
(“Sogou Information”)
Incorporated on July 24, 2019
Incorporated on December 28, 2005
Beijing Shi Ji Si Su Technology Co., Ltd.
Acquired on April 2, 2015
(“Shi Ji Si Su”)
Chengdu Easypay Technology Co., Ltd.
Incorporated on January 19, 2015
(“Chengdu Easypay”)
Consolidated Trust (Note 3(g)—Financing
Incorporated on December 2, 2019
Receivables, Net)
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
The Company’s principal subsidiaries, Sogou Technology, Sogou Network, Tianjin Sogou Network, Sogou Microcredit, Sogou Hangzhou, and
Sogou Financing Guarantee, are wholly foreign-owned enterprises (or “WFOEs”) established in the PRC. The Company’s principal VIEs, which consist of
Sogou Information and its principal subsidiaries Shi Ji Si Su and Chengdu Easypay, and the Consolidated Trust, are controlled by Sogou Technology
through a series of contractual agreements (see Note 22—VIEs).
2. IPO AND IPO-RELATED ARRANGEMENTS
In August 2017, Sohu, Tencent, and the Company entered into a voting agreement that provides, among things, that, following the completion of
the Company’s IPO, subject to certain conditions, for so long as Sohu and Tencent together hold a majority of the combined voting power of the
Company’s Class A Ordinary Shares and Class B Ordinary Shares, Sohu will have the right to appoint a majority of the Company’s Board of Directors.
Under the Company’s amended and restated articles of association of the Company, the Class A Ordinary Shares are entitled to one vote per share and the
Class B Ordinary Shares, which are held solely by Sohu and Tencent, are entitled to 10 votes per share.
In November, 2017, the Company completed its IPO on the New York Stock Exchange. In the offering, 50,643,856 American depositary shares
(“ADSs”), representing 50,643,856 Class A Ordinary Shares, were issued and sold to the public at a price of US$13.00 per ADS. The net proceeds to the
Company from the IPO, after deducting commissions and offering expenses, were approximately $622.1 million. Upon the completion of the IPO, the
Company completed the redesignation on a one-for-one basis of: (i) 127,200,000 Pre-IPO Class A Ordinary Shares then held by Sohu and 6,757,875 Pre-
IPO Class A Ordinary Shares and 79,368,421 Pre-IPO Class B Ordinary Shares then held by Tencent into Class B Ordinary Shares; (ii) 32,000,000 Pre-IPO
Series A Preferred Shares then held by Photon into Class A Ordinary Shares; (iii) 65,431,579 Pre-IPO Series B Preferred Shares then held by Tencent into
Class B Ordinary Shares; and (iv) the remaining Pre-IPO Class A Ordinary Shares into Class A Ordinary Shares.
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Table of Contents
3. SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Presentation, Principle of Consolidation and Use of Estimates
Basis of Presentation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of
America (“US GAAP”) and on a going concern basis.
Principle of Consolidation
The accompanying consolidated financial statements include the financial statements of the Company, its subsidiaries and VIEs for which Sogou
is the ultimate primary beneficiary. All significant intra-company balances and transactions within the Sogou Group have been eliminated upon
consolidation. See Note 22—VIEs for discussion of the consolidation of the VIEs.
Use of Estimates
The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, management bases the estimates 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 available from other sources. Actual results may differ from these
estimates. Identified below are the accounting policies that reflect the Sogou Group’s most significant estimates and judgments, and those that the Sogou
Group believes are the most critical for fully understanding and evaluating its consolidated financial statements.
b. Functional Currency and Foreign Currency Translation
Functional Currency
An entity’s functional currency is the currency of the primary economic environment in which it operates; normally that is the currency of the
environment in which it primarily generates and expends cash. It is essential that management use its judgment to determine the functional currency by
assessing various indicators, such as cash flows, product and service prices and markets, expenses, financing and intra-company transactions and
arrangements. The functional currency of the Company and the Company’s subsidiaries in the BVI and Hong Kong is the United States dollar
(the “U.S. dollar”), while the functional currency of the Company’s subsidiaries and VIEs in the PRC is the Renminbi (the “RMB”).
Foreign Currency Translation
The Sogou Group uses the U.S. dollar as its reporting currency. In the consolidated financial statements, the financial information of the
Company’s subsidiaries and VIEs in the PRC, which use the RMB as their functional currency, has been translated into U.S. dollars. Assets and liabilities
are translated from the functional currency at the exchange rates on the balance sheet date; equity amounts are translated at historical exchange rates; and
revenues, expenses, gains, and losses are translated using the average rates in effect during the reporting period. Translation adjustments are reported as
foreign currency translation adjustments and are shown as a separate component of other comprehensive income or loss in the consolidated statements of
changes in shareholders’ (deficit)/equity.
Foreign currency transactions denominated in currencies other than the functional currency are translated into the functional currency using the
exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are re-
measured at the applicable rates of exchange in effect at that date. Foreign exchange gains and losses resulting from the settlement of such transactions and
from re-measurement at period end are recognized in the consolidated statements of comprehensive income.
c. Cash and Cash Equivalents
Cash and cash equivalents consist of cash, time deposits with original maturities of three months or less, demand deposits, and highly liquid
investments that are readily convertible to known amounts of cash.
d. Short-term Investments
Short-term investments consist of time deposits with original maturities of more than three months and investments in financial instruments with a
variable interest rate indexed to performance of underlying assets. In accordance with ASC 825, the Sogou Group elected the fair value method at the date
of initial recognition and carried these investments at fair value. For both time deposits with original maturities of more than three months and financial
instruments with a variable interest rate indexed to performance of underlying assets, fair values are determined based on the pervasive interest rates in the
market. Changes in the fair value are reflected in the consolidated statements of comprehensive income as other income, net. To estimate fair value, the
Sogou Group refers to the quoted rate of return provided by banks at the end of each period using the discounted cash flow method. The Sogou Group
classifies the valuation techniques that use these inputs as Level 2 of fair value measurements (see Note 3y—Fair Value of Financial Instruments).
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Table of Contents
e. Restricted Cash
Restricted cash mainly consists of cash deposited and held in escrow accounts at certain banks as collateral and cash received through a
consolidated trust that has not yet been distributed from the consolidated trust (see Note 3(g)—Financing Receivables, Net).
All restricted cash of the Sogou Group was originated in the year of 2019 and is presented on the face of the consolidated balance sheets as
“Restricted cash.”
f. Accounts Receivable, Net
The carrying value of accounts receivable is reduced by an allowance that reflects management’s best estimate of the amounts that will not be
collected. Management makes estimations of the collectability of accounts receivable. In estimating the general allowance, many factors are considered,
including reviewing delinquent accounts receivable, performing aging analyses and customer credit analyses, and analyzing historical bad debt records and
current economic trends. Additional allowance for specific doubtful accounts might be made if the financial conditions of the customers of the Sogou
Group deteriorate, resulting in their inability to make payments due to the Sogou Group.
g. Financing Receivables, Net
Financing receivables consist primarily of small consumer loans to individual borrowers. The Sogou Group funds such loans either through its
own capital or through a trust that was jointly established by the Sogou Group and a third-party investor, and is administered by a third-party trust
company. As the trust only invests in loans facilitated by the Sogou Group, the Sogou Group has power to direct the activities of the trust. The Sogou
Group also has the obligation to absorb losses and the right to receive benefits from the trust that could potentially be significant to the trust. As a result, the
Sogou Group is considered the primary beneficiary of the trust and the trust is considered a consolidated VIE (the “Consolidated Trust”) under ASC 810.
The financing receivables are recorded at the principal amount and interest accrued, net of allowance for credit losses that reflects the Sogou
Group’s best estimate of the amounts that will not be collected. Interest on loans is accrued based on the contractual interest rates of the loans when earned.
The loan periods granted by the Sogou Group to the borrowers related to the small consumer loans are generally within one year. The allowance for credit
losses is determined at a level believed to be reasonable to absorb probable losses inherent in the loan portfolio as of each balance sheet date. The
allowance is provided based on an assessment performed on a portfolio basis and is estimated on a quarterly basis or more often as necessary based on the
delinquency rate, the aging of the amount due and other relevant factors.
h. Short-term Receivables and Payables
Prepaid and other current assets are financial assets with carrying values that approximate fair value due to their short-term nature. Accounts
payable, receipts in advance and accrued liabilities are financial liabilities with carrying values that approximate fair value due to their short-term nature.
i. Inventory
Inventory, which mainly consists of smart hardware products, is recorded at the lower of cost or net realizable value. Cost of inventory is
determined using the first-in-first-out cost method. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably
predictable costs and disposal and transportation expenses. Adjustments are recorded to write down the cost of inventory to the estimated net realizable
value for obsolete and slow-moving goods.
j. Long-term Investments
Investments in entities are recorded as equity investments under long-term investments. For entities over which the Sogou Group can exercise
significant influence but in which it does not own a majority equity interest or control, the equity method is applied. For entities over which the Sogou
Group does not have significant influence, the cost method was applied before the adoption of ASC321 effective as of January 1, 2018; after the adoption
of ASC 321, these investments should generally be measured at fair value with gains or losses resulting from changes in fair value recognized in earnings.
Based on ASC 321, an entity may elect to record equity investments without readily determinable fair values and not accounted for by the equity method at
cost, less impairment, adjusted for subsequent observable price changes. Entities that elect this measurement alternative will report in current earnings
changes in the carrying value due to re-measurement based on observable price changes of the equity investments. As of December 31, 2019, all of the
Sogou Group’s equity investments were accounted as equity investments without readily determinable fair values.
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Table of Contents
k. Fixed Assets
Fixed assets comprise computer equipment (including servers), leasehold improvement, office furniture, and vehicles. Fixed assets are recorded at
cost less accumulated depreciation with no residual value. Depreciation is calculated on a straight-line basis over the estimated useful lives listed below:
Fixed Assets
Computer equipment (including servers)
Leasehold improvements
Office furniture
Vehicles
Estimated Useful Lives (Years)
4 - 5
The lesser of the term of the lease or the estimated useful lives of the assets
5
4
Repairs and maintenance costs are expensed as incurred, whereas the cost of renewals and betterments that extend the useful lives of fixed assets
are capitalized as additions to the related assets.
Gains or losses on the disposal of fixed assets are the difference between the net sale proceeds and the carrying amounts of the relevant assets and
are recognized in the consolidated statements of comprehensive income.
l. Goodwill
Goodwill represents the excess of the purchase price over the fair value of the identifiable assets and liabilities acquired as a result of the Sogou
Group’s acquisitions of interests in its subsidiaries and consolidated VIEs.
Goodwill is not depreciated or amortized but is tested for impairment at the reporting unit level on an annual basis, and between annual tests when
an event occurs or circumstances change that could indicate that the asset might be impaired. Under ASC 350-20-35, the Sogou Group has the option to
choose whether it will apply the qualitative assessment first and then the quantitative assessment, if necessary, or to apply the quantitative assessment
directly. The Sogou Group chooses to directly apply the quantitative impairment test, which consists of a one-step quantitative impairment test, comparing
the carrying amount of the reporting unit to the fair value of the reporting unit. If the carrying value of the reporting unit exceeds the fair value of the
reporting unit, goodwill impairment is measured and recognized by the amount by which a reporting unit’s carrying value exceeds its fair value.
Application of a goodwill impairment test requires significant management judgment, including the identification of reporting units, assigning
assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value of each reporting unit. Prior to the completion
of the Company’s IPO, the judgment in estimating the fair value of reporting units included estimating future cash flows, determining appropriate discount
rates and making other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each
reporting unit. After the completion of the Company’s IPO, the fair value of reporting units is determined based on the trading price of the Company’s
ADSs in the public market.
m. Intangible Assets
Intangible assets primarily comprise copyright, developed technologies, domain names and trademarks and computer software. Intangible assets
are recorded at cost less accumulated amortization with no residual value. Amortization of intangible assets is computed using the straight-line method over
the estimated useful lives of the assets as follows:
Intangible Assets
Copyright
Computer software
Domain names and trademarks
Developed technologies
n. Impairment of Long-lived Assets
Estimated Useful
Lives (Years)
5
3
5 - 10
3 - 10
The carrying values of long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value
of an asset may not be recoverable. Based on the existence of one or more indicators of impairment, the Sogou Group compares the carrying amount of the
long-lived asset group with the sum of undiscounted cash flows expected to result from the use and eventual disposal of the asset group. If the carrying
amount exceeds the sum of undiscounted cash flows, the Sogou Group will measure any impairment of long-lived assets using the projected discounted
cash flow method at the asset group level. The estimation of future cash flows requires significant management judgment based on the Sogou Group’s
historical results and anticipated results and is subject to many factors. The discount rate that is commensurate with the risk inherent in the Sogou Group’s
business model is determined by the Sogou Group’s management. An impairment charge would be recorded if the Sogou Group were to determine that the
carrying value of long-lived assets may not be recoverable. The impairment to be recognized would be measured by the amount by which the carrying
values of the assets exceeded the fair value of the assets.
F-13
Table of Contents
o. Treasury Stock
Treasury stock consist of shares repurchased by the Company or that the Company is obligated to repurchase as of the reporting date. Shares
included in treasury stock are no longer outstanding. Treasury stock is accounted for under the cost method.
Treasury stock also includes ordinary shares that were issued upon the early exercise of options and transferred to trusts for the benefit of the
holders, but remained subject to vesting in accordance with the requirements of the applicable option agreements (See “Option Modification” in Note 15—
Share-based Compensation).
p. Revenue Recognition
On January 1, 2018, the Sogou Group adopted ASC 606, using the modified retrospective method applied to those contracts that were not
completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts
are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605. The adoption did not have a material impact on
retained earnings as of January 1, 2018 and the financial statements as of and for the year ended December 31, 2018.
The adoption of ASC 606 mainly resulted in a change to the Sogou Group’s accounting policy for advertising-for-advertising barter transactions.
Under ASC 605, revenue and expense were recognized at fair value from an advertising barter transaction only if the fair value of the advertising
surrendered in the transaction was determinable based on the entity’s own historical practice of receiving cash, marketable securities, or other consideration
that is readily convertible to a known amount of cash for similar advertising from buyers unrelated to the counterparty in the barter transaction. If the fair
value of the advertising surrendered in the barter transaction was not determinable, the barter transaction was to be recorded based on the carrying amount
of the advertising surrendered, which would likely be zero. ASC 606 has suspended the guidance of ASC 605 and provides that when the contract
consideration from a customer is in forms other than cash, the revenue will be measured at the fair value of the noncash consideration, or indirectly
measured by reference to the standalone selling price of the goods or services promised to the customer if the fair value of the non-cash consideration
cannot be reasonably estimated. For the year ended December 31, 2017, the Sogou Group engaged in certain advertising barter transactions for which the
fair value of the service surrendered was not determinable under ASC 605 and therefore no revenues or expenses derived from these barter transactions
were recognized. For the years ended December 31, 2018 and 2019, because of the adoption of ASC 606, the Sogou Group estimated the fair value of the
advertising services received in barter transactions and recognized US$21,817 and US$15,730, respectively, in revenues, with corresponding increases in
cost of revenues and sales and marketing expenses. The adoption of ASC 606 did not have a material impact on the Sogou Group’s consolidated balance
sheet, consolidated statement of cash flows, or consolidated statement of changes in equity for the years ended December 31, 2018 and 2019.
Under Topic 606, the Sogou Group recognizes revenue when control of the promised goods or services is transferred to the customers, in an
amount that reflects the consideration the Sogou Group expects to be entitled to in exchange for those goods or services.
The Sogou Group determines revenue recognition through the following steps:
Step 1: identification of the contract, or contracts, with a customer;
Step 2: identification of the performance obligations in the contract;
Step 3: determination of the transaction price;
Step 4: allocation of the transaction price to the performance obligations in the contract; and
Step 5: recognition of revenue when, or as, the Sogou Group satisfies a performance obligation.
The Sogou Group is principally engaged in offering search and search-related advertising services including pay-for-click services and other
online advertising services. The Sogou Group also offers IVAS, primarily with respect to the operation of Web games and mobile games developed by third
parties, and offers other products and services including smart hardware products and online lending and microcredit services. The following table presents
revenues disaggregated by revenue source, net of value-added tax (“VAT”).
Search and search-related advertising revenues
Other revenues
Total
$
$
801,551
106,806
908,357
$
$
1,023,132
101,026
1,124,158
$
$
1,073,173
99,079
1,172,252
2017
(1)
For the Year Ended
December 31,
2018
(2)
2019
(2)
(1)
(2)
As noted above, prior-period amounts have not been adjusted, pursuant to the modified retrospective method.
Search and search-related advertising revenues would be US$1,001,315 and US$1,057,443, and total revenues would be US$1,102,341 and
US$1,156,522, for the years ended December 31, 2018 and 2019, respectively, without the adoption of ASC 606.
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Search and Search-related Advertising Revenues
The Sogou Group procures a majority of its search and search-related advertisers through advertising agencies. Discounts and other cash
incentives provided to the advertising agencies are accounted for as a reduction of revenues.
Pay-for-click Services
Pay-for-click services enable advertisers’ promotional links to be displayed on the Sogou Group’s search result pages and other Internet properties
and third parties’ Internet properties where the links are relevant to the subject and content of searches and such properties. For pay-for-click services, the
Sogou Group introduces Internet users to its advertisers through the auction-based systems and charge advertisers on a per-click basis when the users click
on the displayed links. The performance obligation of pay-for-click services is satisfied at the point in time when users click on the displayed links, and
revenue for pay-for-click services is recognized on a per-click basis.
Other Online Advertising Services
Other online advertising services mainly consist of displaying advertisers’ promotional links on the Sogou Group’s Internet properties. For time-
based advertising services, the performance obligation is satisfied over time when the advertising links are displayed over the contract periods, and
therefore revenue is normally recognized on a straight-line basis over the contracted display period. For performance-based advertising services, for
example, the advertisers are charged based on the times that users download from the displayed links, the performance obligation is satisfied at the point in
time when the promised performance is completed, and the revenue is recognized upon the completion of the promised performance.
The Sogou Group’s advertising services expand distribution of advertisers’ promotional links and advertisements by leveraging traffic on third
parties’ Internet properties, including Web content, software, and mobile applications. The Sogou Group is the principal in such arrangement because its
promise to advertisers is to provide the advertising services itself rather than to arrange for the advertising services to be provided by third parties on their
Internet properties. Payments made to operators of third-party Internet properties are included in the traffic acquisition costs.
Other Revenues
Other revenues consist of IVAS revenues, which are mainly from the operation of Web games and mobile games developed by third parties, as
well as revenues from other products and services, including smart hardware products and online lending and microcredit services, offered by the Sogou
Group. Other revenues are generally recognized when the Sogou Group’s performance obligations under the applicable agreements are satisfied, except for
interest revenues generated from the Sogou Group’s online lending and microcredit services, which are recognized using the effective interest method.
Contract Balances
Timing of revenue recognition may differ from the timing of invoicing to customers. Accounts receivable represent amounts invoiced, and revenue
recognized prior to invoicing when the Sogou Group has satisfied its performance obligations and has the unconditional right to payment.
Receipts in advance relates to unsatisfied performance obligations at the end of the year and consists of cash payments received in advance from customers.
The unused cash balances remaining in customers’ accounts are recorded as a liability of the Sogou Group. Due to the generally short-term duration of the
Sogou Group’s contracts, the majority of the performance obligations are satisfied in one year. The amounts of revenues recognized that were included in
the receipts in advance balances at the beginning of the year were US$63,459 and US$62,191, respectively, for the years ended December 31, 2018 and
2019.
Revenues recognized in the current year from performance obligations related to prior years were not material.
Practical Expedients
The Sogou Group has used the following practical expedients as allowed under ASC 606:
(i) The transaction price allocated to performance obligations that are unsatisfied, or partially unsatisfied, has not been disclosed, as substantially all of the
Sogou Group’s contracts have a duration of one year or less;
(ii) Payment terms and conditions vary by contract type, although terms generally include a requirement of prepayment or payment within one year or less.
In instances where the timing of revenue recognition differs from the timing of invoicing, the Sogou Group has determined that its contracts generally do
not include a significant financing component; and
(iii) The Sogou Group generally expenses sales commissions when incurred because the amortization period would be one year or less. These costs are
recorded within sales and marketing expenses.
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q. Cost of Revenues
Cost of revenues consist primarily of traffic acquisition cost, bandwidth costs, server and Internet equipment depreciation associated with the
operation of the Sogou Group’s Internet properties, salary and benefits expenses and share-based compensation for staff employed in network operations,
and costs related to the other business. Traffic acquisition costs represent the most significant portion of cost of revenues.
The Sogou Group’s traffic acquisition costs consist primarily of payments to third parties that direct search queries of their users to Internet
properties of the Sogou Group or distribute the Sogou Group’s advertisers’ promotional links through such third parties’ Internet properties. The traffic
acquisitions costs for such arrangements consist primarily of fees that the Sogou Group pays to the third parties based on an agreed-upon unit price and
revenue-sharing payments that the Sogou Group makes to such third parties based on an agreed-upon percentage of revenues generated from users’ clicks.
r. Research and Development Expenses
Research and development expenses primarily consist of salary and benefits expenses incurred in the research and development of new products
and new functionality added to existing products.
Costs incurred during the application development stage for software programs to be used solely to meet internal needs were not material in the
years presented; therefore, no research and development expenses were capitalized as intangible assets.
s. Sales and Marketing Expenses
Sales and marketing expenses mainly consist of advertising and promotional expenses, and salary and benefits expenses. Advertising and
promotional expenses generally represent the expenses incurred for promoting the Sogou Group’s products, services and brand. The Sogou Group
recognizes advertising and promotional expenses as incurred. Total advertising and promotional expenses were US$117,553, US$102,098, and US$87,035,
respectively, for the years ended December 31, 2017, 2018 and 2019.
t. Leases
The Sogou Group adopted ASU No. 2016-02, Leases (Topic 842), at the beginning of the first quarter of 2019 using the modified retrospective
method, and did not restate prior comparable periods. Results and disclosure requirements for reporting periods beginning on and after January 1, 2019 are
presented under Topic 842, while prior period amounts have not been adjusted and continue to be reported in accordance with the Group’s historical
accounting under Topic 840. Under the old Topic 840, leases where substantially all the rewards and risks of ownership of assets remain with the lessor are
accounted for as operating leases. Payments made under operating leases, including rent concessions, are charged to the consolidated statements of
comprehensive income on a straight-line basis over the lease term.
The Sogou Group elected the package of practical expedients permitted under the transition guidance, which allowed the Sogou Group to carry
forward the historical classification of leases, the assessment of whether an existing or expired contract contains a lease, and the treatment of initial direct
costs. The Sogou Group also elected to keep leases with an initial term of 12 months or less off the balance sheet.
Under the new lease standard, the Sogou Group determines if an arrangement is or contains a lease at inception. Right-of-use assets and liabilities
are recognized at the lease commencement date based on the present value of remaining lease payments over the lease term. The Sogou Group considers
only payments that are fixed and determinable at the time of the commencement of the lease. The adoption of the new leasing guidance resulted in
recognition of right-of-use assets of $25.4 million and leasing liability of $23.1 million as of January 1, 2019. The adoption did not impact the beginning
retained earnings, or the prior year consolidated statements of comprehensive income and statements of cash flows.
u. Share-based Compensation Expense
Share-based compensation expense arises from share-based awards, including share options for the purchase of Sogou ordinary shares, granted by
the Sogou Group to its management and other key employees, and granted by Sohu to its management and other key employees who to some extent
provide services to the Sogou Group and to certain management and other key employees of the Sogou Group (“Sogou Share-based Awards”); restricted
share units and share options for the purchase of Sohu common stock granted by Sohu to employees of the Sogou Group (“Sohu Stock-based Awards”);
and restricted share units granted by Tencent to certain persons who became the Sogou Group’s employees when Tencent’s Soso search-related businesses
were transferred to the Sogou Group in September 2013 (“Tencent Share-based Awards”).
In determining the fair value of share options granted, a binomial option-pricing model (the “BP Model”) is applied. The determination of the fair
value is affected by the fair value of the ordinary shares as well as assumptions regarding a number of complex and subjective variables, including risk-free
interest rates, exercise multiples, expected forfeiture rates, the expected share price volatility rates, and expected dividends. Prior to the completion of the
Company’s IPO, the fair values of the ordinary shares were assessed using the income approach/discounted cash flow method or based on the mid-point of
the estimated IPO price range, in each case with a discount for lack of marketability, given that the shares underlying the awards were not publicly traded at
the time of grant. After the completion of the Company’s IPO, the fair values of the ordinary shares were determined based on the trading price of the
Company’s ADSs in the public market.
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Share-based compensation expense for share options granted to employees is measured based on their grant-date fair values. In circumstances
where the service inception date precedes the grant date, share-based compensation expense is measured beginning on the service inception date and is re-
measured on each subsequent reporting date before the grant date, based on the estimated fair value of the related options. For options with only a service
requirement, share-based compensation expense is recognized on an accelerated basis over the requisite service period. For options with both a service
requirement and performance targets, share-based compensation expense is recognized over the estimated period during which both the service period
requirement and the performance targets will be met. For options vesting subject to an IPO, share-based compensation expense is recognized on an
accelerated basis over the requisite service period after the completion of Sogou’s IPO on November 13, 2017. The number of share-based awards for
which the service is not expected to be rendered over the requisite period is estimated, and the related compensation expense is not recorded for the number
of awards so estimated.
Before the Group’s adoption of ASU 2018-07 “Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting,” effective for fiscal years beginning after December 15, 2018, share-based compensation expense for share options granted to non-
employees was measured at fair value at the earlier of the performance commitment date or the date service was completed and recognized over the period
during which the service was provided. The Sogou Group applies the guidance in ASC 505-50 to measure share options granted to non-employees based
on the then-current fair value at each reporting date until the service has been provided and the performance targets have been met. After the Group’s
adoption of ASU 2018-07, share-based compensation expense for share options granted to non-employees is recognized in accordance with the
requirements of ASC 718 for employee share-based compensation awards.
Share-based awards granted by Sohu are deemed to be share-based compensation made by the Sogou Group in exchange for services rendered to
the Sogou Group, and the Sogou Group recognizes share-based compensation expense accordingly. Because the Sogou Group is not required to reimburse
Sohu for such share-based compensation expense, the related amount is recorded as a capital contribution from Sohu.
v. Income Taxes and Uncertain Tax Positions
Income Taxes
Income taxes are accounted for using an asset and liability approach which requires the recognition of income taxes payable or refundable for the
current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in the Sogou Group’s financial
statements or tax returns. Deferred income taxes are determined based on the differences between the financial reporting and tax bases of assets and
liabilities and are measured using tax rates and tax laws in effect as of the measurement date. Deferred tax assets are reduced by a valuation allowance if,
based on available evidence, it is considered more likely than not that some portion of or all of the deferred tax assets will not be realized. In making such
determination, the Sogou Group considers factors including (i) future reversals of existing taxable temporary differences, (ii) future profitability, and
(iii) tax planning strategies.
Uncertain Tax Positions
In order to assess uncertain tax positions, the Sogou Group applies a more likely than not threshold and a two-step approach for financial
statement recognition and measurement of its tax position. For the two-step approach, the first step is to evaluate the tax position for recognition by
determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained, including resolution of related
litigation processes and appeals, if any. The second step is to measure the tax benefit as the largest amount that is more likely than not to be realized upon
settlement. Significant judgment is required in evaluating the Sogou Group’s uncertain tax positions and determining its provision for income taxes. The
Sogou Group did not have any significant interest or penalties associated with tax positions for the years ended December 31, 2017, 2018 and 2019. As of
December 31, 2018 and 2019, the Sogou Group did not have any significant unrecognized uncertain tax positions, and did not recognize any liability for
unrecognized tax benefits or any significant interest or penalties associated with such uncertain tax positions.
w. Comprehensive Income
Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances
excluding transactions resulting from investments from owners and distributions to owners. Accumulated other comprehensive loss, as presented in the
Sogou Group’s consolidated balance sheets, consists of the Sogou Group’s cumulative foreign currency translation adjustment.
x. Net Income per Ordinary Share
Basic net income per ordinary share are computed using the weighted average number of ordinary shares outstanding during the year. Diluted net
income per ordinary share are computed using the weighted average number of ordinary shares and, if dilutive, potential ordinary shares outstanding during
the year. Potential ordinary shares consist of shares issuable upon the exercise of share options, vesting and settlement of restricted share units, and, for
periods prior to the completion of the IPO, conversion of Pre-IPO Preferred Shares. Potential ordinary shares issuable upon the exercise of share options
are accounted for in the computation of diluted net income per ordinary share using the treasury stock method. The dilutive effect of share-based awards
with performance requirements is not considered before the performance targets are actually met. Potential ordinary shares issuable upon the conversion of
Pre-IPO Preferred Shares are accounted for in the computation of diluted net income per ordinary share for periods prior to the completion of the IPO,
using the if-converted method. Potential ordinary shares are not included in the denominator of the diluted net income per share calculation when inclusion
of such shares would be anti-dilutive.
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The two-class method was used to calculate the basic net income per ordinary share for periods prior to the completion of the IPO, since the Pre-
IPO Preferred Shares were entitled to participation with ordinary shares in the Company’s undistributed net income and therefore were deemed to be
participating securities. Net income per ordinary share are computed on Class A Ordinary Shares and Class B Ordinary Shares together, because both
classes have the same dividend rights in the Company’s undistributed net income.
y. Fair Value of Financial Instruments
U.S. GAAP defines fair value as the price that would be received to sell 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 Sogou Group considers the principal or most advantageous market in which a transaction would be expected to occur and considers
assumptions that market participants would use when pricing the asset or liability.
U.S. GAAP establishes a three-tier hierarchy to prioritize the inputs used in the valuation methodologies in measuring the fair value of financial
instruments. This hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring
fair value. The three-tier fair value hierarchy is:
Level 1—observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2—other inputs that are directly or indirectly observable in the marketplace.
Level 3—unobservable inputs that are supported by little or no market activity.
The Sogou Group’s financial instruments primarily include cash equivalents, restricted cash, short-term investments, accounts receivable,
financing receivables, accounts payables, accrued and other short-term liabilities, and amounts due from/to related parties. The carrying value of these
balances approximates their fair value due to the current and short-term nature of the balances.
z. Segment Reporting
Based on the criteria established by ASC 280 “Segment Reporting”, the Sogou Group’s chief operating decision maker has been identified as the
Chief Executive Officer, who reviews consolidated results when making decisions about allocating resources and assessing the performance of the Sogou
Group. The Sogou Group does not distinguish between markets or segments for the purpose of internal reporting. Hence, the Sogou Group has only one
operating segment. As the Sogou Group’s long-lived assets and revenue are substantially located in and derived from the PRC, no geographical segments
are presented.
aa. Recently Issued Accounting Pronouncements
Financial Instruments-Credit Losses. In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), which
requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and
reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets
measured at amortized cost. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.
Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The
Sogou Group evaluated the impact of adopting this standard and does not expect this standard to have a material impact on its consolidated financial
statements.
Simplifying the Test for Goodwill Impairment. In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment”.
The guidance removes Step 2 of goodwill impairment tests, which requires a hypothetical purchase price allocation. A goodwill impairment will now be
the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance is to be adopted
on a prospective basis for annual or interim goodwill impairment tests beginning after December 15, 2019. Early adoption is permitted for interim or
annual goodwill impairment tests performed on testing dates after January 1, 2017. The Sogou Group does not expect this standard to have a material
impact on its consolidated financial statements.
Cloud computing. In 2018, the FASB issued new guidance on a customer’s accounting for implementation, set-up, and other upfront costs
incurred in a cloud computing arrangement that is hosted by the vendor (i.e., a service contract). Under the new guidance, customers will apply the same
criteria for capitalizing implementation costs as they would for an arrangement that has a software license. This standard is effective for annual reporting
periods beginning after December 15, 2019, including interim reporting periods within those fiscal years. The adoption of this standard will not have a
material impact on the Sogou Group’s consolidated financial statements.
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Fair value measurement disclosure requirements. In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820):
Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”) which eliminates, adds and modifies
certain disclosure requirements for fair value measurements. Under the guidance, public companies will be required to disclose the range and weighted
average used to develop significant unobservable inputs for Level 3 fair value measurements. The guidance is effective for all entities for fiscal years
beginning after December 15, 2019 and for interim periods within those fiscal years, but entities are permitted to early adopt either the entire standard or
only the provisions that eliminate or modify the requirements. The Sogou Group does not expect this standard to have a material impact on its consolidated
financial statements.
4. CONCENTRATION OF RISK
a. Concentration of Credit Risk
Financial instruments that potentially expose the Sogou Group to concentrations of credit risk consist primarily of cash and cash equivalents,
short-term investments, accounts receivable, and financing receivables.
Cash, Cash Equivalents, Restricted Cash, and Short-term Investments
As of December 31, 2018, approximately 40% of the Sogou Group’s cash and cash equivalents and short-term investments were held in fourteen
financial institutions in mainland China, approximately 31% of the Sogou Group’s cash and cash equivalents and short-term investments were held in four
financial institutions in Hong Kong, and approximately 14% of the Sogou Group’s cash and cash equivalents and short-term investments were held in one
financial institution in Macau. The remaining cash and cash equivalents and short-term investments were held in one financial institution in New York.
As of December 31, 2019, approximately 53% of the Sogou Group’s cash, cash equivalents, restricted cash, and short-term investments were
held in seventeen financial institutions in mainland China; approximately 27% of the Sogou Group’s cash, cash equivalents, restricted cash, and short-term
investments were held in four financial institutions in Hong Kong; and approximately 20% of the Sogou Group’s cash, cash equivalents, restricted cash,
and short-term investments were held in one financial institution in Macau. The remaining cash, cash equivalents, restricted cash, and short-term
investments were held in one financial institution in New York.
The Sogou Group holds its cash, cash equivalents, restricted cash, and short-term investments at financial institutions that are among the largest
and most respected in the PRC and at international financial institutions with high ratings from internationally-recognized rating agencies. The Sogou
Group’s management chooses these institutions because of their reputations and track records for stability, and their known large cash reserves, and
management periodically reviews these institutions’ reputations, track records, and reported reserves.
Management expects that any additional institutions that the Sogou Group uses for its cash, cash equivalents, restricted cash, and short-term
investments will be chosen with similar criteria for soundness. As a further means of managing its credit risk, the Sogou Group holds its cash and bank
deposits in a number of different financial institutions. As of December 31, 2018 and 2019, the Sogou Group held its cash, cash equivalents, restricted cash,
and short-term investments in different financial institutions and held no more than approximately 29% and 27% of its total cash, cash equivalents,
restricted cash, and short-term investments at any single institution.
Under PRC law, it is generally required that a commercial bank in the PRC that holds third party cash deposits protect the depositors’ rights over
and interests in their deposited money; PRC banks are subject to a series of risk control regulatory standards; and PRC bank regulatory authorities are
empowered to take over the operation and management of any PRC bank that faces a material credit crisis.
Accounts Receivable
As of December 31, 2018 and 2019, the Sogou Group’s accounts receivable from its top three customers represented 59%, and 50%, respectively,
of the Sogou Group’s aggregate accounts receivable balance, and a single customer accounted for 38%, and 22%, respectively, of such balance.
Management assesses the credit quality of and sets credit limits on the Sogou Group’s customers, taking into account their financial position, the
availability of guarantees from third parties, their credit history, and other factors such as current market conditions. In estimating the Sogou Group’s
general allowance for doubtful accounts, management considers many factors, including among other things the results of reviews of delinquent accounts,
aging analyses and customer credit analyses, and analysis of historical bad debt records and current economic trends.
Financing Receivables
Financing receivables consisted of the principal amounts of small consumer loans made by the Sogou Group to individual borrowers and related
interest accrued on these loans. As of December 31, 2018 and 2019, no borrower accounted for 10% or more of the financing receivables balance. The
Sogou Group is subject to credit risks resulting from defaults by borrowers and records an allowance based on its estimated probable losses against its
financing receivables. The Sogou Group manages the credit risk of financing receivables by performing credit assessments on its borrowers and ongoing
monitoring of the outstanding balances.
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b. Foreign Currency Exchange Rate Risks
While the reporting currency of the Sogou Group is the U.S. dollar, to date almost all of its revenues and costs, almost half of its assets, and almost
all of its liabilities are denominated in RMB. As a result, the Sogou Group is exposed to foreign exchange risk, as its revenues and assets may be affected
by fluctuations in the exchange rate between the U.S. dollar and the RMB. If the RMB depreciates against the U.S. dollar, the value of the Sogou Group’s
RMB revenues and assets as expressed in its U.S. dollar financial statements will decline.
5. CASH AND CASH EQUIVALENTS
Cash
Cash equivalents
Total
6. ACCOUNT AND FINANCING RECEIVABLES, NET
Accounts receivable
Financing receivables
Less: allowance for doubtful accounts and credit losses
Total
As of December 31,
2018
2019
68,719
116,456
185,175
$
$
34,836
107,628
142,464
As of December 31,
2018
2019
104,159
46,238
(7,511)
142,886
$
$
77,210
66,858
(12,255)
131,813
$
$
$
$
The following table presents the movement of the allowance for doubtful accounts and credit losses:
Beginning balance
Additional provision
Written off
Foreign currency translation adjustment
Ending balance
7. PREPAID AND OTHER CURRENT ASSETS
2017
As of December 31,
2018
2019
—
378
—
6
384
$
$
384
9,119
(1,908)
(84)
7,511
$
$
7,511
15,620
(11,741)
865
12,255
$
$
Receivables from third party payment service providers
Advances to suppliers
(1)
Inventories
Deductible input VAT
Interest receivable from bank deposits with original maturities of three months or less
Collaboration deposits
Employee advances
Prepaid content and licenses
Others
Total
$
$
As of December 31,
2018
2019
14,012
5,329
12,606
5,320
1,198
—
557
288
812
40,122
$
$
10,748
4,424
4,132
3,976
1,252
1,175
445
375
361
26,888
(1)
The inventory balances as of December 31, 2018 and 2019 were offset by provisions for impairment of US$2,547 and US$6,756, respectively.
8. LONG-TERM INVESTMENTS
As of December 31, 2018 and 2019, the aggregate carrying value of all equity investments was US$63,305 and US$63,345, respectively. The
Sogou Group’s equity investments mainly consisted of equity interests held by the Sogou Group in Zhihu Technology Limited, a company that engages
primarily in the business of operating an online question and answer-based knowledge and information sharing platform.
Impairment losses for the years ended December 31, 2017, 2018, and 2019, were recorded at US$230, US$2,605, and US$10,965, respectively, in
other income, net, for the years ended December 31, 2017, 2018, and 2019, and a cumulative impairment loss of US$13,800 was recognized as of
December 31, 2019. Upward adjustments in accordance with ASC321 for the years ended December 31, 2017, 2018, and 2019 were nil, US$18,013, and
nil, respectively.
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9. FIXED ASSETS, NET
Computer equipment (including servers)
Leasehold improvements
Office furniture
Vehicles
Fixed assets, gross
Less: Accumulated depreciation
Fixed assets, net
As of December 31,
2018
2019
$
$
280,157
12,207
1,914
362
294,640
(147,145)
147,495
$
$
281,081
13,011
2,482
356
296,930
(186,924)
110,006
For the years ended December 31, 2017, 2018, and 2019, depreciation expenses were US$48,205, US$60,690, and US$64,663, respectively. No
impairment loss was recognized for the years ended December 31, 2017, 2018, and 2019.
10. GOODWILL
Beginning balance
Foreign currency translation adjustment
Ending balance
As of December 31,
2018
2019
5,908
(283)
5,625
$
$
5,625
(91)
5,534
$
$
No impairment loss was recognized for the years ended December 31, 2017, 2018, and 2019. No accumulated goodwill impairment has
been provided as of December 31, 2019.
11. INTANGIBLE ASSETS, NET
Items
Copyright
Computer software
Domain names and trademarks
Developed technologies
Others
Total
Items
Copyright
Computer software
Domain names and trademarks
Developed technologies
Others
Total
Cost
As of December 31, 2018
Accumulated
Amortization
Net Value
3,213
2,105
1,366
583
145
7,412
3,161
2,958
1,344
573
143
8,179
$
$
(3,213)
(898)
(1,330)
(583)
(39)
(6,063)
As of December 31, 2019
Accumulated
Amortization
$
$
(3,161)
(1,563)
(1,314)
(573)
(54)
(6,665)
$
$
$
$
—
1,207
36
—
106
1,349
Net Value
—
1,395
30
—
89
1,514
Cost
$
$
$
$
For the years ended December 31, 2017, 2018, and 2019, amortization expenses were US$1,389, US$1,251, and US$705, respectively. No
impairment loss was recognized for the years ended December 31, 2017, 2018, and 2019.
F-21
Table of Contents
As of December 31, 2019, intangible assets amortization expense for future years is expected to be as follows:
2020
2021
2022
2023
2024
Thereafter
Total expected amortization expense
12. ACCRUED AND OTHER SHORT-TERM LIABILITIES
Accrued advertising and promotion expenses
Contract deposits from customers
Accrued professional fees
Payable to a third-party investor in the Consolidated Trust
Accrued bandwidth costs
Contingent litigation liabilities (See “Litigation” in Note 21—Commitments and Contingencies)
Lease liabilities
Deferred ADS deposit income
Early exercise of Sogou share options with trust arrangements (See “Option Modification” in
Note 15—Share-based Compensation)
Payable to Web game and mobile game developers
Accrued content and license fees
Payable for government project
Accrual for fixed assets purchases
Others
Total
13. FAIR VALUE MEASUREMENT
Intangible Assets
Amortization Expense
701
701
84
8
8
12
1,514
$
$
As of December 31,
2018
2019
$
$
56,353
36,222
20,459
—
8,966
3,440
—
4,985
2,702
3,288
1,954
1,764
1,409
9,857
151,399
$
$
51,344
31,399
19,235
8,601
7,532
6,476
4,877
3,697
2,702
2,209
2,103
1,736
274
8,090
150,275
The following table sets forth the financial instruments, measured at fair value on a recurring basis, by level within the fair value hierarchy as of
December 31, 2018, and 2019:
Items
Cash equivalents
Short-term investments
Total
Fair Value Measurements at Reporting
Date Using
As of
December 31,
2018
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
$
$
116,456
851,327
967,783
$
$
F-22
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
—
—
—
$
$
116,456
851,327
967,783
$
$
—
—
—
Table of Contents
Items
Cash equivalents
Short-term investments
Total
Cash Equivalents
As of
December 31,
2019
$
$
107,628
995,350
1,102,978
$
$
Fair Value Measurements at Reporting
Date Using
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
—
—
—
$
$
107,628
995,350
1,102,978
$
$
—
—
—
The Sogou Group’s cash equivalents consist of time deposits with original maturities of three months or less, and demand deposits that are readily
convertible to known amounts of cash. The fair values of cash equivalents are determined based on the pervasive interest rates in the market. The Sogou
Group classifies the valuation techniques that use the pervasive interest rates input as Level 2 of fair value measurements.
Short-term Investments
The Sogou Group invested in time deposits with original maturities of more than three months and financial instruments issued by commercial
banks in China which had variable interest rates indexed to the performance of underlying assets. Since the investments’ maturity dates are within one year,
they are classified as short-term investments. In accordance with ASC 825, the Sogou Group elected the fair value method at the date of initial recognition
and carried these investments at fair value. For both time deposits with original maturities of more than three months and financial instruments with a
variable interest rate indexed to performance of underlying assets, the fair values are determined based on the pervasive interest rates in the market.
Changes in the fair value are reflected in the consolidated statements of comprehensive income as other income, net. To estimate fair value, the
Sogou Group refers to the quoted rate of return provided by banks at the end of each period using the discounted cash flow method. The Sogou Group
classifies the fair value measurements as Level 2 of fair value measurements. The Sogou Group recorded gains resulting from changes in the fair value of
short-term investments of US$927, US$22,058, and US$29,900, respectively, in other income for the years ended December 31, 2017, 2018, and 2019.
Long-term Investments
Since the adoption of ASC 321 in 2018, all of the Sogou Group’s long-term equity investments are accounted for at cost less impairments,
adjusted by observable price changes as these investments do not have readily determinable market values. When observable price changes are identified,
with the assistance of a qualified professional appraiser, the Sogou Group uses the back-solve method to re-measure the fair value of the investments and to
determine the amount that should be recorded as upward or downward adjustments. The back-solve method requires considering the rights and preferences
of each classes of equity and solving for the total equity value that is consistent with a recent transaction of the subject company’s securities. This method
requires making assumptions on future outcomes available to the subject company, the probability of each scenario, expected time to liquidity events,
volatility and risk-free rate. The Sogou Group classifies these non-recurring fair value measurement as Level 3 of fair value measurement. The Sogou
Group recorded gains resulting from upward adjustment of US$18,013 and nil in other income for the years ended December 31, 2018 and 2019,
respectively.
The Sogou Group also measures equity investments without readily determinable fair values at fair value on a non-recurring basis when an
impairment loss is to be recognized. As of December 31, 2018 and 2019, certain investments were measured using significant unobservable inputs (Level
3) and written down from their respective carrying values to their fair values, considering the stage of development, the business plan, the financial
condition, the sufficiency of funding and the operating performance of the investee companies, with impairment charges incurred and recorded in other
income for the years then ended. The Sogou Group recognized an impairment loss of US$230 under cost method in 2017, and impairment losses of
US$2,605 and US$10,965, respectively, for those investments without readily determinable fair values in 2018 and 2019.
14. TREASURY STOCK
On August 3, 2019, the Company’s board of directors authorized a repurchase program of up to US$50 million of the Company’s outstanding
ADSs over a twelve-month period from August 3, 2019 to August 2, 2020. As of December 31, 2019, the Company had repurchased under the program an
aggregate of 8,690,618 ADSs, representing 8,690,618 Class A ordinary shares, at an average price of US$4.80 per ADS, or US$4.80 per Class A ordinary
share, for aggregate consideration of US$42,016, including trading commissions. The repurchased shares were recorded at their historical cost of
US$42,016 and were not canceled.
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Table of Contents
The treasury stock account also includes 5,805,000 and 5,520,000 Class A ordinary shares that were issued upon the early exercise of options
(See “Option Modification” in Note 15—Share-based Compensation), but remained subject to original vesting restrictions both before and after exercise,
and remained unvested as of December 31, 2018 and 2019, respectively. Although the Class A Ordinary Shares have been determined to be treasury stock
for accounting purposes, they are outstanding for legal purposes, given that the underlying shares were placed in trusts with the original option grantees as
beneficiaries.
15. SHARE-BASED COMPENSATION
Sogou 2010 Share Incentive Plan
The Company adopted a share incentive plan on October 20, 2010 and adopted an amendment to the plan effective August 22, 2014 that increased
the aggregate number of Sogou Class A Ordinary Shares issuable under the plan to 41,500,000 (as amended to date, the “Sogou 2010 Share Incentive
Plan”). Awards of share rights may be granted under the Sogou 2010 Share Incentive Plan to management and other key employees of the Sogou Group
and of any present or future parents or subsidiaries or VIEs of the Sogou Group. The maximum term of any share incentive award granted under the Sogou
2010 Share Incentive Plan is ten years from the grant date. The Sogou 2010 Share Incentive Plan will expire on October 19, 2020.
The options contractually granted under the Sogou 2010 Share Incentive Plan may be placed in one of the following three categories:
(1) Performance-based options, which vest and become exercisable either in four equal installments or in two to four installments of specified
share numbers over their specified vesting periods, with each installment vesting upon a service period requirement being met, as well as the
employee grantee’s achievement, as determined by the Company’s chief executive officer, of performance targets for the corresponding
period specified by the Company’s chief executive officer. For purposes of recognition of share-based compensation expense, each
installment is considered to be granted as of the date that the performance targets have been set; or
(2) Service-based options, which vest and become exercisable either in four equal installments or in two to four installments of specified share
numbers over their specified vesting periods, with each installment vesting only upon a service period requirement being met; or
(3) IPO-based options, which were subject to completion of an IPO and vesting/ exercisability in five equal installments, with (i) the first
installment vesting upon the expiration of all underwriters’ lockup periods applicable to the Company’s IPO and (ii) each of the four
subsequent installments vesting on the first, second, third, and fourth anniversary dates of the completion of the IPO.
A summary of each of the above three categories of options as of December 31, 2019 is presented below (in thousands):
Performance-based options
Service-based options
IPO-based options
Total
Contractually Granted
Granted
(For Purposes of Share-based
Compensation Expense)
29,932
2,031
7,250
39,213
28,059
2,031
7,250
37,340
Vested and Exercisable
Exercised
27,653
951
4,370
32,974
26,767
481
2,930
30,178
A summary of share option activity under the Sogou 2010 Share Incentive Plan as of and for the year ended 2019 is presented below:
Outstanding as of January 1, 2019
Granted
Exercised
Forfeited/Expired
Outstanding as of December 31, 2019
Vested as of December 31, 2019 and expected to vest thereafter
Exercisable as of December 31, 2019
Number
of Shares
(In thousands)
Weighted
Average
Exercise
Price
6,445
1,432
(500)
(215)
7,162
6,572
2,796
$
$
$
$
0.419
0.001
0.001
0.001
0.377
0.411
0.033
Weighted
Average
Remaining
Contractual
Life (Years)
5.29
Aggregate
Intrinsic
Value (1)
4.45
4.35
4.42
$
$
$
29,887
27,198
11,819
(1) The aggregate intrinsic value in the preceding table represents the difference between the closing price of Sogou Class A Ordinary Shares of $4.55 on
the last trading day in 2019 and the exercise price of the options.
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Table of Contents
For the years ended December 31, 2017, 2018, and 2019, total share-based compensation expense recognized for share options under the Sogou
2010 Share Incentive Plan was US$23,037, US$12,547, and US$13,465, respectively. As of December 31, 2019, there was US$2,734 of unrecognized
compensation expense related to unvested share options granted under the Sogou 2010 Share Incentive Plan, which is expected to be recognized over a
weighted average period of 1.56 years.
For the years ended December 31, 2017, 2018, and 2019, the total fair values of the share options vested on their respective vesting dates were
US$21,710, US$28,530, and US$11,893, respectively.
For the years ended December 31, 2017, 2018, and 2019, total intrinsic value of options exercised was US$11,136, US$33,180, and US$1,635,
respectively.
Prior to the completion of the Company’s IPO, the fair values of the Class A Ordinary Shares were assessed using the income approach/discounted
cash flow method or based on the mid-point of the estimated IPO price range, in each case with a discount for lack of marketability because the Class A
Ordinary Shares underlying the award were not publicly traded at the time of grant. The assessment required complex and subjective judgments regarding
the Sogou Group’s projected financial and operating results, its unique business risks, the liquidity of its ordinary shares, and its operating history and
prospects at the time the grants were made. After the completion of the Company’s IPO, the fair values of the ordinary shares were determined based on the
trading price of the Company’s ADSs in the public market.
The fair value of the share options granted under the Sogou 2010 Incentive Plan was estimated on the date of grant with the assistance of a
qualified professional appraiser, using the BP Model with the following assumptions used:
Average risk-free interest rate
Exercise multiple
Expected forfeiture rate (post-vesting)
Weighted average expected option life
Volatility rate
Dividend yield
Weighted average fair value of share options
2017
2.14% ~ 3.00%
2 ~ 3
0% ~ 12%
7
39% ~ 47%
0%
10.35
2018
3.36% ~ 3.51%
2
12%
9
40% ~ 46%
0%
12.26
2019
2.60% ~ 2.86%
2 ~ 3
0% ~ 12%
7
36% ~ 41%
0%
4.05
The Sogou Group estimated the risk-free rate based on the market yields of U.S. Treasury securities with an estimated country-risk differential as
of the valuation date. An exercise multiple was estimated as the ratio of the fair value of the Class A Ordinary Shares over the exercise prices as of the time
the options would be expected to be exercised, based on consideration of research studies regarding exercise patterns based on historical statistical data. In
the Sogou Group’s valuation analysis, a multiple of three was applied for management and a multiple of two was applied for other key employees. The
Sogou Group estimated the forfeiture rate to be 0% or 1% for share options granted to management and 12% for share options granted to other key
employees. As the Company’s ordinary shares had been publicly traded for only slightly more than two years as of December 31, 2019, the expected
volatility at the valuation date was estimated based on the historical volatility of specified comparable companies and Sogou for the periods before the
grant dates with length commensurate with the expected term of the options. The Company has no history or expectation of paying dividends on its
ordinary shares. Accordingly, the dividend yield was estimated to be 0%.
Sogou 2017 Share Incentive Plan
In October 2017, the Company adopted a share incentive plan (the “Sogou 2017 Share Incentive Plan”), which provides that the aggregate number
of Sogou Class A Ordinary Shares issuable under the plan is 28,000,000. Share incentive awards may be granted under the Sogou 2017 Share Incentive
Plan to our management and employees and of any of our present or future parents or subsidiaries. The maximum term of any share incentive award
granted under the Sogou 2017 Share Incentive Plan is ten years from the grant date.
The options contractually granted under Sogou 2017 Share Incentive Plan may be placed in one of the following categories:
(1) Performance-based options, which vest and become exercisable in four equal installments, with each installment vesting upon a service
period requirement being met, as well as the employee grantee’s achievement, as determined by the Company’s chief executive officer, of
performance targets for the corresponding period specified by the Company’s chief executive officer. For purposes of recognition of share-
based compensation expense, each installment is considered to be granted as of the date that the performance targets have been set; or
(2) Service-based options, which vest and become exercisable in four equal installments, with each installment vesting only upon a service
period requirement being met.
F-25
Table of Contents
A summary of the above two categories of options as of December 31, 2019 is presented below (in thousands):
Performance-based options
Service-based options
Total
Contractually Granted
Granted
(For Purposes of Share-based
Compensation Expense)
140
829
969
18
829
847
Vested and Exercisable
Exercised
14
155
169
—
48
48
A summary of share option activity under the Sogou 2017 Share Incentive Plan as of and for the year ended 2019 is presented below:
Outstanding as of January 1, 2019
Granted
Exercised
Forfeited/Expired
Outstanding as of December 31, 2019
Vested as of December 31, 2019 and expected to vest
thereafter
Exercisable as of December 31, 2019
Number
of Shares
(In thousands)
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life (Years)
Aggregate
Intrinsic
(1)
Value
730
267
(48)
(151)
798
638
121
$
$
$
$
0.001
0.001
0.001
0.001
0.001
0.001
0.001
9.57
8.90
8.87
8.55
$
$
$
3,629
2,904
551
(1)
The aggregate intrinsic value in the preceding table represents the difference between the closing price of Sogou Class A Ordinary Shares of $4.55 on the
last trading day in 2019 and the exercise prices of the options.
For the years ended December 31, 2018 and 2019, total share-based compensation expense recognized for share options under the Sogou 2017
Share Incentive Plan was US$1,569 and US$2,436, respectively. As of December 31, 2019, there was US$2,294 of unrecognized compensation expense
related to unvested share options granted under the Sogou 2017 Share Incentive Plan, which is expected to be recognized over a weighted average period of
1.9 years.
The method used to determine the fair value of share options granted under the Sogou 2017 Share Incentive Plan was the same as the method used
for the share options granted under the Sogou 2010 Incentive Plan as described above, except for the assumptions used in the BP Model as presented
below.
Average risk-free interest rate
Exercise multiple
Expected forfeiture rate (post-vesting)
Weighted average expected option life
Volatility rate
Dividend yield
Weighted average fair value of share options
Sohu Management Sogou Share Option Arrangement
2018
3.41% ~ 3.95%
2
12%
10
40% ~ 46%
0%
10.09
2019
2.37% ~ 3.45%
2 ~ 3
0% ~ 12%
10
41% ~ 42%
0%
4.87
Under an arrangement (the “Sohu Management Sogou Share Option Arrangement”) that was approved by the board of directors of Sohu and the
Company in March 2011, Sohu has the right to provide to members of Sohu’s Board of Directors, management and other key employees of Sohu, and
certain management and other key employees of the Sogou Group the opportunity to purchase from Sohu up to 12,000,000 Class A Ordinary Shares of
Sogou at a fixed exercise price of US$0.625 or US$0.001 per share. Of these 12,000,000 Class A Ordinary Shares, 8,800,000 are Sogou Class A Ordinary
Shares previously held by Sohu and 3,200,000 are Sogou Class A Ordinary Shares that were newly-issued on April 14, 2011 by the Company to Sohu at a
price of US$0.625 per share, or a total of US$2.0 million.
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Table of Contents
The options contractually granted under the Sohu Management Sogou Share Option Arrangement may be placed in one of the following
categories:
(1) Performance-based options, which vest and become exercisable in four equal installments, with each installment vesting upon a service
period requirement being met, as well as the Sogou Group’s achievement of performance targets for the corresponding period. All of these
options vested and became exercisable before January 1, 2017. For purposes of recognition of share-based compensation expense, each
installment is considered to be granted as of the date that the performance targets have been set; or
(2) Service-based options, which were granted to members of Sohu’s Board of Directors. All of these share options vested and became
exercisable in 2015, as the service period requirement had been met. As the requisite service was provided by members of Sohu’s Board of
Directors to Sohu and not to the Sogou Group, no share-based compensation expense related to these options was recognized in the Sogou
Group’s consolidated statements of comprehensive income.
A summary of the above two categories of options as of December 31, 2019 is presented below (in thousands):
Performance-based options
Service-based options
Total
Contractually Granted
Granted
(For Purposes of Share-based
Compensation Expense)
8,290
15
8,305
8,290
15
8,305
Vested and Exercisable
Exercised
8,290
15
8,305
8,290
6
8,296
A summary of share option activity as of and for the year ended December 31, 2019 is presented below:
Outstanding as of January 1, 2019
Granted
Exercised
Forfeited/Expired
Outstanding as of December 31, 2019
Vested as of December 31, 2019 and expected to vest
thereafter
Exercisable as of December 31, 2019
Number
of Shares
(In thousands)
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life (Years)
Aggregate
Intrinsic
(1)
Value
9
—
—
—
9
9
9
$
$
$
$
0.001
0.001
0.001
0.001
6.38
5.38
5.38
5.38
$
$
$
41
41
41
(1)
The aggregate intrinsic value in the preceding table represents the difference between the closing price of Sogou Class A Ordinary Shares of $4.55 on the
last trading day in 2019 and the exercise price of the options.
As all options granted under the Sohu Management Sogou Share Option Arrangement vested before January 1, 2017, no share-based compensation
expense was recognized for the years ended December 31, 2017, 2018, and 2019. For the years ended December 31, 2017, 2018, and 2019, the total
intrinsic value of options exercised was US$249, nil, and nil, respectively.
Option Modification
In the first and second quarter of 2013, a portion of the share options granted under the Sogou 2010 Share Incentive Plan and the Sohu
Management Sogou Share Option Arrangement were exercised early, and the resulting Sogou ordinary shares were transferred to trusts with the original
option grantees as beneficiaries. The trusts will distribute the ordinary shares to those beneficiaries in instalments based on the vesting requirements under
the original option agreements. Although these trust arrangements caused a modification of the terms of these share options, the modification was not
considered substantive. Accordingly, no incremental fair value related to these ordinary shares resulted from the modification, and the remaining share-
based compensation expense for these ordinary shares continued to be recognized over the original remaining vesting period. As of December 31, 2019,
3,798,000 Class A Ordinary Shares issued upon the early exercise of options granted under the Sogou 2010 Share Incentive Plan remained unvested in
accordance with the vesting requirements under the original option agreements and 1,722,000 Class A Ordinary Shares have vested but have not been
distributed to the beneficiaries. All of the Class A Ordinary Shares issued upon such early exercise that have become vested have been included in the
disclosures under the headings “Sogou 2010 Share Incentive Plan” and “Sohu Management Sogou Share Option Arrangement” above.
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Table of Contents
In the first quarter of 2018, the Company changed the vesting conditions of options for the purchase of 2,181,192 Class A Ordinary Shares
contractually granted under the Sogou 2010 Share Incentive Plan by removing as a condition of vesting Sogou Group’s achievement of performance targets
for the period corresponding to the vesting schedule. Of these options, options for the purchase of 1,601,427 Class A Ordinary Shares had not been deemed
granted, because their performance targets for the current period had not been set, so the removal of the performance targets resulted in these options
becoming subject to vesting only upon service-period requirements being met and being deemed granted immediately upon the effectiveness of the
changes. For the remaining options for the purchase of 579,765 Class A Ordinary Shares, which had been deemed granted, the removal of the performance
targets constituted a modification. The modification was not considered substantive, because the performance targets had been achieved before the
modification. Based on valuation results, no incremental fair value related to these Sogou ordinary shares was recognized in connection with the
modification, and the remaining share-based compensation expense for these options continued to be recognized over their remaining vesting periods.
16. TAXATION
a. PRC Value-added Tax
The Company’s subsidiaries and VIEs in China are subject to VAT.
The Sogou Group’s revenues were subject to VAT at a rate of 6% or 17%, depending on the type of service or product offered, for the year ended
December 31, 2017 and for the period from January 1, 2018 to April 30, 2018, and at rates of 6% or 16%, also depending on the type of service or product
offered, for the period from May 1, 2018 to March 31, 2019. Commencing April 1, 2019, the Sogou Group’s revenues are subject to VAT at rates of 6% or
13%, also depending on the type of service or product offered.
b. Income Taxes
Cayman Islands
Under the current laws of Cayman Islands, the Company is not subject to tax on income or capital gains. In addition, upon any payment of
dividends by the Company to its shareholders, no Cayman Islands withholding tax will be imposed.
British Virgin Islands
Under the current laws of British Virgin Islands, Sogou BVI is not subject to tax on income or capital gains.
Hong Kong
The Company’s subsidiaries in Hong Kong are subject to income tax at a rate of 16.5% for the years ended December 31, 2017, 2018 and 2019.
Hong Kong does not impose a withholding tax on dividends.
PRC
The PRC Corporate Income Tax Law (the “CIT Law”) generally applies an income tax rate of 25% to all enterprises, but grants preferential tax
treatment to qualified “High and New Technology Enterprises” (“HNTEs”), Software Enterprises, and “Key National Software Enterprises” (“KNSEs”).
Entities Qualified as HNTEs
HNTEs are entitled to an income tax rate of 15%, subject to a requirement that they re-apply for HNTE status every three years. During this three-
year period, an HNTE must conduct a qualification self-review each year to ensure it meets the HNTE criteria and is eligible for the 15% preferential tax
rate for that year. If an HNTE fails to meet the criteria for qualification as an HNTE in any year, the enterprise cannot enjoy the 15% preferential tax rate in
that year, and must instead use the regular 25% CIT rate.
Sogou Technology, Sogou Information, and Sogou Network qualified as HNTEs in December 31, 2017, 2018, and 2019, respectively, and will
need to re-apply for HNTE qualification in 2020 (Sogou Technology), 2021 (Sogou Information), and 2022 (Sogou Network).
Entities Qualified as Software Enterprises and KNSEs
The CIT Law and its implementing regulations provide that a “Software Enterprise” is entitled to an income tax exemption for two years
beginning with its first profitable year and a 50% reduction to a rate of 12.5% for the subsequent three years. An entity that qualifies as a KNSE is entitled
to a further reduced preferential income tax rate of 10%. Enterprises wishing to enjoy the status of a Software Enterprise or a KNSE must perform a self-
assessment each year to ensure they meet the criteria for qualification and file required supporting documents with the tax authorities before using the
preferential CIT rates. These enterprises will be subject to the tax authorities’ assessment each year as to whether they are entitled to use the relevant
preferential CIT treatments. If at any time during the preferential tax treatment years an enterprise uses the preferential CIT rates but the relevant authorities
determine that it fails to meet applicable criteria for qualification, the relevant authorities may revoke the enterprise’s Software Enterprise/KNSE status.
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Table of Contents
Sogou Technology performed a self-assessment and filed the required supporting documents and passed the relevant government authorities’ assessment in
each of the years 2017 and 2018, and thus was qualified as a KNSE and entitled to a preferential income tax rate of 10% for 2016 and 2017. As a result, a
reversal of income tax of US$1,467 and US$3,773 for the preferential income tax rate was recorded in the consolidated statements of comprehensive
income for the year ended December 31, 2017 and 2018.
PRC Withholding Tax on Dividends
Under the CIT Law and its implementation rules, the profits of a foreign-invested enterprise arising in 2008 and thereafter that are distributed to its
immediate holding company outside the PRC are subject to withholding tax at a rate of 10%. A lower withholding tax rate will be applied if there is a
beneficial tax treaty between the PRC and the jurisdiction of the foreign holding company. A holding company in Hong Kong, for example, will be eligible,
with approval of the PRC local tax authority, to be subject to a 5% withholding tax rate under the Arrangement Between the PRC and the Hong Kong
Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to Taxes on Income if such holding
company is considered to be a non-PRC resident enterprise and holds at least 25% of the equity interests in the PRC foreign-invested enterprise distributing
the dividends. However, if the Hong Kong holding company is not considered to be the beneficial owner of such dividends under applicable PRC tax
regulations, such dividend will remain subject to withholding tax at a rate of 10%.
Aggregate undistributed profits of certain of the Company’s subsidiaries and VIEs located in PRC were approximately US$396,541 as of
December 31, 2019. The Company does not intend to have any of its subsidiaries and VIEs located in PRC distribute any of their undistributed profits in
the foreseeable future, but rather expects that such profits will be reinvested by such subsidiaries and VIEs for their PRC operations. Accordingly, no
withholding tax was recorded as of December 31, 2019. If those profits were to be distributed or they were determined to be no longer permanently
reinvested, the Company would have to record a deferred income tax liability in respect of those undistributed profits of approximately US$39,654 as of
December 31, 2019 if those profits were subject to withholding tax at a rate of 10%.
Composition of Income Tax Expense
All income tax expense for the years ended December 31, 2017, 2018 and 2019 was PRC corporate income tax for PRC entities. The current and
deferred portions of income tax expense included in the consolidated statements of comprehensive income are as follows:
Income from PRC entities
(Loss)/income from non-PRC entities
Income before income tax expenses
Current income tax expense
Deferred tax (benefit)/expense
Income tax expense
Effective Tax Rate
2017
For the Year Ended
December 31,
2018
2019
$
$
126,104
(29,482)
96,622
18,382
(3,960)
14,422
$
$
73,720
26,214
99,934
462
691
1,153
$
$
84,760
7,093
91,853
5,480
(2,732)
2,748
Reconciliation of the PRC CIT tax rate of 25% to the Sogou Group’s effective tax rate for the years of 2017, 2018 and 2019 is as follows:
PRC statutory tax rate
Tax differential from statutory rate in other jurisdictions
Effect of tax holidays
Permanent book-tax differences
Tax-exempt income
Changes in deferred tax asset allowance
Effective income tax rate
(2)
(1)
(3)
2017
For the Year Ended
December 31,
2018
2019
25.0%
6.8%
(14.4)%
(7.5)%
—
5.0%
14.9
25.0%
0.4%
(5.1)%
(18.5)%
(7.0)
6.4%
1.2 %
25.0%
2.6%
(2.3)%
(25.3)%
(4.6)%
7.6%
3.0%
(1)
The income tax reversals resulting from the preferential income tax rates that Sogou Technology was entitled to as a KNES in 2016 and 2017 are
included in the “Effect of tax holidays” in the table above.
(2)
The permanent book-tax differences mainly consisted of R&D expenses super deductions. Under PRC regulations issued in September 2018 that are
applicable retroactively beginning January 1, 2018, additional R&D expenses have become eligible for deduction from taxable income.
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(3) Tax-exempt income consisted of interest on financial instruments and capital gains from long-term investments. The aforementioned financial
instruments and long-term investments were held by the Company’s subsidiaries located in Hong Kong.
The combined effects of the income tax expense exemptions and reductions available to the Sogou Group are as follows:
Tax holiday effect
Basic income per share
c. Deferred Tax
2017
For the year ended
December 31,
2018
$
$
13,914
0.05
$
$
5,097
0.01
$
$
2019
2,113
0.01
As of December 31, 2018 and 2019, the significant temporary differences between the tax and financial statement bases of assets and liabilities
that gave rise to deferred tax balances were principally related to the following:
Deferred tax assets:
Net operating loss carry forwards
Temporary non-deductible advertising cost carried forward
Accrued expenses
Accrued payroll expense
Provision for inventory and doubtful receivables
Provision for long-term investments
Total deferred tax assets
Deferred tax liabilities:
Depreciation of fixed assets
Others
Total deferred tax liabilities
Less: Valuation allowance
Deferred tax assets, net
As of December 31,
2018
2019
10,392
1,336
21,934
2,178
3,931
401
40,172
(4,868)
(27)
(4,895)
(21,484)
13,793
$
$
12,788
965
22,810
3,229
7,517
2,050
49,359
(4,925)
(26)
(4,951)
(28,102)
16,306
$
$
As of December 31, 2018 and 2019, the Sogou Group made a valuation allowance against its deferred tax assets to the extent that such deferred
tax assets were not expected to be realized by each individual entity within the Sogou Group. The Sogou Group evaluated a variety of factors in
determining the amount of the valuation allowance, including each individual entity’s operating history and financial forecast.
As of December 31, 2019, the Sogou Group had net operating losses from PRC entities of approximately US$73,555 available to offset against
future net profit for income tax purposes. The Sogou Group anticipated that it was more likely than not that these net operating losses would not be utilized
based on its estimate of the operating performance of these PRC entities. Therefore, US$12,788 in deferred tax assets generated from net operating losses
were offset by a valuation allowance. These net operating losses of entities not qualified as HNTEs are expected to expire during periods between
December 31, 2020 and December 31, 2024 and those of entities qualified as HNTEs are expected to expire during periods between December 31, 2020
and December 31, 2029.
The following table sets forth the movement of the valuation allowance for net deferred tax assets for the periods presented:
Beginning balance
Additions
Reversals
Foreign currency translation adjustment
Ending balance
2017
For the Year Ended
December 31,
2018
11,317
4,851
(680)
698
16,186
$
$
16,186
6,852
(779)
(775)
21,484
$
$
2019
21,484
8,305
(1,339)
(348)
28,102
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17. CHINA CONTRIBUTION PLAN
The Company’s subsidiaries and VIEs in the PRC participate in a government-mandated multi-employer defined contribution plan, pursuant to
which certain retirement, medical and other welfare benefits are provided to employees. Chinese labor regulations require the Company’s PRC based
subsidiaries and VIEs to pay to the local labor bureau a monthly contribution at a stated contribution rate based on the monthly compensation of qualified
employees. The Sogou Group has no further legal obligation beyond its monthly contribution.
For the years ended December 31, 2017, 2018, and 2019, the Sogou Group contributed a total of approximately US$33,290, US$40,094, and
US$39,990, respectively.
18. NET INCOME PER ORDINARY SHARE
The following table sets forth the basic and diluted net income per ordinary share computation and provides a reconciliation of the numerator and
denominator for the periods presented (in thousands except per share data):
Numerator:
Net income attributable to Sogou Inc.
Less: Dividends attributable to preferred shareholders
Net income attributable to ordinary shareholders
Numerator for net income per ordinary share—basic
Reversal of preferred share dividends
Numerator for net income per ordinary share—diluted
Denominator
Weighted average number of ordinary shares outstanding—basic
Incremental shares from if-converted method
Incremental shares from treasury stock method
Weighted average number of ordinary shares outstanding—diluted
Net income per ordinary share—basic
Net income per ordinary share—diluted
2017
For the Year Ended
December 31,
2018
2019
82,200
24,388
57,812
57,812
1,042
58,854
257,173
27,704
2,428
287,305
0.22
0.20
$
$
$
$
$
98,781
—
98,781
98,781
—
98,781
388,731
—
7,167
395,898
0.25
0.25
$
$
$
$
$
89,105
—
89,105
89,105
—
89,105
389,797
—
5,436
395,233
0.23
0.23
$
$
$
$
$
56,647,614 Pre-IPO Preferred Shares, options for the purchase of 30,000 Class A Ordinary Shares, and options for the purchase of 12,500 Class A
Ordinary Shares, respectively, were excluded from the computation of diluted net income per ordinary share for the years ended December 31, 2017, 2018,
and 2019 because of their anti-dilutive effect. The dilutive effects of Pre-IPO Preferred Shares and share options were calculated using the if-converted
method and the treasury share method, respectively.
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19. RELATED PARTY TRANSACTIONS
The table below sets forth the significant related parties of the Sogou Group and their relationship to the Sogou Group:
Hgp0-
Related Party’s Name
Sohu
Tencent
Under common control of Sohu.com Limited with the Sogou Group
Holder of Class B Ordinary Shares
Relationship with the Sogou Group
The table below sets forth the significant related party transactions of the Sogou Group:
Transactions with Sohu:
Expenses of research and development undertaken by Sohu
Online marketing activities provided to Sohu
Online marketing activities provided by Sohu
Rental of Sohu.com Internet Plaza paid to Sohu
Others
Transactions with Tencent:
2017
$
For the Year Ended
December 31,
2018
2019
$
707
348
1,123
8,091
45
$
670
677
393
8,369
464
Share-based compensation expense related to Soso search-related businesses
employees undertaken by Tencent (See “Tencent Share-based Awards” in Note 3u
—Share-based Compensation Expense)
Online marketing activities provided to Tencent
Online marketing activities provided by Tencent
Bandwidth services provided by Tencent
Rental paid to Tencent
Others
682
15,599
61,565
3,299
378
3,137
88
40,758
108,542
4,183
383
3,463
The Sogou Group provided online marketing services to Sohu and Tencent, and received similar online marketing services from Sohu and
Tencent. Related revenues and expenses are measured at the amount of consideration agreed to and paid by the related parties, which approximates
amounts charged to third parties.
The table below sets forth the amounts due to related parties:
Due from/to related parties—current
Due from Sohu
Due from Tencent
Total
Due to Sohu
Due to Tencent
Total
Due from related parties—non current
Due from Sohu
Due from Tencent
Total
As of December 31,
2018
2019
$
$
$
$
$
$
60
2,548
2,608
145
38,280
38,425
2,108
116
2,224
$
$
$
$
$
$
—
311
191
8,318
61
—
31,943
86,902
6,364
500
2,254
15
2,822
2,837
101
22,493
22,594
2,074
179
2,253
The balance due from/to Sohu mainly consists of lease deposits prepaid to Sohu, and online marketing services provided by or to Sohu.
The balance due from/to Tencent mainly consists of online marketing services provided to or by Tencent, etc.
20. LEASES
The Sogou Group has entered into operating lease agreements, primarily for office space in China, with lease periods expiring between 2019 and
2023. The determination of whether an arrangement is or contains a lease is made at inception by evaluating whether the arrangement conveys the right to
use an identified asset and whether the Sogou Group obtains substantially all of the economic benefit from and has the ability to direct the use of the asset.
Operating lease assets and liabilities are included on the Sogou Group’s consolidated balance sheets beginning January 1, 2019. Right-of-use assets are
included in due from related parties and other assets, while the current portion of the operating lease liabilities is included in due to related parties and other
short-term liabilities and the long term portion is included in long-term liabilities. The Sogou Group has elected to not recognize lease assets and lease
liabilities for leases with a term of twelve months or less on the consolidated balance sheets.
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Operating lease assets and liabilities are recognized at the present value of the future lease payments at the lease commencement date. The Sogou
Group uses its incremental borrowing rate in determining the present value of the future lease payments, because the interest rate implicit in most of the
leases is not readily determinable. The Sogou Group estimates its incremental borrowing rate for each leased asset based on the interest rate the Sogou
Group would incur to borrow an amount equal to the lease payments on a collateralized basis over a similar term in a similar economic environment.
The Sogou Group’s lease agreements generally do not contain any residual value guarantees or material restrictive covenants. Certain of the Sogou
Group’s leases contain free or escalating rent payment terms. Operating lease expense is recognized on a straight-line basis over the lease term.
The Sogou Group’s lease agreements generally contain lease and non-lease components. Non-lease components consist primarily of payments for
property management. The Sogou Group combines fixed payments for non-lease components with the lease payments and accounts for them together as a
single lease component, which increases the amount of the Sogou Group’s lease assets and liabilities. Payments under the lease arrangements are primarily
fixed, with no variable payments.
Components of operating lease expense were as follows:
Operating lease cost
Short-term lease cost
Total operating lease cost
For the Year Ended
December 31, 2019
15,760
19
15,779
$
$
Supplemental cash flow information related to leases is as follows:
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases
Right-of-use assets obtained in exchange for lease liabilities:
Operating leases
For the Year Ended
December 31, 2019
15,146
For the Year Ended
December 31, 2019
11,198
$
$
The following table presents supplemental balance sheet information related to the operating leases:
Assets:
Operating lease right-of-use assets
Liabilities:
Current portion of lease liabilities
Non-current portion of lease liabilities
Total operating lease liabilities
As of December 31, 2019
$
$
13,333
6,106
5,686
11,792
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Maturities of lease liabilities under operating leases as of December 31, 2019 were as follows:
2020
2021
2022
2023
2024
Thereafter
Total future lease payments
Less: imputed interest
Total present value of lease liabilities
Maturities of lease
liabilities
6,725
4,713
965
—
—
—
12,403
611
11,792
$
$
The following table presents supplemental information for comparative periods of future minimum rental payments under operating leases as of
December 31, 2018:
2019
2020
2021
2022
2023
Thereafter
Total minimum lease payments
Maturities of
leases
(1)
15,884
6,805
5,974
799
271
—
29,733
$
$
(1)
Amounts are based on ASC 840, Leases that were superseded upon the Sogou Group’s adoption of ASC 842, Leases on January 1, 2019. Rent expenses
under operating leases were US$12,818 and US$15,732 for the years ended December 31, 2017, and 2018, respectively.
As of December 31, 2019, operating leases recognized in lease liabilities had a weighted average remaining lease term of 2.2 years and a weighted
average discount rate of 4.75%.
21. COMMITMENTS AND CONTINGENCIES
Contractual obligations
Operating Commitments
As of December 31, 2019, the Sogou Group had operating commitments related to operating lease obligations, bandwidth purchase obligations,
content and service purchase obligations and etc., as follows:
As of December 31,
2020
2021
2022
2023
2024
Thereafter
Total
Bandwidth
Purchase
Operating
Lease
Obligations
(1)
Goods
Purchase
$
$
33,177
306
—
—
—
—
33,483
$
$
10,518
10,491
10,491
—
—
—
31,500
$
$
5,633
—
—
—
—
—
5,633
$
$
Others
Total
822
440
—
—
—
—
1,262
$
$
50,150
11,237
10,491
—
—
—
71,878
(1)
The operating lease obligations consist of lease obligations that commenced on January 1, 2020.
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Litigation
The Sogou Group is a party to various legal proceedings which it considers routine and incidental to its business, and is currently involved in
several lawsuits in PRC courts where its competitors instituted proceedings or asserted counterclaims against the Sogou Group or the Sogou Group
instituted proceedings or asserted counterclaims against its competitors. For example, there are various legal proceedings currently pending between the
Sogou Group and affiliates of Baidu, Inc. (“Baidu”) in which the Sogou Group alleges that Baidu’s input method infringes certain of its patents relating to
Sogou Input Method and seeks monetary damages, while Baidu has asserted in counterclaims or in legal proceedings that it has initiated against the Sogou
Group that Sogou Input Method infringes certain of its patents, and seeks monetary damages. There is also a lawsuit pending against us in which Shanghai
Cishu Publications Ltd. has alleged that the Sogou Group used vocabulary content without permission and seeks monetary damages. In addition, the Sogou
Group is subject to ongoing unfair competition claims against it brought by each of Baidu and ShenMa, operated by UCWeb Inc., which is a subsidiary of
Alibaba Group Holding Limited, separately, as to which a PRC lower court has issued initial judgments against us that both we and Baidu have appealed, in
which they allege that certain functions of Sogou Input method unfairly divert users to the Sogou Group, and seek monetary damages and cessation of the
alleged unfair competitive practices. There are also two putative class action lawsuits that have been filed against the Company in the United States, one in
a State court in the State of California and one in the United States District Court for the Southern District of New York, that allege violations of U.S.
securities laws in connection with the Company’s IPO in 2017.
The Sogou Group records a liability when the likelihood of an unfavorable outcome is probable and the amount of loss can be reasonably
estimated. As of December 31, 2019, the Sogou Group estimated the range of reasonably possible outcomes and has recorded liabilities for the most
probable outcome within that range. The Sogou Group also evaluates, on a regular basis, developments in litigation matters that could affect the amount of
liability that has been previously accrued and makes adjustments as appropriate. Based on the information currently available, management believes that
the total liabilities to the Sogou Group that may arise as a result of currently pending legal proceedings are not reasonably likely to have a material adverse
effect on the Sogou Group’s business, results of operations, financial condition, and cash flows.
As of December 31, 2018 and 2019, the Sogou Group had recorded estimated liabilities of US$3,440 and US$6,476, respectively, as a component
of accrued and other short-term liabilities related to litigation contingencies.
22. VIEs
Sogou consolidates in its consolidated financial statements the VIEs, of which Sogou is the primary beneficiary.
a. VIEs Consolidated within the Sogou Group (excluding the Consolidated Trust)
PRC laws and regulations prohibit or restrict foreign ownership of companies that operate Internet information and content, Internet access, value-
added telecommunications, and certain other businesses in which the Sogou Group is engaged or could be deemed to be engaged. Consequently, the Sogou
Group conducts certain of its operations and businesses in the PRC through its VIEs.
The Sogou Group adopted the guidance of accounting for VIEs, which requires VIEs to be consolidated by their primary beneficiary. Management
evaluated the relationships between Sogou and its VIEs and the flow of economic benefits under contractual arrangements with its VIE Sogou Information
and its shareholders. Sogou Information is the parent company of the Sogou Group’s other three VIEs. In connection with such evaluation, management
also took into account the fact that, as a result of contractual arrangements with Sogou Information and its shareholders, Sogou controls the shareholders’
voting interests in the VIEs. As a result of such evaluation, management concluded that Sogou is the primary beneficiary of the VIEs consolidated.
Under the contractual agreements with Sogou Information and its shareholders, Sogou has power to direct activities of the VIEs, and can have
assets transferred freely out of the VIEs without any restrictions. Therefore Sogou considers that there are no assets of the VIEs that can be used only to
settle obligations of the VIEs, except for registered capital and statutory surplus reserves of the VIEs. As the VIEs are incorporated as limited liability
companies under the PRC Company Law, creditors of the VIEs do not have recourse to the general credit of Sogou. Currently there is no contractual
arrangement that could require Sogou to provide additional financial support to the VIEs. As the Sogou Group is conducting certain business in the PRC
mainly through the VIEs, Sogou may provide such support on a discretionary basis in the future, which could expose Sogou to a loss.
The following is a summary of the Sogou Group’s principal VIEs:
Basic Information
Sogou Information
Sogou Information was incorporated in December 2005. As of December 31, 2018, the registered capital of Sogou Information was
US$2.5 million and the Company’s Chief Executive Officer Xiaochuan Wang, Sohu, and Tencent (collectively the “Nominee Shareholders”) held
10%, 45%, and 45% interests, respectively, in Sogou Information.
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Shi Ji Si Su
Shi Ji Si Su was acquired in April 2015 for cash consideration of US$30. As of December 31, 2019, the registered capital of Shi Ji Si Su was
US$10.5 million and Sogou Information held 100% of the equity interest in this entity.
Chengdu Easypay
Chengdu Easypay was incorporated in January 2015. As of December 31, 2019, the registered capital of Chengdu Easypay was US$16.3 million
and Sogou Information and Shi Ji Si Su together held 100% of the equity interest in this entity.
Summary of VIE Agreements Currently in Effect
Agreements between Sogou Technology and Nominee Shareholders of Sogou Information
Loan and share pledge agreements between Sogou Technology and the shareholders of Sogou Information. The loan agreement provides for a
loan to Xiaochuan Wang, who holds 10% of the equity interest in Sogou Information, used by him to make contributions to the registered capital of Sogou
Information in exchange for his equity interest in Sogou Information. The loan is interest free and is repayable on demand, but Mr. Wang may repay the
loan only by transferring to Sogou Technology his equity interest in Sogou Information. Under the pledge agreement, all of the shareholders of Sogou
Information pledge their equity interests to Sogou Technology to secure the performance of their obligations under certain of the VIE agreements. If any
shareholder of Sogou Information breaches any of his or its obligations under any VIE agreements, Sogou Technology is entitled to exercise its rights as
the beneficiary under the share pledge agreement. The share pledge agreement terminates only after all of the obligations of the shareholders under the
various VIE agreements are no longer in effect.
Equity interest purchase rights agreement between Sogou Technology, Sogou Information, and the shareholders of Sogou Information. Pursuant to
this agreement, Sogou Technology and any third party designated by it have the right, exercisable at any time when it becomes legal to do so under PRC
law, to purchase from the shareholders of Sogou Information all or any part of their equity interests at the lowest purchase price permissible under
PRC law.
Business operation agreement among Sogou Technology, Sogou Information, and the shareholders of Sogou Information. The agreement sets
forth the right of Sogou Technology to control the actions of the shareholders of Sogou Information in their capacities as such and of Sogou Information.
The agreement has a term of 10 years and is renewable at the request of Sogou Technology.
Powers of attorney executed by the shareholders of Sogou Information in favor of Sogou Technology with a term of 10 years that is extendable at
the request of Sogou Technology. These powers of attorney give Sogou Technology the right to appoint nominees to act on behalf of each of the three
Sogou Information shareholders in connection with all actions to be taken by Sogou Information.
Business Arrangements between Sogou Technology and Sogou Information
Technology consulting and service agreement between Sogou Technology and Sogou Information. Pursuant to this agreement Sogou Technology
has the exclusive right to provide technical consultation and other related services to Sogou Information in exchange for a fee. The agreement has a term of
10 years and is renewable at the request of Sogou Technology.
b. Consolidated Trust
As disclosed in Note 3(g) Financing Receivables, net, the Sogou Group has jointly established the Consolidated Trust with a third-party investor,
and the trust is administered by a trust company. As the Consolidated Trust only invests in loans facilitated by the Sogou Group, the Sogou Group has
power to direct the activities of the Consolidated Trust. The Sogou Group also has the obligation to absorb losses or the right to receive benefits from the
trust that could potentially be significant to the Consolidated Trust. As a result, the Sogou Group is considered the primary beneficiary of the Consolidated
Trust and the Consolidated Trust is considered a consolidated VIE under ASC 810.
The Consolidated Trust was incorporated in December 2019. As of December 31, 2019, the registered capital of the Consolidated Trust was
US$2.9 million, and Chengdu Easypay consolidated 100% of the equity interest in the trust.
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c. Financial Information
The following table sets forth the assets, liabilities, results of operations, and cash flows of the VIEs, taken as a whole, that were included in the
Sogou Group’s consolidated balance sheets, statements of comprehensive income, and statements of cash flows:
As of December 31,
2018
2019
ASSETS
Cash and cash equivalents
Restricted cash
Short-term investments
Account and financing receivables, net
Prepaid and other current assets
Intra-Sogou Group receivable due from the Company and the Company’s subsidiaries
Due from related parties of the Sogou Group
Total current assets
Long-term investments
Fixed assets, net
Goodwill
Other assets
Total assets
LIABILITIES
Accounts payable
Accrued and other short-term liabilities
Receipts in advance
Accrued salary and benefits
Taxes payable
Due to related parties of the Sogou Group
Total current liabilities
Long-term liabilities
Total liabilities
Net revenue
Net income/(loss)
Cash flows of the VIEs
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by financing activities
$
$
$
$
20,467
—
7,305
64,584
1,213
29,755
17
123,341
26,129
392
3,468
315
153,645
57,051
49,493
3,647
1,692
6,582
20,552
139,017
—
139,017
$
$
$
2017
For the Year Ended
December 31,
2018
257,424
28,944
$
$
423,270
(19,534)
2017
For the Year Ended
December 31,
2018
$
5,198
(5,218)
—
51,657
(48,161)
—
$
$
$
$
$
$
$
12,209
5,342
7,192
72,214
3,942
19,765
683
121,347
26,169
761
3,412
1,902
153,591
66,186
55,694
8,981
1,250
6,084
108
138,303
1,130
139,433
2019
501,495
(1,491)
2019
(5,046)
(18,040)
8,601
There is no VIE where the Sogou Group has a variable interest but is not the primary beneficiary.
d. Risks in Relation to the VIE Structure
It is possible that the Sogou Group’s conduct of certain of its operations and businesses through its VIEs could be found by PRC authorities to be
in violation of PRC law and regulations prohibiting or restricting foreign ownership of companies that engage in such operations and businesses. If such a
finding were made by PRC authorities, regulatory authorities with jurisdiction over the licensing and operation of such operations and businesses would
have broad discretion in dealing with such a violation, including levying fines, confiscating the Sogou Group’s income, revoking the business or operating
licenses of the affected businesses, requiring the Sogou Group to restructure its ownership structure or operations, or requiring the Sogou Group to
discontinue all or any portion of its operations. Any of these actions could cause significant disruption to the Sogou Group’s business operations, and have
a severe adverse impact on the Sogou Group’s cash flows, financial position, and operating performance. The Sogou Group’s management considers the
possibility of such a finding by PRC regulatory authorities under current law and regulations to be remote.
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In addition, it is possible that the contracts among Sogou Technology, Sogou Information, and the nominee shareholders of Sogou Information
would not be enforceable in China if PRC government authorities or courts were to find that such contracts contravene PRC laws and regulations or are
otherwise not enforceable for public policy reasons. In the event that the Sogou Group was unable to enforce these contractual arrangements, the Sogou
Group would not be able to exert effective control over the its VIEs. Consequently, the VIEs’ results of operations, assets and liabilities would not be
included in the Sogou Group’s consolidated financial statements. If such were the case, the Sogou Group’s cash flows, financial position, and operating
performance would be materially adversely affected. The Sogou Group’s contractual arrangements Sogou Technology, Sogou Information, and the nominee
shareholders of Sogou Information are approved and in place. Management believes that such contracts are enforceable, and considers the possibility
remote that PRC regulatory authorities with jurisdiction over the Sogou Group’s operations and contractual relationships would find the contracts to be
unenforceable.
The Sogou Group’s operations and businesses rely on the operations and businesses of its VIEs, which hold certain recognized and unrecognized
revenue-producing assets. The recognized revenue-producing assets include goodwill and intangible assets acquired through business acquisitions.
Goodwill primarily represents the expected synergies from combining an acquired business with the Sogou Group. Intangible assets acquired through
business acquisitions mainly consist of copyrights, domain names and trademarks, and developed technologies. Unrecognized revenue-producing assets
held by the VIEs include certain licenses for the provision of content over the Internet and other licenses, patents, trademarks, copyrights, domain names,
and trade secrets. The VIEs also have an assembled workforce, focused primarily on research and development, whose costs are expensed as incurred. The
Sogou Group’s operations and businesses may be adversely impacted if the Sogou Group loses the ability to use and enjoy assets held by its VIEs.
23. PROFIT APPROPRIATION
The Company’s China-based subsidiaries and VIEs are required to make appropriations to certain non-distributable reserve funds.
Under the China Foreign Investment Enterprises laws, those of the Company’s China-based subsidiaries that are considered under PRC law to be
WFOEs are required to make appropriations from their after-tax profit as determined under generally accepted accounting principles in the PRC (the “after-
tax-profit under PRC GAAP”) to non-distributable reserve funds, including (i) a general reserve fund, (ii) an enterprise expansion fund, and (iii) a staff
bonus and welfare fund. Each year, at least 10% of the after-tax-profit under PRC GAAP is required to be set aside as a general reserve fund until such
appropriations for the fund equal 50% of the registered capital of the applicable entity. The appropriation for the other two reserve funds is at the
Company’s discretion as determined by the Board of Directors of each entity.
Pursuant to the China Company Laws, those of the Company’s China-based subsidiaries that are considered under PRC law to be domestically
funded enterprises, as well as the Company’s VIEs, are required to make appropriations from their after-tax-profit under PRC GAAP to non-distributable
reserve funds, including a statutory surplus fund and a discretionary surplus fund. Each year, at least 10% of the after-tax-profit under PRC GAAP is
required to be set aside as statutory surplus fund until such appropriations for the fund equal 50% of the registered capital of the applicable entity. The
appropriation for the discretionary surplus fund is at the Company’s discretion as determined by the Board of Directors of each entity.
Upon certain regulatory approvals and subject to certain limitations, the general reserve fund and the statutory surplus fund can be used to offset
prior year losses, if any, and can be converted into paid-in capital of the applicable entity.
For the years ended December 31, 2017, 2018, and 2019, the total amount of profits contributed to these funds by the Sogou Group was
US$4,619, US$2,662, and US$108, respectively. As of December 31, 2018 and 2019, the total balance of profits contributed to these funds by the Sogou
Group was US$23,805 and US$23,913, respectively.
As a result of these and other restrictions under PRC laws and regulations, the Company’s China-based subsidiaries and VIEs are restricted in their
ability to transfer a portion of their net assets in the form of non-distributable reserve funds to the Company in the form of dividends, loans, or advances.
Even though the Company currently does not require any such dividends, loans, or advances from its China-based subsidiaries and VIEs for working
capital and other funding purposes, the Company may in the future require additional cash resources from its China-based subsidiaries and VIEs due to
changes in business conditions, to fund future acquisitions and development, or to declare and pay dividends to or make distributions to its shareholders.
24. RESTRICTED NET ASSETS
Relevant PRC law and regulations permit payment of dividends by PRC-based operating entities only out of their retained earnings, if any, as
determined in accordance with PRC accounting standards and regulations. In addition, a PRC-based operating entity is required to annually appropriate
10% of net after-tax income to the statutory surplus reserve fund prior to payment of any dividends, unless the amount of the reserve fund has reached 50%
of the entity’s registered capital. As a result of these and other restrictions under PRC law and regulations, PRC-based operating entities are restricted in
their ability to transfer a portion of their net assets to the Company in the form of dividends, loans or advances. Even though the Company currently does
not require any such dividends, loans or advances from PRC-based operating entities for working capital and other funding purposes, the Company may in
the future require additional cash resources from PRC-based operating entities due to changes in business conditions, to fund future acquisitions and
development, or to declare and pay dividends to its shareholders. The balance of restricted net assets was $67,078, or 6.3% of the Company’s total
consolidated net assets, as of December 31, 2019.
F-38
Table of Contents
25. SUBSEQUENT EVENTS
The outbreak of the novel coronavirus disease that has been designated as COVID-19, which emerged in December 2019 and has spread around
the world in 2020, has affected economic activity across many industries in China, including the online advertising industry. Government-imposed
measures, including travel restrictions, school closings, extended holidays, and requirements that most business be conducted remotely, have interrupted the
operation of businesses in various areas. This, in turn, has caused an increase in the Company’s user traffic as individuals confined to their homes spent
more time online than they would have otherwise. However, these measures have resulted in an increase during the first quarter of 2020 in the Company’s
traffic acquisition costs, which may continue at a relatively higher level while these measures remain in effect. In addition, these measures and the adverse
impact on the Chinese economy have caused, and could continue to cause, an adverse impact on the Company’s advertising revenues by causing advertisers
and advertising agencies that represent them to delay and curtail their spending on online advertising. As the future extent and effect of the virus in China
and the world are difficult to predict, the related financial impact on the Company’s future results of operations cannot be reasonably estimated at this time.
F-39
[Tencent logo]
Cooperation Agreement between Weixin Official Platform and Sogou Search
Exhibit 4.17
Cooperation Agreement
between
Weixin Official Platform
and
Sogou Search
English Translation
Agreement No.: [ ]
Party A: Shenzhen Tencent Computer Systems Co., Ltd.
Contact person:
Mailing address:
Tel:
Email:
Party B: Beijing Sogou Information Service Co., Ltd.
Contact person:
Mailing address:
Tel:
E-mail:
Whereas:
1. Party A, Party B and their relevant affiliates entered into a Business Development and Resource Sharing Agreement on September 16, 2013, whereby the
parties entered into a strategic cooperation;
2. Party B desires to use public data on Party A’s Weixin official platform to provide search services, and both parties have negotiated their intentions in
respect of such cooperation;
3. Party A and Party B signed No. 14-SGO-04344, No. 15-SD-10681, No. 17-SD-10269, No. 17-SD-00731, and No. 19-SD-10584 Cooperation
Agreements between Weixin Official Platform and Sogou Search (the “Original Agreements”) in May 2014 and November 2015 and on March 21, 2017,
September 15, 2017 and March 1, 2019 respectively.
NOW THEREFORE, in order to specify the terms of the cooperation, establish data usage specifications, and safeguard the legitimate rights and interests
of Weixin official platform users, Party A and Party B hereby enter into the following cooperation agreement in line with the principle of equality and
mutual benefits and win-win cooperation:
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Chapter I Definitions and Interpretations
I. Definitions
Unless otherwise defined in this Agreement, the following terms shall have the following specific meanings:
1. Chinese Law:
Referring to any laws, rules, regulations, judicial interpretations and other legal norms currently in force and promulgated and implemented in the future in
jurisdictions of mainland China.
2. Official Platform Data and Contents:
Referring to the public contents on Party A’s Weixin official platform, including but not limited to public registration information of official platform
subscription accounts and service account operators, and all information publicly distributed by official platform subscription accounts and service account
operators through Weixin official platform (different from point-to-point information and region or subscriber specific information), the specific scope of
contents of which shall be subject to the assessment and determination by Party A according to law.
3. Sogou Search Services:
Referring to such search services as content retrieval and result response on Sogou search engines, including PC end (www.sogou.com, www.soso.com)
and wireless end (including Sogou, Soso mobile web search and Sogou search app client), based on Official Platform Data and Contents.
4. Trade Secrets:
Referring to the technical, financial, commercial and other information owned by either party hereto and/or its subsidiaries or affiliated companies and
treated by such party as trade secrets, which have the following characteristics:
(a) Unknown to the public;
(b) Able to bring economic benefits to the right owner;
(c) Being practical; and
(d) Treated by the right owner as secrets and appropriate protective measures having been taken for it.
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5. Force Majeure:
Referring to earthquake, typhoon, fire, flood, war, strike, riot, hacker attack, operator technical failure or change of policy or any other natural or man-made
disaster occurred during the term of this Agreement, which is unpredictable (or the occurrence or consequences of which is inevitable even though
predictable) and beyond the control of either party and renders the full performance by either party of this Agreement impossible.
6. Official Platform Source Pages:
The source pages (currently bearing a domain suffix of weixin.qq.com) under Weixin official platform, or other pages designated by Weixin official
platform.
II. Interpretations
1. Unless explicitly indicated as working days, the term “day” mentioned herein refers to calendar day.
2. The headings contained in this Agreement are for reference purposes only, and shall not affect the meaning or interpretation of any part of this
Agreement.
3. As the context requires, the plural shall include the singular and vice versa.
4. A reference to a chapter, clause and paragraph shall be a reference to a chapter, clause and paragraph of this Agreement.
Chapter II Representations and Warranties
III. Legal Status
Each party represents and warrants that, from the signing date of this Agreement:
1. It is qualified to engage in the transaction hereunder, and such transaction complies with its business scope;
2. It has full power to enter into this Agreement and to perform its obligations hereunder;
3. Its authorized representative has sufficient authority to sign this Agreement on its behalf.
IV. Legal Force
1. From the effective date, this Agreement shall be legally binding upon both parties.
2. Each party warrants that its execution and performance of this Agreement and the business transactions carried out pursuant to this Agreement will
not violate any Chinese Law.
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V. Cooperation Contents and Scope
Chapter III Cooperation Contents, and Rights and Obligations of the Parties
1. During the term of this Agreement, Party A and Party B will cooperate, based on Official Platform Data and Contents, in providing users in mainland
China (excluding Hong Kong, Macao and Taiwan) with Sogou Search Services. Except for Official Platform Data and Contents (limited to data
provided by Party A) prescribed herein, Sogou shall not grab, acquire or use other contents involving Weixin or Weixin official platform in any way
including through a Spider program or through any third party channels.
2. During the term of this Agreement, in the form of inventory plus regular increment , Party A will provide Party B with Official Platform Data and
Contents within mainland China (excluding Hong Kong, Macao and Taiwan) and provide users in mainland China (excluding Hong Kong, Macao and
Taiwan) with Sogou Search Services based on the foregoing data. In this Agreement, Incremental Package includes all the articles and contents of the
official platform subscription accounts provided by Party A to Party B within mainland China (excluding Hong Kong, Macao and Taiwan) from time
to time, unless Party A believes that it is inappropriate to provide pursuant to the applicable laws or regulations or relevant agreements. The specific
form in which the service will be displayed and the product scheme of Party B shall be used and put online only after they are confirmed by Party A in
writing (including by email). If any technical issues occur to Official Platform Data and Contents, Party A shall provide technical support to fix the
issues or provide a fixing proposal. Party A’s technical supporting team is listed as follows: Contact person: , contact information: .
Party B’s technical supporting team is listed as follows: Contact person: , contact information: . One Party shall immediately inform
the other Party, if any changes to the technical team Contact person.
3. Party A shall furnish the publishing time of Weixin articles and recommended scores of the related articles based on the data regarding thumbs-ups,
comments, originality, account followers etc. to Party B, and help Party B optimize the search results. Party A’s recommendation data is confidential,
and Party B shall not abuse those recommendation data out of the scope of this Agreement or make it public or disclose to any third parties without
Party A’s prior written consent.
4. During the term of this Agreement, in addition to the cooperation prescribed in this Agreement, Party B will also promote Party A’s official platform
products in a manner agreed by the parties by utilizing Party B’s own user platforms and flow resources.
5. During the term of this Agreement, Party B shall, according to Party A’s requirements, provide related popular search words, hit rate, classification,
search volume, click rate and other related data of search services based on Official Platform Data and Contents for Party A to manage user operation
and improve user experience. Except for the Official Platform Data and Contents searched on Weixin app client pages, the Official Platform Data and
Contents search services provided by Party B shall not provide and display to users the reading volume, “like” quantity and other related data. Party A
shall keep the above data confidential, and without the prior written consent of Party B, Party A shall not publish, provide or reveal the above data to
any third party. In addition, Party B shall take reasonable and effective technical measures to ensure the security of Official Platform Data and
Contents provided by Party A, including but not limited to measures to prevent any third party from grabbing, acquiring and using official platform
data in Party B’s products by artificial or technical means, and Party A shall be entitled to limit, suspend, partially or entirely terminate the provision
of official platform data hereunder.
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6. During the term of this Agreement, as to default search results, Party B will display the top 100 official platform data search results for viewing. If the
user needs to view more search results, the user shall log in with the applicable account. In such a strategy restricting unlogged users of Party B’s
products from viewing official platform data search results and similar strategies displaying varied search results by logging status, user level and
other standards, unless with the written consent of Party A, Party B shall only offer the Weixin authorized logging, and logging in through third-party
authorization shall be prohibited.
7. Party A authorizes Party B to provide Sogou Search Services in respect of Official Platform Data and Contents only in mainland China (excluding
Hong Kong, Macao and Taiwan) and for noncommercial purposes. The explicit prior written consent of Party A is required if Party B needs to use
Official Platform Data and Contents in any other territory, in any other form or for commercial purposes.
8. Neither party is required to pay to the other party or any third party any fees in respect of the cooperation hereunder.
9. Without the consent of Party A, Party B shall not, itself or assist any third party to, develop or put online any ranking lists or influence lists or other
ranking products or functions of any Weixin official account or its articles and other information and contents, and shall not use the data, information
and contents acquired from the cooperation hereunder to realize such products or functions.
10. Without the consent of Party A, Party B shall not provide subscription systems independent from Weixin official platform (i.e., users may not
subscribe or collect data or contents of Weixin official platform through any platform other than Weixin official platform), and shall not use or use in a
disguised way data or contents of Weixin official platform to provide any product or service that is the same as or similar to Weixin official platform
products, functions or interfaces. Party B also undertakes not to, and not to assist any third party to, put online such functions.
VI. Rights and Obligations of the Parties
1. Each party confirms that the documents it provides to the other party (including but not limited to business registration, tax registration and other
commercial documents) are true and free from misrepresentation or fraud.
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2. Party A warrants that it has the power to provide Party B with Official Platform Data and Contents according to this Agreement, and to provide
Official Platform Data and Contents and updates thereof according to cooperation needs. Party A shall also use reasonable commercial efforts to make
sure that data information is timely provided to Party B.
3. Party A shall use reasonable commercial efforts to make sure the data interfaces and data fields it provides meet the invocation timeliness and quality
requirements as agreed upon by the parties.
4. When using Official Platform Data and Contents, Party B shall indicate that they are sourced from Party A. Party B is obliged to correctly and
completely indicate the data source to be Party A and mark “services provided by Party A”, and such use of Party A’s product name shall be
confirmed by Party A in writing.
5. The Official Platform Data and Contents hereunder are for use by Party B in Sogou Search Services only, and without the written permission of Party
A, Party B shall not use the related data and contents for any form of sales and commercial utilization other than the purposes prescribed hereby
(including but not limited to bidding rank, media stream and recommendation, except for the home page of Sogou Weixin search.), or reveal, provide
or permit any third party to use the same in any way.
6. Party B may exhibit Weixin official platform Data and Contents solely in the manner of Weixin Official Platform Source Pages. Without Party A’s
written consent, Party B shall not arbitrarily alter official platform Data and Contents provided by Party A, or display the information content of
WeChat official platform in any way other than the source pages of WeChat official platform, including but not limited to arbitrarily editing, sorting,
alter or tampering Weixin official platform data and content, or exhibit the same in a way other than the typesetting style approved.
7. Party B’s display of plugins or functions auxiliary to Official Platform Source Pages, including link to home page (profile) of Weixin official account,
link to Weixin advertisement system, and comment function, must be linked to their source pages, rather than displaying them in any form other than
Weixin Official Platform Source Pages, and Party B shall not shelter, insert in, or hinder by pop-up windows in any form any auxiliary plugins or
functions. When any user of Party B logs into his Weixin account, his browsing and reading of Weixin official platform information and contents,
number of “likes” given and other recording data shall be synchronized with Party A in a way prescribed by Party A. Party B shall make sure such
user can normally use “like”, comment and other plugins and functions that are provided by Party A and auxiliary to source pages.
8. When exhibiting official platform data, Party B shall guide and instruct its users to follow the Weixin official account that releases such content, and
such guidance and instruction shall be obvious, accurate, effective and clear.
9. During the performance of this Agreement, Party B shall take safe, effective and rigorous measures to prevent any third party other than parties hereto
from grabbing, intercepting, acquiring and using official platform data in any way including but not limited to a Spider program. Party A may require
Party B to immediately clean up, rectify or effectively upgrade the prevention measure, if Party A is aware of any third party violation. Party B shall
actively cooperate with Party A to take corresponding measures. Party B shall make response within 24 hours after receiving Party A’s written notice
and update Party A the processing status every 48 hours in writing during the handling process. Party A has the right to investigate Party B’s liability
for breach of contract in accordance with this Agreement, if Party B fails to complete the aforesaid clean-up work with the time frame confirmed by
both parties through negotiation or fails to meet the clean-up requirements determined by both parties.
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10. During the performance of this Agreement, Party B may not set up any subscription systems independent from Weixin official platform based on
Weixin Official Platform Data and Contents.
11. The written consent (including email, Weixin, or QQ discussion group of personnel designated by the parties) from Party A shall be obtained before
the name of any product or service relating to Party A (including but not limited to Weixin) as prepared or edited by Party B is put online.
12. Without the approval and consent of Party A, Party B shall not itself use or authorize any third party to use “Weixin”, “official account”, “official
platform” and other terms or expressions in connection with Weixin or Weixin official platform in the name of any existing or future function,
application or product. If any existing or future function, application or product of Party B uses any official platform data, the name of which shall be
submitted to Party A for examination beforehand, without the approval and consent of Party A, Party B shall not itself use or authorize any third party
to use such names. For purposes of this clause, the examination period of Party A will be 5 working days. The failure of Party A to give a reply during
the examination period shall be deemed as a rejection.
13. Party B shall immediately rectify its products and services (including but not limited to “Weixin headlines”) which have been put online in accordance
with the rights, obligations and cooperation terms prescribed hereby. If Party B fails to complete the rectification within the time limit specified by
Party A, then Party A shall be entitled to claim for liability for breach of contract according to this Agreement. Moreover, during the rectification
period, Party A has the right to suspend providing data to Party B and to request Party B to delete the existing data.
VII. Operation Specifications
Chapter IV Operations and Security Strategies
During the term of this Agreement, Party B shall comply with the provisions of Weixin official platform operation rules, including Weixin Official Platform
Service Agreement, Weixin Official Platform Operation Specifications, Tencent Service Agreement, Software Licensing and Service Agreement of Tencent
Weixin and related specific rules. The related rules are published by Party A on relevant webpages and will be updated according to statutory requirements
and operational needs. When any update requires any business adjustment by Party B, Party A shall inform Party B of such in advance.
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VIII. Security Strategy Synchronization
1. The cooperation hereunder involves Party A’s product operation and backstage security strategies. Party A owns the operation and management power
over Official Platform Data and Contents, and the provision, use and strategic adjustment of such data and contents shall be subject to the
confirmation of Party A. Party B shall cooperate with Party A in real-time synchronization as notified by Party A (including but not limited to
government supervision requirements, and complaint handling), and make sure the Official Platform Data and Contents strategies are at all times
consistent with those of Party A. Any content confirmed by Party A to be deleted shall be synchronized by Party B at the same time and kept from
exhibition in any way (including snapshot). In addition, Party B shall inform Party A of its strategies in real time.
2. The parties shall establish a security strategy coordination mechanism, and determine security strategies for official account data and contents
according to requirements of Party A.
IX. Complaint & Crisis Management
1. Each party shall take responsibility for and clarify system failure or information delay caused by its own reasons. In the event of information
transmission delay caused by basic communication platforms of operators, or business breakdown or service cessation caused by change of state laws,
regulations, policies or adjustment of operators’ policies, which give rise to consumer complaint against Party A, or business breakdown or service
cessation caused by technical failure in the process of information transmission, change of state laws, regulations, policies or adjustment of operators’
policies, either party shall immediately inform the other party so that the parties can handle the same together.
2. Party A has the right to deal with Official Platform Data and Contents that involve violation of state laws or regulations or infringe upon legitimate
rights and interests of others according to government requirements, user complaint and other reasons and to timely inform Party B for synchronous
handling, to which Party B shall provide active cooperation and assistance as required by Party A and ensure consistent handling strategies and
results.
3. Party B shall be responsible for handling and clarification of user complaint, punishment imposed by operators or other investigation by government
agencies due to reasons caused by Party B. Party A shall be responsible for handling and clarification of user complaint, punishment imposed by
operators or other investigation by government agencies due to reasons caused by Party A. In addition, each party shall be liable for compensation for
the loss incurred therefrom in accordance with the principles above prescribed.
4. Party B shall provide open, explicit and effective complaint handling channels and mechanisms, and shall be responsible for operational liabilities
caused by its slackness in handling (within 12 hours after the receipt of a notice from Party A) complaints and other problems.
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X. User Privacy Protection
Chapter V User Privacy Protection
1. The parties hereof shall fully respect and protect user privacy security, and shall not disclose nonpublic information of users without the permission of
users. Relevant data information shall only be used for Sogou Search Services expressly stipulated herein and shall not be used for any other purposes.
2. Party B shall ensure that privacy protection systems and procedures which are as robust as those of Party A shall be developed in respect of the use of
relevant information, so as to ensure that the user privacy information can be effectively protected.
XI. Intellectual Property Protection
Chapter VI Intellectual Property Protection
1. Neither party may use any trademark and logo owned by the other party during the cooperation in this Agreement for any purpose other than those in
this Agreement; other use for the purpose of this Agreement other than for the explicit cooperation hereunder must be subject to the prior consent of
the right owner.
2. Party B shall use the intellectual property logo and relevant information of the relevant data information for the cooperation hereunder and in
compliance with relevant laws and regulations and agreement between the parties, and shall not modify, shield, delete or otherwise change or un-
exhibit relevant logos at will.
3. If either party discovers that any third party infringes the intellectual properties or other lawful rights and interests of the cooperation products, it shall
promptly notify the other party, and take measures to claim against the infringer.
4. Party A shall own the intellectual properties of Weixin Public Platform and related functions, contents and names according to law. In any case, the
intellectual properties owned by Party A shall not be transferred in any form. Any intellectual property of the contents generated from the use of
Weixin Public Platform services by a user shall belong to such user or relevant right owner, and Party B shall not infringe the legitimate intellectual
properties of the user or relevant right owner.
5. The Parties and their staff undertake that they shall not disparage or otherwise damage the trademark, company name and domain name owned by the
other party, nor disparage, copy, distort, destroy or otherwise damage the internet webpage or website of the other party.
6. This Article shall survive the termination of the term of this Agreement or termination of relevant agreements.
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XII. General Obligations.
Chapter VII Confidentiality Obligation
1. The commercial, marketing, technical, business or other material of either party (“Disclosing Party”) that has been or will be disclosed to the other
party (“Receiving Party”) before the date of this Agreement and during the term of this Agreement was either designated as confidential information
(or similar mark) at the time of disclosure, or disclosed in a confidential circumstance, or commercially reasonably determined by the parties to be
confidential information (“Confidential Information”). During the term of this Agreement and three (3) years thereafter, the Receiving Party must:
(A) keep Confidential Information confidential; (B) not use Confidential Information for purposes other than the purposes specified in this Agreement;
and (C) not disclose to any other person other than employees of such party (or employees of its affiliates, lawyer, accountant or other consultants) on a
need-to-know basis for the performance of their duties; provided that the above person shall sign a written confidentiality agreement in which the
degree of confidentiality obligation shall not be lower than that of this Article.
2. The obligation stipulated in the preceding Article does not apply to the following information: (A) information that is in the public domain at the time
of disclosure or becomes part of the public domain after disclosure, other than as a result of the breach of the confidentiality obligation by the
Receiving Party; (B) information that is in the possession of the Receiving Party at the time of disclosure and to which the Receiving Party bears no
confidentiality obligation; (C) information obtained by the Receiving Party from a source other than the Disclosing Party through no breach of this
Agreement; (D) information provided by the Disclosing Party to a third party without being subject to any confidentiality obligation; or
(E) information independently developed by the Receiving Party without using any information disclosed by the Disclosing Party.
3. Upon expiration or termination of this Agreement, or upon request of the Disclosing Party at any time, the Receiving Party shall: (A) return to the
other party (or destroy, upon request of the other party) all materials and data containing Confidential Information of the other party, and (B) within ten
(10) days after request of the other party, assure to the other party in writing that the above materials have been returned or destroyed.
XIII. Disclosure of Trade Secret
The disclosure of any Trade Secret by either party under any of the following circumstances shall not be deemed as a breach of this Agreement:
Such information is disclosed with the prior written consent of the other party, and disclosed by a party according to the requirement of law to which it is
subject, provided that the disclosing party shall inform the other party in writing in advance of the exact nature of the Trade Secret to be disclosed.
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XIV. Publicity and Statement
Any intended publicity of any press release, announcement, statement or advertisement of any event in connection with this Agreement or arising from this
Agreement (including but not limited to the cooperation relationship between the parties) or promotion of such event shall be submitted to the other party
for review and shall be subject to the prior written consent of the other party, but the other party shall not unreasonably withhold or delay such consent.
Notwithstanding the foregoing provisions, either party may: (A) subject to the compliance with confidentiality provisions, disclose this Agreement and
relevant contents to its shareholders, directors, officers, employees, lawyers, accountants and other professionals, or (B) disclose this Agreement and
relevant contents according to the requirements of the securities laws or other relevant laws of its jurisdiction.
XV. Liability for Breach of Contract
Chapter VIII Breach of the Agreement
1. Either party which breaches any obligation stipulated herein shall bear liability for breach of contract, and indemnify the other party for all losses
suffered by the other party therefrom.
2. If both parties have fault, the parties shall respectively bear their own liability according to the degree of their respective fault for breach of contract.
3. If Party B breaches this Agreement, Party A shall be entitled to require Party B to modify, rectify, adjust or cease its products or services, and shall be
entitled to suspend or terminate the call and push of data content on public platform according to the degree of breach until termination of the
cooperation hereunder.
4. If Party B uses any data on public platform in violation of laws and regulations or this Agreement, which causes any loss to a third party, Party B shall
promptly clarify and apologize on public media with nationwide influence, and indemnify such third party for the losses suffered by it; where Party B
fails to perform this Article, Party A shall be entitled to claim against Party B all expenses incurred by Party A for the settlement, litigation, mediation,
arbitration and other dispute resolutions, such as attorney fee, investigation expenses, court costs, arbitration expenses, damages, and compensations.
XVI. General Requirements
Either party shall pay its own taxes according to the provisions of Chinese Law.
Chapter IX Taxation
Chapter X Term and Termination
XVII. Term
This Agreement shall come into force conditioned upon being affixed stamps by the parties. The term of this Agreement commences from March 1, 2020
and expires on February 28, 2021. The parties have the intention of long-term cooperation, and after the expiration of this Agreement Party B has the right
to renew this Agreement under the same conditions with written notice in one month prior to the expiry date .
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XVIII. Termination
This Agreement shall be immediately terminated upon the occurrence of any of the following circumstance:
1. Either party declares bankruptcy or enters into procedures for liquidation or dissolution.
2. If either party breaches this Agreement, which causes this Agreement to be unable to be performed continually, or the continued performance cannot
achieve the purpose of this Agreement, or such breach has infringed the lawful rights and interests of the other party, the other party shall give a 5
working days’ prior written notice to such party to terminate this Agreement; otherwise, either party may reserve the right of recourse.
3. In case of new provisions, the parties may sign a supplementary agreement through friendly negotiation, which shall have equal legal effect with this
Agreement.
4. If, during the term of this Agreement, the conclusion or performance basis of this Agreement is fundamentally changed due to the issuance of new
rules under state laws, regulations, relevant state departments and telecom operators or the change of policy environment, either party may notify the
other party to modify the original agreement through negotiation. If the negotiation fails, either party may terminate this Agreement by giving a 5
working days’ prior written notice to the other party, and shall not bear any liability.
XIX. Matters after Termination
1. The termination of this Agreement shall not affect the outstanding settlement hereunder or the payment obligation and other obligations or rights of
either party accrued before the termination.
2. Notwithstanding the termination of this Agreement, Chapter V and the obligations stipulated therein shall continue to have binding force upon the
parties.
3. Upon termination of this Agreement, Party B shall cease acquiring data and content from Party A’s public platform within the period required by Party
A, and delete existing contents according to the requirement of Party A.
12
XX. Law
Chapter XI Governing Law and Dispute Resolution
The signing, effectiveness, interpretation and enforcement of this Agreement and resolution of dispute hereunder shall be governed by the laws of the
People’s Republic of China.
XXI. Negotiation and Mediation
Any dispute arising from this Agreement shall be settled through friendly negotiation between the parties; if negotiation fails, either party may file a
lawsuit before the People’s Court of Nanshan District, Shenzhen at the domicile of Party A.
XXII. Waiver
Chapter XII Supplementary Provisions
No failure by a party to exercise or timely exercise any right, power or priority under this Agreement shall operate as a waiver of that right, power or
priority, nor shall any single or partial exercise of any right, power or priority prevent the future exercise of any right, power or priority.
XXIII. Modification
This agreement shall not be modified unless by a written agreement signed by the parties.
XXIV. Entire Agreement
This Agreement constitutes the entire agreement between the parties and supersedes all previous discussions, negotiations and agreements.
XXV. Successors
This Agreement shall bind upon and inure to the benefit of the parties and their respective lawful successors and assigns.
XXVI. Force Majeure
1. In case of Force Majeure, the performance of obligations of the parties hereunder will be suspended within the affected scope and duration of Force
Majeure. Neither party shall bear any liability therefrom.
2. Either party which claims to suffer Force Majeure shall notify the other party no later than 5 working days after the occurrence of Force Majeure, and
subsequently a written certification with respect to Force Majeure confirmed by relevant authorities, and shall minimize the impact of Force Majeure
to the extent possible.
13
3. In case of Force Majeure, the parties shall immediately discuss the problem resolution plans. If Force Majeure lasts for more than thirty (30) days, and
has a material adverse impact on the performance of this Agreement, either party may terminate this Agreement.
XXVII. Assignment
Without the prior written consent of the other party, neither party may assign this Agreement or its rights and obligations hereunder to any third party in
part or in whole.
XXVIII. Notice
Any notice or other communications sent according to this Agreement shall be in writing (including email), and sent to the following address of the parties
(including email address) or other address and/or email address subsequently notified by a party to the other party in writing:
If to Party A:
Address:
Email address:
If to Party B:
Address:
Email address:
XXIX: Miscellaneous
1. This Agreement shall be made in two counterparts in Chinese with each party holding one. Such two counterparts shall have the same legal effect.
2. Any matter not mentioned herein shall be subject to the provisions of Chinese Law.
3. Appendixes hereto are integral part of this Agreement. In case of any conflict between the appendixes and this Agreement, this Agreement shall
prevail. Any matter not referred to herein shall be subject to the appendixes hereto and the separate written agreements between the parties.
[Remainder of this page intentionally left blank]
14
Signed by:
Party A (Seal): Shenzhen Tencent Computer Systems Co., Ltd.
Party B (Seal): Beijing Sogou Information Service Co., Ltd.
Authorized Representative:
Authorized Representative:
Date :
Date:
15
Exhibit 4.18B
The Second Supplemental Agreement to the Amended and Restated Business Development and Resource Sharing Agreement
This Second Supplemental Agreement to the Amended and Restated Business Development and Resource Sharing Agreement (“Supplemental
Agreement”) is made by the following parties on October 24, 2019:
(1) Shenzhen Tencent Computer Systems Co., Ltd., a corporation duly established and validly existing under the laws of the People’s Republic of
China, with its legal address at 5/F-10/F, FIYTA Building, High-tech South 1st Road, Hi-tech Park, Nanshan District, Shenzhen (“Tencent”)(cid:0)
(2) Sohu.com Limited, a corporation duly established and validly existing under the laws of Cayman Islands, with its legal address at PO Box 309,
Ugland House, Grand Cayman, KY 1-1104, Cayman Islands (“Sohu”)(cid:0)
(3) Sogou Inc., a corporation duly established and validly existing under the laws of the Cayman Islands, with its legal address at P.O. Box 31119
Grand Pavilion, Hibiscus Way, 802 West Bay Road, Grand Cayman, KY1-1205 Cayman Islands (“Sogou Inc.”)(cid:0)
(4) Beijing Sogou Technology Development Co., Ltd., a corporation duly established and validly existing under the laws of the People’s Republic of
China, with its legal address at Room 01, 9/F Sohu.com Internet Plaza, No. 1 Park Zhongguancun East Road, Haidian District, Beijing (“Sogou
China”);
(5) Beijing Sogou Network Technology Co., Ltd., a corporation duly established and validly existing under the laws of the People’s Republic of
China, with legal address at Room 03, 10/F, Building 9, No. 1 Park Zhongguancun East Road, Haidian District, Beijing (“Sogou Network”);
(6) Beijing Sogou Information Service Co., Ltd., a corporation duly established and validly existing under the laws of the People’s Republic of
China, with its legal address at Room 02, 9/F Sohu.com Internet Plaza, No. 1 Park Zhongguancun East Road, Haidian District, Beijing (“Sogou
Information”);
(7) Shenzhen Shi Ji Guang Su Information Technology Co., Ltd., a corporation duly established and validly existing under the laws of the People’s
Republic of China, with its legal address at 16/F, Tencent Building, Kejizhongyi Road, Yuehai Street, Nanshan District, Shenzhen, Guangdong
Province, China (“Shi Ji Guang Su”)
The parties mentioned above shall hereinafter be referred to individually as a “Party”, and collectively as the “Parties”. In particular, Sogou
Inc., Sogou China, Sogou Network, Sogou Information and Shi Ji Guang Su are collectively referred to as “Sogou”.
Whereas,
The Parties entered into the Amended and Restated Business Development and Resource Sharing Agreement (the “Agreement”) on September 25, 2017,
and Supplemental Agreement to the Amended and Restated Business Development and Resource Sharing Agreement (“First Supplemental Agreement”)
on September 20, 2018.
1
Upon amicable consultation, the Parties amend relevant provisions of the Frist Supplemental Agreement as follows:
1. The Parties agree to extend the validity period of Subparagraph (3) of Paragraph 1 of Clause 2 “Amendment to the Strategic Principles of Business
Development and Resource Sharing” of the First Supplementary Agreement for one year to September 15, 2020, i.e. the Subparagraph is modified as
follows: The search function inside Weixin/WeChat is not the above-mentioned “general search engine”, and is not subject to the above provision that
“such default general search engine shall be the search engine powered by Sogou”. However, from September 16, 2019 to September 15, 2020, under
equivalent conditions and subject to Tencent’s requirements for user experience, Sogou Search will be the preferred third-party search function to
power such a Weixin/WeChat search function that allows Weixin/WeChat users to access Internet information outside Weixin/WeChat for that period.
Without prejudice to user experience, the cooperation herein may be extended for additional successive one-year periods during the Cooperation
Period.
2. Miscellaneous
2.1 Effectiveness. This Supplemental Agreement shall become effective when the Parties sign or seal on the date first written above.
2.2 Validity. This Supplemental Agreement shall become an integral part of the Agreement and First Supplementary Agreement when it becomes
effective, and shall have the same legal force as the Agreement and the First Supplementary Agreement. If there is any discrepancy between the
provisions of this Supplemental Agreement and the Agreement and the First Supplementary Agreement, this Supplemental Agreement shall
prevail, and the other provisions of the Agreement and the First Supplementary Agreement shall remain fully effective.
2.3 Definition and Interpretation. Unless otherwise stated, the words used herein shall have the same meanings set forth in the Agreement and the
First Supplementary Agreement.
2.4 Counterparts. This Supplemental Agreement may be made in multiple counterparts. All counterparts shall be originals when they are signed and
delivered, and together constitute the same one agreement.
(The remainder of this page is intentionally left blank.)
2
IN WITNESS WHEREOF, the Parties hereto have caused this Supplemental Agreement to be executed by their respective authorized representatives on
the date and year first written above.
[Signature Page]
Shenzhen Tencent Computer Systems Co., Ltd.
Sohu.com Limited
(Seal)
Signature:
Name:
Title:
Sogou Inc.
(Seal)
Signature:
Name:
Title:
(Seal)
Signature:
Name:
Title:
Beijing Sogou Technology Development Co., Ltd.
(Seal)
Signature:
Name:
Title:
Beijing Sogou Network Technology Co., Ltd.
Shenzhen Shi Ji Guang Su Information Technology Co., Ltd.
(Seal)
Signature:
Name:
Title:
(Seal)
Signature:
Name:
Title:
Beijing Sogou Information Service Co., Ltd.
(Seal)
Signature:
Name:
Title:
Exhibit 4.19
Contract No.:
SOHU.COM Internet Plaza Office Building Lease
Between
Beijing Sohu New Era Information Technology Co., Ltd.
and
Beijing Sogou Network Technology Co., Ltd.
Parties:
Date:
Article 1
Object:
Lessor:
Address:
Legal representative:
Tel:
Fax:
Lessee:
Address:
Legal representative:
Tel:
Fax:
Lease
Beijing Sohu New Era Information Technology Co., Ltd.
SOHU.com Media Plaza, No. 2 Park, No. 3 Building, South Road of
Academy of Sciences, Haidian District, Beijing, China
Charles Zhang
Beijing Sogou Network Technology Co., Ltd.
SOHU.com Internet Plaza, No.1 Park, Zhongguancun East Road, Haidian
District, Beijing, P.R.C.
Wu Tao
The Lease was concluded on [December 25, 2019].
The parties hereby enter into the following agreement:
Definitions
The Lessor agrees to lease out and the Lessee agrees to take on lease the premises (actual floors) located at 7F, 8F Room 01,
and 10F, SOHU.com Internet Plaza No.1 Park, Zhongguancun East Road, Haidian District, Beijing, P.R.C., that is, 7F, 8F,
and 10F as elevator shows.
As a duly established and validly existing corporation, the Lessor has the authority to enter into the Lease and to perform its
obligations hereunder. In addition, the Lessor has full ownership of the Object leased, and has obtained all internal and
external approval or registration and filings necessary for the performance of the Lease, consenting to the lease of the Object
to the Lessee.
As a duly established and validly existing corporation, the Lessee has the authority to enter into the Lease and to perform its
obligations hereunder. The Lessee agrees to take on lease and enjoys the following rights pursuant to the Lease:
(i) To normally use public inlets and outlets, stairs, platforms, passageways, public restrooms, tea rooms, broom
closets, etc. of the building together with the Lessor and other parties enjoying the same rights, provided that, the
Lessor may restrict such right to use in a proper way at any time when the above facilities need to be repaired or
upon the occurrence of emergency;
(ii) To share the elevators, central air-conditioning and other equipment serving the office building.
Tenancy term and rent:
The tenancy term is more particularly set forth in Article 3 (“Tenancy Term”). The Lessee shall pay the rent and property
management fees as specified in Article 4 hereof within the Tenancy Term in a way specified in Article 6.
Deposit:
Other expenses:
The Lessee shall pay the deposit as specified in Article 5 hereof simultaneously with the execution of the Lease in a way
specified in Article 6.
The Lessee shall timely pay the following expenses as per the bills provided by the property management company
designated by the Lessor, including but not limited to:
Electricity charges and water rates, over time air conditioning costs, machine room cooling water rates, etc. incurred in the
Object.
For specific payment methods, please refer to Article 6 hereof.
Legal expenses:
The parties shall respectively bear their legal expenses.
Application:
The Object leased may only be used by the Lessee for work.
Date of delivery:
.
Article 2
Object
Building No.:
SOHU.com Internet Plaza No.1 Park, Zhongguancun East Road, Haidian District, Beijing, P.R.C.
(hereinafter referred to as the “Office Building”)
Floor No.:
7F, 8F Room 01, and 10F (actual floors) of the Office Building, that is, 7F, 8F, and 10F as elevator shows.
Lease area:
7F, 8F, and 10F (actual floors) of the Office Building, that is, 7F, 8F, and 10F as elevator shows, having a
total lease area of 6585.88 square meters.
For the specific location, please refer to Annex I.
For delivery standards, please refer to Annex II.
Article 3
Tenancy Term
Term: 36 months
Lease commencement date: January 1, 2020
Termination date: December 31, 2022
(The term includes lease commencement date and termination date)
Article 4
Rent and Property Management Fees
(1) Rent
In consideration of using the Object leased, the Lessee shall pay the following rent:
2
Rent standard: RMB 11/day/m
Annual rent: RMB 26,514,752.88
Monthly rent: RMB 2,209,562.74
Second year:
2
Rent standard: RMB 11/day/m
Annual rent: RMB 26,442,308.28
Monthly rent: RMB 2,203,525.69
Third year:
2
Rent standard: RMB 11/day/m
Annual rent: RMB 26,442,308.28
Monthly rent: RMB 2,203,525.69
(Calculated based on the lease area specified in Article 2 above at the unit price of RMB11/day/m , to be settled in
Renminbi)
2
(2) Property management fees
Subject to the SOHU.COM Internet Plaza Office Building Property Services Agreement (subject to the name of the
agreement finalized) entered into by and between the Lessee and the property management company designated by the
Lessor.
Article 5
Deposit
The deposit for rent will be RMB 6,628,688.22 (equivalent to three months of rent). Since RMB5,228,266.68 of deposit has
been paid under the original contract and supplementary contracts No. 16-GNL-ES-05744, 17-GNL-ES-00950 and 18-GNL-
ES-01877, the Lessee needs to hand in RMB 1,400,421.54 of deposit hereunder.
The deposit will bear no interest.
Upon the extinguishment or termination of the Lease, the remaining amount after the Lessor deducts unpaid rent, other
expenses and other deductible expenses payable by the Lessee shall be returned to the Lessee in one lump sum within 20
working days after termination of the Lease.
Article 6
Payment of Rent, Property Management Fees, Deposit and Other Expenses
(1) The rent and property management fees include neither electricity charges and water rates, rent and management fees of
parking space leased, over time air conditioning costs, machine room cooling water rates, etc. of the Object leased, nor
all government taxes and other expenses payable by the Lessee according to laws or regulations.
During the Tenancy Term, the rent shall be paid by calendar month. In particular, the Lessee shall pay the rent and
property management fee for the next month in advance within the first twenty days of each calendar month without
any deduction.
The Lessee shall prepay RMB 2,209,562.74 of rent simultaneously with the execution of the Lease.
(2) Within five working days after the Lease is executed, the Lessee shall pay the deposit to the Lessor in the amount
prescribed in Article 5 hereof.
(3) The Lessee shall pay other expenses then incurred in accordance with the provisions of the Lease, the SOHU.COM
Internet Plaza Office Building Property Services Agreement (subject to the name of the agreement finalized) entered
into with the property management company designated by the Lessor, and the SOHU.COM Internet Plaza User
Manual and the SOHU.COM Internet Plaza Decoration Manual formulated and updated from time to time by the
Lessor or the property management company.
(4) The rent and deposit for the Object leased shall be paid to the following account of the Lessor:
Bank of deposit: China Merchants Bank Co., Ltd., Beijing Branch, Qingnian Road Sub-branch
Account name: Beijing Sohu New Era Information Technology Co., Ltd.
Account number: 010900239210301
(5) The Lessor shall issue vouchers to the Lessee at the following time in the following way:
The Lessor shall issue a receipt within ten working days after the receipt of deposit paid by the Lessee;
Regarding the rent paid by the Lessee by check, remittance or any other means designated by the Lessor, the Lessor
shall issue a formal invoice of corresponding amount within the corresponding Tenancy Term after the related funds
reach the bank account designated by the Lessor.
Article 7
Fixtures and Fittings
The Lessor will provide certain fixtures and fittings for the interior of the Object leased according to Annex II hereto —
SOHU.COM Internet Plaza Office Building Delivery Standards (subject to the confirmation document signed by the Lessee
and the property management company designated by the Lessor), the Lessee shall return such fixtures and fittings in the
same shape, conditions and structure as previously delivered upon the termination of the Lease. The initial delivery status
shall be subject to the confirmation document signed by the Lessee and the property management company designated by the
Lessor.
Article 8
Special Terms
(1) Reception of the Object leased
The Lessor shall deliver the Object leased to the Lessee in accordance with the delivery conditions prescribed in Annex
II hereto and the confirmation document signed by the Lessee and the property management company designated by the
Lessor on the delivery date. As the Lessee is already the actual occupier and user of the premises leased, the delivery
date will be the lease commencement date, that is to say, the Tenancy Term will commence as from the delivery date.
Simultaneously with the execution of the Lease, the Lessee shall enter into a SOHU.COM Internet Plaza Office
Building Property Services Agreement with the property management company designated by the Lessor (subject to the
name of the agreement finalized).
(2) Decoration
During the Tenancy Term, the Lessee may carry out interior decoration in the Object leased with the prior consent of the
Lessor after entering into a Leased Premise Decoration Security Agreement (subject to the name of the agreement
finalized) with the Lessor or the property management company designated by the Lessor.
(3) Government registration, taxes and other incidental expenses
The Lessor shall go through related registration formalities for the premises leased according to law, to which the
Lessee shall offer assistance.
All taxes and dues in connection with the execution, registration and implementation of the Lease shall be governed by
the applicable laws and regulations of China (excluding Hong Kong, Macao and Taiwan). In the absence of explicit
provisions in Chinese laws and regulations, the taxes and dues shall be respectively borne by the Lessor and the Lessee
on their own.
(4) Status of the Object leased
The Lessor has delivered the Object leased to the Lessee in accordance with the standards set forth in Annex II. The
Lessee has received the Object according to such standards and confirmed the Object leased to be in good and rentable
conditions. Both parties acknowledge that the Object leased conforms to the provisions of the Lease.
(5) Other agreements and covenants
The Lessee agrees to comply with the SOHU.COM Internet Plaza Property Management Services Entrustment
Contract and the Constitution of SOHU.COM Internet Plaza’s Owners Association signed by the Lessor. If the
Lessor violates any of the aforesaid agreements as a result of the Lessee, the Lessee shall compensate the Lessor for
its losses.
Article 9
Confidentiality
During the Tenancy Term, the Lessor, the Lessee and their respective agents shall keep the trade
secrets, financial information and other confidential information of the Lessee and the Lessor
confidential, and may not disclose such information to any third party without the consent of the
other party.
Article 10
Others
The Lessee agrees that, the Lessor has the right to sell the premises leased to any third party during
the Tenancy Term, and the Lessee promises to waive its right of preemption.
This Lease includes certain annexes and the Detailed Rules for Office Building Lease.
(The remainder of this page is intentionally left blank)
Beijing Sohu New Era Information Technology Co., Ltd.
Signature of representative:
Common seal:
Beijing Sogou Network Technology Co., Ltd.
Signature of representative:
Common seal:
(No text on this page, this being the seal and signature page to the SOHU.COM Internet Plaza Office Building Lease)
Signed on: 2019
Annexes to the Lease
Annex I: Location Sketch Map
Annex II: SOHU.COM Internet Plaza Office Building Delivery Standards
Annex III: Photocopy of the Lessor’s Business License and Original Power of Attorney
(No text on this page)
Detailed Rules
for
Office Building Lease
Between
Beijing Sohu New Media Information Technology Co., Ltd.
and
Beijing Sogou Information Services Co., Ltd.
Lease Rules
I. Rent, Property Management Fees and Other Expenses
The Lessee agrees to accept and perform the following:
(1) Rent and property management fees
To timely pay the rent and property management fees prescribed in Article 4.
(2) Commercial taxes
To pay the taxes or dues payable by the Lessee as prescribed by laws and regulations annually or regularly imposed by the competent department on
the Object leased or the Lessee at present or in the future, except the land use fees and house property taxes.
(3) Electricity, water and other charges
To pay the charges of electricity and water used in the Object leased.
(4) Other expenses
The Lessee shall pay to the property management company designated by the Lessor: including but not limited to the expenses of machine room
cooling water and over time air-conditioning provided by the property management company designated by the Lessor at the request of the Lessee.
The Lessee agrees to accept and perform the following:
(1) Compliance with regulations, detailed rules and ordinances, etc.
II. Obligations of the Lessee
(a) Comply with all regulations, rules and requirements of the government or other relevant departments concerning the Lessee’s behaviors and
operations in the Object leased, as well as all related regulations, rules and requirements regulating the actions, behaviors, affairs or things
of the Lessee or its employees, agents, contractors or visitors.
The Lessee shall compensate the Lessor for its losses caused by the Lessee’s violation of these regulations, rules and requirements.
(b) The Lessee shall be responsible for all claims, demands, lawsuits, legal proceedings, judgments, losses and related expenditures that the
Lessor may suffer or incur as a result of death, personal injuries or property damages occurred in the Object or occurred during the use of
the Object or part thereof caused by the act or negligence of Lessee or its employees, contractors, agents or visitors.
(c) The Lessee shall be responsible for all losses and damages to the Object leased, the building and all properties in the building caused by the
Lessee or its agents, employees, contractors or visitors.
(2) Decoration, repair and maintenance
(a) Decoration
The Lessee’s decoration of the Object leased must comply with the provisions of the SOHU.COM Internet Plaza Office Building
Decoration Manual (subject to the name of the agreement finalized) formulated and modified from time to time by the property
management company designated by the Lessor.
The Lessee shall make sure the decoration and partition of the Object conform to firefighting, security, building or other relevant
provisions.
According to the drawings and specifications previously submitted to and approved by the Lessor and the property management company
designated by the Lessor in writing, the Lessee shall decorate the interior of the Object at its own expenses.
The interior decoration performed by the Lessee shall be in a good and workmanlike manner and conform to the style of first-class office
buildings. The Lessee shall maintain the decoration in the same status during the entire Tenancy Term, except normal wear and tear.
Without the prior written approval of the Lessor and the property management company designated by the Lessor, the Lessee must not, by
itself or allow to, make any alteration to the approved decoration drawings and specifications as well as the interior design and layout of the
Object.
For the avoidance of doubt, the Lessor and the Lessee hereby declare that:
(i) The Lessor or the property management company designated by the Lessor approving the abovementioned decoration drawings
and specifications of the Lessee doesn’t exempt the Lessee from applying to the related government authorities of Beijing, at its
own cost, for approval of such decoration drawings and specifications already approved by the Lessor or the property management
company designated by the Lessor before formally starting interior decorating.
(ii) The Lessor and the property management company designated by the Lessor shall bear no responsibility for any consequence of
the Lessee not complying with the requirements and conditions set forth in the decoration drawings and specifications approved by
the related government authorities of Beijing.
(iii) The Lessee shall keep the Lessor harmless from any loss caused by the Lessee not complying with the present clause, including
but not limited to legal expenses.
(b) Repair and maintenance
The Lessee shall keep the part of decorations in the Object provided by the Lessor and the part added by the Lessee (including all doors and
windows, walls, equipment and facilities and pipelines, etc.) in good, clean and rentable conditions, and shall keep the Object leased and oil
paint on the surface intact.
The Lessor shall be responsible for daily repair and maintenance of decoration (decorative surface, strong current, weak current) and
electromechanical system (central ventilation system) provided by the Lessor and access control, provided that the Lessee shall bear the
corresponding costs, as more specifically agreed upon by the parties.
The Lessee shall repair and maintain the part of decorations added by itself at its own costs and expenses.
The Lessee shall comply with the regulations of the sanitation and provisions of other relevant government departments concerning
dedicated sanitation and water facilities (if any) used by the Lessee or its employees, agents or visitors at its own expenses.
(3) Replacement of windows or glass curtain walls
The Lessee shall pay the expenses incurred by the Lessor or the property management company designated by the Lessor for replacement of
windows, glass or glass curtain walls accidently broken or damaged by the Lessee or its employees, contractors, agents or visitors.
(4) Compensation and insurance of losses and damages caused by internal defects
The Lessee shall take full responsibility for losses, property damages, death or personal injuries caused by the acts, faults or negligence of the
Lessee or its employees, contractor, agents or visitors expressly or impliedly permitted by the Lessee. The Lessee shall hold the Lessor harmless
therefrom. For purposes of this clause, the term “property” includes but is not limited to fixtures and fittings of the Lessor.
To avoid the above risks, the Lessee shall procure and maintain third-party liability insurance from a domestic insurance company. Such insurance
shall be purchased in the name of the Lessee and particularly indicate the Lessor as the owner of the building (including the Object leased). From
the date of lease commencement date, the Lessee shall furnish the Lessor with a certificate issued by the insurance company within three months,
evidencing to the Lessor that appropriate insurance has been purchased. Such certificate shall constitute a part of annexes to the contract.
The insurance contract shall contain a clause prescribing that without the prior written consent of the Lessor, the insurance purchased and its
conditions may not be cancelled, modified or restricted.
(5) Access of the Lessor or the property management company designated by the Lessor
When the Lessor or the property management company designated by the Lessor needs to examine or check the status of the interior structures,
equipment or facilities in the Object leased by the Lessee and carry out necessary repair or maintenance, with prior notice, the Lessee shall allow the
Lessor or the property management company designated by the Lessor and their authorized personnel to enter the Object in reasonable time. When
exercising such right, the Lessor or the property management company designated by the Lessor shall try not to cause any interference to the Lessee.
In the case of emergency when it becomes impossible to contact the Lessee in advance, the Lessor and its employees or agents may enter the Object
without permission of the Lessee to take necessary measures, provided that the Lessee shall be timely reported afterwards; in the case of especially
critical circumstances, the Lessor or the property management company designated by the Lessor may force an entrance to the Object.
In order to better comply with the preceding clause, the Lessee shall inform the Lessor or the property management company designated by the
Lessor the security system installed in the Object and its nature.
(6) Notice of repair
The Lessee shall conduct the necessary repair in a reasonable time after the receipt of a notice from the Lessor or the property management company
designated by the Lessor requiring repair. If the Lessee fails to do so, the Lessor or the property management company designated by the Lessor
shall be entitled to enter the Object, and may forcibly perform the work or repair in emergency circumstances, with all related expenses to be borne
by the Lessee.
(7) Informing the Lessor of damage
The Lessee shall timely inform the Lessor and the property management company designated by the Lessor of damage to the Object and personal
injuries, and of accidents or defects of water pipes, gas pipes, electric circuits or devices, fixtures or other facilities provided by the Lessor. After the
receipt of such a notice, the Lessor or the property management company designated by the Lessor shall respond immediately and perform the repair
within three working days. In the instance the Lessee becomes unable to normally use the facilities due to losses caused by the Lessor and response
delay of the property management company, the Lessee shall be entitled to engage a third party for repair, with the maintenance costs to be deducted
from the rent or other expenses (except repair caused by the Lessee only).
Upon occurrence of fire alarm or other accidents, in addition to calling the police and taking necessary measures immediately, the Lessee shall
simultaneously inform the Lessor and the property management company designated by the Lessor.
(8) Directory
When the name on the directory of the building is changed upon the request of the Lessee, the Lessee shall pay the expenses for installation, repair,
change or replacement of the Lessee’s name on the directory.
(9) Survey
Within six months before the expiration of the Tenancy Term, the Lessee shall allow the Lessor to accompany potential tenants or users to make a
survey of the Object in a reasonable time with prior notice, but the Lessor shall try its best to avoid interference with the Lessee’s work.
(10) Regulations
The Lessee shall comply with the SOHU.COM Internet Plaza Property Management Services Entrustment Contract, the Constitution of
SOHU.COM Internet Plaza’s Owners Association signed by the Lessor, and shall comply with and abide by the regulations formulated by the Lessor
and the property management company designated by the Lessor, including but not limited to the SOHU.COM Internet Plaza User Manual and
the SOHU.COM Internet Plaza Decoration Manual (subject to the name of the agreement finalized).
(11) Contractors, employees, agents and visitors
The acts, negligence, omission and fault of all contractors, employees, agents and visitors of the Lessee shall be deemed as those of the Lessee, for
which the Lessee shall be responsible to the Lessor.
(12) Return of the Object
Upon the expiration of the Tenancy Term or early termination of the Lease, the Lessee must rehabilitate the Object in the state indicated in the
confirmation document signed upon acceptance, including but not limited to rehabilitating the ceiling system, spraying system, smoke detector, fan
coil, air-conditioning temperature controller, lamp panel, air supply grille and return air inlet, unless with the consent of the owner.
The Object and all fixtures, fittings and ceilings therein returned by the Lessee must be complete, good, clean, rentable and in a proper maintenance
status.
The personal property (including the name boards of the Lessee on doors, walls, etc. of the Object), fixtures and fittings and auxiliary equipment of
the Lessee shall be removed as required by the Lessor upon the expiration of the Tenancy Term or early termination of the Lease, with the
corresponding expenses to be borne by the Lessee. In addition, the Lessee shall compensate the Lessor any damage caused in the process of
removing.
The Lessee shall allow the Lessor to remove from the directory texts and characters relating to the Lessee, and shall compensate the Lessor for its
losses caused by the Lessee’s failure to do so.
If, when the Lessee returns the Object, there remain some items, fixtures or fittings in the Object, the Lessee hereby declares that it has agreed to
waive its ownership of such properties, and allow the Lessor to freely dispose such properties (including but not limited to abandonment, selling off
or other means), except as otherwise agreed then by both parties.
The time for the Lessee to return the Object shall be subject to the written document signed by authorized representatives of the parties.
(13) Indemnification upon default
The Lessee shall indemnify and hold the Lessor harmless from losses caused by the following behavior that may be suffered or incurred by the
Lessor, including lawsuits, claims, losses, damages and expenses: the Lessee fails to comply with or perform any of its responsibilities hereunder, or
the use of the Object by the Lessee (including indoor installation and equipment of electricity and gas), the misconduct taken during the Tenancy
Term against the Object, or the negligence or fault of the Lessee.
(14) Protection under severe weather
The Lessee shall take any reasonable preventive measure to prevent the Object from invasion of storm, heavy rain, snow or similar severe weather.
Under the above severe weather, the Lessee shall especially make sure all exterior doors and windows are closed.
(15) Cancellation or alteration of industrial and commercial registration
The Lessee shall properly go through the cancellation or alteration of industrial and commercial registration with the unit as registered or business
address within 30 days after the expiration of the Tenancy term or the date of early termination hereof.
(16) Maintenance of electrical equipment, pipelines and wirings
If the electrical equipment, wirings or pipelines installed by the Lessee become in danger or unsafe or as reasonably requested by the Lessor or the
relevant municipal corporation, the Lessee shall repair or replace the above equipment, wirings or pipelines. At the time of maintenance, the Lessee
may engage only the maintenance contractors designated or identified by the Lessor or the property management company designated by the Lessor
in writing. The Lessee shall allow the Lessor or the property management company designated by the Lessor to examine the wirings or pipelines
installed by the Lessee in the Object, provided that the Lessor or the property management company designated by the Lessor shall send a written
request in advance and examine the devices at any reasonable time. The Lessee shall indemnify the Lessor harmless from claims, expenses, damages
or lawsuits caused by faults or improper maintenance of electrical equipment, devices, pipelines and wirings installed by the Lessee in the Object.
(17) Sewer cleaning
When the sewer or sanitary fittings or other pipelines are plugged or stop work due to careless or improper use or negligence of the Lessee or its
contractors, employees, agents or visitors, the Lessor or the property management company designated by the Lessor shall clean, repair or replace
such pipelines first, with all costs incurred therefrom to be borne by the Lessee. Moreover, the Lessee shall undertake all expenses, claims or losses
suffered by the Lessor therefrom.
(18) Transportation of waste and garbage
The Lessee shall carry away the waste and garbage generated during the decoration period, and place such waste and garbage in such locations
within the building as designated by the Lessor or the property management company designated by the Lessor. If the Lessee uses the waste and
garbage cleaning services provided by the Lessor or the property management company designated by the Lessor, the Lessee shall pay the relevant
expenses and may not utilize the services provided by any similar contractor.
The Lessor agrees to accept and perform the following:
(1) Non-interference
III. Obligations of the Lessor
Under the premise that the Lessee pays the rent, property management fees and various other expenses in the way and amount prescribed herein and
complies with and performs these terms and conditions that the Lessee shall comply with and perform, the Lessor shall make sure the Lessee’s
peaceful occupation and use of the Object during the Tenancy Term will not be interfered by the Lessor or any person legally claiming its rights
through the Lessor (except the circumstances prescribed by Clauses (5) and (6), Article II of these Detailed Rules).
(2) Land use fees
Except the taxes and dues payable by the Lessee according to the Lease and/or relevant Chinese laws and regulations, all other land use fees and
property taxes on the building shall be borne by the Lessor.
(3) Roof and main structure
The Lessor shall maintain the structure of the building in a good condition.
(4) Decoration
The Lessor may carry out all necessary decoration and place green plants in public areas of the building when it deems necessary.
(5) Cleaning and waste treatment
The Lessor shall keep the public areas, restrooms and other common parts of the building clean.
The Lessor shall be responsible for cleaning the outer walls of the building (except the part that shall be cleaned by the Lessee or the user).
(6) Shared facilities
The Lessor shall keep all elevators, firefighting and safety facilities, air conditioning equipment and other facilities in the building in a normal
operation condition, and regularly repair and maintain the same.
After the receipt of a fault notice from the Lessee, the Lessor shall send certain personnel to repair the facilities in reasonable time (except the part
that shall be repaired by the Lessee or the user).
(7) Directory
The Lessor shall provide a standard directory sign in the lobby and corresponding floors of the building and allocate appropriate places for the
Lessee to add its name thereon according to unified font or character standards designated by the Lessor, the first installation of which will be free of
charge.
(8) Air conditioning
The office building will offer central air conditioning at the following time:
9:00-18:00 from Monday to Friday, excluding other time and public holidays.
If the Lessee requires over-time air conditioning services beyond the above time, it shall notify the property management company designated by the
Lessor 24 hours in advance. After the receipt of a reasonable notice from the Lessee, the property management company designated by the Lessor
will provide such over-time air conditioning services. The charges of such over-time air conditioning services will be determined by the property
management company designated by the Lessor and the Lessee will be informed thereof.
(9) Insurance
The Lessor shall purchase valid insurance for the public areas and shared facilities of the building.
IV. Restrictions and Prohibitions
The Lessee agrees to accept and perform the following:
(1) Installation and variation
(a) Without the prior written consent of the Lessor and the property management company designated by the Lessor, it may not install, place or
vary any fixture, partition or other assets and facilities belonged to the Lessor within the Object or any other part (including but not limited
to: furniture, decoration, air conditioning, access control, etc.).
Without the prior written consent of the Lessor and the property management company designated by the Lessor, the Lessee must not
install or permit the installation of equipment and fixture on electric power circuits, pipelines and facilities, or install or permit the
installation of any equipment, device or machinery which exceeds the originally designed capacity of the floor or requires addition of
electric power circuits or pipelines or the power consumption of which will not be measured through the Lessee’s electricity meter.
The Lessor or the property management company designated by the Lessor has the right to stipulate the maximum weight and placement
location of safe deposit boxes and other heavy equipment. The Lessor or the property management company designated by the Lessor may
require the Lessee to put pad in the specified size and material at the bottom to disperse the weight when it deems necessary.
(b) When performing an approved project, the Lessee shall procure its employees, agent, contractors and workers to fully cooperate with the
Lessor, the property management company designated by the Lessor and the Lessor’s employees, agent, contractors and workers; and to
work with other tenants or contractors working in the building.
The Lessee and its employees, agents, contractors and workers shall abide by and follow all instructions and guidance from the Lessor or
the property management company designated by the Lessor.
(c) When modifying or altering electric circuits, access control, firefighting or air conditioning systems, the Lessee shall use the contractors
designated or identified by the Lessor and the property management company designated by the Lessor in writing, and shall bear all
corresponding expenses.
(2) Rules for commencement of operations
The Lessee shall obtain and maintain in the entire Tenancy Term the validity of permission or approval (if any) from the government or other related
departments on its use or occupation of the Object. Upon the receipt of a notice from the government or any other related department concerning the
Object or any service provided in the Object, the Lessee shall inform the Lessor in writing.
(3) Marks
The Lessee may not place or exhibit or allow other to place or exhibit any billboard, mark, ornament, advertisement or other product in or out of the
Object, whether equipped with lighting to make it visible from the outside, except:
(a) The Lessee may, at its own costs, require the Lessor or the property management company designated by the Lessor to arrange the
placement of its name (and any future addition or alteration) on the directory in the unified Chinese and English model designed by the
Lessor.
(b) The Lessee may, at its own costs, place its name at the entrance of the Object in the font and size approved by the Lessor. If the Lessee
carries on business in another name, it shall notify the Lessor of such name, and may exhibit such name at the entrance only with the
written consent of the Lessor. Without the prior written permission of the Lessor, the Lessee may not change the name of its business.
(4) Purpose
The Lessee may not use or allow the use of the Object for any purpose other than office as explicitly prescribed in the Lease.
(5) Illegal or unethical use
The Lessee may not use or allow the use of the Object for any illegal or unethical purpose.
(6) Passage obstruction
The Lessee may not obstruct or allow the obstruction of the entrance, stairs, platforms, passages, escalators, elevators, lobby and other public parts
of the office building with boxes, packaging scraps and obstructions in other natures.
When it deems fit, the Lessor has the right to move away the abovementioned debris or other items or things without notice to the Lessee, with all
related expenses to be borne by the Lessee.
(7) Wires and cables in public areas
The Lessee may not lay or install attached electric wires, cables or other items and things at the entrance and exit, stairs, passages, lobby and other
places in public areas of the building.
(8) Sublease and assignment
Without the written consent of the Lessor, the Lessee may not transfer, sublease, waive or assign the Object leased or any part thereof or any interest
thereon, nor make any arrangement or transaction, that results in a non-party to the Lease acquiring or enjoying the right to use, take on lease and
occupy the Object leased or any part thereof, regardless of whether rent or other considerations have been paid for such acquisition.
(9) Violation of insurance terms
The Lessee may not carry out or allow others to carry out any act or thing that will or may invalidate the fire insurance, third-party liability
insurance and insurance covering other risks of the building.
The Lessee may not carry out or allow others to carry out any act or thing that will increase the premium. If any act or thing conducted or allowed to
be conducted by the Lessee increases the premium, the Lessor shall be entitled to recover from the Lessee the increment, without prejudice to any
other remedy available to the Lessor.
(10) Air conditioning
Except with the written permission of the Lessor and the property management company designated by the Lessor, the Lessee may not additionally
install air conditioning facilities other than those provided by the Lessor.
(11) Parking
The Lessee may not park in parking spaces assigned to other vehicles, public driveways, entrance and exit for vehicles or other areas specified for
loading and unloading purposes, nor allow its employees, agents, contractors or visitors to do so.
(12) Use of name
The Lessee may only use the name “SOHU.COM Internet Plaza Office Building” or the name and logo of the building or any part thereof to
indicate its address and business location. Without the prior written approval of the Lessor, the Lessee may not use or allow the use of any picture,
name or logo or those which are wholly or partially similar to any name and logo of the Lessor, “SOHU.COM Internet Plaza Office Building” and
the building to serve its business, operations and other purposes.
(13) No auction or solicitation
The Lessee may not organize or allow the organization of any auction in the Object leased.
The Lessee may not permit any of its employees or agents to solicit any business or hand out any leaflet, circular or publicity material within the
redline scope of SOHU.COM Internet Plaza Office Building.
(14) Damage to the main structure, equipment and facilities
Without the prior written approval of the Lessor and the property management company designated by the Lessor, the Lessee may not carve on,
damage, drill holes on, mark or destroy the doors, windows, walls, beams, structure and any other parts of the Object as well as any sewer line,
sanitation and air conditioning facility thereof or allow any foregoing behavior.
(15) Damage to wall surface, ceiling and ground
Without the prior written approval of the Lessor and the property management company designated by the Lessor, the Lessee may not drive nails,
screws, inlayed hooks, brackets or other similar items on the ceiling, wall surface and ground of the Object leased, nor destroy the ground.
(16) Damage to public areas
The Lessee may not damage, ruin or destroy the feature, stairs and elevators placed in the public areas of the building, including surrounding trees,
plants and shrubs, etc.
(17) Disturbance or interference
The Lessee may not cause or allow any possible disturbance to the Lessor, other users or tenants in the building, nor interfere with adjacent user or
tenants.
(18) Noise
At no time may the Lessee make or allow the making of any disturbing or stimulating noise in the Object, or make any music or noise (including
broadcasting or voice produced by any device or equipment that can generate or copy, receive or record) audible from outside the Object.
(19) Dormitory or home use
The Lessee may not use the Object or any part thereof as dormitory.
(20) Manufacturing and storage of goods
The Lessee may not use or allow the use of the Object for production and manufacturing or storage of goods and commodities, except for the
samples and exhibits stored reasonably required for the business permitted hereunder.
(21) Toilet facilities
The Lessee may not use or allow the use of toilet facilities provided by the Lessor in the public areas of the Object or the building for any purposes
other than their designed purposes.
The Lessee may not and shall not allow others to throw any irrelevant item into toilet facilities, and shall pay all expenses as required by the Lessor
for damage, breakage, blocking or spoil caused by the Lessee’s violation of the current clause.
(22) Meal preparation and preventing the disperse of odor
The Lessee may not cook or allow or tolerate anyone to cook any food in the leased units (other than oven heating of food by the Lessee’s
employees in tea rooms), and may not procure or allow any disgusting smell or odor from generating or emitting.
(23) Animals, pets and spread of pests
The Lessee may not breed or allow others to bread any animal or pet in the Object. The Lessee shall take all measures required by the Lessor to
prevent the Object or any part thereof from pest invasion at its own costs, shall hire disinfestation companies with Beijing pest control service
agency qualifications at its own costs, and shall insecticide on a regular basis as instructed by the Lessor or the property management company
designated by the Lessor.
(24) Antenna
The Lessee may not install any antenna on the roof or walls of the building or the ceiling or wall surface of the Object. Moreover, the Lessee may
not interfere, move dismantle or change the antenna provided by the Lessor, if any.
(25) Explosives or hazardous articles
The Lessee may not deposit or allow the storage of any weapon, ammunition, potassium nitrate, kerosene or other explosive, inflammable or
hazardous articles in the Object.
V. Exceptions
Except due to the fault of the Lessor, the property management company designated by the Lessor or their respective employees or agents, the Lessor shall
undertake no responsibility to the Lessee, any user or others upon any of the following circumstances:
(1) Elevators, air conditioning and others
Personal injury or property damage suffered by the Lessee, any user or others as a result of quality defects or stoppage of elevators, firefighting and
security settings, air conditioning equipment and other equipment of the building;
(2) Supply of power and water
Personal injury or property damage suffered by the Lessee, any user or others because of supply fault, stoppage, explosion and suspension of power
and water to the building and the Object;
(3) Fire, flood and plague of insects
Personal injury or property damage suffered by the Lessee, any user or others due to fire, overflow or water leakage in any part of the building, or
water flowing into the building or the Object, or mouse and other insects in the building;
(4) Security
Regarding the quality, security or custody of the Object or any individual or goods therein, especially without limiting the generality of the
foregoing, the security guards and administrators or mechanic or electric alarm systems of any nature provided by the Lessor or the property
management company designated by the Lessor shall constitute no safety responsibility of the Lessor or the property management company
designated by the Lessor to the Object or any article therein, instead, the Lessee shall always take full responsibility for the safety of the Object and
the items therein;
(5) Incompliance
Losses and damages caused by the Lessee or the third party failing to perform applicable regulations or to comply with Part IX of these Detailed
Rules.
VI. Reduction of Rent
When the Object and any part thereof is damaged or the Object becomes unfit for use or lease due to fire, severe weather, act of God, force majeure
or other events not directly or indirectly caused by acts or faults of the Lessee (in this case, the Lessee shall timely notify the Lessor in writing),
upon consensus between the parties, the Lessee may stop paying rent and property management fees in respect of the part of the Object damaged,
until the Object is repaired and restored.
When economically unreasonable and impractical, the Lessor has no obligation to repair or rehabilitate the Object; or, if the entire Object or the
substantial part of the Object is destroyed or unfit for reuse and lease, in both cases, the parties hereto shall be entitled to terminate the Lease by
giving to the other party a written notice, without prejudice to the rights and compensation available to either party in respect of any prior claim or
violation of the Lease, or rights and compensation available to the Lessor in respect of rent, property management fees and other expenses payable
hereunder accrued before the effectiveness of termination. In such case, the Lessor shall return the deposit for the premises.
Both parties further agree and acknowledge as follows:
(1) Default
VII. Default
Upon the occurrence of any of the following, the Lessor shall be entitled to terminate the Lease, to take back the Object leased by the Lessee 30
working days after informing the Lessee in writing in advance, and to claim the Lessee for compensation of its losses if:
(a) The rent or property management fees or other expenses payable by the Lessee hereunder remain unpaid within 30 working days after the
due date;
(b) If the Lessee fails to comply with and perform any term and condition hereunder that the Lessee shall comply with and perform and causes
material damage to the Lessor; or the Lessee fails to rectify the above default within 30 days after the expiration of the period notified by
the Lessor in writing;
(c) The Lessee goes bankrupt or starts liquidation as a corporation, or is applied for liquidation, or becomes insolvent, or has made
arrangement with its creditors, or has exerted any legal arrangement on the Object leased by the Lessee;
(d) The main structure of the Object is substantially damaged due to reasons of the Lessee, and the Lessee fails to make compensation within
30 days after the expiration of the period notified by the Lessor in writing.
This right of the Lessor will not prevent it from exercising the right to lodge a lawsuit in the event that the Lessee breaches the Lease or fails to
comply with or perform any term and condition of the Lease, nor prevent it from exercising the right to deduct the losses incurred therefrom from
the deposit paid by the Lessee and to confiscate the deposit in accordance with Article VIII of these Detailed Rules.
Notwithstanding the foregoing, the Lessor or the property management company designated by the Lessor has the right to cut off water, power or air
conditioning of the Object leased by the Lessee without any responsibility, provided that the Lessee shall be notified of such intention three days in
advance. The expenses incurred by the Lessor or the property management company designated by the Lessor due to cut-off and re-connecting of
water, power or air conditioning shall be borne by the Lessee, which may be recovered by the Lessor from the Lessee or deducted from the deposit
paid by the Lessee in accordance with Article VIII of these Detailed Rules.
(2) Exercise of rights
Instead of actually entering the Object, the Lessor sending to the Lessee a written notice of taking back the Object in the form prescribed by the
Lease will be deemed as fully exercising the right. The Lessor will be deemed to have taken back the Object and the Lessee be deemed to have been
expelled from the Object seven days after the Lessor delivers such a written notice (that is, the evacuation period for the Lessee). During the
evacuation period, if the Lessee fails to restore the Object to the state described in the confirmation document signed upon acceptance of the Object,
the Lessor shall be entitled to freely dispose any item left by the Lessee in the Object without taking any responsibility to the Lessee, and all
expenses resulting therefrom shall be borne by the Lessee.
When the Lessee returns the Object, if there remains some items, fixtures or fittings in the Object, the Lessee hereby declares a waiver of its
ownership of such properties, and consents to free disposal by the Lessor of such properties (including but not limited to abandonment, selling off or
other means), with all proceeds thereof to the account of the Lessor (if any) and all expenses involved to be borne by the Lessee (if any). The Lessor
shall assume no responsibility to the Lessee or any other person for any loss or damage caused by such disposal or any other treatment method.
(3) Acceptance of rent and property management fees
The acceptance of rent by the Lessor and the acceptance of property management fees by the property management company designated by the
Lessor shall not be deemed as an automatic waiver of their right to prosecute the Lessee for default, incompliance with or nonperformance of terms
and conditions it shall comply with and perform.
(4) Acts of contractors, employees, agents and visitors
For the purpose of the Lease, any act of any employee, visitor, contractor, representative or agent of the Lessee or user of the Object shall be deemed
as act of the Lessee.
(5) Payment order
The failure of the Lessee to pay the rent and property management fee for the Object in the time and manner prescribed by the Lease shall constitute
delay in payment. In such case, the Lessor or the property management company designated by the Lessor may apply to the people’s court for a
payment order in accordance with the Civil Procedure Law of the People’s Republic of China, with all related expenses incurred therefrom to be
borne by the Lessee.
(6) Overdue fines
Without prejudice to any other right and remedial measure available to the Lessor upon default, if the rent, property management fees, any other
expenses or a part thereof hereunder haven’t been paid in the way and time prescribed in Articles 4 to 6 of the Lease and Part I of the Detailed
Rules, the Lessee shall pay overdue fines equivalent to 0.1% of the aggregate amount due but unpaid each day from the due date to the actual
payment date (both the due date and the actual payment date are included).
(7) Commitment
Unless otherwise specified herein, in no event (except force majeure) may the Lessee terminate the Lease in advance during the Tenancy Term, if
the Lease is early terminated or becomes unfulfillable due to reasons of the Lessee, the Lessor is not liable to return to the Lessee the paid deposit.
The Lessor may not terminate the Lease for no cause, or otherwise, it shall be liable for breach of contract.
(1) Deposit
VIII. Deposit
Simultaneously with the execution of the Lease, the Lessee shall pay to the Lessor the deposit prescribed in Article 5 of the Lease, so as to ensure
the compliance with the terms and conditions the Lessee shall comply with and perform.
The deposit shall be preserved free of interest by the Lessor on behalf of the Lessee.
(2) Withholding and deduction of deposit
In the instance the Lessee violates any term or condition of the Lease, the Lessor shall be entitled to urge actual performance and deduct from the
deposit: the expenses due but unpaid by the Lessee, the charges required to be assumed by the Lessee according to the Lease or provisions of laws
and regulations, or losses suffered by the Lessor because of default, incompliance or nonperformance of the Lessee.
(3) Complement of deposit
Pursuant to the Lease, in case the rent and property management fees increase in the Tenancy Term, or the deposit becomes insufficient as deducted
by the Lessor due to default of the Lessee, the Lessee shall, within ten working days after the receipt of a written notice from the Lessor or the
property management company designated by the Lessor, make up the deposit.
Complementing the deposit is a prerequisite for further performance of the Lease. If the Lessee fails to do so, the Lessor shall be entitled to exercise
all remedies and rights available.
(4) Return of deposit
Subject to the above provisions, the deposit shall be returned in Renminbi free of interest to the Lessee at the latest of thirty days after the Object
vacated is handed over to the Lessor upon expiration of the Lease, or thirty days after the resolution of claims arising from default, incompliance
with or nonperformance of the terms and conditions of the Lease and from incompliance and nonperformance of regulations that the Lessee shall
comply with and perform, or thirty days after the settlement of the Lessee’s accounts with the telecommunications company and the power
corporation, except the part that the Lessor has the right to deduct, withhold or offset pursuant to the Lease.
(5) Change of Lessor
If the Lessor changes during the Tenancy Term, all rights and obligations in respect of the deposit paid by the Lessee or the deposit remaining after
the Lessor exercises its deduction right according to the Lease shall be succeeded by the new lessor. In this case, the Lessor shall make sure the
Lessee’s rights will not be adversely affected by such change of lessor.
(1) Formulation of rules
IX. Rules
To facilitate the building to become a first-class office building, as long as good for the operation management and maintenance of the building, the
Lessor or the property management company designated by the Lessor has the right to publish, introduce, modify, adopt or abolish any rules in
writing at any time, provided that the Lessee shall be informed in advance. When the formulation and update of any rules cause a significant impact
on the Lessee’s rights, the Lessee shall be entitled to raise an objection and retains the right to recover its losses from the Lessor.
(2) Conflict
Such rules are merely supplementary to these terms and conditions of the Lease, which will not invalidate the latter. In the case of controversy
between such rules and these terms and conditions hereof, the terms and conditions of the Lease shall prevail.
(1) Marginal notes, headings and indexes
X. Interpretation and Miscellaneous
The marginal notes, headings and indexes are for guidance only, and shall not constitute an integral part of the Lease, which shall not be given
consideration to or affect or restrict the interpretation or clarification of any provision hereof.
(2) No waiver by tolerance
The Lessor’s tolerance, forgiveness or excuse of one-off or repeated nonperformance, violation, incompliance or non-execution of responsibility
hereunder by the Lessee doesn’t imply a waiver of rights regarding continuous or further nonperformance, violation, incompliance or non-execution
by the Lessee, nor eliminate or affect the Lessor’s rights or compensation available hereunder in respect of such continuous or further
nonperformance of violation.
Unless the Lessor waives its rights in written statement, no act or omission of the Lessor implies waiver of rights or infers as waiver.
Any approval given by the Lessor applies only to certain issues specifically approved, which shall not operate as simultaneous waiver of other rights
available to the Lessor nor exempt the Lessee from further applying to the Lessor for any other specific written approval.
(3) Service of notice
Any notice required to be given shall be written in Chinese, and sent by double-registered letter, express mail, personal delivery, facsimile or any
other means permitted by law to the legal address or the latest contact address provided by the other party from time to time.
The parties specifically agree that, the above notices and other correspondences shall be deemed effectively delivered on:
(a) The date listed in the receipt if sent by double-registered letter or express mail;
(b) The date of personal delivery;
(c) The transmission time indicated in the fax report or the date on which the recipient acknowledges receipt if sent by facsimile;
(d) After the Object is delivered to the Lessee, the Lessor may serve notices to the Lessee by posting announcements in visible places near the
Object, and the notices shall be deemed delivered on the date of announcement.
(4) Naming of the building
The Lessor retains the right to rename SOHU.COM Internet Plaza Office Building at its own discretion and the right to change, replace or cancel the
original name at any time or from time to time, without any compensation to the Lessee. However, if the Lessor chooses to do so, an announcement
regarding the notice of relevant government agency shall be posted in the building in advance.
(5) Replacement of property management company
To facilitate the building to become a first-class office building, the Lessor has the right to select and replace property management companies.
(6) Applicable law and jurisdiction
The Lease shall be governed and construed by the laws of the People’s Republic of China (excluding laws of Hong Kong, Macao and Taiwan). Any
dispute between the parties that cannot be solved through consultation may be solved by means of lawsuits.
(7) Business license
Before the execution of the Lease, if applicable, the Lessee shall present to the Lessor its business license or registration certificate approved by the
government of the People’s Republic of China, and the original power of attorney authorizing representatives of the Lessee to enter into the Lease as
Annex IV hereto.
(8) Written in Chinese and signature
The Lease is written and signed in Chinese. Any English translated version provided by the Lessor shall be used for reference only. The Lessor
hasn’t guaranteed the consistency between the contents, wording and expressions in the English version and the Chinese version, and in the case of
controversy or difference, the Chinese version shall prevail.
(9) Modification, supplementary, deletion and alteration to the Lease
No modification, supplementary, deletion or alteration to the Lease shall be valid unless made in writing, signed by duly authorized representatives
of the parties and affixed with their common seals.
The above common seals shall be deemed to have been affixed on the date signed by the foregoing authorized representatives.
(10) Counterparts and legal force
The Lease, its annexes and Detailed Rules have been made in quadruplicate, with each party holding two copies, all being of the same legal effect.
Beijing Sohu New Media Information Technology Co., Ltd. (seal)
By:
Beijing Sogou Information Services Co., Ltd. (seal)
By:
Date: 2019
Exhibit 4.20
Contract No.:
SOHU.COM Internet Plaza Office Building Lease
Between
Beijing Sohu New Media Information Technology Co., Ltd.
and
Beijing Sogou Information Services Co., Ltd.
Parties:
Date:
Article 1
Object:
Lessor:
Address:
Legal representative:
Tel:
Fax:
Lessee:
Address:
Legal representative:
Tel:
Fax:
Lease
Beijing Sohu New Media Information Technology Co., Ltd.
SOHU.com Media Plaza, No. 2 Park, No. 3 Building, South Road of Academy of
Sciences, Haidian District, Beijing, China
Charles Zhang
Beijing Sogou Information Services Co., Ltd.
SOHU.com Internet Plaza, No.1 Park, Zhongguancun East Road, Haidian District,
Beijing, P.R.C.
Zhou Yi
The Lease was concluded on [December 25, 2019].
The parties hereby enter into the following agreement:
Definitions
The Lessor agrees to lease out and the Lessee agrees to take on lease the premises (actual floor) located at 8F Room 02,
SOHU.com Internet Plaza No.1 Park, Zhongguancun East Road, Haidian District, Beijing, P.R.C., that is, 8F as elevator
shows.
As a duly established and validly existing corporation, the Lessor has the authority to enter into the Lease and to perform its
obligations hereunder. In addition, the Lessor has full ownership of the Object leased, and has obtained all internal and external
approval or registration and filings necessary for the performance of the Lease, consenting to the lease of the Object to the
Lessee.
As a duly established and validly existing corporation, the Lessee has the authority to enter into the Lease and to perform its
obligations hereunder. The Lessee agrees to take on lease and enjoys the following rights pursuant to the Lease:
(i) To normally use public inlets and outlets, stairs, platforms, passageways, public restrooms, tea rooms, broom
closets, etc. of the building together with the Lessor and other parties enjoying the same rights, provided that, the
Lessor may restrict such right to use in a proper way at any time when the above facilities need to be repaired or
upon the occurrence of emergency;
(ii) To share the elevators, central air-conditioning and other equipment serving the office building.
Tenancy term and rent:
The tenancy term is more particularly set forth in Article 3 (“Tenancy Term”). The Lessee shall pay the rent and property
management fees as specified in Article 4 hereof within the Tenancy Term in a way specified in Article 6.
Deposit:
Other expenses:
The Lessee shall pay the deposit as specified in Article 5 hereof simultaneously with the execution of the Lease in a way
specified in Article 6.
The Lessee shall timely pay the following expenses as per the bills provided by the property management company
designated by the Lessor, including but not limited to:
Electricity charges and water rates, over time air conditioning costs, machine room cooling water rates, etc. incurred in the
Object.
For specific payment methods, please refer to Article 6 hereof.
Legal expenses:
The parties shall respectively bear their legal expenses.
Application:
The Object leased may only be used by the Lessee for work.
Date of delivery:
.
Article 2
Object
Building No.:
SOHU.com Internet Plaza No.1 Park, Zhongguancun East Road, Haidian District, Beijing, P.R.C.
(hereinafter referred to as the “Office Building”)
Floor No.:
8F Room 02 (actual floor) of the Office Building, that is, 8F as elevator shows.
Lease area:
8F (actual floor) of the Office Building, that is, 8F as elevator shows, having a total lease area of
1220.92 square meters.
For the specific location, please refer to Annex I.
For delivery standards, please refer to Annex II.
Article 3
Tenancy Term
Term: 36 months
Lease commencement date: January 1, 2020
Termination date: December 31, 2022
(The term includes lease commencement date and termination date)
Article 4
Rent and Property Management Fees
(1) Rent
In consideration of using the Object leased, the Lessee shall pay the following rent:
First year (leap year):
2
Rent standard: RMB 11/day/m
Annual rent: RMB 4,915,423.92
Monthly rent: RMB 409,618.66
Second year:
2
Rent standard: RMB 11/day/m
Annual rent: RMB 4,901,993.88
Monthly rent: RMB 408,499.49
Third year:
2
Rent standard: RMB 11/day/m
Annual rent: RMB 4,901,993.88
Monthly rent: RMB 408,499.49
(Calculated based on the lease area specified in Article 2 above at the unit price of RMB11/day/m , to be settled in
Renminbi)
2
(2) Property management fees
Subject to the SOHU.COM Internet Plaza Office Building Property Services Agreement (subject to the name of the
agreement finalized) entered into by and between the Lessee and the property management company designated by the
Lessor.
Article 5
Deposit
The deposit for rent will be RMB 1,228,855.98 (equivalent to three months of rent).
The deposit will bear no interest.
Upon the extinguishment or termination of the Lease, the remaining amount after the Lessor deducts unpaid rent, other
expenses and other deductible expenses payable by the Lessee shall be returned to the Lessee in one lump sum within 20
working days after termination of the Lease.
Article 6
Payment of Rent, Property Management Fees, Deposit and Other Expenses
(1) The rent and property management fees include neither electricity charges and water rates, rent and management fees of
parking space leased, over time air conditioning costs, machine room cooling water rates, etc. of the Object leased, nor
all government taxes and other expenses payable by the Lessee according to laws or regulations.
During the Tenancy Term, the rent shall be paid by calendar month. In particular, the Lessee shall pay the rent for the
next month in advance within the first twenty days of each calendar month without any deduction.
The Lessee shall prepay RMB 409,618.66 of rent simultaneously with the execution of the Lease.
(2) Within five working days after the Lease is executed, the Lessee shall pay the deposit to the Lessor in the amount
prescribed in Article 5 hereof.
(3) The Lessee shall pay other expenses then incurred in accordance with the provisions of the Lease, the SOHU.COM
Internet Plaza Office Building Property Services Agreement (subject to the name of the agreement finalized) entered
into with the property management company designated by the Lessor, and the SOHU.COM Internet Plaza User
Manual and the SOHU.COM Internet Plaza Decoration Manual formulated and updated from time to time by the
Lessor or the property management company.
(4) The rent and deposit for the Object leased shall be paid to the following account of the Lessor:
Bank of deposit: China Merchants Bank Co., Ltd., Beijing North Third Ring Road Branch
Account name: Beijing Sohu New Media Information Technology Co., Ltd.
Account number: 862281851810001
(5) The Lessor shall issue vouchers to the Lessee at the following time in the following way:
The Lessor shall issue a receipt within ten working days after the receipt of deposit paid by the Lessee;
Regarding the rent paid by the Lessee by check, remittance or any other means designated by the Lessor, the Lessor
shall issue a formal invoice of corresponding amount within the corresponding Tenancy Term after the related funds
reach the bank account designated by the Lessor.
Article 7
Fixtures and Fittings
The Lessor will provide certain fixtures and fittings for the interior of the Object leased according to Annex II hereto —
SOHU.COM Internet Plaza Office Building Delivery Standards (subject to the confirmation document signed by the Lessee
and the property management company designated by the Lessor), the Lessee shall return such fixtures and fittings in the
same shape, conditions and structure as previously delivered upon the termination of the Lease. The initial delivery status
shall be subject to the confirmation document signed by the Lessee and the property management company designated by the
Lessor.
Article 8
Special Terms
(1) Reception of the Object leased
The Lessor shall deliver the Object leased to the Lessee in accordance with the delivery conditions prescribed in Annex
II hereto and the confirmation document signed by the Lessee and the property management company designated by the
Lessor on the delivery date. As the Lessee is already the actual occupier and user of the premises leased, the delivery
date will be the lease commencement date, that is to say, the Tenancy Term will commence as from the delivery date.
Simultaneously with the execution of the Lease, the Lessee shall enter into a SOHU.COM Internet Plaza Office
Building Property Services Agreement with the property management company designated by the Lessor (subject to the
name of the agreement finalized).
(2) Decoration
During the Tenancy Term, the Lessee may carry out interior decoration in the Object leased with the prior consent of the
Lessor after entering into a Leased Premise Decoration Security Agreement (subject to the name of the agreement
finalized) with the Lessor or the property management company designated by the Lessor.
(3) Government registration, taxes and other incidental expenses
The Lessor shall go through related registration formalities for the premises leased according to law, to which the
Lessee shall offer assistance.
All taxes and dues in connection with the execution, registration and implementation of the Lease shall be governed by
the applicable laws and regulations of China (excluding Hong Kong, Macao and Taiwan). In the absence of explicit
provisions in Chinese laws and regulations, the taxes and dues shall be respectively borne by the Lessor and the Lessee
on their own.
(4) Status of the Object leased
The Lessor has delivered the Object leased to the Lessee in accordance with the standards set forth in Annex II. The
Lessee has received the Object according to such standards and confirmed the Object leased to be in good and rentable
conditions. Both parties acknowledge that the Object leased conforms to the provisions of the Lease.
(5) Other agreements and covenants
The Lessee agrees to comply with the SOHU.COM Internet Plaza Property Management Services Entrustment
Contract and the Constitution of SOHU.COM Internet Plaza’s Owners Association signed by the Lessor. If the Lessor
violates any of the aforesaid agreements as a result of the Lessee, the Lessee shall compensate the Lessor for its losses.
Article 9
Confidentiality
During the Tenancy Term, the Lessor, the Lessee and their respective agents shall keep the trade
secrets, financial information and other confidential information of the Lessee and the Lessor
confidential, and may not disclose such information to any third party without the consent of the other
party.
Article 10
Others
The Lessee agrees that, the Lessor has the right to sell the premises leased to any third party during the
Tenancy Term, and the Lessee promises to waive its right of preemption.
This Lease includes certain annexes and the Detailed Rules for Office Building Lease.
(The remainder of this page is intentionally left blank)
Beijing Sohu New Media Information Technology Co., Ltd.
Signature of representative:
Common seal:
Beijing Sogou Information Services Co., Ltd.
Signature of representative:
Common seal:
(No text on this page, this being the seal and signature page to the SOHU.COM Internet Plaza Office Building Lease)
Signed on: December 25, 2019
Annexes to the Lease
Annex I: Location Sketch Map
Annex II: SOHU.COM Internet Plaza Office Building Delivery Standards
Annex III: Photocopy of the Lessor’s Business License and Original Power of Attorney
(No text on this page)
Detailed Rules
for
Office Building Lease
Between
Beijing Sohu New Media Information Technology Co., Ltd.
and
Beijing Sogou Information Services Co., Ltd.
Lease Rules
I. Rent, Property Management Fees and Other Expenses
The Lessee agrees to accept and perform the following:
(1) Rent and property management fees
To timely pay the rent and property management fees prescribed in Article 4.
(2) Commercial taxes
To pay the taxes or dues payable by the Lessee as prescribed by laws and regulations annually or regularly imposed by the competent department on
the Object leased or the Lessee at present or in the future, except the land use fees and house property taxes.
(3) Electricity, water and other charges
To pay the charges of electricity and water used in the Object leased.
(4) Other expenses
The Lessee shall pay to the property management company designated by the Lessor: including but not limited to the expenses of machine room
cooling water and over time air-conditioning provided by the property management company designated by the Lessor at the request of the Lessee.
The Lessee agrees to accept and perform the following:
(1) Compliance with regulations, detailed rules and ordinances, etc.
II. Obligations of the Lessee
(a) Comply with all regulations, rules and requirements of the government or other relevant departments concerning the Lessee’s behaviors and
operations in the Object leased, as well as all related regulations, rules and requirements regulating the actions, behaviors, affairs or things
of the Lessee or its employees, agents, contractors or visitors.
The Lessee shall compensate the Lessor for its losses caused by the Lessee’s violation of these regulations, rules and requirements.
(b) The Lessee shall be responsible for all claims, demands, lawsuits, legal proceedings, judgments, losses and related expenditures that the
Lessor may suffer or incur as a result of death, personal injuries or property damages occurred in the Object or occurred during the use of
the Object or part thereof caused by the act or negligence of Lessee or its employees, contractors, agents or visitors.
(c) The Lessee shall be responsible for all losses and damages to the Object leased, the building and all properties in the building caused by the
Lessee or its agents, employees, contractors or visitors.
(2) Decoration, repair and maintenance
(a) Decoration
The Lessee’s decoration of the Object leased must comply with the provisions of the SOHU.COM Internet Plaza Office Building
Decoration Manual (subject to the name of the agreement finalized) formulated and modified from time to time by the property
management company designated by the Lessor.
The Lessee shall make sure the decoration and partition of the Object conform to firefighting, security, building or other relevant
provisions.
According to the drawings and specifications previously submitted to and approved by the Lessor and the property management company
designated by the Lessor in writing, the Lessee shall decorate the interior of the Object at its own expenses.
The interior decoration performed by the Lessee shall be in a good and workmanlike manner and conform to the style of first-class office
buildings. The Lessee shall maintain the decoration in the same status during the entire Tenancy Term, except normal wear and tear.
Without the prior written approval of the Lessor and the property management company designated by the Lessor, the Lessee must not, by
itself or allow to, make any alteration to the approved decoration drawings and specifications as well as the interior design and layout of the
Object.
For the avoidance of doubt, the Lessor and the Lessee hereby declare that:
(i) The Lessor or the property management company designated by the Lessor approving the abovementioned decoration drawings
and specifications of the Lessee doesn’t exempt the Lessee from applying to the related government authorities of Beijing, at its
own cost, for approval of such decoration drawings and specifications already approved by the Lessor or the property management
company designated by the Lessor before formally starting interior decorating.
(ii) The Lessor and the property management company designated by the Lessor shall bear no responsibility for any consequence of
the Lessee not complying with the requirements and conditions set forth in the decoration drawings and specifications approved by
the related government authorities of Beijing.
(iii) The Lessee shall keep the Lessor harmless from any loss caused by the Lessee not complying with the present clause, including
but not limited to legal expenses.
(b) Repair and maintenance
The Lessee shall keep the part of decorations in the Object provided by the Lessor and the part added by the Lessee (including all doors and
windows, walls, equipment and facilities and pipelines, etc.) in good, clean and rentable conditions, and shall keep the Object leased and oil
paint on the surface intact.
The Lessor shall be responsible for daily repair and maintenance of decoration (decorative surface, strong current, weak current) and
electromechanical system (central ventilation system) provided by the Lessor and access control, provided that the Lessee shall bear the
corresponding costs, as more specifically agreed upon by the parties.
The Lessee shall repair and maintain the part of decorations added by itself at its own costs and expenses.
The Lessee shall comply with the regulations of the sanitation and provisions of other relevant government departments concerning
dedicated sanitation and water facilities (if any) used by the Lessee or its employees, agents or visitors at its own expenses.
(3) Replacement of windows or glass curtain walls
The Lessee shall pay the expenses incurred by the Lessor or the property management company designated by the Lessor for replacement of
windows, glass or glass curtain walls accidently broken or damaged by the Lessee or its employees, contractors, agents or visitors.
(4) Compensation and insurance of losses and damages caused by internal defects
The Lessee shall take full responsibility for losses, property damages, death or personal injuries caused by the acts, faults or negligence of the
Lessee or its employees, contractor, agents or visitors expressly or impliedly permitted by the Lessee. The Lessee shall hold the Lessor harmless
therefrom. For purposes of this clause, the term “property” includes but is not limited to fixtures and fittings of the Lessor.
To avoid the above risks, the Lessee shall procure and maintain third-party liability insurance from a domestic insurance company. Such insurance
shall be purchased in the name of the Lessee and particularly indicate the Lessor as the owner of the building (including the Object leased). From
the date of lease commencement date, the Lessee shall furnish the Lessor with a certificate issued by the insurance company within three months,
evidencing to the Lessor that appropriate insurance has been purchased. Such certificate shall constitute a part of annexes to the contract.
The insurance contract shall contain a clause prescribing that without the prior written consent of the Lessor, the insurance purchased and its
conditions may not be cancelled, modified or restricted.
(5) Access of the Lessor or the property management company designated by the Lessor
When the Lessor or the property management company designated by the Lessor needs to examine or check the status of the interior structures,
equipment or facilities in the Object leased by the Lessee and carry out necessary repair or maintenance, with prior notice, the Lessee shall allow the
Lessor or the property management company designated by the Lessor and their authorized personnel to enter the Object in reasonable time. When
exercising such right, the Lessor or the property management company designated by the Lessor shall try not to cause any interference to the Lessee.
In the case of emergency when it becomes impossible to contact the Lessee in advance, the Lessor and its employees or agents may enter the Object
without permission of the Lessee to take necessary measures, provided that the Lessee shall be timely reported afterwards; in the case of especially
critical circumstances, the Lessor or the property management company designated by the Lessor may force an entrance to the Object.
In order to better comply with the preceding clause, the Lessee shall inform the Lessor or the property management company designated by the
Lessor the security system installed in the Object and its nature.
(6) Notice of repair
The Lessee shall conduct the necessary repair in a reasonable time after the receipt of a notice from the Lessor or the property management company
designated by the Lessor requiring repair. If the Lessee fails to do so, the Lessor or the property management company designated by the Lessor
shall be entitled to enter the Object, and may forcibly perform the work or repair in emergency circumstances, with all related expenses to be borne
by the Lessee.
(7) Informing the Lessor of damage
The Lessee shall timely inform the Lessor and the property management company designated by the Lessor of damage to the Object and personal
injuries, and of accidents or defects of water pipes, gas pipes, electric circuits or devices, fixtures or other facilities provided by the Lessor. After the
receipt of such a notice, the Lessor or the property management company designated by the Lessor shall respond immediately and perform the repair
within three working days. In the instance the Lessee becomes unable to normally use the facilities due to losses caused by the Lessor and response
delay of the property management company, the Lessee shall be entitled to engage a third party for repair, with the maintenance costs to be deducted
from the rent or other expenses (except repair caused by the Lessee only).
Upon occurrence of fire alarm or other accidents, in addition to calling the police and taking necessary measures immediately, the Lessee shall
simultaneously inform the Lessor and the property management company designated by the Lessor.
(8) Directory
When the name on the directory of the building is changed upon the request of the Lessee, the Lessee shall pay the expenses for installation, repair,
change or replacement of the Lessee’s name on the directory.
(9) Survey
Within six months before the expiration of the Tenancy Term, the Lessee shall allow the Lessor to accompany potential tenants or users to make a
survey of the Object in a reasonable time with prior notice, but the Lessor shall try its best to avoid interference with the Lessee’s work.
(10) Regulations
The Lessee shall comply with the SOHU.COM Internet Plaza Property Management Services Entrustment Contract, the Constitution of
SOHU.COM Internet Plaza’s Owners Association signed by the Lessor, and shall comply with and abide by the regulations formulated by the Lessor
and the property management company designated by the Lessor, including but not limited to the SOHU.COM Internet Plaza User Manual and
the SOHU.COM Internet Plaza Decoration Manual (subject to the name of the agreement finalized).
(11) Contractors, employees, agents and visitors
The acts, negligence, omission and fault of all contractors, employees, agents and visitors of the Lessee shall be deemed as those of the Lessee, for
which the Lessee shall be responsible to the Lessor.
(12) Return of the Object
Upon the expiration of the Tenancy Term or early termination of the Lease, the Lessee must rehabilitate the Object in the state indicated in the
confirmation document signed upon acceptance, including but not limited to rehabilitating the ceiling system, spraying system, smoke detector, fan
coil, air-conditioning temperature controller, lamp panel, air supply grille and return air inlet, unless with the consent of the owner.
The Object and all fixtures, fittings and ceilings therein returned by the Lessee must be complete, good, clean, rentable and in a proper maintenance
status.
The personal property (including the name boards of the Lessee on doors, walls, etc. of the Object), fixtures and fittings and auxiliary equipment of
the Lessee shall be removed as required by the Lessor upon the expiration of the Tenancy Term or early termination of the Lease, with the
corresponding expenses to be borne by the Lessee. In addition, the Lessee shall compensate the Lessor any damage caused in the process of
removing.
The Lessee shall allow the Lessor to remove from the directory texts and characters relating to the Lessee, and shall compensate the Lessor for its
losses caused by the Lessee’s failure to do so.
If, when the Lessee returns the Object, there remain some items, fixtures or fittings in the Object, the Lessee hereby declares that it has agreed to
waive its ownership of such properties, and allow the Lessor to freely dispose such properties (including but not limited to abandonment, selling off
or other means), except as otherwise agreed then by both parties.
The time for the Lessee to return the Object shall be subject to the written document signed by authorized representatives of the parties.
(13) Indemnification upon default
The Lessee shall indemnify and hold the Lessor harmless from losses caused by the following behavior that may be suffered or incurred by the
Lessor, including lawsuits, claims, losses, damages and expenses: the Lessee fails to comply with or perform any of its responsibilities hereunder, or
the use of the Object by the Lessee (including indoor installation and equipment of electricity and gas), the misconduct taken during the Tenancy
Term against the Object, or the negligence or fault of the Lessee.
(14) Protection under severe weather
The Lessee shall take any reasonable preventive measure to prevent the Object from invasion of storm, heavy rain, snow or similar severe weather.
Under the above severe weather, the Lessee shall especially make sure all exterior doors and windows are closed.
(15) Cancellation or alteration of industrial and commercial registration
The Lessee shall properly go through the cancellation or alteration of industrial and commercial registration with the unit as registered or business
address within 30 days after the expiration of the Tenancy term or the date of early termination hereof.
(16) Maintenance of electrical equipment, pipelines and wirings
If the electrical equipment, wirings or pipelines installed by the Lessee become in danger or unsafe or as reasonably requested by the Lessor or the
relevant municipal corporation, the Lessee shall repair or replace the above equipment, wirings or pipelines. At the time of maintenance, the Lessee
may engage only the maintenance contractors designated or identified by the Lessor or the property management company designated by the Lessor
in writing. The Lessee shall allow the Lessor or the property management company designated by the Lessor to examine the wirings or pipelines
installed by the Lessee in the Object, provided that the Lessor or the property management company designated by the Lessor shall send a written
request in advance and examine the devices at any reasonable time. The Lessee shall indemnify the Lessor harmless from claims, expenses, damages
or lawsuits caused by faults or improper maintenance of electrical equipment, devices, pipelines and wirings installed by the Lessee in the Object.
(17) Sewer cleaning
When the sewer or sanitary fittings or other pipelines are plugged or stop work due to careless or improper use or negligence of the Lessee or its
contractors, employees, agents or visitors, the Lessor or the property management company designated by the Lessor shall clean, repair or replace
such pipelines first, with all costs incurred therefrom to be borne by the Lessee. Moreover, the Lessee shall undertake all expenses, claims or losses
suffered by the Lessor therefrom.
(18) Transportation of waste and garbage
The Lessee shall carry away the waste and garbage generated during the decoration period, and place such waste and garbage in such locations
within the building as designated by the Lessor or the property management company designated by the Lessor. If the Lessee uses the waste and
garbage cleaning services provided by the Lessor or the property management company designated by the Lessor, the Lessee shall pay the relevant
expenses and may not utilize the services provided by any similar contractor.
The Lessor agrees to accept and perform the following:
(1) Non-interference
III. Obligations of the Lessor
Under the premise that the Lessee pays the rent, property management fees and various other expenses in the way and amount prescribed herein and
complies with and performs these terms and conditions that the Lessee shall comply with and perform, the Lessor shall make sure the Lessee’s
peaceful occupation and use of the Object during the Tenancy Term will not be interfered by the Lessor or any person legally claiming its rights
through the Lessor (except the circumstances prescribed by Clauses (5) and (6), Article II of these Detailed Rules).
(2) Land use fees
Except the taxes and dues payable by the Lessee according to the Lease and/or relevant Chinese laws and regulations, all other land use fees and
property taxes on the building shall be borne by the Lessor.
(3) Roof and main structure
The Lessor shall maintain the structure of the building in a good condition.
(4) Decoration
The Lessor may carry out all necessary decoration and place green plants in public areas of the building when it deems necessary.
(5) Cleaning and waste treatment
The Lessor shall keep the public areas, restrooms and other common parts of the building clean.
The Lessor shall be responsible for cleaning the outer walls of the building (except the part that shall be cleaned by the Lessee or the user).
(6) Shared facilities
The Lessor shall keep all elevators, firefighting and safety facilities, air conditioning equipment and other facilities in the building in a normal
operation condition, and regularly repair and maintain the same.
After the receipt of a fault notice from the Lessee, the Lessor shall send certain personnel to repair the facilities in reasonable time (except the part
that shall be repaired by the Lessee or the user).
(7) Directory
The Lessor shall provide a standard directory sign in the lobby and corresponding floors of the building and allocate appropriate places for the
Lessee to add its name thereon according to unified font or character standards designated by the Lessor, the first installation of which will be free of
charge.
(8) Air conditioning
The office building will offer central air conditioning at the following time:
9:00-18:00 from Monday to Friday, excluding other time and public holidays.
If the Lessee requires over-time air conditioning services beyond the above time, it shall notify the property management company designated by the
Lessor 24 hours in advance. After the receipt of a reasonable notice from the Lessee, the property management company designated by the Lessor
will provide such over-time air conditioning services. The charges of such over-time air conditioning services will be determined by the property
management company designated by the Lessor and the Lessee will be informed thereof.
(9) Insurance
The Lessor shall purchase valid insurance for the public areas and shared facilities of the building.
IV. Restrictions and Prohibitions
The Lessee agrees to accept and perform the following:
(1) Installation and variation
(a) Without the prior written consent of the Lessor and the property management company designated by the Lessor, it may not install, place or
vary any fixture, partition or other assets and facilities belonged to the Lessor within the Object or any other part (including but not limited
to: furniture, decoration, air conditioning, access control, etc.).
Without the prior written consent of the Lessor and the property management company designated by the Lessor, the Lessee must not
install or permit the installation of equipment and fixture on electric power circuits, pipelines and facilities, or install or permit the
installation of any equipment, device or machinery which exceeds the originally designed capacity of the floor or requires addition of
electric power circuits or pipelines or the power consumption of which will not be measured through the Lessee’s electricity meter.
The Lessor or the property management company designated by the Lessor has the right to stipulate the maximum weight and placement
location of safe deposit boxes and other heavy equipment. The Lessor or the property management company designated by the Lessor may
require the Lessee to put pad in the specified size and material at the bottom to disperse the weight when it deems necessary.
(b) When performing an approved project, the Lessee shall procure its employees, agent, contractors and workers to fully cooperate with the
Lessor, the property management company designated by the Lessor and the Lessor’s employees, agent, contractors and workers; and to
work with other tenants or contractors working in the building.
The Lessee and its employees, agents, contractors and workers shall abide by and follow all instructions and guidance from the Lessor or
the property management company designated by the Lessor.
(c) When modifying or altering electric circuits, access control, firefighting or air conditioning systems, the Lessee shall use the contractors
designated or identified by the Lessor and the property management company designated by the Lessor in writing, and shall bear all
corresponding expenses.
(2) Rules for commencement of operations
The Lessee shall obtain and maintain in the entire Tenancy Term the validity of permission or approval (if any) from the government or other related
departments on its use or occupation of the Object. Upon the receipt of a notice from the government or any other related department concerning the
Object or any service provided in the Object, the Lessee shall inform the Lessor in writing.
(3) Marks
The Lessee may not place or exhibit or allow other to place or exhibit any billboard, mark, ornament, advertisement or other product in or out of the
Object, whether equipped with lighting to make it visible from the outside, except:
(a) The Lessee may, at its own costs, require the Lessor or the property management company designated by the Lessor to arrange the
placement of its name (and any future addition or alteration) on the directory in the unified Chinese and English model designed by the
Lessor.
(b) The Lessee may, at its own costs, place its name at the entrance of the Object in the font and size approved by the Lessor. If the Lessee
carries on business in another name, it shall notify the Lessor of such name, and may exhibit such name at the entrance only with the
written consent of the Lessor. Without the prior written permission of the Lessor, the Lessee may not change the name of its business.
(4) Purpose
The Lessee may not use or allow the use of the Object for any purpose other than office as explicitly prescribed in the Lease.
(5) Illegal or unethical use
The Lessee may not use or allow the use of the Object for any illegal or unethical purpose.
(6) Passage obstruction
The Lessee may not obstruct or allow the obstruction of the entrance, stairs, platforms, passages, escalators, elevators, lobby and other public parts
of the office building with boxes, packaging scraps and obstructions in other natures.
When it deems fit, the Lessor has the right to move away the abovementioned debris or other items or things without notice to the Lessee, with all
related expenses to be borne by the Lessee.
(7) Wires and cables in public areas
The Lessee may not lay or install attached electric wires, cables or other items and things at the entrance and exit, stairs, passages, lobby and other
places in public areas of the building.
(8) Sublease and assignment
Without the written consent of the Lessor, the Lessee may not transfer, sublease, waive or assign the Object leased or any part thereof or any interest
thereon, nor make any arrangement or transaction, that results in a non-party to the Lease acquiring or enjoying the right to use, take on lease and
occupy the Object leased or any part thereof, regardless of whether rent or other considerations have been paid for such acquisition.
(9) Violation of insurance terms
The Lessee may not carry out or allow others to carry out any act or thing that will or may invalidate the fire insurance, third-party liability
insurance and insurance covering other risks of the building.
The Lessee may not carry out or allow others to carry out any act or thing that will increase the premium. If any act or thing conducted or allowed to
be conducted by the Lessee increases the premium, the Lessor shall be entitled to recover from the Lessee the increment, without prejudice to any
other remedy available to the Lessor.
(10) Air conditioning
Except with the written permission of the Lessor and the property management company designated by the Lessor, the Lessee may not additionally
install air conditioning facilities other than those provided by the Lessor.
(11) Parking
The Lessee may not park in parking spaces assigned to other vehicles, public driveways, entrance and exit for vehicles or other areas specified for
loading and unloading purposes, nor allow its employees, agents, contractors or visitors to do so.
(12) Use of name
The Lessee may only use the name “SOHU.COM Internet Plaza Office Building” or the name and logo of the building or any part thereof to
indicate its address and business location. Without the prior written approval of the Lessor, the Lessee may not use or allow the use of any picture,
name or logo or those which are wholly or partially similar to any name and logo of the Lessor, “SOHU.COM Internet Plaza Office Building” and
the building to serve its business, operations and other purposes.
(13) No auction or solicitation
The Lessee may not organize or allow the organization of any auction in the Object leased.
The Lessee may not permit any of its employees or agents to solicit any business or hand out any leaflet, circular or publicity material within the
redline scope of SOHU.COM Internet Plaza Office Building.
(14) Damage to the main structure, equipment and facilities
Without the prior written approval of the Lessor and the property management company designated by the Lessor, the Lessee may not carve on,
damage, drill holes on, mark or destroy the doors, windows, walls, beams, structure and any other parts of the Object as well as any sewer line,
sanitation and air conditioning facility thereof or allow any foregoing behavior.
(15) Damage to wall surface, ceiling and ground
Without the prior written approval of the Lessor and the property management company designated by the Lessor, the Lessee may not drive nails,
screws, inlayed hooks, brackets or other similar items on the ceiling, wall surface and ground of the Object leased, nor destroy the ground.
(16) Damage to public areas
The Lessee may not damage, ruin or destroy the feature, stairs and elevators placed in the public areas of the building, including surrounding trees,
plants and shrubs, etc.
(17) Disturbance or interference
The Lessee may not cause or allow any possible disturbance to the Lessor, other users or tenants in the building, nor interfere with adjacent user or
tenants.
(18) Noise
At no time may the Lessee make or allow the making of any disturbing or stimulating noise in the Object, or make any music or noise (including
broadcasting or voice produced by any device or equipment that can generate or copy, receive or record) audible from outside the Object.
(19) Dormitory or home use
The Lessee may not use the Object or any part thereof as dormitory.
(20) Manufacturing and storage of goods
The Lessee may not use or allow the use of the Object for production and manufacturing or storage of goods and commodities, except for the
samples and exhibits stored reasonably required for the business permitted hereunder.
(21) Toilet facilities
The Lessee may not use or allow the use of toilet facilities provided by the Lessor in the public areas of the Object or the building for any purposes
other than their designed purposes.
The Lessee may not and shall not allow others to throw any irrelevant item into toilet facilities, and shall pay all expenses as required by the Lessor
for damage, breakage, blocking or spoil caused by the Lessee’s violation of the current clause.
(22) Meal preparation and preventing the disperse of odor
The Lessee may not cook or allow or tolerate anyone to cook any food in the leased units (other than oven heating of food by the Lessee’s
employees in tea rooms), and may not procure or allow any disgusting smell or odor from generating or emitting.
(23) Animals, pets and spread of pests
The Lessee may not breed or allow others to bread any animal or pet in the Object. The Lessee shall take all measures required by the Lessor to
prevent the Object or any part thereof from pest invasion at its own costs, shall hire disinfestation companies with Beijing pest control service
agency qualifications at its own costs, and shall insecticide on a regular basis as instructed by the Lessor or the property management company
designated by the Lessor.
(24) Antenna
The Lessee may not install any antenna on the roof or walls of the building or the ceiling or wall surface of the Object. Moreover, the Lessee may
not interfere, move dismantle or change the antenna provided by the Lessor, if any.
(25) Explosives or hazardous articles
The Lessee may not deposit or allow the storage of any weapon, ammunition, potassium nitrate, kerosene or other explosive, inflammable or
hazardous articles in the Object.
V. Exceptions
Except due to the fault of the Lessor, the property management company designated by the Lessor or their respective employees or agents, the Lessor shall
undertake no responsibility to the Lessee, any user or others upon any of the following circumstances:
(1) Elevators, air conditioning and others
Personal injury or property damage suffered by the Lessee, any user or others as a result of quality defects or stoppage of elevators, firefighting and
security settings, air conditioning equipment and other equipment of the building;
(2) Supply of power and water
Personal injury or property damage suffered by the Lessee, any user or others because of supply fault, stoppage, explosion and suspension of power
and water to the building and the Object;
(3) Fire, flood and plague of insects
Personal injury or property damage suffered by the Lessee, any user or others due to fire, overflow or water leakage in any part of the building, or
water flowing into the building or the Object, or mouse and other insects in the building;
(4) Security
Regarding the quality, security or custody of the Object or any individual or goods therein, especially without limiting the generality of the
foregoing, the security guards and administrators or mechanic or electric alarm systems of any nature provided by the Lessor or the property
management company designated by the Lessor shall constitute no safety responsibility of the Lessor or the property management company
designated by the Lessor to the Object or any article therein, instead, the Lessee shall always take full responsibility for the safety of the Object and
the items therein;
(5) Incompliance
Losses and damages caused by the Lessee or the third party failing to perform applicable regulations or to comply with Part IX of these Detailed
Rules.
VI. Reduction of Rent
When the Object and any part thereof is damaged or the Object becomes unfit for use or lease due to fire, severe weather, act of God, force majeure
or other events not directly or indirectly caused by acts or faults of the Lessee (in this case, the Lessee shall timely notify the Lessor in writing),
upon consensus between the parties, the Lessee may stop paying rent and property management fees in respect of the part of the Object damaged,
until the Object is repaired and restored.
When economically unreasonable and impractical, the Lessor has no obligation to repair or rehabilitate the Object; or, if the entire Object or the
substantial part of the Object is destroyed or unfit for reuse and lease, in both cases, the parties hereto shall be entitled to terminate the Lease by
giving to the other party a written notice, without prejudice to the rights and compensation available to either party in respect of any prior claim or
violation of the Lease, or rights and compensation available to the Lessor in respect of rent, property management fees and other expenses payable
hereunder accrued before the effectiveness of termination. In such case, the Lessor shall return the deposit for the premises.
Both parties further agree and acknowledge as follows:
(1) Default
VII. Default
Upon the occurrence of any of the following, the Lessor shall be entitled to terminate the Lease, to take back the Object leased by the Lessee 30
working days after informing the Lessee in writing in advance, and to claim the Lessee for compensation of its losses if:
(a) The rent or property management fees or other expenses payable by the Lessee hereunder remain unpaid within 30 working days after the
due date;
(b) If the Lessee fails to comply with and perform any term and condition hereunder that the Lessee shall comply with and perform and causes
material damage to the Lessor; or the Lessee fails to rectify the above default within 30 days after the expiration of the period notified by
the Lessor in writing;
(c) The Lessee goes bankrupt or starts liquidation as a corporation, or is applied for liquidation, or becomes insolvent, or has made arrangement
with its creditors, or has exerted any legal arrangement on the Object leased by the Lessee;
(d) The main structure of the Object is substantially damaged due to reasons of the Lessee, and the Lessee fails to make compensation within
30 days after the expiration of the period notified by the Lessor in writing.
This right of the Lessor will not prevent it from exercising the right to lodge a lawsuit in the event that the Lessee breaches the Lease or fails to
comply with or perform any term and condition of the Lease, nor prevent it from exercising the right to deduct the losses incurred therefrom from
the deposit paid by the Lessee and to confiscate the deposit in accordance with Article VIII of these Detailed Rules.
Notwithstanding the foregoing, the Lessor or the property management company designated by the Lessor has the right to cut off water, power or air
conditioning of the Object leased by the Lessee without any responsibility, provided that the Lessee shall be notified of such intention three days in
advance. The expenses incurred by the Lessor or the property management company designated by the Lessor due to cut-off and re-connecting of
water, power or air conditioning shall be borne by the Lessee, which may be recovered by the Lessor from the Lessee or deducted from the deposit
paid by the Lessee in accordance with Article VIII of these Detailed Rules.
(2) Exercise of rights
Instead of actually entering the Object, the Lessor sending to the Lessee a written notice of taking back the Object in the form prescribed by the
Lease will be deemed as fully exercising the right. The Lessor will be deemed to have taken back the Object and the Lessee be deemed to have been
expelled from the Object seven days after the Lessor delivers such a written notice (that is, the evacuation period for the Lessee). During the
evacuation period, if the Lessee fails to restore the Object to the state described in the confirmation document signed upon acceptance of the Object,
the Lessor shall be entitled to freely dispose any item left by the Lessee in the Object without taking any responsibility to the Lessee, and all
expenses resulting therefrom shall be borne by the Lessee.
When the Lessee returns the Object, if there remains some items, fixtures or fittings in the Object, the Lessee hereby declares a waiver of its
ownership of such properties, and consents to free disposal by the Lessor of such properties (including but not limited to abandonment, selling off or
other means), with all proceeds thereof to the account of the Lessor (if any) and all expenses involved to be borne by the Lessee (if any). The Lessor
shall assume no responsibility to the Lessee or any other person for any loss or damage caused by such disposal or any other treatment method.
(3) Acceptance of rent and property management fees
The acceptance of rent by the Lessor and the acceptance of property management fees by the property management company designated by the
Lessor shall not be deemed as an automatic waiver of their right to prosecute the Lessee for default, incompliance with or nonperformance of terms
and conditions it shall comply with and perform.
(4) Acts of contractors, employees, agents and visitors
For the purpose of the Lease, any act of any employee, visitor, contractor, representative or agent of the Lessee or user of the Object shall be deemed
as act of the Lessee.
(5) Payment order
The failure of the Lessee to pay the rent and property management fee for the Object in the time and manner prescribed by the Lease shall constitute
delay in payment. In such case, the Lessor or the property management company designated by the Lessor may apply to the people’s court for a
payment order in accordance with the Civil Procedure Law of the People’s Republic of China, with all related expenses incurred therefrom to be
borne by the Lessee.
(6) Overdue fines
Without prejudice to any other right and remedial measure available to the Lessor upon default, if the rent, property management fees, any other
expenses or a part thereof hereunder haven’t been paid in the way and time prescribed in Articles 4 to 6 of the Lease and Part I of the Detailed
Rules, the Lessee shall pay overdue fines equivalent to 0.1% of the aggregate amount due but unpaid each day from the due date to the actual
payment date (both the due date and the actual payment date are included).
(7) Commitment
Unless otherwise specified herein, in no event (except force majeure) may the Lessee terminate the Lease in advance during the Tenancy Term, if
the Lease is early terminated or becomes unfulfillable due to reasons of the Lessee, the Lessor is not liable to return to the Lessee the paid deposit.
The Lessor may not terminate the Lease for no cause, or otherwise, it shall be liable for breach of contract.
(1) Deposit
VIII. Deposit
Simultaneously with the execution of the Lease, the Lessee shall pay to the Lessor the deposit prescribed in Article 5 of the Lease, so as to ensure
the compliance with the terms and conditions the Lessee shall comply with and perform.
The deposit shall be preserved free of interest by the Lessor on behalf of the Lessee.
(2) Withholding and deduction of deposit
In the instance the Lessee violates any term or condition of the Lease, the Lessor shall be entitled to urge actual performance and deduct from the
deposit: the expenses due but unpaid by the Lessee, the charges required to be assumed by the Lessee according to the Lease or provisions of laws
and regulations, or losses suffered by the Lessor because of default, incompliance or nonperformance of the Lessee.
(3) Complement of deposit
Pursuant to the Lease, in case the rent and property management fees increase in the Tenancy Term, or the deposit becomes insufficient as deducted
by the Lessor due to default of the Lessee, the Lessee shall, within ten working days after the receipt of a written notice from the Lessor or the
property management company designated by the Lessor, make up the deposit.
Complementing the deposit is a prerequisite for further performance of the Lease. If the Lessee fails to do so, the Lessor shall be entitled to exercise
all remedies and rights available.
(4) Return of deposit
Subject to the above provisions, the deposit shall be returned in Renminbi free of interest to the Lessee at the latest of thirty days after the Object
vacated is handed over to the Lessor upon expiration of the Lease, or thirty days after the resolution of claims arising from default, incompliance
with or nonperformance of the terms and conditions of the Lease and from incompliance and nonperformance of regulations that the Lessee shall
comply with and perform, or thirty days after the settlement of the Lessee’s accounts with the telecommunications company and the power
corporation, except the part that the Lessor has the right to deduct, withhold or offset pursuant to the Lease.
(5) Change of Lessor
If the Lessor changes during the Tenancy Term, all rights and obligations in respect of the deposit paid by the Lessee or the deposit remaining after
the Lessor exercises its deduction right according to the Lease shall be succeeded by the new lessor. In this case, the Lessor shall make sure the
Lessee’s rights will not be adversely affected by such change of lessor.
(1) Formulation of rules
IX. Rules
To facilitate the building to become a first-class office building, as long as good for the operation management and maintenance of the building, the
Lessor or the property management company designated by the Lessor has the right to publish, introduce, modify, adopt or abolish any rules in
writing at any time, provided that the Lessee shall be informed in advance. When the formulation and update of any rules cause a significant impact
on the Lessee’s rights, the Lessee shall be entitled to raise an objection and retains the right to recover its losses from the Lessor.
(2) Conflict
Such rules are merely supplementary to these terms and conditions of the Lease, which will not invalidate the latter. In the case of controversy
between such rules and these terms and conditions hereof, the terms and conditions of the Lease shall prevail.
(1) Marginal notes, headings and indexes
X. Interpretation and Miscellaneous
The marginal notes, headings and indexes are for guidance only, and shall not constitute an integral part of the Lease, which shall not be given
consideration to or affect or restrict the interpretation or clarification of any provision hereof.
(2) No waiver by tolerance
The Lessor’s tolerance, forgiveness or excuse of one-off or repeated nonperformance, violation, incompliance or non-execution of responsibility
hereunder by the Lessee doesn’t imply a waiver of rights regarding continuous or further nonperformance, violation, incompliance or non-execution
by the Lessee, nor eliminate or affect the Lessor’s rights or compensation available hereunder in respect of such continuous or further
nonperformance of violation.
Unless the Lessor waives its rights in written statement, no act or omission of the Lessor implies waiver of rights or infers as waiver.
Any approval given by the Lessor applies only to certain issues specifically approved, which shall not operate as simultaneous waiver of other rights
available to the Lessor nor exempt the Lessee from further applying to the Lessor for any other specific written approval.
(3) Service of notice
Any notice required to be given shall be written in Chinese, and sent by double-registered letter, express mail, personal delivery, facsimile or any
other means permitted by law to the legal address or the latest contact address provided by the other party from time to time.
The parties specifically agree that, the above notices and other correspondences shall be deemed effectively delivered on:
(a) The date listed in the receipt if sent by double-registered letter or express mail;
(b) The date of personal delivery;
(c) The transmission time indicated in the fax report or the date on which the recipient acknowledges receipt if sent by facsimile;
(d) After the Object is delivered to the Lessee, the Lessor may serve notices to the Lessee by posting announcements in visible places near the
Object, and the notices shall be deemed delivered on the date of announcement.
(4) Naming of the building
The Lessor retains the right to rename SOHU.COM Internet Plaza Office Building at its own discretion and the right to change, replace or cancel the
original name at any time or from time to time, without any compensation to the Lessee. However, if the Lessor chooses to do so, an announcement
regarding the notice of relevant government agency shall be posted in the building in advance.
(5) Replacement of property management company
To facilitate the building to become a first-class office building, the Lessor has the right to select and replace property management companies.
(6) Applicable law and jurisdiction
The Lease shall be governed and construed by the laws of the People’s Republic of China (excluding laws of Hong Kong, Macao and Taiwan). Any
dispute between the parties that cannot be solved through consultation may be solved by means of lawsuits.
(7) Business license
Before the execution of the Lease, if applicable, the Lessee shall present to the Lessor its business license or registration certificate approved by the
government of the People’s Republic of China, and the original power of attorney authorizing representatives of the Lessee to enter into the Lease as
Annex IV hereto.
(8) Written in Chinese and signature
The Lease is written and signed in Chinese. Any English translated version provided by the Lessor shall be used for reference only. The Lessor
hasn’t guaranteed the consistency between the contents, wording and expressions in the English version and the Chinese version, and in the case of
controversy or difference, the Chinese version shall prevail.
(9) Modification, supplementary, deletion and alteration to the Lease
No modification, supplementary, deletion or alteration to the Lease shall be valid unless made in writing, signed by duly authorized representatives
of the parties and affixed with their common seals.
The above common seals shall be deemed to have been affixed on the date signed by the foregoing authorized representatives.
(10) Counterparts and legal force
The Lease, its annexes and Detailed Rules have been made in quadruplicate, with each party holding two copies, all being of the same legal effect.
Beijing Sohu New Media Information Technology Co., Ltd. (seal)
By:
Beijing Sogou Information Services Co., Ltd. (seal)
By:
Date: 2019
Exhibit 4.21
Contract No.:
SOHU.COM Internet Plaza Office Building Lease
Between
Beijing Sohu New Media Information Technology Co., Ltd.
and
Beijing Sogou Technology Development Co., Ltd.
Parties:
Lessor:
Address:
Lease
Beijing Sohu New Media Information Technology Co., Ltd.
SOHU.com Media Plaza, No. 2 Park, No. 3 Building, South
Road of Academy of Sciences, Haidian District, Beijing,
China
Charles Zhang
Legal representative:
Tel:
Fax:
Lessee:
Address:
Legal representative:
Tel:
Fax:
Beijing Sogou Technology Development Co., Ltd.
SOHU.com Internet Plaza, No.1 Park, Zhongguancun East
Road, Haidian District, Beijing, P.R.C.
Hong Tao
Date:
Article 1
Object:
The Lease was concluded on [December 25, 2019].
The parties hereby enter into the following agreement:
Definitions
The Lessor agrees to lease out and the Lessee agrees to take on lease the premises (actual floors) located at 9F, 11F, 12F,
and 13F of SOHU.com Internet Plaza No.1 Park, Zhongguancun East Road, Haidian District, Beijing, P.R.C., that is, 9F,
11F, 12F, and 15F as elevator shows.
As a duly established and validly existing corporation, the Lessor has the authority to enter into the Lease and to perform
its obligations hereunder. In addition, the Lessor has full ownership of the Object leased, and has obtained all internal and
external approval or registration and filings necessary for the performance of the Lease, consenting to the lease of the
Object to the Lessee.
As a duly established and validly existing corporation, the Lessee has the authority to enter into the Lease and to perform
its obligations hereunder. The Lessee agrees to take on lease and enjoys the following rights pursuant to the Lease:
(i) To normally use public inlets and outlets, stairs, platforms, passageways, public restrooms, tea rooms, broom
closets, etc. of the building together with the Lessor and other parties enjoying the same rights, provided that, the
Lessor may restrict such right to use in a proper way at any time when the above facilities need to be repaired or
upon the occurrence of emergency;
(ii) To share the elevators, central air-conditioning and other equipment serving the office building.
Tenancy term and rent:
The tenancy term is more particularly set forth in Article 3 (“Tenancy Term”). The Lessee shall pay the rent and property
management fees as specified in Article 4 hereof within the Tenancy Term in a way specified in Article 6.
Deposit:
Other expenses:
The Lessee shall pay the deposit as specified in Article 5 hereof simultaneously with the execution of the Lease in a way
specified in Article 6.
The Lessee shall timely pay the following expenses as per the bills provided by the property management company
designated by the Lessor, including but not limited to:
Electricity charges and water rates, over time air conditioning costs, machine room cooling water rates, etc. incurred in the
Object.
For specific payment methods, please refer to Article 6 hereof.
Legal expenses:
The parties shall respectively bear their legal expenses.
Application:
The Object leased may only be used by the Lessee for work.
Date of delivery:
_____________.
Article 2
Object
Building No.:
SOHU.com Internet Plaza No.1 Park, Zhongguancun East Road, Haidian District, Beijing, P.R.C.
(hereinafter referred to as the “Office Building”)
Floor No.:
Lease area:
9F, 11F, 12F, and 13F (actual floors) of the Office Building, that is, 9F, 11F, 12F, and 15F as
elevator shows.
9F, 11F, 12F, and 13F (actual floors) of the Office Building, that is, 9F, 11F, 12F, and 15F as
elevator shows, having a total lease area of 10421.07 square meters.
For the specific location, please refer to Annex I.
For delivery standards, please refer to Annex II.
Article 3
Tenancy Term
Term: 36 months
Lease commencement date: January 1, 2020
Termination date: December 31, 2022
(The term includes lease commencement date and termination date)
Article 4
Rent and Property Management Fees
(1) Rent
In consideration of using the Object leased, the Lessee shall pay the following rent:
First year (leap year):
2
Rent standard: RMB 11/day/m
Annual rent: RMB 41,955,227.88
Monthly rent: RMB 3,496,268.99
Second year:
2
Rent standard: RMB 11/day/m
Annual rent: RMB 41,840,596.08
Monthly rent: RMB 3,486,716.34
Third year:
2
Rent standard: RMB 11/day/m
Annual rent: RMB 41,840,596.08
Monthly rent: RMB 3,486,716.34
(Calculated based on the lease area specified in Article 2 above at the unit price of RMB11/day/m , to be settled in
Renminbi)
2
(2) Property management fees
Subject to the SOHU.COM Internet Plaza Office Building Property Services Agreement (subject to the name of the
agreement finalized) entered into by and between the Lessee and the property management company designated by the
Lessor.
Article 5
Deposit
The deposit for rent will be RMB 10,488,806.97 (equivalent to three months of rent). Since RMB9,242,118.11 of deposit
has been paid under the original contract and supplementary contracts No. 16-GNL-ES-05765, 16-GNL-ES-05784, 17-
GNL-ES-00948, 17-GNL-ES-05727 and 18-GNL-ES-01875, the Lessee needs to hand in RMB 1,246,688.86 of deposit
hereunder.
The deposit will bear no interest.
Upon the extinguishment or termination of the Lease, the remaining amount after the Lessor deducts unpaid rent, other
expenses and other deductible expenses payable by the Lessee shall be returned to the Lessee in one lump sum within 20
working days after termination of the Lease.
Article 6
Payment of Rent, Property Management Fees, Deposit and Other Expenses
(1) The rent and property management fees include neither electricity charges and water rates, rent and management fees
of parking space leased, over time air conditioning costs, machine room cooling water rates, etc. of the Object leased,
nor all government taxes and other expenses payable by the Lessee according to laws or regulations.
During the Tenancy Term, the rent shall be paid by calendar month. In particular, the Lessee shall pay the rent for the
next month in advance within the first twenty days of each calendar month without any deduction.
The Lessee shall prepay RMB 3,496,268.99 of rent simultaneously with the execution of the Lease.
(2) Within five working days after the Lease is executed, the Lessee shall pay the deposit to the Lessor in the amount
prescribed in Article 5 hereof.
(3) The Lessee shall pay other expenses then incurred in accordance with the provisions of the Lease, the SOHU.COM
Internet Plaza Office Building Property Services Agreement (subject to the name of the agreement finalized) entered
into with the property management company designated by the Lessor, and the SOHU.COM Internet Plaza User
Manual and the SOHU.COM Internet Plaza Decoration Manual formulated and updated from time to time by the
Lessor or the property management company.
(4) The rent and deposit for the Object leased shall be paid to the following account of the Lessor:
Bank of deposit: China Merchants Bank Co., Ltd., Beijing North Third Ring Road Branch
Account name: Beijing Sohu New Media Information Technology Co., Ltd.
Account number: 862281851810001
(5) The Lessor shall issue vouchers to the Lessee at the following time in the following way:
The Lessor shall issue a receipt within ten working days after the receipt of deposit paid by the Lessee;
Regarding the rent paid by the Lessee by check, remittance or any other means designated by the Lessor, the Lessor
shall issue a formal invoice of corresponding amount within the corresponding Tenancy Term after the related funds
reach the bank account designated by the Lessor.
Article 7
Fixtures and Fittings
The Lessor will provide certain fixtures and fittings for the interior of the Object leased according to Annex II hereto —
SOHU.COM Internet Plaza Office Building Delivery Standards (subject to the confirmation document signed by the
Lessee and the property management company designated by the Lessor), the Lessee shall return such fixtures and fittings
in the same shape, conditions and structure as previously delivered upon the termination of the Lease. The initial delivery
status shall be subject to the confirmation document signed by the Lessee and the property management company
designated by the Lessor.
Article 8
Special Terms
(1) Reception of the Object leased
The Lessor shall deliver the Object leased to the Lessee in accordance with the delivery conditions prescribed in
Annex II hereto and the confirmation document signed by the Lessee and the property management company
designated by the Lessor on the delivery date. As the Lessee is already the actual occupier and user of the premises
leased, the delivery date will be the lease commencement date, that is to say, the Tenancy Term will commence as
from the delivery date. Simultaneously with the execution of the Lease, the Lessee shall enter into a SOHU.COM
Internet Plaza Office Building Property Services Agreement with the property management company designated by
the Lessor (subject to the name of the agreement finalized).
(2) Decoration
During the Tenancy Term, the Lessee may carry out interior decoration in the Object leased with the prior consent of
the Lessor after entering into a Leased Premise Decoration Security Agreement (subject to the name of the agreement
finalized) with the Lessor or the property management company designated by the Lessor.
(3) Government registration, taxes and other incidental expenses
The Lessor shall go through related registration formalities for the premises leased according to law, to which the
Lessee shall offer assistance.
All taxes and dues in connection with the execution, registration and implementation of the Lease shall be governed
by the applicable laws and regulations of China (excluding Hong Kong, Macao and Taiwan). In the absence of
explicit provisions in Chinese laws and regulations, the taxes and dues shall be respectively borne by the Lessor and
the Lessee on their own.
(4) Status of the Object leased
The Lessor has delivered the Object leased to the Lessee in accordance with the standards set forth in Annex II. The
Lessee has received the Object according to such standards and confirmed the Object leased to be in good and
rentable conditions. Both parties acknowledge that the Object leased conforms to the provisions of the Lease.
(5) Other agreements and covenants
The Lessee agrees to comply with the SOHU.COM Internet Plaza Property Management Services Entrustment
Contract and the Constitution of SOHU.COM Internet Plaza’s Owners Association signed by the Lessor. If the
Lessor violates any of the aforesaid agreements as a result of the Lessee, the Lessee shall compensate the Lessor for
its losses.
Article 9
Confidentiality
During the Tenancy Term, the Lessor, the Lessee and their respective agents shall keep the
trade secrets, financial information and other confidential information of the Lessee and the
Lessor confidential, and may not disclose such information to any third party without the
consent of the other party.
Article 10
Others
The Lessee agrees that, the Lessor has the right to sell the premises leased to any third party
during the Tenancy Term, and the Lessee promises to waive its right of preemption.
This Lease includes certain annexes and the Detailed Rules for Office Building Lease.
(The remainder of this page is intentionally left blank)
Beijing Sohu New Media Information Technology Co., Ltd.
Signature of representative:
Common seal:
Beijing Sogou Technology Development Co., Ltd.
Signature of representative:
Common seal:
(No text on this page, this being the seal and signature page to the SOHU.COM Internet Plaza Office Building Lease)
Signed on: December 25, 2019
Annexes to the Lease
Annex I: Location Sketch Map
Annex II: SOHU.COM Internet Plaza Office Building Delivery Standards
Annex III: Photocopy of the Lessor’s Business License and Original Power of Attorney
(No text on this page)
Detailed Rules
for
Office Building Lease
Between
Beijing Sohu New Media Information Technology Co., Ltd.
and
Beijing Sogou Technology Development Co., Ltd.
Lease Rules
I. Rent, Property Management Fees and Other Expenses
The Lessee agrees to accept and perform the following:
(1) Rent and property management fees
To timely pay the rent and property management fees prescribed in Article 4.
(2) Commercial taxes
To pay the taxes or dues payable by the Lessee as prescribed by laws and regulations annually or regularly imposed by the competent department on
the Object leased or the Lessee at present or in the future, except the land use fees and house property taxes.
(3) Electricity, water and other charges
To pay the charges of electricity and water used in the Object leased.
(4) Other expenses
The Lessee shall pay to the property management company designated by the Lessor: including but not limited to the expenses of machine room
cooling water and over time air-conditioning provided by the property management company designated by the Lessor at the request of the Lessee.
The Lessee agrees to accept and perform the following:
(1) Compliance with regulations, detailed rules and ordinances, etc.
II. Obligations of the Lessee
(a) Comply with all regulations, rules and requirements of the government or other relevant departments concerning the Lessee’s behaviors and
operations in the Object leased, as well as all related regulations, rules and requirements regulating the actions, behaviors, affairs or things
of the Lessee or its employees, agents, contractors or visitors.
The Lessee shall compensate the Lessor for its losses caused by the Lessee’s violation of these regulations, rules and requirements.
(b) The Lessee shall be responsible for all claims, demands, lawsuits, legal proceedings, judgments, losses and related expenditures that the
Lessor may suffer or incur as a result of death, personal injuries or property damages occurred in the Object or occurred during the use of
the Object or part thereof caused by the act or negligence of Lessee or its employees, contractors, agents or visitors.
(c) The Lessee shall be responsible for all losses and damages to the Object leased, the building and all properties in the building caused by the
Lessee or its agents, employees, contractors or visitors.
(2) Decoration, repair and maintenance
(a) Decoration
The Lessee’s decoration of the Object leased must comply with the provisions of the SOHU.COM Internet Plaza Office Building
Decoration Manual (subject to the name of the agreement finalized) formulated and modified from time to time by the property
management company designated by the Lessor.
The Lessee shall make sure the decoration and partition of the Object conform to firefighting, security, building or other relevant
provisions.
According to the drawings and specifications previously submitted to and approved by the Lessor and the property management company
designated by the Lessor in writing, the Lessee shall decorate the interior of the Object at its own expenses.
The interior decoration performed by the Lessee shall be in a good and workmanlike manner and conform to the style of first-class office
buildings. The Lessee shall maintain the decoration in the same status during the entire Tenancy Term, except normal wear and tear.
Without the prior written approval of the Lessor and the property management company designated by the Lessor, the Lessee must not, by
itself or allow to, make any alteration to the approved decoration drawings and specifications as well as the interior design and layout of the
Object.
For the avoidance of doubt, the Lessor and the Lessee hereby declare that:
(i) The Lessor or the property management company designated by the Lessor approving the abovementioned decoration drawings
and specifications of the Lessee doesn’t exempt the Lessee from applying to the related government authorities of Beijing, at its
own cost, for approval of such decoration drawings and specifications already approved by the Lessor or the property management
company designated by the Lessor before formally starting interior decorating.
(ii) The Lessor and the property management company designated by the Lessor shall bear no responsibility for any consequence of
the Lessee not complying with the requirements and conditions set forth in the decoration drawings and specifications approved by
the related government authorities of Beijing.
(iii) The Lessee shall keep the Lessor harmless from any loss caused by the Lessee not complying with the present clause, including
but not limited to legal expenses.
(b) Repair and maintenance
The Lessee shall keep the part of decorations in the Object provided by the Lessor and the part added by the Lessee (including all doors and
windows, walls, equipment and facilities and pipelines, etc.) in good, clean and rentable conditions, and shall keep the Object leased and oil
paint on the surface intact.
The Lessor shall be responsible for daily repair and maintenance of decoration (decorative surface, strong current, weak current) and
electromechanical system (central ventilation system) provided by the Lessor and access control, provided that the Lessee shall bear the
corresponding costs, as more specifically agreed upon by the parties.
The Lessee shall repair and maintain the part of decorations added by itself at its own costs and expenses.
The Lessee shall comply with the regulations of the sanitation and provisions of other relevant government departments concerning
dedicated sanitation and water facilities (if any) used by the Lessee or its employees, agents or visitors at its own expenses.
(3) Replacement of windows or glass curtain walls
The Lessee shall pay the expenses incurred by the Lessor or the property management company designated by the Lessor for replacement of
windows, glass or glass curtain walls accidently broken or damaged by the Lessee or its employees, contractors, agents or visitors.
(4) Compensation and insurance of losses and damages caused by internal defects
The Lessee shall take full responsibility for losses, property damages, death or personal injuries caused by the acts, faults or negligence of the
Lessee or its employees, contractor, agents or visitors expressly or impliedly permitted by the Lessee. The Lessee shall hold the Lessor harmless
therefrom. For purposes of this clause, the term “property” includes but is not limited to fixtures and fittings of the Lessor.
To avoid the above risks, the Lessee shall procure and maintain third-party liability insurance from a domestic insurance company. Such insurance
shall be purchased in the name of the Lessee and particularly indicate the Lessor as the owner of the building (including the Object leased). From
the date of lease commencement date, the Lessee shall furnish the Lessor with a certificate issued by the insurance company within three months,
evidencing to the Lessor that appropriate insurance has been purchased. Such certificate shall constitute a part of annexes to the contract.
The insurance contract shall contain a clause prescribing that without the prior written consent of the Lessor, the insurance purchased and its
conditions may not be cancelled, modified or restricted.
(5) Access of the Lessor or the property management company designated by the Lessor
When the Lessor or the property management company designated by the Lessor needs to examine or check the status of the interior structures,
equipment or facilities in the Object leased by the Lessee and carry out necessary repair or maintenance, with prior notice, the Lessee shall allow the
Lessor or the property management company designated by the Lessor and their authorized personnel to enter the Object in reasonable time. When
exercising such right, the Lessor or the property management company designated by the Lessor shall try not to cause any interference to the Lessee.
In the case of emergency when it becomes impossible to contact the Lessee in advance, the Lessor and its employees or agents may enter the Object
without permission of the Lessee to take necessary measures, provided that the Lessee shall be timely reported afterwards; in the case of especially
critical circumstances, the Lessor or the property management company designated by the Lessor may force an entrance to the Object.
In order to better comply with the preceding clause, the Lessee shall inform the Lessor or the property management company designated by the
Lessor the security system installed in the Object and its nature.
(6) Notice of repair
The Lessee shall conduct the necessary repair in a reasonable time after the receipt of a notice from the Lessor or the property management company
designated by the Lessor requiring repair. If the Lessee fails to do so, the Lessor or the property management company designated by the Lessor
shall be entitled to enter the Object, and may forcibly perform the work or repair in emergency circumstances, with all related expenses to be borne
by the Lessee.
(7) Informing the Lessor of damage
The Lessee shall timely inform the Lessor and the property management company designated by the Lessor of damage to the Object and personal
injuries, and of accidents or defects of water pipes, gas pipes, electric circuits or devices, fixtures or other facilities provided by the Lessor. After the
receipt of such a notice, the Lessor or the property management company designated by the Lessor shall respond immediately and perform the repair
within three working days. In the instance the Lessee becomes unable to normally use the facilities due to losses caused by the Lessor and response
delay of the property management company, the Lessee shall be entitled to engage a third party for repair, with the maintenance costs to be deducted
from the rent or other expenses (except repair caused by the Lessee only).
Upon occurrence of fire alarm or other accidents, in addition to calling the police and taking necessary measures immediately, the Lessee shall
simultaneously inform the Lessor and the property management company designated by the Lessor.
(8) Directory
When the name on the directory of the building is changed upon the request of the Lessee, the Lessee shall pay the expenses for installation, repair,
change or replacement of the Lessee’s name on the directory.
(9) Survey
Within six months before the expiration of the Tenancy Term, the Lessee shall allow the Lessor to accompany potential tenants or users to make a
survey of the Object in a reasonable time with prior notice, but the Lessor shall try its best to avoid interference with the Lessee’s work.
(10) Regulations
The Lessee shall comply with the SOHU.COM Internet Plaza Property Management Services Entrustment Contract, the Constitution of
SOHU.COM Internet Plaza’s Owners Association signed by the Lessor, and shall comply with and abide by the regulations formulated by the Lessor
and the property management company designated by the Lessor, including but not limited to the SOHU.COM Internet Plaza User Manual and
the SOHU.COM Internet Plaza Decoration Manual (subject to the name of the agreement finalized).
(11) Contractors, employees, agents and visitors
The acts, negligence, omission and fault of all contractors, employees, agents and visitors of the Lessee shall be deemed as those of the Lessee, for
which the Lessee shall be responsible to the Lessor.
(12) Return of the Object
Upon the expiration of the Tenancy Term or early termination of the Lease, the Lessee must rehabilitate the Object in the state indicated in the
confirmation document signed upon acceptance, including but not limited to rehabilitating the ceiling system, spraying system, smoke detector, fan
coil, air-conditioning temperature controller, lamp panel, air supply grille and return air inlet, unless with the consent of the owner.
The Object and all fixtures, fittings and ceilings therein returned by the Lessee must be complete, good, clean, rentable and in a proper maintenance
status.
The personal property (including the name boards of the Lessee on doors, walls, etc. of the Object), fixtures and fittings and auxiliary equipment of
the Lessee shall be removed as required by the Lessor upon the expiration of the Tenancy Term or early termination of the Lease, with the
corresponding expenses to be borne by the Lessee. In addition, the Lessee shall compensate the Lessor any damage caused in the process of
removing.
The Lessee shall allow the Lessor to remove from the directory texts and characters relating to the Lessee, and shall compensate the Lessor for its
losses caused by the Lessee’s failure to do so.
If, when the Lessee returns the Object, there remain some items, fixtures or fittings in the Object, the Lessee hereby declares that it has agreed to
waive its ownership of such properties, and allow the Lessor to freely dispose such properties (including but not limited to abandonment, selling off
or other means), except as otherwise agreed then by both parties.
The time for the Lessee to return the Object shall be subject to the written document signed by authorized representatives of the parties.
(13) Indemnification upon default
The Lessee shall indemnify and hold the Lessor harmless from losses caused by the following behavior that may be suffered or incurred by the
Lessor, including lawsuits, claims, losses, damages and expenses: the Lessee fails to comply with or perform any of its responsibilities hereunder, or
the use of the Object by the Lessee (including indoor installation and equipment of electricity and gas), the misconduct taken during the Tenancy
Term against the Object, or the negligence or fault of the Lessee.
(14) Protection under severe weather
The Lessee shall take any reasonable preventive measure to prevent the Object from invasion of storm, heavy rain, snow or similar severe weather.
Under the above severe weather, the Lessee shall especially make sure all exterior doors and windows are closed.
(15) Cancellation or alteration of industrial and commercial registration
The Lessee shall properly go through the cancellation or alteration of industrial and commercial registration with the unit as registered or business
address within 30 days after the expiration of the Tenancy term or the date of early termination hereof.
(16) Maintenance of electrical equipment, pipelines and wirings
If the electrical equipment, wirings or pipelines installed by the Lessee become in danger or unsafe or as reasonably requested by the Lessor or the
relevant municipal corporation, the Lessee shall repair or replace the above equipment, wirings or pipelines. At the time of maintenance, the Lessee
may engage only the maintenance contractors designated or identified by the Lessor or the property management company designated by the Lessor
in writing. The Lessee shall allow the Lessor or the property management company designated by the Lessor to examine the wirings or pipelines
installed by the Lessee in the Object, provided that the Lessor or the property management company designated by the Lessor shall send a written
request in advance and examine the devices at any reasonable time. The Lessee shall indemnify the Lessor harmless from claims, expenses, damages
or lawsuits caused by faults or improper maintenance of electrical equipment, devices, pipelines and wirings installed by the Lessee in the Object.
(17) Sewer cleaning
When the sewer or sanitary fittings or other pipelines are plugged or stop work due to careless or improper use or negligence of the Lessee or its
contractors, employees, agents or visitors, the Lessor or the property management company designated by the Lessor shall clean, repair or replace
such pipelines first, with all costs incurred therefrom to be borne by the Lessee. Moreover, the Lessee shall undertake all expenses, claims or losses
suffered by the Lessor therefrom.
(18) Transportation of waste and garbage
The Lessee shall carry away the waste and garbage generated during the decoration period, and place such waste and garbage in such locations
within the building as designated by the Lessor or the property management company designated by the Lessor. If the Lessee uses the waste and
garbage cleaning services provided by the Lessor or the property management company designated by the Lessor, the Lessee shall pay the relevant
expenses and may not utilize the services provided by any similar contractor.
The Lessor agrees to accept and perform the following:
(1) Non-interference
III. Obligations of the Lessor
Under the premise that the Lessee pays the rent, property management fees and various other expenses in the way and amount prescribed herein and
complies with and performs these terms and conditions that the Lessee shall comply with and perform, the Lessor shall make sure the Lessee’s
peaceful occupation and use of the Object during the Tenancy Term will not be interfered by the Lessor or any person legally claiming its rights
through the Lessor (except the circumstances prescribed by Clauses (5) and (6), Article II of these Detailed Rules).
(2) Land use fees
Except the taxes and dues payable by the Lessee according to the Lease and/or relevant Chinese laws and regulations, all other land use fees and
property taxes on the building shall be borne by the Lessor.
(3) Roof and main structure
The Lessor shall maintain the structure of the building in a good condition.
(4) Decoration
The Lessor may carry out all necessary decoration and place green plants in public areas of the building when it deems necessary.
(5) Cleaning and waste treatment
The Lessor shall keep the public areas, restrooms and other common parts of the building clean.
The Lessor shall be responsible for cleaning the outer walls of the building (except the part that shall be cleaned by the Lessee or the user).
(6) Shared facilities
The Lessor shall keep all elevators, firefighting and safety facilities, air conditioning equipment and other facilities in the building in a normal
operation condition, and regularly repair and maintain the same.
After the receipt of a fault notice from the Lessee, the Lessor shall send certain personnel to repair the facilities in reasonable time (except the part
that shall be repaired by the Lessee or the user).
(7) Directory
The Lessor shall provide a standard directory sign in the lobby and corresponding floors of the building and allocate appropriate places for the
Lessee to add its name thereon according to unified font or character standards designated by the Lessor, the first installation of which will be free of
charge.
(8) Air conditioning
The office building will offer central air conditioning at the following time:
9:00-18:00 from Monday to Friday, excluding other time and public holidays.
If the Lessee requires over-time air conditioning services beyond the above time, it shall notify the property management company designated by the
Lessor 24 hours in advance. After the receipt of a reasonable notice from the Lessee, the property management company designated by the Lessor
will provide such over-time air conditioning services. The charges of such over-time air conditioning services will be determined by the property
management company designated by the Lessor and the Lessee will be informed thereof.
(9) Insurance
The Lessor shall purchase valid insurance for the public areas and shared facilities of the building.
IV. Restrictions and Prohibitions
The Lessee agrees to accept and perform the following:
(1) Installation and variation
(a) Without the prior written consent of the Lessor and the property management company designated by the Lessor, it may not install, place or
vary any fixture, partition or other assets and facilities belonged to the Lessor within the Object or any other part (including but not limited
to: furniture, decoration, air conditioning, access control, etc.).
Without the prior written consent of the Lessor and the property management company designated by the Lessor, the Lessee must not
install or permit the installation of equipment and fixture on electric power circuits, pipelines and facilities, or install or permit the
installation of any equipment, device or machinery which exceeds the originally designed capacity of the floor or requires addition of
electric power circuits or pipelines or the power consumption of which will not be measured through the Lessee’s electricity meter.
The Lessor or the property management company designated by the Lessor has the right to stipulate the maximum weight and placement
location of safe deposit boxes and other heavy equipment. The Lessor or the property management company designated by the Lessor may
require the Lessee to put pad in the specified size and material at the bottom to disperse the weight when it deems necessary.
(b) When performing an approved project, the Lessee shall procure its employees, agent, contractors and workers to fully cooperate with the
Lessor, the property management company designated by the Lessor and the Lessor’s employees, agent, contractors and workers; and to
work with other tenants or contractors working in the building.
The Lessee and its employees, agents, contractors and workers shall abide by and follow all instructions and guidance from the Lessor or
the property management company designated by the Lessor.
(c) When modifying or altering electric circuits, access control, firefighting or air conditioning systems, the Lessee shall use the contractors
designated or identified by the Lessor and the property management company designated by the Lessor in writing, and shall bear all
corresponding expenses.
(2) Rules for commencement of operations
The Lessee shall obtain and maintain in the entire Tenancy Term the validity of permission or approval (if any) from the government or other related
departments on its use or occupation of the Object. Upon the receipt of a notice from the government or any other related department concerning the
Object or any service provided in the Object, the Lessee shall inform the Lessor in writing.
(3) Marks
The Lessee may not place or exhibit or allow other to place or exhibit any billboard, mark, ornament, advertisement or other product in or out of the
Object, whether equipped with lighting to make it visible from the outside, except:
(a) The Lessee may, at its own costs, require the Lessor or the property management company designated by the Lessor to arrange the
placement of its name (and any future addition or alteration) on the directory in the unified Chinese and English model designed by the
Lessor.
(b) The Lessee may, at its own costs, place its name at the entrance of the Object in the font and size approved by the Lessor. If the Lessee
carries on business in another name, it shall notify the Lessor of such name, and may exhibit such name at the entrance only with the
written consent of the Lessor. Without the prior written permission of the Lessor, the Lessee may not change the name of its business.
(4) Purpose
The Lessee may not use or allow the use of the Object for any purpose other than office as explicitly prescribed in the Lease.
(5) Illegal or unethical use
The Lessee may not use or allow the use of the Object for any illegal or unethical purpose.
(6) Passage obstruction
The Lessee may not obstruct or allow the obstruction of the entrance, stairs, platforms, passages, escalators, elevators, lobby and other public parts
of the office building with boxes, packaging scraps and obstructions in other natures.
When it deems fit, the Lessor has the right to move away the abovementioned debris or other items or things without notice to the Lessee, with all
related expenses to be borne by the Lessee.
(7) Wires and cables in public areas
The Lessee may not lay or install attached electric wires, cables or other items and things at the entrance and exit, stairs, passages, lobby and other
places in public areas of the building.
(8) Sublease and assignment
Without the written consent of the Lessor, the Lessee may not transfer, sublease, waive or assign the Object leased or any part thereof or any interest
thereon, nor make any arrangement or transaction, that results in a non-party to the Lease acquiring or enjoying the right to use, take on lease and
occupy the Object leased or any part thereof, regardless of whether rent or other considerations have been paid for such acquisition.
(9) Violation of insurance terms
The Lessee may not carry out or allow others to carry out any act or thing that will or may invalidate the fire insurance, third-party liability
insurance and insurance covering other risks of the building.
The Lessee may not carry out or allow others to carry out any act or thing that will increase the premium. If any act or thing conducted or allowed to
be conducted by the Lessee increases the premium, the Lessor shall be entitled to recover from the Lessee the increment, without prejudice to any
other remedy available to the Lessor.
(10) Air conditioning
Except with the written permission of the Lessor and the property management company designated by the Lessor, the Lessee may not additionally
install air conditioning facilities other than those provided by the Lessor.
(11) Parking
The Lessee may not park in parking spaces assigned to other vehicles, public driveways, entrance and exit for vehicles or other areas specified for
loading and unloading purposes, nor allow its employees, agents, contractors or visitors to do so.
(12) Use of name
The Lessee may only use the name “SOHU.COM Internet Plaza Office Building” or the name and logo of the building or any part thereof to
indicate its address and business location. Without the prior written approval of the Lessor, the Lessee may not use or allow the use of any picture,
name or logo or those which are wholly or partially similar to any name and logo of the Lessor, “SOHU.COM Internet Plaza Office Building” and
the building to serve its business, operations and other purposes.
(13) No auction or solicitation
The Lessee may not organize or allow the organization of any auction in the Object leased.
The Lessee may not permit any of its employees or agents to solicit any business or hand out any leaflet, circular or publicity material within the
redline scope of SOHU.COM Internet Plaza Office Building.
(14) Damage to the main structure, equipment and facilities
Without the prior written approval of the Lessor and the property management company designated by the Lessor, the Lessee may not carve on,
damage, drill holes on, mark or destroy the doors, windows, walls, beams, structure and any other parts of the Object as well as any sewer line,
sanitation and air conditioning facility thereof or allow any foregoing behavior.
(15) Damage to wall surface, ceiling and ground
Without the prior written approval of the Lessor and the property management company designated by the Lessor, the Lessee may not drive nails,
screws, inlayed hooks, brackets or other similar items on the ceiling, wall surface and ground of the Object leased, nor destroy the ground.
(16) Damage to public areas
The Lessee may not damage, ruin or destroy the feature, stairs and elevators placed in the public areas of the building, including surrounding trees,
plants and shrubs, etc.
(17) Disturbance or interference
The Lessee may not cause or allow any possible disturbance to the Lessor, other users or tenants in the building, nor interfere with adjacent user or
tenants.
(18) Noise
At no time may the Lessee make or allow the making of any disturbing or stimulating noise in the Object, or make any music or noise (including
broadcasting or voice produced by any device or equipment that can generate or copy, receive or record) audible from outside the Object.
(19) Dormitory or home use
The Lessee may not use the Object or any part thereof as dormitory.
(20) Manufacturing and storage of goods
The Lessee may not use or allow the use of the Object for production and manufacturing or storage of goods and commodities, except for the
samples and exhibits stored reasonably required for the business permitted hereunder.
(21) Toilet facilities
The Lessee may not use or allow the use of toilet facilities provided by the Lessor in the public areas of the Object or the building for any purposes
other than their designed purposes.
The Lessee may not and shall not allow others to throw any irrelevant item into toilet facilities, and shall pay all expenses as required by the Lessor
for damage, breakage, blocking or spoil caused by the Lessee’s violation of the current clause.
(22) Meal preparation and preventing the disperse of odor
The Lessee may not cook or allow or tolerate anyone to cook any food in the leased units (other than oven heating of food by the Lessee’s
employees in tea rooms), and may not procure or allow any disgusting smell or odor from generating or emitting.
(23) Animals, pets and spread of pests
The Lessee may not breed or allow others to bread any animal or pet in the Object. The Lessee shall take all measures required by the Lessor to
prevent the Object or any part thereof from pest invasion at its own costs, shall hire disinfestation companies with Beijing pest control service
agency qualifications at its own costs, and shall insecticide on a regular basis as instructed by the Lessor or the property management company
designated by the Lessor.
(24) Antenna
The Lessee may not install any antenna on the roof or walls of the building or the ceiling or wall surface of the Object. Moreover, the Lessee may
not interfere, move dismantle or change the antenna provided by the Lessor, if any.
(25) Explosives or hazardous articles
The Lessee may not deposit or allow the storage of any weapon, ammunition, potassium nitrate, kerosene or other explosive, inflammable or
hazardous articles in the Object.
V. Exceptions
Except due to the fault of the Lessor, the property management company designated by the Lessor or their respective employees or agents, the Lessor shall
undertake no responsibility to the Lessee, any user or others upon any of the following circumstances:
(1) Elevators, air conditioning and others
Personal injury or property damage suffered by the Lessee, any user or others as a result of quality defects or stoppage of elevators, firefighting and
security settings, air conditioning equipment and other equipment of the building;
(2) Supply of power and water
Personal injury or property damage suffered by the Lessee, any user or others because of supply fault, stoppage, explosion and suspension of power
and water to the building and the Object;
(3) Fire, flood and plague of insects
Personal injury or property damage suffered by the Lessee, any user or others due to fire, overflow or water leakage in any part of the building, or
water flowing into the building or the Object, or mouse and other insects in the building;
(4) Security
Regarding the quality, security or custody of the Object or any individual or goods therein, especially without limiting the generality of the
foregoing, the security guards and administrators or mechanic or electric alarm systems of any nature provided by the Lessor or the property
management company designated by the Lessor shall constitute no safety responsibility of the Lessor or the property management company
designated by the Lessor to the Object or any article therein, instead, the Lessee shall always take full responsibility for the safety of the Object and
the items therein;
(5) Incompliance
Losses and damages caused by the Lessee or the third party failing to perform applicable regulations or to comply with Part IX of these Detailed
Rules.
VI. Reduction of Rent
When the Object and any part thereof is damaged or the Object becomes unfit for use or lease due to fire, severe weather, act of God, force majeure
or other events not directly or indirectly caused by acts or faults of the Lessee (in this case, the Lessee shall timely notify the Lessor in writing),
upon consensus between the parties, the Lessee may stop paying rent and property management fees in respect of the part of the Object damaged,
until the Object is repaired and restored.
When economically unreasonable and impractical, the Lessor has no obligation to repair or rehabilitate the Object; or, if the entire Object or the
substantial part of the Object is destroyed or unfit for reuse and lease, in both cases, the parties hereto shall be entitled to terminate the Lease by
giving to the other party a written notice, without prejudice to the rights and compensation available to either party in respect of any prior claim or
violation of the Lease, or rights and compensation available to the Lessor in respect of rent, property management fees and other expenses payable
hereunder accrued before the effectiveness of termination. In such case, the Lessor shall return the deposit for the premises.
Both parties further agree and acknowledge as follows:
(1) Default
VII. Default
Upon the occurrence of any of the following, the Lessor shall be entitled to terminate the Lease, to take back the Object leased by the Lessee 30
working days after informing the Lessee in writing in advance, and to claim the Lessee for compensation of its losses if:
(a) The rent or property management fees or other expenses payable by the Lessee hereunder remain unpaid within 30 working days after the
due date;
(b) If the Lessee fails to comply with and perform any term and condition hereunder that the Lessee shall comply with and perform and causes
material damage to the Lessor; or the Lessee fails to rectify the above default within 30 days after the expiration of the period notified by
the Lessor in writing;
(c) The Lessee goes bankrupt or starts liquidation as a corporation, or is applied for liquidation, or becomes insolvent, or has made arrangement
with its creditors, or has exerted any legal arrangement on the Object leased by the Lessee;
(d) The main structure of the Object is substantially damaged due to reasons of the Lessee, and the Lessee fails to make compensation within
30 days after the expiration of the period notified by the Lessor in writing.
This right of the Lessor will not prevent it from exercising the right to lodge a lawsuit in the event that the Lessee breaches the Lease or fails to
comply with or perform any term and condition of the Lease, nor prevent it from exercising the right to deduct the losses incurred therefrom from
the deposit paid by the Lessee and to confiscate the deposit in accordance with Article VIII of these Detailed Rules.
Notwithstanding the foregoing, the Lessor or the property management company designated by the Lessor has the right to cut off water, power or air
conditioning of the Object leased by the Lessee without any responsibility, provided that the Lessee shall be notified of such intention three days in
advance. The expenses incurred by the Lessor or the property management company designated by the Lessor due to cut-off and re-connecting of
water, power or air conditioning shall be borne by the Lessee, which may be recovered by the Lessor from the Lessee or deducted from the deposit
paid by the Lessee in accordance with Article VIII of these Detailed Rules.
(2) Exercise of rights
Instead of actually entering the Object, the Lessor sending to the Lessee a written notice of taking back the Object in the form prescribed by the
Lease will be deemed as fully exercising the right. The Lessor will be deemed to have taken back the Object and the Lessee be deemed to have been
expelled from the Object seven days after the Lessor delivers such a written notice (that is, the evacuation period for the Lessee). During the
evacuation period, if the Lessee fails to restore the Object to the state described in the confirmation document signed upon acceptance of the Object,
the Lessor shall be entitled to freely dispose any item left by the Lessee in the Object without taking any responsibility to the Lessee, and all
expenses resulting therefrom shall be borne by the Lessee.
When the Lessee returns the Object, if there remains some items, fixtures or fittings in the Object, the Lessee hereby declares a waiver of its
ownership of such properties, and consents to free disposal by the Lessor of such properties (including but not limited to abandonment, selling off or
other means), with all proceeds thereof to the account of the Lessor (if any) and all expenses involved to be borne by the Lessee (if any). The Lessor
shall assume no responsibility to the Lessee or any other person for any loss or damage caused by such disposal or any other treatment method.
(3) Acceptance of rent and property management fees
The acceptance of rent by the Lessor and the acceptance of property management fees by the property management company designated by the
Lessor shall not be deemed as an automatic waiver of their right to prosecute the Lessee for default, incompliance with or nonperformance of terms
and conditions it shall comply with and perform.
(4) Acts of contractors, employees, agents and visitors
For the purpose of the Lease, any act of any employee, visitor, contractor, representative or agent of the Lessee or user of the Object shall be deemed
as act of the Lessee.
(5) Payment order
The failure of the Lessee to pay the rent and property management fee for the Object in the time and manner prescribed by the Lease shall constitute
delay in payment. In such case, the Lessor or the property management company designated by the Lessor may apply to the people’s court for a
payment order in accordance with the Civil Procedure Law of the People’s Republic of China, with all related expenses incurred therefrom to be
borne by the Lessee.
(6) Overdue fines
Without prejudice to any other right and remedial measure available to the Lessor upon default, if the rent, property management fees, any other
expenses or a part thereof hereunder haven’t been paid in the way and time prescribed in Articles 4 to 6 of the Lease and Part I of the Detailed
Rules, the Lessee shall pay overdue fines equivalent to 0.1% of the aggregate amount due but unpaid each day from the due date to the actual
payment date (both the due date and the actual payment date are included).
(7) Commitment
Unless otherwise specified herein, in no event (except force majeure) may the Lessee terminate the Lease in advance during the Tenancy Term, if
the Lease is early terminated or becomes unfulfillable due to reasons of the Lessee, the Lessor is not liable to return to the Lessee the paid deposit.
The Lessor may not terminate the Lease for no cause, or otherwise, it shall be liable for breach of contract.
(1) Deposit
VIII. Deposit
Simultaneously with the execution of the Lease, the Lessee shall pay to the Lessor the deposit prescribed in Article 5 of the Lease, so as to ensure
the compliance with the terms and conditions the Lessee shall comply with and perform.
The deposit shall be preserved free of interest by the Lessor on behalf of the Lessee.
(2) Withholding and deduction of deposit
In the instance the Lessee violates any term or condition of the Lease, the Lessor shall be entitled to urge actual performance and deduct from the
deposit: the expenses due but unpaid by the Lessee, the charges required to be assumed by the Lessee according to the Lease or provisions of laws
and regulations, or losses suffered by the Lessor because of default, incompliance or nonperformance of the Lessee.
(3) Complement of deposit
Pursuant to the Lease, in case the rent and property management fees increase in the Tenancy Term, or the deposit becomes insufficient as deducted
by the Lessor due to default of the Lessee, the Lessee shall, within ten working days after the receipt of a written notice from the Lessor or the
property management company designated by the Lessor, make up the deposit.
Complementing the deposit is a prerequisite for further performance of the Lease. If the Lessee fails to do so, the Lessor shall be entitled to exercise
all remedies and rights available.
(4) Return of deposit
Subject to the above provisions, the deposit shall be returned in Renminbi free of interest to the Lessee at the latest of thirty days after the Object
vacated is handed over to the Lessor upon expiration of the Lease, or thirty days after the resolution of claims arising from default, incompliance
with or nonperformance of the terms and conditions of the Lease and from incompliance and nonperformance of regulations that the Lessee shall
comply with and perform, or thirty days after the settlement of the Lessee’s accounts with the telecommunications company and the power
corporation, except the part that the Lessor has the right to deduct, withhold or offset pursuant to the Lease.
(5) Change of Lessor
If the Lessor changes during the Tenancy Term, all rights and obligations in respect of the deposit paid by the Lessee or the deposit remaining after
the Lessor exercises its deduction right according to the Lease shall be succeeded by the new lessor. In this case, the Lessor shall make sure the
Lessee’s rights will not be adversely affected by such change of lessor.
(1) Formulation of rules
IX. Rules
To facilitate the building to become a first-class office building, as long as good for the operation management and maintenance of the building, the
Lessor or the property management company designated by the Lessor has the right to publish, introduce, modify, adopt or abolish any rules in
writing at any time, provided that the Lessee shall be informed in advance. When the formulation and update of any rules cause a significant impact
on the Lessee’s rights, the Lessee shall be entitled to raise an objection and retains the right to recover its losses from the Lessor.
(2) Conflict
Such rules are merely supplementary to these terms and conditions of the Lease, which will not invalidate the latter. In the case of controversy
between such rules and these terms and conditions hereof, the terms and conditions of the Lease shall prevail.
(1) Marginal notes, headings and indexes
X. Interpretation and Miscellaneous
The marginal notes, headings and indexes are for guidance only, and shall not constitute an integral part of the Lease, which shall not be given
consideration to or affect or restrict the interpretation or clarification of any provision hereof.
(2) No waiver by tolerance
The Lessor’s tolerance, forgiveness or excuse of one-off or repeated nonperformance, violation, incompliance or non-execution of responsibility
hereunder by the Lessee doesn’t imply a waiver of rights regarding continuous or further nonperformance, violation, incompliance or non-execution
by the Lessee, nor eliminate or affect the Lessor’s rights or compensation available hereunder in respect of such continuous or further
nonperformance of violation.
Unless the Lessor waives its rights in written statement, no act or omission of the Lessor implies waiver of rights or infers as waiver.
Any approval given by the Lessor applies only to certain issues specifically approved, which shall not operate as simultaneous waiver of other rights
available to the Lessor nor exempt the Lessee from further applying to the Lessor for any other specific written approval.
(3) Service of notice
Any notice required to be given shall be written in Chinese, and sent by double-registered letter, express mail, personal delivery, facsimile or any
other means permitted by law to the legal address or the latest contact address provided by the other party from time to time.
The parties specifically agree that, the above notices and other correspondences shall be deemed effectively delivered on:
(a) The date listed in the receipt if sent by double-registered letter or express mail;
(b) The date of personal delivery;
(c) The transmission time indicated in the fax report or the date on which the recipient acknowledges receipt if sent by facsimile;
(d) After the Object is delivered to the Lessee, the Lessor may serve notices to the Lessee by posting announcements in visible places near the
Object, and the notices shall be deemed delivered on the date of announcement.
(4) Naming of the building
The Lessor retains the right to rename SOHU.COM Internet Plaza Office Building at its own discretion and the right to change, replace or cancel the
original name at any time or from time to time, without any compensation to the Lessee. However, if the Lessor chooses to do so, an announcement
regarding the notice of relevant government agency shall be posted in the building in advance.
(5) Replacement of property management company
To facilitate the building to become a first-class office building, the Lessor has the right to select and replace property management companies.
(6) Applicable law and jurisdiction
The Lease shall be governed and construed by the laws of the People’s Republic of China (excluding laws of Hong Kong, Macao and Taiwan). Any
dispute between the parties that cannot be solved through consultation may be solved by means of lawsuits.
(7) Business license
Before the execution of the Lease, if applicable, the Lessee shall present to the Lessor its business license or registration certificate approved by the
government of the People’s Republic of China, and the original power of attorney authorizing representatives of the Lessee to enter into the Lease as
Annex IV hereto.
(8) Written in Chinese and signature
The Lease is written and signed in Chinese. Any English translated version provided by the Lessor shall be used for reference only. The Lessor
hasn’t guaranteed the consistency between the contents, wording and expressions in the English version and the Chinese version, and in the case of
controversy or difference, the Chinese version shall prevail.
(9) Modification, supplementary, deletion and alteration to the Lease
No modification, supplementary, deletion or alteration to the Lease shall be valid unless made in writing, signed by duly authorized representatives
of the parties and affixed with their common seals.
The above common seals shall be deemed to have been affixed on the date signed by the foregoing authorized representatives.
(10) Counterparts and legal force
The Lease, its annexes and Detailed Rules have been made in quadruplicate, with each party holding two copies, all being of the same legal effect.
Beijing Sohu New Media Information Technology Co., Ltd. (seal)
By:
Beijing Sogou Technology Development Co., Ltd. (seal)
By:
Date: 2019
Wholly-Owned Subsidiaries:
List of significant subsidiaries and VIEs of the Registrant
Exhibit 8.1
· Sogou (BVI) Limited, incorporated in the British Virgin Islands
· Beijing Sogou Technology Development Co., Ltd., incorporated in the PRC
· Sogou Hong Kong Limited, incorporated in Hong Kong
· Vast Creation Advertising Media Services Limited, incorporated in Hong Kong
· Beijing Sogou Network Technology Co., Ltd., incorporated in the PRC
· Sogou Technology Hong Kong Limited, incorporated in Hong Kong
· Tianjin Sogou Network Technology Co., Ltd., incorporated in the PRC
· Sogou (Shantou) Internet Microcredit Co., Ltd., incorporated in the PRC
· Sogou (Hangzhou) Intelligent Technology Co., Ltd., incorporated in the PRC
· Shantou Ying Zhong Bai Fu Financing Guarantee Co., Ltd., incorporated in the PRC
Consolidated Variable Interest Entities:
· Beijing Sogou Information Service Co., Ltd., incorporated in the PRC
· Beijing Shi Ji Si Su Technology Co., Ltd., incorporated in the PRC
· Chengdu Easypay Technology Co., Ltd., incorporated in the PRC
· Consolidated Trust, established in the PRC
Exhibit 12.1
I, Xiaochuan Wang, certify that:
1. I have reviewed this annual report on Form 20-F of Sogou Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the company and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, 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;
c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the
annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting;
and
5. The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control
over financial reporting.
Date: April 21, 2020
/s/ Xiaochuan Wang
By:
Name: Xiaochuan Wang
Title: Chief Executive Officer
Exhibit 12.2
I, Joe Zhou, certify that:
1. I have reviewed this annual report on Form 20-F of Sogou Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the company and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, 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;
c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the
annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting;
and
5. The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control
over financial reporting.
Date: April 21, 2020
/s/ Joe Zhou
By:
Name: Joe Zhou
Title: Chief Financial Officer
Certification Pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934
In connection with the Annual Report on Form 20-F of Sogou Inc. (the “Company”) for the year ended December 31, 2019 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Xiaochuan Wang, Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition of the Company as of December 31, 2019
and results of operations of the Company for the year ended December 31, 2019.
Exhibit 13.1
/s/ Xiaochuan Wang
Name:
Title:
Xiaochuan Wang
Chief Executive Officer
Date:
April 21, 2020
Certification Pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934
In connection with the Annual Report on Form 20-F of Sogou Inc. (the “Company”) for the year ended December 31, 2019 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Joe Zhou, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.
§1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition of the Company as of December 31, 2019
and results of operations of the Company for the year ended December 31, 2019
Exhibit 13.2
/s/ Joe Zhou
Name:
Title:
Joe Zhou
Chief Financial Officer
Date:
April 21, 2020
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-222343) of Sogou Inc. of our report dated
April 21, 2020 relating to the financial statements and the effectiveness of internal control over financial reporting, which appears in this Form 20-F.
Exhibit 15.1
/s/ PricewaterhouseCoopers Zhong Tian LLP
Beijing, the People’s Republic of China
April 21, 2020
Exhibit 15.2
April 21, 2020
Sogou Inc.
Level 15, Sohu.com Internet Plaza,
No. 1 Unit Zhongguancun East Road, Haidian District,
Beijing 100084
People’s Republic of China
Re: Consent of Commerce & Finance Law Offices
We hereby consent to the use of our firm name and summaries of our firm’s opinions under the headings “Risk Factors” and “Business Overview —
Organizational Structure” in the annual report on Form 20-F of Sogou Inc. (the “Company”) for the Company’s fiscal year ended December 31, 2019 to be
filed with the U.S. Securities and Exchange Commission (the “SEC”) on or about April 21, 2020 (the “Form 20-F”), and to the incorporation by reference
in the Company’s Registration Statement on Form S-8 (File No. 333-222343) filed with the SEC on December 29, 2017 of such references to our firm and
summaries of our firm’s opinions included under such headings.
We also hereby consent to the filing of this consent letter as an exhibit to the Form 20-F.
Yours sincerely,
/s/ Commerce & Finance Law Offices
Commerce & Finance Law Offices