ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SOHU.COM INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(In thousands, except par value)
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
December 31,
2016
|
|
|
September 30,
2017
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,050,957
|
|
|
$
|
1,040,564
|
|
Restricted cash
|
|
|
0
|
|
|
|
1,501
|
|
Short-term investments
|
|
|
247,926
|
|
|
|
304,264
|
|
Accounts receivable, net
|
|
|
189,167
|
|
|
|
280,372
|
|
Assets held for sale
|
|
|
103,079
|
|
|
|
0
|
|
Prepaid and other current assets (including $29,019 and $31,213, respectively, due from a related
party as of December 31, 2016 and September 30, 2017)
|
|
|
260,133
|
|
|
|
228,206
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,851,262
|
|
|
|
1,854,907
|
|
|
|
|
|
|
|
|
|
|
Fixed assets, net
|
|
|
503,631
|
|
|
|
529,734
|
|
Goodwill
|
|
|
68,290
|
|
|
|
70,957
|
|
Long-term investments, net
|
|
|
74,273
|
|
|
|
86,585
|
|
Intangible assets, net
|
|
|
32,131
|
|
|
|
31,463
|
|
Restricted time deposits
|
|
|
269
|
|
|
|
270
|
|
Prepaid
non-current
assets
|
|
|
4,734
|
|
|
|
4,205
|
|
Other assets
|
|
|
29,100
|
|
|
|
27,162
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,563,690
|
|
|
$
|
2,605,283
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable (including accounts payable of consolidated variable interest entities
(VIEs) without recourse to the Company of $15,824 and $56,945, respectively, as of December 31, 2016 and September 30, 2017)
|
|
$
|
193,209
|
|
|
$
|
270,939
|
|
Accrued liabilities (including accrued liabilities of consolidated VIEs without recourse to the
Company of $96,695 and $79,203, respectively, as of December 31, 2016 and September 30, 2017)
|
|
|
324,876
|
|
|
|
342,555
|
|
Receipts in advance and deferred revenue (including receipts in advance and deferred revenue of
consolidated VIEs without recourse to the Company of $44,797 and $48,307, respectively, as of December 31, 2016 and September 30, 2017)
|
|
|
118,951
|
|
|
|
131,723
|
|
Accrued salary and benefits (including accrued salary and benefits of consolidated VIEs without
recourse to the Company of $10,306 and $7,770, respectively, as of December 31, 2016 and September 30, 2017)
|
|
|
92,475
|
|
|
|
72,635
|
|
Taxes payable (including taxes payable of consolidated VIEs without recourse to the Company of
$11,475 and $12,099, respectively, as of December 31, 2016 and September 30, 2017)
|
|
|
40,014
|
|
|
|
73,118
|
|
Short-term bank loans (including short-term bank loans of consolidated VIEs without recourse to
the Company of nil as of both December 31, 2016 and September 30, 2017)
|
|
|
0
|
|
|
|
61,027
|
|
Liabilities held for sale (including liabilities held for sale of consolidated VIEs without
recourse to the Company of $3,232 and nil, respectively, as of December 31, 2016 and September 30, 2017)
|
|
|
3,902
|
|
|
|
0
|
|
Other short-term liabilities (including other short-term liabilities of consolidated VIEs without
recourse to the Company of $89,994 and $77,106, respectively, as of December 31, 2016 and September 30, 2017, and due to a related party of $28,678 and $30,525, respectively, as of December 31, 2016 and September 30,
2017)
|
|
|
159,315
|
|
|
|
146,115
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
932,742
|
|
|
|
1,098,112
|
|
|
|
|
|
|
|
|
|
|
Long-term accounts payable (including long-term accounts payable of consolidated VIEs without
recourse to the Company of nil as of both December 31, 2016 and September 30, 2017)
|
|
|
744
|
|
|
|
778
|
|
Long-term taxes payable (including long-term taxes payable of consolidated VIEs without recourse
to the Company of $13,463 and $14,072, respectively, as of December 31, 2016 and September 30, 2017)
|
|
|
32,625
|
|
|
|
30,901
|
|
Deferred tax liabilities (including deferred tax liabilities of consolidated VIEs without
recourse to the Company of $1,273 and $3,954, respectively, as of December 31, 2016 and September 30, 2017)
|
|
|
39,784
|
|
|
|
45,860
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
73,153
|
|
|
|
77,539
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,005,895
|
|
|
|
1,175,651
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Sohu.com Inc. shareholders equity:
|
|
|
|
|
|
|
|
|
Common stock: $0.001 par value per share (75,400 shares authorized; 38,742 shares and 38,881
shares, respectively, issued and outstanding as of December 31, 2016 and September 30, 2017)
|
|
|
45
|
|
|
|
45
|
|
Additional
paid-in
capital
|
|
|
821,867
|
|
|
|
840,483
|
|
Treasury stock (5,889 shares as of both December 31, 2016 and September 30,
2017)
|
|
|
(143,858
|
)
|
|
|
(143,858
|
)
|
Accumulated other comprehensive income
|
|
|
3,220
|
|
|
|
31,192
|
|
Retained earnings
|
|
|
312,306
|
|
|
|
51,915
|
|
|
|
|
|
|
|
|
|
|
Total Sohu.com Inc. shareholders equity
|
|
|
993,580
|
|
|
|
779,777
|
|
Noncontrolling interest
|
|
|
564,215
|
|
|
|
649,855
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
1,557,795
|
|
|
|
1,429,632
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
2,563,690
|
|
|
$
|
2,605,283
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
-3-
SOHU.COM INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online advertising:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brand advertising (including revenues generated from a related party of nil for both the three
months ended September 30, 2016 and the three months ended September 30, 2017, and of $862 and nil, respectively, for the nine months ended September 30, 2016 and 2017)
|
|
$
|
110,871
|
|
|
$
|
74,832
|
|
|
$
|
349,261
|
|
|
$
|
242,315
|
|
Search and search-related advertising
|
|
|
150,667
|
|
|
|
225,363
|
|
|
|
444,633
|
|
|
|
554,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal of online advertising revenues
|
|
|
261,538
|
|
|
|
300,195
|
|
|
|
793,894
|
|
|
|
796,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online games
|
|
|
98,553
|
|
|
|
132,427
|
|
|
|
300,309
|
|
|
|
340,150
|
|
Others
|
|
|
50,491
|
|
|
|
83,439
|
|
|
|
144,469
|
|
|
|
214,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
410,582
|
|
|
|
516,061
|
|
|
|
1,238,672
|
|
|
|
1,351,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online advertising:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brand advertising
|
|
|
102,137
|
|
|
|
75,733
|
|
|
|
281,427
|
|
|
|
280,660
|
|
Search and search-related advertising
|
|
|
76,457
|
|
|
|
115,422
|
|
|
|
210,547
|
|
|
|
294,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal of cost of online advertising revenues
|
|
|
178,594
|
|
|
|
191,155
|
|
|
|
491,974
|
|
|
|
574,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online games
|
|
|
23,719
|
|
|
|
17,560
|
|
|
|
75,232
|
|
|
|
45,678
|
|
Others
|
|
|
20,571
|
|
|
|
53,679
|
|
|
|
60,783
|
|
|
|
138,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
222,884
|
|
|
|
262,394
|
|
|
|
627,989
|
|
|
|
759,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
187,698
|
|
|
|
253,667
|
|
|
|
610,683
|
|
|
|
591,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
|
90,007
|
|
|
|
105,162
|
|
|
|
261,645
|
|
|
|
289,406
|
|
Sales and marketing (including expenses generated for a related party of nil for both the three
months ended September 30, 2016 and the three months ended September 30, 2017, and of $216 and nil, respectively, for the nine months ended September 30, 2016 and 2017)
|
|
|
110,584
|
|
|
|
111,935
|
|
|
|
318,597
|
|
|
|
296,866
|
|
General and administrative
|
|
|
38,670
|
|
|
|
31,038
|
|
|
|
95,927
|
|
|
|
87,045
|
|
Goodwill impairment and impairment of intangible assets acquired as part of business
acquisitions
|
|
|
0
|
|
|
|
86,882
|
|
|
|
0
|
|
|
|
86,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
239,261
|
|
|
|
335,017
|
|
|
|
676,169
|
|
|
|
760,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(51,563
|
)
|
|
|
(81,350
|
)
|
|
|
(65,486
|
)
|
|
|
(168,334
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income /(loss)
|
|
|
3,678
|
|
|
|
(5,068
|
)
|
|
|
(16,971
|
)
|
|
|
2,337
|
|
Interest income (including interest income generated from a related party of $294 and $295,
respectively, for the three months ended September 30, 2016 and 2017, and $956 and $859, respectively, for the nine months ended September 30, 2016 and 2017)
|
|
|
6,327
|
|
|
|
6,497
|
|
|
|
17,448
|
|
|
|
16,781
|
|
Interest expense (including interest expense generated from a related party of $184 and $185,
respectively, for the three months ended September 30, 2016 and 2017, and $488 and $537, respectively, for the nine months ended September 30, 2016 and 2017)
|
|
|
(209
|
)
|
|
|
(1,141
|
)
|
|
|
(1,151
|
)
|
|
|
(1,521
|
)
|
Exchange difference
|
|
|
702
|
|
|
|
(5,032
|
)
|
|
|
3,546
|
|
|
|
(10,326
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax expense
|
|
|
(41,065
|
)
|
|
|
(86,094
|
)
|
|
|
(62,614
|
)
|
|
|
(161,063
|
)
|
Income tax expense
|
|
|
(974
|
)
|
|
|
(15,927
|
)
|
|
|
(15,272
|
)
|
|
|
(39,363
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(42,039
|
)
|
|
|
(102,021
|
)
|
|
|
(77,886
|
)
|
|
|
(200,426
|
)
|
Less: Net income attributable to the noncontrolling interest shareholders
|
|
|
32,775
|
|
|
|
1,939
|
|
|
|
80,238
|
|
|
|
59,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Sohu.com Inc.
|
|
$
|
(74,814
|
)
|
|
$
|
(103,960
|
)
|
|
$
|
(158,124
|
)
|
|
$
|
(260,391
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(42,039
|
)
|
|
|
(102,021
|
)
|
|
|
(77,886
|
)
|
|
|
(200,426
|
)
|
Foreign currency translation adjustments
|
|
|
(7,619
|
)
|
|
|
19,015
|
|
|
|
(35,031
|
)
|
|
|
41,152
|
|
Change in unrealized gain /(loss) for
available-for-sale
securities
|
|
|
(693
|
)
|
|
|
12,496
|
|
|
|
(2,121
|
)
|
|
|
11,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income/(loss)
|
|
|
(8,312
|
)
|
|
|
31,511
|
|
|
|
(37,152
|
)
|
|
|
52,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
(50,351
|
)
|
|
|
(70,510
|
)
|
|
|
(115,038
|
)
|
|
|
(148,029
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Comprehensive income attributable to noncontrolling interest shareholders
|
|
|
29,724
|
|
|
|
13,808
|
|
|
|
67,275
|
|
|
|
84,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss attributable to Sohu.com Inc.
|
|
$
|
(80,075
|
)
|
|
$
|
(84,318
|
)
|
|
$
|
(182,313
|
)
|
|
$
|
(232,419
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per share attributable to Sohu.com Inc.
|
|
$
|
(1.93
|
)
|
|
$
|
(2.67
|
)
|
|
$
|
(4.09
|
)
|
|
$
|
(6.70
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic net income per share attributable to Sohu.com Inc.
|
|
|
38,728
|
|
|
|
38,877
|
|
|
|
38,695
|
|
|
|
38,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net loss per share attributable to Sohu.com Inc.
|
|
$
|
(1.94
|
)
|
|
$
|
(2.67
|
)
|
|
$
|
(4.12
|
)
|
|
$
|
(6.72
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing diluted net income per share attributable to Sohu.com Inc.
|
|
|
38,728
|
|
|
|
38,877
|
|
|
|
38,695
|
|
|
|
38,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
-4-
SOHU.COM INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2017
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(77,886
|
)
|
|
$
|
(200,426
|
)
|
Adjustments to reconcile net income /(loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Amortization of intangible assets and purchased video content in prepaid expense
|
|
|
105,773
|
|
|
|
110,883
|
|
Depreciation
|
|
|
53,769
|
|
|
|
61,000
|
|
Goodwill impairment and impairment of intangible assets acquired as part of business
acquisitions
|
|
|
0
|
|
|
|
86,882
|
|
Impairment of other intangible assets and other assets
|
|
|
6,027
|
|
|
|
44,989
|
|
Provision for allowance for doubtful accounts
|
|
|
4,341
|
|
|
|
4,403
|
|
Share-based compensation expense
|
|
|
16,147
|
|
|
|
22,455
|
|
Investment loss from equity investments
|
|
|
1,006
|
|
|
|
850
|
|
Impairment of
available-for-sale
securities
|
|
|
0
|
|
|
|
5,754
|
|
Change in fair value of financial instruments
|
|
|
(7,732
|
)
|
|
|
(5,566
|
)
|
Others
|
|
|
(407
|
)
|
|
|
(434
|
)
|
Changes in assets and liabilities, net of acquisition:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
56,560
|
|
|
|
(84,542
|
)
|
Prepaid and other assets
|
|
|
7,520
|
|
|
|
21,101
|
|
Accounts payable
|
|
|
17,507
|
|
|
|
20,624
|
|
Accrued liabilities and other short-term liabilities
|
|
|
64,720
|
|
|
|
(44,733
|
)
|
Receipts in advance and deferred revenue
|
|
|
(2,792
|
)
|
|
|
7,432
|
|
Taxes payable
|
|
|
(35,520
|
)
|
|
|
26,463
|
|
Deferred tax
|
|
|
5,191
|
|
|
|
6,837
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
214,224
|
|
|
|
83,972
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of financial instruments
|
|
|
(282,000
|
)
|
|
|
(568,686
|
)
|
Purchase of fixed assets
|
|
|
(89,990
|
)
|
|
|
(64,764
|
)
|
Purchase of intangible and other assets
|
|
|
(134,513
|
)
|
|
|
(46,310
|
)
|
Purchase of long-term investments
|
|
|
(12,940
|
)
|
|
|
(7,680
|
)
|
Matching loan to a related party
|
|
|
(18,115
|
)
|
|
|
0
|
|
Cash released from restricted time deposits and time deposits, net
|
|
|
225,462
|
|
|
|
0
|
|
Proceeds from financial instruments
|
|
|
295,591
|
|
|
|
500,344
|
|
Return of funds from a third party
|
|
|
3,619
|
|
|
|
4,928
|
|
Other cash proceeds/(payments) related to investing activities
|
|
|
3,840
|
|
|
|
(3,065
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(9,046
|
)
|
|
|
(185,233
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from short-term bank loan
|
|
|
0
|
|
|
|
67,785
|
|
Matching loan from a related party
|
|
|
17,041
|
|
|
|
0
|
|
Exercise of share-based awards in subsidiaries
|
|
|
291
|
|
|
|
493
|
|
Repayments of loans from banks
|
|
|
(344,500
|
)
|
|
|
(6,914
|
)
|
Repurchase of Sogou Class A Common Shares from noncontrolling shareholders
|
|
|
0
|
|
|
|
(3,190
|
)
|
Other cash payments related to financing activities
|
|
|
(423
|
)
|
|
|
(909
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used in) financing activities
|
|
|
(327,591
|
)
|
|
|
57,265
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(20,427
|
)
|
|
|
21,919
|
|
Reclassification of cash and cash equivalents from assets held for sale
|
|
|
(10,280
|
)
|
|
|
11,684
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(153,120
|
)
|
|
|
(10,393
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
1,245,205
|
|
|
|
1,050,957
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
1,092,085
|
|
|
$
|
1,040,564
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow disclosures:
|
|
|
|
|
|
|
|
|
Barter transactions recognized in revenue
|
|
$
|
9,259
|
|
|
$
|
4,771
|
|
Supplemental schedule of
non-cash
investing
activity:
|
|
|
|
|
|
|
|
|
Changes in payables and other liabilities related to fixed assets and intangible assets
additions
|
|
|
0
|
|
|
|
54,071
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
-5-
SOHU.COM INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (unaudited)
Nine Months Ended September 30, 2016
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sohu.com Inc. Shareholders Equity
|
|
|
|
|
|
|
Total
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
Capital
|
|
|
Treasury
Stock
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
Retained
Earnings
|
|
|
Noncontrolling
Interest
|
|
Beginning balance
|
|
$
|
1,730,752
|
|
|
$
|
45
|
|
|
$
|
798,357
|
|
|
$
|
(143,858
|
)
|
|
$
|
50,151
|
|
|
$
|
536,327
|
|
|
$
|
489,730
|
|
Share-based compensation expense
|
|
|
16,145
|
|
|
|
0
|
|
|
|
5,095
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
11,050
|
|
Settlement of share-based awards in subsidiary
|
|
|
337
|
|
|
|
0
|
|
|
|
19,136
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(18,799
|
)
|
Contribution from noncontrolling interest shareholder
|
|
|
0
|
|
|
|
0
|
|
|
|
1,333
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(1,333
|
)
|
Disposal of noncontrolling interest
|
|
|
(238
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(238
|
)
|
Other
|
|
|
(46
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(46
|
)
|
Net income/(loss) attributable to Sohu.com Inc. and noncontrolling interest shareholders
|
|
|
(77,886
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(158,124
|
)
|
|
|
80,238
|
|
Accumulated other comprehensive loss
|
|
|
(37,152
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(24,189
|
)
|
|
|
0
|
|
|
|
(12,963
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
1,631,912
|
|
|
$
|
45
|
|
|
$
|
823,921
|
|
|
$
|
(143,858
|
)
|
|
$
|
25,962
|
|
|
$
|
378,203
|
|
|
$
|
547,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
-6-
SOHU.COM INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (unaudited)
Nine Months Ended September 30, 2017
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sohu.com Inc. Shareholders Equity
|
|
|
|
|
|
|
Total
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
Capital
|
|
|
Treasury
Stock
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
Retained
Earnings
|
|
|
Noncontrolling
Interest
|
|
Beginning balance
|
|
$
|
1,557,795
|
|
|
$
|
45
|
|
|
$
|
821,867
|
|
|
$
|
(143,858
|
)
|
|
$
|
3,220
|
|
|
$
|
312,306
|
|
|
$
|
564,215
|
|
Share-based compensation expense
|
|
|
22,455
|
|
|
|
0
|
|
|
|
4,512
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
17,943
|
|
Settlement of share-based awards in subsidiaries
|
|
|
494
|
|
|
|
0
|
|
|
|
14,104
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(13,610
|
)
|
Repurchase of Sogou Class A Common Shares from noncontrolling shareholders
|
|
|
(3,190
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(3,190
|
)
|
Disposal of noncontrolling interest
|
|
|
(80
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(80
|
)
|
Net income/(loss) attributable to Sohu.com Inc. and noncontrolling interest shareholders
|
|
|
(200,426
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(260,391
|
)
|
|
|
59,965
|
|
Accumulated other comprehensive income
|
|
|
52,397
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
27,972
|
|
|
|
0
|
|
|
|
24,425
|
|
Other
|
|
|
187
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
1,429,632
|
|
|
$
|
45
|
|
|
|
840,483
|
|
|
|
(143,858
|
)
|
|
|
31,192
|
|
|
|
51,915
|
|
|
|
649,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
-7-
SOHU.COM INC.
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 search-related services and mobile Internet products 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) as well as its mobile game Legacy TLBB, 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 advertising 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 Sohu Business
Sohu also
engages in the other business, which consists primarily of paid subscription services,
sub-licensing
of purchased video content to third parties, interactive broadcasting services, 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.
Sogous Business
Search and
Search-related Business
The search and search-related business consists primarily of search and search-related advertising services offered by Sogou.
Search and search-related advertising services enable advertisers promotional links to be displayed on Sogous search results pages and other Internet properties and third parties Internet properties where the links are relevant to
the subject and content of searches and such properties. Sogous advertising services expand distribution of advertisers promotional links and advertisements by leveraging traffic on third parties Internet properties, including Web
content, software, and mobile applications. The search and search-related business benefits from Sogous collaboration with Tencent Holdings Limited (together with its subsidiaries, Tencent), which provides Sogou access to traffic
and content generated from the products and services provided by Tencent.
-8-
Revenues generated by the search and search-related business are classified as search and search-related
advertising revenues in the Sohu Groups consolidated statements of comprehensive income.
Other Sogou Business
Sogou also offers Internet value-added services (IVAS), primarily with respect to the operation of Web games and mobile games developed by third
parties, and offers other products and services, including smart hardware products. Revenues generated by Sogou from Sogous 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 and nine months ended September 30, 2017, revenues from TLBB were $48.3 million and $149.4 million, respectively, accounting for approximately 36% and 44%, respectively, of Changyous online game revenues,
approximately 29% and 34%, respectively, of Changyous total revenues, and approximately 9% and 11%, respectively, of the Sohu Groups total revenues. For the three and nine months ended September 30, 2016, revenues from TLBB were
$56.0 million and $162.9 million, respectively, accounting for approximately 57% and 54%, respectively, of Changyous online game revenues, approximately 41% and 41%, respectively, of Changyous total revenues and approximately
14% and 13%, respectively, of the Sohu Groups total revenues.
In the second quarter of 2017, Changyou launched a new mobile game, Legacy TLBB,
which is operated by Tencent under license from Changyou. For the three months ended September 30, 2017, revenues from Legacy TLBB were $56.2 million, accounting for approximately 42% of Changyous online game revenues, approximately
34% of Changyous total revenues, and approximately 11% 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 two
platforms, RaidCall and MoboTap. RaidCall provides online music and entertainment services, primarily in Taiwan. MoboTap provides (a) software applications for PCs and mobile devices through Dolphin Browser, which is a gateway to a host of user
activities on mobile devices with the majority of its users based in overseas markets, and (b) domestic online card and board games.
In 2014,
Changyou purchased 51% of the equity interests in MoboTap on a fully-diluted basis for approximately $91 million in cash. Changyous intention in making the acquisition was to generate benefits from expected synergies of MoboTaps
Dolphin Browser with Changyous platform channel business.
-9-
In 2015, the financial performance of the Dolphin Browser was below original expectations, and Changyous
management concluded that the Dolphin Browser was unable to provide the expected synergies with Changyous platform channel business. Accordingly management performed a goodwill impairment test using the discounted cash flow method for the
goodwill generated in the acquisition of MoboTap. As a result, Changyou recorded $29.6 million and $8.9 million, respectively, in goodwill and intangible assets impairment losses. MoboTap then switched its focus to the development and
operation of card and board games in China, which have been MoboTaps main source of revenue since 2015.
In 2016, Changyous Board of Directors
approved the disposal of Changyous 51% equity interest in MoboTap. 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.
In the first quarter of 2017,
Changyous management determined that the disposal was unlikely to be completed within one year due to the suspension of negotiations with a potential buyer of MoboTap. As a result, the assets and liabilities held for sale related to MoboTap
were reclassified and have been recorded 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 as of the reclassification date in the Sohu Groups consolidated balance sheets commencing on the reclassification date. 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.
In the third quarter of 2017, due to reinforced restrictions the Chinese regulatory authorities imposed on card and board games,
some of Changyous key distribution partners informed Changyou that they had decided to stop the distribution and promotion of card and board games, which had an adverse impact on MoboTaps current performance, and also increased the
uncertainty for its future operations and cash flow. As a result, Changyou determined that it is unlikely for MoboTap to gain users and grow its online card and board games revenues in China, Changyou management performed an impairment test in the
third quarter of 2017 using the discounted cash flow method and impairment charges of $86.9 million were recognized to reflect the fair value of the MoboTap business, of which an $83.5 million impairment loss was recognized for goodwill and a $3.4
million impairment loss was recognized for intangible assets.
All revenues generated by the 17173.com Website are classified as brand advertising
revenues, online card and board games revenues generated by MoboTap are classified as online game revenues, and IVAS revenues generated by MoboTap through the Dolphin Browser and generated by RaidCall are classified as other 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 intra-Group 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.
-10-
Noncontrolling Interest for Sogou
Sogous Share Structure
As of
September 30, 2017, Sogou had outstanding a combined total of 336,194,956 ordinary shares and preferred shares held as follows:
(i)
|
Sohu.com Inc.: 130,920,250 Class A Ordinary Shares, of which 3,707,000 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: 21,716,831 Class A Ordinary Shares.
|
Sohus Shareholding
in and Control of Sogou
As of September 30, 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 September 30, 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.
|
-11-
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.
(i)
Dividend Rights
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 dividends (Accrued
Dividends). Accrued 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 Accrued 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 Accrued 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 an initial public offering (IPO) of Sogou with certain parameters 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.
-12-
(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.
Voting Agreement Signed among Sohu, Tencent, and Sogou in August 2017
In August 2017, in anticipation of Sogous previously-announced currently pending proposed IPO, Sohu, Tencent, and Sogou entered into a voting agreement
(the Voting Agreement) that will take effect upon the completion of the proposed IPO. Effective upon the completion of the proposed IPO, all of the Sogou shares held by Sohu for its own account and all of the Sogou shares held by Tencent
will be redesignated as Class B Ordinary Shares. Each Class B Ordinary Share will be entitled to ten votes per share on any matter brought to a vote of Sogou shareholders, whereas Class A Ordinary Shares, which will be held by
shareholders other than Sohu and Tencent, will be entitled to one vote per share. As a result of the additional voting power of the Class B Ordinary Shares, upon the completion of the proposed IPO Sogou and Tencent will together have the power to
determine all matters that may come to a vote of Sogous shareholders, including the election of directors. Under the Voting Agreement, following the completion of Sogous proposed IPO, Sohu will have the right to appoint a majority of
Sogous Board of Directors and Tencent will have the right to appoint two directors. Sohu will continue to consolidate Sogou in its financial statements following the completion of the proposed IPO, and will provide
for non-controlling interests
reflecting ordinary shares in Sogou held by shareholders other than Sohu.
Noncontrolling Interest for Changyou
Changyou is
a public company listed on the NASDAQ Global Select Market. As of September 30, 2017, Sohu.com Inc. held approximately 68% of the combined total of Changyous outstanding ordinary shares, and controlled approximately 95% 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 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 nine months ended September 30, 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.
-13-
The following tables present summary information by segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016
|
|
|
|
Sohu
|
|
|
Sogou
|
|
|
Changyou
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Revenues (1)
|
|
$
|
109,560
|
|
|
$
|
165,952
|
|
|
$
|
135,862
|
|
|
$
|
(792
|
)
|
|
$
|
410,582
|
|
Segment cost of revenues
|
|
|
(102,772
|
)
|
|
|
(78,788
|
)
|
|
|
(41,071
|
)
|
|
|
42
|
|
|
|
(222,589
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment gross profit
|
|
|
6,788
|
|
|
|
87,164
|
|
|
|
94,791
|
|
|
|
(750
|
)
|
|
|
187,993
|
|
SBC (2) in cost of revenues
|
|
|
(266
|
)
|
|
|
(3
|
)
|
|
|
(26
|
)
|
|
|
0
|
|
|
|
(295
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
6,522
|
|
|
|
87,161
|
|
|
|
94,765
|
|
|
|
(750
|
)
|
|
|
187,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development (3)
|
|
|
(25,043
|
)
|
|
|
(34,496
|
)
|
|
|
(27,410
|
)
|
|
|
1,047
|
|
|
|
(85,902
|
)
|
Sales and marketing (1)
|
|
|
(66,555
|
)
|
|
|
(26,011
|
)
|
|
|
(18,311
|
)
|
|
|
1,045
|
|
|
|
(109,832
|
)
|
General and administrative
|
|
|
(11,831
|
)
|
|
|
(6,409
|
)
|
|
|
(12,432
|
)
|
|
|
20
|
|
|
|
(30,652
|
)
|
SBC (2) in operating expenses
|
|
|
(5,509
|
)
|
|
|
(190
|
)
|
|
|
(7,176
|
)
|
|
|
0
|
|
|
|
(12,875
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
(108,938
|
)
|
|
|
(67,106
|
)
|
|
|
(65,329
|
)
|
|
|
2,112
|
|
|
|
(239,261
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit /(loss)
|
|
|
(102,416
|
)
|
|
|
20,055
|
|
|
|
29,436
|
|
|
|
1,362
|
|
|
|
(51,563
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (3)
|
|
|
1,379
|
|
|
|
970
|
|
|
|
2,691
|
|
|
|
(1,362
|
)
|
|
|
3,678
|
|
Interest income (4)
|
|
|
2,396
|
|
|
|
705
|
|
|
|
6,929
|
|
|
|
(3,703
|
)
|
|
|
6,327
|
|
Interest expense (4)
|
|
|
(2,862
|
)
|
|
|
0
|
|
|
|
(1,050
|
)
|
|
|
3,703
|
|
|
|
(209
|
)
|
Exchange difference
|
|
|
(297
|
)
|
|
|
481
|
|
|
|
518
|
|
|
|
0
|
|
|
|
702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income /(loss) before income tax benefit /(expense)
|
|
|
(101,800
|
)
|
|
|
22,211
|
|
|
|
38,524
|
|
|
|
0
|
|
|
|
(41,065
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit /(expense)
|
|
|
635
|
|
|
|
(2,128
|
)
|
|
|
519
|
|
|
|
0
|
|
|
|
(974
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income /(loss)
|
|
$
|
(101,165
|
)
|
|
$
|
20,083
|
|
|
$
|
39,043
|
|
|
$
|
0
|
|
|
$
|
(42,039
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 intra-Group loans between the Sohu segment and the Changyou segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2017
|
|
|
|
Sohu
|
|
|
Sogou
|
|
|
Changyou
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Revenues (1)
|
|
$
|
93,648
|
|
|
$
|
257,345
|
|
|
$
|
165,572
|
|
|
$
|
(504
|
)
|
|
$
|
516,061
|
|
Segment cost of revenues
|
|
|
(87,900
|
)
|
|
|
(130,299
|
)
|
|
|
(43,961
|
)
|
|
|
48
|
|
|
|
(262,112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment gross profit
|
|
|
5,748
|
|
|
|
127,046
|
|
|
|
121,611
|
|
|
|
(456
|
)
|
|
|
253,949
|
|
SBC (2) in cost of revenues
|
|
|
(278
|
)
|
|
|
0
|
|
|
|
(4
|
)
|
|
|
0
|
|
|
|
(282
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
5,470
|
|
|
|
127,046
|
|
|
|
121,607
|
|
|
|
(456
|
)
|
|
|
253,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development (3)
|
|
|
(29,225
|
)
|
|
|
(40,000
|
)
|
|
|
(35,281
|
)
|
|
|
1,591
|
|
|
|
(102,915
|
)
|
Sales and marketing (1)
|
|
|
(50,239
|
)
|
|
|
(44,791
|
)
|
|
|
(17,467
|
)
|
|
|
906
|
|
|
|
(111,591
|
)
|
General and administrative
|
|
|
(11,551
|
)
|
|
|
(6,246
|
)
|
|
|
(9,591
|
)
|
|
|
32
|
|
|
|
(27,356
|
)
|
Goodwill impairment and impairment of intangible assets acquired as part of business
acquisitions
|
|
|
0
|
|
|
|
0
|
|
|
|
(86,882
|
)
|
|
|
0
|
|
|
|
(86,882
|
)
|
SBC (2) in operating expenses
|
|
|
(3,753
|
)
|
|
|
(316
|
)
|
|
|
(2,204
|
)
|
|
|
0
|
|
|
|
(6,273
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
(94,768
|
)
|
|
|
(91,353
|
)
|
|
|
(151,425
|
)
|
|
|
2,529
|
|
|
|
(335,017
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit /(loss)
|
|
|
(89,298
|
)
|
|
|
35,693
|
|
|
|
(29,818
|
)
|
|
|
2,073
|
|
|
|
(81,350
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income/(expense) (3)
|
|
|
(3,534
|
)
|
|
|
(42
|
)
|
|
|
581
|
|
|
|
(2,073
|
)
|
|
|
(5,068
|
)
|
Interest income (4)
|
|
|
1,731
|
|
|
|
2,390
|
|
|
|
8,916
|
|
|
|
(6,540
|
)
|
|
|
6,497
|
|
Interest expense (4)
|
|
|
(6,576
|
)
|
|
|
0
|
|
|
|
(1,105
|
)
|
|
|
6,540
|
|
|
|
(1,141
|
)
|
Exchange difference
|
|
|
(973
|
)
|
|
|
(2,475
|
)
|
|
|
(1,584
|
)
|
|
|
0
|
|
|
|
(5,032
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income /(loss) before income tax expense
|
|
|
(98,650
|
)
|
|
|
35,566
|
|
|
|
(23,010
|
)
|
|
|
0
|
|
|
|
(86,094
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
(541
|
)
|
|
|
(4,593
|
)
|
|
|
(10,793
|
)
|
|
|
0
|
|
|
|
(15,927
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income /(loss)
|
|
$
|
(99,191
|
)
|
|
$
|
30,973
|
|
|
$
|
(33,803
|
)
|
|
$
|
0
|
|
|
$
|
(102,021
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-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 intra-Group loans between the Sohu segment and the Changyou segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
|
|
|
Sohu
|
|
|
Sogou
|
|
|
Changyou
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Revenues (1)
|
|
$
|
357,437
|
|
|
$
|
488,829
|
|
|
$
|
394,862
|
|
|
$
|
(2,456
|
)
|
|
$
|
1,238,672
|
|
Segment cost of revenues
|
|
|
(284,765
|
)
|
|
|
(218,394
|
)
|
|
|
(124,795
|
)
|
|
|
259
|
|
|
|
(627,695
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment gross profit
|
|
|
72,672
|
|
|
|
270,435
|
|
|
|
270,067
|
|
|
|
(2,197
|
)
|
|
|
610,977
|
|
SBC (2) in cost of revenues
|
|
|
(255
|
)
|
|
|
(3
|
)
|
|
|
(36
|
)
|
|
|
0
|
|
|
|
(294
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
72,417
|
|
|
|
270,432
|
|
|
|
270,031
|
|
|
|
(2,197
|
)
|
|
|
610,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development (3)
|
|
|
(71,606
|
)
|
|
|
(99,781
|
)
|
|
|
(87,785
|
)
|
|
|
3,328
|
|
|
|
(255,844
|
)
|
Sales and marketing (1)
|
|
|
(194,171
|
)
|
|
|
(82,618
|
)
|
|
|
(43,921
|
)
|
|
|
3,040
|
|
|
|
(317,670
|
)
|
General and administrative
|
|
|
(36,914
|
)
|
|
|
(13,972
|
)
|
|
|
(35,985
|
)
|
|
|
69
|
|
|
|
(86,802
|
)
|
SBC (2) in operating expenses
|
|
|
(4,007
|
)
|
|
|
(2,542
|
)
|
|
|
(9,304
|
)
|
|
|
0
|
|
|
|
(15,853
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
(306,698
|
)
|
|
|
(198,913
|
)
|
|
|
(176,995
|
)
|
|
|
6,437
|
|
|
|
(676,169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit /(loss)
|
|
|
(234,281
|
)
|
|
|
71,519
|
|
|
|
93,036
|
|
|
|
4,240
|
|
|
|
(65,486
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income /(expense) (3)
|
|
|
3,832
|
|
|
|
(26,623
|
)
|
|
|
10,060
|
|
|
|
(4,240
|
)
|
|
|
(16,971
|
)
|
Interest income (4)
|
|
|
6,851
|
|
|
|
4,233
|
|
|
|
15,135
|
|
|
|
(8,771
|
)
|
|
|
17,448
|
|
Interest expense (4)
|
|
|
(6,739
|
)
|
|
|
0
|
|
|
|
(3,183
|
)
|
|
|
8,771
|
|
|
|
(1,151
|
)
|
Exchange difference
|
|
|
366
|
|
|
|
819
|
|
|
|
2,361
|
|
|
|
0
|
|
|
|
3,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income /(loss) before income tax benefit /(expense)
|
|
|
(229,971
|
)
|
|
|
49,948
|
|
|
|
117,409
|
|
|
|
0
|
|
|
|
(62,614
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit /(expense)
|
|
|
1,505
|
|
|
|
(4,550
|
)
|
|
|
(12,227
|
)
|
|
|
0
|
|
|
|
(15,272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income /(loss)
|
|
$
|
(228,466
|
)
|
|
$
|
45,398
|
|
|
$
|
105,182
|
|
|
$
|
0
|
|
|
$
|
(77,886
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 intra-Group loans between the Sohu segment and the Changyou segment.
|
-15-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2017
|
|
|
|
Sohu
|
|
|
Sogou
|
|
|
Changyou
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Revenues (1)
|
|
$
|
286,990
|
|
|
$
|
630,572
|
|
|
$
|
435,803
|
|
|
$
|
(2,033
|
)
|
|
$
|
1,351,332
|
|
Segment cost of revenues
|
|
|
(317,649
|
)
|
|
|
(323,213
|
)
|
|
|
(118,027
|
)
|
|
|
118
|
|
|
|
(758,771
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment gross profit
|
|
|
(30,659
|
)
|
|
|
307,359
|
|
|
|
317,776
|
|
|
|
(1,915
|
)
|
|
|
592,561
|
|
SBC (2) in cost of revenues
|
|
|
(619
|
)
|
|
|
(5
|
)
|
|
|
(72
|
)
|
|
|
0
|
|
|
|
(696
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
(31,278
|
)
|
|
|
307,354
|
|
|
|
317,704
|
|
|
|
(1,915
|
)
|
|
|
591,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development (3)
|
|
|
(82,251
|
)
|
|
|
(110,335
|
)
|
|
|
(91,911
|
)
|
|
|
4,590
|
|
|
|
(279,907
|
)
|
Sales and marketing (1)
|
|
|
(152,233
|
)
|
|
|
(106,147
|
)
|
|
|
(39,785
|
)
|
|
|
3,238
|
|
|
|
(294,927
|
)
|
General and administrative
|
|
|
(29,859
|
)
|
|
|
(16,182
|
)
|
|
|
(26,769
|
)
|
|
|
95
|
|
|
|
(72,715
|
)
|
Goodwill impairment and impairment of intangible assets acquired as part of business
acquisitions
|
|
|
0
|
|
|
|
0
|
|
|
|
(86,882
|
)
|
|
|
0
|
|
|
|
(86,882
|
)
|
SBC (2) in operating expenses
|
|
|
(3,304
|
)
|
|
|
(5,313
|
)
|
|
|
(17,151
|
)
|
|
|
0
|
|
|
|
(25,768
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
(267,647
|
)
|
|
|
(237,977
|
)
|
|
|
(262,498
|
)
|
|
|
7,923
|
|
|
|
(760,199
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit /(loss)
|
|
|
(298,925
|
)
|
|
|
69,377
|
|
|
|
55,206
|
|
|
|
6,008
|
|
|
|
(168,334
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income /(expense) (3)
|
|
|
2,799
|
|
|
|
112
|
|
|
|
5,434
|
|
|
|
(6,008
|
)
|
|
|
2,337
|
|
Interest income (4)
|
|
|
5,130
|
|
|
|
6,187
|
|
|
|
23,526
|
|
|
|
(18,062
|
)
|
|
|
16,781
|
|
Interest expense (4)
|
|
|
(16,317
|
)
|
|
|
0
|
|
|
|
(3,266
|
)
|
|
|
18,062
|
|
|
|
(1,521
|
)
|
Exchange difference
|
|
|
(1,165
|
)
|
|
|
(5,277
|
)
|
|
|
(3,884
|
)
|
|
|
0
|
|
|
|
(10,326
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income /(loss) before income tax expense
|
|
|
(308,478
|
)
|
|
|
70,399
|
|
|
|
77,016
|
|
|
|
0
|
|
|
|
(161,063
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
(2,413
|
)
|
|
|
(7,672
|
)
|
|
|
(29,278
|
)
|
|
|
0
|
|
|
|
(39,363
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income /(loss)
|
|
$
|
(310,891
|
)
|
|
$
|
62,727
|
|
|
$
|
47,738
|
|
|
$
|
0
|
|
|
$
|
(200,426
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 intra-Group loans between the Sohu segment and the Changyou segment.
|
-16-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 intra-Group loans between the Sohu segment and the Changyou segment, and elimination of long-term investments in subsidiaries and consolidated VIEs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2017
|
|
|
|
Sohu
|
|
|
Sogou
|
|
|
Changyou
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Cash and cash equivalents
|
|
$
|
90,540
|
|
|
$
|
373,141
|
|
|
$
|
576,883
|
|
|
$
|
0
|
|
|
$
|
1,040,564
|
|
Accounts receivable, net
|
|
|
103,400
|
|
|
|
71,628
|
|
|
|
105,429
|
|
|
|
(85
|
)
|
|
|
280,372
|
|
Fixed assets, net
|
|
|
198,282
|
|
|
|
141,328
|
|
|
|
190,124
|
|
|
|
0
|
|
|
|
529,734
|
|
Total assets (1)
|
|
$
|
1,134,611
|
|
|
$
|
677,174
|
|
|
$
|
1,850,960
|
|
|
$
|
(1,057,462
|
)
|
|
$
|
2,605,283
|
|
Note (1):
|
The elimination for segment assets mainly consists of elimination of intra-Group 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 and 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.
-17-
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 September 30, 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 September 30, 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.
Share-based Compensation Expense Recognition
Share-based compensation expense was recognized in costs and expenses for the three and nine months ended September 30, 2016 and the three and nine months
ended September 30, 2017 as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended September 30,
|
|
|
Nine Months
Ended September 30,
|
|
Share-based compensation expense
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
Cost of revenues
|
|
$
|
295
|
|
|
$
|
281
|
|
|
$
|
294
|
|
|
$
|
696
|
|
Product development expenses
|
|
|
4,105
|
|
|
|
2,247
|
|
|
|
5,801
|
|
|
|
9,499
|
|
Sales and marketing expenses
|
|
|
752
|
|
|
|
344
|
|
|
|
927
|
|
|
|
1,939
|
|
General and administrative expenses
|
|
|
8,018
|
|
|
|
3,682
|
|
|
|
9,125
|
|
|
|
14,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,170
|
|
|
$
|
6,554
|
|
|
$
|
16,147
|
|
|
$
|
26,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 30,
|
|
|
Nine Months
Ended September 30,
|
|
Share-based compensation expense
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
For Sohu (excluding Sohu Video) share-based awards
|
|
$
|
5,639
|
|
|
$
|
4,086
|
|
|
$
|
4,749
|
|
|
$
|
4,088
|
|
For Sogou share-based awards (2)
|
|
|
180
|
|
|
|
310
|
|
|
|
2,505
|
|
|
|
5,302
|
|
For Changyou share-based awards
|
|
|
7,202
|
|
|
|
2,208
|
|
|
|
9,340
|
|
|
|
17,223
|
|
For Sohu Video share-based awards (1)
|
|
|
149
|
|
|
|
(50
|
)
|
|
|
(447
|
)
|
|
|
(149
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,170
|
|
|
$
|
6,554
|
|
|
$
|
16,147
|
|
|
$
|
26,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note (1): The negative amount represented
re-measured
compensation expense based on
the then-current fair value of the awards on the reporting date.
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 and search-related businesses and compensation expense of $4.0 million, recognized in the first quarter of 2017 in
connection with Sogous repurchase of Sogou Class A Ordinary Shares from the former President and Chief Financial Officer of the Sohu Group, which is equal to the excess of the repurchase price over the fair value of the Sogou Class A
Ordinary Shares as of the repurchase date.
There was no capitalized share-based compensation expense for the three and nine months ended
September 30, 2016 and 2017.
For details of the share-based compensation expenses of the Sohu Group, see Note 12.
-18-
4. RELATED PARTY TRANSACTIONS
Under an agreement between Sohu and Fox Financial entered into in August 2014, Sohu invested $4.8 million and $16.1 million, respectively, in Fox
Financial in August 2014 and April 2015. In February 2016, Sohu invested an additional $10.5 million in Fox Financial, see Note 6 - Fair Value Measurements - Other Financial Instruments - Long-term Investments.
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 (Fox Financial is one of
Sohus equity investments, see Note 6 - FAIR VALUE MEASUREMENTS ) 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 September 30, 2017, Changyou had U.S.
dollar-denominated loans payable to Fox Financial in a total amount of approximately $29.4 million, which was recorded in other short-term liabilities, and
RMB-denominated
loans receivable from Fox
Financial in a total amount of approximately $29.4 million, which was recorded in prepaid and other current assets. For the three months and nine months ended September 30, 2017, Changyou incurred interest expense of $0.2 million and
$0.5 million, respectively, and earned interest income of $0.3 million and $0.9 million, respectively. As of September 30, 2017, total interest expense payable to Fox Financial amounted to $1.1 million, which was recorded in
other short-term liabilities; and total interest income receivable from Fox Financial was $1.8 million, which was recorded in prepaid and other current assets.
Other Information
For the three months ended
September 30, 2017 and 2016, the Sohu Group generated no brand advertising revenue and no sales and marketing expense from Fox Financial. For the nine months ended September 30, 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 $0.2 million, respectively.
5. INTRA-GROUP LOAN AND SHARE PLEDGE AGREEMENT
On
October 24, 2016, Beijing Sohu New Media Information Technology Co., Ltd. (Sohu Media), a subsidiary of Sohu, entered into a loan agreement (the Loan Agreement) with Beijing AmazGame Age Internet Technology Co., Ltd.
(AmazGame), a subsidiary of Changyou, 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 number of Class B ordinary shares pledged by Sohu Game to Changyou is subject to upward adjustment from time to time while amounts are outstanding
under the Loan Agreement if the price of Changyous American depositary shares (ADSs) on the Nasdaq Global Select Market drops for at least 10 consecutive trading days by an amount of 20% or more from such price as of the date of
the Share Pledge Agreement, and is subject to further upward adjustment in the event of any additional incremental drops of 20% or more in the price of Changyous ADSs during 10 consecutive trading days. 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 under the Loan Agreement are not paid when
due. As of September 30, 2017, the number of Class B ordinary shares pledged by Sohu Game to Changyou was 13,704,663.
In December 2016, March
2017 and April 2017, Sohu Media received RMB500.0 million (or approximately $73.8 million), RMB200.0 million (or $29.5 million) and RMB 300.0 million (or $44.3 million), respectively, from AmazGame. As of September 30, 2017, the
total outstanding balance of the loan was RMB1.00 billion (or $147.6 million). The intra-Group loan has been eliminated upon consolidation.
-19-
6. FAIR VALUE MEASUREMENTS
Fair Value of Financial Instruments
The Sohu
Groups financial instruments include cash equivalents, restricted cash, 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, short-term bank loans, 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 recognized in prepaid and other current assets
|
|
|
3,040
|
|
|
|
0
|
|
|
|
3,040
|
|
|
|
0
|
|
Restricted time deposits
|
|
|
269
|
|
|
|
0
|
|
|
|
269
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
888,313
|
|
|
$
|
10,381
|
|
|
$
|
877,932
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the financial instruments, measured at fair value by level within the fair value hierarchy, as
of September 30, 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements at reporting date using
|
|
Items
|
|
As of
September 30,
2017
|
|
|
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
|
|
|
Significant
Other Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Cash equivalents
|
|
$
|
894,099
|
|
|
$
|
0
|
|
|
$
|
894,099
|
|
|
$
|
0
|
|
Restricted cash
|
|
|
1,501
|
|
|
|
0
|
|
|
|
1,501
|
|
|
|
0
|
|
Short-term investments
|
|
|
304,264
|
|
|
|
0
|
|
|
|
304,264
|
|
|
|
0
|
|
Available-for-sale
equity securities
|
|
|
20,833
|
|
|
|
20,833
|
|
|
|
0
|
|
|
|
0
|
|
Restricted time deposits
|
|
|
270
|
|
|
|
0
|
|
|
|
270
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,220,967
|
|
|
$
|
20,833
|
|
|
$
|
1,200,134
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts recognized in other short-term liabilities
|
|
$
|
469
|
|
|
$
|
0
|
|
|
$
|
469
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-20-
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
As of September 30, 2017 and December 31, 2016, the Sohu Groups investment in financial instruments was $304.3 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 and nine months ended September 30, 2017, the Sohu Group recorded in the consolidated statements of comprehensive income changes in the fair value of short-term investments in the
amounts of $3.4 million and $9.1 million, respectively. For the three and nine months ended September 30, 2016, the Sohu Group recorded in the consolidated statements of comprehensive income changes in the fair value of short-term
investments in the amounts of $2.8 million and $5.3 million, respectively.
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.
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 using a market approach based on Keyeasts stock price on the South Korean stock market. The unrealized income or loss representing the change in fair value of this investment was recorded in
accumulated other comprehensive income /(loss) in the Sohu Groups consolidated balance sheets. The fair value of this investment was continually below its original cost for a twelve-month period ended July 31, 2017. Management considered
the decline in the fair value to be other-than-temporary, and the Sohu Group recognized an impairment loss of $5.8 million in other income /(loss) in the Sohu Groups consolidated statements in the third quarter of 2017. As of
September 30, 2017, the fair value of the Keyeast
available-for-sale
equity securities held by Sohu was $7.8 million.
On May 5, 2011, Sohu acquired 2% of the equity interests of Hylink Digital Solution Co., Ltd (Hylink), for a purchase price of
RMB15 million ($2.3 million). Given that Sohu neither controls nor has significant influence over Hylink, and the equity interest of Hylink did not have a readily determinable fair value, Sohu accounted for this investment using the cost
method. On August 2, 2017, Hylink completed its IPO on the Shanghai Stock Exchange. Upon the completion of Hylinks IPO, Sohus interest in Hylink was diluted to 1.5% of Hylinks total ordinary shares then outstanding. The Sohu
Group reclassified this investment as
available-for-sale
equity securities with the investments fair value measured based on Hylinks stock price on the
Shanghai Stock Exchange. As of September 30, 2017, the fair value of the Hylink
available-for-sale
equity securities held by Sohu was RMB86.7 million ($13.1
million). Unrealized income representing the change in fair value of $10.8 million was recorded in accumulated other comprehensive income in the Sohu Groups consolidated balance sheets.
-21-
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 were reclassified and have been recorded 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 their fair value as of the reclassification date, respectively, in the Sohu Groups consolidated balance sheet
since the reclassification date. 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. For the three and nine months ended September 30, 2017, the Sohu Group recorded changes in the fair value of the forward contracts consisting of a gain of $0.2 million and a loss of
$3.5 million, respectively, 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 in the first quarter of 2017. As of September 30, 2017, the carrying value of Sohus investment in Fox Financial was $25.2 million.
Long-term Investment in Zhihu
As of September 30,
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 and the underlying shares are not considered
in-substance
common stock.
-22-
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, short- term bank loans 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. The Group classifies the valuation technique as Level 2 of fair value measurements.
Short-term Bank Loans
For short-term bank loans, the
rates of interest under the agreements with the lending banks were determined based on the prevailing interest rates in the market. The Sohu Group estimated fair values using the discounted cash flow method and classifies the valuation techniques
that use these inputs as Level 2 of fair value measurements.
|
|
|
Factoring contract with recourse with HongKong and Shanghai Banking Corporation Limited (HSBC)
|
In May 2017, Sohu entered into a one year factoring contract with recourse with HSBC, pursuant to which Sohu may borrow from HSBC from time to time up to a
combined aggregate of RMB180.0 million (or $27.1 million), which is the upper limit reviewed by HSBC at least annually. The loan is secured by up to RMB198.0 million (or $29.8 million) of Sohus accounts receivable and guaranteed by
Sohu Media. Interest will accrue on the principal amounts of the loans outstanding at an annual rate published by the Peoples Bank of China (the PBOC). As of September 30, 2017, the total outstanding balance of the loan was
RMB5.0 million (or $0.8 million), which is secured by a pledge of accounts receivable equal to 110% of this amount. As of the date of the filing of this report, all of the outstanding loan balance had been repaid.
|
|
|
Credit agreements with Ping An Bank Co., Ltd. (Ping An Bank)
|
In May 2017, Sohu entered
into credit agreements with Ping An Bank pursuant to which Sohu was entitled to borrow from Ping An Bank from time to time until May 18, 2020 up to a combined aggregate of RMB2.50 billion (or $376.7 million). The loan was initially secured
by pledges of Sohus two buildings and is guaranteed by Sohu.com (Game) Limited (Sohu Game). The initial interest rate for the loans was an annual rate equal to 115% of the rate published by the PBOC. In July 2017, Sohu entered into
an amendment of its loan arrangements with Ping An Bank pursuant to which interest on outstanding principal amounts will accrue at a rate designated separately upon each drawdown based on the benchmark loan rate published by the PBOC with reference
to then prevailing market interest rates. In July 2017, Sohu drew down from Ping An Bank pursuant to the loan arrangements a loan with a term of 12 months in the amount of RMB400.0 million (or approximately $59.0 million) and an interest rate
of 6.525%, which is 150% of the rate published by the PBOC as of the date of the drawdown. In September 2017, Sohu entered into another amendment of its loan arrangements with Ping An Bank pursuant to which the maximum amount that Sohu is entitled
to borrow has been reduced from RMB2.5 billion (or $376.7 million) to RMB600 million (or $90.4 million), and one of the Sohus buildings has been released from the loan agreement as a subject matter of pledge. As of September 30,
2017, the total outstanding balance of the loan was RMB400 million (or $60.3 million).
Long-term Payables
Long-term accounts payable and long-term bank loans are financial liabilities with carrying values that approximate fair value due to any changes in fair
value, after considering the discount rate, being immaterial. The Group estimated fair values using the discounted cash flow method, and classifies the valuation technique as Level 2 of fair value measurements.
In September 2017, Sohu entered into credit agreements with the Industrial and Commercial Bank of China Limited (ICBC) pursuant to which Sohu will
be entitled to borrow from ICBC from time to time until March 31, 2018 up to a combined aggregate of RMB800 million (or $123 million). The outstanding principal amount of the loan will be payable in four equal installments, with the first
installment payable 18 months after the drawdown and the other three installments payable semi-annually at the end of each of the three successive
six-month
periods after the first installment payment. The
loan is secured by the pledge of Sohus building that was released based upon the amendment of Sohus loan arrangements with Ping An Bank. Interest will accrue on the principal amounts of the loans outstanding at an annual rate equal to
the Loan Prime Rate (LPR) published by the National Interbank Funding Center, plus 1.2%. As of September 30, 2017, there was no outstanding loan balance under the credit agreements with ICBC.
-23-
7. IMPAIRMENT OF PURCHASED VIDEO CONTENT
In the second quarter of 2017, the Sohu Group recognized an impairment loss of $44.9 million in cost of revenues with respect to its purchased video
content, which was mainly due to the ongoing restructuring of the sales team of Sohu Video as well as a strategic shift to reduce purchasing of licensed video content beginning in the second half of 2016. These two factors had an adverse impact on
Sohu Videos performance for the second quarter of 2017, which failed to meet managements expectations. Management also revised downward its expectations of the programming usefulness of certain of Sohu Videos purchased video
content. The discounted cash flow method was used to determine the fair value of this purchased video content.
8. 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
|
|
|
681
|
|
|
|
251
|
|
|
|
735
|
|
|
|
1,667
|
|
Goodwill impairment (2)
|
|
|
0
|
|
|
|
0
|
|
|
|
(83,470
|
)
|
|
|
(83,470
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2017
|
|
$
|
37,904
|
|
|
$
|
5,816
|
|
|
$
|
27,237
|
|
|
$
|
70,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
73,692
|
|
|
$
|
5,816
|
|
|
$
|
181,154
|
|
|
$
|
260,662
|
|
Accumulated impairment losses
|
|
|
(35,788
|
)
|
|
|
0
|
|
|
|
(153,917
|
)
|
|
|
(189,705
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
37,904
|
|
|
$
|
5,816
|
|
|
$
|
27,237
|
|
|
$
|
70,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Assets and Liabilities Held for Sale.
Note (2): Represents goodwill impairment
associated with the MoboTap business recognized in the third quarter of 2017. Due to reinforced restrictions the Chinese regulatory authorities imposed on online card and board games, some of Changyous key distribution partners informed
Changyou that they had decided to stop the distribution and promotion of card and board games in the third quarter of 2017, which had an adverse impact on MoboTaps current performance, and also increased the uncertainty for its future
operations and cash flow. As a result, Changyou determined that it is unlikely for MoboTap to gain users and grow its online card and board games revenues in China, Changyou management performed an impairment test in the third quarter of 2017 using
the discounted cash flow method, and impairment charges of $86.9 million were recognized to reflect the fair value of the MoboTap business, of which an $83.5 million impairment loss was recognized for goodwill and a $3.4 million impairment loss was
recognized for intangible assets.
9. 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.
-24-
PRC Corporate Income Tax
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.
As of September 30, 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.
|
|
|
|
Sohu Media and Guangzhou Qianjun Network Technology Co., Ltd (Guangzhou Qianjun). Sohu Media and Guangzhou Qianjun
re-applied
for HNTE qualification in August 2017 and
May 2017, respectively. New Medias
re-application
has been approved, and it is qualified as an HNTE for 2017 to 2019 and will need to
re-apply
for qualification in
2020. Pending approval of its
re-application,
Guanzhou Qianjun is entitled to continue to enjoy the beneficial tax rate as if it had already qualified as an HNTE for 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
re-applied
for HNTE qualification in September 2017. Pending approval of its
re-application,
Sogou Technology is entitled to continue to enjoy the beneficial tax rate as if it had already qualified as an HNTE for 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 Gamease Age Digital Technology Co., Ltd. (Gamease) and Beijing AmazGame Age Internet Technology Co., Ltd. (AmazGame). Gamease and AmazGame
re-applied
for HNTE qualification in August 2017 and October 2017, respectively. Pending approval of their
re-applications,
AmazGame and Gamease are entitled to continue
to enjoy the beneficial tax rate as if they had already qualified as HNTEs for 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.
-25-
For Sohus Business
|
|
|
Sohu New Momentum. In the second quarter of 2017, Sohu New Momentum completed a self-assessment and filed 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 the second quarter of 2017, Sogou Technology completed a self-assessment and filed required supporting documents for KNSE status for 2016, and will follow the same process in 2018 for KNSE status
for 2017.
|
For Changyous Business
|
|
|
AmazGame. In the second quarter of 2017, AmazGame completed a self-assessment and filed required supporting documents for KNSE status for 2016, and will follow the same process in 2018 for KNSE status for 2017. In the
third quarter of 2017, AmazeGame was qualified as a KNSE after the relevant government authorities assessment and was entitled to a preferential income tax rate of 10% for 2016.
|
|
|
|
Baina (Wuhan) Information Technology Co., Ltd. (Wuhan Baina Information). In the second quarter of 2017, Wuhan Baina Information completed a self-assessment and filed 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 September 30, 2017, Changyou had accrued deferred tax liabilities in the amount of $29.5 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
On May 1, 2016,
transition from the imposition of PRC business tax (Business Tax) to the imposition of value-added tax (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).
-26-
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.
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 and nine months ended September 30,
2017, nor did the Group have any significant unrecognized uncertain tax positions for the three and nine months ended September 30, 2017.
10.
COMMITMENTS AND CONTINGENCIES
Contractual Obligations
The following table sets forth our contractual obligations as of September 30, 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
Thereafter
|
|
|
Total
Payments
Required
|
|
Purchase of cinema advertisement slot rights
|
|
|
15,795
|
|
|
|
78,225
|
|
|
|
43,686
|
|
|
|
20,124
|
|
|
|
2,858
|
|
|
|
79
|
|
|
|
160,767
|
|
Purchase of content and services video
|
|
|
27,087
|
|
|
|
16,379
|
|
|
|
18,718
|
|
|
|
580
|
|
|
|
0
|
|
|
|
0
|
|
|
|
62,764
|
|
Purchase of bandwidth
|
|
|
26,827
|
|
|
|
13,771
|
|
|
|
1,261
|
|
|
|
1,103
|
|
|
|
322
|
|
|
|
0
|
|
|
|
43,284
|
|
Operating lease obligations
|
|
|
4,290
|
|
|
|
14,417
|
|
|
|
3,234
|
|
|
|
1,032
|
|
|
|
60
|
|
|
|
10
|
|
|
|
23,043
|
|
Expenditures for operating rights for licensed games with technological feasibility
|
|
|
529
|
|
|
|
19,154
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
19,683
|
|
Purchase of content and services others
|
|
|
5,766
|
|
|
|
2,483
|
|
|
|
298
|
|
|
|
59
|
|
|
|
27
|
|
|
|
0
|
|
|
|
8,633
|
|
Fees for operating rights for licensed games in development
|
|
|
1,362
|
|
|
|
1,182
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,544
|
|
Expenditures for rights to titles of games in development
|
|
|
259
|
|
|
|
1,233
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,492
|
|
Others
|
|
|
3,596
|
|
|
|
424
|
|
|
|
87
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
4,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Payments Required
|
|
|
85,511
|
|
|
|
147,268
|
|
|
|
67,284
|
|
|
|
22,898
|
|
|
|
3,267
|
|
|
|
89
|
|
|
|
326,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
-27-
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 advertising, 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 11 - VIEs.
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.
11. 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 September 30, 2017, the aggregate amount of these loans was $9.4 million.
-28-
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 September 30, 2017, the registered capital and PRC statutory reserves of the consolidated VIEs totaled $79.9 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:
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 September 30, 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 September 30, 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 September 30, 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 September 30, 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 September 30, 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 September 30,
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 September 30, 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 September 30, 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.
-29-
For Changyous Business
Gamease was incorporated in 2007. As of September 30, 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 September 30, 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.
Shanghai ICE Information Technology Co., Ltd. (Shanghai ICE) was
acquired by Changyou in 2010. As of September 30, 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 September 30, 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
|
|
|
September 30,
2017
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
94,859
|
|
|
$
|
55,414
|
|
Accounts receivable, net
|
|
|
72,151
|
|
|
|
97,153
|
|
Prepaid and other current assets
|
|
|
86,722
|
|
|
|
29,986
|
|
Assets held for sale
|
|
|
12,551
|
|
|
|
0
|
|
Intra-Group receivables due from the Companys subsidiaries
|
|
|
197,438
|
|
|
|
386,656
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
463,721
|
|
|
|
569,209
|
|
|
|
|
|
|
|
|
|
|
Long-term investments, net
|
|
|
17,472
|
|
|
|
30,240
|
|
Fixed assets, net
|
|
|
4,372
|
|
|
|
3,023
|
|
Intangible assets, net
|
|
|
14,545
|
|
|
|
12,405
|
|
Goodwill
|
|
|
35,161
|
|
|
|
36,989
|
|
Other
non-current
assets
|
|
|
4,052
|
|
|
|
2,871
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
539,323
|
|
|
$
|
654,737
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
15,824
|
|
|
$
|
56,945
|
|
Accrued liabilities
|
|
|
96,695
|
|
|
|
79,203
|
|
Receipts in advance and deferred revenue
|
|
|
44,797
|
|
|
|
48,307
|
|
Liabilities held for sale
|
|
|
3,232
|
|
|
|
0
|
|
Other current liabilities
|
|
|
111,775
|
|
|
|
96,975
|
|
Intra-Group payables due to the Companys subsidiaries
|
|
|
129,431
|
|
|
|
169,452
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
401,754
|
|
|
|
450,882
|
|
|
|
|
|
|
|
|
|
|
Long-term taxes payable
|
|
|
13,463
|
|
|
|
14,072
|
|
Deferred tax liabilities
|
|
|
1,273
|
|
|
|
3,954
|
|
Intra-Group payables due to the Companys subsidiaries
|
|
|
19,620
|
|
|
|
20,492
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
436,110
|
|
|
$
|
489,400
|
|
|
|
|
|
|
|
|
|
|
-30-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
Net revenue
|
|
$
|
228,599
|
|
|
$
|
224,450
|
|
|
$
|
675,281
|
|
|
$
|
649,409
|
|
Net income/(loss)
|
|
$
|
5,338
|
|
|
$
|
(2,693
|
)
|
|
$
|
20,854
|
|
|
$
|
49,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
|
2016
|
|
|
2017
|
|
Net cash provided by /(used in) operating activities
|
|
$
|
20,306
|
|
|
$
|
(52,043
|
)
|
Net cash provided by /(used in) investing activities
|
|
|
1,061
|
|
|
|
(1,602
|
)
|
Net cash used in financing activities
|
|
$
|
0
|
|
|
$
|
(131
|
)
|
|
|
|
|
|
|
|
|
|
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, who holds 10% of the equity interest in 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 Mr. Wang may repay the loan only by transferring to Sogou Technology his equity interest in Sogou Information. Under the pledge agreement, all of the shareholders of Sogou
Information pledge their equity interests to Sogou Technology to secure the performance of their obligations under 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 rights as the beneficiary under the share pledge agreement. The share pledge agreement terminates only
after all of the obligations of the shareholders under the various
VIE-related
agreements are no longer in effect.
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 and is renewable at the request of Sogou Technology.
Powers of Attorney
executed by the shareholders of Sogou Information in favor of Sogou Technology with a term of 10 years and is extendable at the
request of Sogou Technology. These powers of attorney give Sogou Technology the right to appoint nominees to act on behalf of each of the three Sogou Information shareholders in connection with all actions to be taken by Sogou Information.
-31-
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.
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.
-32-
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.
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
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.
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.
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.
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.
-33-
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.
12. 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.
-34-
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 nine months ended September 30, 2017 and 2016, the Company did not repurchase any shares of its common stock.
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 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 September 30, 2017, 587,280 shares were available for grant under the Sohu 2010 Stock Incentive Plan.
Summary of Stock Option Activity
In February
2015, May 2016 and September 2017, 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, 13,000 and 32,000 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, February 7, 2017, and May 1, 2017, 253,250, 175,000, and 3,250, respectively, of these stock options had been granted and
had become vested on their respective vesting dates, 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 their aggregate fair value at the grant date of $10.8 million, $7.0 million, and $0.1 million,
respectively.
-35-
A summary of stock option activity under the Sohu 2010 Stock Incentive Plan as of and for the nine months ended
September 30, 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
|
|
|
178
|
|
|
|
0.001
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(132
|
)
|
|
|
0.001
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2017
|
|
|
239
|
|
|
|
0.001
|
|
|
|
7.36
|
|
|
|
13,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at September 30, 2017
|
|
|
239
|
|
|
|
0.001
|
|
|
|
7.36
|
|
|
|
13,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2017
|
|
|
239
|
|
|
|
0.001
|
|
|
|
7.36
|
|
|
|
13,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note (1): The aggregated intrinsic value in the preceding table represents the difference between Sohus closing stock
price of $56.16 on September 30, 2017 and the nominal exercise prices of the stock options.
For the three and nine months ended September 30,
2017, total share-based compensation expense recognized for these stock options was $4.0 million and $3.9 million, respectively. For the three and nine months ended September 30, 2016, total share-based compensation expense recognized
for these stock options was $5.3 million and $3.6 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 nine months ended September 30, 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
|
|
|
(5
|
)
|
|
|
71.85
|
|
|
|
|
|
|
|
|
|
|
Unvested at September 30, 2017
|
|
|
4
|
|
|
|
81.56
|
|
|
|
|
|
|
|
|
|
|
Expected to vest after September 30, 2017
|
|
|
3
|
|
|
|
81.56
|
|
|
|
|
|
|
|
|
|
|
For the three and nine months ended September 30, 2017, total share-based compensation expense recognized for restricted
stock units was $82,828 and $227,791, respectively. For the three and nine months ended September 30, 2016, total share-based compensation expense recognized for restricted stock units was $0.4 million and $1.1 million, respectively.
As of September 30, 2017, there was negative $2.0 million of unrecognized compensation expense related to unvested restricted stock units. The
expense is expected to be recognized over a weighted average period of 0.25 years. The total fair value on their respective vesting dates of restricted stock units that vested during the three and nine months ended September 30, 2017 was nil
and $86,078, respectively. The total fair value on their respective vesting dates of restricted stock units that vested during the three and nine months ended September 30, 2016 was $0.2 million and $0.5 million, respectively.
-36-
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 September 30, 2017, Sogou had contractually granted options for the purchase of 38,048,189 Sogou ordinary shares
under the 2010 Sogou Share Incentive Plan.
Of the contractually-granted Sogou share options for the purchase of 38,048,189 Sogou ordinary shares, options
for the purchase of 30,828,189 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 30,828,189 Sogou ordinary shares, options for the purchase of 29,727,589 Sogou ordinary shares vest and become exercisable in four equal installments and options for
the purchase of 1,100,600 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 September 30, 2017, Sogou had granted options for the purchase of 25,232,745 Sogou ordinary shares under the 2010 Sogou Share Incentive Plan. As of September 30, 2017, options for the
purchase of 25,167,933 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 25,163,373 Sogou ordinary shares
had been exercised.
Of the contractually granted Sogou share options, options for the purchase of 7,220,000 Sogou ordinary shares vest and become
exercisable subject to the completion of an IPO. Of the granted options for the purchase of 7,220,000 ordinary shares, option for the purchase of 7,200,000 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 remaining options for the purchase of 20,000 ordinary Shares vest and become exercisable on the later of (i) the first anniversary of the grant date or (ii) the
expiration date of all underwriters lockup periods applicable to an IPO, if the company has completed the IPO on or prior to the first anniversary of the grant date. 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 and
nine months ended September 30, 2017 for the options for the purchase of 7,220,000 Sogou ordinary shares that are subject to vesting upon completion of Sogous IPO.
As of September 30, 2017, for purposes of recognition of share-based compensation expense, Sogou had granted Sogou share options for the purchase of
32,452,745 Sogou ordinary shares, of which options for the purchase of 7,289,372 Sogou ordinary shares were outstanding. A summary of Sogou share option activity under the Sogou 2010 Share Incentive Plan as of and for the nine months ended
September 30, 2017 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Number
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Of
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
Options
|
|
(in thousands)
|
|
|
Price
|
|
|
Life (Years)
|
|
|
Value
|
|
Outstanding at January 1, 2017
|
|
|
9,451
|
|
|
$
|
0.476
|
|
|
|
6.31
|
|
|
|
|
|
Granted
|
|
|
20
|
|
|
|
0.001
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(2,168
|
)
|
|
|
0.001
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(14
|
)
|
|
|
0.001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2017
|
|
|
7,289
|
|
|
|
0.617
|
|
|
|
5.36
|
|
|
|
3,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at September 30, 2017 and expected to vest thereafter
|
|
|
69
|
|
|
|
|
|
|
|
6.96
|
|
|
|
209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2017
|
|
|
5
|
|
|
|
|
|
|
|
4.99
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-37-
For the three and nine months ended September 30, 2017, total share-based compensation expense recognized
for share options under the Sogou 2010 Share Incentive Plan was $48,133 and $0.7 million, respectively. For the three and nine months ended September 30, 2016, total share-based compensation expense recognized for share options under the
Sogou 2010 Share Incentive Plan was $0.2 million and $1.4 million, respectively.
As of September 30, 2017, there was $3.0 million of
unrecognized compensation expense related to the unvested Sogou share options granted under the Sogou 2010 Share Incentive Plan. An expense of $14,095 is expected to be recognized over a weighted average period of 0.1 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.
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%~2.92%
|
|
Exercise multiple
|
|
|
2~3
|
|
Expected forfeiture rate (post-vesting)
|
|
|
0%~12%
|
|
Weighted average expected option life
|
|
|
9
|
|
Volatility rate
|
|
|
47%
|
|
Dividend yield
|
|
|
0%
|
|
Fair value
|
|
|
3.18~9.99
|
|
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
0% or 1% for the Sogou share options granted to Sogou management and 12% for the Sogou share options granted to Sogou employees. 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 (the Sohu Management Sogou Share Option Arrangement) that 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 key employees of the Sohu Group 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 September 30, 2017, Sohu had contractually granted options for the purchase of 8,305,000 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 8,305,000 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 September 30, 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 September 30, 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 8,290,000 Sogou ordinary shares had been exercised.
-38-
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.
In March 2013, Sohu granted options
for the purchase of 2,400,000 Sogou ordinary shares to the then President and Chief Financial Officer of the Sohu Group. These options were to 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
completion of Sogous IPO. All installments of the Sogou share options for the purchase of 2,400,000 Sogou ordinary shares that were 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 was to be recognized related to these Sogou share options
until the completion of an IPO. Pursuant to the option agreements, these options for the purchase of 2,400,000 shares were forfeited upon the resignation of the former President and Chief Financial Officer in July 2016.
As of September 30, 2017, for purposes of recognition of share-based compensation expense, Sohu had granted options for the purchase of 8,305,000 Sogou
ordinary shares, of which options for the purchase of 12,000 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 nine months ended
September 30, 2017 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Number
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Of
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
Options
|
|
(in thousands)
|
|
|
Price
|
|
|
Life (Years)
|
|
|
Value
|
|
Outstanding at January 1, 2017
|
|
|
70
|
|
|
$
|
0.517
|
|
|
|
6.79
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(58
|
)
|
|
|
0.625
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2017
|
|
|
12
|
|
|
|
0.001
|
|
|
|
7.64
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at September 30, 2017
|
|
|
12
|
|
|
|
0.001
|
|
|
|
7.64
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2017
|
|
|
12
|
|
|
|
0.001
|
|
|
|
7.64
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For both the three and the nine months ended September 30, 2017, total share-based compensation expense recognized for
share options under the Sohu Management Sogou Share Option Arrangement was nil. For the three and nine months ended September 30, 2016, total share-based compensation expense recognized for share options under the Sohu Management Sogou Share
Option Arrangement was $3,094 and $0.3 million, respectively.
As of September 30, 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 and nine months ended September 30, 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 the repurchase, which was made pursuant to 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 first quarter of 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 nine months ended September 30, 2017.
-39-
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 resulting 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 original 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 continued to be recognized over the original remaining
vesting period.
As of September 30, 2017, 10,327,500 Sogou ordinary shares that were purchased upon the early exercise of options granted under the
Sogou 2010 Share Incentive Plan remained unvested in accordance with the vesting requirements under the original option agreements. All Sogou ordinary shares purchased upon such early-exercise are included in the disclosures under the heading
Sogou 2010 Share Incentive Plan and Sohu Management Sogou Share Option Arrangement above.
Tencent Share-based Awards Granted
to Employees Who Transferred to Sogou with the Soso Search and Search-related Business
Certain persons who became Sogou employees when Tencents
Soso search and 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. Following the transfer of
the businesses, 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 and 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.
For the three and nine months ended September 30, 2017, share-based compensation expense of
$0.3 million and $0.6 million, respectively, related to these Tencent restricted share units was recognized in the Groups consolidated statements of comprehensive income. For the three and nine months ended September 30, 2016,
share-based compensation expense of negative $38,458 and $0.8 million, respectively, related to these Tencent restricted share units was recognized in the Groups consolidated statements of comprehensive income. As of September 30,
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 0.76 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 IPO, 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 U.S. Securities and Exchange Commission (the SEC) to be beneficially owned by Tao Wang.
Through September 30, 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.
-40-
Share-based Awards granted after Changyous IPO
Through September 30, 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.
A summary of activity for these restricted share units as
of and for the nine months ended September 30, 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 September 30, 2017
|
|
|
10
|
|
|
|
14.25
|
|
|
|
|
|
|
|
|
|
|
Expected to vest after September 30, 2017
|
|
|
10
|
|
|
|
14.25
|
|
|
|
|
|
|
|
|
|
|
For the three and nine months ended September 30, 2017, total share-based compensation expense recognized for the above
restricted share units was $9,000 and $27,000, respectively. For the three and nine months ended September 30, 2016, total share-based compensation expense recognized for the above restricted share units was $22,000 and $66,000, respectively.
As of September 30, 2017, there was $3,000 of unrecognized compensation expense related to restricted share units that were unvested. The expense is
expected to be recognized over a weighted average period of 0.25 years. No restricted share units vested during the three and nine months ended September 30, 2017. The total fair value of these restricted share units that vested during the
three and nine months ended September 30, 2016 was both nil.
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 September 30, 2017, 2,962,000 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.
-41-
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.
As of September 30, 2017, 1,549,000 of these Changyou share options had been
granted and had become vested on their respective vesting dates, 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 cumulative share-based compensation expense for these granted share options has been adjusted and fixed based on their aggregate fair value at the grant date of $20.0 million.
A summary of share option activity under the Changyou 2014 Share Incentive Plan as of and for the nine months ended September 30, 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
|
|
|
320
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(650
|
)
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2017
|
|
|
522
|
|
|
|
0.01
|
|
|
|
7.43
|
|
|
|
10,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at September 30, 2017
|
|
|
522
|
|
|
|
0.01
|
|
|
|
|
|
|
|
10,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2017
|
|
|
522
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note (1): The aggregated intrinsic value in the preceding table represents the difference between Changyous closing
price of $39.61 per ADS, or $19.81 per Class A ordinary share, on September 30, 2017 and the nominal exercise price of share option.
For the
three and nine months ended September 30, 2017, share-based compensation expense recognized for these share options under the Changyou 2014 Share Incentive Plan was $2.2 million and $17.2 million, respectively. For the three and nine
months ended September 30, 2016, share-based compensation expense recognized for these share options under the Changyou 2014 Share Incentive Plan was $7.2 million and $9.3 million, respectively.
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 September 30, 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 September 30, 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 September 30, 2017, options for the purchase of 4,972,800 Sohu Video ordinary shares were
vested.
For the three and nine months ended September 30, 2017, total share-based compensation expense recognized for vested options under the Video
2011 Share Incentive Plan was negative $50,000 and negative $149,000, respectively. For the three and nine months ended September 30, 2016, total share-based compensation expense recognized for vested options under the Video 2011 Share
Incentive Plan was $149,000 and negative $448,000, respectively.
-42-
The fair value as of September 30, 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
|
|
|
2.54
|
%
|
Exercise multiple
|
|
|
2.8
|
|
Expected forfeiture rate (post-vesting)
|
|
|
14
|
%
|
Weighted average expected option life
|
|
|
4.3
|
|
Volatility rate
|
|
|
41.2
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
Fair value
|
|
|
0.67
|
|
13. 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 December 31, 2016 and September 30, 2017, noncontrolling interest in the consolidated balance sheets was $564.2 million and
$649.9 million, respectively.
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
December 31, 2016
|
|
|
September 30, 2017
|
|
Sogou
|
|
$
|
165,584
|
|
|
$
|
223,609
|
|
Changyou
|
|
|
398,631
|
|
|
|
426,137
|
|
Other
|
|
|
0
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
564,215
|
|
|
$
|
649,855
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling Interest of Sogou
As of September 30, 2017 and December 31, 2016, noncontrolling interest of Sogou of $223.6 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
September 30, 2017 and December 31, 2016, noncontrolling interest of Changyou of $426.1 million and $398.6 million, respectively, was recognized in the Sohu Groups consolidated balance sheets, representing a 32% and 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.
-43-
Noncontrolling Interest in the Consolidated Statements of Comprehensive Income
For the three and nine months ended September 30, 2017, net income attributable to the noncontrolling interest in the consolidated statements of comprehensive
income was $1.9 million and $60.0 million, respectively. For the three and nine months ended September 30, 2016, net income attributable to the noncontrolling interest in the consolidated statements of comprehensive income was
$32.8 million and $80.2 million, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
Sogou
|
|
$
|
20,283
|
|
|
$
|
31,166
|
|
|
$
|
46,383
|
|
|
$
|
63,252
|
|
Changyou
|
|
|
12,492
|
|
|
|
(29,190
|
)
|
|
|
33,855
|
|
|
|
(3,204
|
)
|
Other
|
|
|
0
|
|
|
|
(37
|
)
|
|
|
0
|
|
|
|
(83
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
32,775
|
|
|
$
|
1,939
|
|
|
$
|
80,238
|
|
|
$
|
59,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling Interest of Sogou
For the three months ended September 30, 2017 and 2016, net income of $31.2 million and $20.3 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 September 30, 2017 and 2016, net loss of $29.2 million and net income $12.5 million, respectively, attributable to the noncontrolling interest of Changyou, was recognized in the Sohu Groups consolidated statements
of comprehensive income, representing a 32% and a 31% economic interest in Changyou attributable to shareholders other than Sohu.com Inc.
14. 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 and nine months ended September 30, 2017, 247,000 and 273,000, respectively, 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. For the three and nine months ended September 30, 2016, 214,000 and 241,000, respectively, 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 13 - Noncontrolling Interest.
|
-44-
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.
For the three and nine months ended September 30, 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.
|
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.
For the three months ended September 30, 2017, all of these Changyou restricted share units and
share options had an anti-dilutive effect, and therefore were excluded in the calculation of Sohu.com Inc.s diluted net income /(loss) per share, and incremental dilution from Changyou for the three months ended September 30,
2017 in the table below was zero.
For the nine months ended September 30, 2017, a portion of these Changyou restricted share units
and share options had a dilutive effect, and therefore was included in the calculation of Sohu.com Inc.s diluted net income /(loss) per share. This impact is presented as incremental dilution from Changyou for the nine months ended
September 30, 2017 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
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Sohu.com Inc., basic
|
|
$
|
(74,814
|
)
|
|
$
|
(103,960
|
)
|
|
$
|
(158,124
|
)
|
|
$
|
(260,391
|
)
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental dilution from Sogou
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Incremental dilution from Changyou
|
|
|
(472
|
)
|
|
|
0
|
|
|
|
(1,125
|
)
|
|
|
(931
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Sohu.com Inc., diluted
|
|
$
|
(75,286
|
)
|
|
$
|
(103,960
|
)
|
|
$
|
(159,249
|
)
|
|
$
|
(261,322
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic shares of common stock outstanding
|
|
|
38,728
|
|
|
|
38,877
|
|
|
|
38,695
|
|
|
|
38,848
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share options and restricted share units
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding
|
|
|
38,728
|
|
|
|
38,877
|
|
|
|
38,695
|
|
|
|
38,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per share attributable to Sohu.com Inc.
|
|
$
|
(1.93
|
)
|
|
$
|
(2.67
|
)
|
|
$
|
(4.09
|
)
|
|
$
|
(6.70
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net loss per share attributable to Sohu.com Inc.
|
|
$
|
(1.94
|
)
|
|
$
|
(2.67
|
)
|
|
$
|
(4.12
|
)
|
|
$
|
(6.72
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-45-
15. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
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.
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; (c) classification
on the statement of cash flows; and (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.
-46-
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 to each period presented using a retrospective transition method. The Sohu Group is currently evaluating the impact of adopting this standard on its consolidated financial statements.
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.
16. SUBSEQUENT EVENTS
As previously disclosed in Current Reports on Form 8-K filed by the Company with the SEC on October 13, 2017 and October 27, 2017, on October 13, 2017
Sogou filed with the SEC a registration statement on Form F-1 relating to a proposed IPO of American depositary shares (ADSs) representing Sogou Class A Ordinary Shares, and on October 27, 2017 Sogou filed with the SEC an amendment to
the Form F-1 that included the number of ADSs proposed to be offered and the estimated price range for the proposed IPO. Sogou intends to apply to have the ADSs listed on the New York Stock Exchange under the symbol SOGO. The proposed
offering of Sogou ADSs will only be made by means of a prospectus. The registration statement has not yet become effective. The ADSs may not be sold, nor may any offers to buy be accepted, prior to the time the registration statement becomes
effective. Market conditions, adverse changes in Sogous business or prospects, or other factors could prevent Sogou from conducting and completing the proposed IPO.
On October 25, 2017, Sohu received from ICBC pursuant to the loan arrangements with ICBC RMB800.0 million (or approximately $120.6 million) at an
annual interest rate of 5.5%.
-47-
ITEM 2.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
As used
in this report, references to us, we, our, our company, our Group, the Sohu Group, the Group, and Sohu.com are to Sohu.com Inc. and, except where the
context requires otherwise, our subsidiaries and variable interest entities (VIEs) Sohu.com Limited, Sohu.com (Hong Kong) Limited (Sohu Hong Kong), All Honest International Limited (All Honest), Sohu.com (Game)
Limited (Sohu Game), Go2Map Inc., Sohu.com (Search) Limited (Sohu Search), Sogou Inc. (Sogou), Sogou (BVI) Limited (Sogou BVI), Sogou Hong Kong Limited (Sogou HK), Vast Creation Advertising
Media Services Limited (Vast Creation), Sogou Technology Hong Kong Limited, Fox Video Investment Holding Limited (Video Investment), Fox Video Limited (Sohu Video), Fox Video (HK) Limited (Video HK),
Focus Investment Holding Limited, Sohu Focus Limited, Sohu Focus (HK) Limited, Beijing Sohu New Era Information Technology Co., Ltd. (Sohu Era), Beijing Sohu Software Technology Co., Ltd., Beijing Sogou Technology Development Co., Ltd.
(Sogou Technology), Beijing Sogou Network Technology Co., Ltd (Sogou Network), Fox Information Technology (Tianjin) Limited (Video Tianjin), Beijing Sohu New Media Information Technology Co., Ltd. (Sohu
Media), Beijing Sohu New Momentum Information Technology Co., Ltd. (Sohu New Momentum), Beijing Century High Tech Investment Co., Ltd. (High Century), Beijing Heng Da Yi Tong Information Technology Co., Ltd. (Heng
Da Yi Tong, formerly known as Beijing Sohu Entertainment Culture Media Co., Ltd.), Beijing Sohu Internet Information Service Co., Ltd. (Sohu Internet), Beijing GoodFeel Technology Co., Ltd., Beijing Sogou Information Service Co.,
Ltd. (Sogou Information), Beijing 21 East Culture Development Co., Ltd., Beijing Sohu Donglin Advertising Co., Ltd.(Donglin), Beijing Pilot New Era Advertising Co., Ltd. (Pilot New Era), Beijing Focus Yiju Network
Information Technology Co., Ltd., SohuPay Science and Technology Co., Ltd., Beijing Yi He Jia Xun Information Technology Co., Ltd., Tianjin Jinhu Culture Development Co., Ltd. (Tianjin Jinhu), Guangzhou Qianjun Network Technology Co.,
Ltd. (Guangzhou Qianjun), Beijing Modu Legendary Culture Media Co., Ltd., Shenzhen Shi Ji Guang Su Information Technology Co., Ltd., Chengdu Easypay Technology Co., Ltd., Beijing Shi Ji Si Su Technology Co., Ltd., Tianjin Sogou Network
Technology Co., Ltd, Chongqing Qogir Enterprise Management Consulting Co., Ltd., Beijing Focus Interactive Information Service Co., Ltd., Beijing Focus Xin Gan Xian Information Technology Co., Ltd., Beijing Focus Real Estate Agency Co., Ltd. and our
independently-listed majority-owned subsidiary Changyou.com Limited (Changyou) as well as the following direct and indirect subsidiaries and VIEs of Changyou: Changyou.com HK Limited (Changyou HK) formerly known as TL Age
Hong Kong Limited), Changyou.com Webgames (HK) Limited (Changyou HK Webgames), Changyou.com Gamepower (HK) Limited, ICE Entertainment (HK) Limited (ICE HK), Changyou.com Gamestar (HK) Limited, Changyou.com Korea Limited,
Changyou.com India Private Limited, Changyou BILISIM HIZMETLERI TICARET LIMITED SIRKETI, Kylie Enterprises Limited, Mobogarden Enterprises Limited, Heroic Vision Holdings Limited, TalkTalk Limited, RaidCall (HK) Limited, 7Road.com Limited
(7Road), 7Road.com HK Limited (7Road HK), Changyou.com (TH) Limited, PT. CHANGYOU TECHNOLOGY INDONESIA, Changyou Middle East FZ-LLC, Changyou.com Technology Brazil Desenvolvimento De Programas LTDA, Greative Entertainment
Limited (formerly known as Greative Digital Limited), Glory Loop Limited (Glory Loop), MoboTap Inc. (MoboTap, a Cayman Islands company), MoboTap Inc. Limited (MoboTap HK), MoboTap Inc. (a Delaware corporation),
TMobi Limited (formerly known as Muse Entertainment Limited), Mobo Information Technology Pte. Ltd., Changyou Mobo Glint Limited, Beijing AmazGame Age Internet Technology Co., Ltd. (AmazGame), Beijing Changyou Skyline Property Management
Co. Ltd, Beijing Changyou Chuangxiang Software Technology Co., Ltd., Beijing Changyou Gamespace Software Technology Co., Ltd. (Gamespace), ICE Information Technology (Shanghai) Co., Ltd. (ICE Information), Beijing Changyou
RaidCall Internet Technology Co., Ltd. (RaidCall), Beijing Yang Fan Jing He Information Consulting Co., Ltd. (Yang Fan Jing He), Shanghai Jingmao Culture Communication Co., Ltd. (Shanghai Jingmao), Shanghai Hejin
Data Consulting Co., Ltd., Beijing Changyou Jingmao Film & Culture Communication Co., Ltd. (Beijing Jingmao), Beijing Gamease Age Digital Technology Co., Ltd. (Gamease), Beijing Guanyou Gamespace Digital Technology
Co., Ltd. (Guanyou Gamespace), Beijing Zhi Hui You Information Technology Co., Ltd., Shanghai ICE Information Technology Co., Ltd. (Shanghai ICE), Shenzhen 7Road Network Technologies Co., Ltd. (7Road Technology),
Beijing Changyou Star Digital Technology Co., Ltd (Changyou Star), Beijing Changyou Creation Information Technology Co., Ltd. (formerly known as Beijing Changyou e-pay Co. Ltd.), Shenzhen Brilliant Imagination Technologies Co., Ltd.
(Brilliant Imagination), Beijing Baina Information Technology Co., Ltd., Baina Zhiyuan (Beijing) Technology Co., Ltd. (Beijing Baina Technology), Baina Zhiyuan (Chengdu) Technology Co., Ltd., Chengdu Xingyu Technology Co.,
Ltd., Baina (Wuhan) Information Technology Co., Ltd. (Wuhan Baina Information), Wuhan Xingyu Technology Co., Ltd., Beijing Changyou Creative Technology Co., Ltd., BeiJing Changmica Culture Co., Ltd., and HongKong New Xinlang Electron
Group Limited, and these references should be interpreted accordingly. Unless otherwise specified, references to China or PRC refer to the Peoples Republic of China and do not include the Hong Kong Special
Administrative Region, the Macau Special Administrative Region or Taiwan. This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including, without limitation, statements regarding our expectations, beliefs, intentions or future strategies that are signified by the words expect, anticipate, intend, believe, or similar
language. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Our business and financial performance are
subject to substantial risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. In evaluating our business, you should carefully consider the information set forth under the heading
Risk Factors in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the U.S. Securities and Exchange Commission (SEC) on February 27, 2017, as updated by Part II
Item 1A of our quarterly report on Form 10 Q for the quarter ended June 30, 2017 and by Part II Item 1A of this report. Readers are cautioned not to place undue reliance on these forward-looking statements.
-48-
OVERVIEW
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). Our 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 search-related services and mobile Internet products 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) as well as its mobile game Legacy TLBB, and engages primarily in the development, operation and licensing of online games for PCs and mobile devices. Most of our operations are conducted through our China-based subsidiaries and
VIEs.
Factors and Trends Affecting our Business
With the accelerated shift in user activities from PCs to mobile devices and an increase in the number of Internet users, the use of various kinds of mobile
Internet services continued to increase. At Sohu, we focused our efforts on developing a portfolio of leading mobile products across our business lines that we believed our users would like.
Smartphones have completely reshaped the online media business in China, as in-stream feeds have become a mainstream format through which users have become
accustomed to receiving personalized information. During the first three quarters of 2017, the market for delivering services to smartphones has developed quickly, and competition has increased. We invested extensivily in content and technology for
Sohu Media Portal to continue to build it as a competitive online media platform. We continuously refined the design of our key product Sohu News APP, and introduced innovative features to meet users appetites. In the third quarter of 2017, we
improved the algorithm used by the recommendation engine of Sohu News APP to enhance its user experience. On the sales front, in the third quarter of 2017, large brand advertisers performance remained soft, while the demand from small and
medium enterprise (SME) customers was resilient.
Online video services remained one of the most popular Internet applications, and continued
to gain viewers from television stations. The video industry continued to be deeply competitive as major online platforms aggressively competed for popular content. The competition led to an escalation in the price of content, especially the prices
of premium TV dramas. Since 2016, Sohu Video has been shifting our focus to the self-developed content category, which, in our view, will create long-lasting value to our platform. Leveraging our exclusive original content, we also actively explored
opportunities with subscription services that we believe will become an important revenue source in addition to traditional advertising revenues. From the second quarter of 2017, Sohu Video has stopped chasing the costly domestic TV dramas that are
scheduled to be released in 2018. We expect this decision will generate substantial cost savings and help improve the bottom-line results for Sohu Video in 2018.
For our search and search-related business, Sogou is one of the top players in the online search sector in China. In the third quarter of 2017, we continued
to strengthen our competitive advantages in search from channel to content, leveraging the robust ecosystem we have built and shared with Tencent. Specially, Tencent began testing, on a trial basis and for purposes of assessment, the integration of
Sogou Search into Weixin/WeChat, whereby its users can use Sogou Search as a general search function from within Weixin/WeChat to access information outside Weixin/WeChat. By the end of September 2017, Sogous mobile search traffic had grown
38% from the end of September 2016. The revenues generated from our mobile auction-based pay-for-click services accounted for 83% of our total auction-based pay-for-click revenues. We also made solid progress in artificial intelligence, in
particular with voice technology. As of September 30, 2017, daily use of voice input through Sogou Mobile Keyboard had increased by approximately 75% from a year ago.
For our online game business, PC games revenue remained stable in the quarter and mobile games revenue continued to grow, driven by the launch of Legacy TLBB.
Managements top priority is to address the needs of core users and keep users entertained with continuual upgrades of content and social functions. For the three months ended September 30, 2017, Changyous PC games and mobile games
had approximately 7.5 million Average Monthly Active Accounts and approximately 2.2 million Quarterly Aggregate Active Paying Accounts.
-49-
Our Business
Through the operation of Sohu, Sogou and Changyou, we generate online advertising revenues (including brand advertising revenues and search and search-related
advertising revenues), online games revenues and other revenues. Online advertising and online games are our core businesses. For the three months ended September 30, 2017, total revenues generated by Sohu, Sogou and Changyou were approximately
$516.1 million, including:
Sohu:
|
|
|
$68.8 million in brand advertising revenues, of which $37.9 million was from Sohu Media Portal, $18.9 million was from Sohu Video, and $12.0 million was from Focus; and
|
|
|
|
$24.6 million in other revenues, mainly attributable to revenues from paid subscription services, sub-licensing of purchased video content to third parties, interactive broadcasting services, and content provided
through the platforms of the three main telecommunications operators in China.
|
Total revenues generated by Sohu were $93.4 million.
Sogou:
|
|
|
$225.4 million in search and search-related advertising revenues; and
|
|
|
|
$31.8 million in other revenues, attributable to Sogous offering of Internet value-added services (or IVAS), primarily with respect to the operation of Web games and mobile games developed by third
parties, and of other products and services, including smart hardware products.
|
Total revenues generated by Sogou were $257.2 million.
Changyou:
|
|
|
$132.4 million in online game revenues;
|
|
|
|
$6.0 million in brand advertising revenues, mainly attributable to Changyous 17173.com Website; and
|
|
|
|
$27.1 million in other revenues attributable to Changyous cinema advertising business and IVAS business.
|
Total revenues generated by Changyou were $165.5 million.
For
the three months ended September 30, 2017, our total brand advertising revenues were $74.8 million, total search and search-related advertising revenues were $225.4 million, total online game revenues were $132.4 million, and total other
revenues were $83.5 million.
Sohus Business
Brand Advertising Business
Sohus main business is
the brand advertising business, which offers to users, over our 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 our
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. Sohu Media Portal 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 our consolidated statements of comprehensive income.
-50-
Other Sohu Business
Sohu also engages in the other business, which consists primarily of paid subscription services, sub-licensing of purchased video content to third parties,
interactive broadcasting services, 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 our consolidated statements
of comprehensive income.
Sogous Business
Search and Search-related Business
The search and
search-related business consists primarily of search and search-related advertising services offered by Sogou. Search and search-related advertising services enable advertisers promotional links to be displayed on Sogous search results
pages and other Internet properties and third parties Internet properties where the links are relevant to the subject and content of searches and such properties. Sogous advertising services expand distribution of advertisers
promotional links and advertisements by leveraging traffic on third parties Internet properties, including Web content, software, and mobile applications. Our search and search-related business benefits from our collaboration with Tencent
Holdings Limited (Tencent), which provides us access to traffic and content generated from the products and services provided by Tencent.
Revenues generated by the search and search-related business are classified as search and search-related advertising revenues in our consolidated statements
of comprehensive income.
Other Sogou Business
Sogou
also offers IVAS, primarily with respect to the operation of Web games and mobile games developed by third parties, and offers other products and services, including smart hardware products. Revenues generated by Sogou from the other business are
classified as other revenues in our 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; (b) mobile games, which are played on mobile devices and require an Internet
connection. Prior to the sale of 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 our consolidated statements of comprehensive income.
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 two platforms, RaidCall and MoboTap. RaidCall provides online music and entertainment services, primarily in Taiwan. MoboTap provides (a) software applications for PCs and mobile devices through Dolphin Browser, which is a gateway to a
host of user activities on mobile devices with the majority of its users based in overseas markets, and (b) domestic online card and board games.
In
2014, Changyou purchased 51% of the equity interests in MoboTap on a fully-diluted basis for approximately $91 million in cash. Changyous intention in making the acquisition was to generate benefits from expected synergies of the Dolphin
Browser with Changyous platform channel business.
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In 2015, the financial performance of the Dolphin Browser was below original expectations, and Changyous
management concluded that the Dolphin Browser was unable to provide the expected synergies with Changyous platform channel business. Accordingly mangagment performed a goodwill impairment test using the discounted cash flow method for the
goodwill generated in the acquisition of MoboTap. As a result, Changyou recorded $29.6 million and $8.9 million, respectively, in goodwill and intangible assets impairment losses. MoboTap then switched its focus to the development and operation of
card and board games in China, which have been MoboTaps main source of revenue since 2015.
In 2016, Changyous Board of Directors approved the
disposal of Changyous 51% equity interest in MoboTap. 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.
In the first quarter of 2017, Changyous
management determined that the disposal was unlikely to be completed within one year, due to the suspension of negotiations with a potential buyer of MoboTap. As a result, the assets held for sale and liabilities held for sale related to MoboTap
were reclassified and have been recorded 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 as of the reclassification date in the Sohu Groups consolidated balance sheets commencing on the reclassification date. 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.
In the third quarter of 2017, due to reinforced restrictions the Chinese regulatory authorities imposed on card and board games, some of Changyous key
distribution partners informed Changyou that they had decided to stop the distribution and promotion of card and board games, which had an adverse impact on MoboTaps current performance, and also increased the uncertainty for its future
operations and cash flow. As a result, Changyou determined that it is unlikely for MoboTap to gain users and grow its online card and board games revenues in China. Management performed an impairment test in the third quarter of 2017 using the
discounted cash flow method and impairment charges of $86.9 million were recognized to reflect the fair value of the MoboTap business, of which an $83.5 million impairment loss was recognized for goodwill and a $3.4 million impairment loss was
recognized for intangible assets.
All revenues generated by the 17173.com Website are classified as brand advertising revenues, online card and board
games revenues generated by MoboTap are classified as online game revenues, and IVAS revenues generated by MoboTap through the Dolphin Browser and generated by RaidCall are classified as other 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 our consolidated
statements of comprehensive income.
CRITICAL ACCOUNTING POLICIES AND MANAGEMENT ESTIMATES
Our discussion and analysis of our financial condition and results of operations relates to our consolidated financial statements, which have been prepared in
accordance with generally accepted accounting principles (GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, costs and
expenses, and related disclosures. On an on-going basis, we evaluate our estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Identified below are the accounting
policies that reflect our most significant estimates and judgments, and those that we believe are the most critical to fully understanding and evaluating our consolidated financial statements.
Basis of Consolidation and Recognition of Noncontrolling Interest
Our consolidated financial statements include the accounts of Sohu.com Inc. and its subsidiaries and consolidated VIEs. All intra-Group transactions are
eliminated.
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VIE Consolidation
Our VIEs are wholly or partially owned by certain of our employees as nominee shareholders. For our consolidated VIEs, management made evaluations of the
relationships between us and our 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, we
control the shareholders voting interests in these VIEs. As a result of such evaluation, management concluded that we are the primary beneficiary of our consolidated VIEs.
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 shareholder. The noncontrolling interests in our consolidated financial statements primarily
consist of noncontrolling interests for Sogou and Changyou.
Noncontrolling Interest for Sogou
Sogous Share Structure
As of
September 30, 2017, Sogou had outstanding a combined total of 336,194,956 ordinary shares and preferred shares held as follows:
(i) Sohu.com Inc.:
130,920,250 Class A Ordinary Shares, of which 3,707,000 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: 21,716,831 Class A Ordinary Shares.
Sohus Shareholding in and Control of Sogou
As of September 30, 2017, we 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 us. Also as of September 30, 2017, we 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 us, 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, we consolidate Sogou in our consolidated financial statements, and recognize noncontrolling interest reflecting economic interests in Sogou held by shareholders other than us (the Sogou noncontrolling
shareholders). Sogous net income/(loss) attributable to the Sogou noncontrolling shareholders is recorded as noncontrolling interest in our 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 those share-based awards which are unvested and vested but not yet
settled and the Sogou noncontrolling shareholders investments in Sogous 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 our consolidated balance sheets, as we have the right to reject a redemption requested by the noncontrolling shareholders. These treatments are based on the terms governing investments from,
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;
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(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 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 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 and noncontrolling shareholders based on their shareholding percentage 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.
(i)
Dividend Rights
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 dividends (Accrued
Dividends). Accrued 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 Accrued
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 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 Accrued 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.
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(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 an IPO of Sogou with certain parameters 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.
Voting Agreement Signed among Sohu, Tencent, and Sogou in August 2017
In August 2017, in anticipation of Sogous previously-announced currently pending proposed IPO, Sohu, Tencent, and Sogou entered into the Voting
Agreement, which will take effect upon the completion of the proposed IPO. Effective upon the completion of the proposed IPO, all of the Sogou shares held by us for our own account and all of the Sogou shares held by Tencent will be redesignated as
Class B Ordinary Shares. Each Class B Ordinary Share will be entitled to ten votes per share on any matter brought to a vote of Sogou shareholders, whereas Class A Ordinary Shares, which will be held by shareholders other than us and
Tencent, will be entitled to one vote per share. As a result of the additional voting power of the Class B Ordinary Shares, upon the completion of the proposed IPO Sogou and Tencent will together have the power to determine all matters that may come
to a vote of Sogous shareholders, including the election of directors. Under the Voting Agreement, following the completion of Sogous proposed IPO, we will have the right to appoint a majority of Sogous Board of Directors and
Tencent will have the right to appoint two directors. We will continue to consolidate Sogou in our financial statements following the completion of the proposed IPO, and will provide for non-controlling interests reflecting ordinary shares
in Sogou held by shareholders other than us.
Noncontrolling Interest for Changyou
Changyou is a public company listed on the NASDAQ Global Select Market. As of September 30, 2017, we held approximately 68% of the combined total of
Changyous outstanding ordinary shares, and controlled approximately 95% of the total voting power in Changyou.
As Changyous controlling
shareholder, we consolidate Changyou in our consolidated financial statements, and recognize noncontrolling interest reflecting the economic interest in Changyou held by shareholders other than us (the Changyou noncontrolling
shareholders). Changyous net income /(loss) attributable to the Changyou noncontrolling shareholders is recorded as noncontrolling interest in our consolidated statements of comprehensive income, based on their 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 our ownership in Changyou, are recorded as noncontrolling interest in our consolidated balance sheets.
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Segment Reporting
Our 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 CODM is Sohu.com Inc.s Chief Executive Officer.
Revenue Recognition
We recognize revenue when persuasive
evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured. The recognition of revenues involves certain management judgments. The amount and timing of our revenues
could be materially different for any period if management made different judgments or utilized different estimates.
Revenues or expenses from barter
transactions are recognized at fair value during the period in which the advertisements are provided only if the fair value of the advertising services surrendered in the transaction is determinable based on our historical practice of receiving cash
and cash equivalents, marketable securities, or other consideration that is readily convertible to a known amount of cash for similar advertising from buyers unrelated to the counterparty in the barter transaction.
Online Advertising Revenues
Online advertising
revenues include revenues from brand advertising services as well as search and search-related advertising services. We recognize revenue for the amount of fees we receive from our advertisers, after deducting agent rebates and net of value-added
tax (VAT) and related surcharges.
Brand Advertising Revenues
Business Model
Through PCs and mobile devices, we
provide advertisement placements to our advertisers on different Internet platforms and in different formats, which include banners, links, logos, buttons, full screen, pre-roll, mid-roll, post-roll video screens, pause video screens, loading page
ads, news feed ads and in-feed video infomercial ads.
Currently we have four main types of pricing models, consisting of the Fixed Price model, the Cost
Per Impression (CPM) model, the Cost Per click (CPC) model, and the E-commerce model.
Under the Fixed Price model, a contract is signed to establish a fixed price for the
advertising services to be provided. We recognize revenue based on the contract price and the period of display.
(ii) CPM model
Under the CPM model, the unit price for each qualifying display is fixed, but there is no overall fixed price for the advertising services stated in the
contract with the advertiser. A qualifying display is defined as the appearance of an advertisement, where the advertisement meets criteria specified in the contract. We recognize revenue based on the fees we charge the advertisers, which are based
on the unit prices and the number of qualifying displays.
(iii) CPC model
Under the CPC model, there is no overall fixed price for advertising services stated in the contract with the advertiser. We charge advertisers on a
per-click basis when the users click on the advertisements. The unit price for each click is auction-based. We recognize revenue based on qualifying clicks and the unit price.
(iv) E-commerce model
Under the e-commerce model, revenues were
mainly generated from sales of membership cards which allow potential home buyers to purchase specified properties from real estate developers at a discount greater than the price that Focus charges for the card. Membership fees are refundable until
the potential home buyer uses the discounts to purchase properties. Focus recognizes such revenues upon obtaining confirmation that the membership card has been redeemed to purchase a property.
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Revenue Recognition
For brand advertising revenue recognition, prior to entering into contracts, we make a credit assessment of the advertiser. For contracts for which
collectability is determined to be reasonably assured, we recognize revenue when all revenue recognition criteria are met. In other cases, we only recognize revenue when the cash is received and all other revenue recognition criteria are met.
We treat advertising contracts with multiple deliverable elements as separate units of accounting for revenue recognition purposes and recognize revenue on a
periodic basis during the contract period when each deliverable service is provided. Since the contract price is for all deliverables under one advertising contract, we allocate the contract price among all the deliverables at the inception of the
arrangement on the basis of their relative selling prices according to the selling price hierarchy established by
ASU No. 2009-13
. We first use vendor-specific objective evidence of selling price, if it exists. If vendor-specific
objective evidence of selling price does not exist, we use third-party evidence of selling price. If neither vendor-specific objective evidence of selling price nor third-party evidence of selling price exists, we use managements best estimate
of selling price for the deliverables.
Search and Search-related Advertising Revenues
Search and search-related services consist primarily of search and search-related advertising services offered by Sogou.
Pay-for-click Services
Pay-for-click services are
services that enable our advertisers promotional links to be displayed on Sogous search results pages and other Internet properties and third parties Internet properties where the links are relevant to the subject and content of
searches and such properties. For pay-for-click services, we introduce Internet users to our advertisers through our auction-based systems and charge advertisers on a per-click basis when the users click on the displayed links. Revenue for
pay-for-click services is recognized on a per-click basis when the users click on the displayed links.
Other Online Advertising Services
Other online advertising services mainly consist of displaying advertisers promotional links on Sogous Internet properties. Revenue
for time-based advertising is normally recognized on a straight-line basis over the contract period, provided our obligations under the contract have been met and all revenue recognition criteria have been met. Revenue for performance-based
advertising services is recognized when our obligations under the contract have been met.
Sogous advertising services expand distribution of
advertisers promotional links and advertisements by leveraging traffic on third parties Internet properties, including Web content, software, and mobile applications. We recognize gross revenue for the amount of fees we receive from
advertisers, as we are the primary obligor to the advertisers. Payments made to operators of third-party Internet properties are included in traffic acquisition costs, which are included in cost of search and search-related advertising revenues.
Online Game Revenues
Changyous online
game revenues are generated primarily from its self-operated and licensed-out PC games and mobile games. Prior to the sale of the Shenzhen 7Road business in 2015, Changyou generated online game revenues from Web games, which have been an
insignificant part of Changyous business since the sale. Changyous online game revenues also include revenues generated from online card and board games offered by MoboTap. All of Changyous games are operated under the item-based
revenue model, where the basic game play functions are free of charge and players are charged for purchases of in-game virtual items, including those with a predetermined expiration time and perpetual virtual items.
Self-Operated Games
Changyou is the primary obligor of
its self-operated games. Changyou hosts the games on its own servers and is responsible for the sale and marketing of the games as well as customer service. Accordingly, revenues are recorded gross of revenue sharing-payments to third-party
developers and/or mobile APP stores, but are net of business tax/VAT and discounts to game card distributors where applicable. Changyou obtains revenues from the sale of in-game virtual items. Revenues are recognized over the estimated lives of the
virtual items purchased by game players or as the virtual items are consumed. If different assumptions were used in deriving the estimated lives of the virtual items, the timing of the recording of the revenues would be impacted.
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PC Games
Proceeds from the self-operation of PC games are collected from players and third-party game card distributors through sales of Changyous game points on
its online payment platform and prepaid game cards.
Self-operated PC games are either developed in house or licensed from third-party developers. For
licensed PC games, Changyou remits a pre-agreed percentage of the proceeds to the third-party developers, and keeps the balance pursuant to revenue-sharing agreements. Such revenue-sharing amounts paid to third-party developers are recorded in
Changyous cost of revenues.
Mobile Games
For self-operated mobile games, Changyou sells game points to its game players via third-party mobile APP stores. The mobile APP stores in turn pay Changyou
proceeds after deducting their share of pre-agreed revenue-sharing amounts.
Self-operated mobile games are either developed in house or licensed from or
jointly developed with third-party developers. For licensed and jointly developed mobile games, Changyou remits a pre-agreed percentage of the proceeds to the third-party developers, and keeps the balance pursuant to revenue-sharing agreements. Such
revenue-sharing amounts paid to mobile application stores and third-party developers are recorded in Changyous cost of revenues.
Web Games
Changyou continued to operate a small portfolio of self-operated Web games after its sale of the Shenzhen 7Road in 2015. Proceeds from those
self-operated Web games are collected from players through the sale of game points.
Licensed-Out Games
Changyou also authorizes third parties to operate its online games. Licensed out games include PC games and mobile games developed in house (such as its mobile
game Legacy TLBB) and mobile games jointly developed with third-party developers. Changyou receives monthly revenue-based royalty payments from all the third-party licensee operators. Changyou receives additional up-front license fees from certain
third-party licensee operators who are entitled to an exclusive right to operate Changyous games in specified geographic areas. Since Changyou is obligated to provide post-sale services, the initial license fees are recognized as revenue
ratably over the license period, and the monthly revenue-based royalty payments are recognized when relevant services are delivered, provided that collectability is reasonably assured. Changyou views the third-party licensee operators as
Changyous customers and recognizes revenues on a net basis, as Changyou does not have the primary responsibility for fulfillment and acceptability of the game services. Changyou remits to the third-party developers a pre-agreed percentage of
revenues from jointly-developed and licensed-out mobile games, and recognizes the revenue-sharing amounts paid to third-party developers as cost of revenues or product development expenses.
Other Revenues
Sohu
Other revenues attributable to Sohu consist primarily of revenues from paid subscription services, sub-licensing of purchased video content to third parties,
interactive broadcasting services, and content provided through the platforms of the three main telecommunications operators in China.
Sogou
Other revenues attributable to Sogou are revenues from IVAS, primarily with respect to the operation of Web games and mobile games developed by third parties,
and revenues from other products and services that Sogou offers, including smart hardware products.
Changyou
Other revenues attributable to Changyou are primarily from its cinema advertising business and are also from IVAS.
In its cinema advertising business, Changyou provides clients advertising placements in slots that are shown in theaters before the screening of movies. The
rights to place advertisements in such advertising slots are granted under contracts Changyou signs with different theaters. When all the recognition criteria are met, revenues from cinema advertising are recognized based on a percentage of the
advertising slots actually delivered or on a straight-line basis over the contract period.
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Changyou provides IVAS primarily through software applications for PCs and mobile devices offered by MoboTap on
the Dolphin Browser and by RaidCall. Revenues from IVAS are recognized during the period the service is rendered or items are consumed under the gross method, as Changyou is the principal obligor for provision of the services.
Product Development Expenses
Product development
expenses mainly consist of salary and benefits expenses, content and license expenses, development, upgrade and technical support service fees, depreciation and amortization expenses, share-based compensation, and facilities expenses. These expenses
are incurred for the enhancement and maintenance of our Internet platforms as well as for our products and services, including the development costs of online games prior to the establishment of technological feasibility and cost of upgrades and
technical support after the online games are available for marketing.
Advertising Expenses
Advertising expenses are included in sales and marketing expenses, and generally represent the expenses of promotions to create or stimulate a positive image
of us or a desire to subscribe for our products and services. Advertising and promotional expenses are expensed as incurred.
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.
For share-based awards for which a grant date has occurred, 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 share-based awards for which the service inception date precedes the grant date, share-based compensation expense is recognized as
costs and expenses in the consolidated statements of comprehensive income beginning on the service inception date and is re-measured on each subsequent reporting date before the grant date, based on the estimated fair value of the related
share-based awards. Share-based compensation expense is charged to the shareholders equity or noncontrolling interest section in the consolidated balance sheets. The assumptions used in share-based compensation expense recognition represent
managements best estimates, but these estimates involve inherent uncertainties and the application of management judgment. If factors change or different assumptions are used, our share-based compensation expense could be materially different
for any period. Moreover, the estimates of fair value are not intended to predict actual future events or the value that ultimately will be realized by employees who receive equity awards, and subsequent events are not indicative of the
reasonableness of the original estimates of fair value made by us for accounting purposes.
Sohu (excluding Sohu Video), Sogou, and Changyou
Share-based Awards
Sohu (excluding Sohu Video) Share-based Awards
In determining the fair value of stock options granted by Sohu (excluding Sohu Video) as share-based awards before 2006, the Black-Scholes valuation model was
applied. In determining the fair value of restricted share units granted, the public market price of the underlying shares on the grant dates was applied.
Options for the purchase of Sohu common stock contractually granted under the Sohu 2010 Stock 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 Sohu 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 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 values 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 values of the stock options granted, the public market price of the underlying shares at each reporting date
was used, and a binomial valuation model was applied.
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Sogou Share-based Awards
In determining the fair value of share options granted by Sogou as share-based awards, a binomial model was applied. The determination of the fair value is
affected by the fair value of the ordinary shares as well as assumptions regarding a number of complex and subjective variables, including risk-free interest rates, exercise multiples, expected forfeiture rates, the expected share price volatility
rates, and expected dividends. The fair values of the ordinary shares were 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. Certain persons who became Sogou employees when Tencents Soso search and 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 and search-related businesses to Sogou, Sogou applied the guidance in
ASC 505-50
to measure the related compensation expense, as the expense is deemed to have
been incurred by Tencent as an investor on Sogous behalf, based on the then-current fair value at each reporting date. 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.
Changyou Share-based Awards
In determining the fair
value of ordinary shares and restricted share units granted by Changyou as share-based awards in 2008, the income approach /discounted cash flow method with a discount for lack of marketability was applied, given that the shares underlying the
awards were not publicly traded at the time of grant. In determining the fair value of restricted share units granted in 2009 shortly before Changyous IPO, the fair value of the underlying shares was determined based on Changyous
offering price for its IPO. In determining the fair value of restricted share units granted after Changyous IPO, the public market price of the underlying shares on the grant dates was applied.
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 Changyou 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 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 values will be fixed in
the period in which the grant date occurs, and cumulative compensation expense will be adjusted based on the fair values at the grant date. In determining the fair values of Changyou share options granted, the public market price of the underlying
shares at each reporting date was used, and a binomial valuation model was applied.
Compensation Expense Recognition
For options and restricted share units granted with respect to Sohu (excluding Sohu Video) shares and Changyou shares, compensation expense is recognized on an
accelerated basis over the requisite service period. For share options granted with respect to Sogou shares, compensation expense is recognized over the estimated period during which the service period requirement and performance target will be met,
which is usually within one year. For Tencent restricted share units that Tencent had granted to employees who transferred to Sogou with the Soso search and search-related businesses, compensation expense is recognized by Sogou on an accelerated
basis over the requisite service period, and the fair value of the share-based compensation is re-measured at each reporting date until the service has been provided. The number of share-based awards for which the service is not expected to be
rendered over the requisite period is estimated, and no compensation expense is recorded for the number of awards so estimated.
For Sogou Class A
Ordinary Shares repurchased from our former President and Chief Financial Officer 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 September 30, 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.
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For purposes of
ASC 718-10-25
, as of September 30, 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
, our 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, we 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.
Taxation
Income Taxes
Recognition
Income taxes are accounted for using an asset
and liability approach which requires the recognition of income taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our financial statements
or tax returns. Deferred income taxes are determined based on the differences between the accounting basis and the tax basis of assets and liabilities and are measured using the currently enacted tax rates and laws. Deferred tax assets are reduced
by a valuation allowance, if based on available evidence, it is considered that it is more likely than not that some portion of or all of the deferred tax assets will not be realized. In making such determination, we consider factors including
future reversals of existing taxable temporary differences, future profitability, and tax planning strategies. If events were to occur in the future that would allow us to realize more of our deferred tax assets than the presently recorded net
amount, an adjustment would be made to the deferred tax assets that would increase income for the period when those events occurred. If events were to occur in the future that would require us to realize less of our deferred tax assets than the
presently recorded net amount, an adjustment would be made to the valuation allowance against deferred tax assets that would decrease income for the period when those events occurred. Significant management judgment is required in determining income
tax expense and deferred tax assets and liabilities.
Our deferred tax assets are related to net operating losses and temporary differences between
accounting basis and tax basis for our China-Based Subsidiaries and VIEs, which are subject to corporate income tax in the PRC under the CIT law.
Applicable Income Tax Rate
Principal Entities
Qualified as HNTEs
The CIT Law generally applies an income tax rate of 25% to all enterprises but grants preferential tax treatment to 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.
As of September 30, 2017, the
following principal entities were qualified as HNTEs and were entitled to an income tax rate of 15%.
For Sohus Business
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Sohu New Momentum. Sohu New Momentum qualified as an HNTE for 2016 to 2018, and will need to re-apply for HNTE qualification in 2019.
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Sohu Internet. Sohu Internet qualified as an HNTE for 2015 to 2017, and will need to re-apply for HNTE qualification in 2018.
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Sohu Media and Guangzhou Qianjun. Sohu Media and Guangzhou Qianjun re-applied for HNTE qualification in August 2017 and May 2017, respectively. New Medias re-application has been approved, and it is qualified as
an HNTE for 2017 to 2019 and will need to re-apply for qualification in 2020. Pending approval of its re-application, Guanzhou Qianjun is entitled to continue to enjoy the beneficial tax rate as if it had already qualified as an HNTE for 2017.
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For Sogous Business
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Sogou Information. Sogou Information qualified as an HNTE for 2015 to 2017, and will need to re-apply for HNTE qualification in 2018.
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Sogou Technology. Sogou Technology re-applied for HNTE qualification in September 2017. Pending approval of its re-application, Sogou Technology is entitled to continue to enjoy the beneficial tax rate as if it had
already qualified as an HNTE for 2017.
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Sogou Network. Sogou Network qualified as an HNTE for 2016 to 2018, and will need to re-apply for HNTE qualification in 2019.
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For Changyous Business
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Gamease and AmazGame. Gamease and AmazGame re-applied for HNTEs qualification in August 2017 and October 2017, respectively. Pending approval of their re-applications, AmazGame and Gamease are entitled to continue to
enjoy the beneficial tax rate as if they had already qualified as an HNTE for 2017.
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Gamespace. Gamespace qualified as HNTE for the years 2017 to 2019, and will need to re-apply for HNTE qualification in 2020.
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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
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Sohu New Momentum. In the second quarter of 2017, Sohu New Momentum completed a self-assessment and filed 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 2017.
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For Sogous Business
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Sogou Technology. In the second quarter of 2017, Sogou Technology completed a self-assessment and filed required supporting documents for KNSE status for 2016, and will follow the same process in 2018 for KNSE status
for 2017.
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For Changyous Business
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AmazGame. In the second quarter of 2017, AmazGame completed a self-assessment and filed required supporting documents for KNSE status for 2016, and will follow the same process in 2018 for KNSE status for 2017. In the
third quarter of 2017, AmazeGame was qualified as a KNSE after the relevant government authorities assessment and was entitled to a preferential income tax rate of 10% for 2016.
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Wuhan Baina Information. In the second quarter of 2017, Wuhan Baina Information completed a self-assessment and filed 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.
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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%.
PRC Value Added Tax
On May 1, 2016, the
transition from the imposition of Business Tax to the imposition of VAT was expanded to all industries in China, and all of our revenues have been subject to VAT since that date. To record VAT payable, we 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 our consolidated statements of comprehensive income and estimated tax payments are made when required by U.S. law.
Uncertain Tax Positions
We are 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 our income and transactions. In order to assess uncertain tax positions, we apply 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.
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. Additionally, for purposes
of calculating the numerator of diluted net income / (loss) per share, the net income / (loss) attributable to the Sohu Group is adjusted as follows. The adjustment will not be made if there is an anti-dilutive effect.
(i)
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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.
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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. 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.
(ii)
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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.
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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. 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.
Fair Value of Financial Instruments
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.
Our financial instruments mainly include cash equivalents, restricted cash, 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, short-term bank
loans, other short-term liabilities and long-term accounts payable.
Cash Equivalents
Our 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.
Short-term Investments
For investments in financial instruments with a variable interest rate indexed to the performance of underlying assets, we elected the fair value method at the
date of initial recognition and carried these investments subsequently at fair value. Changes in fair values are reflected in the consolidated statements of comprehensive income.
Accounts Receivable, Net
The carrying value of accounts
receivable is reduced by an allowance that reflects our best estimate of the amounts that will not be collected. We make estimations of the collectability of accounts receivable. Many factors are considered in estimating the general allowance,
including reviewing delinquent accounts receivable, performing an aging analysis and a customer credit analysis, and analyzing historical bad debt records and current economic trends.
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Available-for-Sale Securities
Investments in debt securities and equity securities that have readily determinable fair values not classified as trading securities or as held-to-maturity
securities are classified as available-for-sale securities, and are included in long-term investments. Available-for-sale securities are reported at fair value, with unrealized gains or losses recorded in other comprehensive income or losses in the
consolidated balance sheets. Realized gains or losses are included in the consolidated statements of comprehensive income during the period in which the gain or loss is realized. An impairment loss on the available-for-sale securities is recognized
in the consolidated statements of comprehensive income when the decline in value is determined to be other-than-temporary.
Foreign exchange forward
contracts
Foreign exchange forward contracts are initially recognized on the date a foreign exchange forward contract is entered into and are
subsequently measured at fair value. Changyou entered into such 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. The instruments are marked-to-market at each period-end with the associated changes in fair value recognized in the line item Other income /(expense), net in the consolidated
statements of comprehensive income and Other short-term liabilities or Prepaid and other current assets in the consolidated balance sheets.
Equity Investments
Investments in entities are recorded
as equity investments under long-term investments. For entities over which we do not have significant influence, the cost method is applied, as there is no readily determinable fair value; for entities over which we can exercise significant
influence but do not own a majority equity interest or control, the equity method is applied. For cost method investments, we carry the investment at historical cost after the date of investment. For equity method investments, we adjust the carrying
amount of an investment and recognize investment income or loss for our share of the earnings or loss of the investee after the date of investment.
Long-Lived Assets
Long-lived assets include fixed assets
and intangible assets.
Fixed Assets
Fixed
assets mainly comprise office buildings, leasehold improvements, building improvements, vehicles, office furniture and computer equipment and hardware. Fixed assets are recorded at cost less accumulated depreciation with no residual value.
Depreciation is computed using the straight-line method over the estimated useful lives of the assets.
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Fixed Assets
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Estimated Useful Lives (years)
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Office buildings
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36-47
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Leasehold improvements
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Lesser of term of the lease or the estimated useful lives of the assets
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Building improvements
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10
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Vehicles
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4-10
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Office furniture
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5
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Computer equipment and hardware
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2-5
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Expenditure for maintenance and repairs is expensed as incurred.
The gain or loss on the disposal of fixed assets is the difference between the net sales proceeds and the lower of the carrying value or fair value less cost
to sell the relevant assets and is recognized in operating expenses in the consolidated statements of comprehensive income.
Intangible Assets
Intangible assets mainly comprise domain names and trademarks, developed technologies, computer software, purchased video content, cinema
advertising slot rights and operating rights for licensed games. Intangible assets are recorded at cost less accumulated amortization with no residual value. Amortization of intangible assets other than purchased video content is computed using the
straight-line method over their estimated useful lives.
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The estimated useful lives of our intangible assets are listed below:
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Intangible Assets
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Estimated Useful Lives (years)
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Domain names and trademarks
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4-30
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Developed technologies
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3-10
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Computer software
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1-5
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Video content
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4 months to 2 years, or over the applicable licensing period
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Cinema advertising slot rights
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over the contract terms
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Operating rights for licensed games
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over the contract terms
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Impairment of Long-lived Assets
In accordance with
ASC 360-10-35
, we review the carrying values of long-lived assets for impairment whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable. Based on the existence of one or more indicators of impairment, we measure any impairment of long-lived assets using the projected discounted cash flow method at the asset group level. The
estimation of future cash flows requires significant management judgment based on our historical results and anticipated results and is subject to many factors. The discount rate that is commensurate with the risk inherent in our business model is
determined by our management. An impairment loss would be recorded if we determined that the carrying value of long-lived assets may not be recoverable. The impairment to be recognized is measured by the amount by which the carrying values of the
assets exceed the fair value of the assets.
Video Content
Video content consists primarily of purchased video content and self-developed video content. Purchased video content is recognized as intangible assets.
Amortization of purchased video content is computed based on the trend in viewership accumulation. For self-developed video content, production costs incurred in excess of the amount of revenue contracted for are expensed as incurred, instead of
being recorded as intangible assets.
Sohu Video enters into nonmonetary transactions to exchange online broadcasting rights for purchased video content
with other online video broadcasting companies. Under
ASC 845
, the cost of a nonmonetary asset acquired in exchange for another nonmonetary asset is the fair value of the asset surrendered to obtain the acquired nonmonetary asset, and a gain
or loss should be recognized on the exchange. The fair value of the asset received should be used to measure the cost if the fair value of the asset received is more reliable than the fair value of the asset surrendered. We record these nonmonetary
exchanges at the fair values of the online broadcasting rights for purchased video content and recognize any net gain or loss from such exchange transactions.
Impairment of Video Content
Purchased video
content is stated at the lower of cost less accumulated amortization, or net realizable value (NRV).
In accordance with
ASC
920-350-35
, if managements expectations of the programming usefulness of a program, series, package, or program segment are revised downward, it may be necessary to write down unamortized cost to estimated NRV. A write-down from
unamortized cost to a lower estimated NRV establishes a new cost basis. Accordingly, we measure the video contents impairment loss by comparing the contents carrying value to its NRV. An impairment loss will be recorded if the carrying
value of video content is higher than its NRV. The impairment to be recognized is measured by the amount by which the carrying value of video content exceeds its NRV.
Goodwill
Goodwill represents the excess of the purchase
price over the fair value of the identifiable assets and liabilities acquired as a result of our acquisitions of interests in our subsidiaries and consolidated VIEs. If the initial accounting for a business combination is incomplete by the end of
the reporting period in which the combination occurs, we report in our financial statements provisional amounts for the items for which the accounting is incomplete. If a measurement period adjustment is identified, we recognize the adjustment as
part of the acquisition accounting. We increase or decrease the provisional amounts of identifiable assets or liabilities by means of increases or decreases in goodwill for measurement period adjustments.
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In accordance with
ASC 350
, we do not amortize goodwill, but test it for impairment. We test goodwill for
impairment at the reporting unit level on an annual basis as of October 1, and between annual tests when an event occurs or circumstances change that could indicate that the asset might be impaired. Under
ASC 350-20-35
, we have the
option to choose whether we will apply a qualitative assessment first and then a quantitative assessment, if necessary, or to apply a quantitative assessment directly. For reporting units applying a qualitative assessment first, we start the
goodwill impairment test by assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If it is more likely than not that the fair value of a reporting unit
is less than its carrying amount, the quantitative impairment test is mandatory. Otherwise, no further testing is required. The quantitative impairment test consists of a comparison of the fair value of goodwill with its carrying value. For
reporting units directly applying the quantitative assessment, we perform the goodwill impairment test by quantitatively comparing the fair values of those reporting units to their carrying amounts. After performing the assessment, if the carrying
amounts of the reporting units are higher than their fair value, we perform the second step of the two-step quantitative goodwill impairment test.
Application of a goodwill impairment test requires significant management judgment, including the identification of reporting units, assigning assets and
liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value of each reporting unit. We estimate fair value using the income approach or the market approach. The judgment in estimating the fair value of
reporting units includes estimating future cash flows, determining appropriate discount rates, control premium, comparable companies multipliers, and making other assumptions. Changes in these estimates and assumptions could materially affect
the determination of fair value for each reporting unit.
Comprehensive Income
Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding
transactions resulting from investments from owners and distributions to owners. Accumulated other comprehensive income, as presented on our consolidated balance sheets, includes a cumulative foreign currency translation adjustment and an unrealized
gain/(loss) on available-for-sale securities.
Functional Currency and Foreign Currency Translation
An entitys functional currency is the currency of the primary economic environment in which it operates, normally that is the currency of the environment
in which the entity primarily generates and expends cash. Managements judgment is essential to determine the functional currency by assessing various indicators, such as cash flows, sales price and market, expenses, financing and inter-company
transactions and arrangements. The functional currency of Sohu.com Inc. is the U.S. dollar. The functional currency of our subsidiaries in the U.S., the Cayman Islands, the British Virgin Islands and Hong Kong is the U.S. dollar. The functional
currencies of our subsidiaries and VIEs in other countries are the national currencies of those counties, rather than the U.S. dollar.
Foreign currency
transactions denominated in currencies other than the functional currency are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign
currencies at the balance sheet date are re-measured at the applicable rates of exchange in effect at that date. Gains and losses resulting from foreign currency re-measurement are included in the consolidated statements of comprehensive income.
Financial statements of entities with a functional currency other than the U.S. dollar are translated into U.S. dollars, which is the reporting currency.
Assets and liabilities are translated at the current exchange rate in effect at the balance sheet date, and revenues and expenses are translated at the average of the exchange rates in effect during the reporting period. Shareholders equity
accounts are translated using the historical exchange rates at the date the entry to shareholders equity was recorded, except for the change in retained earnings during the year, which is translated using the historical exchange rates used to
translate each periods income statement. Differences resulting from translating a foreign currency to the reporting currency are recorded in accumulated other comprehensive income in the consolidated balance sheets.
-67-
RESULTS OF OPERATIONS
Revenues
The following table presents our revenues by
revenue source and by proportion for the periods indicated (in thousands, except percentages):
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|
Three Months Ended September 30,
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|
Nine Months Ended September 30,
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2016
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|
|
2017
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|
2017 vs 2016
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|
|
2016
|
|
|
2017
|
|
|
2017 vs 2016
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|
|
|
Amount
|
|
|
Percentage
of the total
revenue
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|
|
Amount
|
|
|
Percentage
of the total
revenue
|
|
|
Amount
|
|
|
Incremental
ratio
|
|
|
Amount
|
|
|
Percentage
of the total
revenue
|
|
|
Amount
|
|
|
Percentage
of the total
revenue
|
|
|
Amount
|
|
|
Incremental
ratio
|
|
Revenues
|
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Online advertising:
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|
Brand advertising
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|
$
|
110,871
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|
|
|
27
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%
|
|
|
74,832
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|
|
|
15
|
%
|
|
|
(36,039
|
)
|
|
|
(33
|
)%
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|
$
|
349,261
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|
|
|
28
|
%
|
|
|
242,315
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|
|
|
18
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%
|
|
|
(106,946
|
)
|
|
|
(31
|
)%
|
Search and search-related advertising
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|
|
150,667
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|
|
|
37
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%
|
|
|
225,363
|
|
|
|
43
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%
|
|
|
74,696
|
|
|
|
50
|
%
|
|
|
444,633
|
|
|
|
36
|
%
|
|
|
554,145
|
|
|
|
41
|
%
|
|
|
109,512
|
|
|
|
25
|
%
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|
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|
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|
|
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|
|
|
|
|
|
Subtotal of online advertising revenues
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|
|
261,538
|
|
|
|
64
|
%
|
|
|
300,195
|
|
|
|
58
|
%
|
|
|
38,657
|
|
|
|
15
|
%
|
|
|
793,894
|
|
|
|
64
|
%
|
|
|
796,460
|
|
|
|
59
|
%
|
|
|
2,566
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
Online game
|
|
|
98,553
|
|
|
|
24
|
%
|
|
|
132,427
|
|
|
|
26
|
%
|
|
|
33,874
|
|
|
|
34
|
%
|
|
|
300,309
|
|
|
|
24
|
%
|
|
|
340,150
|
|
|
|
25
|
%
|
|
|
39,841
|
|
|
|
13
|
%
|
Others
|
|
|
50,491
|
|
|
|
12
|
%
|
|
|
83,439
|
|
|
|
16
|
%
|
|
|
32,948
|
|
|
|
65
|
%
|
|
|
144,469
|
|
|
|
12
|
%
|
|
|
214,722
|
|
|
|
16
|
%
|
|
|
70,253
|
|
|
|
49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
410,582
|
|
|
|
100
|
%
|
|
|
516,061
|
|
|
|
100
|
%
|
|
|
105,479
|
|
|
|
26
|
%
|
|
$
|
1,238,672
|
|
|
|
100
|
%
|
|
|
1,351,332
|
|
|
|
100
|
%
|
|
|
112,660
|
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
|
|
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|
|
|
|
|
|
Online Advertising Revenues
Online advertising revenues were $300.2 million and $796.5 million, respectively, for the three and nine months ended September 30, 2017, compared to
$261.5 million and $793.9 million, respectively, for the corresponding periods in 2016. Online advertising revenues were generally stable for the three and nine months ended September 30, 2017, compared to the three and nine months ended
September 30, 2016.
Brand Advertising Revenues, Generated by Sohu and Changyou
Brand advertising revenues were $74.8 million and $242.3 million, respectively, for the three and nine months ended September 30, 2017, compared to $110.9
million and $349.3 million, respectively, for the corresponding periods in 2016. The decrease in brand advertising revenues from the three months ended September 30, 2016 to the three months ended September 30, 2017 was $36.1 million,
representing a year-on-year decrease rate of 33%, and the decrease from the nine months ended September 30, 2016 to the nine months ended September 30, 2017 was $107.0 million, representing a year-on-year decrease rate of 31%. The
year-on-year decrease in brand advertising revenues was mainly attributable to a decline in revenues from large advertisers as well as an adverse real estate advertising market.
Sohu
Revenues from Sohu Media Portal were $37.9 million and $115.9 million, respectively, for the
three and nine months ended September 30, 2017, compared to $48.0 million and $140.1 million, respectively, for the corresponding periods in 2016. The decrease in revenues from Sohu Media Portal from the three months ended September 30,
2016 to the three months ended September 30, 2017 was $10.1 million, representing a year-on-year decrease rate of 21%, and the decrease from the nine months ended September 30, 2016 to the nine months ended September 30, 2017 was
$24.2 million, representing a year-on-year decrease rate of 17%. The average amount spent per advertiser was approximately $10,000 and $20,000, respectively, for the three months and nine months ended September 30, 2017, compared to $26,000 and
$47,000, respectively, for the corresponding periods in 2016. While the slowdown in the growth of the economy in China shrank the budgets of brand advertisers, rapid growth in the number of small and medium enterprise (SME) customers
advertising on Sohu Media Portal helped offset the impact to some extent. The number of advertisers for Sohu Media Portal was 3,881 and 5,773, respectively, for the three and nine months ended September 30, 2017, compared to 1,865 and 2,997,
respectively, for the corresponding periods in 2016.
-68-
Revenues from Sohu Video were $18.9 million and $62.3 million, respectively, for the three and nine
months ended September 30, 2017, compared to $25.4 million and $98.4 million, respectively, for the corresponding periods in 2016. The decrease in revenues from Sohu Video from the three months ended September 30, 2016 to the three months
ended September 30, 2017 was $6.5 million, representing a year-on-year decrease rate of 26%, and the decrease from the nine months ended September 30, 2016 to the nine months ended September 30, 2017 was $36.1 million, representing a
year-on-year decrease rate of 37%. The changes were mainly attributable to fluctuations both in the number of advertisers and in the average amount spent per advertiser. Both the number of advertisers and the average amount spent per advertiser for
the three and nine months ended September 30, 2017 decreased compared to the corresponding periods in 2016, which led to the decreases in revenues from Sohu Video. The number of advertisers for Sohu Video was 152 and 296, respectively, for the
three and nine months ended September 30, 2017, compared to 208 and 385, respectively, for the corresponding periods in 2016. The average amount spent per advertiser was approximately $124,000 and $210,000, respectively, for the three and nine
months ended September 30, 2017, compared to $122,000 and $256,000, respectively, for the corresponding periods in 2016.
Revenues from Focus were $12.0 million and $45.1 million, respectively, for the three and nine months
ended September 30, 2017, compared to $25.8 million and $79.6 million, respectively, for the corresponding periods in 2016. The decrease in revenues from Focus from the three months ended September 30, 2016 to the three months ended
September 30, 2017 was $13.8 million, representing a year-on-year decrease rate of 53%, and the decrease from the nine months ended September 30, 2016 to the nine months ended September 30, 2017 was $34.5 million, representing a
year-on-year decrease rate of 43%.
Revenues from Focus were generated through the Fixed Price model and the E-commerce model.
For the Fixed Price model, revenues were $8.2 million and $30.2 million, respectively, for the three and nine months ended September 30, 2017, compared
to $10.9 million and $36.3 million, respectively, for the corresponding periods in 2016, representing a year-on-year decrease of $2.7 million and $6.1 million, respectively, from the three months ended September 30, 2016 to the three months
ended September 30, 2017 and from the nine months ended September 30, 2016 to the nine months ended September 30, 2017.
For the E-commerce
model, revenues were $3.8 million and $14.9 million, respectively, for the three and nine months ended September 30, 2017, compared to $14.9 million and $43.3 million, respectively, for the corresponding periods in 2016, representing a
year-on-year decrease of 75% and 66%, repectively, from the three months ended September 30, 2016 to the three months ended September 30, 2017 and from the nine months ended September 30, 2016 to the nine months ended
September 30, 2017. The decrease was mainly driven by sharp declines in the numbers of paying subscribers and cooperative developers, resulting from the PRC governments implementation of tightened real estate policies starting from the
beginning of 2017. The number of developers with which we had cooperation arrangements was 364 and 937, respectively, for the three and nine months ended September 30, 2017, compared to 725 and 1,234, respectively, for the corresponding periods
in 2016. The number of paying subscribers for the membership services was 3,745 and 22,620, respectively, for the three and nine months ended September 30, 2017, compared to 26,233 and 74,050, respectively, for the corresponding periods in
2016.
Changyou
Revenues from the 17173.com Website were $6.0 million and $19.0 million, respectively, for
the three and nine months ended September 30, 2017, compared to $11.7 million and $31.1 million, respectively, for the corresponding periods in 2016. The decrease in revenues from 17173.com Website for the three months ended September 30,
2017 compared to the three months ended September 30, 2016 was $5.7 million, representing a year-on-year decrease of 49%, and the decrease for the nine months ended September 30, 2017 compared to the nine months ended September 30,
2016 was $12.1 million, representing a year-on-year decrease of 39%. The decrease was mainly due to fewer PC games being launched in China and our new mobile initiatives being at an early stage. The number of advertisers on the 17173.com Website was
89 and 148, respectively, for the three and nine months ended September 30, 2017, compared to 106 and 163, respectively, for the corresponding periods in 2016. The average amount spent per advertiser was approximately $67,000 and $128,000,
respectively, for the three months and nine months ended September 30, 2017, compared to $110,000 and $191,000, respectively, for the corresponding periods in 2016.
-69-
Search and Search-related Advertising Revenues, Generated by Sogou
Search and search-related advertising revenues were $225.4 million and $554.1 million, respectively, for the three and nine months ended September 30,
2017, compared to $150.7 million and $444.6 million, respectively, for the corresponding periods in 2016. The increase in search and search-related advertising revenues from the three months ended September 30, 2016 to the three months ended
September 30, 2017 was $74.7 million, representing a year-on-year growth rate of 50%, and the increase from the nine months ended September 30, 2016 to the nine months ended September 30, 2017 was $109.5 million, representing a
year-on-year growth rate of 25%. The increases were mainly driven by robust traffic growth and improved monetization on the mobile end.
The increase in
search and search-related advertising revenues mainly consisted of an increase in revenues from auction-based pay-for-click services, which accounted for approximately 84% and 83%, respectively, of the total search and search-related revenues for
the three and the nine months ended September 30, 2017, compared to 78% and 77%, respectively, for the corresponding periods in 2016.
The growth in
revenues from auction-based pay-for-click services resulted from increases both in the number of advertisers and in average revenue per advertiser (or ARPA). The number of auction-based pay-for-click advertisers was approximately 77,000
and 115,000, respectively, for the three and nine months ended September 30, 2017, compared to 63,000 and 100,000, respectively, for the corresponding periods in 2016. The ARPA for auction-based pay-for-click services was $2,455 and $3,987,
respectively, for the three and nine months ended September 30, 2017, compared to $1,859 and $3,442, respectively, for the corresponding periods in 2016. The increase in auction-based pay-for-click advertisers was primarily driven by a
successful expansion of our network of advertising agencies. The increase in ARPA was primarily attributable to an increase in the number of paid clicks, but ARPA for the nine months ended September 30, 2017 was adversely affected by
depreciation of the RMB against the U.S. dollar. The total number of our paid clicks increased by 65% and 35%, respectively, for the three and nine months ended September 30, 2017, primarily driven by strong growth in mobile paid clicks as a
result of rapidly-growing mobile search traffic, and an improved click-through rate on the mobile end, which was partially offset by declining PC paid clicks.
Online Game Revenues Generated by Changyou
Revenues from the online game business were $132.4 million and $340.2 million, respectively, for the three and nine months ended September 30, 2017,
compared to $98.6 million and $300.3 million, respectively, for the corresponding periods in 2016. The year-over-year increases were mainly due to the revenue contribution of the Legacy TLBB mobile game, which was launched in the middle of the
second quarter of 2017.
PC Games and Mobile Games
Revenues from PC games were $58.3 million and $180.8 million, respectively, for the three and nine months ended September 30, 2017, compared to $70.4
million and $204.3 million, respectively, for the corresponding periods in 2016. The decrease in revenues from PC games from the three months ended September 30, 2016 to the three months ended September 30, 2017 was $12.1 million,
representing a year-on-year decrease rate of 17%, and the decrease from the nine months ended September 30, 2016 to the nine months ended September 30, 2017 was $23.5 million, representing a year-on-year decrease rate of 12%. The
year-on-year decrease in revenues from PC games was mainly due to the natural decline in revenues of TLBB, which is an older PC game. For the three and nine months ended September 30, 2017, the PC game TLBB generated $48.3 million and $149.4
million, respectively, in revenues, accounting for approximately 36% and 44%, respectively, of Changyous online game revenues, approximately 29% and 34%, respectively, of Changyous total revenues and approximately 9% and 11%,
respectively, of the Sohu Groups total revenues.
Revenues from mobile games were $73.7 million and $157.8 million, respectively, for the three and
nine months ended September 30, 2017, compared to $27.3 million and $92.5 million, respectively, for the corresponding periods in 2016. The increase in revenues from mobile games from the three months ended September 30, 2016 to the three
months ended September 30, 2017 was $46.4 million, representing a year-on-year increase rate of 170%, and the increase from the nine months ended September 30, 2016 to the nine months ended September 30, 2017 was $65.3 million,
representing a year-on-year increase rate of 71%. The increase in revenues from mobile games was mainly driven by the successful launch of the new mobile game Legacy TLBB in the second quarter of 2017. For the three and nine months ended
September 30, 2017, the mobile game Legacy TLBB generated $56.2 million and $104.2 million, respectively, in revenues, accounting for approximately 42% and 31%, respectively, of Changyous online game revenues, approximately 34% and 24%,
respectively, of Changyous total revenues, and approximately 11% and 8%, respectively, of the Sohu Groups total revenues.
-70-
The following table sets forth certain operating data for Changyous PC games and mobile games for the
periods indicated:
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|
|
|
|
|
|
|
|
|
|
Average Monthly Active
Accounts
(1)
|
|
Three Months Ended March 31
|
|
|
Three Months Ended June 30
|
|
|
Three Months Ended September 30
|
|
(in millions)
|
|
PC games
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|
|
Mobile games
|
|
|
PC games
|
|
|
Mobile games
|
|
|
PC games
|
|
|
Mobile games
|
|
2016
|
|
|
3.0
|
|
|
|
3.2
|
|
|
|
2.9
|
|
|
|
2.4
|
|
|
|
2.7
|
|
|
|
2.8
|
|
2017
|
|
|
2.4
|
|
|
|
1.1
|
|
|
|
2.4
|
|
|
|
7.4
|
|
|
|
2.3
|
|
|
|
5.2
|
|
|
|
|
|
Quarterly Aggregate Active
Paying
Accounts (2)
|
|
Three Months Ended March 31
|
|
|
Three Months Ended June 30
|
|
|
Three Months Ended September 30
|
|
(in millions)
|
|
PC games
|
|
|
Mobile games
|
|
|
PC games
|
|
|
Mobile games
|
|
|
PC games
|
|
|
Mobile games
|
|
2016
|
|
|
1.1
|
|
|
|
0.8
|
|
|
|
1.0
|
|
|
|
0.6
|
|
|
|
1.0
|
|
|
|
0.7
|
|
2017
|
|
|
0.9
|
|
|
|
0.3
|
|
|
|
0.9
|
|
|
|
2.5
|
|
|
|
0.8
|
|
|
|
1.4
|
|
(1)
|
Average Monthly Active Accounts for a given period refers to the number of registered accounts that were logged in to these games at least once during the period.
|
(2)
|
Quarterly Aggregate Active Paying Accounts for a given quarter refers to the number of accounts from which game points were used at least once during the quarter.
|
Web Games
Revenues from Web games were $0.4 million and
$1.6 million, respectively, for the three and nine months ended September 30, 2017, compared to $0.8 million and $3.5 million, respectively, for the corresponding periods in 2016.
Other Revenues
Revenues from other services were
$83.4 million and $214.7 million, respectively, for the three and nine months ended September 30, 2017, compared to $50.4 million and $144.5 million, respectively, for the corresponding periods in 2016.
The increase from the three months ended September 30, 2016 to the corresponding period of 2017 was $33.0 million, consisting of a $9.3 million increase
in revenues from smart hardware products, a $6.8 million increase in revenues from sub-licensing of purchased video content to third parties, a $6.6 million increase in paid subscription services, a $5.8 million increase in IVAS revenues.
The increase from the nine months ended September 30, 2016 to the corresponding period of 2017 was $70.2 million, consisting mainly of a $17.8 million
increase in revenues from the cinema advertisement business, a $15.5 million increase in IVAS revenues, a $14.9 million increase in paid subscription service revenues, and a $12.0 million increase in revenues from smart hardware products.
-71-
Costs and Expenses
Cost of Revenues
The following table presents our
cost of revenues by source and by proportion for the periods indicated (in thousands, except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
2017 vs 2016
|
|
|
2016
|
|
|
2017
|
|
|
2017 vs 2016
|
|
|
|
Amount
|
|
|
Percentage
of the total
cost
|
|
|
Amount
|
|
|
Percentage
of the total
cost
|
|
|
Amount
|
|
|
Incremental
ratio
|
|
|
Amount
|
|
|
Percentage
of the total
cost
|
|
|
Amount
|
|
|
Percentage
of the total
cost
|
|
|
Amount
|
|
|
Incremental
ratio
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online advertising:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brand advertising
|
|
$
|
102,137
|
|
|
|
46
|
%
|
|
|
75,733
|
|
|
|
29
|
%
|
|
|
(26,404
|
)
|
|
|
(26
|
)%
|
|
$
|
281,427
|
|
|
|
45
|
%
|
|
|
280,660
|
|
|
|
37
|
%
|
|
|
(767
|
)
|
|
|
(0
|
)%
|
Search and search-related advertising
|
|
|
76,457
|
|
|
|
34
|
%
|
|
|
115,422
|
|
|
|
44
|
%
|
|
|
38,965
|
|
|
|
51
|
%
|
|
|
210,547
|
|
|
|
34
|
%
|
|
|
294,221
|
|
|
|
39
|
%
|
|
|
83,674
|
|
|
|
40
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal of cost of online advertising revenues
|
|
|
178,594
|
|
|
|
80
|
%
|
|
|
191,155
|
|
|
|
73
|
%
|
|
|
12,561
|
|
|
|
7
|
%
|
|
|
491,974
|
|
|
|
79
|
%
|
|
|
574,881
|
|
|
|
76
|
%
|
|
|
82,907
|
|
|
|
17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online game
|
|
|
23,719
|
|
|
|
11
|
%
|
|
|
17,560
|
|
|
|
7
|
%
|
|
|
(6,159
|
)
|
|
|
(26
|
)%
|
|
|
75,232
|
|
|
|
12
|
%
|
|
|
45,678
|
|
|
|
6
|
%
|
|
|
(29,554
|
)
|
|
|
(39
|
)%
|
Others
|
|
|
20,571
|
|
|
|
9
|
%
|
|
|
53,679
|
|
|
|
20
|
%
|
|
|
33,108
|
|
|
|
161
|
%
|
|
|
60,783
|
|
|
|
9
|
%
|
|
|
138,908
|
|
|
|
18
|
%
|
|
|
78,125
|
|
|
|
129
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
$
|
222,884
|
|
|
|
100
|
%
|
|
|
262,394
|
|
|
|
100
|
%
|
|
|
39,510
|
|
|
|
18
|
%
|
|
$
|
627,989
|
|
|
|
100
|
%
|
|
|
759,467
|
|
|
|
100
|
%
|
|
|
131,478
|
|
|
|
21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-72-
Cost of Online Advertising Revenues
Cost of online advertising revenues was $191.2 million and $574.9 million, respectively, for the three and nine months ended September 30, 2017, compared
to $178.6 million and $492.0 million, respectively, for the corresponding periods in 2016. The increase in cost of online advertising revenues from the three months ended September 30, 2016 to the three months ended September 30, 2017 was
$12.6 million, representing a year-on-year growth rate of 7%.The increase in cost of online advertising revenues from the nine months ended September 30, 2016 to the nine months ended September 30, 2017 was $82.9 million, representing a
year-on-year growth of 17%.
Cost of Brand Advertising Revenues
Cost of brand advertising revenues mainly consists of content and license costs, bandwidth leasing costs, salary and benefits expense, and depreciation
expense.
Cost of brand advertising revenues was $75.7 million and $280.7 million, respectively, for the three and nine months ended September 30,
2017, compared to $102.1 million and $281.4 million, respectively, for the corresponding periods in 2016.
The decrease in cost of brand advertising
revenues from the three months ended September 30, 2016 to the three months ended September 30, 2017 was $26.4 million, representing a year-on-year decrease rate of 26%. The decrease mainly consisted of a $17.4 million decrease in content
and license costs, and a $3.0 million decrease in salary and benefits expense.
The decrease in cost of brand advertising revenues from the nine months
ended September 30, 2016 to the nine months ended September 30, 2017 was $0.7 million, representing a year-on-year decrease rate of 0.2%. The decrease mainly consisted of a $12.6 million decrease in bandwidth leasing costs, a $7.1 million
decrease in salary and benefits expense, a $2.3 million decrease in depreciation expense, a $1.7 million decrease in travelling and entertainment expense, and a $1.2 million decrease in facilities expense, offset by a $24.1 million increase in
content and license costs resulting primarily from an impairment charge related to video content in the second quarter of 2017. In the second quarter of 2017, we recognized an impairment loss of $44.9 million, which was mainly due to the ongoing
restructuring of the sales team of Sohu Video as well as a strategic shift to reduce purchasing of licensed video content beginning in the second half of 2016. These two factors had an adverse impact on Sohu Videos performance for the second
quarter of 2017, which failed to meet managements expectations.
Our brand advertising gross margin was negative 1% and negative 16%, respectively,
for the three and nine months ended September 30, 2017, as compared to 8% and 19%, respectively, for the corresponding periods in 2016. The year-over-year decrease was mainly due to decreased revenues from Sohu Video and the impairment loss
recognized with respect to video content in the second quarter of 2017.
Cost of Search and Search-related Advertising Revenues
Cost of search and search-related advertising revenues mainly consists of traffic acquisition costs, bandwidth leasing costs, depreciation expenses, as well as
salary and benefits expenses.
Cost of search and search-related advertising revenues was $115.4 million and $294.2 million, respectively, for the three
and nine months ended September 30, 2017 compared to $76.5 million and $210.5 million, respectively, for the corresponding periods in 2016.
The
increase in cost of search and search-related advertising revenues from the three months ended September 30, 2016 to the three months ended September 30, 2017 was $38.9 million. The increase mainly consisted of a $33.0 million increase in
traffic acquisition costs, a $3.6 million increase in depreciation expense and a $1.7 million increase in bandwidth leasing costs.
The increase in cost
of search and search-related advertising revenues from the nine months ended September 30, 2016 to the nine months ended September 30, 2017 was $83.7 million. The increase mainly consisted of $67.3 million increase in traffic acquisition
costs, a $10.6 million increase in depreciation expense, a $6.2 million increase in salary and benefits expenses, and a $4.2 million increase in bandwidth leasing costs.
Our search and search-related advertising gross margin was 49% and 47%, respectively, for the three and nine months ended September 30, 2017, as compared
to 49% and 53%, respectively, for the corresponding periods in 2016. The decreases in our search and search-related advertising gross margin for the nine months ended September 30, 2017 were mainly due to higher traffic acquisition costs as a
percentage of search and search-related advertising revenues.
-73-
Cost of Online Game Revenues
Cost of online game revenues mainly consists of revenue-sharing payments, salary and benefits expense, amortization and depreciation expenses, and content and
license costs.
Cost of online game revenues was $17.6 million and $45.7 million, respectively, for the three and nine months ended September 30,
2017, compared to $23.7 million and $75.2 million, respectively, for the corresponding periods in 2016.
The decrease in cost of online game revenues from
the three months ended September 30, 2016 to the three months ended September 30, 2017 was $6.1 million, representing a year-on-year decrease of 26%. The decrease consisted primarily of a $3.5 million decrease in revenue-sharing payments
to mobile APP stores and third-party developers, and a $1.5 million decrease in professional fee expenses.
The decrease in cost of online game revenues
from the nine months ended September 30, 2016 to the nine months ended September 30, 2017 was $29.5 million, representing a year-on-year decrease of 39%. The decrease consisted primarily of a $16.4 million decrease in revenue-sharing
payments to mobile APP stores and third-party developers, a $5.4 million decrease in bandwidth leasing costs, and a $4.5 million decrease in salary and benefits expense.
Our online game gross margin was 87% for both the three months and the nine months ended September 30, 2017, compared to 76% and 75%, respectively, for
the corresponding periods in 2016. The increase in our online game gross margin was mainly due to the successful launch of Legacy TLBB in the second quarter of 2017, which has a high gross margin as revenue is recognized on a net basis after
revenue-sharing with Tencent.
Cost of Other Revenues
Cost of other revenues mainly consists of payments to theaters for pre-film screening advertising slots, cost of smart hardware products, content and license
costs related to paid subscription services, revenue-sharing payments related to the IVAS business, and revenue-sharing payments related to interactive broadcasting services.
Cost of other revenues was $53.7 million and $138.9 million, respectively, for the three and nine months ended September 30, 2017, compared to $20.6
million and $60.8 million, respectively, for the corresponding periods in 2016. The increase in cost of other revenues for the three and nine months period was mainly due to increased payments to theaters for pre-film screening advertising slots of
$10.7 million and $27.9 million, respectively, increased cost of smart hardware products of $8.4 million and $12.2 million, respectively, and increased content and license costs related to paid subscription services of $8.2 million and $25.3
million, respectively.
-74-
Operating Expenses
The following table presents our operating expenses by nature and by proportion for the periods indicated (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
2017 vs 2016
|
|
|
2016
|
|
|
2017
|
|
|
2017 vs 2016
|
|
|
Amount
|
|
|
Percentage
of the total
expense
|
|
|
Amount
|
|
|
Percentage
of the total
expense
|
|
|
Amount
|
|
|
Incremental
ratio
|
|
|
Amount
|
|
|
Percentage
of the total
expense
|
|
|
Amount
|
|
|
Percentage
of the total
expense
|
|
|
Amount
|
|
|
Incremental
ratio
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
$
|
90,007
|
|
|
|
38
|
%
|
|
|
105,162
|
|
|
|
31
|
%
|
|
|
15,155
|
|
|
|
17
|
%
|
|
$
|
261,645
|
|
|
|
39
|
%
|
|
|
289,406
|
|
|
|
38
|
%
|
|
|
27,761
|
|
|
|
11
|
%
|
Sales and marketing
|
|
|
110,584
|
|
|
|
46
|
%
|
|
|
111,935
|
|
|
|
34
|
%
|
|
|
1,351
|
|
|
|
1
|
%
|
|
|
318,597
|
|
|
|
47
|
%
|
|
|
296,866
|
|
|
|
39
|
%
|
|
|
(21,731
|
)
|
|
|
(7
|
)%
|
General and administrative
|
|
|
38,670
|
|
|
|
16
|
%
|
|
|
31,038
|
|
|
|
9
|
%
|
|
|
(7,632
|
)
|
|
|
(20
|
)%
|
|
|
95,927
|
|
|
|
14
|
%
|
|
|
87,045
|
|
|
|
12
|
%
|
|
|
(8,882
|
)
|
|
|
(9
|
)%
|
Goodwill impairment and impairment of intangible assets acquired as part of business
acquisitions
|
|
|
0
|
|
|
|
0
|
%
|
|
|
86,882
|
|
|
|
26
|
%
|
|
|
86,822
|
|
|
|
100
|
%
|
|
|
0
|
|
|
|
0
|
%
|
|
|
86,882
|
|
|
|
11
|
%
|
|
|
86,882
|
|
|
|
100
|
%
|
Total operating expenses
|
|
$
|
239,261
|
|
|
|
100
|
%
|
|
|
335,017
|
|
|
|
100
|
%
|
|
|
95,756
|
|
|
|
40
|
%
|
|
$
|
676,169
|
|
|
|
100
|
%
|
|
|
760,199
|
|
|
|
100
|
%
|
|
|
84,030
|
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Development Expenses
Product development expenses mainly consist of salary and benefits expenses, content and license expenses, development, upgrade and technical support service
fees, depreciation and amortization expenses, and facilities expenses.
Product development expenses were $105.2 million and $289.4 million, respectively,
for the three and nine months ended September 30, 2017 compared to $90.0 million and $261.6 million, respectively, for the corresponding periods in 2016.
The increase in product development expenses from the three months ended September 30, 2016 to the three months ended September 30, 2017 was $15.2
million. The increase mainly consisted of a $8.6 million increase in content and license expenses, and a $7.4 million increase in salary and benefits expense, offset by a $1.9 million decrease in share-based compensation expense.
-75-
The increase in product development expenses from the nine months ended September 30, 2016 to the nine
months ended September 30, 2017 was $27.8 million. The increase mainly consisted of a $15.2 million increase in content and license expenses, a $8.0 million increase in salary and benefits expense, a $3.7 million increase in share-based
compensation expense, and a $2.5 million increase in technical service fees, offset by a $2.0 million decrease in depreciation and amortization expense.
Sales and Marketing Expenses
Sales and marketing
expenses mainly consist of advertising and promotional expenditures, salary and benefits expenses, travel expenses, and facility expenses.
Sales and
marketing expenses were $111.9 million and $296.9 million, respectively, for the three and nine months ended September 30, 2016, compared to $110.6 million and $318.6 million, respectively, for the corresponding periods in 2016.
The increase in sales and marketing expenses from the three months ended September 30, 2016 to the three months ended September 30, 2017 was $1.3
million. The increase mainly consisted of a $2.8 million increase in advertising and promotional expenditures, offset by a $0.7 million decrease in travelling and entertainment expense, a $0.4 million decrease in office expense, and a $0.4 million
decrease in share-based compensation expense.
The decrease in sales and marketing expenses from the nine months ended September 30, 2016 to the nine
months ended September 30, 2017 was $21.7 million. The decrease mainly consisted of a $16.1 million decrease in advertising and promotional expenditures, and a $5.4 million decrease in salary and benefits expense.
General and Administrative Expenses
General and
administrative expenses mainly consist of salary and benefits expenses, professional service fees, share-based compensation expense, facilities expense, depreciation and amortization expenses, and travel expenses.
General and administrative expenses were $31.0 million and $87.0 million, respectively, for the three and nine months ended September 30, 2017, compared
to $38.7 million and $95.9 million, respectively, for the corresponding periods in 2016.
The decrease in general and administrative expenses from the
three months ended September 30, 2016 to the three months ended September 30, 2017 was $7.7 million. The decrease mainly consisted of a $4.3 million decrease in share-based compensation expense, a $1.9 million decrease in technical service
fees, and a $1.3 million decrease in salary and benefits expense, offset by a $0.6 increase in facilities expense.
The decrease in general and
administrative expenses from the nine months ended September 30, 2016 to the nine months ended September 30, 2017 was $8.9 million. The decrease mainly consisted of a $6.5 million decrease in salary and benefits expense, and a $5.4 million
decrease in professional service fees, offset by a $5.2 million increase in share-based compensation expense.
Goodwill impairment and impairment of
intangible assets acquired as part of business acquisitions
In the third quarter of 2017, Changyou recognized goodwill impairment associated with
MoboTap. For the online card and board games conducted by MoboTap, due to reinforced restrictions the Chinese regulatory authorities imposed on online card and board games, some of Changyous key distribution partners informed Changyou that
they had decided to stop the distribution and promotion of card and board games in the third quarter of 2017, which had an adverse impact on MoboTaps current performance, and also increased the uncertainty for its future operations and cash
flow. As a result, Changyou determined that it is unlikely for MoboTap to gain users and grow its online card and board games revenues in China. Changyou management performed an impairment test in the third quarter of 2017 using the discounted cash
flow method, and impairment charges of $86.9 million were recognized to reflect the fair value of the MoboTap business, of which an $83.5 million impairment loss was recognized for goodwill and a $3.4 million impairment loss was recognized for
intangible assets.
-76-
Share-based Compensation Expense
Share-based compensation expense was recognized in costs and expenses for the three and nine months ended September 30, 2016 and the three and nine months
ended September 30, 2017, as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
Share-based compensation expense
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
Cost of revenues
|
|
$
|
295
|
|
|
$
|
281
|
|
|
$
|
294
|
|
|
$
|
696
|
|
Product development expense
|
|
|
4,105
|
|
|
|
2,247
|
|
|
|
5,801
|
|
|
|
9,499
|
|
Sales and marketing expenses
|
|
|
752
|
|
|
|
344
|
|
|
|
927
|
|
|
|
1,939
|
|
General and administrative expenses
|
|
|
8,018
|
|
|
|
3,682
|
|
|
|
9,125
|
|
|
|
14,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,170
|
|
|
$
|
6,554
|
|
|
$
|
16,147
|
|
|
$
|
26,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense recognized for share awards of Sohu (excluding Sohu Video), Sogou, Changyou and Sohu Video as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
Share-based compensation expense
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
For Sohu (excluding Sohu Video) share-based awards
|
|
$
|
5,639
|
|
|
$
|
4,086
|
|
|
$
|
4,749
|
|
|
$
|
4,088
|
|
For Sogou share-based awards (2)
|
|
|
180
|
|
|
|
310
|
|
|
|
2,505
|
|
|
|
5,302
|
|
For Changyou share-based awards
|
|
|
7,202
|
|
|
|
2,208
|
|
|
|
9,340
|
|
|
|
17,223
|
|
For Sohu Video share-based awards (1)
|
|
|
149
|
|
|
|
(50
|
)
|
|
|
(447
|
)
|
|
|
(149
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,170
|
|
|
$
|
6,554
|
|
|
$
|
16,147
|
|
|
$
|
26,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note (1): The negative amount represented re-measured compensation expense based on the then-current fair value of the awards
on the reporting date.
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 and search-related businesses and compensation expense of $4.0 million, recognized in the first quarter of 2017 in connection with Sogous repurchase of Sogou
Class A Ordinary Shares from the former President and Chief Financial Officer of the Sohu Group, which is equal to the excess of the repurchase price over the fair value of the Sogou Class A Ordinary Shares as of the repurchase date.
As of September 30, 2017, unrecognized share-based compensation expense for Sohu (excluding Sohu Video), Sogou and Changyou share-based awards was as
follows (in thousands):
|
|
|
|
|
Unrecognized share-based compensation expense
|
|
As of September 30, 2017
|
|
For Sohu (excluding Sohu Video) share-based awards
|
|
$
|
(1,975
|
)
|
For Sogou share-based awards (3)
|
|
|
86
|
|
For Changyou share-based awards
|
|
|
7,024
|
|
|
|
|
|
|
|
|
$
|
5,135
|
|
|
|
|
|
|
Note (3): Includes the unrecognized compensation expense for employees who transferred from Tencent with Soso search and
search-related businesses.
Operating Profit/(Loss)
For the three and nine months ended September 30, 2017, we had an operating loss of $81.4 million and $168.3 million, respectively, compared to an
operating loss of $51.6 million and $65.5 million, respectively, for the corresponding periods in 2016.
-77-
Other Income / (Loss)
We had other loss of $5.1 million and other income of $2.3 million, respectively, for the three and nine months ended September 30, 2017, compared to
other income of $3.7 million and other loss of $17.0 million, respectively, for the corresponding periods in 2016. The change for the three months ended September 30, 2017, was mainly due to a $5.8 million impairment loss recognized in the
third quarter of 2017 related to Keyeast. The change for the nine months ended September 30, 2017, was mainly due to a $27.8 million one-time expense recognized in the second quarter of 2016 related to a donation by Sogou to Tsinghua University
related to setting up a joint research institute focusing on artificial intelligence technology, as well as a $5.8 million impairment loss recognized in the third quarter of 2017 related to Keyeast.
Interest Income
Interest income was $6.5 million
and $16.8 million, respectively, for the three and nine months ended September 30, 2017, compared to $6.3 million and $17.4 million, respectively, for the corresponding periods of 2016.
Interest Expense
Interest expense was $1.1
million and $1.5 million, respectively, for the three and nine months ended September 30, 2017, compared to $0.2 million and $1.2 million, respectively, for the corresponding periods of 2016.
Income Tax Expense
Income tax expense was $15.9
million and $39.4 million, respectively, for the three and nine months ended September 30, 2017, compared to $1.0 million and $15.3 million, respectively, for the corresponding periods in 2016.
The increase in income tax expense was mainly due to an increase in online game revenues as a result of the launch of Changyous new mobile game Legacy
TLBB in the second quarter of 2017, offset by a reversal of PRC income tax expense of $5.1 million in the third quarter of 2017 for the preferential tax rate that one of Changyous subsidiaries received in 2017 as a KNSE for
2016.
Net Loss
For the three and nine months
ended September 30, 2017, we had net loss of $102.0 million and $200.4 million, respectively, compared to net loss of $42.0 million and $77.9 million, respectively, for the corresponding periods of 2016.
Net Income Attributable to Noncontrolling Interest
Net income attributable to noncontrolling interest was $1.9 million and $60.0 million, respectively, for the three and nine months ended September 30,
2017 compared to $32.8 million and $80.2 million, respectively, for the corresponding periods in 2016.
Net Loss Attributable to Sohu.com Inc.
As a result of the foregoing, we had a net loss attributable to Sohu.com Inc. of $104.0 million and $260.4 million, respectively, for the three
and nine months ended September 30, 2017, compared to a net loss attributable to Sohu.com Inc. of $74.8 million and $158.1 million, respectively, for the corresponding periods of 2016.
LIQUIDITY AND CAPITAL RESOURCES
Resources Analysis
Liquidity Sources and Balances
Our
principal sources of liquidity are cash and cash equivalents, short-term investments, and cash flows generated from our operations. 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. Short-term investments comprise investment instruments issued by commercial banks in China, with a variable interest rate indexed to performance of underlying assets and maturity
dates within one year.
-78-
As of September 30, 2017, we had cash and cash equivalents of approximately $1.0 billion, and short-term
investments of $304.3 million. Of our cash and cash equivalents, $430.4 million was held in financial institutions inside Mainland China and $610.2 million was held in financial institutions outside of Mainland China. Our VIEs held $55.4 million of
our cash and cash equivalents and $985.2 million was held outside of our VIEs.
We believe our current liquidity and capital resources are sufficient to
meet anticipated working capital needs (net cash used in operating activities), commitments, capital expenditures, and investment activities over the next twelve months. We may, however, require additional cash resources due to changes in business
conditions and other future developments, or changes in general economic conditions.
See Restrictions and Limitations on Cash Available to Sohu.com
Inc. below and Item 3 Quantitative and Qualitative Disclosure About Market Risk - Foreign Currency Exchange Rate Risk.
Contractual Obligations
The following table sets
forth our contractual obligations as of September 30, 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
Thereafter
|
|
|
Total
Payments
Required
|
|
Purchase of cinema advertisement slot rights
|
|
|
15,795
|
|
|
|
78,225
|
|
|
|
43,686
|
|
|
|
20,124
|
|
|
|
2,858
|
|
|
|
79
|
|
|
|
160,767
|
|
Purchase of content and services - video
|
|
|
27,087
|
|
|
|
16,379
|
|
|
|
18,718
|
|
|
|
580
|
|
|
|
0
|
|
|
|
0
|
|
|
|
62,764
|
|
Purchase of bandwidth
|
|
|
26,827
|
|
|
|
13,771
|
|
|
|
1,261
|
|
|
|
1,103
|
|
|
|
322
|
|
|
|
0
|
|
|
|
43,284
|
|
Operating lease obligations
|
|
|
4,290
|
|
|
|
14,417
|
|
|
|
3,234
|
|
|
|
1,032
|
|
|
|
60
|
|
|
|
10
|
|
|
|
23,043
|
|
Expenditures for operating rights for licensed games with technological feasibility
|
|
|
529
|
|
|
|
19,154
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
19,683
|
|
Purchase of content and services - others
|
|
|
5,766
|
|
|
|
2,483
|
|
|
|
298
|
|
|
|
59
|
|
|
|
27
|
|
|
|
0
|
|
|
|
8,633
|
|
Fees for operating rights for licensed games in development
|
|
|
1,362
|
|
|
|
1,182
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,544
|
|
Expenditures for rights to titles of games in development
|
|
|
259
|
|
|
|
1,233
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,492
|
|
Others
|
|
|
3,596
|
|
|
|
424
|
|
|
|
87
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
4,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Payments Required
|
|
|
85,511
|
|
|
|
147,268
|
|
|
|
67,284
|
|
|
|
22,898
|
|
|
|
3,267
|
|
|
|
89
|
|
|
|
326,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Generating Ability
Our cash flows are summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2017
|
|
Net cash provided by operating activities
|
|
$
|
214,224
|
|
|
$
|
83,972
|
|
Net cash used in investing activities
|
|
|
(9,046
|
)
|
|
|
(185,233
|
)
|
Net cash provided by /(used in) financing activities
|
|
|
(327,591
|
)
|
|
|
57,265
|
|
Effect of exchange rate change on cash and cash equivalents
|
|
|
(20,427
|
)
|
|
|
21,919
|
|
Reclassification of cash and cash equivalents to held-for-sale assets
|
|
|
(10,280
|
)
|
|
|
11,684
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(153,120
|
)
|
|
|
(10,393
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
1,245,205
|
|
|
|
1,050,957
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
1,092,085
|
|
|
$
|
1,040,564
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Operating Activities
For the nine months ended September 30, 2017, $84.0 million net cash provided by in operating activities was primarily attributable to our net loss of
$200.4 million, adjusted by (i) the add back of non-cash items consisting of $171.9 million in depreciation and amortization, $86.9 million in impairment loss of goodwill and impairment of acquired intangible assets via acquisition of
businesses, $45.0 million in impairment of other intangible assets and other assets, $22.5 million in share-based compensation expense, $5.8 million in impairment of available-for-sale securities, $4.4 million in provison for allowance for doubtful
accounts, and $0.9 million in investment loss from equity investments, (ii) offset by $5.6 million in change in fair value of financial instruments, and $0.6 million of other items. A decrease in cash from $46.8 million in working capital items
is also included in operating cash flow.
-79-
For the nine months ended September 30, 2016, $214.2 million net cash provided by operating activities was
primarily attributable to our net loss of $77.9 million, adjusted by (i) the add back of non-cash items consisting of $159.5 million in depreciation and amortization, $16.1 million share-based compensation expense, $6.0 million in impairment of
intangible assets, $4.3 million in provision for allowance for doubtful accounts, and $0.7 million other items, (ii) offset by $7.7 million in change in fair value of short-term investments. The increase in cash from $113.2 million working
capital items is also included in operating cash flow.
Net Cash Used in Investing Activities
For the nine months ended September 30, 2017, $185.2 million net cash used in investing activities was primarily attributable to (i) $568.7 million
used in purchase of financial instruments, $111.1 million used in purchase of fixed assets and intangible assets, $7.7 million used in the purchase of a long-term investment, and $2.9 million in payments for other investing activities,
(ii) offset by $500.3 million in proceeds from financial instruments, and $4.9 million from loan repayment to Changyou by a third party.
For the
nine months ended September 30, 2016, $9.0 million net cash used in investing activities was primarily attributable to (i) $282.0 million used in the purchase of financial instruments, $224.5 million used in the purchase of fixed assets
and intangible assets, $18.1 million used in a matching loan from Changyou to SoEasy, and $12.9 million used in the purchase of long-term investments, (ii) offset by $295.6 million in proceeds from financial instruments, $225.5 million from
withdrawal of restricted time deposits originally used as collateral for Changyou loans from offshore banks, $3.6 million from loan repayment by a third party to Changyou, and $3.8 million cash received from other investing activities.
Net Cash Provided by /(Used in) Financing Activities
For the nine months ended September 30, 2017, $57.3 million net cash provided by financing activities was primarily attributable to (i) a $67.8
million in proceeds from a short-term bank loan and $0.5 million received from exercise of share-based awards in a subsidiary, (ii) offset by $6.9 million used in repayments of loans from offshore banks, $3.2 million used in the repurchase of
Sogou Class A Common Shares from a noncontrolling shareholder, and $0.9 million used in other investing activities.
For the nine months ended
September 30, 2016, $327.6 million net cash used in financing activities was primarily attributable to (i) $344.5 million used in repayments of Changyou loans from offshore banks, (ii) offset by $16.9 million Changyou received from
the matching loan with SoEasy.
Restrictions and Limitations on Cash Available to Sohu.com Inc.
To fund any cash requirements it may have, Sohu.com Inc. may need to rely on dividends and other distributions on equity paid by our subsidiaries Sohu.com
Limited, Sogou Inc., and Changyou.com Limited. Since substantially all of our operations are conducted through our indirect Mainland China-based subsidiaries and VIEs, Sohu.com Limited, Sogou Inc., and Changyou.com Limited may need to rely on
dividends, loans, or advances made by our PRC subsidiaries and VIEs in order to pay dividends and make other distributions to us.
The ability of Sohu.com
Limited, Sogou Inc., and Changyou.com Limited to receive dividends and distributions from our China-based subsidiaries and VIEs, and the amount of cash available for distribution to, and use by, Sohu.com Inc., are subject to certain restrictions and
limitations related to PRC law, our subsidiary and VIE structure and U.S. corporate income tax. We do not expect any of such restrictions or taxes to have a material impact on our ability to meet our cash obligations. However, such restrictions and
taxes limit our ability to use Sohu Group cash and cash equivalents held by Changyou and its subsidiaries and VIEs, and by Sogou and its subsidiaries and VIEs, for our Sohu business separate from Changyou and Sogou.
PRC Regulations Related to Profit Appropriation, Withholding Tax on Dividends and Foreign Currency Exchange
Regulations in the PRC currently permit payment of dividends of a PRC company only out of accumulated profits as determined in accordance with accounting
standards and regulations in China. Our China-based WFOEs are also required to set aside each year to their general reserves at least 10% of their after-tax profit based on PRC accounting standards, until the cumulative amount reaches 50% of their
paid-in capital. These reserves may not be distributed as cash dividends, or as loans or advances. Our WFOEs may also allocate a portion of their after-tax profits, at the discretion of their Boards of Directors, to their staff welfare and bonus
funds. Any amounts so allocated may not be distributed by Sohu.com Limited, Sogous parent company Sohu.com (Search) Limited, or Changyou.com Limited and, accordingly, would not be available for distribution to Sohu.com Inc.
-80-
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 will be applied if there is a tax treaty arrangement 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 withholding tax at a rate of 10%. As of September 30,
2017, we had accrued deferred tax liabilities in the amount of $29.5 million for withholding taxes associated with dividends paid by Changyous Mainland China-based WFOEs to Changyous Hong Kong subsidiary.
Under regulations of the PRC State Administration of Foreign Exchange (SAFE), the RMB is not convertible into foreign currencies for capital
account items, such as loans, repatriation of investments and investments outside of Mainland China, unless prior approval of the SAFE is obtained and prior registration with the SAFE is made.
PRC Restrictions Related to Our VIE Structure
Substantially all of our operations are conducted through our VIEs, which generate most of our revenues. Although our subsidiaries received or absorbed a
majority of the VIEs profits or losses pursuant to contractual agreements between the VIEs and our PRC subsidiaries providing for payments to the subsidiaries in return for services provided to the VIEs by the PRC subsidiaries, significant
cash balances remained in our VIEs as of September 30, 2017. As our VIEs are not owned by our PRC subsidiaries, the VIEs are not able to make dividend payments to the subsidiaries. Therefore, in order for Sohu.com Inc. or our subsidiaries
outside of Mainland China to receive any dividends, loans or advances from our PRC subsidiaries, we will need to rely on these contractual payments made by our VIEs to our PRC subsidiaries. Depending on the nature of services provided by our PRC
subsidiaries to their corresponding VIEs, certain of these payments will subject to PRC taxes, such as VAT, which will effectively reduce the amount that the PRC subsidiary receives from its corresponding VIE. In addition, the PRC government could
impose restrictions on such payments or change the tax rates applicable to such payments.
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 our consolidated statements of comprehensive income and estimated tax payments are made when required by U.S. law.
In accordance with U.S. GAAP, we do not provide for U.S. federal income taxes or tax benefits on the undistributed earnings or losses of our non-U.S.
subsidiaries or consolidated VIEs because, for the foreseeable future, we do not have the intention to repatriate those undistributed earnings or losses to the U.S. (except that, under certain circumstances, we may repatriate to the U.S. income that
was previously included in our income for U.S. corporate income tax purposes). However, certain activities conducted in the PRC may give rise to U.S. corporate income tax, even if there are no distributions to Sohu.com Inc. U.S. corporate income
taxes would be imposed on Sohu.com Inc. when its subsidiaries that are controlled foreign corporations (CFCs) generate income that is subject to Subpart F of the U.S. Internal Revenue Code (Subpart F). Generally, passive
income, such as rents, royalties, interest, dividends, and gains from disposal of our investments is among the types of income subject to taxation under Subpart F. Any income taxable under Subpart F is taxable in the U.S. at federal corporate income
tax rates of up to 35%. Subpart F income also includes certain income from intra-Group transactions between Sohu.com Inc.s non-U.S. subsidiaries and VIEs and Changyous non-U.S. subsidiaries and VIEs, or where Sohu.com Inc.s
non-U.S. subsidiaries or VIEs make an investment in U.S. property, such as holding the stock in, or making a loan to, a U.S. corporation. Under a provision of the U.S. tax code commonly referred to as the CFC look-through rule, Sohu.com
Inc. has not had to treat dividends received by its CFC subsidiaries as Subpart F income includible in Sohu.com Inc.s taxable income in the U.S. The CFC look-through rule, which is currently scheduled to expire for taxable years beginning
after December 31, 2019, has been extended several times by the U.S. Congress. Unless further extended, the CFC look-through rule will be available for Sohu.com Inc.s CFC subsidiaries and their VIEs only through their taxable years ending
November 30, 2020.
-81-
Dividend Policy
The Sohu Group intends to retain all available funds and any future earnings for use in the operation and expansion of its own business, and does not
anticipate paying any cash dividends on Sohu.com Inc.s common stock for the foreseeable future. Future cash dividends distributed by Sohu.com Inc., if any, will be declared at the discretion of Sohu.com Inc.s Board of Directors and will
depend upon future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and such other factors as our Board of Directors may deem relevant.
OFF-BALANCE SHEET COMMITMENTS AND ARRANGEMENTS
We have
not entered into any financial guarantees or other commitments to guarantee the payment obligations of third parties. We are not subject to any additional potential payments. We have not entered into any derivative contracts that are indexed to our
shares and classified as shareholders equity, or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as
credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or that engages in leasing, hedging or product
development services with us.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
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 publicly-traded business entities that follow U.S. GAAP, the deferral results in the
new revenue standards 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.
We will apply the new revenue standard beginning January 1, 2018, and will not early adopt. We have set up an implementation team that is currently in the process of analyzing each of our revenue streams in accordance with the new revenue
standard to determine the impact on our consolidated financial statements. We plan to continue the evaluation, analysis, and documentation of our adoption of ASU 2014-09 (including those subsequently issued updates that clarify ASU 2014-09s
provisions) throughout 2017 as we work towards the implementation and finalize our determination of the impact that the adoption will have on our consolidated financial statements.
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 the 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. We are evaluating the impact of adopting this standard on our 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, generally on a 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 publicly-traded companies for annual reporting periods, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. We are currently evaluating
the impact of adopting this standard on our 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 compensation. This
standard addresses several aspects of the accounting for share-based award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; (c) classification in the statement of cash
flows; and (d) accounting for forfeitures of share-based awards. This guidance became effective for reporting periods beginning after December 15, 2016. We adopted this new guidance on January 1, 2017. We elected to continue to
account for forfeitures by estimating expected forfeitures, and this standard does not have a material impact on our consolidated financial statements.
-82-
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.
We are currently evaluating the impact that the standard will have on our 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. We are currently evaluating the impact that the standard will have on our 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 to each period presented using a retrospective transition method. We are currently evaluating the impact of adopting this standard on our consolidated financial statements.
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. We 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. We are currently evaluating the impact of adopting this standard on our consolidated financial statements.