The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
|
THE COMPANY AND BASIS OF PRESENTATION
|
Nature of Operations
Sohu.com Inc. (NASDAQ: SOHU), a Delaware corporation organized in 1996, is a leading Chinese online media, search and game service group providing
comprehensive online products and services on PCs and mobile devices in the Peoples Republic of China (the PRC or China). Sohu.com Inc.s businesses are conducted by Sohu.com Inc. and its subsidiaries and VIEs
(collectively referred to as the Sohu Group or the Group). The Sohu Group consists of Sohu, which when referred to in this report, unless the context requires otherwise, excludes the businesses and the corresponding
subsidiaries and VIEs of Sogou Inc. (Sogou) and Changyou.com Limited (Changyou), Sogou and Changyou. Sogou and Changyou are indirect controlled subsidiaries of Sohu.com Inc. Sohu is a leading Chinese language online media
content and services provider. Sogou is a leading online search and mobile Internet product provider in China. Changyou is a leading online game developer and operator in China as measured by the popularity of its PC game Tian Long Ba Bu
(TLBB) and its mobile game TLBB 3D, and engages primarily in the development, operation and licensing of online games for PCs and mobile devices. Most of the Groups operations are conducted through the Groups China-based
subsidiaries and VIEs.
Through the operation of Sohu, Sogou and Changyou, the Sohu Group generates online advertising revenues, including brand
advertising revenues and search and search-related revenues; online games revenues; and other revenues. Online advertising and online games are the Groups core businesses.
Sohus Business
Brand Advertising
Business
Sohus main business is the brand advertising business, which offers to users, over Sohus matrices of Chinese language online
media, various content, products and services across multiple Internet-enabled devices such as PCs, mobile phones and tablets. The majority of Sohus products and services are provided through Sohu Media Portal, Sohu Video and Focus.
|
|
|
Sohu Media Portal.
Sohu Media Portal is a leading online news and information provider in China. It provides users comprehensive content through www.sohu.com for PCs, the mobile phone application Sohu News APP
and the mobile portal m.sohu.com;
|
|
|
|
Sohu Video.
Sohu Video is a leading online video content and service provider in China through tv.sohu.com for PCs and the mobile phone application Sohu Video APP; and
|
|
|
|
Focus.
Focus (www.focus.cn) is a leading online real estate information and services provider in China.
|
Revenues generated by the brand advertising business are classified as brand advertising revenues in the Sohu Groups consolidated statements of
comprehensive income.
Other Business
Sohu also
engages in the other business, which consists primarily of paid subscription services, interactive broadcasting services, sub-licensing of purchased video content to third parties, and content provided through the platforms of the three main
telecommunications operators in China. Revenues generated by Sohu from the other business are classified as other revenues in the Sohu Groups consolidated statements of comprehensive income.
-9-
Sogous Business
Search and Search-related Business
The search and
search-related business primarily offers advertisers pay-for-click services, as well as online marketing services on Web directories operated by Sogou. Pay-for-click services enable advertisers promotional links to be displayed on the Sogou
search result pages and Sogou Website Alliance members Internet properties where the links are relevant to the subject and content of such properties. Both pay-for-click services and online marketing services on Web directories operated by
Sogou expand distribution of its advertisers promotional links and advertisements by leveraging traffic on Sogou Website Alliance members Internet properties, including Web content, software and mobile applications. The search and
search-related business benefits from Sogous collaboration with Tencent Holdings Limited (together with its subsidiaries, Tencent), which provides Sogou access to traffic and content generated from users of products and services
provided by Tencent.
Revenues generated by the search and search-related business are classified as search and search-related revenues in the Sohu
Groups consolidated statements of comprehensive income.
Other Business
Sogou also engages in other business, by offering Internet value-added services (IVAS) primarily with respect to the operation of Web games and
mobile games developed by third parties, as well as other products and services provided to users. Revenues generated by Sogou from other business are classified as other revenues in the Sohu Groups consolidated statements of comprehensive
income.
Changyous Business
Changyous business lines consist of the online game business; the platform channel business, which consists primarily of online advertising and also
includes IVAS; and the cinema advertising business.
Online Game Business
Changyous online game business offers to game players (a) PC games, which are interactive online games that are accessed and played simultaneously
by hundreds of thousands of game players through personal computers and require that local client-end game access software be installed on the computers used, and (b) mobile games, which are played on mobile devices and require an Internet
connection. Prior to the sale of Shenzhen 7Road Technology Co., Ltd., or Shenzhen 7Road, in August 2015, Changyous online games also included Web games, which are online games that are played through a Web browser with no local game software
installation requirements. Following the sale of Shenzhen 7Road, Web games became an insignificant part of Changyous online game business. All of Changyous games are operated under the item-based revenue model, meaning that game players
can play the games for free, but can choose to pay for virtual items, which are non-physical items that game players can purchase and use within a game, such as gems, pets, fashion items, magic medicine, riding animals, hierograms, skill books and
fireworks. Revenues derived from the operation of online games are classified as online game revenues in the Sohu Groups consolidated statements of comprehensive income.
Changyous dominant game is TLBB, a PC-based client-end game. For the three months ended March 31, 2017, revenues from the PC game TLBB were $53.3
million, accounting for approximately 63% of Changyous online game revenues, approximately 44% of Changyous total revenues, and approximately 14% of the Sohu Groups total revenues. For the three months ended March 31, 2016,
revenues from the PC game TLBB were $55.5 million, accounting for approximately 54% of Changyous online game revenues, approximately 43% of Changyous total revenues, and approximately 14% of the Sohu Groups total revenues.
Platform Channel Business
Changyous platform
channel business consists primarily of the operation of the 17173.com Website, one of the leading information portals in China, which provides news, electronic forums, online videos and other information services regarding online games to game
players. Changyous platform channel business also offers a number of software applications for PCs and mobile devices through the Dolphin Browser and RaidCall. RaidCall provides online music and entertainment services, primarily in Taiwan. The
Dolphin Browser, which is operated by MoboTap Inc. (collectively with its subsidiaries and VIEs MoboTap), is a gateway to a host of user activities on mobile devices, with the majority of its users based in Europe, Russia and Japan.
-10-
As Changyou management had determined that the Dolphin Browser was unable to provide expected synergies with
Changyous platform channel business, in 2016 Changyous Board of Directors approved the disposal of Changyous 51% equity interest in MoboTap, which is the mobile technology developer behind the Dolphin Browser. Accordingly, the
assets and liabilities attributable to MoboTap were classified as assets and liabilities held for sale and measured at the lower of their carrying amounts or their fair value, less cost to sell, in the Sohu Groups consolidated balance sheet as
of December 31, 2016. Due to the suspension of negotiations with a potential buyer of MoboTap in the first quarter of 2017, Changyous management determined that the disposal is unlikely to be completed within one year. As a result, the
assets held for sale and liabilities held for sale related to MoboTap have been reclassified as assets and liabilities held for use and measured at the lower of the carrying value before MoboTap was classified as held for sale, adjusted for any
depreciation and amortization expense that would have been recognized had the assets and liabilities been continuously classified as held for use, or the fair value at reclassification day, respectively, in the Sohu Groups consolidated balance
sheet as of March 31, 2017. In the first quarter of 2017, Changyou recorded a $1.4 million expense in the consolidated statements of comprehensive income for catch-up of depreciation and amortization expense of the assets held for sale before the
reclassification. All revenues generated by the 17173.com Website are classified as brand advertising revenues, IVAS revenues generated by the Dolphin Browser and by RaidCall are classified as other revenues, and a relatively small amount of online
game revenues generated by the Dolphin Browser are included in online game revenues in the Sohu Groups consolidated statements of comprehensive income.
Cinema Advertising Business
Changyou also operates a
cinema advertising business, which consists primarily of the acquisition, from operators of movie theaters, and the sale, to advertisers, of pre-film advertising slots, which are advertisements shown before the screening of a movie in a cinema
theatre. Revenues generated by Changyous cinema advertising business are classified as other revenues in the Sohu Groups consolidated statements of comprehensive income.
Basis of Consolidation and Recognition of Noncontrolling Interest
The Sohu Groups consolidated financial statements include the accounts of Sohu.com Inc. and its subsidiaries and consolidated VIEs. All intercompany
transactions are eliminated.
VIE Consolidation
The
Sohu Groups VIEs are wholly or partially owned by certain employees of the Group as nominee shareholders. For consolidated VIEs, management made evaluations of the relationships between the Sohu Group and the VIEs and the economic benefit flow
of contractual arrangements with the VIEs. In connection with such evaluation, management also took into account the fact that, as a result of such contractual arrangements, the Group controls the shareholders voting interests in these VIEs.
As a result of such evaluation, management concluded that the Sohu Group is the primary beneficiary of its consolidated VIEs.
Noncontrolling Interest
Recognition
Noncontrolling interests are recognized to reflect the portion of the equity of subsidiaries and VIEs which is not attributable, directly
or indirectly, to the controlling shareholders. The noncontrolling interests in the Sohu Groups consolidated financial statements primarily consist of noncontrolling interests for Sogou and Changyou.
Noncontrolling Interest for Sogou
Sogous Share Structure
As of March 31,
2017, Sogou had outstanding a combined total of 334,026,595 ordinary shares and preferred shares held as follows:
(i)
|
Sohu.com Inc.: 130,977,750 Class A Ordinary Shares, of which 3,764,500 shares may be purchased by Sohu management and key employees under an option arrangement;
|
(ii)
|
Photon Group Limited, an investment vehicle of the Sohu Groups Chairman and Chief Executive Officer Charles Zhang (Photon): 32,000,000 Series A Preferred Shares;
|
(iii)
|
Tencent: 6,757,875 Class A Ordinary Shares, 65,431,579 Series B Preferred Shares and 79,368,421 non-voting Class B Ordinary Shares; and
|
(iv)
|
Various employees of Sogou and Sohu: 19,490,970 Class A Ordinary Shares.
|
-11-
Sohus Shareholding in and Control of Sogou
As of March 31, 2017, Sohu.com Inc. held approximately 36% of the outstanding equity capital of Sogou on a fully-diluted basis, assuming for such purpose
that all share options under the Sogou 2010 Share Incentive Plan and all share options under the Sohu Management Sogou Share Option Arrangement are granted and exercised, and that all of the Sogou Class A Ordinary Shares that Sogou has
repurchased are re-issued to shareholders other than Sohu.com Inc. Also as of March 31, 2017, Sohu.com Inc. held over 50% of the total voting power of Sogou on a fully-diluted basis and controlled the election of a majority of the Board of
Directors of Sogou, assuming that Tencents non-voting Class B Ordinary Shares are converted to voting shares, that all of the Sogou Class A Ordinary Shares that Sogou has repurchased are re-issued to shareholders other than Sohu.com Inc.,
and that all Sogou share options under the Sogou 2010 Share Incentive Plan and all Sogou share options under the Sohu Management Sogou Share Option Arrangement are granted and exercised.
As Sogous controlling shareholder, Sohu.com Inc. consolidates Sogou in its consolidated financial statements, and recognizes noncontrolling interest
reflecting economic interests in Sogou held by shareholders other than Sohu.com Inc. (the Sogou noncontrolling shareholders). Sogous net income/(loss) attributable to the Sogou noncontrolling shareholders is recorded as
noncontrolling interest in the Sohu Groups consolidated statements of comprehensive income. Sogous cumulative results of operations attributable to the Sogou noncontrolling shareholders, along with changes in shareholders
equity/(deficit) and adjustment for share-based compensation expense in relation to share-based awards that are unvested and vested but not yet settled and the Sogou noncontrolling shareholders investments in Sogou Series A Preferred Shares
and Series B Preferred Shares (collectively, the Sogou Preferred Shares) and Ordinary Shares are accounted for as a noncontrolling interest classified as permanent equity in the Sohu Groups consolidated balance sheets, as the Sohu
Group has the right to reject a redemption requested by the noncontrolling shareholders. These treatments are based on the terms governing the investments of, and on the terms of the classes of Sogou shares held by, the noncontrolling shareholders
in Sogou.
Principles of Allocation of Sogous Profit and Loss
By virtue of the terms of Sogou Preferred Shares and Class A Ordinary Shares and Class B Ordinary Shares, Sogous losses are allocated in the
following order:
(i)
|
net losses are allocated to holders of Sogou Class A Ordinary Shares and the holder of Sogou Class B Ordinary Shares until their basis in Sogou decreases to zero;
|
(ii)
|
additional net losses are allocated to holders of Sogou Series A Preferred Shares until their basis in Sogou decreases to zero;
|
(iii)
|
additional net losses are allocated to the holder of Sogou Series B Preferred Shares until its basis in Sogou decreases to zero; and
|
(iv)
|
further net losses are allocated between Sohu.com Inc. and noncontrolling shareholders based on their shareholding percentage in Sogou.
|
Net income from Sogou is allocated in the following order:
(i)
|
net income is allocated between Sohu.com Inc. and noncontrolling shareholders based on their shareholding percentage in Sogou until their basis in Sogou increases to zero;
|
(ii)
|
additional net income is allocated to the holder of Sogou Series B Preferred Shares to bring its basis back;
|
(iii)
|
additional net income is allocated to holders of Sogou Series A Preferred Shares to bring their basis back;
|
(iv)
|
further net income is allocated to holders of Sogou Class A Ordinary Shares and the holder of Sogou Class B Ordinary Shares to bring their basis back; and
|
(v)
|
further net income is allocated between Sohu.com Inc. and noncontrolling shareholders based on their shareholding percentages in Sogou.
|
Key Terms of Sogou Preferred Shares
The
following is a summary of some of the key terms of the Sogou Preferred Shares under Sogous Memorandum and Articles of Association as currently in effect.
-12-
Sogou may not declare or pay dividends on its Class A Ordinary Shares or Class B Ordinary Shares
(collectively, Ordinary Shares) unless the holders of the Sogou Preferred Shares then outstanding first receive a dividend on each outstanding Preferred Share in an amount at least equal to the sum of (i) the dividends that would
have been payable to the holder of such Preferred Share if such share had been converted into Ordinary Shares, at the then-applicable conversion rate, immediately prior to the record date for such dividend, and (ii) all accrued and unpaid
Accruing Dividends. Accruing Dividends are calculated from the date of issuance of the Series A Preferred Shares at the rate per annum of $0.0375 per Series A Preferred Share and from the date of issuance of the Series B Preferred Shares
at the rate per annum of $0.411 per Series B Preferred Share.
(ii) Liquidation Rights
In the event of any Liquidation Event, such as the liquidation, dissolution or winding up of Sogou, a merger or consolidation of Sogou resulting in
a change of control, the sale of substantially all of Sogous assets or similar events, the holders of Series B Preferred Shares are entitled to receive an amount per share equal to the greater of (i) $6.847 plus any unpaid Accruing
Dividends or (ii) such amount per share as would have been payable if the Series B Preferred Shares had been converted into Ordinary Shares prior to the Liquidation Event, and holders of Series A Preferred Shares are entitled to receive, after
payment to the holders of the Series B Preferred Shares but before any payment to holders of Ordinary Shares, an amount equal to the greater of (i) 1.3 times their original investment in the Series A Preferred Shares plus all accrued but unpaid
Accruing Dividends or (ii) such amount per share as would be payable if the Series A Preferred Shares had been converted into Ordinary Shares immediately prior to the Liquidation Event.
(iii) Redemption Rights
The Sogou Preferred Shares are not
redeemable at the option of the holders.
(iv) Conversion Rights
Each Sogou Preferred Share is convertible, at the option of the holder, at any time, and without the payment of additional consideration by the holder. Each
Sogou Preferred Share is convertible into such number of Class A Ordinary Shares as is determined, in the case of Series A Preferred Shares, by dividing $0.625 by the then-effective conversion price for Series A Preferred Shares, which is
initially $0.625, and, in the case of Series B Preferred Shares, by dividing $7.267 by the then-effective conversion price for Series B Preferred Shares, which is initially $7.267. The conversion prices of the Sogou Preferred Shares are subject to
adjustment on a weighted average basis upon the issuance of additional equity shares, or securities convertible into equity shares, at a price per share less than $0.625, in the case of Series A Preferred Shares, or less than $7.267, in the case of
Series B Preferred Shares, subject to certain customary exceptions, such as shares issued pursuant to the Sogou 2010 Share Incentive Plan. Each Sogou Preferred Share will be automatically converted into Class A Ordinary Shares of Sogou upon the
closing of a qualified IPO of Sogou based on the then-effective conversion ratio of such Sogou Preferred Share, which is currently one-for-one for both Series A Preferred Shares and Series B Preferred Shares.
(v) Voting Rights
Each holder of Sogou Preferred Shares is
entitled to cast the number of votes equal to the number of Class A Ordinary Shares into which the Sogou Preferred Shares held by such holder are then convertible.
(vi) Other Rights
The holders of Sogou Preferred Shares have
various other rights typical of preferred share investments.
Key Terms of Sogou Class A Ordinary Shares and Class B Ordinary Shares
The Class A Ordinary Shares and Class B Ordinary Shares have identical rights, except that Class B Ordinary Shares do not have voting rights
unless the holders of at least a majority of the then outstanding Class B Ordinary Shares elect, by written notice to Sogou, to convert them into shares with voting rights.
-13-
Noncontrolling Interest for Changyou
Changyou is a public company listed on the NASDAQ Global Select Market. As of March 31, 2017, Sohu.com Inc. held approximately 69% of the combined total
of Changyous outstanding ordinary shares, and controlled approximately 96% of the total voting power in Changyou.
As Changyous controlling
shareholder, Sohu.com Inc. consolidates Changyou in its consolidated financial statements, and recognizes noncontrolling interest reflecting the economic interest in Changyou held by shareholders other than Sohu.com Inc.(the Changyou
noncontrolling shareholders). Changyous net income /(loss) attributable to the Changyou noncontrolling shareholders is recorded as noncontrolling interest in the Sohu Groups consolidated statements of comprehensive income, based on
the noncontrolling shareholders share of the economic interest in Changyou. Changyous cumulative results of operations attributable to the Changyou noncontrolling shareholders, along with changes in shareholders equity, adjustment
for share-based compensation expense in relation to those share-based awards which are unvested and vested but not yet settled and adjustment for changes in Sohu.com Inc.s ownership in Changyou, are recorded as noncontrolling interest in the
Sohu Groups consolidated balance sheets.
Basis of Presentation
These financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These financial statements should be read in
conjunction with the consolidated financial statements and related footnotes included in the Companys Annual Report on Form 10-K for the year ended December 31, 2016.
The accompanying unaudited condensed consolidated interim financial statements reflect all normal recurring adjustments which, in the opinion of management,
are necessary for a fair statement of the results for the interim periods presented. Results for the three months ended March 31, 2017 are not necessarily indicative of the results expected for the full fiscal year or for any future period.
2. SEGMENT INFORMATION
The Sohu Groups
segments are business units that offer different services and are reviewed separately by the chief operating decision maker (the CODM), or the decision making group, in deciding how to allocate resources and in assessing performance. The
Groups CODM is Sohu.com Inc.s Chief Executive Officer.
The following tables present summary information by segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
|
|
Sohu
|
|
|
Sogou
|
|
|
Changyou
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Revenues (1)
|
|
$
|
131,572
|
|
|
$
|
147,329
|
|
|
$
|
129,840
|
|
|
$
|
(789
|
)
|
|
$
|
407,952
|
|
Segment cost of revenues
|
|
|
(86,422
|
)
|
|
|
(64,571
|
)
|
|
|
(41,857
|
)
|
|
|
58
|
|
|
|
(192,792
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment gross profit
|
|
|
45,150
|
|
|
|
82,758
|
|
|
|
87,983
|
|
|
|
(731
|
)
|
|
|
215,160
|
|
SBC (2) in cost of revenues
|
|
|
(62
|
)
|
|
|
0
|
|
|
|
7
|
|
|
|
0
|
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
45,088
|
|
|
|
82,758
|
|
|
|
87,990
|
|
|
|
(731
|
)
|
|
|
215,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development (3)
|
|
|
(22,536
|
)
|
|
|
(30,722
|
)
|
|
|
(30,597
|
)
|
|
|
1,173
|
|
|
|
(82,682
|
)
|
Sales and marketing (1)
|
|
|
(51,371
|
)
|
|
|
(27,099
|
)
|
|
|
(12,556
|
)
|
|
|
993
|
|
|
|
(90,033
|
)
|
General and administrative
|
|
|
(12,231
|
)
|
|
|
(3,390
|
)
|
|
|
(11,647
|
)
|
|
|
28
|
|
|
|
(27,240
|
)
|
SBC (2) in operating expenses
|
|
|
99
|
|
|
|
(1,744
|
)
|
|
|
1,267
|
|
|
|
0
|
|
|
|
(378
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
(86,039
|
)
|
|
|
(62,955
|
)
|
|
|
(53,533
|
)
|
|
|
2,194
|
|
|
|
(200,333
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit /(loss)
|
|
|
(40,951
|
)
|
|
|
19,803
|
|
|
|
34,457
|
|
|
|
1,463
|
|
|
|
14,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (3)
|
|
|
1,376
|
|
|
|
164
|
|
|
|
3,847
|
|
|
|
(1,463
|
)
|
|
|
3,924
|
|
Interest income (4)
|
|
|
2,261
|
|
|
|
1,704
|
|
|
|
4,051
|
|
|
|
(2,179
|
)
|
|
|
5,837
|
|
Interest expense (4)
|
|
|
(1,666
|
)
|
|
|
0
|
|
|
|
(1,211
|
)
|
|
|
2,179
|
|
|
|
(698
|
)
|
Exchange difference
|
|
|
(334
|
)
|
|
|
(81
|
)
|
|
|
(607
|
)
|
|
|
0
|
|
|
|
(1,022
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income /(loss) before income tax expense
|
|
|
(39,314
|
)
|
|
|
21,590
|
|
|
|
40,537
|
|
|
|
0
|
|
|
|
22,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
(2,647
|
)
|
|
|
(1,487
|
)
|
|
|
(7,734
|
)
|
|
|
0
|
|
|
|
(11,868
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income /(loss)
|
|
$
|
(41,961
|
)
|
|
$
|
20,103
|
|
|
$
|
32,803
|
|
|
$
|
0
|
|
|
$
|
10,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-14-
Note (1):
|
The elimination mainly consists of revenues and expenses generated from marketing services among the Sohu, Sogou and Changyou segments.
|
Note (2):
|
SBC stands for share-based compensation expense.
|
Note (3):
|
The elimination mainly consists of leasing income and expenses generated from a building that Sohu leases to Sogou.
|
Note (4):
|
The elimination represents interest income/ (expense) resulting from intracompany loans between the Sohu segment and the Changyou segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
|
|
Sohu
|
|
|
Sogou
|
|
|
Changyou
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Revenues (1)
|
|
$
|
92,492
|
|
|
$
|
162,284
|
|
|
$
|
119,870
|
|
|
$
|
(543
|
)
|
|
$
|
374,103
|
|
Segment cost of revenues
|
|
|
(92,202
|
)
|
|
|
(87,454
|
)
|
|
|
(39,088
|
)
|
|
|
51
|
|
|
|
(218,693
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment gross profit
|
|
|
290
|
|
|
|
74,830
|
|
|
|
80,782
|
|
|
|
(492
|
)
|
|
|
155,410
|
|
SBC (2) in cost of revenues
|
|
|
(159
|
)
|
|
|
(3
|
)
|
|
|
(24
|
)
|
|
|
0
|
|
|
|
(186
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
131
|
|
|
|
74,827
|
|
|
|
80,758
|
|
|
|
(492
|
)
|
|
|
155,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development (3)
|
|
|
(25,979
|
)
|
|
|
(32,849
|
)
|
|
|
(24,404
|
)
|
|
|
1,461
|
|
|
|
(81,771
|
)
|
Sales and marketing (1)
|
|
|
(55,051
|
)
|
|
|
(24,765
|
)
|
|
|
(10,536
|
)
|
|
|
931
|
|
|
|
(89,421
|
)
|
General and administrative
|
|
|
(10,905
|
)
|
|
|
(4,635
|
)
|
|
|
(8,791
|
)
|
|
|
32
|
|
|
|
(24,299
|
)
|
SBC (2) in operating expenses
|
|
|
2,806
|
|
|
|
(4,340
|
)
|
|
|
(5,509
|
)
|
|
|
0
|
|
|
|
(7,043
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
(89,129
|
)
|
|
|
(66,589
|
)
|
|
|
(49,240
|
)
|
|
|
2,424
|
|
|
|
(202,534
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit /(loss)
|
|
|
(88,998
|
)
|
|
|
8,238
|
|
|
|
31,518
|
|
|
|
1,932
|
|
|
|
(47,310
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income/(expense) (3)
|
|
|
3,741
|
|
|
|
23
|
|
|
|
2,267
|
|
|
|
(1,932
|
)
|
|
|
4,099
|
|
Interest income (4)
|
|
|
1,671
|
|
|
|
1,658
|
|
|
|
6,416
|
|
|
|
(5,274
|
)
|
|
|
4,471
|
|
Interest expense (4)
|
|
|
(4,376
|
)
|
|
|
0
|
|
|
|
(1,073
|
)
|
|
|
5,274
|
|
|
|
(175
|
)
|
Exchange difference
|
|
|
615
|
|
|
|
(639
|
)
|
|
|
(742
|
)
|
|
|
0
|
|
|
|
(766
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income /(loss) before income tax expense
|
|
|
(87,347
|
)
|
|
|
9,280
|
|
|
|
38,386
|
|
|
|
0
|
|
|
|
(39,681
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
(1,195
|
)
|
|
|
(1,052
|
)
|
|
|
(8,425
|
)
|
|
|
0
|
|
|
|
(10,672
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income /(loss)
|
|
$
|
(88,542
|
)
|
|
$
|
8,228
|
|
|
$
|
29,961
|
|
|
$
|
0
|
|
|
$
|
(50,353
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note (1):
|
The elimination mainly consists of revenues and expenses generated from marketing services among the Sohu, Sogou and Changyou segments.
|
Note (2):
|
SBC stands for share-based compensation expense.
|
Note (3):
|
The elimination mainly consists of leasing income and expenses generated from a building that Sohu leases to Sogou.
|
Note (4):
|
The elimination represents interest income/ (expense) resulting from intracompany loans between the Sohu segment and the Changyou segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
|
|
Sohu
|
|
|
Sogou
|
|
|
Changyou
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Cash and cash equivalents
|
|
$
|
167,691
|
|
|
$
|
286,078
|
|
|
$
|
597,188
|
|
|
$
|
0
|
|
|
$
|
1,050,957
|
|
Accounts receivable, net
|
|
|
100,317
|
|
|
|
41,781
|
|
|
|
47,150
|
|
|
|
(81
|
)
|
|
|
189,167
|
|
Fixed assets, net
|
|
|
196,839
|
|
|
|
117,022
|
|
|
|
189,770
|
|
|
|
0
|
|
|
|
503,631
|
|
Total assets (1)
|
|
$
|
1,241,844
|
|
|
$
|
499,589
|
|
|
$
|
1,708,037
|
|
|
$
|
(885,780
|
)
|
|
$
|
2,563,690
|
|
Note (1):
|
The elimination for segment assets mainly consists of elimination of intracompany loans between the Sohu segment and the Changyou segment, and elimination of long-term investments in subsidiaries and consolidated VIEs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2017
|
|
|
|
Sohu
|
|
|
Sogou
|
|
|
Changyou
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Cash and cash equivalents
|
|
$
|
113,541
|
|
|
$
|
294,734
|
|
|
$
|
560,674
|
|
|
$
|
0
|
|
|
$
|
968,949
|
|
Accounts receivable, net
|
|
|
87,421
|
|
|
|
36,065
|
|
|
|
50,097
|
|
|
|
(82
|
)
|
|
|
173,501
|
|
Fixed assets, net
|
|
|
194,716
|
|
|
|
114,474
|
|
|
|
187,892
|
|
|
|
0
|
|
|
|
497,082
|
|
Total assets (1)
|
|
$
|
1,170,143
|
|
|
$
|
508,559
|
|
|
$
|
1,750,861
|
|
|
$
|
(953,136
|
)
|
|
$
|
2,476,427
|
|
-15-
Note (1):
|
The elimination for segment assets mainly consists of elimination of intracompany loans between the Sohu segment and the Changyou segment, and elimination of long-term investments in subsidiaries and consolidated VIEs.
|
3.
|
SHARE-BASED COMPENSATION EXPENSE
|
Sohu (excluding Fox Video Limited), Sogou, Changyou, and Fox Video
Limited (Sohu Video) have incentive plans for the granting of share-based awards, including stock options, share options and restricted share units, to members of the boards of directors, management and other key employees.
Sohu (excluding Sohu Video), Sogou, and Changyou Share-based Awards
For Sohu (excluding Sohu Video) stock options that Sohu granted before 2006 and Sohu restricted share units, Sogou share-based awards, and Changyou share-based
awards under the Changyou 2008 Share Incentive Plan, share-based compensation expense is recognized as costs and expenses in the consolidated statements of comprehensive income based on the fair value of the related share-based awards on their grant
dates.
For Tencent restricted share units that Tencent had granted to employees who transferred to Sogou with the Soso search-related businesses,
share-based compensation expense is recognized in the consolidated statements of comprehensive income based on the then-current fair value at each reporting date.
Options for the purchase of Sohu common stock contractually granted under the Sohu 2010 Stock Incentive Plan and options for the purchase of Changyou
Class A ordinary shares contractually granted under the Changyou 2014 Share Incentive Plan are subject to vesting in four equal installments over a period of four years, with each installment vesting upon satisfaction of a service period
requirement and certain subjective performance targets. Under
ASC 718-10-25
, no grant date can be established until a mutual understanding is reached between the companies and the recipients clarifying the subjective performance requirements.
In accordance with
ASC 718-10-55
, as the service inception date preceded the grant date, compensation expense was accrued beginning on the service inception date, and was re-measured and will be re-measured on each subsequent reporting date
before the grant date is established, based on the then-current fair value of the awards. The estimate of the awards fair value will be fixed in the period in which the grant date occurs, and cumulative compensation expense will be adjusted
based on the fair value at the grant date. In determining the fair value of stock options and share options granted by Sohu and Changyou, the public market price of the underlying shares at each reporting date was used, and a binomial valuation
model was applied.
For Sogou Class A Ordinary Shares repurchased by Sogou from the former President and Chief Financial Officer of the Sohu Group in
the first quarter of 2017, share-based compensation expense is recognized by the Sohu Group in the consolidated statements of comprehensive income in an amount equal to the excess of the repurchase price over the fair value of the Sogou Class A
Ordinary Shares at the repurchase date.
Sohu Video Share-based Awards
On January 4, 2012, Sohu Video, the holding entity of Sohus video division, adopted a 2011 Share Incentive Plan (the Video 2011 Share
Incentive Plan) which provides for the issuance of up to 25,000,000 ordinary shares of Sohu Video (representing approximately 10% of the outstanding Sohu Video shares on a fully-diluted basis) to management and key employees of the video
division and to Sohu management. As of March 31, 2017, grants of options for the purchase of 16,368,200 ordinary shares of Sohu Video had been contractually made, of which options for the purchase of 4,972,800 ordinary shares were vested.
For purposes of
ASC 718-10-25
, as of March 31, 2017, no grant date had occurred, because the broader terms and conditions of the option awards had
neither been finalized nor mutually agreed upon with the recipients. Therefore the fair value of the awards was not determinable and could not be accounted for. In accordance with
ASC 718-10-55
, the Groups management determined that the
service inception date with respect to vested option awards for the purchase of 4,972,800 shares had preceded the grant date. Therefore, the Group recognized compensation expense for these vested Sohu Video share-based awards and re-measured, and
will re-measure, the compensation expense on each subsequent reporting date based on the then-current fair values of these vested awards until the grant date is established.
-16-
Share-based Compensation Expense Recognition
Share-based compensation expense was recognized in costs and expenses for the three months ended March 31, 2016 and 2017 as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended March 31,
|
|
Share-based compensation expense
|
|
2016
|
|
|
2017
|
|
Cost of revenues
|
|
$
|
55
|
|
|
$
|
186
|
|
Product development expenses (1)
|
|
|
(3
|
)
|
|
|
2,327
|
|
Sales and marketing expenses
|
|
|
14
|
|
|
|
665
|
|
General and administrative expenses
|
|
|
367
|
|
|
|
4,051
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
433
|
|
|
$
|
7,229
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense was recognized for share awards of Sohu (excluding Sohu Video), Sogou, Changyou and Sohu
Video as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
Share-based compensation expense
|
|
2016
|
|
|
2017
|
|
For Sohu (excluding Sohu Video) share-based awards (1)
|
|
$
|
(272
|
)
|
|
$
|
(2,443
|
)
|
For Sogou share-based awards (2)
|
|
|
1,730
|
|
|
|
4,337
|
|
For Changyou share-based awards (1)
|
|
|
(1,274
|
)
|
|
|
5,533
|
|
For Sohu Video share-based awards (1)
|
|
|
249
|
|
|
|
(198
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
433
|
|
|
$
|
7,229
|
|
|
|
|
|
|
|
|
|
|
Note (1): The negative amount represented re-measured compensation expense based on the then-current fair value of the awards
on the reporting date, as well as reversals of share-based compensation expense for awards that were forfeited due to termination of employment prior to vesting. The difference for the three months ended March 31, 2017 compared to the
corresponding period of 2016 was mainly due to differences in the fair values of certain awards as of the respective reporting dates, as well as reversals of share-based compensation expense for awards that were forfeited due to termination of
employment prior to vesting.
Note (2): Compensation expense for Sogou share-based awards also includes compensation expense for Tencent restricted share
units that Tencent had granted to employees who transferred to Sogou with the Soso search-related businesses and compensation expense of $4.0 million in connection with Sogous repurchase of Sogou Class A Ordinary Shares from the former
President and Chief Financial Officer of the Sohu Group.
There was no capitalized share-based compensation expense for the three months ended
March 31, 2017 and 2016.
For details of the share-based compensation expenses of the Sohu Group, see Note 11.
4.
|
RELATED PARTY TRANSACTIONS
|
Changyous Loan Arrangements with Fox Financial Technology Group
Limited (Fox Financial, formerly known as SoEasy Internet Finance Group Limited)
Commencing in April 2015, certain
subsidiaries of Changyou and certain subsidiaries of Fox Financial entered into a series of loan agreements pursuant to which the subsidiaries of Changyou are entitled to draw down HK dollar-denominated or U.S. dollar-denominated loans from the Fox
Financial subsidiaries and the Fox Financial subsidiaries are entitled to draw down equivalent RMB-denominated loans from the subsidiaries of Changyou, to facilitate each others business operations. All of the loans carry a fixed rate of
interest equal to the current market interest rate.
As of March 31, 2017, Changyou had U.S. dollar-denominated loans payable to Fox Financial in a
total amount of approximately $28.3 million, which was recorded in other short-term liabilities, and RMB-denominated loans receivable from Fox Financial in a total amount of approximately $28.3 million, which was recorded in prepaid and other
current assets. For the three months ended March 31, 2017, Changyou incurred interest expense of $0.2 million and earned interest income of $0.3 million. As of March 31, 2017, total interest expense payable to Fox Financial amounted to
$0.7 million, which was recorded in other short-term liabilities; and total interest income receivable from Fox Financial was $1.2 million, which was recorded in prepaid and other current assets.
-17-
For the three months ended March 31, 2017 and 2016, the Sohu Group generated brand
advertising revenue from Fox Financial of nil and $0.9 million, respectively, and incurred sales and marketing expense for Fox Financial of nil and $13,000, respectively.
5.
|
INTRACOMPANY LOAN AND SHARE PLEDGE AGREEMENT
|
On October 24, 2016, Beijing Sohu New Media
Information Technology Co., Ltd. (Sohu Media) entered into a loan agreement (the Loan Agreement) with Beijing AmazGame Age Internet Technology Co., Ltd. (AmazGame), pursuant to which Sohu Media may borrow from
time to time from AmazGame up to RMB1.00 billion (or approximately $144.9 million). The first request for an advance under the Loan Agreement was required to be made on or prior to December 31, 2016, and requests for further advances may be
made for one year following the initial advance. The one-year request period may be extended for another one-year period with the consent of AmazGame. Principal amounts outstanding under the Loan Agreement bear interest at an annual rate of 6%. The
outstanding principal of each advance will be due one year from the date of the advance, subject to extension for an additional year with the consent of AmazGame.
Also on October 24, 2016, Sohu.com (Game) Limited (Sohu Game), a Cayman Islands company that is an indirect subsidiary of Sohu and is the
direct parent of Changyou, and Changyou entered into a share pledge agreement (the Share Pledge Agreement) pursuant to which Sohu Game pledged to Changyou 11,386,228 Class B ordinary shares of Changyou held by Sohu Game. The share pledge
agreement gives Changyou the right to apply the outstanding principal and accrued interest on the loan to the repurchase of Changyou Class B ordinary shares from Sohu Game in the event that such principal and interest are not paid when due.
In December 2016 and March 2017, Sohu Media received RMB500.0 million (or approximately $72.5 million) and RMB200.0 million (or $29.0 million), respectively,
from AmazGame. As of March 31, 2017, the total outstanding balance of the loan was RMB700.0 million (or $101.5 million). The intracompany loan has been eliminated upon consolidation.
6.
|
FAIR VALUE MEASUREMENTS
|
Fair Value of Financial Instruments
The Sohu Groups financial instruments include cash equivalents, short-term investments, accounts receivable, assets held for sale, prepaid and other
current assets, long-term investments (including available-for-sale equity securities), restricted time deposits, accounts payable, accrued liabilities, receipts in advance and deferred revenue, liabilities held for sale, other short-term
liabilities and long-term accounts payable.
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 - include other inputs that are directly or indirectly observable in the market place.
Level 3 - unobservable inputs which are supported by little or no market activity.
Financial Instruments Measured at Fair Value
The
following table sets forth the financial instruments, measured at fair value, by level within the fair value hierarchy as of December 31, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements at reporting date using
|
|
Items
|
|
As of
December 31,
2016
|
|
|
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
|
|
|
Significant
Other Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Cash equivalents
|
|
$
|
626,697
|
|
|
$
|
0
|
|
|
$
|
626,697
|
|
|
$
|
0
|
|
Short-term investments
|
|
|
247,926
|
|
|
|
0
|
|
|
|
247,926
|
|
|
|
0
|
|
Available-for-sale equity securities
|
|
|
10,381
|
|
|
|
10,381
|
|
|
|
0
|
|
|
|
0
|
|
Foreign exchange forward contracts
|
|
|
3,040
|
|
|
|
0
|
|
|
|
3,040
|
|
|
|
0
|
|
Restricted time deposits
|
|
|
269
|
|
|
|
0
|
|
|
|
269
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
888,313
|
|
|
$
|
10,381
|
|
|
$
|
877,932
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-18-
The following table sets forth the financial instruments, measured at fair value by level within the fair value hierarchy, as of March 31, 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements at reporting date using
|
|
Items
|
|
As of
March 31,
2017
|
|
|
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
|
|
|
Significant
Other Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Cash equivalents
|
|
$
|
573,742
|
|
|
$
|
0
|
|
|
$
|
573,742
|
|
|
$
|
0
|
|
Short-term investments
|
|
|
282,976
|
|
|
|
0
|
|
|
|
282,976
|
|
|
|
0
|
|
Available-for-sale equity securities
|
|
|
9,703
|
|
|
|
9,703
|
|
|
|
0
|
|
|
|
0
|
|
Foreign exchange forward contracts
|
|
|
2,517
|
|
|
|
0
|
|
|
|
2,517
|
|
|
|
0
|
|
Restricted time deposits
|
|
|
269
|
|
|
|
0
|
|
|
|
269
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
869,207
|
|
|
$
|
9,703
|
|
|
$
|
859,504
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Equivalents
The
Sohu Groups cash equivalents mainly consist of time deposits with original maturities of three months or less, and highly liquid investments 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 Group classifies the valuation techniques that use the pervasive interest rates input as Level 2 of fair value measurements. Generally there are no quoted prices in active markets
for identical cash equivalents at the reporting date. In order to determine the fair value, the Group must use the discounted cash flow method and observable inputs other than quoted prices in active markets for identical assets and liabilities,
quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Short-term Investments
In accordance with
ASC
825
, for investments in financial instruments with a variable interest rate indexed to performance of underlying assets, the Sohu Group elected the fair value method at the date of initial recognition and carried these investments at fair value.
Changes in the fair value are reflected in the consolidated statements of comprehensive income as other income /(expense). To estimate fair value, the Group refers to the quoted rate of return provided by banks at the end of each period using the
discounted cash flow method. The Group classifies the valuation techniques that use these inputs as Level 2 of fair value measurements.
As of
March 31, 2017 and December 31, 2016, the Sohu Groups investment in financial instruments was $283.0 million and $247.9 million, respectively. The investment instruments were issued by commercial banks in China, and have a variable
interest rate indexed to performance of underlying assets. Since these investments maturity dates are within one year, they are classified as short-term investments. For the three months ended March 31, 2017 and 2016, the Sohu Group
recorded in the consolidated statements of comprehensive income gain from changes in the fair value of short-term investments in the amounts of $2.6 million and $1.5 million, respectively.
Available-for-Sale Equity Securities
Available-for-sale
equity securities are valued using the market approach based on the quoted prices in active markets at the reporting date. The Group classifies the valuation techniques that use these inputs as Level 1 of fair value measurements. On August 12,
2014, Sohu acquired approximately 6% of the total outstanding common shares of Keyeast Co., Ltd., a Korean-listed company (Keyeast), for a purchase price of $15.1 million. The Sohu Group classified this investment as available-for-sale
equity securities under long-term investments, and reported it at fair value. As of March 31, 2017, the fair value of the Keyeast available-for-sale equity securities held by Sohu was $9.7 million. An unrealized loss representing the change in
fair value of $5.4 million was recorded in accumulated other comprehensive income /(loss) in the Sohu Groups consolidated balance sheets.
-19-
Assets and Liabilities Held for Sale
In 2016, Changyous Board of Directors approved the disposal of the 51% equity interest in MoboTap. Accordingly, the assets and liabilities attributable
to MoboTap are classified as assets and liabilities held for sale and measured at the lower of their carrying amounts or their fair value, less cost to sell, in the Sohu Groups consolidated balance sheet as of December 31, 2016. Due to
the suspension of negotiations with a potential buyer of MoboTap in the first quarter of 2017, Changyous management determined that the disposal is unlikely to be completed within one year. As a result, the assets held for sale and liabilities
held for sale related to MoboTap have been reclassified as assets and liabilities held for use and measured at the lower of the carrying value before MoboTap was classified as held for sale, adjusted for any depreciation and amortization expense
that would have been recognized had the assets and liabilities been continuously classified as held for use, or the fair value at reclassification day, respectively, in the Sohu Groups consolidated balance sheet as of March 31, 2017. In the
first quarter of 2017, Changyou recorded a $1.4 million expense in the consolidated statements of comprehensive income for catch-up of depreciation and amortization expense of the assets held for sale before the reclassification.
Foreign Exchange Forward Contracts
In September 2016 and
January 2017, Changyou entered into foreign exchange forward contracts with banks in an aggregate nominal amount of $100 million and $50 million, respectively. Changyou entered into the foreign exchange forward contracts in compliance with its risk
management policy for the purpose of eliminating the negative impact on earnings and equity resulting from fluctuations in the exchange rate between the U.S. dollar and the RMB. There was no cash collateral or settlement under the forward contracts
as of March 31, 2017. For the three months ended March 31, 2017, the Sohu Group recorded loss from changes in the fair value of forward contracts of $0.5 million in the consolidated statements of comprehensive income.
The Group estimated the fair values of foreign exchange forward contracts using the Black-Scholes model. The fair values of the forward contracts were
estimated based on quoted forward exchange prices at the reporting date. The Group classifies the fair value measurement of the forward contracts based on such inputs as Level 2 of fair value measurements.
Other Financial Instruments
The fair values of
other financial instruments are estimated for disclosure purposes as follows:
Long-term Investments
Long-term Investment in Fox Financial
Under an agreement
between Sohu and Fox Financial entered into in August 2014, Sohu invested $4.8 million and $16.1 million in Fox Financial on August 2014 and April 2015, respectively. In February 2016, Sohu invested an additional $10.5 million in Fox Financial. Sohu
accounted for its investments in Fox Financial under long-term investments. These investments include both preferred shares and common shares. Sohu accounted for its investment in Fox Financials preferred shares under the cost method, since
they were not considered to be common shares in substance and had no readily determinable fair value. Sohu accounted for its investment in Fox Financials common shares under the equity method, since Sohu can exercise significant influence but
does not own a majority of Fox Financials equity capital or control Fox Financial.
In March 2017, Fox Financial issued additional common shares to
new investors, while shares held by Sohu remained unchanged. As a result, Sohus shareholding percentage of common shares was diluted from 7% to 6%. In accordance with
ASC 320-10-40
, the Group recognized dilution gain of $0.7 million in
other income for the three months ended March 31, 2017. As of March 31, 2017, the carrying value of Sohus investment in Fox Financial was $25.6 million.
Long-term Investment in Zhihu
As of March 31, 2017,
Sogou had invested a cumulative total of $18.9 million in Zhihu Technology Limited (Zhihu), a company that engages primarily in the business of operating an online question and answer-based knowledge and information-sharing platform.
Sogou accounted for the investment in Zhihu using the cost method, since Sogou does not have significant influence over Zhihu.
-20-
Short-term Receivables and Payables
Accounts receivable and prepaid and other current assets are financial assets with carrying values that approximate fair value due to their short-term nature.
Short-term accounts payable, accrued liabilities, receipts in advance and deferred revenue and other short-term liabilities are financial liabilities with carrying values that approximate fair value due to their short-term nature. For short-term
receivables and payables, the Group estimated fair values using the discounted cash flow method, which is unobservable in the market. The Group classifies the valuation technique as Level 2 of fair value measurements.
Long-term Payables
Long-term accounts payable are
financial liabilities with carrying values that approximate fair value due to any changes in fair value, after considering the discount rate, being immaterial. For long-term accounts payable, the Group estimated fair values using the discounted cash
flow method, which is unobservable in the market. The Sohu Group classifies the valuation technique as Level 2 of fair value measurements.
7. GOODWILL
Changes in the carrying value of goodwill by segment are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sohu
|
|
|
Sogou
|
|
|
Changyou
|
|
|
Total
|
|
Balance as of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
72,011
|
|
|
|
5,565
|
|
|
|
96,949
|
|
|
|
174,525
|
|
Accumulated impairment losses
|
|
|
(35,788
|
)
|
|
|
0
|
|
|
|
(70,447
|
)
|
|
|
(106,235
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
36,223
|
|
|
$
|
5,565
|
|
|
$
|
26,502
|
|
|
$
|
68,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transactions in 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill associated with MoboTap and reclassification of assets held for sale to assets held for
use (1)
|
|
|
0
|
|
|
|
0
|
|
|
|
83,470
|
|
|
|
83,470
|
|
Goodwill associated with an acquisition
|
|
|
1,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,000
|
|
Foreign currency translation adjustment
|
|
|
77
|
|
|
|
30
|
|
|
|
90
|
|
|
|
197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2017
|
|
$
|
37,300
|
|
|
$
|
5,595
|
|
|
$
|
110,062
|
|
|
$
|
152,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
73,088
|
|
|
$
|
5,595
|
|
|
$
|
180,509
|
|
|
$
|
259,192
|
|
Accumulated impairment losses
|
|
|
(35,788
|
)
|
|
|
0
|
|
|
|
(70,447
|
)
|
|
|
(106,235
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
37,300
|
|
|
$
|
5,595
|
|
|
$
|
110,062
|
|
|
$
|
152,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note (1): Represents goodwill associated with the reclassification of assets held for sale to assets held for use in
connection with MoboTap. See Note 6 Fair Value Measurements.
8. TAXATION
Sohu.com Inc. is subject to United States (U.S.) income tax, and Changyous income that is from a U.S. source is generally subject to U.S.
income tax. The majority of the subsidiaries and VIEs of the Sohu Group are based in mainland China and are subject to income taxes in the PRC. These China-based subsidiaries and VIEs conduct substantially all of the Sohu Groups operations,
and generate most of the Sohu Groups income or losses.
Principal Entities Qualified as HNTEs
The PRC Corporate Income Tax Law (the CIT Law) applies an income tax rate of 25% to all enterprises but grants preferential tax treatment to High
and New Technology Enterprises (HNTEs). Under this preferential tax treatment, HNTEs can enjoy an income tax rate of 15%, but need to re-apply 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.
-21-
As of March 31, 2017, the following principal entities of the Sohu Group were qualified as HNTEs and were
entitled to an income tax rate of 15%.
For Sohus Business
|
|
|
Beijing Sohu New Momentum Information Technology Co., Ltd. (Sohu New Momentum). Sohu New Momentum qualified as an HNTE for the years 2016 to 2018, and will need to re-apply for HNTE qualification in 2019.
|
|
|
|
Beijing Sohu Internet Information Service Co., Ltd. (Sohu Internet). Sohu Internet qualified as an HNTE for the years 2015 to 2017, and will need to re-apply for HNTE qualification in 2018.
|
|
|
|
Beijing Sohu New Era Information Technology Co., Ltd. (Sohu Era), Sohu Media and Guangzhou Qianjun Network Technology Co., Ltd (Guangzhou Qianjun). Sohu Era, Sohu Media and Guangzhou Qianjun were
each qualified as HNTEs for the years 2014 to 2016. Sohu Media and Guangzhou Qianjun will re-apply for HNTE qualification in 2017.
|
For
Sogous Business
|
|
|
Beijing Sogou Information Service Co., Ltd. (Sogou Information). Sogou Information qualified as an HNTE for the years 2015 to 2017, and will need to re-apply for HNTE qualification in 2018.
|
|
|
|
Beijing Sogou Technology Development Co., Ltd. (Sogou Technology). Sogou Technology qualified as an HNTE for the years 2014 to 2016, and will need to re-apply for HNTE qualification in 2017.
|
|
|
|
Beijing Sogou Network Technology Co., Ltd. (Sogou Network). Sogou Network qualified as an HNTE for the years 2016 to 2018, and will need to re-apply for HNTE qualification in 2019.
|
For Changyous Business
|
|
|
Beijing AmazGame Age Internet Technology Co., Ltd. (AmazGame) and Beijing Gamease Age Digital Technology Co., Ltd. (Gamease). AmazGame and Gamease were both qualified as HNTEs for the years 2014
to 2016, and will need to re-apply for HNTE qualification in 2017.
|
|
|
|
Beijing Changyou Gamespace Software Technology Co., Ltd. (Gamespace). Gamespace qualified as HNTE for the years 2017 to 2019, and will need to re-apply for HNTE qualification in 2020.
|
Principal 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 Key National Software Enterprise (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 enterprises Software Enterprise/KNSE
status.
For Sohus Business
|
|
|
Sohu New Momentum. In 2017, Sohu New Momentum will perform a self-assessment and file required supporting documents to entitle it to the first year of an income tax rate reduction from 25% to 12.5% as a Software
Enterprise for 2016, and will follow the same process in 2018 to entitle it to the second year of an income tax rate reduction from 25% to 12.5%.
|
For Sogous Business
|
|
|
Sogou Technology. In 2017, Sogou Technology will perform a self-assessment and file required supporting documents for KNSE status for 2016, and will follow the same process in 2018 for KNSE status for 2017.
|
-22-
For Changyous Business
|
|
|
AmazGame. In 2017, AmazGame will perform a self-assessment and file required supporting documents for KNSE status for 2016, and will follow the same process in 2018 for KNSE status for 2017.
|
|
|
|
Baina (Wuhan) Information Technology Co., Ltd. (Wuhan Baina Information). In 2017, Wuhan Baina Information will perform a self-assessment and file required supporting documents to entitle it to the first
year of an income tax exemption as a Software Enterprise for 2016, and will follow the same process in 2018 to entitle it to the second year of an income tax exemption for 2017.
|
PRC Withholding Tax on Dividends
The CIT Law imposes a 10% withholding income tax on dividends distributed by foreign invested enterprises in the PRC to their immediate holding companies
outside Mainland China. A lower withholding tax rate may be applied if there is a tax treaty between Mainland 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 an 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 and Capital, 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 a withholding tax rate of 10%.
In order to fund the distribution of a dividend to shareholders of the Sohu Groups majority-owned subsidiary Changyou, Changyous management
determined to cause one of its PRC subsidiaries to declare and distribute a cash dividend of all of its stand-alone 2012 earnings and half of its stand-alone subsequent years earnings to its direct overseas parent company, Changyou.com (HK)
Limited (Changyou HK). As of March 31, 2017, Changyou had accrued deferred tax liabilities in the amount of $26.9 million for PRC withholding tax.
With the exception of that dividend, the Sohu Group does not intend to have any of its PRC subsidiaries distribute any undistributed profits of such
subsidiaries to their direct overseas parent companies, but rather intends that such profits will be permanently reinvested by such subsidiaries for their PRC operations.
PRC Value-Added Tax
Effective
September 1, 2012, a pilot program (the Pilot Program) for transition from the imposition of PRC business tax (Business Tax) to the imposition of value-added tax (VAT) was implemented for revenues from
certain industries and certain cities. Prior to Pilot Program, the Group was mainly subject to a 5% PRC business tax and related surcharges on revenues in the PRC. PRC business tax and the related surcharges are recognized when the revenue is
earned.
On May 1, 2016, the transition from the imposition of PRC business tax (Business Tax) to the imposition of VAT was expanded to
all industries in China, and as a result all of the Sohu Groups revenues have been subject to VAT since that date. To record VAT payable, the Group adopted the net presentation method, which presents the difference between the output VAT (at a
rate of 6%) and the available input VAT amount (at the rate applicable to the supplier).
U.S. Corporate Income Tax
Sohu.com Inc. is a Delaware corporation that is subject to U.S. corporate income tax on its taxable income at a rate of up to 35%. To the extent that portions
of its U.S. taxable income, such as Subpart F income or a dividend, are determined to be from sources outside of the U.S., subject to certain limitations, Sohu.com Inc. may be able to claim foreign tax credits to offset its U.S. income tax
liabilities. Any remaining liabilities are accrued in the Companys consolidated statements of comprehensive income and estimated tax payments are made when required by U.S. law.
-23-
Uncertain Tax Positions
The Sohu Group is subject to various taxes in different jurisdictions, primarily the U.S. and the PRC. Management reviews regularly the adequacy of the
provisions for taxes as they relate to the Groups income and transactions. In order to assess uncertain tax positions, the Group applies a more likely than not threshold and a two-step approach for tax position measurement and financial
statement recognition. 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 appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon settlement.
The Group did not have any significant penalties or significant interest associated with tax positions for the three months ended March 31, 2017, nor did
the Group have any significant unrecognized uncertain tax positions for the three months ended March 31, 2017.
9. COMMITMENTS AND CONTINGENCIES
Contractual Obligations
The
following table sets forth our contractual obligations as of March 31, 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
Thereafter
|
|
|
Total
Payments
Required
|
|
Purchase of cinema advertisement slot rights
|
|
|
48,622
|
|
|
|
61,663
|
|
|
|
25,906
|
|
|
|
9,177
|
|
|
|
639
|
|
|
|
0
|
|
|
|
146,007
|
|
Purchase of content and services video
|
|
|
90,867
|
|
|
|
25,352
|
|
|
|
17,002
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
133,221
|
|
Purchase of bandwidth
|
|
|
60,936
|
|
|
|
4,646
|
|
|
|
1,235
|
|
|
|
1,061
|
|
|
|
309
|
|
|
|
0
|
|
|
|
68,187
|
|
Operating lease obligations
|
|
|
14,246
|
|
|
|
13,784
|
|
|
|
2,855
|
|
|
|
618
|
|
|
|
58
|
|
|
|
10
|
|
|
|
31,571
|
|
Expenditures for operating rights for licensed games with technological feasibility
|
|
|
2,381
|
|
|
|
17,222
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
19,603
|
|
Purchase of content and services others
|
|
|
9,311
|
|
|
|
473
|
|
|
|
72
|
|
|
|
30
|
|
|
|
0
|
|
|
|
0
|
|
|
|
9,886
|
|
Purchase of fixed assets
|
|
|
3,556
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
3,556
|
|
Fees for operating rights for licensed games in development
|
|
|
1,369
|
|
|
|
348
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,717
|
|
Expenditures for rights to titles of games in development
|
|
|
259
|
|
|
|
1,186
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,445
|
|
Others
|
|
|
3,644
|
|
|
|
3
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
3,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Payments Required
|
|
|
235,191
|
|
|
|
124,677
|
|
|
|
47,070
|
|
|
|
10,886
|
|
|
|
1,006
|
|
|
|
10
|
|
|
|
418,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Litigation
The Sohu Group is a party to various litigation matters which it considers routine and incidental to its business. The Sohu Group records a liability when the
likelihood of an unfavorable outcome is probable and the amount of loss can be reasonably estimated. The Sohu Group 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. Management believes that the total liabilities to the Sohu Group that may arise as a result of currently pending legal proceedings will not have a material adverse effect on the Groups business,
results of operations, financial condition and cash flows.
PRC Law and Regulations
The Chinese market in which the Sohu Group operates poses certain macro-economic and regulatory risks and uncertainties. These uncertainties extend to the
ability to operate an Internet business and to conduct brand advertising, search and search-related, online game, and other services in the PRC. Though the PRC has, since 1978, implemented a wide range of market-oriented economic reforms, continued
reforms and progress towards a full market-oriented economy are uncertain. In addition, the telecommunication, information, and media industries remain highly regulated. Restrictions are currently in place and are unclear with respect to which
segments of these industries foreign-owned entities, like the Sohu Group, may operate. The Chinese government may issue from time to time new laws or new interpretations of existing laws to regulate areas such as telecommunication, information and
media. The Sohu Groups legal structure and scope of operations in China could be subject to restrictions, which could result in limits on its ability to conduct business in the PRC. Certain risks related to PRC law that could affect the Sohu
Groups VIE structure are discussed in Note 10 - VIEs.
-24-
Regulatory risks also encompass interpretation by PRC tax authorities of current tax law, including the
applicability of certain preferential tax treatments.
The Sohu Groups sales, purchase and expense transactions are generally denominated in RMB and
a significant portion of its assets and liabilities are denominated in RMB. The RMB is not freely convertible into foreign currencies. In China, foreign exchange transactions are required by law to be transacted only by authorized financial
institutions. Remittances in currencies other than RMB by its subsidiaries in China may require certain supporting documentation in order to effect the remittance.
10. VIES
Background
PRC laws and regulations prohibit or restrict foreign ownership of companies that operate Internet information and content, Internet access, online games,
mobile, value added telecommunications and certain other businesses in which the Sohu Group is engaged or could be deemed to be engaged. Consequently, the Sohu Group conducts certain of its operations and businesses in the PRC through its VIEs. The
Sohu Group consolidates in its consolidated financial statements all of the VIEs of which the Group is the primary beneficiary.
VIEs
Consolidated within the Sohu Group
The Sohu Group adopted the guidance of accounting for VIEs, which requires VIEs to be consolidated by
the primary beneficiary of the entity. Management made evaluations of the relationships between the Sohu Group and its VIEs and the economic benefit flow of contractual arrangements with the VIEs. In connection with such evaluation, management also
took into account the fact that, as a result of contractual arrangements with its consolidated VIEs, the Sohu Group controls the shareholders voting interests in those VIEs. As a result of such evaluation, the management concluded that the
Sohu Group is the primary beneficiary of the VIEs which the Group consolidates.
All of the consolidated VIEs are incorporated and operated in the PRC,
and the Groups principal VIEs are directly or indirectly owned by Dr. Charles Zhang, the Sohu Groups Chairman and Chief Executive Officer, or other executive officers and employees of the Sohu Group identified below. Capital for the
consolidated VIEs was funded by the Sohu Group through loans provided to Dr. Charles Zhang and other executive officers and employees, and was initially recorded as loans to related parties. These loans are eliminated for accounting purposes
against the capital of the VIEs upon consolidation.
Under contractual agreements with the Sohu Group, Dr. Charles Zhang and those other executive
officers and employees of the Sohu Group who are shareholders of the consolidated VIEs are required to transfer their ownership in these entities to the Group, if permitted by PRC laws and regulations, or, if not so permitted, to designees of the
Group at any time as requested by the Group to repay the loans outstanding. All voting rights of the consolidated VIEs are assigned to the Sohu Group, and the Group has the right to designate all directors and senior management personnel of the
consolidated VIEs, and also has the obligation to absorb losses of the consolidated VIEs. Dr. Charles Zhang and those other executive officers and employees of the Sohu Group who are shareholders of the consolidated VIEs have pledged their
shares in the consolidated VIEs as collateral for the loans. As of March 31, 2017, the aggregate amount of these loans was $9.4 million.
Under its
contractual arrangements with the consolidated VIEs, the Sohu Group has the power to direct activities of the VIEs, and can have assets transferred freely out of the VIEs without any restrictions. Therefore, the Group considers that there is no
asset of a consolidated VIE that can be used only to settle obligations of the VIEs, except for registered capital and PRC statutory reserves of the VIEs. As of March 31, 2017, the registered capital and PRC statutory reserves of the
consolidated VIEs totaled $79.6 million. As all of the consolidated VIEs are incorporated as limited liability companies under the PRC Company Law, creditors of the consolidated VIEs do not have recourse to the general credit of the Sohu Group for
any of the liabilities of the consolidated VIEs. Currently there is no contractual arrangement that could require the Sohu Group to provide additional financial support to the consolidated VIEs. As the Sohu Group is conducting certain business in
the PRC mainly through the consolidated VIEs, the Group may provide such support on a discretionary basis in the future, which could expose the Group to a loss.
The Sohu Group classified the consolidated VIEs within the Sohu Group as principal VIEs or immaterial VIEs based on certain criteria, such as the VIEs
total assets or revenues. The following is a summary of the principal VIEs within the Sohu Group:
-25-
Basic Information for Principal VIEs and Subsidiaries of Principal VIEs
For Sohus Business
Beijing Century High Tech Investment Co., Ltd. (High Century) was
incorporated in 2001. As of March 31, 2017, the registered capital of High Century was $4.6 million and Dr. Charles Zhang and Wei Li held 80% and 20% interests, respectively, in this entity.
Beijing Heng Da Yi Tong Information Technology Co., Ltd. (Heng Da Yi
Tong) was incorporated in 2002. As of March 31, 2017, the registered capital of Heng Da Yi Tong was $1.2 million and Dr. Charles Zhang and Wei Li held 80% and 20% interests, respectively, in this entity.
Sohu Internet was incorporated in 2003. As of March 31, 2017, the
registered capital of Sohu Internet was $1.6 million and High Century held a 100% interest in this entity.
Beijing Sohu Donglin Advertising Co., Ltd. (Donglin) was incorporated in
2010. As of March 31, 2017, the registered capital of Donglin was $1.5 million and Sohu Internet held a 100% interest in this entity.
Tianjin Jinhu Culture Development Co., Ltd. (Tianjin Jinhu) was
incorporated in 2011. In October, 2016, Ye Deng transferred its 50% equity interest in Tianjin Jinhu to Xiufeng Deng. As of March 31, 2017, the registered capital of Tianjin Jinhu was $0.5 million and Xiufeng Deng and Xuemei Zhang each held a
50% interest in this entity.
Guangzhou Qianjun was acquired in November 2014. As of March 31, 2017,
the registered capital of Guangzhou Qianjun was $3.3 million and Tianjin Jinhu held a 100% interest in this entity.
Beijing Focus Interactive Information Service Co., Ltd. (Focus
Interactive) was incorporated in July 2014. As of March 31, 2017, the registered capital of Focus Interactive was $1.6 million and Heng Da Yi Tong held 100% of the equity interests in this entity.
For Sogous Business
Sogou Information was incorporated in 2005. As of March 31, 2017, the
registered capital of Sogou Information was $2.5 million and Xiaochuan Wang, Sogous Chief Executive Officer, High Century and Tencent held 10%, 45% and 45% interests, respectively, in this entity.
For Changyous Business
Gamease was incorporated in 2007. As of March 31, 2017, the registered capital of
Gamease was $1.3 million and High Century held a 100% interest in this entity.
Beijing Guanyou Gamespace Digital Technology Co., Ltd. (Guanyou
Gamespace) was incorporated in 2010. As of March 31, 2017, the registered capital of Guanyou Gamespace was $1.5 million and Beijing Changyou Star Digital Technology Co., Ltd (Changyou Star) held a 100% interest in this entity.
-26-
Shanghai ICE Information Technology Co., Ltd. (Shanghai ICE) was
acquired by Changyou in 2010. As of March 31, 2017, the registered capital of Shanghai ICE was $1.2 million and Gamease held a 100% interest in this entity.
|
|
|
Wuhan Baina Information
|
Baina (Wuhan) Information Technology Co., Ltd. (Wuhan Baina
Information) was acquired by Gamease in July 2014. As of March 31, 2017, the registered capital of Wuhan Baina Information was $3.0 million and Changyou Star and Yongzhi Yang, the former chief executive officer of MoboTap, held 60% and
40% interests, respectively, in this entity.
Financial Information
The following financial information of the Sohu Groups consolidated VIEs (including subsidiaries of VIEs) is included in the accompanying consolidated
financial statements (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
December 31,
2016
|
|
|
March 31,
2017
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
94,859
|
|
|
$
|
88,530
|
|
Accounts receivable, net
|
|
|
72,151
|
|
|
|
69,203
|
|
Prepaid and other current assets
|
|
|
86,722
|
|
|
|
35,279
|
|
Assets held for sale
|
|
|
12,551
|
|
|
|
0
|
|
Intercompany receivables due from the Companys subsidiaries
|
|
|
197,438
|
|
|
|
292,904
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
463,721
|
|
|
|
485,916
|
|
|
|
|
|
|
|
|
|
|
Long-term investments, net
|
|
|
17,472
|
|
|
|
16,522
|
|
Fixed assets, net
|
|
|
4,372
|
|
|
|
4,054
|
|
Intangible assets, net
|
|
|
14,545
|
|
|
|
13,611
|
|
Goodwill
|
|
|
35,161
|
|
|
|
36,256
|
|
Other non-current assets
|
|
|
4,052
|
|
|
|
2,857
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
539,323
|
|
|
$
|
559,216
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
15,824
|
|
|
$
|
17,599
|
|
Accrued liabilities
|
|
|
96,695
|
|
|
|
67,368
|
|
Receipts in advance and deferred revenue
|
|
|
44,797
|
|
|
|
45,163
|
|
Liabilities held for sale
|
|
|
3,232
|
|
|
|
0
|
|
Other current liabilities
|
|
|
111,775
|
|
|
|
110,365
|
|
Intercompany payables due to the Companys subsidiaries
|
|
|
129,431
|
|
|
|
171,552
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
401,754
|
|
|
|
412,047
|
|
|
|
|
|
|
|
|
|
|
Long-term taxes payable
|
|
|
13,463
|
|
|
|
13,537
|
|
Deferred tax liabilities
|
|
|
1,273
|
|
|
|
1,255
|
|
Intercompany payables due to the Companys subsidiaries
|
|
|
19,620
|
|
|
|
19,726
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
436,110
|
|
|
$
|
446,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
|
2016
|
|
|
2017
|
|
Net revenue
|
|
$
|
218,664
|
|
|
$
|
190,708
|
|
Net income
|
|
|
5,592
|
|
|
|
9,432
|
|
|
|
|
|
|
|
|
|
|
-27-
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
|
2016
|
|
|
2017
|
|
Net cash provided by /(used in) operating activities
|
|
$
|
2,291
|
|
|
$
|
(18,854
|
)
|
Net cash provided by /(used in) investing activities
|
|
|
(2,502
|
)
|
|
|
4,278
|
|
Net cash provided by financing activities
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Summary of Significant Agreements Currently in Effect
Agreements Between Subsidiaries, Consolidated VIEs and Nominee Shareholders
Loan and share pledge agreement
between Sohu Media and the shareholders of High Century: The agreement provides for loans to the shareholders of High
Century for them to make contributions to the registered capital of High Century in exchange for the equity interests in High Century, and the shareholders pledge those equity interests to Sohu Media as security for the loans. The agreement includes
powers of attorney that give Sohu Media the power to appoint nominees to act on behalf of the shareholders of High Century in connection with all actions to be taken by High Century. Pursuant to the agreement, the shareholders executed in blank
transfers of their equity interests in High Century, which are held by the Sohu Groups legal department and may be completed and effected at Sohu Medias election.
Loan and share pledge agreement
between Sohu Focus (HK) Limited (Focus HK) and the shareholders of Heng Da Yi Tong: The agreement provides
for loans to the shareholders of Heng Da Yi Tong for them to make contributions to the registered capital of Heng Da Yi Tong in exchange for the equity interests in Heng Da Yi Tong, and the shareholders pledge those equity interests to Focus HK as
security for the loans. The agreement includes powers of attorney that give Focus HK the power to appoint nominees to act on behalf of the shareholders of Heng Da Yi Tong in connection with all actions to be taken by Heng Da Yi Tong. Pursuant to the
agreement, the shareholders executed in blank transfers of their equity interests in Heng Da Yi Tong, which are held by the Sohu Groups legal department and may be completed and effected at Focus HKs election.
Loan and share pledge agreements
between Sogou Technology and the shareholders of Sogou Information. The loan agreement provides for a loan to
Xiaochuan Wang, the individual shareholder of Sogou Information, to be 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 the shareholder 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 the various VIE-related agreements. If any shareholder of Sogou Information breaches any of his or its obligations under any VIE-related agreements, Sogou Technology is entitled
to exercise its right 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-related agreements are no longer in effect.
Exclusive equity interest purchase right agreements
between Sogou Technology, Sogou Information and the shareholders of Sogou Information. Pursuant to
these agreements, 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. The agreement has a term of 10 years, 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, 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.
Loan agreements and equity pledge agreements
between Fox Information Technology (Tianjin) Limited (Video Tianjin) and the shareholders of
Tianjin Jinhu. The loan agreements provide for loans to the shareholders of Tianjin Jinhu for them to make contributions to the registered capital of Tianjin Jinhu in exchange for the equity interests in Tianjin Jinhu. Under the equity pledge
agreements, the shareholders of Tianjin Jinhu pledge to Video Tianjin their equity interests in Tianjin Jinhu to secure the performance of their obligations under the loan agreements and Tianjin Jinhus obligations to Video Tianjin under their
business agreements. The loans are interest free and are repayable on demand, but the shareholders can only repay the loans by transferring to Video Tianjin their equity interests in Tianjin Jinhu.
-28-
Equity interest purchase right agreements
between Video Tianjin, Tianjin Jinhu and the shareholders of
Tianjin Jinhu. Pursuant to these agreements, Video Tianjin 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 Tianjin Jinhu all or any part
of their equity interests at the lowest purchase price permissible under PRC law.
Business operation agreement
among Video Tianjin, Tianjin Jinhu
and the shareholders of Tianjin Jinhu. The agreement sets forth the right of Video Tianjin to control the actions of the shareholders of Tianjin Jinhu. The agreement has a term of 10 years, renewable at the request of Video Tianjin.
Powers of Attorney
executed by the shareholders of Tianjin Jinhu in favor of Video Tianjin with a term of 10 years, extendable at the request of Video
Tianjin. These powers of attorney give Video Tianjin the right to appoint nominees to act on behalf of each of the Tianjin Jinhu shareholders in connection with all actions to be taken by Tianjin Jinhu.
Loan agreements and equity pledge agreements
between AmazGame and the sole shareholder of Gamease and between Gamespace and the sole shareholder of
Guanyou Gamespace. The loan agreements provide for loans to the respective shareholders of Gamease and Guanyou Gamespace for the shareholders to make contributions to the registered capital of Gamease and Guanyou Gamespace in exchange for 100% of
the equity interests in Gamease and Guanyou Gamespace. The loans are interest free and are repayable on demand, but the shareholders can only repay the loans by transferring to AmazGame and Gamespace, as the case may be, their equity interests in
Gamease and Guanyou Gamespace. Under the equity pledge agreements, the respective shareholders of Gamease and Guanyou Gamespace pledge to AmazGame and Gamespace, their equity interests in Gamease and Guanyou Gamespace to secure the performance of
their obligations under the loan agreements and Gameases and Guanyou Gamespaces obligations to AmazGame and Gamespace under the various VIE-related agreements. If the shareholders breach their obligations under any VIE-related agreements
(Gameases or Guanyou Gamespaces breach of any of its obligations under the various applicable VIE-related agreements will be treated as its shareholders breach of its obligations), including the equity pledge agreements, AmazGame
and Gamespace are entitled to exercise their rights as the beneficiaries under the applicable equity pledge agreements, including all rights the respective shareholders have as shareholders of Gamease or Guanyou Gamespace.
Equity interest purchase right agreements
among AmazGame, Gamease and the sole shareholder of Gamease and among Gamespace, Guanyou Gamespace and the
sole shareholder of Guanyou Gamespace. Pursuant to these agreements, AmazGame and Gamespace have the right, exercisable at any time if and when it is legal to do so under PRC law, to purchase from the respective shareholders of Gamease and Guanyou
Gamespace all or any part of their equity interests in Gamease and Guanyou Gamespace at a purchase price equal to their initial contributions to the registered capital of Gamease and Guanyou Gamespace.
Powers of attorney
executed by the sole shareholder of Gamease in favor of AmazGame and by the sole shareholder of Guanyou Gamespace in favor of
Gamespace, with a term of 10 years. These powers of attorney give the respective boards of directors of AmazGame and Gamespace the exclusive right to appoint nominees to act on behalf of their respective shareholders in connection with all actions
to be taken by Gamease and Guanyou Gamespace.
Business operation agreements
among AmazGame, Gamease and the sole shareholder of Gamease and among
Gamespace, Guanyou Gamespace and the sole shareholder of Guanyou Gamespace. These agreements set forth the right of AmazGame and Gamespace to control the actions of Gamease and Guanyou Gamespace, as the case may be, and the respective shareholders
of Gamease and Guanyou Gamespace. Each agreement has a term of 10 years.
Share pledge agreement
among Baina Zhiyuan (Beijing) Technology Co., Ltd.
(Beijing Baina Technology), Wuhan Baina Information and the shareholders of Wuhan Baina Information, which are Gamease and Yongzhi Yang, pursuant to which the shareholders pledged to Beijing Baina Technology their equity interests in
Wuhan Baina Information to secure the performance of their obligations and Wuhan Baina Informations obligations under the various VIE-related agreements. If the shareholders breach their obligations under any VIE-related agreements (Wuhan
Baina Informations breach of any of its obligations under the various VIE-related agreements will be treated as the shareholders breach of their obligations), including the share pledge agreement, Beijing Baina Technology is entitled to
exercise its rights as the beneficiary under the share pledge agreement, including all rights of the shareholders as shareholders of Wuhan Baina Information.
Call option agreement
among Beijing Baina Technology, Wuhan Baina Information, Changyou Star and Yongzhi Yang. This agreement provides to Beijing Baina
Technology and any third party designated by Beijing Baina Technology the right, exercisable at any time during the term of the agreement, if and when it is legal to do so under PRC law, to purchase from Changyou Star and Yongzhi Yang all or any
part of their shares in Wuhan Baina Information or to purchase from Wuhan Baina Information all or part of its assets or business at the lower of RMB1.00 (approximately $0.15) or the lowest purchase price permissible under PRC law.
-29-
Business Operation Agreement
among Beijing Baina Technology, Wuhan Baina Information, Changyou Star and
Yongzhi Yang. This agreement grants Beijing Baina Technology effective control of Wuhan Baina Information.
Business Arrangements Between Subsidiaries
and Consolidated VIEs
Exclusive technology consulting and service agreement
between Sohu Era and Sohu Internet. Pursuant to this agreement Sohu
Era has the exclusive right to provide technical consultation and other related services to Sohu Internet, in exchange for a percentage of the gross revenue of Sohu Internet. The agreement has an initial term of two years, and is renewable at the
request of Sohu Era.
Business cooperation agreement
between Sogou Technology and Sogou Information. Pursuant to this agreement, Sogou Information
provides Internet information services to Sogou Technologys customers in exchange for a fee payable to Sogou Information. The agreement has a term of 10 years, and is renewable at the request of Sogou Technology.
Exclusive 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.
Exclusive technology consulting and service agreement
between Video Tianjin and Tianjin Jinhu. Pursuant to this agreement Video Tianjin has the
exclusive right to provide technical consultation and other related services to Tianjin Jinhu in exchange for a fee. The agreement has a term of 10 years and is renewable at the request of Video Tianjin.
Technology support and utilization agreements
between AmazGame and Gamease and between Gamespace and Guanyou Gamespace. Pursuant to these agreements,
AmazGame and Gamespace have the exclusive right to provide certain product development and application services and technology support to Gamease and Guanyou Gamespace, respectively, for a fee equal to a predetermined percentage, subject to
adjustment by AmazGame or Gamespace at any time, of Gameases and Guanyou Gamespaces respective revenues. Each agreement terminates only when AmazGame or Gamespace is dissolved.
Services and maintenance agreements
between AmazGame and Gamease between Gamespace and Guanyou Gamespace. Pursuant to these agreements, AmazGame and
Gamespace, respectively, provide marketing, staffing, business operation and maintenance services to Gamease and Guanyou Gamespace, respectively, in exchange for a fee equal to the cost of providing such services plus a predetermined margin. Each
agreement terminates only when AmazGame or Gamespace, as the case may be, is dissolved.
Exclusive Services agreement
between Beijing Baina
Technology and Wuhan Baina Information. Beijing Baina Technology agrees to provide Wuhan Baina Information with technical services, business consulting, capital equipment lease, market consulting, integration of systems, research and development of
products and maintenance of systems. Service fees are to be determined with reference to the specific services provided, based on a transfer pricing analysis.
Certain of the contractual arrangements described above between the VIEs and the related wholly-owned subsidiaries of the Sohu Group are silent regarding
renewals. However, because the VIEs are controlled by the Sohu Group through powers of attorney granted to the Sohu Group by the shareholders of the VIEs, the contractual arrangements can be, and are expected to be, renewed at the subsidiaries
election.
-30-
VIE-Related Risks
It is possible that the Sohu Groups operation of certain of its operations and businesses through 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. While the Sohu Groups management considers the possibility of such a finding by PRC regulatory
authorities under current law and regulations to be remote, on January 19, 2015, the Ministry of Commerce of the PRC, or (the MOFCOM) released on its Website for public comment a proposed PRC law (the Draft FIE Law) that
appears to include VIEs within the scope of entities that could be considered to be foreign invested enterprises (or FIEs) that would be subject to restrictions under existing PRC law on foreign investment in certain categories of
industry. Specifically, the Draft FIE Law introduces the concept of actual control for determining whether an entity is considered to be an FIE. In addition to control through direct or indirect ownership or equity, the Draft FIE Law
includes control through contractual arrangements within the definition of actual control. If the Draft FIE Law is passed by the Peoples Congress of the PRC and goes into effect in its current form, these provisions regarding
control through contractual arrangements could be construed to reach the Sohu Groups VIE arrangements, and as a result the Sohu Groups VIEs could become explicitly subject to the current restrictions on foreign investment in certain
categories of industry. The Draft FIE Law includes provisions that would exempt from the definition of foreign invested enterprises entities where the ultimate controlling shareholders are either entities organized under PRC law or individuals who
are PRC citizens. The Draft FIE Law is silent as to what type of enforcement action might be taken against existing VIEs that operate in restricted or prohibited industries and are not controlled by entities organized under PRC law or individuals
who are PRC citizens. If a finding were made by PRC authorities, under existing law and regulations or under the Draft FIE Law if it becomes effective, that the Sohu Groups operation of certain of its operations and businesses through VIEs is
prohibited, 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 Sohu Groups income,
revoking the business or operating licenses of the affected businesses, requiring the Sohu Group to restructure its ownership structure or operations, or requiring the Sohu Group to discontinue all or any portion of its operations. Any of these
actions could cause significant disruption to the Sohu Groups business operations, and have a severe adverse impact on the Sohu Groups cash flows, financial position and operating performance.
In addition, it is possible that the contracts among the Sohu Group, the Sohu Groups VIEs and shareholders of its VIEs would not be enforceable in China
if PRC government authorities or courts were to find that such contracts contravene PRC law and regulations or are otherwise not enforceable for public policy reasons. In the event that the Sohu Group was unable to enforce these contractual
arrangements, the Sohu Group would not be able to exert effective control over the affected VIEs. Consequently, such VIEs results of operations, assets and liabilities would not be included in the Sohu Groups consolidated financial
statements. If such were the case, the Sohu Groups cash flows, financial position and operating performance would be severely adversely affected. The Sohu Groups contractual arrangements with respect to its consolidated VIEs are in
place. The Sohu Groups management believes that such contracts are enforceable, and considers the possibility remote that PRC regulatory authorities with jurisdiction over the Sohu Groups operations and contractual relationships would
find the contracts to be unenforceable.
The Sohu Groups 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 Sohu Group. Intangible assets acquired through business acquisitions mainly consist of customer relationships, non-compete agreements, user bases, copyrights, trademarks and developed technologies. Unrecognized
revenue-producing assets mainly consist of licenses and intellectual property. Licenses include operations licenses, such as Internet information service licenses and licenses for providing content. Intellectual property developed by the Sohu Group
mainly consists of patents, copyrights, trademarks, and domain names. The Sohu Groups operations and businesses may be adversely impacted if the Sohu Group loses the ability to use and enjoy assets held by these VIEs.
11. SOHU.COM INC. SHAREHOLDERS EQUITY
Takeover Defense
Sohu intends to adopt appropriate
defensive measures in the future on a case by case basis as and to the extent that Sohus Board of Directors determines that such measures are necessary or advisable to protect Sohu stockholder value in the face of any coercive takeover threats
or to prevent an acquirer from gaining control of Sohu without offering fair and adequate price and terms.
Treasury Stock
Treasury stock consists of shares repurchased by Sohu.com Inc. that are no longer outstanding and are held by Sohu.com Inc. Treasury stock is accounted for
under the cost method. For the three months ended March 31, 2017 and 2016, the Company did not repurchase any shares of its common stock.
-31-
Stock Incentive Plans
Sohu (excluding Sohu Video), Sogou, Changyou, and Sohu Video have incentive plans for the granting of share-based awards, including options and restricted
share units, to their directors, management and other key employees.
Sohu.com Inc. Share-based Awards
Sohus 2000 Stock Incentive Plan
Sohus 2000
Stock Incentive Plan (the Sohu 2000 Stock Incentive Plan) provided for the issuance of up to 9,500,000 shares of common stock, including those issued pursuant to the exercise of stock options and upon vesting and settlement of restricted
share units. Most of these awards vest over a period of four years. The maximum term of any issued stock right under the Sohu 2000 Stock Incentive Plan is ten years from the grant date. The Sohu 2000 Stock Incentive Plan expired on January 24,
2010. A new plan (the Sohu 2010 Stock Incentive Plan) was adopted by Sohus shareholders on July 2, 2010.
There has been no
share-based compensation expense recognized under the Sohu 2000 Stock Incentive Plan since 2015, as the requisite service periods for all these awards had been completed by the end of 2014. No cash has been received under the Sohu 2000 Stock
Incentive Plan since 2016, as all of these awards had been exercised by the end of 2015.
Sohus 2010 Stock Incentive Plan
On July 2, 2010, the Companys shareholders adopted the Sohu 2010 Stock Incentive Plan, which provides for the issuance of up to 1,500,000 shares of
common stock, including stock issued pursuant to the vesting and settlement of restricted stock units and pursuant to the exercise of stock options. The maximum term of any stock right granted under the Sohu 2010 Stock Incentive Plan is ten years
from the grant date. The Sohu 2010 Stock Incentive Plan will expire on July 1, 2020. As of March 31, 2017, 573,680 shares were available for grant under the Sohu 2010 Stock Incentive Plan.
Summary of Stock Option Activity
On February 7,
2015 and May 1, 2016, the Companys Board of Directors approved contractual grants to members of the Companys management and key employees of options for the purchase of an aggregate of 1,068,000 and 13,000 shares of common stock,
respectively, with nominal exercise prices of $0.001. These stock options vest and become exercisable in four equal installments over a period of four years, with each installment vesting upon the satisfaction of a service period requirement and
certain subjective performance targets. These stock options are substantially similar to restricted stock units except for the nominal exercise price, which would be zero for restricted stock units.
Under
ASC 718-10-25
and
ASC 718-10-55
, no grant date can be established for these stock options until a mutual understanding is reached between
the Company and the recipients clarifying the subjective performance requirements. If the service inception date preceded the grant date, compensation expense should be accrued beginning on the service inception date, and re-measured on each
subsequent reporting date before the grant date is established, based on the then-current fair value of the awards. To determine the fair value of these stock options, the public market price of the underlying shares at each reporting date is used
and a binomial valuation model is applied.
On February 7, 2016 and 2017, 253,250 and 175,000, respectively, of these stock options were granted and
became vested, as a mutual understanding of the subjective performance targets was reached between the Company and the recipients, the targets had been satisfied, and the service period requirements had been fulfilled. The cumulative share-based
compensation expense for these granted stock options has been adjusted and fixed based on the fair value at the grant date of $10.8 million and $7.0 million, respectively.
-32-
A summary of stock option activity under the Sohu 2010 Stock Incentive Plan as of and for the three months ended
March 31, 2017 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Number
|
|
|
Weighted
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Of
|
|
|
Average
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Value (1)
|
|
Options
|
|
(in thousands)
|
|
|
Price
|
|
|
Life (Years)
|
|
|
(in thousands)
|
|
Outstanding at January 1, 2017
|
|
|
193
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
175
|
|
|
|
0.001
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(97
|
)
|
|
|
0.001
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2017
|
|
|
271
|
|
|
|
0.001
|
|
|
|
7.85
|
|
|
|
10,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at March 31, 2017
|
|
|
271
|
|
|
|
0.001
|
|
|
|
7.85
|
|
|
|
10,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2017
|
|
|
271
|
|
|
|
0.001
|
|
|
|
7.85
|
|
|
|
10,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note (1): The aggregated intrinsic value in the preceding table represents the difference between Sohus closing stock
price of $39.33 on March 31, 2017 and the nominal exercise prices of the stock options.
For the three months ended March 31, 2017 and 2016,
total share-based compensation expense recognized for these stock options was negative $2.5 million and negative $0.7 million, respectively.
Summary of
Restricted Stock Unit Activity
A summary of restricted stock unit activity under the Sohu 2010 Stock Incentive Plan as of and for the three months ended
March 31, 2017 is presented below:
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
Number of
Units
(in thousands)
|
|
|
Weighted-Average
Grant-Date
Fair Value
|
|
Unvested at January 1, 2017
|
|
|
11
|
|
|
$
|
70.24
|
|
Granted
|
|
|
0
|
|
|
|
|
|
Vested
|
|
|
(2
|
)
|
|
|
64.00
|
|
Forfeited
|
|
|
(3
|
)
|
|
|
63.35
|
|
|
|
|
|
|
|
|
|
|
Unvested at March 31, 2017
|
|
|
6
|
|
|
|
82.85
|
|
|
|
|
|
|
|
|
|
|
Expected to vest after March 31, 2017
|
|
|
4
|
|
|
|
82.85
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2017 and 2016, total share-based compensation expense recognized for restricted
stock units was $0.1 million and $0.4 million, respectively.
As of March 31, 2017, there was $0.2 million of unrecognized compensation expense
related to unvested restricted stock units. The expense is expected to be recognized over a weighted average period of 0.43 years. The total fair value on their respective vesting dates of restricted share units that vested during the three months
ended March 31, 2017 and 2016 was $86,078 and $169,701, respectively.
Sogou Inc. Share-based Awards
Sogou 2010 Share Incentive Plan
Sogou adopted a share
incentive plan on October 20, 2010. The number of Sogou ordinary shares issuable under the plan was 41,500,000 after an amendment that was effective August 22, 2014 (as amended, the Sogou 2010 Share Incentive Plan). Awards of
share rights may be granted under the Sogou 2010 Share Incentive Plan to management and employees of Sogou and of any present or future parents or subsidiaries or VIEs of Sogou. The maximum term of any share right 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. As of March 31, 2017, Sogou had contractually granted options for the purchase of 38,171,450 Sogou ordinary shares under
the 2010 Sogou Share Incentive Plan.
-33-
Of the contractually-granted Sogou share options for the purchase of 38,171,450 Sogou ordinary shares, options
for the purchase of 30,971,450 Sogou ordinary shares vest and become exercisable upon a service period requirement being met, as well as Sogous achievement of performance targets for the corresponding period. Subject to achievement of the
applicable performance targets, of these Sogou share options for the purchase of 30,971,450 Sogou ordinary shares, options for the purchase of 29,799,500 Sogou ordinary shares vest and become exercisable in four equal installments and options for
the purchase of 1,171,950 Sogou ordinary shares vest and become exercisable in two to four installments over varying periods. For purposes of recognition of share-based compensation expense, each installment is considered to be granted as of the
date that the performance target has been set. As of March 31, 2017, Sogou had granted options for the purchase of 25,242,120 Sogou ordinary shares under the 2010 Sogou Share Incentive Plan. As of March 31, 2017, options for the purchase
of 24,894,886 Sogou ordinary shares had become vested and exercisable because both the service period and the performance requirements had been met, and of such vested options, options for the purchase of 22,995,009 Sogou ordinary shares had been
exercised.
Of the contractually granted Sogou share options, options for the purchase of 7,200,000 Sogou ordinary shares vest and become exercisable in
five equal installments, with (i) the first installment vesting upon Sogous IPO and the expiration of all underwriters lockup periods applicable to Sogous IPO, and (ii) each of the four subsequent installments vesting on
the first, second, third and fourth anniversary dates, respectively, of the closing of Sogous IPO. The completion of an IPO is considered to be a performance condition of the awards. An IPO is not considered to be probable until it is
completed. Under
ASC 718
, compensation cost should be accrued if it is probable that the performance condition will be achieved and should not be accrued if it is not probable that the performance condition will be achieved. As a result, no
compensation expense will be recognized related to these Sogou share options until the completion of an IPO, and hence no share-based compensation expense was recognized for the three months ended March 31, 2017 for the options for the purchase
of 7,200,000 Sogou ordinary shares that are subject to vesting upon completion of Sogous IPO.
As of March 31, 2017, for purposes of
recognition of share-based compensation expense, Sogou had granted Sogou share options for the purchase of 32,442,120 Sogou ordinary shares, of which options for the purchase of 9,447,111 Sogou ordinary shares were outstanding. A summary of Sogou
share option activity under the Sogou 2010 Share Incentive Plan as of and for the three months ended March 31, 2017 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number
|
|
|
Weighted
|
|
|
Average
|
|
|
|
Of
|
|
|
Average
|
|
|
Remaining
|
|
|
|
Shares
|
|
|
Exercise
|
|
|
Contractual
|
|
Options
|
|
(in thousands)
|
|
|
Price
|
|
|
Life (Years)
|
|
Outstanding at January 1, 2017
|
|
|
9,451
|
|
|
$
|
0.476
|
|
|
|
|
|
Granted
|
|
|
0
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
0
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(4
|
)
|
|
|
0.001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2017
|
|
|
9,447
|
|
|
|
0.477
|
|
|
|
6.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at March 31, 2017 and expected to vest thereafter
|
|
|
2,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2017
|
|
|
1,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2017 and 2016, total share-based compensation expense recognized for Sogou share
options under the Sogou 2010 Share Incentive Plan was $0.3 million and $1.1 million, respectively.
As of March 31, 2017, there was $0.4 million of
unrecognized compensation expense related to the unvested Sogou share options. The expense is expected to be recognized over a weighted average period of 0.34 years.
The fair value of the ordinary shares of Sogou was assessed using the income approach /discounted cash flow method, with a discount for lack of marketability,
given that the shares underlying the awards were not publicly traded at the time of grant, and was determined with the assistance of a qualified professional appraiser using managements estimates and assumptions. This assessment required
complex and subjective judgments regarding Sogous 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.
-34-
The fair value of the Sogou share options granted to Sogou management and key employees was estimated on the date
of grant using the Binomial option - pricing model (the BP Model) with the following assumptions used:
|
|
|
|
|
Assumptions Adopted
|
|
|
|
Average risk-free interest rate
|
|
|
2.14%~2.26%
|
|
Exercise multiple
|
|
|
2~3
|
|
Expected forfeiture rate (post-vesting)
|
|
|
1%~12%
|
|
Weighted average expected option life
|
|
|
9
|
|
Volatility rate
|
|
|
47%
|
|
Dividend yield
|
|
|
0%
|
|
Fair value
|
|
|
3.18
|
|
Sogou 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 Sogou ordinary shares over the exercise price as of the time the Sogou share option is exercised, based on consideration of research
studies regarding exercise patterns based on historical statistical data. In Sogous valuation analysis, a multiple of two was applied for employees and a multiple of three was applied for management. Sogou estimated the forfeiture rate to be
1% for the Sogou share options granted to Sogou management as of the valuation date and 12% for the Sogou share options granted to Sogou employees as of the valuation date. The life of the Sogou share options is the contract life of the option.
Based on the option agreement, the contract life of the Sogou share options is 10 years. As there is no trading market for Sogous ordinary shares, the expected volatility at the valuation date was estimated based on the historical volatility
of comparable companies for the period before the grant date with length commensurate with the expected term of the Sogou share options. Sogou has no history or expectation of paying dividends on its ordinary shares. Accordingly, the dividend yield
was estimated to be 0%.
Sohu Management Sogou Share Option Arrangement
Under an arrangement providing for Sogou share-based awards to be available for grants to members of Sohus Board of Directors, management and other key
employees (Sohu Management Sogou Share Option Arrangement), which was approved by the boards of directors of Sohu and Sogou in March 2011, Sohu has the right to provide to members of Sohus Board of Directors, management and other
key employees the opportunity to purchase from Sohu up to 12,000,000 ordinary shares of Sogou at a fixed exercise price of $0.625 or $0.001 per share. Of these 12,000,000 ordinary shares, 8,800,000 are Sogou ordinary shares previously held by Sohu
and 3,200,000 are Sogou ordinary shares that were newly-issued on April 14, 2011 by Sogou to Sohu at a price of $0.625 per share, or a total of $2.0 million. As of March 31, 2017, Sohu had contractually granted options for the purchase of
10,705,000 Sogou ordinary shares to members of Sohus Board of Directors, management and other key employees under the Sohu Management Sogou Share Option Arrangement.
Of the contractually-granted Sogou share options for the purchase of 10,705,000 Sogou ordinary shares, options for the purchase of 8,290,000 Sogou ordinary
shares vest and become exercisable in four equal installments, with each installment vesting upon a service period requirement for Sohus management and key employees being met, as well as Sogous achievement of performance targets for the
corresponding period. For purposes of recognition of share-based compensation expense, each installment is considered to be granted as of the date that the performance target has been set. As of March 31, 2017, Sohu had granted Sogou share
options for the purchase of 8,290,000 Sogou ordinary shares under the Sohu Management Sogou Share Option Arrangement. As of March 31, 2017, options for the purchase of 8,290,000 Sogou ordinary shares had become vested and exercisable because
both the service period and the performance requirements had been met, and vested options for the purchase of 8,232,500 Sogou ordinary shares had been exercised.
Options for the purchase of 15,000 Sogou ordinary shares that were granted to members of Sohus Board of Directors in 2015 vested and became exercisable
in 2015, as the service period requirement for vesting had been met.
The remaining options for the purchase of 2,400,000 Sogou ordinary shares vest and
become exercisable in five equal installments, with (i) the first installment vesting upon Sogous IPO and the expiration of all underwriters lockup periods applicable to the IPO, and (ii) each of the four subsequent
installments vesting on the first, second, third and fourth anniversary dates, respectively, of the closing of Sogous IPO. All installments of the Sogou share options for the purchase of 2,400,000 Sogou ordinary shares that are subject to
vesting upon the completion of Sogous IPO were considered granted upon the issuance of the options. The completion of a firm commitment IPO is considered to be a performance condition of the awards. An IPO event is not considered to be
probable until it is completed. Under
ASC 718
, compensation cost should be accrued if it is probable that the performance condition will be achieved and should not be accrued if it is not probable that the performance condition will be
achieved. As a result, no compensation expense will be recognized related to these Sogou share options until the completion of an IPO, and hence no share-based compensation expense was recognized for the three months ended March 31, 2017 for
these options for the purchase of 2,400,000 Sogou ordinary shares.
-35-
As of March 31, 2017, for purposes of recognition of share-based compensation expense, Sohu had granted
options for the purchase of 10,705,000 Sogou ordinary shares, of which options for the purchase of 2,469,500 Sogou ordinary shares were outstanding. A summary of Sogou share option activity under the Sohu Management Sogou Share Option Arrangement as
of and for the three months ended March 31, 2017 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number
|
|
|
Weighted
|
|
|
Average
|
|
|
|
Of
|
|
|
Average
|
|
|
Remaining
|
|
|
|
Shares
|
|
|
Exercise
|
|
|
Contractual
|
|
Options
|
|
(in thousands)
|
|
|
Price
|
|
|
Life (Years)
|
|
Outstanding at January 1, 2017
|
|
|
3,190
|
|
|
$
|
0.623
|
|
|
|
|
|
Granted
|
|
|
0
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(720
|
)
|
|
|
0.625
|
|
|
|
|
|
Forfeited or expired
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2017
|
|
|
2,470
|
|
|
|
0.622
|
|
|
|
5.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at March 31, 2017
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2017
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2017 and 2016, total share-based compensation expense recognized for Sogou share
options under the Sohu Management Sogou Share Option Arrangement was nil and $297,106, respectively.
As of March 31, 2017, there was no unrecognized
compensation expense related to unvested Sogou share options.
The method used to determine the fair value of Sogou share options granted to members of
Sohus Board of Directors, management and other employees was the same as the method used for the Sogou share options granted to Sogous management and key employees as described above. There was no share-based compensation expense
recognized under the Sohu Management Sogou Share Option Arrangement for the three months ended March 31, 2017.
Sogou Share Repurchase Transaction
In January 2017, Sogou repurchased 720,000 of its Class A Ordinary Shares from the former President and Chief Financial Officer of the Sohu Group
for an aggregate price of $7.2 million. Approximately $4.0 million incremental share-based compensation expense associated with letter agreements entered into in 2016 between the Sohu Group and the former President and Chief Financial Officer of the
Sohu Group in connection with her resignation, which amount is equal to the excess of the repurchase price over the fair value of Sogou Class A Ordinary Shares as of the repurchase date, related to events occurring in 2016 and was recorded in
the Sohu Groups statements of comprehensive income for the quarter ended March 31, 2017. The Group assessed the impact and determined that it was not material to the quarter ended December 31, 2016, the year ended December 31,
2016, or the quarter ended March 31, 2017.
Option Modification
In the first and second quarter of 2013, a portion of the Sogou share options granted under the Sogou 2010 Share Incentive Plan and the Sohu Management Sogou
Share Option Arrangement were exercised early, and the Sogou ordinary shares issued upon exercise were transferred to trusts with the original option grantees as beneficiaries. The trusts will distribute the Sogou ordinary shares to those
beneficiaries in installments based on the vesting requirements under the option agreements. Although these trust arrangements caused a modification of the terms of these Sogou share options, the modification was not considered substantive.
Accordingly, no incremental fair value related to these Sogou ordinary shares resulted from the modification, and the remaining share-based compensation expense for these Sogou ordinary shares will continue to be recognized over the original
remaining vesting period.
As of March 31, 2017, options for the purchase of 11,370,000 Sogou ordinary shares granted under the Sogou 2010 Share
Incentive Plan had been exercised early but had not been distributed to the beneficiaries of the trusts. All of the early-exercised Sogou ordinary shares that were distributed to those beneficiaries by the trusts in accordance with the vesting
requirements under the option agreements have been included in the disclosures under the heading Sogou 2010 Share Incentive Plan above.
-36-
Tencent Share-based Awards Granted to Employees Who Transferred to Sogou with Soso Search-related Businesses
Certain persons who became Sogou employees when Tencents Soso search-related businesses were transferred to Sogou on September 16, 2013 had
been granted restricted share units under Tencents share award arrangements prior to the transfer of the businesses to Sogou. These Tencent restricted share units will continue to vest under the original Tencent share award arrangements
provided the transferred employees continue to be employed by Sogou during the requisite service period. After the transfer of the Soso search-related businesses to Sogou, Sogou applied the guidance in
ASC 505-50
to measure the related
compensation expense, based on the then-current fair value at each reporting date, which is deemed to have been incurred by Tencent as an investor on Sogous behalf. To determine the then-current fair value of the Tencent restricted share units
granted to these employees, the public market price of the underlying shares at each reporting date was applied. Because Sogou is not required to reimburse Tencent for such share-based compensation expense, the related amount was recorded by Sogou
as a capital contribution from Tencent.
As of March 31, 2017, unvested Tencent restricted share unit awards held by these employees provided for the
issuance of up to 40,300 ordinary shares of Tencent, taking into consideration a five-for-one split of Tencents shares that became effective in May 2014. For the three months ended March 31, 2017 and 2016, share-based compensation expense
of $298 and $0.3 million, respectively, related to these Tencent restricted share units was recognized in the Groups consolidated statements of comprehensive income. As of March 31, 2017, there was $0.1 million of unrecognized
compensation expense related to these unvested Tencent restricted share units. This amount is expected to be recognized over a weighted average period of 1.03 years.
Changyou.com Limited Share-based Awards
Changyous 2008 Share Incentive Plan
Changyous
2008 Share Incentive Plan (the Changyou 2008 Share Incentive Plan) originally provided for the issuance of up to 2,000,000 Changyou ordinary shares, including Changyou ordinary shares issued pursuant to the exercise of share options and
upon vesting and settlement of restricted share units. The 2,000,000 reserved Changyou ordinary shares became 20,000,000 Changyou ordinary shares in March 2009 when Changyou effected a ten-for-one share split of its ordinary shares. Most of the
awards granted under the Changyou 2008 Share Incentive Plan vest over a period of four years. The maximum term of any share right granted under the Changyou 2008 Share Incentive Plan is ten years from the grant date. The Changyou 2008 Share
Incentive Plan will expire in August 2018.
Prior to the completion of Changyous initial public offering, Changyou had granted under the Changyou
2008 Share Incentive Plan 15,000,000 Changyou ordinary shares to its former chief executive officer Tao Wang, through Prominence Investments Ltd., which is an entity that may be deemed under applicable rules of the Securities and Exchange Commission
to be beneficially owned by Tao Wang. Through March 31, 2017, Changyou had also granted under the Changyou 2008 Share Incentive Plan restricted share units, settleable upon vesting by the issuance of an aggregate of 4,614,098 Changyou ordinary
shares, to certain members of its management other than Tao Wang, and certain other Changyou employees.
Share-based Awards granted before
Changyous IPO
All of the restricted Changyou ordinary shares and restricted share units granted before Changyous IPO became vested by the
end of 2013. Hence there has been no share-based compensation expense recognized with respect to such restricted Changyou ordinary shares and restricted share units since their respective vesting dates.
Share-based Awards granted after Changyous IPO
Through March 31, 2017, in addition to the share-based awards granted before Changyous IPO, Changyou had granted restricted share units, settleable
upon vesting with the issuance of an aggregate of 1,581,226 Changyou ordinary shares, to certain members of its management other than Tao Wang and to certain of its other employees. These Changyou restricted share units are subject to vesting over a
four-year period commencing on their grant dates. Share-based compensation expense for such Changyou restricted share units is recognized on an accelerated basis over the requisite service period. The fair value of Changyou restricted share units
was determined based on the market price of Changyous ADSs on the grant date.
-37-
A summary of activity for these restricted share units as of and for the three months ended March 31, 2017
is presented below:
|
|
|
|
|
|
|
|
|
Restricted Share Units
|
|
Number of
Units
(in thousands)
|
|
|
Weighted-Average
Grant-Date
Fair Value
|
|
Unvested at January 1, 2017
|
|
|
10
|
|
|
$
|
14.25
|
|
Granted
|
|
|
0
|
|
|
|
|
|
Vested
|
|
|
0
|
|
|
|
|
|
Forfeited
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at March 31, 2017
|
|
|
10
|
|
|
|
14.25
|
|
|
|
|
|
|
|
|
|
|
Expected to vest after March 31, 2017
|
|
|
10
|
|
|
|
14.25
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2017 and 2016, total share-based compensation expense recognized for the Changyou
restricted share units described above was $9,000 and $22,000, respectively.
As of March 31, 2017, there was $21,000 of unrecognized compensation
expense related to the unvested restricted share units. The expense is expected to be recognized over a weighted average period of 0.55 years. The total fair value of the unvested restricted share units was nil during both the three months ended
March 31, 2017 and the three months ended March 31, 2016.
Changyou 2014 Share Incentive Plan
On June 27, 2014, Changyou reserved 2,000,000 of its Class A ordinary shares under the Changyou.com Limited 2014 Share Incentive Plan (the
Changyou 2014 Share Incentive Plan) for the purpose of making share incentive awards to certain members of its management and key employees. On November 2, 2014, the number of Class A ordinary shares reserved under the Changyou
2014 Share Incentive Plan increased from 2,000,000 to 6,000,000. The maximum term of any share right granted under the Changyou 2014 Share Incentive Plan is ten years from the grant date. The Changyou 2014 Share Incentive Plan will expire in June
2024. As of March 31, 2017, 2,823,000 shares were available for grant under the Changyou 2014 Share Incentive Plan.
Summary of Share Option
Activity
On November 2, 2014, Changyou approved the contractual grant of an aggregate of 2,416,000 Class A restricted share units to certain
members of its management and certain other employees. On February 16, 2015, Changyous Board of Directors approved the conversion of 2,400,000 of these Class A restricted share units into options for the purchase of Class A
ordinary shares at an exercise price of $0.01. On June 1, 2015, Changyous Board of Directors approved the contractual grant of options for the purchase of an aggregate of 1,998,000 Class A ordinary shares to certain members of its
management and certain other employees at an exercise price of $0.01. On July 28, 2016, Changyous Board of Directors approved the contractual grant of options for the purchase of an aggregate of 100,000 Class A ordinary shares to
certain member of its management at an exercise price of $0.01. These Changyou share options vest in four equal installments over a period of four years, with each installment vesting upon satisfaction of a service period requirement and the
achievement of certain subjective performance targets. These Changyou share options are substantially similar to restricted share units except for the nominal exercise price, which would be zero for restricted share units.
Under
ASC 718-10-25
and
ASC 718-10-55
, no grant date can be established until a mutual understanding is reached between the Company and the
recipients clarifying the subjective performance requirements. If the service inception date preceded the grant date, compensation expense should be accrued beginning on the service inception date, and re-measured on each subsequent reporting date
before the grant date is established, based on the then-current fair value of the awards. To determine the fair value of these Changyou share options, the public market price of the underlying Changyou Class A ordinary shares at each reporting
date is used and a binomial valuation model is applied.
On November 2, 2015, June 1, 2016 and November 2, 2016, 450,000, 329,000 and
450,000, respectively, of these Changyou share options were granted and became vested, as a mutual understanding of the subjective performance targets had been reached between Changyou and the recipients, the targets had been satisfied, and the
service period requirements had been fulfilled. The share-based compensation expense for these granted Changyou share options has been adjusted and fixed based on their fair value of $4.7 million, $3.2 million and $5.9 million, respectively, at the
grant date.
-38-
A summary of share option activity under the Changyou 2014 Share Incentive Plan as of and for the three months
ended March 31, 2017 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Number Of
Shares
(in thousands)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
|
Aggregate
Intrinsic
Value (1)
(in thousands)
|
|
Outstanding at January 1, 2017
|
|
|
852
|
|
|
$
|
0.01
|
|
|
|
7.93
|
|
|
$
|
9,032
|
|
Granted
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(22
|
)
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2017
|
|
|
830
|
|
|
|
0.01
|
|
|
|
7.67
|
|
|
|
11,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at March 31, 2017
|
|
|
830
|
|
|
|
0.01
|
|
|
|
|
|
|
|
11,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2017
|
|
|
830
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note (1): The aggregated intrinsic value in the preceding table represents the difference between Changyous closing
price of $28.04 per ADS, or $14.02 per Class A ordinary share, on March 31, 2017 and the nominal exercise price of share option.
For the three
months ended March 31, 2017 and 2016, share-based compensation expense recognized for these share options under the Changyou 2014 Share Incentive Plan was $5.5 million and negative $1.3 million, respectively.
Summary of Restricted Share Unit Activity
On
November 2, 2014, Changyou had contractually granted under the 2014 Share Incentive Plan an aggregate of 16,000 Changyou Class A restricted share units to an employee. These Class A restricted share units are subject to vesting over a
four-year period commencing on their grant dates. The fair values as of the grant dates of these Changyou restricted share units were determined based on market price of Changyous ADSs on the grant dates.
Due to the termination of employment of an employee during the second quarter of 2015 prior to vesting of Changyou restricted share units held by the
employee, Changyou reversed share-based compensation expense in the amount of $17,000. There was no unrecognized compensation expense for these restricted share units after the second quarter of 2015, as all of them were forfeited during that
quarter.
Sohu Video Share-based Awards
On
January 4, 2012, Sohu Video adopted the Video 2011 Share Incentive Plan, under which 25,000,000 ordinary shares of Sohu Video are reserved for the purpose of making share incentive awards to management and key employees of Sohu Video and to
Sohu management. The maximum term of any share incentive award granted under the Video 2011 Share Incentive Plan is ten years from the grant date. The Video 2011 Share Incentive Plan will expire on January 3, 2021. As of March 31, 2017,
grants of options for the purchase of 16,368,200 ordinary shares of Sohu Video had been contractually made and were subject to vesting in four equal installments, with each installment vesting upon a service period requirement being met, as well as
Sohu Videos achievement of performance targets for the corresponding period. For purposes of
ASC 718-10-25
, as of March 31, 2017, no grant date had occurred, because the broader terms and conditions of the option awards had neither
been finalized nor mutually agreed upon with the recipients. As of March 31, 2017, options for the purchase of 4,972,800 Sohu Video ordinary shares were vested.
For the three months ended March 31, 2017 and the three months ended March 31, 2016, total share-based compensation expense recognized for vested
options under the Video 2011 Share Incentive Plan was $0.2 million and negative $0.2 million, respectively.
-39-
The fair value as of March 31, 2017 of the Sohu Video options contractually granted to management and key
employees of Sohu Video and to Sohu management was estimated on the reporting date using the BP Model, with the following assumptions used:
|
|
|
|
|
Assumptions Adopted
|
|
|
|
Average risk-free interest rate
|
|
|
2.6
|
%
|
Exercise multiple
|
|
|
2.8
|
|
Expected forfeiture rate (post-vesting)
|
|
|
14
|
%
|
Weighted average expected option life
|
|
|
4.8
|
|
Volatility rate
|
|
|
45.6
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
Fair value
|
|
|
0.66
|
|
12. NONCONTROLLING INTEREST
The noncontrolling interests in the Sohu Groups consolidated financial statements primarily consist of noncontrolling interests for Sogou and Changyou.
Noncontrolling Interest in the Consolidated Balance Sheets
As of March 31, 2017 and December 31, 2016, noncontrolling interest in the consolidated balance sheets was $582.7 million and $564.2 million,
respectively.
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
December 31, 2016
|
|
|
March 31, 2017
|
|
Sogou
|
|
$
|
165,584
|
|
|
$
|
167,416
|
|
Changyou
|
|
|
398,631
|
|
|
|
415,120
|
|
Other
|
|
|
0
|
|
|
|
178
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
564,215
|
|
|
$
|
582,714
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling Interest of Sogou
As of March 31, 2017 and December 31, 2016, noncontrolling interest of Sogou of $167.4 million and $165.6 million, respectively, was recognized in
the Sohu Groups consolidated balance sheets, representing Sogous cumulative results of operations attributable to shareholders other than Sohu.com Inc., and reflecting the reclassification of Sogous share-based compensation expense
from shareholders additional paid-in capital to noncontrolling interest, the investments of shareholders other than Sohu.com Inc. in Preferred Shares and Ordinary Shares of Sogou, the repurchase of Sogou Series A Preferred Shares from
noncontrolling shareholders in March 2014 and September 2015, and Sogous repurchase of Class A Ordinary Shares from noncontrolling shareholders in June 2014 and January 2017.
Noncontrolling Interest of Changyou
As of
March 31, 2017 and December 31, 2016, noncontrolling interest of Changyou of $415.1 million and $398.6 million, respectively, was recognized in the Sohu Groups consolidated balance sheets, representing both of a 31% economic interest
in Changyous net assets held by shareholders other than Sohu.com Inc, and reflected the reclassification of Changyous share-based compensation expense from shareholders additional paid-in capital to noncontrolling interest.
Noncontrolling Interest in the Consolidated Statements of Comprehensive Income
For the three months ended March 31, 2017 and 2016, net income of $17.9 million and $31.2 million, respectively, attributable to the noncontrolling
interest was recognized in the Sohu Groups consolidated statements of comprehensive income.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2016
|
|
|
2017
|
|
Sogou
|
|
$
|
20,612
|
|
|
$
|
8,398
|
|
Changyou
|
|
|
10,619
|
|
|
|
9,508
|
|
Other
|
|
|
0
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
31,231
|
|
|
$
|
17,895
|
|
|
|
|
|
|
|
|
|
|
-40-
Noncontrolling Interest of Sogou
For the three months ended March 31, 2017 and 2016, net income of $8.4 million and $20.6 million, respectively, attributable to the noncontrolling
interest of Sogou was recognized in the Sohu Groups consolidated statements of comprehensive income, representing Sogous net income attributable to shareholders other than Sohu.com Inc.
Noncontrolling Interest of Changyou
For the three
months ended March 31, 2017 and 2016, net income of $9.5 million and $10.6 million, respectively, attributable to the noncontrolling interest of Changyou was recognized in the Sohu Groups consolidated statements of comprehensive income,
representing a 31% economic interest in Changyou attributable to shareholders other than Sohu.com Inc. for both periods.
13. NET INCOME /(LOSS) PER
SHARE
Basic net income /(loss) per share is computed using the weighted average number of common shares outstanding during the period. Diluted net
income /(loss) per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares comprise shares issuable upon the exercise or settlement of
share-based awards 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. The computation of diluted net income /(loss) per share
does not assume conversion, exercise, or contingent issuance of securities that would have an anti-dilutive effect (i.e. an increase in earnings per share amounts or a decrease in loss per share amounts) on net income /(loss) per share. For the
three months ended March 31, 2017 and 2016, 302,646 and 265,000 common shares potentially issuable upon the exercise or settlement of share-based awards using the treasury stock method were anti-dilutive and excluded from the denominator for
calculation of diluted net loss per share.
Additionally, for purposes of calculating the numerator of diluted net income /(loss) per share, the net
income /(loss) attributable to Sohu.com Inc. is adjusted as follows. The adjustment will not be made if there is an anti-dilutive effect.
(i)
|
Sogous net income /(loss) attributable to Sohu.com Inc. is determined using the percentage that the weighted average number of Sogou shares held by Sohu.com Inc. represents of the weighted average number of Sogou
Preferred Shares and Ordinary Shares, shares issuable upon the conversion of convertible preferred shares under the if-converted method, and shares issuable upon the exercise or settlement of share-based awards under the treasury stock method, and
is not determined by allocating Sogous net income /(loss) to Sohu.com Inc. using the methodology for the calculation of net income /(loss) attributable to the Sogou noncontrolling shareholders discussed in Note 12Noncontrolling Interest.
|
In the calculation of Sohu.com Inc.s diluted net income /(loss) per share, assuming a dilutive effect, the percentage
of Sohu.com Inc.s shareholding in Sogou was calculated by treating convertible preferred shares issued by Sogou as having been converted at the beginning of the period and unvested Sogou share options with the performance targets achieved as
well as vested but unexercised Sogou share options as having been exercised during the period. The dilutive effect of share-based awards with a performance requirement was not considered before the performance targets were actually met. The effect
of this calculation is presented as incremental dilution from Sogou in the table below. Assuming an anti-dilutive effect, all of these Sogou shares and share options are excluded from the calculation of Sohu.com Inc.s diluted
income /(loss) per share. As a result, Sogous net income /(loss) attributable to Sohu.com Inc. on a diluted basis equals the number used for the calculation of Sohu.com Inc.s basic net income /(loss) per share.
In the first quarter of 2017, all of these Sogou shares and share options had an anti-dilutive effect, and therefore were excluded from the
calculation of Sohu.com Inc.s diluted net income /(loss) per share, and incremental dilution from Sogou in the table below was zero.
(ii)
|
Changyous net income /(loss) attributable to Sohu.com Inc. is determined using the percentage that the weighted average number of Changyou shares held by Sohu.com Inc. represents of the weighted average number of
Changyou ordinary shares and shares issuable upon the exercise or settlement of share-based awards under the treasury stock method, and not by using the percentage held by Sohu.com Inc. of the total economic interest in Changyou, which is used for
the calculation of basic net income per share.
|
-41-
In the calculation of Sohu.com Inc.s diluted net income /(loss) per share, assuming a
dilutive effect, all of Changyous existing unvested restricted share units and share options, and vested restricted share units and share options that have not yet been settled, are treated as vested and settled by Changyou under the treasury
stock method, causing the percentage of the weighted average number of shares held by Sohu.com Inc. in Changyou to decrease. As a result, Changyous net income /(loss) attributable to Sohu.com Inc. on a diluted basis decreased accordingly. The
effect of this calculation is presented as incremental dilution from Changyou in the table below. Assuming an anti-dilutive effect, all of these Changyou restricted share units and share options are excluded from the calculation of
Sohu.com Inc.s diluted net income /(loss) per share. As a result, Changyous net income /(loss) attributable to Sohu.com Inc. on a diluted basis equals the number used for the calculation of Sohu.com Inc.s basic net income /(loss)
per share.
In the first quarter of 2017, all of these Changyou restricted share units and share options had a dilutive effect, and
therefore were included in the calculation of Sohu.com Inc.s diluted net income /(loss) per share. This impact is presented as incremental dilution from Changyou in the table below.
The following table presents the calculation of the Sohu Groups basic and diluted net loss per share (in thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2016
|
|
|
2017
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss attributable to Sohu.com Inc., basic
|
|
$
|
(20,286
|
)
|
|
$
|
(68,248
|
)
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Incremental dilution from Sogou
|
|
|
0
|
|
|
|
0
|
|
Incremental dilution from Changyou
|
|
|
(291
|
)
|
|
|
(416
|
)
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Sohu.com Inc., diluted
|
|
$
|
(20,577
|
)
|
|
$
|
(68,664
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average basic common shares outstanding
|
|
|
38,666
|
|
|
|
38,811
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Share options and restricted share units
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding
|
|
|
38,666
|
|
|
|
38,811
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per share attributable to Sohu.com Inc.
|
|
$
|
(0.52
|
)
|
|
$
|
(1.76
|
)
|
|
|
|
|
|
|
|
|
|
Diluted net loss per share attributable to Sohu.com Inc.
|
|
$
|
(0.53
|
)
|
|
$
|
(1.77
|
)
|
|
|
|
|
|
|
|
|
|
14. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Revenue from Contracts with Customers. In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic
606). This guidance supersedes current guidance on revenue recognition in Topic 605, Revenue Recognition. In addition, there are disclosure requirements related to the nature, amount, timing, and uncertainty of revenue
recognition. In August 2015, the FASB issued ASU No. 2015-14 to defer the effective date of ASU No. 2014-09 for all entities by one year. For public business entities that follow U.S. GAAP, the deferral results in the new revenue standard
are being effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted for interim and annual periods beginning after December 15, 2016. The Sohu Group
will apply the new revenue standard beginning January 1, 2018, and will not early adopt. The Sohu Group has set up an implementation team that is currently in the process of analyzing each of the Sohu Groups revenue streams in accordance
with the new revenue standard to determine the impact on the Groups consolidated financial statements. The Sohu Group plans to continue the evaluation, analysis, and documentation of its adoption of ASU 2014-09 (including those subsequently
issued updates that clarify ASU 2014-09s provisions) throughout 2017 as the Sohu Group works towards the implementation and finalizes its determination of the impact that the adoption will have on its consolidated financial statements.
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Recognition and Measurement of Financial Assets and Financial Liabilities. On January 5, 2016, the FASB
issued
ASU 2016-01 (ASU 2016-01)
, Recognition and Measurement of Financial Assets and Financial Liabilities, which amends certain aspects of recognition, measurement, presentation and disclosure of financial
instruments. This amendment requires all equity investments to be measured at fair value, with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in
consolidation of the investee). This standard will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Sohu Group is currently evaluating the impact of adopting this
standard on its consolidated financial statements.
Leases. On February 25, 2016, the FASB issued
ASU No. 2016-02 (ASU 2016-02),
Leases
.
ASU 2016-02
specifies the accounting for leases. For operating leases,
ASU 2016-02
requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in
its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. In addition, this standard requires both lessees
and lessors to disclose certain key information about lease transactions.
ASU 2016-02
is effective for public companies for annual reporting periods, and interim periods within those years, beginning after December 15, 2018. Early
adoption is permitted. The Sohu Group is currently evaluating the impact of adopting this standard on its consolidated financial statements.
Compensation
Stock Compensation. On March 30, 2016, the FASB issued
ASU 2016-09 (ASU 2016-09), Compensation Stock Compensation: Improvements to Employee Share-Based Payment Accounting
, which relates to the accounting
for employee share-based payments. This standard addresses several aspects of the accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities;
and (c) classification on the statement of cash flows; (d) accounting for forfeitures of share-based payments. This guidance became effective for reporting periods beginning after December 15, 2016. The Group adopted this new guidance
on January 1, 2017. The Sohu Group elected to continue to account for forfeitures by estimating expected forfeitures, and this standard does not have a material impact on the Groups consolidated financial statements.
Financial Instruments-Credit Losses. In June 2016, the FASB issued Accounting Standards Update
(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 Sohu Group is currently evaluating the impact that
the standard will have on its consolidated financial statements and related disclosures.
Statement of Cash Flows Classification of Certain Cash
Receipts and Cash Payments. In August 2016, the FASB issued Accounting Standards Update (ASU) 2016-15,
Statement of Cash Flows Classification of Certain Cash Receipts and Cash Payments,
which clarifies the presentation and
classification of certain cash receipts and cash payments in the statement of cash flows. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal
years. Early adoption is permitted. The Sohu Group is currently evaluating the impact that the standard will have on its consolidated financial statements and related disclosures.
Statement of Cash Flows (Topic 230): Restricted Cash. In November 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
. The guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or
restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown
on the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2017, and interim period within those fiscal years. Early adoption is permitted, including adoption in an interim period. The standard
should be applied using a retrospective transition method to each period presented. The Sohu Group is currently evaluating the impact of adopting this standard on its consolidated financial statements.
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Business Combinations (Topic 805): Clarifying the Definition of a Business. In January 2017, the FASB issued
Accounting Standards Update (ASU) No. 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business, which
clarifies the definition of a business with the objective of adding guidance to assist
entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those
fiscal years. Early adoption is permitted. The standard should be applied prospectively on or after the effective date. The Sohu Group will evaluate the impact of adopting this standard prospectively upon any transactions of acquisitions or
disposals of assets or businesses.
Simplifying the Test for Goodwill Impairment. In January 2017, the FASB issued Accounting Standards Update
(ASU) 2017-04,
Simplifying the Test for Goodwill Impairment.
The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the
amount by which a reporting units carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance should be adopted on a prospective basis for the 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. The Sohu Group is currently evaluating the impact of adopting this standard on its
consolidated financial statements.
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