Table of Contents
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM
20-F
 
 
(Mark One)
☐
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
 
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20202021
OR
 
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
 
☐
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number:
001-38511
 
 
SOHU.COM LIMITED
(Exact name of Registrant as specified in its charter)
 
 
N/A
(Translation of Registrant’s name into English)
Cayman Islands
(Jurisdiction of incorporation or organization)
Level 18, Sohu.com Media Plaza
Block 3, No. 2 Kexueyuan South Road, Haidian District
Beijing 100190
People’s Republic of China
(Address of principal executive offices)
Joanna Lv
Chief Financial Officer
Level 18, Sohu.com Media Plaza
Block 3, No. 2 Kexueyuan South Road, Haidian District
Beijing 100190
Telephone: (011)
8610-6272 8610-
6272
6666
Email:
IR@sohu-inc.com
(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
 
(Title of each class)
 
(Trading Symbol(s))
 
(Name of each exchange on which registered)
American Depositary Shares, each representing one ordinary share, par value US$0.001 per share
 
SOHU
 
The NASDAQ Global Select Market
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
 
 
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 39,306,32338,220,845 ordinary shares, par value $0.001 per share, as of December 31, 2020.2021.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  ☐    Yes   ☒ No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.  ☐    Yes   ☒ No
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  ☒    Yes   ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  ☒    Yes   ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
Large accelerated filer  ☐                Accelerated
filer
  ☒                Non-accelerated
filer  ☐                Emerging growth company  ☐
Large accelerated filer☐Accelerated filer☒Non-accelerated filer☐Emerging growth company☐
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.  ☐
†
†
The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  ☒
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.

 
U.S. GAAP ☒ 
International Financial Reporting Standards as
issued
Other  ☐
by the International Accounting Standards Board  ☐ 
Other  ☐
If “other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.  ☐    Item 17  ☐    Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act).  ☐    Yes  ☒    No
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  ☐    Yes  ☐    No
 
 
 
Table of Contents
TABLE OF CONTENTS
 
INTRODUCTION
   41 
  
FORWARD-LOOKING INFORMATION
   52 
  
PART I
     
   
Item 1.
 
Identity of Directors, Senior Management and Advisers
   63 
Item 2.
 
Offer Statistics and Expected Timetable
   63 
Item 3.
 
Key Information
   63 
Item 4.
 
Information on the Company
   6659 
Item 4A.
 
Unresolved Staff Comments
   113102 
Item 5.
 
Operating and Financial Review and Prospects
   114102 
Item 6.
 
Directors, Senior Management and Employees
   147117 
Item 7.
 
Major Shareholders and Related Party Transactions
   156124 
Item 8.
 
Financial Information
   161129 
Item 9.
 
The Offer and Listing
   161129 
Item 10.
 
Additional Information
   161129 
Item 11.
 
Quantitative and Qualitative Disclosures About Market Risk
   171140 
Item 12.
 
Description of Securities Other than Equity Securities
   172141 
  
PART II
     
   
Item 13.
 
Defaults, Dividend Arrearages and Delinquencies
   173142 
Item 14.
 
Material Modifications to the Rights of Security Holders and Use of Proceeds
   173142 
Item 15.
 
Controls and Procedures
   174142 
Item 16A.
 
Audit Committee Financial Expert
   174143 
Item 16B.
 
Code of Ethics
   174143 
Item 16C.
 
Principal Accountant Fees and Services
   175143 
Item 16D.
 
Exemptions from the Listing Standards for Audit Committees
   175144 
Item 16E.
 
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
   175144 
Item 16F.
 
Change in Registrant’s Certifying Accountant
   175144 
Item 16G.
 
Corporate Governance
   175144 
Item 16H.
 
Mine Safety Disclosure
   175144
Item 16I.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections144 
  
PART III
     
   
Item 17.
 Financial Statements144
Item 18.
Financial Statements144
Item 19.
Exhibits146
Financial StatementsSIGNATURES
   175
Item 18.
Financial Statements
176
Item 19.
Exhibits
177
SIGNATURES
184152 
Table of Contents
Introduction
In this annual report, except where the context otherwise requires and for purposes of this annual report only:
 
“we,” “us,” “our,” “our company,” “our Group,” the “Sohu Group,” the “Group,” and “Sohu” refer to Sohu.com Limited (or our predecessor Sohu.com Inc., as applicable), and, unless the context requires otherwise, include its subsidiaries and variable interest entities.entities (“VIEs”). As described elsewhere in this annual report, we do not own the VIEs, and the results of the VIEs’ operations only accrue to us through contractual arrangements between the VIEs, and the VIEs’ nominee shareholders, and certain of our subsidiaries. Accordingly, in appropriate contexts we will describe the VIEs’ activities separately from those of our direct and indirect owned subsidiaries and our use of the terms “we,” “us,” and “our” may not include the VIEs in those contexts. Sohu.com Inc., a Delaware corporation, was dissolved on May 31, 2018 and Sohu.com Limited, which before then was a direct wholly-owned subsidiary of Sohu.com Inc., replaced Sohu.com Inc. as the
top-tier,
publicly-traded holding company of the Sohu Group. See “Information on the Company-History and Development of the Company” in Item 4 of this annual report.
 
“ADSs” refers to our American depositary shares, each of which represents one ordinary share, par value $0.001 per share;
 
“Changyou” refers to Changyou.com Limited, a Cayman Islands exempted company, and unless the context requires otherwise, includes its subsidiaries and variable interest entities, or VIEs;
 
“China”China,” the “PRC,” or “PRC”“Mainland China” refers to the People’s Republic of China, and for the purpose of this annual report, excludes Hong Kong, Macau, and Taiwan;
“DAU,” for active users quoted from iResearch, for any given month, refers to the average number of active users per day during that month. A user who uses the applicable product more than once in a day is counted as one active user for that day. Each distinguishable device or application is treated as a separate user for purposes of calculating such DAU;
 
“HNTE” refers to high and new technology enterprises;
 
“IVAS” refers to our Internet value-added services;
 
“IPO” refers to an initial public offering;
 
“KNSE” refers to key national software enterprises;
 
“Legacy TLBB Mobile” refers to a mobile game that Changyou developed based on the title and characters of Tian Long Ba Bu, which is operated by Tencent under license from Changyou and was launched in May 2017;
 
“MAU,” for active users quoted from iResearch, for any given month, refers to the number of active users during that month. A user who uses the applicable product more than once in a month is counted as one active user for that month. Each distinguishable device or application is treated as a separate user for purposes of calculating such MAU;
“Memorandum and Articles of Association” refers to our Amended and Restated Memorandum of Association and our Amended and Restated Articles of Association;
 
“MMORPGs” refers to massively multiplayer online role-playing games;
 
“Offshore” refers to nations and territories outside of Mainland China, and for this purpose includes Hong Kong, Macau, and Taiwan;
“Paid clicks” refers to the number of paid clicks, including clicks by users on advertisers’ promotional links displayed on Sogou’s search result pages and other Internet properties and third parties’ Internet properties;
 
“PC games” refers to interactive online games that may be accessed and played simultaneously by hundreds of thousands of game players through personal computers with local game
client-end
access software installation requirements. In previous annual reports, we have sometimes used the terms “MMOGs” and “MMORPGs” when referring to these
client-end
installed games played through personal computers;
 
“PRC GAAP” refers to generally accepted accounting principles of the PRC;
 
“RMB” refers to the Renminbi, which is the legal currency of China;
 
“Sogou” refers to Sogou Inc., a Cayman Islands exempted company, and unless the context requires otherwise, includes its subsidiaries and variable interest entities, or VIEs;
“Sogou
Pre-IPO
Class A Ordinary Shares” refers to the Sogou Class A ordinary shares that were authorized and outstanding prior to the completion of Sogou’s IPO;
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“Sogou
Pre-IPO
Series A Preferred Shares” refers to the Sogou Series A Preferred Shares that were authorized and outstanding prior to the completion of Sogou’s IPO;
“Sogou Class A Ordinary Shares” refers to the Sogou Class A Ordinary Shares, which carry one vote per share;
“Sogou Class B Ordinary Shares” refers to the Sogou Class B Ordinary Shares which carry ten votes per share;
 
“Tencent” refers to Tencent Holdings Limited and its subsidiaries under International Financial Reporting Standards;
 
“Tian Long Ba Bu,” refers to the popular novel of that name by the famous Chinese writer Louis Cha;
 
“TLBB” or “TLBB PC” refers to the PC game developed based on the title and characters of Tian Long Ba Bu;
 
“TLBB 3D” refers to a mobile game that was developed based on the title and characters of Tian Long Ba Bu;
 
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“TLBB Honor” refers to another mobile game that was developed based on the title and characters of Tian Long Ba Bu, which adopts an innovative portrait interface;
 
“U.S. GAAP” refers to generally accepted accounting principles in the United States;
 
“U.S. TCJA” refers to the U.S. Tax Cuts and Jobs Act signed into law on December 22, 2017; and
 
“VIE” refers to an entity that is a variable interest entity under U.S. GAAP, including a subsidiary of an entity that is a variable interest entity under U.S. GAAP.
This annual report on Form
20-F
includes our audited consolidated statements of comprehensive income/(loss) for the years ended December 31, 2018, 2019, 2020, and 20202021 and audited consolidated balance sheets as of December 31, 20192020 and 2020.2021.
Our predecessor Sohu.com Inc. completed an IPO of shares of its common stock on NASDAQ on July 17, 2000. Following the dissolution of Sohu.com Inc. on May 31, 2018, our ADSs began trading on NASDAQ in place of the shares of common stock of Sohu.com Inc. under the same “SOHU” symbol under which Sohu.com Inc.’s shares had previously traded.
Changyou completed its IPO on NASDAQ in April 2009, trading under the symbol “CYOU.” On April 17, 2020, we acquired all outstanding shares of Changyou that we did not already beneficially own pursuant to the merger (the “Changyou Merger”) of an indirect newly-formed wholly-owned subsidiary (“Changyou Merger Co.”) with and into Changyou, with Changyou being the company surviving the Changyou Merger, and resulting in Changyou being delisted from NASDAQ and continuing as a privately-held company wholly-owned directly and indirectly by us.
Sogou completed its IPO on the New York Stock Exchange (the “NYSE”) in November 2017, trading under the symbol “SOGO.” On September 23, 2021, we completed the transactions contemplated by a Share Purchase Agreement, dated September 29, 2020 Sogou entered into a definitive agreement and plan of merger (as amended as ofon December 1, 2020 the “Sogou Merger Agreement”) with THL A21 Limited (“THL”), TitanSupernova Limited (“Tencent Merger Sub”), and Tencent Mobility Limited (“TML”), each of which is a direct or indirect wholly-owned subsidiary of Tencent, that contemplates that Tencent Merger Sub will be merged with and into Sogou in an
all-cash
going-private transaction (the “Sogou Merger”). Alsofurther amended on September 29, 2020, we andJuly 19, 2021, among us, our indirect wholly-owned subsidiary Sohu.com (Search) Limited (“Sohu Search”) entered into a share purchase agreement with , and TitanSupernova Limited (“Tencent Merger SubSub”), an indirect wholly-owned subsidiary of Tencent (as so amended, as of December 1, 2020, the “Tencent/Sohu Sogou Share Purchase Agreement”), pursuant toin which we agreed to sellSohu Search sold all of the Sogou Class A Ordinary Sharesordinary shares of Sogou and Sogou Class B Ordinary Sharesordinary shares of Sogou owned by usSohu Search to Tencent shortly before the effectivenessMerger Sub at a purchase price of the Sogou Merger$9.00 per share (the “Tencent/Sohu Sogou Share Purchase”). IfWe received gross consideration of approximately $1.18 billion in cash from the Tencent/Sohu Sogou Share Purchase. Also on September 23, 2021, shortly after the completion of the Tencent/Sohu Sogou Share Purchase, is completed,Tencent Merger Sub was merged with and into Sogou (the “Sogou Merger”) pursuant to a definitive Agreement and Plan of Merger, dated September 29, 2020 and amended on December 1, 2020 and further amended on July 19, 2021 (as so amended, the “Sogou Merger Agreement”), among Sogou, Tencent Merger Sub, and two other wholly-owned subsidiaries of Tencent. As a result of the completion of the Tencent/Sohu Sogou Share Purchase and the Sogou Merger, we will no longer have any beneficial ownership interest in Sogou, and if the Sogou Merger is completed, Sogou will become an indirect wholly-owned subsidiary of Tencent and will no longer be listed on the NYSE.Sogou. See “Item 4. Information on the Company—History and Development of the Company” for a more detailed description of the transactions contemplated by the Tencent/Sohu Sogou Share Purchase Agreement and the Sogou Merger Agreement.
FORWARD-LOOKING INFORMATION
This annual report on Form
20-F
contains “forward looking statements.” These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. You can identify these forward-looking statements by terms such as “may,” “will,” “expects,” “anticipates,” “future,” “intend,” “plan,” “believe,” “estimate,” “is/are likely to” and similar expressions. The forward-looking statements made in this annual report relate only to events as of the date on which the statements are made. We undertake no obligation, beyond any that is required by law, to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made, even though our situation will change in the future.
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These forward-looking statements include, but are not limited to, the following:
 
our ability to maintain and strengthen our position as a leading Chinese online media, video, and game and search servicebusiness group in China;
 
our expected development, launch and market acceptance of our products and services;
 
our various initiatives to implement our business strategies to expand our business;
 
our future business development, results of operations and financial condition;
 
the expected growth of and change in the online media, searchvideo, and game industries in ChinaChina;
 
the impact of the completion or termination of the currently pending Tencent/Sohu Sogou Share Purchase and Sogou Merger described in “Item 4. Information on the Company-History and Development of the Company;” and2
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the PRC government policies relating to the Internet and Internet content providers, including online media, searchvideo, and game developers and operators.operators; and
the effect that PRC laws and regulations; PRC government policies; and the views of courts, arbitral tribunals, and other governmental authorities may have on our ability to rely on contractual rights to effect control and management of the VIEs that are consolidated with us and our ability to consolidate such VIEs’ results of operations, assets, and liabilities in our consolidated financial statements and/or to transfer the revenues of such VIEs to our corresponding PRC subsidiaries.
Whether actual results will conform with our expectations and predictions is subject to a number of risks and uncertainties, many of which are beyond our control, and reflect future business decisions that are subject to change. Some of the assumptions, future results, and levels of performance expressed or implied in the forward-looking statements we make inevitably will not materialize, and unanticipated events may occur which will affect our results.
Risks and uncertainties affecting the Tencent/Sohu Sogou Share Purchase and the Sogou Merger include the possibility that they will not occur as planned if events arise that result in the termination of the Tencent/Sohu Sogou Share Purchase Agreement and the Sogou Merger Agreement, or if one or more of the various closing conditions to the Tencent/Sohu Sogou Share Purchase and the Sohu Merger, including anti-trust clearance of the Tencent/Sohu Sogou Share Purchase under PRC law, are not satisfied or waived.
We would like to caution you not to place undue reliance on forward-looking statements and you should read these statements in conjunction with all other parts of this annual report, including the risk factors set forth in Item 3. See “Key Information-Risk Factors”
PART I
 
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable.
 
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable.
 
ITEM 3.
KEY INFORMATION
Selected Consolidated Financial DataInformation Related to VIEs and Sohu.com Limited
The following tables present
We do not own the selected consolidatedVIEs that we consolidate in our financial information forstatements. We consolidate the results of the VIEs and their subsidiaries under U.S. GAAP through our company. The selected consolidated statementscontractual arrangements with the VIEs and their nominee shareholders. For more details of comprehensive income data forsuch contractual arrangements, see Item 7 “Related Party Transactions - Contractual Arrangements with VIEs and their Shareholders” of this annual report.
Between our entry into the years ended December 31, 2018, 2019, andTencent/Sohu Sogou Share Purchase Agreement on September 29, 2020 and the consolidated balance sheets datacompletion of the Tencent/Sohu Sogou Share Purchase on September 23, 2021, Sogou met the criteria for discontinued operations. Accordingly, the results of operations of Sogou and the gain of approximately $855 million, net of transaction and other costs, from its disposal are presented in separate line items as of December 31, 2019 and 2020discontinued operations. Retrospective adjustments to the historical statements have been derived frommade in order to provide a consistent basis of comparison. The financial position, results of operations, and cash flows in relation to the discontinued operations were therefore not disaggregated considering they will not constitute any part of our audited consolidated financial statements included in this annual report beginning on pagegoing forward after the completion of the Tencent/Sohu Sogou Share Purchase.
F-1.
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The selected consolidated statementsfollowing table presents our condensed consolidating schedule of comprehensive income datafinancial position for our
top-tier
publicly-traded holding company Sohu.com Limited (the “Company”), our wholly-owned subsidiaries (“WFOEs”) that are the years ended December 31, 2016 and 2017 andprimary beneficiaries of the VIEs under U.S. GAAP (the “Primary Beneficiaries of VIEs”), our consolidated balance sheets data as of December 31, 2016, 2017, and 2018 have been derived from prior-period consolidated financial statementsother subsidiaries that are not included in this annual report. Our consolidated financial statements are preparedthe Primary Beneficiaries of VIEs (the “Other Subsidiaries”), and the VIEs and their subsidiaries that we consolidate as of the dates presented in accordance with U.S. GAAP. The selected consolidated financial data should be read in conjunction with, and are qualified in their entirety by reference to, our audited consolidated financial statements and related notes and “Item 5. Operating and Financial Review and Prospects” below. Our historical results do not indicate the results that may be expected for any future periods.(in thousands):
As
   
As of December 31, 2020
 
   
Sohu.com
Limited
   
Other
Subsidiaries
   
Primary
Beneficiaries
of VIEs
   
VIEs and

their
subsidiaries
   
Eliminating
adjustments
  
Consolidated
totals
 
ASSETS
                             
Current assets:
                             
Cash and cash equivalents
  $586    61,505    107,938    47,028    0   217,057 
Restricted cash
   0    112,028    217,552    1,211    0   330,791 
Short-term investments
   0    31,429    69,163    153    0   100,745 
Accounts receivable, net
   0    19,870    20,417    47,234    0   87,521 
Prepaid and other current assets
   1,609    9,932    110,316    15,385    (30,652)   106,590 
Intra-Group receivables due from the Company’s subsidiaries (1)
   533,678    486,704    1,015,652    506,659    (2,542,693)   0 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
 
Total current assets from continuing operations
   535,873    721,468    1,541,038    617,670    (2,573,345)   842,704 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
 
Assets held for sale (current)
                           1,412,168 
                           
 
 
 
Total current assets
                           2,254,872 
                           
 
 
 
Fixed assets, net
   0    55,929    281,450    295    0   337,674 
Investment in subsidiaries and VIEs (2)
   0    898,680    347,153    0    (1,245,833)   0 
Restricted time deposits
   0    19,924    81,595    0    0   101,519 
Other
non-current
assets
   22,036    22,324    15,945    69,284    (1,533)   128,056 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
 
Total assets
  $                        2,822,121 
                           
 
 
 
LIABILITIES
                             
Current liabilities:
                             
Accounts payable
  $0    15,824    80,642    11,145    0   107,611 
Accrued liabilities
   1,739    13,677    95,209    46,888    0   157,513 
Receipts in advance and deferred revenue
   0    1,402    7,577    43,076    0   52,055 
Accrued salary and benefits
   138    48,396    44,594    7,698    0   100,826 
Tax payables
   0    4,322    19,262    4,422    0   28,006 
Short-term bank loans
   0    315,550    0    0    0   315,550 
Intra-Group payables due to the Company’s subsidiaries (1)
   0    1,216,889    975,205    350,599    (2,542,693)   0 
Other short-term liabilities
   55    89,751    21,989    25,028    (30,652)   106,171 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
 
Total current liabilities from continuing operations
   1,932    1,705,811    1,244,478    488,856    (2,573,345)   867,732 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
 
Liabilities held for sale (current)
                           416,998 
                           
 
 
 
Total current liabilities
                           1,284,730 
                           
 
 
 
Long-term other payables
   0    0    3,202    0    0   3,202 
Long-term bank loans
   0    92,000    0    0    0   92,000 
Long-term tax liabilities
   158,507    16,119    0    14,134    0   188,760 
Deferred tax liabilities
   0    206,594    8,985    2,014    0   217,593 
Deficit of investment in subsidiaries and VIEs
   50,101    0    0    0    (50,101)   0 
Other non-current liabilities
   0    84    3,485    1,819    (1,533)   3,855 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
 
Total long-term liabilities
   208,608    314,797    15,672    17,967    (51,634)   505,410 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
 
Total liabilities
  $                        1,790,140 
                           
 
 
 
Commitments and contingencies
                             
SHAREHOLDERS’ EQUITY
                             
Total Sohu.com Limited shareholders’ equity
                           347,369 
Noncontrolling interest
                           684,612 
                           
 
 
 
Total shareholders’ equity (2)
                           1,031,981 
                           
 
 
 
Total liabilities and shareholders’ equity
  $                        2,822,121 
                           
 
 
 
4
Table of August 12, 2019, we deconsolidated Changyou’s cinema advertising business as a resultContents
   
As of December 31, 2021
 
   
Sohu.com
Limited
   
Other
Subsidiaries
   
Primary
Beneficiaries
of VIEs
   
VIEs and

their
subsidiaries
   
Eliminating
adjustments
  
Consolidated
totals
 
ASSETS
                             
Current assets:
                             
Cash and cash equivalents
  $13,564    606,306    346,566    32,513    0   998,949 
Restricted cash
   0    0    1,969    0    0   1,969 
Short-term investments
   0    147,598    251,747    0    0   399,345 
Accounts receivable, net
   0    25,552    20,971    36,027    0   82,550 
Prepaid and other current assets
   723    13,224    74,528    18,836    0   107,311 
Intra-Group receivables due from the Company’s subsidiaries (1)
   539,677    670,362    837,566    647,330    (2,694,935)   0 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
 
Total current assets
   553,964    1,463,042    1,533,347    734,706    (2,694,935)   1,590,124 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
 
Fixed assets, net
   0    55,358    274,212    427    0   329,997 
Investment in subsidiaries and VIEs (2)
   918,243    779,717    562,971    0    (2,260,931)   0 
Long-term time deposits
   0    0    189,007    0    0   189,007 
Other
non-current
assets
   22,036    9,469    19,976    86,744    (1,568)   136,657 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
 
Total assets
  $1,494,243    2,307,586    2,579,513    821,877    (4,957,434)   2,245,785 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
 
LIABILITIES
                             
Current liabilities:
                             
Accounts payable
  $0    21,301    53,821    12,325    0   87,447 
Accrued liabilities
   1,678    11,257    81,566    43,695    0   138,196 
Receipts in advance and deferred revenue
   0    4,938    6,259    45,844    0   57,041 
Accrued salary and benefits
   83    25,637    57,372    8,393    0   91,485 
Tax payables
   9    7,925    7,241    1,539    0   16,714 
Intra-Group payables due to the Company’s subsidiaries (1)
   36,912    1,011,224    1,184,312    462,487    (2,694,935)   0 
Other short-term liabilities
   1,358    58,866    38,250    14,094    0   112,568 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
 
Total current liabilities
   40,040    1,141,148    1,428,821    588,377    (2,694,935)   503,451 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
 
Long-term other payables
   0    0    3,922    0    0   3,922 
Long-term tax liabilities
   163,334    16,119    0    14,465    0   193,918 
Deferred tax liabilities
   0    237,116    8,726    3,323    0   249,165 
Other non-current liabilities
   0    0    2,960    1,750    (1,568)   3,142 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
 
Total long-term liabilities
   163,334    253,235    15,608    19,538    (1,568)   450,147 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
 
Total liabilities
  $203,374    1,394,383    1,444,429    607,915    (2,696,503)   953,598 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
 
Commitments and contingencies
                             
SHAREHOLDERS’ EQUITY
                             
Total Sohu.com Limited shareholders’ equity
   1,290,869    911,936    1,135,084    213,962    (2,260,982)   1,290,869 
Noncontrolling interest
   0    1,267    0    0    51   1,318 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
 
Total shareholders’ equity (2)
   1,290,869    913,203    1,135,084    213,962    (2,260,931)   1,292,187 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
 
Total liabilities and shareholders’ equity
  $1,494,243    2,307,586    2,579,513    821,877    (4,957,434)   2,245,785 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
 
5
Table of Changyou ceasing the business’s operations. Accordingly, the historical financialContents
The following table presents our condensed consolidating schedules of results of operations for the cinema advertising businessVIEs that we consolidate and other entities for the periods from January 1, 2018 to August 12, 2019 are reflected in our audited consolidated financial statements included in this annual report as discontinued operations, and historical results discussed elsewhere in this annual report exclude such results unless they are expressly included.presented (in thousands):
   
Year Ended December 31, 2019
 
   
Sohu.com
Limited
  
Other
Subsidiaries
  
Primary
Beneficiaries
of VIEs
  
VIEs and

their
subsidiaries
   
Eliminating
adjustments
  
Consolidated
totals
 
Revenues:
                          
Third-party revenues
  $0   111,548   79,972   482,283    0   673,803 
Intra-Group revenues (3)
   0   25,606   321,469   29,674    (376,749)   0 
   
 
 
  
 
 
  
 
 
  
 
 
   
 
 
  
 
 
 
Total revenues
   0   137,154   401,441   511,957    (376,749)   673,803 
Cost of revenues:
                          
Third-party cost of revenues
   0   15,105   127,498   101,044    0   243,647 
Intra-Group cost of revenues (3)
   0   2,234   39,692   139,765    (181,691)   0 
   
 
 
  
 
 
  
 
 
  
 
 
   
 
 
  
 
 
 
Total cost of revenues
   0   17,339   167,190   240,809    (181,691)   243,647 
   
 
 
  
 
 
  
 
 
  
 
 
   
 
 
  
 
 
 
Gross profit
   0   119,815   234,251   271,148    (195,058)   430,156 
Operating expenses:
                          
Third-party operating expenses
   2,320   75,800   354,102   69,131    0   501,353 
Intra-Group operating expenses (3)
   0   4,260   6,044   184,799    (195,103)   0 
   
 
 
  
 
 
  
 
 
  
 
 
   
 
 
  
 
 
 
Total operating expenses
   2,320   80,060   360,146   253,930    (195,103)   501,353 
   
 
 
  
 
 
  
 
 
  
 
 
   
 
 
  
 
 
 
Operating profit/(loss)
   (2,320)   39,755   (125,895)   17,218    45   (71,197) 
Income/(loss) from subsidiaries and VIEs (2)
   (167,657)   (154,566)   75,149   0    247,074   0 
Non-operating
income/(expense)
   21,142   11,870   (36,770)   4,929    (45)   1,126 
   
 
 
  
 
 
  
 
 
  
 
 
   
 
 
  
 
 
 
Income/(loss) before income tax expense
   (148,835)   (102,941)   (87,516)   22,147    247,074   (70,071) 
Income tax expense
   7,887   6,493   11,508   2,540    0   28,428 
   
 
 
  
 
 
  
 
 
  
 
 
   
 
 
  
 
 
 
Net income/(loss) from continuing operations
   (156,722)   (109,434)   (99,024)   19,607    247,074   (98,499) 
Less: Net income from continuing operations attributable to the noncontrolling interest shareholders
   0   58,223   0   0    0   58,223 
   
 
 
  
 
 
  
 
 
  
 
 
   
 
 
  
 
 
 
Net income/(loss) from continuing operations attributable to Sohu.com Limited
   (156,722)   (167,657)   (99,024)   19,607    247,074   (156,722) 
Net income from discontinued operations, net of tax
                        7,386 
                        
 
 
 
Net loss
  $                     (149,336) 
                        
 
 
 
 
6
Table of Contents
Because of our entry into the Tencent/Sohu Sogou Share Purchase Agreement, the historical financial results of Sogou for periods from January 1, 2018 to December 31, 2020 are reflected in our audited consolidated financial statements included in this annual report as discontinued operations, and historical results discussed elsewhere in this annual report exclude such results, unless they are expressly included. See “Item 4. Information on the Company-History and Development of the Company” for a more detailed description of the transactions contemplated by the Tencent/Sohu Sogou Share Purchase Agreement and the Sogou Merger Agreement.
Selected Consolidated Statements of Comprehensive Income/(Loss) Data
   
Year Ended December 31,
 
   
2016
  
2017
  
2018
  
2019
  
2020
 
   
(In thousands, except per ADS data)
 
Statements of Comprehensive Income Data:
      
Revenues:
      
Brand advertising
  $450,448  $315,235  $232,339  $175,056  $146,526 
Online games
   395,709   449,533   389,788   440,902   536,684 
Others
   77,905   97,937   68,048   57,845   66,680 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total revenues
   924,062   862,705   690,175   673,803   749,890 
Cost of revenues (1):
      
Brand advertising
   371,066   363,624   184,473   126,406   105,604 
Online games
   96,168   62,775   60,981   88,992   91,526 
Others
   43,879   66,467   43,562   28,249   20,307 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total cost of revenues
   511,113   492,866   289,016   243,647   217,437 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Gross profit
   412,949   369,839   401,159   430,156   532,453 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Operating expenses:
     
Product development (1)
   219,121   245,536   246,155   234,852   241,941 
Sales and marketing (1)
   299,020   237,252   236,898   204,665   159,787 
General and administrative (1)
   94,964   86,448   70,129   54,591   57,354 
Goodwill impairment and impairment of intangible assets acquired as part of business acquisitions
   0   86,882   16,369   7,245   0 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total operating expenses
   613,105   656,118   569,551   501,353   459,082 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Operating profit/(loss)
   (200,156)   (286,279)   (168,392)   (71,197)   73,371 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Other income/(expense), net
   19,832   13,207   30,701   7,963   25,993 
Interest income
   17,302   15,012   16,036   6,103   7,369 
Interest expense
   (1,356)   (4,088)   (17,538)   (14,370)   (6,234) 
Exchange difference
   7,456   (7,303)   3,301   1,430   (3,800) 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Income/(loss) before income tax expense/(benefit)
   (156,922)   (269,451)   (135,892)   (70,071)   96,699 
Income tax expense/(benefit)
   23,311   258,214   (14,586)   28,428   133,226 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net loss from continuing operations
   (180,233)   (527,665)   (121,306)   (98,499)   (36,527) 
Net income/(loss) from discontinued operations, net of tax
   65,260   57,662   53,947   55,108   (91,793) 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net loss
   (114,973)   (470,003)   (67,359)   (43,391)   (128,320) 
Less: Net income from continuing operations attributable to the noncontrolling interest shareholders
   46,031   14,050   41,732   58,223   18,448 
Less: Net income/(loss) from discontinued operations attributable to the noncontrolling interest shareholders
   63,017   70,473   50,991   47,722   (60,656) 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net loss from continuing operations attributable to Sohu.com Limited
  $(226,264)  $(541,715)  $(163,038)  $(156,722)  $(54,975) 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net income/(loss) from discontinued operations attributable to Sohu.com Limited
   2,243   (12,811)   2,956   7,386   (31,137) 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net loss attributable to Sohu.com Limited
  $(224,021)  $(554,526)  $(160,082)  $(149,336)  $(86,112) 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net loss
  $(114,973)  $(470,003)  $(67,359)  $(43,391)  $(128,320) 
Other comprehensive income/(loss)
   (77,155)   68,429   (37,339)   (13,069)   11,972 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Comprehensive loss
   (192,128)   (401,574)   (104,698)   (56,460)   (116,348) 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
   
Year Ended December 31, 2020
 
   
Sohu.com
Limited
  
Other
Subsidiaries
  
Primary
Beneficiaries
of VIEs
   
VIEs and

their
subsidiaries
   
Eliminating
adjustments
  
Consolidated
totals
 
Revenues:
                           
Third-party revenues
  $0   119,098   77,812    552,980    0   749,890 
Intra-Group revenues (3)
   0   19,598   390,062    30,207    (439,867)   0 
   
 
 
  
 
 
  
 
 
   
 
 
   
 
 
  
 
 
 
Total revenues
   0   138,696   467,874    583,187    (439,867)   749,890 
Cost of revenues:
                           
Third-party cost of revenues
   0   24,674   99,430    93,333    0   217,437 
Intra-Group cost of revenues (3)
   0   4,376   34,280    141,717    (180,373)   0 
   
 
 
  
 
 
  
 
 
   
 
 
   
 
 
  
 
 
 
Total cost of revenues
   0   29,050   133,710    235,050    (180,373)   217,437 
   
 
 
  
 
 
  
 
 
   
 
 
   
 
 
  
 
 
 
Gross profit
   0   109,646   334,164    348,137    (259,494)   532,453 
Operating expenses:
                           
Third-party operating expenses
   1,613   95,727   310,759    50,983    0   459,082 
Intra-Group operating expenses (3)
   0   3,957   741    254,796    (259,494)   0 
   
 
 
  
 
 
  
 
 
   
 
 
   
 
 
  
 
 
 
Total operating expenses
   1,613   99,684   311,500    305,779    (259,494)   459,082 
   
 
 
  
 
 
  
 
 
   
 
 
   
 
 
  
 
 
 
Operating profit/(loss)
   (1,613)   9,962   22,664    42,358    0   73,371 
Income/(loss) from subsidiaries and VIEs (2)
   (46,084)   69,099   78,938    0    (101,953)   0 
Non-operating
income/(expense)
   (1,071)   (3,948)   24,679    3,668    0   23,328 
   
 
 
  
 
 
  
 
 
   
 
 
   
 
 
  
 
 
 
Income/(loss) before income tax expense
   (48,768)   75,113   126,281    46,026    (101,953)   96,699 
Income tax expense
   6,207   102,749   20,000    4,270    0   133,226 
   
 
 
  
 
 
  
 
 
   
 
 
   
 
 
  
 
 
 
Net income/(loss) from continuing operations
   (54,975)   (27,636)   106,281    41,756    (101,953)   (36,527) 
Less: Net income from continuing operations attributable to the noncontrolling interest shareholders
   0   18,448   0    0    0   18,448 
   
 
 
  
 
 
  
 
 
   
 
 
   
 
 
  
 
 
 
Net income/(loss) from continuing operations attributable to Sohu.com Limited
   (54,975)   (46,084)   106,281    41,756    (101,953)   (54,975) 
Net loss from discontinued operations, net of tax
                         (31,137) 
                         
 
 
 
Net loss
  $                      (86,112) 
                         
 
 
 
 
7
Table of Contents
Less: Comprehensive income attributable to noncontrolling interest shareholders
   78,824   117,960   61,376   93,244   (35,074) 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Comprehensive loss attributable to Sohu.com Limited.
   (270,952)   (519,534)   (166,074)   (149,704)   (81,274) 
Basic net (loss)/income per ADS
      
Continuing operations
  $(5.85)  $(13.94)  $(4.18)  $(3.99)  $(1.39) 
Discontinued operations
   0.06   (0.33)   0.07   0.19   (0.79) 
Net loss per share
   (5.79)   (14.27)   (4.11)   (3.80)   (2.18) 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Shares used in computing basic net (loss)/income per ADS
   38,706   38,858   38,959   39,249   39,452 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Diluted net (loss)/income per ADS
      
Continuing operations
  $(5.89)  $(13.98)  $(4.20)  $(4.01)  $(1.40) 
Discontinued operations
   0.06   (0.32)   0.07   0.18   (0.79) 
Net loss per share
   (5.83)   (14.30)   (4.13)   (3.83)   (2.19) 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Shares used in computing diluted net (loss)/income per ADS
   38,706   38,858   38,959   39,249   39,452 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
(1)
Share-based compensation expenses are included in the following financial statements line items:
   
Year Ended December 31,
 
   
2016
   
2017
  
2018
  
2019
  
2020
 
   
(In thousands)
 
Cost of revenues
  $195   $(342)  $(739)  $142  $720 
Product development expenses
   3,570    7,078   (4,182)   1,364   7,325 
Sales and marketing expenses
   578    1,614   (920)   (326)   460 
General and administrative expenses
   5,927    13,404   (6,267)   1,170   5,975 
The negative amounts in the table above resulted from
re-measured
compensation expense based on the then-current fair value of the awards on the reporting date.
Selected Consolidated Balance Sheet Data
   
As of December 31,
 
   
2016
   
2017
   
2018
   
2019
   
2020
 
   
(In thousands)
 
Balance Sheets Data:
          
Cash and cash equivalents
  $764,731   $669,646   $634,310   $162,662   $217,057 
Restricted cash
   0    3,928    3,539    3,290    330,791 
Restricted time deposits
   240    240    244,150    240    101,519 
Working capital
   918,522    1,472,485    1,131,571    914,801    970,142 
Total assets
   2,592,450    3,442,985    3,372,956    2,691,864    2,822,121 
Short-term bank loans
   0    61,216    129,677    114,528    315,550 
Long-term bank loans
   0    122,433    302,323    0    92,000 
Total liabilities
   1,034,655    1,625,748    1,820,005    1,384,947    1,790,140 
Ordinary Shares: $0.001 par value per share (75,400 shares authorized; 38,742 shares, 38,898 shares, 39,229 shares, 39,269 shares, and 39,306 shares, respectively, issued and outstanding as of December 31, 2016, 2017, 2018, 2019, and 2020)
   45    45    39    39    39 
Total Sohu.com Limited shareholders’ equity
   993,580    750,634    588,840    428,454    347,369 
Noncontrolling interest
   564,215    1,066,603    964,111    878,463    684,612 
Total shareholders’ equity
   1,557,795    1,817,237    1,552,951    1,306,917    1,031,981 
   
Year Ended December 31, 2021
 
   
Sohu.com
Limited
  
Other
Subsidiaries
  
Primary
Beneficiaries
of VIEs
  
VIEs and

their
subsidiaries
   
Eliminating
adjustments
  
Consolidated
totals
 
Revenues:
                          
Third-party revenues
  $0   90,830   79,923   664,823    0   835,576 
Intra-Group revenues (3)
   0   275,774   256,801   21,488    (554,063)   0 
   
 
 
  
 
 
  
 
 
  
 
 
   
 
 
  
 
 
 
Total revenues
   0   366,604   336,724   686,311    (554,063)   835,576 
Cost of revenues:
                          
Third-party cost of revenues
   0   26,055   96,891   81,725    0   204,671 
Intra-Group cost of revenues (3)
   0   4,957   37,732   136,221    (178,910)   0 
   
 
 
  
 
 
  
 
 
  
 
 
   
 
 
  
 
 
 
Total cost of revenues
   0   31,012   134,623   217,946    (178,910)   204,671 
   
 
 
  
 
 
  
 
 
  
 
 
   
 
 
  
 
 
 
Gross profit
   0   335,592   202,101   468,365    (375,153)   630,905 
Operating expenses:
                          
Third-party operating expenses
   1,768   123,963   335,576   72,126    0   533,433 
Intra-Group operating expenses (3)
   0   11,325   2,831   366,762    (380,918)   0 
   
 
 
  
 
 
  
 
 
  
 
 
   
 
 
  
 
 
 
Total operating expenses
   1,768   135,288   338,407   438,888    (380,918)   533,433 
   
 
 
  
 
 
  
 
 
  
 
 
   
 
 
  
 
 
 
Operating profit/(loss)
   (1,768)   200,304   (136,306)   29,477    5,765   97,472 
Income/(loss) from subsidiaries and VIEs (2)
   75,343   (71,989)   218,623   0    (221,977)   0 
Non-operating
income/(expense)
   526   (3,017)   32,843   9,508    (5,765)   34,095 
   
 
 
  
 
 
  
 
 
  
 
 
   
 
 
  
 
 
 
Income before income tax expense
   74,101   125,298   115,160   38,985    (221,977)   131,567 
Income tax expense
   4,827   49,958   4,331   3,180    0   62,296 
   
 
 
  
 
 
  
 
 
  
 
 
   
 
 
  
 
 
 
Net income from continuing operations
   69,274   75,340   110,829   35,805    (221,977)   69,271 
Less: Net loss from continuing operations attributable to the noncontrolling interest shareholders
   0   (3)   0   0    0   (3) 
   
 
 
  
 
 
  
 
 
  
 
 
   
 
 
  
 
 
 
Net income from continuing operations attributable to Sohu.com Limited
   69,274   75,343   110,829   35,805    (221,977)   69,274 
Net income from discontinued operations, net of tax
                        858,451 
                        
 
 
 
Net income
  $                     927,725 
                        
 
 
 
 
8
Table of Contents
The following table presents our condensed consolidating schedules of cash flows for the VIEs that we consolidate and other entities for the periods presented (in thousands):
   
Year Ended December 31, 2019
 
   
Sohu.com
Limited
  
Other
Subsidiaries
  
Primary
Beneficiaries
of VIEs
  
VIEs and

their
subsidiaries
  
Eliminating
adjustments
  
Consolidated
totals
 
Cash flows from operating activities:
       
Net cash provided by/(used in) transactions with external parties
  $(3,126)   26,983   (377,027)   334,903   0   (18,267) 
Net cash provided by/(used in) transactions with intra-Group entities
   0   23,240   287,003   (310,243)   0   0 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net cash provided by/(used in) continuing operating activities (4)
   (3,126)   50,223   (90,024)   24,660   0   (18,267) 
Net cash provided by discontinued operating activities
        228,857 
       
 
 
 
Net cash provided by operating activities
        210,590 
Cash flows from investing activities:
       
Net cash used in transactions with external parties
   0   (11,975)   (189,567)   (13,272)   0   (214,814) 
Net cash used in transactions with intra-Group entities
   (9,610)   (439,805)   (318,738)   (40,426)   808,579   0 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net cash used in continuing investing activities (4)
   (9,610)   (451,780)   (508,305)   (53,698)   808,579   (214,814) 
Net cash used in discontinued investing activities
        (228,406) 
       
 
 
 
Net cash used in investing activities
        (443,220) 
Cash flows from financing activities:
       
Net cash used in transactions with external parties
   0   (374,682)   (105,066)   0   0   (479,748) 
Net cash provided by transactions with intra-Group entities
   0   294,566   487,454   26,559   (808,579)   0 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net cash provided by/(used in) continuing financing activities (4)
   0   (80,116)   382,388   26,559   (808,579)   (479,748) 
Net cash used in discontinued financing activities
        (33,415) 
       
 
 
 
Net cash used in financing activities
        (513,163) 
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Year Ended December 31, 2020
 
   
Sohu.com
Limited
  
Other
Subsidiaries
  
Primary
Beneficiaries
of VIEs
  
VIEs and

their
subsidiaries
  
Eliminating
adjustments
  
Consolidated
totals
 
Cash flows from operating activities:
       
Net cash provided by/(used in) transactions with external parties
  $(5,371)   (25,798)   (264,700)   459,263   0   163,394 
Net cash provided by/(used in) transactions with intra-Group entities
   0   18,721   360,928   (379,649)   0   0 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net cash provided by/(used in) continuing operating activities (4)
   (5,371)   (7,077)   96,228   79,614   0   163,394 
Net cash provided used in discontinued operating activities
        (68,187) 
       
 
 
 
Net cash provided by operating activities
        95,207 
Cash flows from investing activities:
       
Net cash provided by/(used in) transactions with external parties
   0   167,702   17,464   (773)   0   184,393 
Net cash provided by/(used in) transactions with intra-Group entities
   1,961   5,660   226,972   (106,321)   (128,272)   0 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net cash provided by/(used in) continuing investing activities (4)
   1,961   173,362   244,436   (107,094)   (128,272)   184,393 
Net cash provided by discontinued investing activities
        235,374 
       
 
 
 
Net cash provided by investing activities
        419,767 
Cash flows from financing activities:
       
Net cash provided by/(used in) transactions with external parties
   0   204,941   (103,146)   0   0   101,795 
Net cash provided by/(used in) transactions with intra-Group entities
   0   (254,216)   93,193   32,751   128,272   0 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net cash provided by/(used in) continuing financing activities (4)
   0   (49,275)   (9,953)   32,751   128,272   101,795 
Net cash used in discontinued financing activities
        (8,209) 
       
 
 
 
Net cash provided by financing activities
        93,586 
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Year Ended December 31, 2021
 
   
Sohu.com
Limited
  
Other
Subsidiaries
  
Primary
Beneficiaries
of VIEs
  
VIEs and

their
subsidiaries
  
Eliminating
adjustments
  
Consolidated
totals
 
Cash flows from operating activities:
       
Net cash provided by/(used in) transactions with external parties
  $(517)   (127,098)   (299,947)   541,172   0   113,610 
Net cash provided by/(used in) transactions with intra-Group entities
   0   288,308   217,245   (505,553)   0   0 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net cash provided by/(used in) continuing operating activities
   (517)   161,210   (82,702)   35,619   0   113,610 
Net cash used in discontinued operating activities
        (175,888) 
       
 
 
 
Net cash used in operating activities
        (62,278) 
Cash flows from investing activities:
       
Net cash used in transactions with external parties
   0   (112,599)   (400,933)   (23,887)   0   (537,419) 
Net cash provided by/(used in) transactions with intra-Group entities
   (5,999)   (172,370)   209,079   (140,671)   109,961   0 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net cash used in continuing investing activities
   (5,999)   (284,969)   (191,854)   (164,558)   109,961   (537,419) 
Net cash provided by discontinued investing activities
        1,054,148 
       
 
 
 
Net cash provided by investing activities
        516,729 
Cash flows from financing activities:
       
Net cash used in transactions with external parties
   (17,418)   (407,550)   0   0   0   (424,968) 
Net cash provided by/(used in) transactions with intra-Group entities
   36,912   (236,658)   197,819   111,888   (109,961)   0 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net cash provided by/(used in) continuing financing activities
   19,494   (644,208)   197,819   111,888   (109,961)   (424,968) 
Net cash used in discontinued financing activities
        (9,132) 
       
 
 
 
Net cash used in financing activities
        (434,100) 
Note (1): Represents the elimination of intercompany balances among Sohu.com Limited, the Primary Beneficiaries of VIEs, the Other Subsidiaries, and the VIEs and their subsidiaries that we consolidate. The intra-Group receivables of Sohu.com Limited and the intra-Group payables of the VIEs and their subsidiaries that we consolidate, as of December 31, 2020 have been revised from amounts previously disclosed in the financial statements Notes.
Note (2): Represents the elimination of investments among Sohu.com Limited, the Primary Beneficiaries of VIEs, the Other Subsidiaries, and VIEs and their subsidiaries that we consolidate.
Note (3): Represents the elimination of the intercompany service charge at the consolidation level.
Note (4): The net cash provided by/(used in) operating activities and investing activities of Sohu.com Limited and the net cash provided by/(used in) operating activities, investing activities and financing activities of the VIEs and their subsidiaries that we consolidate, for the years ended December 31, 2020 and 2019 have been revised from amounts previously disclosed in the financial statements Notes.
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Transfers of Cash Within the Sohu Group
The following is a summary of cash transfers that have occurred between our subsidiaries and the VIEs (in thousands):
   
Year ended December 31,
 
   
2019
   
2020
   
2021
 
Cash paid by the VIEs to our subsidiaries under service agreements
  $(341,696)   $(411,668)   $(528,330) 
Cash received by the VIEs from our subsidiaries under service agreements
   31,453    32,019    22,777 
Cash paid by the VIEs to our subsidiaries for intra-Group financing
   (40,426)    (106,321)    (140,671) 
Cash received by the VIEs from our subsidiaries for intra-Group financing
   26,559    32,751    111,888 
Risk Factors
Risks Related to Our Business
We are subject to the risks associated with operating in an evolving market.
As a company operating in the rapidly evolving PRC Internet market, we face numerous risks and uncertainties. Some of these risks relate to our ability to:
 
continue to attract users to remain with us and use our products and services as the primary means of surfing the Internet switches from traditional PCs to mobile phones and other portable devices;
 
build our businesses such as Sohu Media Portal, Sohu Video, Focus, online games, and other businesses successfully;
continue to attract a large audience to our matrices of Chinese language content and services by expanding the type and technical sophistication of the content and services we offer;
 
maintain and develop a sufficiently large advertiser base for our brand advertising and search and search-related advertising businesses;business;
 
maintain and attract online game users by periodically updating our existing online games and developing and launching new online games;
 
increase the revenues derived from our
fee-based
services and products we offer online;
 
buildeffectively control increases in our businesses such as Sohu Media Portal, Sohu Video, Focus, online games, searchcosts and search-related,expenses; and other businesses successfully;
 
attract and retain qualified personnel; and
effectively control our increased costs and expenses.personnel.
Our operating results are likely to fluctuate significantly and may differ from market expectations.
Our annual and quarterly operating results have varied significantly in the past, and may vary significantly in the future, due to a number of factors which could have an adverse impact on our business. Our online advertising revenuerevenues often fluctuatesfluctuate as our advertisers adjust their online marketing spending as their industries go through business and economic cycles. We rely on third-party providers for high-quality news, video, audio and text contentOur advertisers’ online marketing spending may also be negatively impacted by the ongoing
COVID-19
pandemic and/or the general macroeconomic environment in order to makeChina, which in turn could negatively impact our Internet platforms, which include our Websites and our applications optimized for mobile devices, or Mobile Apps, more attractive to users and advertisers. Over the years, video content costs have escalated sharply and have adversely affected our operating results. In an attempt to reduce these costs, we have gradually shifted our video strategy from purchasing expensive head content to self-producing content, which generally generates less user traffic and revenues than purchased content does and has adversely affected, and may continue to adversely affect, our brandonline advertising revenues. Sogou incurred substantial traffic acquisition costs to expand distribution of advertisers’ promotional linksAlso see “- We depend on revenues from Changyou’s PC game TLBB and advertisements by leveraging traffic on third parties’ Internet properties, and we expect such increases to continue. Amobile game Legacy TLBB Mobile for a significant portion of our online game revenue is attributable torevenues, net income, and operating cash flow.”
We depend on revenues from Changyou’s PC game TLBB.TLBB and mobile game Legacy TLBB Mobile for a significant portion of our revenues, net income, and operating cash flow.
For the year ended December 31, 2021, 60% of our total revenues and 79% of our online game revenues were derived from TLBB and Legacy TLBB Mobile. However, the popularity of PC games continues to decline as game players have switched to mobile devices to access online games. Despite Changyou’s efforts to improve TLBB, our game players may nevertheless lose interest in it over time and TLBB’s popularity, revenues, and profitability may decline accordingly. If Changyou fails to improve and update TLBB on a timely basis, or if Changyou’s competitors introduce more popular games, including mobile games, catering to Changyou’s game-player base, the decline in TLBB’s popularity can be expected to accelerate, which could cause a significant decrease in our revenues.
We have depended on revenues from Sogou’s search and search-related advertising services and from Changyou’s PC game TLBB and mobile game Legacy TLBB Mobile for a significant portion of our revenues, net income, and operating cash flow.
For the year ended December 31, 2020, 53% of our total revenues and 74% of our online game revenues were derived from TLBB and Legacy TLBB Mobile and if Sogou’s revenues had been included in our total revenue rather than as discontinued operations, 50% of our total revenues would have been derived from Sogou’s search and search-related advertising services. If Changyou’s revenues from TLBB and Legacy TLBB Mobile continue to decline as they have in recent years, or if Changyou’s online game revenues from games other than TLBB and Legacy TLBB Mobile do not grow or if they decrease, or if the Tencent/Sohu Sogou Share Purchase and the Sogou Merger are not completed and Sogou’s search and search-related advertising revenues do not grow or if they decrease, our revenues, net income, and operating cash flowsflow will be adversely affected. Furthermore, any interruptions in TLBB’s and Legacy TLBB Mobile’s operations or, if the Tencent/ Sohu Sogou Share Purchase and the Sogou Merger are not completed, any interruptions in Sogou’s search and search-related advertising services, could cause significant decreases in our revenues, net income, and operating cash flow. For example, Sogou suspended part of its advertising services for 10 days in July 2018 in order to implement remedial measures to ensure compliance with government regulations following a government investigation into certain
non-compliant
advertisements created by a third party unrelated to Sogou and displayed on Sogou’s platform. See “Risks Related to Sogou Inc.—Risks Related to Sogou’s Business —Sogou may be subject to regulatory investigations and sanctions for inappropriate or illegal content that is accessed through its search results.”
 
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We face intense competition, which could reduce our market share and adversely affect our financial performance.
There are many companies that distribute online content and services targeting Chinese Internet users. We compete with distributors of content and services over the Internet, including content sites, Web directories, search engines, online games, Internet service providers and sites maintained by government, educational institutions and other institutions. These sites compete with us for user traffic, advertising dollars, online game players, potential partners and mobile services. The Internet market in China is rapidly evolving. Competition is intense and can be expected to increase significantly in the future, because there are no substantial barriers to entry in our market.
We have many competitors in the PRC Internet market, including among others58.com, Alibaba, Archosaur, Autohome, Baidu, and Tencent, which are the three dominant Internet companies in China,Bilibili, BitAuto, Century Huatong (formerly known as well as 58.com, Autohome, Beijing Kunlun Tech Co.Shanda), Ltd., BitAuto, Bilibili, Ctrip, Douyin, Douyu, Fang, Giant, Network Group Co., Ltd., Huya, IGG, Inc., iQIYI, Kingsoft,JOYY, Kuaishou, Leju, Lilith, Mango TV, Meituan Dianping,miHoYo, Momo, NetDragon, NetEase, Perfect World, Co., Ltd., Phoenix, Qutoutiao, Qunar, Sina, Tencent, TouTiao, Wuhu 37 Interactive Entertainment Network Technology Group Co., Ltd., YOOZOO Games Co., Ltd., Youku, YY, and Zhejiang Century Huatong Group Co., Ltd. (formerly known as Shanda Games Limited).Youku. We compete with our peers and competitors in China primarily on the following basis:
 
access to financial resources;
 
gateway to a host of Internet user activities;
 
technological advancements;
 
attractiveness of products;
 
brand recognition;
 
volume of traffic and users;
 
quality of Internet platforms and content;
 
strategic relationships;
 
quality of services;
 
effectiveness of sales and marketing efforts;
 
talent of staff; and
 
pricing;
Our competitors may have certain competitive advantages over us including:
 
greater brand recognition among Internet users and clients;
 
better products and services;
 
larger user and advertiser bases;
 
more extensive and well
-developed
well-developed marketing and sales networks; and
 
substantially greater financial and technical resources.
Our existing competitors may in the future achieve greater market acceptance and gain a greater market share through launching of new products, introducing new technologies, or forming alliances among themselves, or may enhance their ability to compete with us through mergers and acquisitions or financing activities. For example, during the past few years, many of our competitors have successfully raised significant amounts of capital through IPOs,
follow-on
public equity offerings, and convertible bond offerings. Several of our competitors have also conducted private placements of equity or debt that included alliances with larger partners who are able to bring them strategic advantages in addition to financing. By enhancing their capital bases and forming strategic alliances, our competitors have strengthened their competitiveness and gained greater brand recognition. Recently some of our major competitors have engaged inactively invested or initiated transactions thatin the market sectors in which we operate or into which we wish to expand our business, which could make it more difficult for us to compete against them effectively. For example, investments in Qutoutiao by Tencent in March 2018 and by Alibaba in March 2019 provided Qutoutiao with considerably greater strategic benefitsresources than were previously available to it for developing and expanding its mobile content business, which benefitsresources we are unlikely to be able to match.
In addition, in recent years the Internet industry in China has been increasingly dominated by Alibaba, Baidu, and Tencent. Alibaba and Tencent, in particular, have been able to expand their reach in the industry through acquisitions and by developing close ties with other Internet companies through equity investments and cooperative strategic relationships. These dominant companies may be able to further strengthen their influence in the industry by encouraging cooperation among the companies in which they invest or with which they establish strategic relationships. We may not be able to compete successfully and avoid marginalization in the industry if we are unable to develop our own comparable business ecosystem, which may be difficult for us to do in view of our relatively limited resources in comparison to these dominant companies.
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Further, new competitors may emerge and acquire significant market share. For example, high-quality smaller Internet companies have emerged in the Internet industry recently with competitive advantages over us, including that many are led by young entrepreneurs who have a particular understanding of the needs and interests of younger users and that, in view of their relatively small size, they are able to adapt more easily than we are to rapid changes in the industry by adjusting their product strategies, market focus, and profit models. Such smaller competitors compete with us in such areas as vertical content production, video playback, and live broadcast.
As a result,
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In order to compete effectively in the primary markets in which we operate, we are likely to need additional financial and additional strategic resources, in orderwhich may be hard to compete effectively in the primary markets in which we operate.obtain. If our competitors are more successful than we are in obtaining necessary resources, in developing products or in attracting and retaining users and advertisers, our revenues and growth rates could decline.
If we fail to successfully develop and introduce new products, features and services, our ability to attract and retain users and generate revenues could be harmed.
We are continually developing new products, features and services for our users. The planned timing or introduction of new products, features and services is subject to risks and uncertainties. Actual timing may differ materially from original plans. Unexpected technical, operational, distribution or other problems could delay or prevent the introduction of one or more of our new products or services. Emerging
start-ups
may be able to innovate and provide new products, features and services faster than we can. Moreover, we cannot be sure that any of our new products, features and services will achieve widespread market acceptance or generate incremental revenue.
In addition, we may experience difficulties in promoting our new products, features and services as a result of the significant market power of our competitors or any anti-competitive practices they might engage in. As a result, despite considerable efforts in this regard, we may fail to attract and retain users.
As our products and services are currently accessed primarily through mobile phones, tablets and other internet-enabled mobile devices, we believe that we must develop products and applications for such devices if we are to maintain or increase our market share and revenues, and we may not be successful in doing so.
Devices other than personal computers, such as mobile phones, tablets, wearable devices and other internet-enabled mobile devices, are used increasingly in China and in overseas markets, and have surpassed personal computers as the primary means to access the Internet in the key Chinese markets in which we operate.Internet. We believe that, for our business to be successful when our content and services are delivered over mobile devices, we need to design, develop, promote and operate products and applications that are attractive to users of such devices, as well as enhance targeted delivery of our content and advertising services to our users and advertising customers. The design and development of new products and applications, and our efforts to enhance the effectiveness of such targeted delivery, may not be successful. We may encounter difficulties with the installation of such new products and applications for mobile devices, such products and applications may not function smoothly, and algorithms we develop for targeted delivery may not be effective in identifying the interests and needs of our users and advertising customers. As new devices are released or updated, we may encounter problems in developing and upgrading our products or applications for use on mobile devices and we may need to devote significant resources to the creation, support, and maintenance of such products or applications for mobile devices.
Our business depends on a strong brand; thus we will not be able to attract users, customers and clients of our products and offerings if we do not maintain and develop our brands.
It is critical for us to maintain and develop our brands so as to effectively expand our user base and our revenues. We believe that the importance of brand recognition will increase as the number of Internet users in China grows. In order to attract and retain Internet users, brand advertising, search, online game and mobile customers, we may need to substantially increase our expenditures for creating and maintaining brand loyalty. Our success in promoting and enhancing our brands, as well as our ability to remain competitive, will also depend on our success in offering high quality content, features and functionality. If we fail to promote our brands successfully or if our users or advertisers do not perceive our content and services to be of high quality, we may not be able to continue growing our business and attracting users, advertisers, online game players and mobile users.
Our failure to keep up with rapid technology changes may severely affect our future success.
The Internet industry is undergoing rapid technological changes. Our future success will depend on our ability to respond to rapidly evolving technologies, adapt our services to changing industry standards and improve the performance and reliability of our services. If we fail to adapt to such changes, our business may be adversely affected. For example, with the emergence of cloud computing technology, the primary Internet technology platform has been transformed from a traditional platform to a cloud computing platform. If we fail to adapt to the transformation, our products and services upgrade process will fall behind our competitors, and accordingly weaken our capacity to adapt our technology to the market. Furthermore, cloud computing itself is a significant business opportunity. If we fail to seize the opportunity, we will lose our ability to capture a share of that market. In addition, as mobile devices other than personal computers are increasingly used to access the Internet, we must develop products and services for such devices. To meet advertisers’ needs in targeting potential advertisers accurately, we need to develop and operate a more effective system for our advertising delivery, tracking and recording. Otherwise, we will not be able to maintain or increase our revenues and market share. In the meantime, the Ministry of Industry and Information Technology (the “MIIT”) and other PRC governmental authorities can be expected to regularly promulgate standards and other regulations regarding Internet software and other Internet-based technologies. Adapting to any such standards and regulations could require us to make significant expenditures in the future.
 
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Our strategy of acquiring complementary assets, technologies and businesses or making other strategic investments may fail and result in impairment losses.
As a component of our growth strategy, we have acquired and intend to actively identify and acquire assets, technologies and businesses that are complementary to our existing businesses. Our acquisitions could result in the use of substantial amounts of cash, issuance of potentially dilutive equity securities, significant impairment losses related to goodwill or amortization expenses related to intangible assets, and exposure to undisclosed or potential liabilities of acquired companies. Companies that we have invested in could be adversely affected by the novel coronavirus disease
(“COVID-19”)COVID-19
outbreak,pandemic, which may lead to impairment inof the fair values of our investments and in turn adversely affect our financial condition and operating results.
In 2017 Changyou recognized a $83.5 million impairment loss for goodwill and a $3.4 million impairment loss for intangible assets relating to the MoboTap business, which Changyou disposed of in 2018; in 2018 Changyou recognized a $16.4 million impairment loss for goodwill relating to the 17173.com Website; in 2019 Changyou ceased operation of its cinema advertising business and recognized a $17.0 million impairment loss related to the assets of the business. Also in 2019, Sohu recognized a $7.2 million impairment loss for a domain name related to the 56.com Website, and a total of $23.2 million in impairment losses for equity investments in a third-party entity.
We may be required to record a significant charge to earnings if we are required to reassess our goodwill or other amortizable intangible assets.
We are required under U.S. GAAP to test for goodwill impairment annually or more frequently if facts and circumstances warrant a review. Currently our brand advertising business is losing money, and goodwill will be impaired if the losses continue. We are also required to review our amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Factors that may be considered a change in circumstances indicating that the carrying value of our amortizable intangible assets may not be recoverable include a decline in stock price and market capitalization and slower or declining growth rates in our industry. We may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined. For example, we recognized impairment losses of $10.4 million, $4.0 million and $1.5 million, respectively, in 2018, 2019 and 2020 with respect to Sohu Video’s purchased video content.
Any changes in accounting rules for share-based compensation, or any changes we make in our employee share incentive plans, may adversely affect our operating results, our stock price and our competitiveness in the employee marketplace.
Our performance is largely dependent on talented and highly skilled individuals. Our future success depends on our continuing ability to identify, develop, motivate and retain highly skilled personnel for all areas of our organization. We have a history of using employee share options and restricted stock units to align employees’ interests with the interests of our shareholders and encourage quality employees to join us and retain our quality employees by providing competitive compensation packages. We have adopted guidance on accounting for share-based compensation that requires the measurement and recognition of compensation expense for all share-based compensation based on estimated fair values. As a result, our operating results contain a charge for share-based compensation expense related to employee share options and restricted share units. The recognition of share-based compensation in our statement of comprehensive income has had and will have a negative effect on our reported results and earnings per share, which can in turn negatively affect our ADS price. On the other hand, if we altermodify or cancel our employee share incentive plans, to minimize share-based compensation expense might be minimized but it may also limit our ability to continue to use share-based awards as a tool to attract and retain our employees, which may adversely affect our operations. It is possible that there will be changes in the accounting rules for share-based compensation in the future that could have an adverse effect on our ADS price and our competitiveness in the employee marketplace.
Our failure to manage growth and adapt to evolving industry trends and business models could harm us.
The retention and growth of personnel requires significant time and resource commitments from us and our senior management. If we are unable to effectively manage a large and geographically dispersed group of employees or anticipate our future growth, our business could be adversely affected. As we have approximately 7,6004,900 employees, it can be difficult for us to fully monitor each employee’s behavior. In addition, as we have several branch offices in China, it is harder for us to monitor and regulate the overall behavior of our branch offices or of individual employees at such branch offices, to effectively implement our strategy to local offices and to manage the growth of these local operations. We cannot assure yoube certain that we will be able to maintain policies and procedures that are rigorous enough or that we will be able to cause all of our employees or all of our branch offices to behave in conformity with those policies and procedures, or to ensure that our employees will not engage in conduct that could expose us to third-party liability or governmental sanctions, which may limit our future growth and hamper our business strategy. Additionally, our business relies on our financial reporting and data systems (including our systems for billing users of our
fee-based
services), which have grown increasingly complex, due to acquisitions and the diversification and complexity of our business. Our ability to operate our business efficiently depends on these systems, and if we are unable to adapt to these changes, our business could be adversely affected.
 
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Moreover, to keep pace with the rapidly developing and evolving Internet industry, we must continually explore new products, services or revenue models for our business. Since we may have limited experience in new business areas, we may fail to manage growth and adapt to industry trends and business models.
In addition, as the Internet industry has seen a significant shift from traditional personal computers to mobile devices, we must develop products and services that are adaptable to mobile devices so as to attract users and cause our existing users and advertisers to remain with us.
See “
-
As our products and services are currently accessed primarily through mobile phones, tablets and other internet-enabled mobile devices, we believe that we must develop products and applications for such devices if we are to maintain or increase our market share and revenues, and we may not be successful in doing so.”
If we fail to establish and maintain relationships with content, technology and infrastructure providers, we may not be able to attract and retain users.
We rely on third partythird-party content providers for high-quality news, video, audio and text content in order to make our Internet platforms, which include our Websites and our applications optimized for mobile devices (“Mobile Apps”), more attractive to users and advertisers. OurTo enlarge our video content library, we also produce self-developed video content. Content providers may increase the fees they charge us for their content, which wouldand the production costs for our self-developed video content may also rise. These could cause our costs and operating expenses to increase and could affect our ability to obtain content at an economically acceptable cost. Video content purchase costs have escalated sharply in recent years. If we are not able to purchase or produce enough video content, the size of our video library will be reduced and our attractivenessplatforms may become less attractive to users will be severely impaired and advertisers may choose not to advertise through our Internet platforms. Except for exclusive content that we obtain from certain of our video content providers, much of the
third-party
third party content provided to our Internet platforms is also available from other sources or may be provided to other Internet companies. If other Internet companies present the same or similar content in a superior manner, it would adversely affect our user traffic.
We have made efforts to create a culture for user-generated content (“UGC”) and professional generated content (“PGC”), a
sub-category
of UGC where the content is created by a large group of professional or semi-professional content studios, that will allow and encourage Internet users to play an active role in the process of collecting, reporting, analyzing and disseminating content, and to encourage our users and other content providers to establish and disseminate their content, and interact, through our Internet platforms. We increasingly rely on high-quality news, video, audio and text content provided by UGC and PGC providers to generate user traffic, retain our existing users and attract new users. If we are not able to continue to attract users or other content providers to establish quality content on our Internet platforms, or if the UGC and PGC providers on our Internet platform are not able to provide quality content that is appealing to Internet users in general, the volume of our user traffic may decrease and our business and prospects may be adversely affected. Also see “We may be subject to intellectual property infringement claims, which may force us to incur substantial legal expenses and, if determined adversely to us, materially disrupt our business.”
Our business also depends significantly on relationships with leading technology and infrastructure providers and the licenses that the technology providers have granted to us. Our competitors may establish the same relationships as we have, which may adversely affect us. We may not be able to maintain these relationships or replace them on commercially attractive terms.
We depend on key personnel and our business may be severely disrupted if we lose the services of our key executives and employees.
Our future success is heavily dependent upon the services of our key executives, particularly Dr. Charles Zhang, who is the founder, Chief Executive Officer, Chairman of the Board, and a major shareholder of our company. We rely on his expertise in our business operations. For Changyou, we rely heavily on the services of Dewen Chen, Changyou’s Chief Executive Officer. For Sogou, we rely heavily on the services of Xiaochuan Wang, Sogou’s Chief Executive Officer. If one or more of our key executives and employees are unable or unwilling to continue in their present positions, we may not be able to replace them easily and our business may be severely disrupted. In addition, if any of our key executives or employees joins a competitor or forms a competing company, we may lose
know-how,
key professionals and staff members as well as customers, suppliers and incur additional expenses to recruit and train personnel. Each of our executive officers has entered into an employment agreement and a confidentiality,
non-competition
and
non-solicitation
agreement with us. However, the degree of protection afforded to an employer pursuant to confidentiality and
non-competition
agreements governed by PRC law may be more limited when compared to the degree of protection afforded under the laws of other jurisdictions.
We also rely on a number of key members of our technology staff for our business. Given the competitive nature of the industry, and in particular our competitors’ increasingly aggressive efforts to provide competitive compensation packages to attract talent in the key Chinese markets where we operate, the risk of key technology staff leaving Sohu is high and could have a disruptive impact on our operations.
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Our growth may cause significant pressures upon our financial, operational, and administrative resources.
Our financial, operational, and administrative resources may be inadequate to sustain the growth we want to achieve. As the demands of our users and the needs of our customers change, the number of our users and volume of advertising increase, requirements for maintaining sufficient servers to provide high-definition online video and to provide game players smooth online game experiences increase, requirements for search traffic and users’ requirements as to the quality of search services increase, and mobile activities increase, we will need to increase our investment in our network infrastructure, facilities and other areas of operations. If we are unable to manage our growth and expansion effectively, the quality of our services could deteriorate and our business may suffer. Our future success will depend on, among other things, our ability to:
 
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access financial resources;
 
adapt our services and maintain and improve the quality of our services;
 
protect our Internet platforms from hackers and unauthorized access;
 
continue training, motivating and retaining our existing employees and attract and integrate new employees; and
 
maintain and improve our operational, financial, accounting and other internal systems and controls.
Unauthorized use of our intellectual property by third parties, and the expenses incurred in protecting our intellectual property rights, may adversely affect our business.
We regard our copyrights, trademarks, trade secrets and other intellectual property as critical to our success. Unauthorized use of our intellectual property by third parties may adversely affect our business and reputation. For example, a third-party Internet platform operator might provide its users access to video content on our Internet platforms while blocking Internet advertisements embedded in our video content, which could adversely affect our advertising revenues and our reputation with our current and potential advertising clients. We rely on trademark and copyright law, trade secret protection and confidentiality agreements with our employees, customers, business partners and others to protect our intellectual property rights. Despite our precautions, it may be possible for third parties to obtain and use our intellectual property without authorization. For example, some of ourOur self-developed Web series video productions weremay be disseminated by third parties without our authorization. Furthermore,In addition, under the
Patent Law
, the State Council’s Patent Administration Department may grant a compulsory license to individuals or entities to use one or more of our patents if our exploitation of the patents has been determined to violate the antitrust laws. Furthermore, the validity, enforceability and scope of protection of intellectual property in Internet-related industries are uncertain and still evolving. In particular, the laws of the PRC and certain other countries in which we operate our business are uncertain or do not protect intellectual property rights to the same extent as do the laws of the United States. Moreover, litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Future litigationLitigation could result in substantial costs and diversion of resources. We cannot be certain that judgments from theany such lawsuits will be issued in our favor, or that any resulting damages will cover our business losses and litigation expenses. If our campaignsexpenses, and if any such lawsuits against piracy do not achieve their intended effect, our business and operationoperations may be adversely affected.
We may be subject to intellectual property infringement claims, which may force us to incur substantial legal expenses and, if determined adversely to us, materially disrupt our business.
We cannot be certain that the products, services and intellectual property used in our normal course of business do not or will not infringe valid patents, copyrights or other intellectual property rights held by third parties. We have in the past been, and may in the future be, subject to claims and legal proceedings relating to the intellectual property of others in the ordinary course of our business and have in the past been, and may in the future be, required to pay damages or to agree to restrict our activities. In particular, if we are found to have violated the intellectual property rights of others, we may be enjoined from using such intellectual property, may be ordered to pay damages or fines, and may incur licensing fees or be forced to develop alternatives. We may incur substantial expense in defending against third party infringement claims, regardless of their merit. Successful infringement claims against us may result in substantial monetary liability or may materially disrupt the conduct of our business by restricting or prohibiting our use of the intellectual property in question. In March 2008, we were sued by four major record companies, Sony BMG, Warner, Universal and Gold Label, which alleged that we had provided music search links and download services that violated copyrights they owned. Although the lawsuits were settled in 2013 without any payment of damages by us, we may be subject to similar lawsuits in the future. In addition, it is possible that content on our Internet platforms, which not only includes content developed by us but also provides a platform for a significant amount of content generated by others, may violate the intellectual property rights of third parties. As we produce more self-developed content for our Internet platformsWe, as part of our new content strategy, we, as thea primary provider of suchself-developed video content, may incur relatively higher monetary liability if such content is found to have infringed the intellectual property rights of third parties. Also, as we increasingly rely on content provided by third-party UGC and PGC providers on our Internet platforms, either developed by the outlets themselves or adapted from content of parties separate from such outlets, it will become increasingly difficult for us to fully monitor such content, which could make us more vulnerable to potential infringement claims. Furthermore, PRC governmental authorities have recently been drawing attention to issues regarding the infringement of online intellectual property rights. For example, a governmental program, called the “Jian Wang Campaign,” aimed at cracking down on network copyright infringement, has been in effect for several years. The Jian Wang Campaign for 2020,2021, which targets copyright infringement related to the online transmission of games, music,short videos, live online broadcasting of sporting events, and other copyrighted audio-visual works on or through
e-commerce,
online education, knowledge sharing, and other social platforms, and aims to strengthenenhance the existing campaign with respect to the protection of news works, online music, and online literature, application software, and other copyrighted content,in the field of
e-commerce
platforms, was launched onin June 12, 2020.
2021.
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We may be subject to, and may expend significant resources in defending against, claims based on the content and services we provide over our Internet platforms.
As our services may be used to download and distribute information to others, there is a risk that claims may be made against us for defamation, negligence, copyright or trademark infringement or based on the nature and content of such information. Furthermore, we could be subject to claims for the online activities of our users and incur significant costs in our defense. In the past, claims based on the nature and content of information that was posted online by users have been made in the United States against companies that provide online services. We do not carry any liability insurance against such risks.
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We could be exposed to liability for the selection of listings that may be accessible through our Internet platforms or through content and materials that our users may post using our interactive services. If any information provided through our services contains errors, third parties may make claims against us for losses incurred in reliance on the information. We also offer
Web-based
e-mail
and subscription services, which expose us to potential liabilities or claims resulting from:
 
unsolicited
e-mail;
 
lost or misdirected messages;
 
illegal or fraudulent use of
e-mail;
or
 
interruptions or delays in
e-mail
service.service, or
illegal or inappropriate content included in advertisements on our platforms.
Investigating and defending any such claims may be expensive, even if they do not result in liability.
We may not have exclusive rights to trademarks, designs and technologies that are crucial to our business.
We have applied for initial registrations in the PRC and overseas, and/or changes in registrations relating to transfers of our key trademarks in the PRC, including Sohu.com logos, Sohu Fox logos, www.focus.com.cn, Sohu Focus, GoodFeel logos, Go2Map, Sogou’s name, trademarks relating to Sogou products such as Sogou Input Method, Sogou logos, trademarks relating to Changyou products such as ChangYou.com, cyou.com, New Blade Online, 17173, and the corresponding Chinese versions of the marks, so as to establish and protect our exclusive rights to these trademarks. Changyou has the right to use trademarks including TLBB, TLBB logos, and TLBB 3D for its PC game TLBB and its mobile games TLBB 3D and Legacy TLBB Mobile under Changyou’s existing license agreements with the holder of the intellectual property rights with respect to the popular Chinese martial arts novel Tian Long Ba Bu written by Louis Cha, who died in 2018. After the expiration of their terms Changyou may not be able to renew these license agreements with commercial terms that are favorable to Changyou, if at all, and Changyou’s inability to renew these license agreements could force Changyou to lose the right to use the trademarks related to those games to the extent that they relate to Tian Long Ba Bu. We have also applied for patents relating to our business. While we have succeeded in registering the trademarks for most of these marks in the PRC under certain classes, the applications for initial registration, and/or changes in registrations relating to transfers, of some marks and/or of some of marks under other classes are still under examination by the Trademark Office of the China National Intellectual Property Administration (the “CNIPA”) and relevant authorities overseas. While we have succeeded in obtaining some patents, some of our patent applications are still under examination by the Patent Office of the CNIPA. Approvals of our initial trademark registration applications, and/or of changes in registrations relating to such transfers, or of our patent applications, are subject to determinations by the Trademark Office of the CNIPA, the Patent Office of the CNIPA and relevant authorities overseas that there are no prior rights in the applicable territory. We cannot assure that these applications will be approved. Any rejection of these applications could adversely affect our rights to the affected marks, designs and technologies. In addition, even if these applications are approved, we cannot assure yoube certain that any registered trademark or issued patent will be sufficient in scope to provide adequate protection of our rights.
We may be subject to claims for invasion of personal privacy, which may force us to incur legal expenses and, if determined adversely to us, disrupt our business.
We allow users to upload written materials, images, pictures and other content on our platform and download, share, link to audio, video and other content either on our platform or from other Websites through our platform. Procedures that we have designed to reduce the likelihood that content will be used without proper licenses or third-party consents may not be effective in preventing the unauthorized posting or sharing of content. WeFurther, we cannot be certain that content uploaded or shared by our users is legal and will not violate the privacy of others, and we may be unable to anticipate the existence of such content on our platform or to implement adequate preventative measures. WeAs a result, we may be subject to claims and legal proceedings relating to violations of the personal privacy of others in the ordinary course of our business and may be required to pay damages or fines or to restrict our activities. We are also subject to various regulatory requirements relating to the protection of personal privacy. See “Government“Governmental Regulation and Legal Uncertainties - Miscellaneous - Miscellaneous—Laws and Regulations Related to Consumer Protection and Privacy Protection - Protection—Privacy Protection.” Complying with such requirements could cause us to incur substantial expenses or necessitate that we alter or change our practices in a manner that could harm our business.
 
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InformationData security breaches relating to our platforms could damage our reputation and expose us to penalties and legal liability.
We collect, process, and store on our servers significant amounts of data concerning our users.users, business partners and employees. Although we have taken steps to protect our user data, our security measures could be compromised, because techniques used to sabotage or obtain unauthorized access to systems change frequently and generally are not recognized until they are launched against a target, and we may be unable to anticipate these techniques or to implement adequate preventative measures. In addition, we are, and will continue to be, subject to various PRC regulatory requirements relating to the security and privacy of such data, including restrictionsrequirements that took effect in 2021 or may be imposed on us in the collection and use of personal information of users and steps we must take to prevent personal data from being divulged, stolen, or tampered with. Regulatory requirements regarding the protection of such data are constantly evolving and can be subject to significant change,future, making the extent of our responsibility in that regard uncertain. For example, we are subject to the Internet Security Law became effective in June 2017, but the circumstances and standards for applicationrequirements of the lawPersonal Information Protection Law (the “PIPL”), which took effect on November 1, 2021 and what might be found to constitute a violation are unclear.
emphasizes the importance of processors’ obligations and responsibilities for personal information protection. See “Government“Governmental Regulation and Legal Uncertainties—Miscellaneous -Miscellaneous—Laws and Regulations Related to Consumer Protection and Privacy Protection—Privacy Protection.” In addition, the Data Security Law, which took effect on September 1, 2021 (the “Data Security Law”), regulates data processing activities and security. Any organizations or individuals who engage in data processing activities that violate the Data Security Law can be subject to civil, administrative, or criminal penalties depending on the circumstances. On November 14, 2021, the Cyberspace Administration of China (the “CAOC”) publicly solicited opinions on the
Regulations on the Administration of Cyber Data Security (Draft for Comments)
(the “Draft Data Security Regulations”), which, if adopted, would impose enhanced requirements on internet platform operators, such as us, with respect to the protection of personal data in connection with data processing activities conducted over the internet. See “Governmental Regulation and Legal Uncertainties—Miscellaneous—Laws and Regulations Related to Security and Censorship.” It is possibleFor the purpose of cracking down on infringement of the legal rights and interests of APP users, the MIIT launched a campaign in 2021 and issued several notices to report Apps that were alleged to have engaged in illegal activities. Sohu Video, for example, was listed in one such notice and was required to rectify alleged violations. In addition, the CAOC carried out a similar campaign in 2021 and posted four related notices naming more than three hundred Apps which the CAOC alleged were engaging in illegal collection and use of personal information, and requiring the Apps to rectify the alleged violations within a prescribed period. In a notice posted by CAOC on June 11, 2021, Sohu News, for example, was alleged to have collected personal information unrelated to its services and was required to rectify the alleged violations.
Any failure, or perceived failure, by us, or by our partners, to maintain the security of our user data or to comply with applicable PRC or foreign privacy, data security and personal information protection laws, regulations, policies, contractual provisions, industry standards and other requirements may result in civil or regulatory liability, including governmental or data protection practices are at presentauthority enforcement actions and investigations, fines, penalties, enforcement orders requiring us to cease operating in a certain way, litigation or willadverse publicity, and may require us to expend significant resources in the future be inconsistent with regulatory requirements.responding to and defending allegations and claims against us. Moreover, any claims or allegations that we have failed to adequately protect our users’ data, or otherwise violated applicable privacy and data security laws, regulations, policies, contractual provisions, industry standards or other requirements, may result in damage to our reputation and a loss of confidence in us by our users or our partners, potentially causing us to lose users, advertisers, content providers, other business partners and revenues, which could have an adverse effect on our financial condition and results of operations.
Pending or future litigation could have an adverse impact on our financial condition and results of operations.
From time to time, we have been, and may in the future be, subject to lawsuits brought against us by our competitors, individuals, or other entities. For example, a group of plaintiffs brought a lawsuit against Changyou in the Cayman Islands claiming that they were entitled to assert dissenters’ rights in the Changyou Merger. The trialGrand Court of the Cayman Islands, a court of first instance, ruled in the plaintiffs’ favor, and Changyou’s appealthe judgment of the trial court’s decision to the Cayman Court of Appeal is pending.on Changyou’s appeal of the Grand Court’s ruling has not yet been rendered. There is also a putative class action lawsuit that was filedpending against Sohu.com Limited, Sohu.com (Game) Limited (“Sohu Game”), Changyou, and others in the United States District Court for the EasternSouthern District of New York that alleges violations of U.S. securities laws in connection with the Changyou Merger.
Where we can make a reasonable estimate of the liability relating to pending litigation against us and determine that an adverse result for us from such litigation is probable, we record a related contingent liability. As additional information becomes available, we assess the potential liability and revise estimates as appropriate. However, due to the inherent uncertainties relating to litigation, the amount of our estimates may be inaccurate. While we do not believe that any currently pending proceedings are likely to have a material adverse effect on our business, financial condition and results of operations, if there were adverse determinations in legal proceedings against us we could be required to pay substantial monetary damages or adjust our business practices, which could have an adverse effect on our financial condition and results of operations.
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We face risks related to natural disasters, terrorist attacks, and health epidemics, such as the
COVID-19
pandemic.
Our business has been and could in the future be adversely affected by natural disasters, such as earthquakes, floods, landslides, and tsunamis; terrorist attacks and other acts of violence or war; social instability; and recurrences of outbreaks of previous health epidemics such avian influenza, severe acute respiratory syndrome (or “SARS”), the Zika virus, and the Ebola virus; or new outbreaks of health epidemics.
COVID-19
spread rapidly in 2020 to become a worldwide pandemic. In response toBecause of the emergencepandemic, some of the
COVID-19
virus, the Chinese government implemented several control measure that had a negative impact on the Chinese economy, and on our business, during the first half of 2020. For example, in the first quarter of 2020, our brand advertising customers have curtailed their spending on online advertising which had an adverse impact on our results of operations. In addition, some of our advertising customersor required additional time to pay us, and such trends, which have had, and may continue to have, a negative impact on the revenues and cash flow generated from our advertising business, may continue during 2021.2022. The extent to which
COVID-19
impacts our results of operations will depend on future developments, including the possibility of a resurgence of the
COVID-19
outbreak in China, which remain uncertain and difficult to predict.
We do not have business insurance coverage.
The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products, or offer them at a high price. As a result, weproducts. We do not have any business liability, loss of data or disruption insurance coverage for our operations in China. Any business disruption, litigation or natural disaster might result in our incurring substantial costs and the diversion of our resources.
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The brand advertisement market includes many uncertainties, which could cause our brand advertising revenues to decline.
We generate a portion of our revenues from the sale of advertising for posting on our Internet platforms. Brand advertising revenues represented approximately 20%16% and 26%20% of our total revenues for the years ended December 31, 2021 and 2020, and 2019, respectively. For the years ended December 31, 2020 and 2019, sales to our five largest advertising agencies and advertisers accounted for approximately 27% and 28%, respectively, of our total brand advertising revenues. The growth of our brand advertising revenues relies on increased revenue from the sale of advertising for posting our Internet platforms, which may be affected by many of the following risk factors:
 
The advertising market is still evolving in China. Our current and potential advertising clients may not devote a significant portion of their advertising budgets to Internet-based advertising in general, or to us in particular;
 
Changes in government policy could restrict or curtail our brand advertising services. For example, during the last several years, the PRC government enacted a series of regulations, administrative instructions and policies to restrict online medical advertising. As a result of these regulations, we may lose some of our existing medical advertising clients. For another example, see “Government“Governmental Regulation and Legal Uncertainties - Uncertainties—Specific Statutes and Regulations - Regulations—Regulation of Other Services - Services—Real Estate Services” for a description of the Beijing Measures and other regulations affecting Focus’s business;
 
Advertising clientsagencies and advertisers may adopt new methods and strategies other than brand advertising to promote their brand, and thereforeor may face financial difficulties that cause them to curtail their spending on brand advertising, any of which would have an adverse effect on our advertising revenue would be negatively affected;revenues;
 
The acceptance of the Internet as a medium for advertising depends on the development of standards for measuring the effectiveness of advertisements disseminated over the Internet, and no standards have been widely accepted for the measurement of the effectiveness of brand advertising over the Internet. Industry-wide standards may not develop that are sufficient to support the Internet as an effective advertising medium. If these standards do not develop, advertisers may choose not to advertise on the Internet in general or through our portals or search engines;
 
We may not have systems that are sufficiently well-developed to support our brand advertising business, and as a result, we may suffer system bugs that cause bad user experiences, errors, or omissionomissions in publishing our client’s advertisements, which could have a negative impact on our brand advertising business.
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In addition, our ability to generate and maintain significant brand advertising revenues will also depend upon:
 
the development of a large base of users possessing demographic characteristics attractive to advertising clients;
 
the acceptance of brand advertisement as an effective way for business marketing by advertising clients;
 
the effectiveness of our advertising delivery, tracking and reporting systems;
 
the resistance pressure on brand advertising prices and limitations on inventory; and
 
the establishment of a successful business model to make our new products adaptable to portable devices, which has required, and will continue to require us, to make significant expenditures for research, development, promotion and operations.
Many advertisers have shifted their PC online advertising budgets to advertising on mobile devices.devices, and the forms of advertising also change rapidly. Hence we must successfully optimize, adapt and make attractive our various product and service offerings for access on mobile devices and must effectively deliver advertising content in a manner that attracts and retains users’ interest and attention or our online advertising business will suffer.
The operation of our online video services requires us to make substantial expenditures for content, technology, infrastructure, and brand promotion. We may not be able to effectively contain these costs or sell sufficient advertising to recoup our continuing costs, and our relatively limited financial resources compared to those of many of our competitors in the online video market may prevent us from competing effectively.
It has been, and can be expected to continue to be, necessary for us to invest significant financial, operational, strategic, technological, personnel, and other resources for our online video services. Over the years, video content costs have escalated sharply and have adversely affected our operating results. Although we have attempted to control our expenditures for online video services, in part by using relatively more self-developed video content, which we produce in house or contract with independent
third-party
studios to produce for us, and relatively less content acquired from third parties, our total operating costs in this regard are still large, andmay continue to exceed the amount of our revenues derived from advertising on our online video platforms. Further, we compete with popular vertical online video sites, such as those operated by iQiyi,iQIYI, Tencent, Alibaba’s online video subsidiary Youku, and Mango TV, that have substantially greater financial resources than we do. These expenditures have had, and are likely to continue to have, an adverse impact on our operating results and have significantly strained, and can be expected to continue to strain, our resources. If we are unable to continue to expend the resources at a level necessary to self-develop or acquire the rights to, and provide on our video platforms, quality video content, we may not be able to compete effectively against these other popular sites, or grow or maintain the level of our user traffic, which could make our video platforms less attractive to advertisers, have a negative impact on our ability to generate advertising revenues, and make it difficult for us to stem our losses from operation of our online video services or to recoup our substantial expenditures. In addition, when we obtain rights to video content from third parties we are often required to pay license fees upfront, prior to production of the content. There often are delays of several months, or sometimes up to two or three years, between our payment of such
up-front
fees and the time when we are able to offer fully-developed content online and begin to receive advertising dollars. These delays have often placed, and can be expected to continue to place, significant strains on our cash flow. Our
up-front
payments also subject us to a certain level of credit risk, as content producers to which we make such payments may fall into financial difficulties and be unable to deliver the content we have purchased.
 
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Further, when we purchase rights to the online versions of TV series, we generally rely on the expectation that the series will be broadcast on nationwide TV channels according to a specified schedule. If there are delays in such TV broadcasts, we will have to delay, perhaps indefinitely, our presentation of the online version of the series. We are also subject to the risk that TV content we purchase will be broadcast on less popular TV channels than expected, or may not be broadcast at all, which would be likely to cause our online viewership and advertising revenues to be correspondingly lower than we expected.
As we continue a strategic shift from purchasing licensed video content to focusing on self-developed video content that we develop in house or contract with third parties to produce for us, we face the risk that such self-developed content may not be well received by viewers and/or fail to attract advertisers, and we may not be able to generate sufficient advertising revenues to stem our losses from our online video services or to ultimately recoup our costs.
With the goal of reducing our overall costs for our online video business, weWe have been making a strategic shift to reduce our purchase of licensed video content and focus more on self-developed video content, which generally requires relatively lower expenditures by us than those required for obtaining license rights from third parties. Accordingly, we have spent, and expect to continue to spend, significant resources on self-developed video content. We have also invested, and expect tomay invest in the future, in the production of movies and other content by selected independent third-party studios. However, we are subject to the risk that the quality of our self-developed video content, or movies or other content in which we invest, will not be up to our expectations or those of our target viewer audience. If our self-developed video content, or such movies and other content produced for us by third parties, are not well received by viewers and/or fail to attract sufficient advertising placements from advertisers, or if the development of any such content or movies is not completed as a result of financial, regulatory, or other restraints, we may not be able to recoup our production costs and other expenditures. In addition, if developing
in-house
content becomes more widespread in the online video business in China, we could face significant competition from other online video sitesplatforms with respect to the acquisition of quality and popular intellectual property, such as story lines, plots, and characters, for use in such content, and the cost of obtaining such intellectual property would therefore be likely to increase.
We may not be able to reverse the decline in revenues from our online video business. If we fail to do so, Sohu Video may not be able to become profitable, in which case we will be unable to recoup our substantial expenditures for the development of our online video business.
Our brand advertising revenues in general, and the revenues of our online video business in particular, have declined in recent years. Although China’s online video industry has experienced substantial growth in recent years in terms of both users and content, we cannot assure yoube certain that the online video industry will continue to grow as rapidly as it has in the past, if at all.past. With the development of technology, new forms of media may emerge and render online video Websites or Mobile Apps less attractive to users. Growth of the online video industry is affected by numerous factors, such as users’ general online video experience, technological innovations, development of Internet and Internet-based services, regulatory changes in general, and regulations affecting copyright in particular, and the macroeconomic environment. If the online video industry in China does not grow as quickly as expected or if we fail to benefit from such growth by successfully implementing our business strategies, our user traffic may decrease, our advertising revenues may continue to decline, and our business and prospects may be adversely affected. For Sohu Video to become profitable, it will be necessary for us to both increase our revenues from Sohu Video and control or reduce our expenditures for video content and other costs. If Sohu Video fails to become profitable, we will be unable to recoup our substantial expenditures for the development of our online video business.
We rely on advertising agencies to sell our brand advertising services. As the brand advertising market in China is effectively controlled by a small number of large advertising agencies, such advertising agencies may be in a position to demand higher sales rebates or to delay payments to us, which would adversely affect our gross margin.
Most of our brand advertising services are distributed by advertising agencies. In 2020,2021, for example, approximately 67%70% of our brand advertising revenues were derived from advertising agencies.agencies, and the five largest advertising agencies in China contributed approximately 29% of our brand advertising revenues. In consideration for these agencies’ services, we are required to pay certain percentages of revenues as sales rebates. As the brand advertising market is effectively controlled by a small number of large advertising agencies, such advertising agencies may be in a position to demand higher sales rebates based on increased bargaining power, or to delay in payments to us, which could negatively affect our brand advertising growth and the timing of our collection of payments. During 2020 the biggest five advertisingMoreover, if any of these agencies in China contributed approximately 26% of ourface financial difficulties that cause them to curtail their spending on brand advertising, revenues.our revenues will be adversely affected.
The expansion of Internet advertisement blocking measures may result in a decrease in our advertising revenues.
The development of Web software that blocks Internet advertisements before they appear on a user’s screen may hinder the growth of online advertising. For example, some Internet platforms allow their users to access video content from our Internet platforms, while completely blocking our advertisements from being viewed by their users. Since our advertising revenues are generally based on user views, the expansion of advertisement blocking on the Internet may decrease our advertising revenues because, when an advertisement is blocked, it is not downloaded from the server, which means such advertisements will not be tracked as a delivered advertisement. In addition, advertisers may choose not to advertise on the Internet or on our Internet platforms because of the use by third parties of Internet advertisement blocking measures. In addition, increasing numbers of browsers include technical barriers designed to prevent Internet information service providers such as us to trail the browsing history of the Internet users, which is also likely to adversely affect the growth of online advertising.
 
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If our video content fails to attract and retain users and advertisers, we may not be able to generate sufficient user traffic to allow us to maintain or increase our video revenues.
Our online video business largely depends on our ability to generate sufficient user traffic, through provision of attractive content and products, to in turn attract advertisers to place advertisements on our Internet platforms for video. In order to attract and retain users, we have needed, and will continue to need, to expend resources to develop our own or acquire from third parties’ high-quality video content, including films and TV dramas.content. In 2015 and 2016,the past, we purchased significant amounts of exclusive video content, including films and TV dramas, through which we generated user traffic, advertising revenues, and revenues byfrom bartering for other video content from other parties or distributing to other third parties. As some films and TV dramas are required to obtain permits from the National Radio and Television Administration (the “NRTA”), the National Film Administration (the “NFA”), or their respective local branches before they are transmitted via the Internet, if we are not able to timely obtain the required permits, users might access pirated versions of such films and TV dramas and become less likely to view them on our Internet platforms when they become available, which would significantly affect the ability of our exclusive video content to attract and retain users, and cause our online traffic and advertising revenues to be lower than we expected.
In order to reduce our video content costs, in recent years, we have gradually shifted our strategy has gradually shifted from purchasing expensive head content to self-producing content.content, which generally generates less user traffic and revenues than purchased content does and has adversely affected, and may continue to adversely affect, our brand advertising revenues. We cannot assure yoube certain that we will continue to be able to acquire exclusive content rights or develop premium content in the future and our user traffic and revenues generated from such exclusive content rights and self-developed content could be reduced. Moreover, if we fail to produce by ourselves or acquire from third parties high-quality video content, or if video content we develop by ourselves or acquire proves to be less attractive to users than we anticipated, our user traffic and our market share could be adversely effected, which could result in our being unable to maintain or increase our video revenues.
Videos and other types of content and materials displayed on our Internet platforms may be found objectionable by PRC regulatory authorities, may subject us to penalties and other administrative actions, and may be subject us to liabilities for infringement of third-party intellectual property rights or other allegations.
The PRC government has adopted regulations governing Internet access and the distribution of videos over the Internet. In addition to professionally produced content, we allow our users to upload videos to our Internet platforms. Our users can upload all types of content, including user-created and professionally produced content, and can upload graphic files for limited purposes, such as updating user biographies. Although we have adopted internal procedures to monitor the content displayed on our Internet platforms which is uploaded by PGC and UGC providers, due to the significant amount of content uploaded, by our users, we may not be able to identify all videos or other content that may violate relevant laws and regulations, and the risk may be greater as we increasingly rely on content provided by UGC and PGC providers through our Internet platforms, as we do not have an opportunityour ability to fully review such content prior to its publication.publication is limited. Failure to identify and prevent illegal or inappropriate content, such as content that is defamatory, is racially or religiously discriminatory, compromises national security, or infringes the intellectual property rights of third parties, from being displayed on our Internet platforms may subject us to liability.
To the extent that PRC regulatory authorities find any content displayed on our Internet platforms objectionable, they may require us to limit or eliminate the dissemination of such content on our Internet platforms, with take-down orders or otherwise. The State Administration of Press, Publication, Radio, Film and Television (the “SAPPRFT”), which in March 2018 was reorganized into three separate governmental authorities—the National Radio and Television Administration,NRTA, the National Film Administration,NFA, and the State Press Publication Administration (the “SPPA”), prior to March 31, 2018 published, and one or more of those successor entities have published or can be expected to publish, from time to time lists of content that they consider objectionable, and we must dedicate teams of employees to continually monitor user-uploaded content and remove content that is deemed objectionable. In addition, regulatory authorities may impose penalties on us based on content displayed on or linked to our Internet platforms in cases of significant violations, including a revocation of our operating licenses or a suspension or shutdown of our online operations. In the event that PRC regulatory authorities find the video content on our Internet platforms objectionable and impose penalties on us or take other administrative actions against us in the future, our business and reputation may be adversely affected. Moreover, the costs of compliance with these regulations may continue to increase as more content is uploaded by our users.
In addition, under PRC laws and regulations governing online advertising, online publishers, such as us, are required to monitor advertising content displayed on their Internet platforms for accuracy, and for compliance with PRC law governing the dissemination of content over the Internet that is deemed to be unlawful or inappropriate. If we were found to have failed to fulfill our obligation to monitor the advertisements of an advertising customer, we could be subject to various penalties, including being prohibited from providing advertising services for advertisers in the entire industry of the customer.
For example, PRC governmental authorities required that we suspend our News Apps from the Apple App Store for two weeks during 2018, based on a claim that our News Apps had been displaying unlawful and inappropriate advertising content.
We have been involved in litigation based on allegations of infringement of third-party copyright and other rights, such as privacy and image rights, due to the videos displayed on our Internet platforms. See “Risks Related to Our Business - Business—We may be subject to intellectual property infringement claims, which may force us to incur substantial legal expenses and, if determined adversely to us, materially disrupt our business.” While we have implemented internal procedures to review videos uploaded by our users and remove promptly from our Internet platforms any infringing videos after we receive infringement notifications from rights owners, due to the significant number of videos uploaded by users, we may not be able to identify all content that may infringe on third-party rights. Moreover, some rights owners may not send us a notice before bringing a lawsuit against us. Thus, our failure to identify unauthorized videos posted on our Internet platforms has subjected us to, and may in the future subject us to, claims of infringement of third-party intellectual property rights or other rights. In addition, we may be subject to administrative actions brought by the National Copyright Administration (the “NCA”) or its local branches for alleged copyright infringement.
 
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We may also face litigation or administrative actions for defamation, negligence, or other purported injuries resulting from videos and advertisements that we display on our Internet platforms. Such litigation and administrative actions, with or without merit, may be expensive and time-consuming and may result in significant diversion of resources and management attention from our business operations. Furthermore, such litigation or administrative actions may adversely affect our brand image and reputation.
Risks Related to China’s Telecommunications Infrastructure
The telecommunications infrastructure in China, which is not as well developed as in the United States, may limit our growth.
The telecommunications infrastructure in China is not as well developed as it is in the United States. Our growth will depend on the PRC government and state-owned enterprises establishing and maintaining a reliable Internet and telecommunications infrastructure to reach a broader base of Internet users in China. The Internet infrastructure, standards, protocols and complementary products, services and facilities necessary to support the demands associated with continued growth may not be developed on a timely basis or at all by the PRC government and state-owned enterprises.
We depend on China Mobile, China Unicom, and China Telecom for telecommunications services, and any interruption in these services may result in severe disruptions to our business.
Although private Internet service providers exist in China, almost all access to the Internet is maintained through China Mobile, China Unicom and China Telecom under the administrative control and regulatory supervision of the MIIT. We rely on this infrastructure and China Mobile, China Unicom, and China Telecom to provide data communications capacity primarily through local telecommunications lines. Although the government has announced aggressive plans to develop the national information infrastructure, this infrastructure may not be developed and the Internet infrastructure in China may not be able to support the continued growth of Internet usage. In addition, we will have no access to alternative networks and services, on a timely basis if at all, in the event of any infrastructure disruption or failure.
We have signed Bandwidth Provision and Server Hosting Agreements with China Mobile, China Unicom, and China Telecom. Under these agreements, we maintained servers in China to support most of our core services. However, as there are limited telecommunication infrastructure service providers, we may not be able to lease additional bandwidth on acceptable terms, on a timely basis, or at all. If we are not able to lease additional bandwidth, the development of our business can be affected.
To the extent we are unable to scale our systems to meet the increasing PRC Internet population, we will be unable to expand our user base and increase our attractiveness to advertisers and merchants.
As Internet volume and traffic increase in China, we may not be able to scale our systems proportionately. To the extent we do not successfully address our capacity constraints, our operations may be severely disrupted, and we may not be able to expand our user base and increase our attractiveness to advertisers and merchants. Even if we scale our systems proportionately, any unforeseen increase in traffic may disrupt our operations and make it difficult for our users to visit our Internet platforms, or even cause users to be unable to access our Internet platforms at all, which could result in a loss of users.
Unexpected network interruptions caused by system failures may result in reduced user traffic, reduced revenue and harm to our reputation.
Our Internet platforms operations are dependent upon Web browsers, Internet service providers, content providers and other Internet platforms operators in China, which have experienced significant system failures and system outages in the past. Our users have in the past experienced difficulties due to system failures unrelated to our systems and services. Any system failure or inadequacy that causes interruptions in the availability of our services, or increases the response time of our services, as a result of increased traffic or otherwise, could reduce our user satisfaction, future traffic and our attractiveness to users and advertisers.
Our operations are vulnerable to natural disasters and other events, as we only have limited backup systems and do not maintain any backup servers outside of China.
We have limited backup systems and have experienced system failures and electrical outages from time to time in the past, which have disrupted our operations. Our disaster recovery plan cannot fully ensure safety in the event of damage from fire, floods, typhoons, earthquakes, power loss, telecommunications failures,
break-ins
and similar events. If any of the foregoing occurs, we may experience a complete system shutdown. We do not carry any business interruption insurance. To improve the performance and to prevent disruption of our services, we may have to make substantial investments to deploy additional servers or one or more copies of our Internet platforms to mirror our online resources.
 
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Although we carry property insurance with low coverage limits, our coverage may not be adequate to compensate us for all losses, particularly with respect to loss of business and reputation that may occur.
Our network operations may be vulnerable to hacking, viruses and other disruptions, which may make our products and services less attractive and reliable, and third-party online payment platforms that we partner with may be susceptible to security breaches, which may damage our reputation and adversely affect our business.
Internet use can decline if any well-publicized compromise of security occurs. “Hacking” involves efforts to gain unauthorized access to information or systems or to cause intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment. Hackers, if successful, could misappropriate proprietary information or cause disruptions in our service. We may be required to expend capital and other resources to protect our Internet platforms against hackers, and measures we may take may not be effective. In addition, the inadvertent transmission of computer viruses could expose us to a risk of loss or litigation and possible liability, as well as damage our reputation and decrease our user traffic.
Furthermore, we could be liable for security breaches of our users’ confidential information, such as credit card numbers and expiration dates, personal information and billing addresses, stored by the third-party online payment platforms that we partner with. Since our revenues are derived in part from such payment platforms, any security breach resulting from Internet payment transactions could damage our reputation and deter current and potential users from using our online services.
Risks Related to Our Corporate Structure
Although the Sohu Group holds substantial amounts of cash and cash equivalents, a significant portion of such cash and cash equivalents is held by Sogou, and it can be difficult for Sohu to have access to the portion held by Sogou.
Sohu has made significant expenditures in recent years, and expects to continue to do so through the current fiscal year. Although we hold a significant amount of cash and cash equivalents in the Sohu Group, the amount of cash directly available to Sohu, without including cash and cash equivalents of our subsidiary Sogou, which are now included in assets held for sale in our consolidated balance sheets, is limited. As of December 31, 2020, Sohu and Changyou together held approximately $217.1 million in cash and cash equivalents; Sogou held approximately $287.2 million in cash and cash equivalents, which was included in assets held for sale in our consolidated balance sheet.
Sohu can obtain access, for use in its business, to cash held or generated by Sogou only through dividends paid by Sogou to its shareholders, or through loans made by Sogou to Sohu. Further, if the transactions contemplated by the Tencent/Sohu Sogou Share Purchase Agreement and the Sogou Merger Agreement are completed as planned, Sohu will no longer have any ability to access Sogou’s cash. In addition, payment of dividends by Sogou is subject to approval of the Board of Directors of Sogou. Moreover, cash held by Mainland China-based subsidiaries and VIEs of Sogou, and also of our wholly-owned subsidiary Changyou, can only be available for distribution by Sogou or Changyou as dividends to shareholders after compliance with restrictions and requirements imposed by PRC law, including PRC profit appropriation and PRC withholding tax, that will reduce the amount available for such subsidiaries and VIEs to distribute to Sogou Inc. and Changyou.com Limited for payment of dividends to their shareholders. Further, payments of such dividends by Sogou would reduce the cash and cash equivalents of the Sohu Group as a whole, as
non-controlling
shareholders of Sogou would be entitled to a pro rata share of such dividends. See “Risks Related to China’s Regulatory Environment
-Our
Offshore entities may need to rely on dividends and other distributions on equity paid by our Mainland China-based subsidiaries, including the Mainland China-based subsidiaries of our subsidiaries Changyou and Sogou, to fund any cash requirements those Offshore entities may have. Our Offshore entities may not be able to obtain cash from distributions because our subsidiaries and VIEs in Mainland China are subject to restrictions imposed by PRC law on paying such dividends or making other payments,” and “- Dividends we receive from our operating subsidiaries located in the PRC are subject to PRC profit appropriation and PRC withholding tax.”
Sohu’s ability to obtain loans from Sogou for use by Sohu in its business is subject to determination by the Board of Directors of Sogou that making any such loans is in the best interests of Sogou separate from Sohu.
Our interests in our wholly-owned subsidiary Changyou and in our controlled subsidiary Sogou could be diluted from the issuance of equity incentive shares.
Our percentage and economic interests in our wholly-owned subsidiary Changyou and in our controlled subsidiary Sogou could be diluted by the implementation and operation of existing or future equity incentive plans, or any equity issued by Sogou as consideration for acquisitions. For example, in August 2019 Changyou adopted a new share incentive plan that reserves Changyou Class A ordinary share for issuance, and in November 2017 Sogou adopted a share incentive plan that reserves Sogou Class A Ordinary Shares for issuance. These reserved shares, if and when issued, would reduce our percentage interests in Changyou and Sogou. The issuance of these reserved shares or the occurrence of any of such other dilutive events with respect to Changyou or Sogou in the future would cause our share of the earnings of the affected subsidiary to be reduced.
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In order to comply with PRC regulatory requirements, we operate our main businesses through companies with which we have contractual relationships but in which we do not have an actual ownership interest. If our current ownership structure is found to be in violation of current or future PRC laws, rules or regulations regarding the legality of foreign investment in the PRC Internet sector, we could be subject to severe penalties.
Various regulations in the PRC restrict or prohibit WFOEs from operating in specified industries such as Internet information, online game, mobile, Internet access, and certain other industries. We areOur ADSs represent ordinary shares of a Cayman Islands exempted holding company and, in order to comply with PRC regulatory requirements, we conductthat has no operations of its own. All of our Internet and value-added telecommunication operations in the PRCare conducted through our direct and indirect subsidiaries, or through VIEs whichthat are incorporated in the PRC and are not owned, directly or indirectly, by us, but rather are held by Dr. Charles Zhang and/or certain of our other employees. Throughemployees, as our nominees. Various regulations in the PRC restrict or prohibit our WFOEs and their direct and indirect subsidiaries from operating in specified industries such as value-added telecommunication services, Internet publishing, online news information services, online audiovisual transmission, online games, and certain other business activities in the PRC. Accordingly, in order to comply with PRC regulatory requirements while providing our shareholders with the opportunity to hold economic interests in results of PRC operations in those industries, the VIEs conduct operations in those industries where foreign investment is prohibited or restricted in the PRC, and the results of operations of the VIEs only accrue to us through a series of contractual arrangements between the VIEs and/or their shareholders, on the one hand, and certain of our VIEs, for which Sohu isWFOEs, on the primary beneficiary,other hand. These arrangements pose substantial risks to us and our shareholders that are effectively controlled by ournot present in conventional arrangements where operations are conducted through direct and indirect PRC subsidiaries.subsidiaries of holding companies.
The MIIT issued a circular in 2006 that emphasizes restrictions on foreign investment in value-added telecommunications businesses. In addition, a notice issued in 2009 by the SAPPRFT, the NCA, and the National Office of Combating Pornography and Illegal Publications states that foreign investors are not permitted to invest in online game operating businesses in China or to exercise control over or participate in the operation of such businesses through indirect means. While we are not aware of any internet company which uses the same or similar contractual arrangements as we do having been penalized or ordered to terminate operations by PRC authorities claiming that the arrangements constituted foreign investment in value-added telecommunication services or a kind of control over or participation in the operation of online game operating businesses through indirect means, it is unclear whether and how the various regulations of the PRC authorities might be interpreted or implemented in the future. For a detailed discussion of PRC regulations, notices and circulars with respect to such restrictions, see “Government“Governmental Regulation and Legal Uncertainties—Specific Statues and Regulations - Regulations—Regulation of Foreign Direct Investment in Value-Added Telecommunications Companies” and “Government“Governmental Regulation and Legal Uncertainties - Uncertainties—Specific Statues and Regulations - Regulations—Regulation of the Online Game Services - Services—Online Games and Cultural Products.”
In addition, pursuant to the
Notice on Establishing a Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors
(“Circular 6”) and the Ministry of Commerce (the “MOFCOM”) Security Review Rules, a security review is required for mergers and acquisitions by foreign investors having “national defense and security” concerns and mergers and acquisitions by which foreign investors may acquire “de facto control” of domestic enterprises with “national security” concerns and prohibit foreign investors from bypassing the security review requirement by structuring transactions through proxies, trusts, indirect investments, leases, loans, control through contractual arrangements or Offshore transactions. These national security review-related regulations are relatively new and there is a lack of clear statutory interpretation regarding the implementation of the rules, and PRC authorities may interpret these regulations to mean that the transactions implementing our VIE structures should have been submitted for review. For a discussion of these PRC national security review requirements, see “Government“Governmental Regulation and Legal Uncertainties - Uncertainties—Specific Statues and Regulations - Miscellaneous - Regulations—Miscellaneous—Regulation of M&A and Overseas Listings.”
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The
Law of the People’s Republic of China on Foreign Investment
(the “Foreign Investment Law”) currently does not explicitly categorize contractual arrangements as a form of foreign investment. However, the Foreign Investment Law provides that foreign investment includes “foreign investors’ investment in China through any other methods specified by laws, administrative regulations, or provisions prescribed by the State Council” without elaboration on the meaning of “other methods”. The Implementing Regulations of the Foreign Investment Law are also silent on whether foreign investment includes contractual arrangements. There is no assurance that future laws, administrative regulations or provisions of the State Council would not count contractual arrangements as a form of foreign investment. For a detailed discussion of PRC regulations with respect to WFOEs, see “Governmental Regulation and Legal Uncertainties—Specific Statues and Regulations – Requirements for Establishment of WFOEs.”
If we were found to be in violation of any existing or future PRC law or regulations relating to foreign ownership of value-added telecommunications businesses and security reviews of foreign investments in such businesses, includingtelecommunication services, Internet publishing, online news information services, online audiovisual transmission, online games, and certain other businesses where foreign investment is prohibited or restricted in the PRC or is subject to security review under PRC law, regulatory authorities with jurisdiction over the operation of our business would have broad discretion in dealing with such a violation, including levying fines, confiscating our income, revoking the business or operating licenses of PRC subsidiaries and/or VIEs, requiring us to restructure our ownershipcorporate structure, including our use of VIE arrangements, or operations, requiring us to discontinue or divest ourselves of all or any portion of our operations or assets, restricting our right to collect revenues, blocking our Internet platforms, or imposing additional conditions or requirements with which we may not be able to comply. Any of these actions could cause significant disruption to our business operations and have an adverse impact on our business, financial condition and results of operations.operations, which could cause the value of our ADSs to significantly decline or become worthless. Further, if changes were required to be made to our ownershipVIE structure, our abilitywe might be unable to consolidate the VIEs, which would adversely affect our VIEs could be adversely affected.financial condition and results of operations as presented in our financial statements.
We may be unable to collect long-term loans to our officers and employees in connection with High Century, Heng Da Yi Tong, Tianjin Jinhu, Gamease, and Guanyou Gamespace, and Sogou Information or exercise control over these entities.Gamespace.
As of December 31, 2020, Sohu2021, we had outstanding long-term loans of $7.6 million to Dr. Charles Zhang and to certain PRC entities owned by Dr. Zhang and/or certain other employees. These long-term loans were used by them to finance their investments in our VIEsthe equity of Beijing Century High-Tech Investment Co., Ltd. (“High Century”), Beijing Heng Da Yi Tong Information Technology Co., Ltd. (“Heng Da Yi Tong”), Tianjin Jinhu Culture Development Co., Ltd. (“Tianjin Jinhu”), Beijing Gamease Age Digital Technology Co., Ltd. (“Gamease”), and Beijing Guanyou Gamespace Digital Technology Co., Ltd. (“Guanyou Gamespace”), and Beijing Sogou Information Service Co., Ltd. (“Sogou Information”), which are VIEs, not owned by us or our subsidiaries, that are used to facilitate our participation in telecommunications, Internetinternet content, online games and certain other businesses in China where foreign ownership is either prohibited or restricted.
The loan agreements contain provisions that, subject to PRC laws, (i) the loans can only be repaid to us by the nominee shareholders transferring the shares of High Century, Heng Da Yi Tong, Tianjin Jinhu, Gamease, and Guanyou Gamespace and Sogou Information to us; (ii) the shares of High Century, Heng Da Yi Tong, Tianjin Jinhu, Gamease, Guanyou Gamespace, and Sogou Information cannot be transferred by the borrowers without our approval; and (iii) we have the right to appoint all directors and senior management personnel of High Century, Heng Da Yi Tong, Tianjin Jinhu, Gamease, Guanyou Gamespace and Sogou Information. Under the loan agreements the borrowersus. The nominee shareholders have pledged all of their shares in High Century, Heng Da Yi Tong, Tianjin Jinhu, Gamease, and Guanyou Gamespace and Sogou Information collateral forto secure the loans, andperformance of their obligations under the loan agreements. The loans bear no interest and are due on the earlier of a demand or such time as Dr. Charles Zhang or one of the other employeeshareholder borrowers, as the case may be, is not an employee of Sohu. Sohu doesus. We do not intend to request repayment of the loans as long as PRC regulations prohibit itour WOFEs from directly investingowning entities engaged in the businesses engaged inoperated by the VIEs.
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Because these loans can only be repaid by the borrowers’ transferring the shares of the various entities to us, our ability to ultimately realize the effective return of the amounts advanced under these loans will depend on the profitability of High Century, Heng Da Yi Tong, Tianjin Jinhu, Gamease, and Guanyou Gamespace and Sogou Information,on changes being made in existing PRC law that may never occur, and is therefore highly uncertain.
Furthermore, because of uncertainties associated with PRC law related to VIEs and the fact that the enforceability of our arrangements with the VIEs and/or their shareholders has never been considered or determined by a PRC court, ultimate enforcement of the loan agreements is uncertain. Accordingly, we may never be able to collect these loans and we may not be able to continue to exercise influence over High Century, Heng Da Yi Tong, Tianjin Jinhu, Gamease, Guanyou Gamespace, and Sogou Information.loans.
We depend upon contractual arrangements with ourthe VIEs and/or their shareholders for the success of our business, and these arrangements may not be as effective in providing operational control as directwould ownership of these businesses, and the contracts may be difficult to enforce.
Because we conduct our Internet operations mainly in the PRC, and are restricted or prohibited by the PRC government from owningengaging in value-added telecommunication services, Internet content, telecommunication,publishing, online news information services, online audiovisual transmission, online games, operations and certain other operationsbusiness activities in the PRC, we are dependentmust depend on ourthe VIEs, in which we have no direct ownership interest, to provide those services through contractual agreements among the partiesarrangements and to hold some of our assets, including some of the domain names and trademarks relating to our business. These arrangements may not be as effective in providing control over our value-added telecommunication services, Internet content, telecommunications operations,publishing, online news information services, online audiovisual transmission, online games, operations and certain other business activities as directwould ownership of the entities operating these businesses. For example, if we had direct ownership of ourowned the VIEs, we would be able to exercise our rights as a shareholder to effect changes in their boards of directors, which in turn could effect changes at the management level. Due to our VIE structure, we have to rely on contractual rights to effect control and management of ourthe VIEs, which exposes us to the risk of potential breach of contract by the VIEs or their shareholders, such as their failing to use the domain names and trademarks held by them, or failing to maintain our Internet platforms, in an acceptable manner or taking other actions that are detrimental to our interests. In addition, as each of ourthe VIEs is jointly owned by its shareholders, it may be difficult for us to change our corporate structure if such shareholders refuse to cooperate with us. In addition,Moreover, some of our subsidiaries andthe VIEs could fail to take actions required for our business, such as entering into content development contracts with potential content suppliers or failing to maintain the necessary permits for the content servers. Furthermore, if the shareholders of any of ourthe VIEs were involved in proceedings that had an adverse impact on their shareholder interests in such VIEthe VIEs or on our ability to enforce relevant contracts related to the VIE structure, our business would be adversely affected.
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The shareholders of the VIEs may breach, or cause the VIEs to breach, the VIE contracts for a number of reasons. For example, their interests as shareholders of the VIEs and the interests of our subsidiaries may conflict and we may fail to resolve such conflicts; the shareholders may believe that breaching the contracts will lead to greater economic benefit for them; or the shareholders may otherwise act in bad faith. If any of the foregoing were to happen, we might have to rely on legal or arbitral proceedings to enforce our contractual rights. In addition, disputes may arise among the shareholders of any of ourthe VIEs with respect to their ownership of such VIE,VIEs, which could lead them to breach their agreements with us. Such arbitrallegal and legalarbitral proceedings and disputes may cost us substantial financial and other resources, and result in disruption of our business, and the outcome might not be in our favor. For example, a PRC court or arbitration panel could conclude that our VIE contracts with the VIEs and/or their shareholders violate PRC law or are otherwise unenforceable. If theour contractual arrangements with any of ourthe VIEs or their shareholders were found by PRC authorities with appropriate jurisdiction to be unenforceable, we could lose control over the assets owned by such VIEVIEs and lose our ability to consolidate such VIE’sVIEs’ results of operations, assets and liabilities in our consolidated financial statements and/or to transfer the revenues of such VIEVIEs to our corresponding PRC subsidiary.subsidiaries, which could have a severe adverse impact on our financial condition and results of operations, which could in turn cause the market price of our ADSs to decline significantly.
A failure by ourthe VIEs or their shareholders to perform their obligations under our contractual arrangements with them could have an adverse effect on our business and financial condition.
As all of theseour contractual arrangements with the VIEs and/or their shareholders are governed by PRC law and provide for the resolution of disputes through either arbitration or litigation in the PRC, they would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. We would have to rely for enforcement on legal remedies under PRC law, including specific performance, injunctive relief or damages, which might not be effective. For example, if we sought to enforce the equity interest purchase right agreements for the transfer of the shareholders’ equity interests in any of ourthe VIEs ifand the transferee was a foreign company, the transfer would be subject to approval by PRC governmental authorities such as the MIIT and the MOFCOM, and the transferee would be required to comply with various requirements, including qualification and maximum foreign shareholding percentage requirements. As these PRC governmental authorities have wide discretion in granting such approvals, we could fail to obtain such approval. In addition, our VIE contracts with the VIEs and/or their shareholders might not be enforceable in China if PRC governmental authorities, courts or arbitral tribunals took the view that such contracts contravened PRC law or were otherwise not enforceable for public policy reasons. As of the date of this annual report, the validity and enforceability of the types of contracts that we have with the VIEs and/or their shareholders, or, to our knowledge, of similar contracts used by other China-based companies, have never been considered or determined by a PRC court. Accordingly, we cannot assure that these contracts are valid and enforceable in the PRC.
Furthermore, the legal environment in the PRC is not as developed as in other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could further limit our ability to enforce these contractual arrangements. In the event we were unable to enforce these contractual arrangements, we would not be able to exert effective control over ourthe VIEs, and our ability to conduct our business, and our financial condition and results of operations, would be severely adversely affected.
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The contractual arrangements between our subsidiaries and the VIEs that conduct a significant portion of our VIEsoperations may result in adverse tax consequences.
PRC laws and regulations emphasize the requirement of an arm’s length basis for transfer pricing arrangements between related parties. The laws and regulations also require enterprises with related party transactions to prepare transfer pricing documentation to demonstrate the basis for determining pricing, the computation methodology and detailed explanations. Related party arrangements and transactions may be subject to challengetax inspection or tax inspectionchallenge by PRC tax authorities.
Under a tax inspection, ifIf our transfer pricing arrangements between our China-based subsidiaries and the VIEs are judged asby tax authorities to be tax avoidance, or if related documentation does not meet applicable requirements, or the requirements,transactions are challenged as not being at arm’s length, our China-based subsidiaries and the VIEs may be subject to material adverse tax consequences, such as transfer pricing adjustment.adjustments. A transfer pricing adjustment could result in a reduction, for PRC tax purposes, of adjustments recorded by VIEs, which could adversely affect us by (i) increasing VIE’sthe VIEs’ tax liabilities without reducing our subsidiaries’ tax liabilities, which could further result in interest and penalties being levied on us for unpaid taxes; or (ii) limiting the ability of our PRC companies to maintain preferential tax treatment and other financial incentives. In addition, if for any reason we needed to cause the transfer of any of the shareholders’ equity interestinterests in any of ourthe VIEs to a different nominee shareholder (such as if, for example, one of such shareholders was no longer employed by us), we might be required to pay individual income tax, on behalf of the transferring shareholder, on any gain deemed to have been realized by such shareholder on such transfer.
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We may lose the ability to use and enjoy assets held by any of our VIEs that are important to the operation of our business if such VIE declares bankruptcy or becomes subject to a dissolution or liquidation proceeding.
Each of our VIEs holds assets, such as our core intellectual property, licenses and permits, that are critical to our business operations. Although the equity interest purchase right agreements among our WFOEs, our VIEs and the shareholders of our VIEs contain terms that specifically obligate the shareholders of our VIEs to ensure the valid existence of our VIEs, in the event the shareholders breached these obligations and voluntarily liquidated our VIEs, or if any of our VIEs declared bankruptcy and all or part of its assets became subject to liens or rights of third-party creditors, we might be unable to continue some or all of our business operations. Furthermore, if any of our VIEs were to undergo a voluntary or involuntary liquidation proceeding, its shareholders or unrelated third-party creditors might claim rights to some or all of such VIE’s assets and their rights could be senior to our rights under the VIE contracts, thereby hindering our ability to operate our business.
FrequentHeightened regulatory focus and frequent press reports and other commentary in the United States questioning the VIE structure used by us and other Chinese companies publicly-tradedpublicly traded in the United States appear to have created concern among investors, and may cause such an effect in the future.
In recent years various prominent Western news outlets, as well as members of the U.S. Congress, the Chairman of the SEC, and members of the SEC Staff, have questioned the use by Chinese companies that are publicly-tradedpublicly traded in the United States of VIE structures as a means of complying with Chinese laws prohibiting or restricting foreign ownership of certain businesses in China, including businesses we are engaged in, such as Internet information and content, online advertising, online game, sponsored search, and value-added telecommunication services.services, Internet publishing, online news information services, online audiovisual transmission, online games, and certain other business activities. Some of such news reportscomments have also sought to draw a connection between recent widely reportedwidely-reported accounting issues at certain Chinese companies and the use of VIE structures. Such news reportscomments appear to have had the effect of causing concern among investors in several Chinese companies, including us, that are publicly-tradedpublicly traded in the United States. While we are not aware of any causal connection between the recently reported accounting scandals and the use of VIE structures, it is possible that investors in our common stockADSs will believe that such a connection exists. Any of such circumstances could lead to further loss of investor confidence in Chinese companies such as ours and cause fluctuations in the market pricesprice of our common stockADSs and, if such prices were to drop sharply, could subject us to shareholder litigation, which could cause the price for our shares to drop further.
Our interests in our subsidiaries, such as our wholly-owned subsidiary Changyou, could be diluted from the issuance of equity incentive shares.
Our interest in our subsidiaries, such as our wholly-owned subsidiary Changyou, could be diluted by the implementation and operation of existing or future equity incentive plans. For example, in August 2019 Changyou adopted a new share incentive plan that reserves Changyou Class A ordinary share for issuance. These reserved shares, if and when issued, would reduce our percentage interests in Changyou. The issuance of these reserved shares or the occurrence of any of such other dilutive events with respect to Changyou in the future would cause our share of the earnings of the affected subsidiary to be reduced.
Risks Related to China’s Regulatory Environment
Political, economic and social policies of the PRC government could affect our business.
Substantially all of our business, operating assets, fixed assets and operations are located in China, and substantially all of our revenues are derived from our operations in China. Accordingly, our business may be adversely affected by changes in political, economic or social conditions in China, adjustments in PRC government policies or changes in laws and regulations.
The economy of China differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development in a number of respects, including:
 
structure;
 
level of government involvement;
 
level of development;
 
level of capital reinvestment;
 
growth rate;
 
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control of foreign exchange; and
 
methods of allocating resources.
Since 1949, China has been primarily a planned economy subject to a system of macroeconomic management. Although the PRC government still owns a significant portion of the productive assets in China, economic reform policies since the late 1970s have emphasized decentralization, autonomous enterprises and the utilization of market mechanisms. We cannot predict the future effects of the economic reform and macroeconomic measures adopted by the PRC government on our business or results of operations. Furthermore, the PRC government began to focus more attention on social issues in recent years and has promulgated or may promulgate additional laws or regulations in this area, which could affect our business in China.
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While the Chinese economy has grown significantly over the past thirty years, the growth has been uneven geographically among various sectors of the economy, and during different periods. The Chinese economy may not continue to grow, and if there is growth, such growth may not be steady and uniform; if there is a slowdown, such a slowdown may have a negative effect on our business. The Chinese economy experienced high inflation in 2010 and 2011, and to curb the accelerating inflation the PBOC, China’s central bank, raised benchmark interest rates three times in 2011. The level of exports from the PRC also declined significantly recently. According to the National Bureau of Statistics of China, the growth rate of China’s gross domestic product, compared to that of the same period in the previous year, slowed from 6.6% in 2018, to 6.0% in 2019, to 2.2% in 2020, and to 2.3%accelerated and reached 8.1% in 2020.2021. Various macroeconomic measures and monetary policies adopted by the PRC government to guide economic growth and manage inflation and the allocation of resources may not be effective in sustaining the growth rate of the Chinese economy. In addition, such measures, even if they benefit the overall Chinese economy in the long run, may have an adverse effect on us if they reduce the amount of money that our existing or future advertisers devote to online advertising.
The PRC legal system embodies uncertainties which could limit the legal protections available to us and you, or could lead to penalties on us.
The PRC legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases have little precedential value. In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. Our PRC operating subsidiaries Beijing Sohu New Momentum Information Technology Co., Ltd. (“Sohu New Momentum”), Beijing Sohu New Era Information Technology Co., Ltd., (“Sohu Era”), Beijing Sohu New Media Information Technology Co., Ltd. (“Sohu Media”), Fox Information Technology (Tianjin) Limited (“Video Tianjin”), Beijing AmazGame Age Internet Technology Co., Ltd. (“AmazGame”), and Beijing Changyou Gamespace Software Technology Co., Ltd. (“Gamespace”), Beijing Sogou Technology Development Co., Ltd. (“Sogou Technology”), and Beijing Sogou Network Technology Co., Ltd. (“Sogou Network”) are WFOEs, which are enterprises incorporated in China and wholly-owned by our indirect
off-shore
subsidiaries. Those WFOEs are subject to laws and regulations applicable to foreign investment in China. In addition, all of our subsidiaries and VIEs are incorporated in China and subject to all applicable Chinese laws and regulations. Because of the relatively short period for enacting such a comprehensive legal system, it is possible that the laws, regulations and legal requirements are relatively recent, and their interpretation and enforcement involve uncertainties. These uncertainties could limit the legal protections available to us and other foreign investors, including you. Such uncertainties may also make it easier for others to infringe our intellectual property without significant cost, and new entrants to the market may tend to use gray areas to compete with us. In addition, uncertainties in the PRC legal system may lead to penalties imposed on us because of a difference in interpretation of the applicable law between the relevant governmental authority and us. For example, under current tax laws and regulations, in order to be entitled to the preferential tax treatment afforded to “Software Enterprises” or KNSEs we are responsible for conducting a self-assessment and filing required supporting documentation with tax authorities. However, since there is no clear guidance as to the applicability of certain areas of preferential tax treatment, we may be found to be in violation of the tax laws and regulations based on the interpretation of local tax authorities with regard to the applicable tax rates, and therefore might be subject to penalties, including monetary penalties. In addition, we cannot predict the effect of future developments in the PRC legal system, particularly with regard to the Internet, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws.
The enforcement of the PRC Labor Contract Law and other labor-related regulations in the PRC may adversely affect our business and results of operations.
In 2007, the Standing Committee of the National People’s Congress enacted the
Labor Contract Law
, which was amended on December 28, 2012. The Labor Contract Law introduced specific provisions related to fixed-term employment contracts, part-time employment, probationary periods, consultation with labor unions and employee assemblies, employment without a written contract, dismissal of employees, severance, and collective bargaining to enhance previous PRC labor laws. Under the Labor Contract Law, an employer is obligated to sign an unlimited-term labor contract with any employee who has worked for the employer for ten consecutive years. Further, if an employee requests or agrees to renew a fixed-term labor contract that has already been entered into twice consecutively, the resulting contract, with certain exceptions, must
have
an unlimited term. With certain exceptions, an employer must pay severance to an employee where a labor contract is terminated or expires. In addition, PRC governmental authorities have continued to introduce various new labor-related regulations since the effectiveness of the Labor Contract Law. For example, there are regulations which require that annual leave ranging from five to 15 days be made available to employees and that employees be compensated for any unused annual leave days at a rate of three times their daily salary, subject to certain exceptions.
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Under the
PRC Social Insurance Law
and the
Administrative Measures on Housing Fund
, employees are required to participate in pension insurance, work-related injury insurance, medical insurance, unemployment insurance, maternity insurance and housing funds and employers are required, together with their employees or separately, to pay the social insurance premiums and housing funds for their employees.
These laws designed to enhance labor protection tend to increase our labor costs. In addition, as the interpretation and implementation of these regulations are still evolving, our employment practices may not be at all times be deemed in compliance with the regulations. As a result, we could be subject to penalties or incur significant liabilities in connection with labor disputes or investigations.
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If we are found to be in violation of current or future PRC laws, rules, orand regulations regarding Internet-related services, and telecom-related activities, and overseas listing, we could be subject to severe penalties.
The PRC has enacted regulations that apply to Internet-related services and telecom-related activities. While many aspects of these regulations remain unclear, they purport to limit and require licensing of various aspects of the provision of value-added telecommunication services, Internet publishing, online news information services, online audiovisual transmission, online games, and content, online advertising, online game, and mobile services.certain other business activities in the PRC.
The Catalogue of Classification of Internet Audio-Video Program Services (Trial) issued by the SAPPRFT on March 17, 2010 and amended on March 10, 2017, classifies the business of providing public program searching and watching services through the Internet to the public as an Internet audio-video program service for which a Permit for the Network Transmission of Audiovisual Programs is required. The VIE Sohu Internet received a renewal of a Permit for the Network Transmission of Audiovisual Programs from the SAPPRFT on June 20, 2020. However, Sogou Information has not yet been granted such a license. If Sogou’s provision of video search services is later challenged by the NRTA, which was established in connection with the reorganization of the SAPPRFT in 2018 and assumed certain responsibilities previously held by the SAPPRFT, such as the issuance of Permits for Network Transmission of Audiovisual Programs, we may be subject to severe penalties, including fines or the suspension of our video search services or even our operations. In addition, Sohu’s online video businesses are operated under various Internet platforms, such as sohu.com, Focus.cn and sogou.com,Focus.cn, but current PRC laws and regulations are lack of clear provisions indicating whether it is permissible to provide video services over several Internet platforms that are owned by a single company under one permit and the NRTA might claim that such operation under one permit is not allowed under the
Provisions on the Administration of Private Network and Targeted Communication Audiovisual Program Services
. If the NRTA were to make such a claim, we could face penalties from the NRTA, such as fines, cancellation of our existing permit, or the forced discontinuation or restriction on our video services or even our operations. If we are ordered to suspend our services, our user traffic will be reduced and therefore our revenues will be negatively affected.
Current PRC laws and regulations require us to obtain an Internet publishing service license for ourthe provision of online game services, Sogou’s online literature services,services. As, under PRC law, our WFOEs and Sogou Ask. An Internet publishing servicetheir direct and indirect subsidiaries are not allowed to obtain such a license, may also be required for image search services, as these services may be considered to be “online publication services,” which require an Internet publishing service license under current PRC laws and regulations. Sohu Internet,the VIEs Gamease and Guanyou Gamespace instead obtained such licenses. As of the date of this annual report, both licenses have each been grantedexpired, and Gamease and Guanyou Gamespace are in the process of applying for renewal of their respective licenses. There is uncertainty as to whether Gamease and Guanyou Gamespace will be able to renew such a license. However, none of Sogou’s VIEs currently holds such a license. licenses
In addition, an internet news information services permit is required under current PRC laws and regulations for news dissemination, search,republishing services and newsfeed services. Althoughplatforms services that disseminate news over the Internet. The VIE Sohu Internet holds such a permit, none of Sogou’s VIEs currently holdsas our WFOEs and their direct and indirect subsidiaries are not allowed to obtain such a license.permit.
The Cyberspace Administration of China (the “CAOC”)CAOC issued a series of regulations and administrative measures regulating Internet users’ social accounts accessible by the public, group information platforms, BBS communities, and news information platforms, which require Internet platform operators to establish specific management rules for their platforms, and subject them to various specific obligations. See “Government“Governmental Regulation and Legal Uncertainties - Uncertainties—Specific Statutes and Regulations - Regulations—Regulation of the Provision of Internet Content - Content—Internet Information Services” and “Government“Governmental Regulation and Legal Uncertainties - Uncertainties—Specific Statutes and Regulations - Regulations—Regulation of the Provision of Internet Content - Content—Online News Dissemination and Online News Search Services” for further descriptions of the Internet platform operators’ obligations as required by several administrative measures issued by the CAOC. Complying with such requirements could cause us to incur substantial expense or necessitate that we alter or change our existing practices in a manner that could harm our business.
PRC governmental authorities regularly enhance the anti-monopoly law enforcement and supervision of internet platform operators. On February 7, 2021, the Anti-Monopoly Committee of the State Council issued the
Anti-Monopoly Guidelines for the Platform Economy Sector
(the “Platform Guidelines”), which provide guidance on competition and compliance for companies operating in Internet-related businesses. While weFurther, the Anti-Monopoly Law of the PRC (Revision Draft) was published on October 23, 2021 for public comment. In addition, during 2021 the State Administration for Market Regulation (the “SAMR”) imposed administrative penalties on a number of internet companies in anti-monopoly cases. We do not expect that the Platform Guidelinesregulatory requirements under PRC anti-monopoly laws and related regulations will have a material impact on our business and results of operations, suchand as of the date of this annual report, we have not been subject to any penalties or other administrative actions in connection with any anti-monopoly violation. Due to the uncertainties associated with the evolving legislative activities and varied local implementation practices of competition laws and regulations in the PRC, it may increase our compliance burden in our already highly-regulated industry. Further, the Platform Guidelines are indications of
In recent years, PRC governmental authorities’ continual enhancementauthorities have enacted or published for public comment a series of anti-monopoly lawlaws and regulations related to cybersecurity and data security, such as the
Internet Security Law
(the “Internet Security Law”), which was enacted by the Standing Committee of the National People’s Congress on November 7, 2016 and became effective on June 1, 2017; the Internet Data Security Law, which took effect on September 1, 2021; the Draft Data Security Regulations, which were published for public comment on November 14, 2021; and the
Measures for Cybersecurity Review,
which were promulgated on December 28, 2021 and took effect on February 15, 2022 (the “Measures for Cybersecurity Review”), while intensifying oversight and enforcement actions. See “Governmental Regulation and supervision of internet platform operators.
PRC laws, rules, regulationsLegal Uncertainties—Miscellaneous—Laws and governmental policies governing the online lending industryRegulations Related to Security and microcredit businesses are at a relatively early stage, and can be expected to continue to evolve. Although Sogou has not made new loans to borrowers since September 30, 2020 and while Sogou was making loans Sogou implemented measures intended to comply with applicable PRCCensorship.” The laws and regulations governing its online lendingcybersecurity and microcredit businesses, due todata security in China are relatively new and evolving rapidly, and the lack of clearrelevant PRC government authorities have wide discretion in their interpretation and rules regardingenforcement, which involve significant uncertainties. For example, the implementation of such laws and regulations,Measures for Cybersecurity Review provide that the measures Sogou took may not have been sufficient to ensure such compliance. Failure to comply with such laws and regulations could result in Sogou’s beingfollowing activities are subject to among other things, regulatory warnings, fines,cybersecurity review: (i) purchases of network products and services by critical information infrastructure operators (“CIIOs”) that impact or criminal penalties.
may impact national security; (ii) listings abroad by Internet platform operators holding personal information of over one million users; and (iii) data processing activities by Internet platform operators that affect or may affect national security. However, it is not clear under the current regulations how it is determined whether a purchaser of network products and services is a CIIO, whether an Internet platform operator holds personal information of over one million users, or the precise circumstances under which a data processor may be subject to such review.
 
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On July 6, 2021, several PRC authorities jointly promulgated the
Opinions on Strictly Combating Illegal Securities Activities in Accordance with the Law
, which called for the enhanced administration and supervision of China-based companies listing outside the PRC, proposed to revise the relevant regulations governing the issuance and listing of shares outside the PRC by such companies, and clarified the related responsibilities of competent PRC industry regulators and government authorities. On December 24, 2021, the China Securities Regulatory Commission (the “CSRC”) published two draft regulations, the
Provisions of the State Council on the Administration of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments)
and the
Administrative Measures for the Filing of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments)
, which, if adopted, would establish requirements and procedures for filings with the CSRC by PRC domestic companies in connection with their initial public offerings and continued listings in overseas markets. It is not clear whether and how these opinions and draft regulations, if adopted, might impact our ability to continue to list our ADSs on NASDAQ.
We cannot assure yoube certain that we have fully complied with or will in the future always comply with PRC rules and regulations regardingwith respect to Internet security, data security, anti-monopoly, and other matters associated with Internet-related services and telecom-related activities. In addition, the PRC government may promulgate new laws, rules or regulations at any time. If current or future laws, rules or regulations regarding Internet-related activities are interpreted to be inconsistent with our ownership structure and/or our business operations, our business could be severely impaired and we could be subject to severe penalties.
PRC laws and regulations mandate complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to make acquisitions in China.
PRC laws and regulations, such as the M&A Rules, which were jointly issued by six PRC regulatory agencies on August 8, 2006 and were amended on June 22, 2009, the Anti-Monopoly Law, Circular 6 and the MOFCOM Security Review Rules, established additional procedures and requirements that are expected to make merger and acquisition activities in China by foreign investors more time-consuming and complex, including requirements in some instances that the MOFCOM be notified in advance of any
change-of-control
transaction in which a foreign investor takes control of a PRC domestic enterprise, or that the approval from the MOFCOM be obtained in circumstances where overseas companies established or controlled by PRC enterprises or residents acquire affiliated domestic companies. The Platform Guidelines stipulate that any business combinations or acquisitions of control (“Concentrations of Undertakings”) involving VIE structures fall within the scope of anti-monopoly review. If a Concentration of Undertakings meets the criteria for declaration as stipulated by the State Council, an operator shall report such Concentration of Undertakings to the anti-monopoly law enforcement agency under the State Council in advance. PRC laws and regulations also require certain merger and acquisition transactions to be subject to a merger control security review. The MOFCOM Security Review Rules, effective from September 1, 2011, further provide that, when deciding whether a specific merger or acquisition of a domestic enterprise by foreign investors is subject to a security review by the MOFCOM, the principle of substance over form should be applied and foreign investors are prohibited from bypassing the security review requirement by structuring transactions through proxies, trusts, indirect investments, leases, loans, control through contractual arrangements of Offshore transaction. Factors that the MOFCOM considers in its review are whether (i) an important industry is involved, (ii) such transaction involves factors that have had or may have an impact on national economic security and (iii) such transaction will lead to a change in control of a domestic enterprise that holds a well-known PRC trademark or a time-honored PRC brand. The
Measures for the Security Review of Foreign Investment
(the “Security Review Measures”), promulgated by the MOFCOM and the NDRC, which became effective on January 18, 2021, further stipulate that any foreign investment that affects or may affect national security will be subject to a security review by relevant governmental authorities. If a business of any target company that we plan to acquire falls into the ambit of security review, we may not be able to successfully acquire such company. Complying with the requirements of the relevant regulation to complete any such transaction could be time-consuming, and any required approval process, including approval from the MOFCOM, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business.
Even if we are in compliance with PRC governmental regulations relating to licensing and foreign investment prohibitions, the PRC government may prevent us from distributing, and we may be subject to liability for, content that it believes is inappropriate.
The PRC has enacted regulations governing Internet access and the distribution of news and other information. In the past, the PRC government has stopped the distribution of information over the Internet that it believes to violate PRC law, including content that is obscene, incites violence, endangers national security, is contrary to the national interest or is defamatory. In addition, we may not publish certain news items, such as news relating to national security, without permission from the PRC government. Furthermore, the Ministry of Public Security (the “MPS”) has the authority to make any local Internet service provider block any Website maintained outside the PRC at its sole discretion. Even if we comply with PRC governmental regulations relating to licensing and foreign investment prohibitions, if the PRC government were to take any action to limit or prohibit the distribution of information through our network or to limit or regulate any current or future content or services available to users on our network, our business would be harmed.
We are also subject to potential liabilities for content on our Internet platforms that is deemed inappropriate and for any unlawful actions of our subscribers and other users of our systems under regulations promulgated by the MIIT, such potential liabilities including the imposition of fines or even the shutting down of the Internet platforms.
Furthermore, we are required to delete content that clearly violates the laws of the PRC and report content that we suspect may violate PRC law. We may have difficulty determining the type of content that may result in liability for us and, if we are wrong, we may be prevented from operating our Internet platforms.
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Dividends we receive from our operating subsidiaries located in the PRC are subject to PRC profit appropriation and PRC withholding tax.
PRC legal restrictions permit payment of dividends by our China-based WFOEs only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, PRC law requires our China-based WFOEs to set aside no less than 10% of their net income each year to fund certain reserve funds until these reserves equal 50% of the amount of registered capital. These reserves are not distributable as cash dividends.
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Furthermore, the PRC Corporate Income Tax Law (the “CIT Law”) and its implementing regulations provide that a withholding tax at a rate of up to 10% may be applicable to dividends payable to
non-PRC
investors that are
“non-resident
enterprises,” to the extent that such dividends are derived from sources within the PRC. Under the Arrangement Between the PRC and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to Taxes on Income (the
“China-HK
Tax Arrangement”), which became effective on January 1, 2007, the dividend withholding tax rate may be reduced to 5% if a Hong Kong resident enterprise is considered a
non-PRC
resident enterprise and holds at least 25% of the equity interests in the PRC enterprise distributing the dividends, subject to approval of the PRC local tax authority. However, if the Hong Kong resident enterprise is not considered to be the beneficial owner of such dividends under applicable PRC tax regulations, such dividends may remain subject to withholding tax at a rate of 10%. The State Administration of Taxation (the “SAT”) issued an
Announcement on Issues in Tax Treaties
Relating to “Beneficial Owner”
(“Announcement 9”), effective April 1, 2018, which provides guidance on determining whether an enterprise is a “beneficial owner” of dividends under China’s tax treaties and tax arrangements. Announcement 9 provides that, in order to be a beneficial owner, an entity generally must be a direct owner of, and have the right to control, the income of the enterprise that is paying the dividends or must be a direct owner of, and have the right to control, the tangible or intangible assets generating such income, and also specifies that a company that is not organized for the purpose of engaging in substantive business activities may not be regarded as a beneficial owner. If any of our Hong Kong subsidiaries is, in the light of Announcement 9, determined by the SAT to not be a beneficial owner for purposes of the
China-HK
Tax Arrangement, any dividends paid to it by any of our PRC subsidiaries would not qualify for the preferential dividend withholding tax rate of 5%, but rather would be subject to the regular withholding tax rate of 10% under the CIT Law.
Furthermore, to the extent that the VIEs have undistributed
after-tax
profits, we must pay tax on behalf of our employees who hold interests in the VIEs when the VIEs distribute dividends in the future. The current individual income tax rate is 20%.
Our Offshore entities may need to rely on dividends and other distributions on equity paid by our Mainland China-based subsidiaries, including the Mainland China-based subsidiaries of our subsidiariessubsidiary Changyou, and Sogou, to fund any cash requirements those Offshore entities may have. Our Offshore entities may not be able to obtain cash from distributions because our subsidiaries and VIEs in Mainland China are subject to restrictions imposed by PRC law on paying such dividends and making other payments.
Sohu.com Limited is a holding company with no operating assets other than investments in Chinese operating entities through our intermediate Offshore holding companies. Our Offshore entities may need to rely on dividends and other distributions on equity paid by Mainland China-based subsidiaries for the cash requirements in excess of any cash raised from investors and retained by Sohu.com Limited or our other Offshore entities. In addition, for subsidiaries engaging in Sohu’s business in Mainland China to be able to use the proceeds of cash dividends from Changyou, or Sogou, the dividends would have to be paid through the Sohu Cayman Islands entities Sohu Game and Sohu Search that hold Sohu’s shares in Changyou and Sogou.Changyou. The primary source of any dividend payments to our Offshore entities would need to be our subsidiaries in Mainland China after they receive payments from our VIEs under various service agreements and other arrangements. It is possible that our Mainland China-based subsidiaries will not continue to receive payments in accordance with our contracts with our VIEs or that such payments will become subject to restrictions imposed by PRC law. If our subsidiaries and VIEs incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us through the intermediate companies. In addition, amounts available for dividends are further reduced because transfers of funds out of Mainland China generally are subject to a withholding tax of 10%, and of 5% if transfers are made to Hong Kong and subject to the
China-HK
Tax Arrangement.
The PRC government also imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currencies out of Mainland China. We may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currencies. If we or any of our subsidiaries are unable to receive the revenues from our operations through these service agreements and other arrangements, we may be unable to effectively fund any cash requirements we may have.
Activities of Internet content providers are or will be subject to additional PRC regulations, which have not yet been put into effect. Our operations may not be consistent with these new regulations when put into effect, and, as a result, we could be subject to severe penalties.
The MIIT has stated that the activities of Internet content providers are subject to regulation by various PRC government authorities, depending on the specific activities conducted by the Internet content provider. Various government authorities have stated publicly that they are in the process of preparing new laws and regulations that will govern these activities. The areas of regulation currently include online advertising, online news reporting, online publishing, provision of online or mobile music, online securities trading, the provision of industry-specific information (such as, for example, drug-related information) over the Internet, and foreign investment in value-added telecommunication services.services, cybersecurity, and data security. Other aspects of our online operations may be subject to additional regulations in the future. For example, our online interactive broadcasting video platform enables users to perform real time musical acts, exchange information, interact with others and engage in various other online activities. Although we have obtained a permit to engage in the online interactivelive broadcasting video platform services, we cannot assure yoube certain that the PRC regulatory authorities will not issue new laws or regulations specifically regulating the operation of an online interactivea live broadcasting video platform. Our operations might not be consistent with current laws and regulations or any such new regulations and, as a result, we could be subject to penalties.
 
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Regulation and censorship of information distribution in China may adversely affect our business.
China has enacted regulations governing Internet access and the distribution of news and other information. Furthermore, the Propaganda Department of the Chinese Communist Party takes the responsibility to censor news published in China to ensure, supervise and control a particular political ideology. In addition, the MIIT has published implementing regulations that subject online information providers to potential liability for contents included in their portals and the actions of subscribers and others using their systems, including liability for violation of PRC laws prohibiting the distribution of content deemed to be socially destabilizing. Furthermore, because many PRC laws, regulations and legal requirements with regard to the Internet are relatively new and untested, their interpretation and enforcement may involve significant uncertainty. In addition, the PRC legal system is a civil law system in which decided legal cases have limited binding force as legal precedents. As a result, in many cases an Internet platform operator may have difficulties determining the type of content that may subject it to liability.
Periodically, the MPS has stoppedstops the distribution over the Internet of information which it believes to be socially destabilizing. Meanwhile, theThe MPS also has the authority to require any local Internet service provider to block any Website maintained outside China at its sole discretion. If the PRC government were to take action or exercise its authority to limit or eliminate the distribution of information through our portal or to limit or regulate current or future applications available to users of our portal, our business would be adversely affected.
The State Secrecy Bureau, which is directly responsible for the protection of state secrets of all PRC government and Chinese Communist Party organizations, is authorized to block any Website it deems to be leaking state secrets or failing to meet the relevant regulations relating to the protection of state secrets in the distribution of online information. Under the applicable regulations, we may be held liable for any content transmitted on our portal. Furthermore, where the transmitted content clearly violates the laws of the PRC, we will be required to delete it. Moreover, if we consider transmitted content suspicious, we are required to report such content. We must also undergo computer security inspections, and if we fail to implement the relevant safeguards against security breaches, we may be shut down. In addition, the State Secrecy Bureau has adopted regulations stipulating that Internet companies, such as us, that provide bulletin board systems, chat rooms or similar services must apply for the approval of the State Secrecy Bureau. As the implementing rules of these new regulations have not been issued, we do not know how or when we will be expected to comply, or how our business will be affected by the application of these regulations.
We may be adversely affected by the PRC government’s ongoing crackdown on Internet pornographic content.
The Chinese government has stringent prohibitions on online pornographic information and has launched several crackdowns on Internet pornography recently. On December 4, 2009, the MIIT and other three PRC government authorities jointly issued the
Incentives Measures for Report of Pornographic, Obscene and Vulgar Messages on Internet and Mobile Media
(the “Anti-Pornography Notice”) to further crackdown on online pornography. Pursuant to this Anti-Pornography Notice, rewards of up to RMB10,000 will be provided to Internet users who report Websites that feature pornography, and a committee has been established to review such reports to determine an appropriate award. On April 13, 2014, the National Working Group on Anti-Pornography and three other PRC government authorities jointly issued the Anti-Pornography Proclamation, under which Internet service providers must immediately remove texts, images, video, advertisements and other information that contain pornographic content. The relevant government authority may order enterprises or individuals who flagrantly produce or disseminate pornographic content to stop conducting business, and may revoke relevant administrative permits. Although we require all users upon account registration to agree to our terms of service, which specify the types of content that are prohibited on our platform, and we have deleted from our relevant channels and communities all Web pages with material that we believe could reasonably be considered to be vulgar and have strengthened our internal censorship and supervision of links and content uploaded by users, it is possible that our users may engage in obscene conversations or activities on our platform that may be deemed illegal under PRC laws and regulations. For example, we provide an online interactivea live broadcasting video platform for users, and because the video and audio communication on this platform is conducted in real time, we are unable to examine the content generated by our hosts and users on air before the content is streamed on the platform. There is no assurance that content considered vulgar by PRC government agencies will not appear in the future. We may be subject to fines or other disciplinary actions, including in serious cases suspension or revocation of the licenses necessary to operate our platform, if we are deemed to have facilitated the appearance of inappropriate content placed by third parties on our platform under PRC laws and regulations. In addition, if we are accused by the government of hosting vulgar content, our reputation could be adversely affected.
Regulations relating to the online transmission of foreign films and TV dramas may adversely affect our online video business.
On September 2, 2014, the SAPPRFT issued a
Notice on Further Strengthening the Administration of Online Foreign Audiovisual Content
(the “September 2014 SAPPRFT Notice”), which requires that operators of audiovisual Websites obtain from the SAPPRFT a Film Public Screening Permit, TV Drama Distribution Permit, or TV Animation Distribution Permit for all foreign films and TV dramas before they are transmitted via the Internet in China. The September 2014 SAPPRFT Notice further stipulates that before any foreign films or TV dramas for transmission exclusively via the Internet are purchased after the promulgation of the September 2014 SAPPRFT Notice, operators of audiovisual Websites must declare their annual purchasing plans with the SAPPRFT before the end of the year preceding the year of the intended broadcast and obtain the SAPPRFT’s approval. The September 2014 SAPPRFT Notice also states that the number of foreign films and TV dramas to be purchased by an operator and transmitted via its Website in a single year may not exceed 30% of the total amount of the Chinese films and TV dramas purchased and transmitted by the same Website in the previous year.
 
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The promulgation of the September 2014 SAPPRFT Notice could have an adverse impact on our online video business. If we are not able to obtain the required SAPPRFT approval in time, there will be a delay in our ability to broadcast such foreign films and TV dramas on our Internet platforms and in our generation of advertising revenues from such films and TV dramas. We are also subject to the risk that users might access pirated versions of such films and TV dramas during any such delay, and become less likely to view them on our Internet platforms when they become available, which would cause our online traffic and advertising revenues to be lower than we expected. If we fail to obtain the required approval by the SAPPRFT, we may not be able to recoup the costs we spent in acquiring the broadcasting rights of, and marketing, those films and TV dramas. In addition, it could be necessary for us to recognize impairment charges related to foreign films and TV dramas we have purchased. The requirement of a minimum ratio of domestic video content to foreign-sourced content in the September 2014 SAPPRFT Notice may require us to purchase more domestic video content in order for us to be permitted to maintain a sufficient portfolio of online foreign films and TV dramas. If, on the other hand, we respond to the minimum ratio requirement of the September 2014 SAPPRFT Notice by reducing our purchases of foreign films and TV dramas, our attraction to users, traffic or advertisers on our online video Internet platforms could be reduced, resulting in a decrease in our advertising revenues.
Regulation and censorship of online interactivelive broadcasting services in China may adversely affect our business.
As online interactivelive broadcasting has surged in popularity in China, PRC governmental authorities have increased their efforts to regulate it. The Ministry of Culture and Tourism of the People’s Republic of China (the “MCT”) issued an
Online Performance Notice
, which became effective on July 1, 2016, and issued the
Online Performance Measures,
which became effective on January 1, 2017; the CAOC issued
Live Social Video Provisions
on November 4, 2016; and the MIIT and several other PRC governmental authorities issued a
Notice on Strengthening the Administration of Live Online Social Video Services
on August 1, 2018, providing for the administration and censorship of online interactivelive broadcasting. The Live Social Video Provisions require us to implement procedures to detect and block illegal, fraudulent, politically-sensitive and inappropriate content and activities conducted through our online interactivelive broadcasting platform. Although we have implemented procedures for our online interactivelive broadcasting platform designed to detect and prevent material and activity that we believe could reasonably be considered to be prohibited, it is possible that hosts and users of our platform may distribute content and engage in activities that may be deemed illegal, but that we do not detect and identify as such. Furthermore, we may not be able to immediately block all such content uploads or activities generated by our hosts and users, because there is often a lag between the time our hosts and users upload and stream content on our platform and the time we are able to examine such content. If PRC authorities believe that illegal or inappropriate activities haven been conducted through our online interactivelive broadcasting platform, or if there is negative media coverage concerning our platform, PRC government authorities may hold us liable for
non-compliance
and subject us to administrative penalties or other sanctions, which could cause our business to suffer or have an adverse effect on our user base. See “Government“Governmental Regulation and Legal Uncertainties—Specific Statutes and Regulations—Regulation of the Provision of Internet Content—Online Cultural Products.”
Regulations relating to Offshore investment activities by PRC residents may limit our ability to acquire PRC companies and could adversely affect our business.
In July 2014, the State Administration of Foreign Exchange (the “SAFE”) promulgated Circular 37, which replaced Circular 75, promulgated by the SAFE in October 2005. Circular 37 requires PRC residents, including PRC institutions and individuals, to register with the local SAFE branch in connection with their direct establishment or indirect control of an Offshore entity, referred to in Circular 37 as a “special purpose vehicle,” for the purpose of holding domestic or Offshore assets or interests. PRC residents must also file amendments to their registrations in the event of any significant changes with respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event. In February 2015, the SAFE promulgated the Circular for Further Simplifying and Improving Policies of Foreign Exchange Administration Applicable to Direct Investment, which provides that effective June 2015 designated local banks are delegated authority under Circular 37 to review and process PRC residents’ applications for their initial foreign exchange registrations or amendments to their registrations in connection with their overseas direct investments. Under these regulations, PRC residents’ failure to comply with specified registration procedures may result in restrictions being imposed on the foreign exchange activities of the relevant PRC entity, including the payment of dividends and other distributions to its Offshore parent, as well as restrictions on capital inflows from the Offshore entity to the PRC entity, including restrictions on the ability to contribute additional capital to the PRC entity.
It is possible that some or all of our shareholders who are PRC residents will not comply with all the requirements required by Circular 37 or related rules. Any future failure by any of our shareholders who is a PRC resident, or controlled by a PRC resident, to comply with relevant requirements under these regulations could subject us to fines or legal sanctions imposed by the PRC government, including restrictions on our subsidiaries’ ability to pay dividends or make distributions to us and our ability to increase our investment in these subsidiaries and restrict our cross-border investment activities, which could in turn limit our ability to distribute dividends to holders of our ordinary shares and ADSs.
 
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PRC regulatory requirements with respect to transfers by offshore holding companies, such as us, to their PRC subsidiaries and VIEs that they consolidate and PRC governmental control of currency conversion may limit or delay our ability to transfer funds to our PRC subsidiaries and the VIEs we consolidate, which could have an adverse effect on our ability to fund and expand our business.
As a holding company incorporated in the Cayman Islands, we will need to comply with applicable PRC laws and regulations in order to transfer funds to our PRC subsidiaries, which are treated as foreign-invested enterprises (“FIEs”), or to the VIEs in China that we consolidate. If we transfer funds to any of our PRC subsidiaries by way of increasing their registered capital, we will need to make a capital contribution to such PRC subsidiaries and convert the contributed amount from U.S. dollars or another foreign currency into RMB, and will need to report any such increase to the MOFCOM or one of its local branches, the SAFE or one of its local branches, or an authorized bank. If we transfer funds to our PRC subsidiaries or the VIEs through loans, under current PRC law we will also need to register such loans with the SAFE or one of its local branches, and the amount that we may convert into RMB and loan to one of these entities will be limited by applicable SAFE regulations, in the case of a loan to one of our PRC subsidiaries, to the greater of (i) the difference between the subsidiary’s approved total investment and the subsidiary’s total registered capital and (ii) two times the PRC subsidiary’s net assets and, in the case of one of the VIEs that we consolidate, to two times the VIE’s net assets. The need to comply with such requirements could prevent us from making timely fund transfers to our PRC subsidiaries and, in the event we wish to make such transfers through loans to our PRC subsidiaries or the VIEs, will limit the amounts that we may transfer, which could limit our ability to fund or expand our business.
SAFE promulgated the
Circular on Reforming Management of the Settlement of Foreign Exchange Capital of Foreign-Invested Enterprises
(“Circular 19”), which became effective on June 1, 2015, and the
Circular on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts
(“Circular 16”), which took effect on June 9, 2016. Circular 19 and Circular 16 replaced previous regulations limiting an FIE’s use of its
RMB-settled
registered capital. Circular 19 and Circular 16 provide, among other restrictions, that an FIE may use its RMB funds converted from foreign currencies through capital contributions by or loans from its overseas investor(s) only for purposes within the FIE’s approved business scope, and that violations of the regulations can result in severe penalties, including large fines. These regulations may limit our ability to transfer and use our overseas funds through capital contributions or loans to our PRC subsidiaries and the VIEs to invest in or acquire other businesses, or establish additional VIEs.
We may be subject to fines and legal sanctions if we or our employees who are PRC citizens fail to comply with PRC regulations relating to employee share options.
Under the
Administration Measures on Individual Foreign Exchange Control
issued by the People’s Bank of China (the “PBOC”) and the related Implementation Rules issued by the SAFE, all foreign exchange transactions involving an employee share incentive plan, share option plan or similar plan participated in by PRC citizens may be conducted only with the approval of the SAFE. Under the
Notice of Issues Related to the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Listed Company
(“Offshore Share Incentives Rule”), issued by the SAFE on February 15, 2012, PRC citizens who are granted share options, restricted share units or restricted shares by an overseas publicly listed company are required to register with the SAFE or its authorized branch and comply with a series of other requirements. The Offshore Share Incentives Rule also provides procedures for registration of incentive plans, the opening and use of special accounts for the purpose of participation in incentive plans, and the remittance of funds for exercising options and gains realized from such exercises and sales of such options or the underlying shares, both outside and inside the PRC. We, and any of our PRC employees or members of our Board of Directors who have been granted share options, restricted share units or restricted shares, are subject to the
Administration Measures on Individual Foreign Exchange Control
, the related Implementation Rules, and the Offshore Share Incentives Rule. Circular 37 was the first regulation to regulate the foreign exchange registration of a
non-listed
special purpose vehicle’s equity incentives granted to PRC residents, there remains uncertainty with respect to its implementation. If we, or any of our PRC employees or members of our Board of Directors who receive or hold options, restricted share units or restricted shares in us or any of our subsidiaries, fail to comply with these registration and other procedural requirements, we may be subject to fines and other legal or administrative sanctions.
If the status of certain of our PRC subsidiaries and VIEs as “High and New Technology Enterprises,” KNSEs, or “Software Enterprises” is revoked or expires, we may have to pay additional taxes or make up any previously unpaid tax and may be subject to a higher tax rate, which would adversely affect our results of operations.
The CIT Law generally imposes a uniform income tax rate of 25% on all enterprises, but grants preferential treatment to HNTEs, pursuant to which HNTEs are instead subject to an income tax rate of 15%, subject to a requirement that they
re-apply
for HNTE status every three years. During this three-year period, an HNTE must conduct a qualification self-review each year to ensure it meets the HNTE criteria, and will be subject to the regular 25% income tax rate for any year in which it does not meet the criteria. The CIT Law and its implementing regulations provide that a “Software Enterprise” can enjoy an income tax exemption for two years beginning with its first profitable year and a 50% reduction to a rate of 12.5% for the subsequent three years. An entity that qualifies as a KNSE can enjoy a further reduced preferential income tax rate of 10%. Enterprises wishing to enjoy the status of Software Enterprises or KNSEs must perform a self-assessment each year to ensure they meet the relevant criteria for qualification. If at any time during the preferential tax treatment years an enterprise uses the preferential CIT rates but the relevant authorities determine that it failed to meet applicable criteria for qualification, the authorities may revoke the enterprise’s Software Enterprise or KNSE status, as applicable.
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There are uncertainties regarding future interpretation and implementation of the CIT Law and its implementing regulations. It is possible that the HNTE, Software Enterprise, and KNSE qualifications of our operating entities currently qualified as such, or their entitlement to an income tax exemption or refund of their VAT, will be challenged by higher level tax authorities and be repealed, or that there will be future implementing regulations that are inconsistent with current interpretation of the CIT Law. For example, in 2016If our subsidiaries and the SAT issued a circular with new criteria for certifying aVIEs that we have consolidated that have qualified as HNTEs, Software Enterprise. Therefore, it is possible that the qualification of oneEnterprises or more of our PRC Subsidiaries or VIEs as a Software Enterprise will be challenged in the future or that such companies will not be able to take any further actions, such as
re-application
for Software Enterprise qualification, to enjoy such preferential tax treatment. If those operating entitiesKNSEs, cannot qualify for such preferential income tax status in the future, our effective income tax rate will be increased significantly and we may have to pay additional income tax to make up the previously unpaid tax, which would reduce our net income.
We may be deemed a PRC resident enterprise under the CIT Law and be subject to PRC taxation on our worldwide income.
The CIT Law provides that enterprises established outside of China whose “de facto management bodies” are located within China are considered “resident enterprises” and are generally subject to the uniform 25% enterprise income tax rate on their worldwide income (including dividend income received from subsidiaries). Under
the Implementing Regulations for the Corporate Income Tax Law
, “de facto management body” is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and treasury, and acquisition and disposition of properties and other assets of an enterprise. Since substantially all of our operational management is currently based in the PRC, it is unclear whether PRC tax authorities would require (or permit) us to be treated as a
PRC-resident
enterprise. If we are treated as a resident enterprise for PRC tax purposes, we will be subject to PRC tax on our worldwide income at the 25% uniform tax rate, which could have an impact on our effective tax rate and an adverse effect on our net income and the results of operations, although dividends distributed from our PRC Subsidiaries to us could be exempted from Chinese dividend withholding tax, since such income is exempted under the CIT Law for
PRC-resident
recipients.
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Dividends payable by us to our foreign investors and profits on the sale of our shares may be subject to tax under PRC tax laws.
Under the
Implementing Regulations for the Corporate Income Tax Law
, PRC income tax at the rate of 10% is applicable to dividends payable to investors that are
“non-resident
enterprises,” not having an establishment or place of business in the PRC, or which do have such establishment or place of business but the relevant income is not effectively connected with the establishment or place of business, to the extent that such dividends have their sources within the PRC. Similarly, any profits realized through the transfer of shares by such investors are also subject to 10% PRC income tax if such profits are regarded as income derived from sources within the PRC. It is unclear whether dividends we pay with respect to our share, or the profits you may realize from the transfer of our shares, would be treated as income derived from sources within the PRC and be subject to PRC tax. If we are required under the
Implementing Regulations for the Corporate Income Tax Law
to withhold PRC income tax on dividends payable to our
non-PRC
investors that are
“non-resident
enterprises,” or if you are required to pay PRC income tax on the transfer of our shares, the value of your investment in our shares may be materially and adversely affected.
Restrictions on currency exchange may limit our ability to use our revenues effectively.
Substantially all of our revenues and operating expenses are denominated in RMB. The RMB is not freely tradable in “capital account” transactions, which include foreign direct investment. Foreign exchange transactions classified as capital account transactions are subject to limitations and require approval from the SAFE. This could affect our China-based subsidiaries’ ability to obtain foreign exchange through debt or equity financing, including by means of loans or capital contributions from us.
Further, although the RMB is at present freely convertible in “current account” transactions, which include dividends, and trade and service-related foreign exchange transactions, and our China-based subsidiaries may purchase and retain foreign exchange for settlement of such transactions, including payment of dividends, without the approval of the SAFE, the relevant PRC governmental authorities may limit or eliminate our ability to purchase and retain foreign currencies in the future.
Since a significant amount of our future revenues are likely to be in the form of RMB, these existing restrictions, and any future restrictions, on currency exchange may limit our ability to use revenues generated in RMB to fund our business activities outside of China, or to make expenditures denominated in foreign currencies.
We may suffer currency exchange risks if the RMB depreciates or appreciates relative to the U.S. dollar.
Our reporting currency is the U.S. dollar. However, substantially all of our revenues are denominated in RMB. In July 2005, China reformed its exchange rate regime by establishing a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies. The RMB is no longer pegged to the U.S. dollar and the exchange rate will have some flexibility. Hence, considering the floating exchange rate regime, if the RMB depreciates relative to the U.S. dollar, our revenues as expressed in our U.S. dollar financial statements will decline in value. Conversely, if the RMB appreciates relative to the U.S. dollar, our revenues as expressed in our U.S. dollar financial statements will appreciate in value, while not illustrating fully the relative strength of our operating results following such appreciation compared to prior periods. Also, we currently have outstanding loans from overseas banks that are denominated in U.S. dollars. To repay these loans, we will need to first convert our cash denominated in RMB into U.S. dollars. If the RMB depreciates relative to the U.S. dollar, we will have to use a larger amount of cash in RMB for any such loan repayment.
Between 2007 and 2014, the PBOC frequently announced that it was the PBOC’s policy to expand the maximum daily floating range of RMB trading prices against the U.S. dollar in the inter-bank spot foreign exchange market. Between June 19, 2010 and February 2014, when the center point of the RMB’s official trading band hit 6.1146, the RMB appreciated by more than 11.7%.
However, between 2014 and 2016 the RMB depreciated significantly. The center point36
Table of the currency’s official trading band was 6.5486 in January 2016, and was 6.9189 in December 2016, which contributed to a decline in our revenues reported in U.S. dollars. Contents
In 2018 and 2019, the RMB exchange rate against the U.S. dollar again depreciated significantly, mainly due to changes in political and economic conditions, including trade friction between China and the U.S. The center-point of the currency’s official trading band was 6.4395 and 6.7953, respectively, in January 2018 and 2019, and was 6.8844 and 7.0129, respectively, in December 2018 and 2019, which led to a decline in our revenues reported in U.S. dollars and an increase in the amount of cash in RMB necessary to meet our repayment obligations for U.S. dollar-denominated Offshore loans in each such year. On the other hand, the center point of the currency’s official trading band was 6.9140 in January 2020, and was 6.5415 in December 2020, representing appreciation of approximately 5.4% in 2020. The center point of the currency’s official trading band was 6.4790 in January 2021, and was 6.3699 in December 2021, representing appreciation of approximately 1.7% in 2021.
There are limited hedging transactions available in China to reduce our exposure to exchange rate fluctuations. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to successfully hedge our exposure, if at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into U.S. dollars.
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Risks Related to Our Ordinary Shares and ADSs
The U.S. Public Company Accounting Oversight Board (the “PCAOB”) has been unable to conduct inspections of our independent auditor’s work in relation to its audits of our financial statements, and the inability of the PCAOB to conduct such inspections deprives investors in our ADSs of the benefits of such inspections.
Starting in 2011, we and the PRC affiliates of the “big four” accounting firms, including our independent registered public accounting firm, have been affected by a conflict between U.S. and PRC law. As a result, the PCAOB has not been able to conduct to its satisfaction inspections of independent registered public accounting firms based in Mainland China, including our independent registered public accounting firm, and we and investors in our ADSs have been deprived of the potential benefits of such inspections. The lack of such inspections could also cause investors and potential investors in our ADSs to lose confidence in our audit procedures, our reported financial information, and the quality of our financial statements.
The U.S. Holding Foreign Companies Accountable Act, which was signed into law by the U.S. President in December 2020, could result in the prohibition of the trading of our ADSs on NASDAQ, any other U.S. securities exchange, or in the U.S.
over-the-counter
markets.
On December 18, 2020, the U.S. President signed the Holding Foreign Companies Accountable Act (the “HFCAA”), which, among other things, directs the SEC to prohibit trading on U.S. stock exchanges and in the U.S.
over-the-counter
markets the securities of foreign-based companies if their financial statements are audited by accounting firms that the PCAOB determines it has been unable to inspect or investigate completely for a period of three consecutive audit years, because of a position taken by the authorities in a foreign jurisdiction in which the accounting firms are based (each accounting firm so determined by the PCAOB, a “PCAOB-Identified Firm”). On November 5, 2021, the SEC approved a proposed rule of the PCAOB that provides a framework for the PCAOB to determine, pursuant to the HFCAA, whether an accounting firm is a PCAOB-Identified Firm. On December 2, 2021, the SEC adopted amendments (the “SEC Final HFCAA Amendments”) to finalize rules providing, among other things, procedures to identify issuers that filed their annual reports with audit reports issued by PCAOB-Identified Firms (each issuer so identified by the SEC, a “Commission-Identified Issuer”) and prohibiting the trading of the securities of Commission-Identified Issuers if they are identified as such by the SEC for three consecutive years. On December 16, 2021, the PCAOB reported to the SEC that the PCAOB had determined that it is unable to inspect or investigate completely PCAOB-registered public accounting firms headquartered in Mainland China of the PRC and in Hong Kong, because of a position taken by the authorities in Mainland China and in Hong Kong, and identified the accounting firms that are subject to the PCAOB’s determination, which include our independent registered public accounting firm. If we are conclusively identified by the SEC as a Commission-Identified Issuer, which identification is highly likely in view of the fact that our registered public accounting firm has been identified by the PCAOB as a PCAOB-Identified Firm and we continue as such for a period of three consecutive years (the
“Non-Inspection
Years”), the HFCAA, the SEC Final HFCAA Amendments, and any other rules promulgated by the SEC pursuant to the statute, could require that the SEC prohibit trading of our ADSs and Ordinary Shares on NASDAQ, any other U.S. securities exchange, and in the
over-the-counter
market as early as 2024, which would substantially reduce or effectively terminate the trading of our ADSs in the United States.
In addition, the U.S. Senate has passed the Accelerating Holding Foreign Companies Accountable Act (the “AHFCAA”), which, if also adopted by the U.S. House of Representatives and signed into law by the U.S. President, would decrease the specified number of
Non-Inspection
Years under the HFCAA from three consecutive years to two consecutive years, and thus could require that the SEC prohibit trading of our ADSs and Ordinary Shares in 2023. The U.S. House of Representatives recently included, in a much larger bill that includes various items unrelated to the HFCAA or the U.S. Senate’s AHFCAA bill, but did not adopt the U.S. Senate’s AHFCAA as a stand-alone bill. Accordingly, it is unclear when, if ever, the AHFCAA will become law. Nevertheless, we urge investors in our ADSs to weigh carefully the possibility that the provisions of both the U.S. Senate’s AHFCAA, and the identical language included in the U.S. House of Representatives’ larger bill, will become law in the near future, which could result in trading of our ADSs and Ordinary Shares being prohibited in the U.S. beginning in the early part of 2023.
In addition, the provisions of the HFCAA, and of the AHFCAA if it becomes law, could cause uncertainty among investors and potential investors in our ADSs, and lead them to lose confidence in our ADSs as an investment. Furthermore, it could be difficult for us to terminate the registration of our ADSs and ordinary shares under the Exchange Act even if a trading prohibition is imposed by the SEC pursuant to the HFCAA (and the AHFCAA if it becomes law), because the HFCAA does not provide for such termination, and the general requirements for terminating such registration are stringent and difficult to meet. This would mean that we would continue to be subject to the time and expense of complying with the periodic reporting and other requirements under the Exchange Act, even though the holders of our ADSs would not be able to trade those ADSs in the U.S. public securities markets.
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We are a Cayman Islands exempted company and, because judicial precedent regarding the rights of shareholders is more limited under Cayman Islands law than that under U.S. law, our shareholders may have less protection for their shareholder rights than they would under U.S. law.
Our corporate affairs are governed by our Memorandum and Articles of Association, the Companies Act (as amended from time to time, currently the Companies Act (2021(2022 Revision)) of the Cayman Islands and the common law of the Cayman Islands. The rights of shareholders to take action against our directors, actions by minority shareholders, and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, which has persuasive, and in some cases binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States, such as the State of Delaware, where many United States-based corporations are organized. In particular, the Cayman Islands has a less developed body of securities laws as compared to the United States, and provides significantly less protection to investors. In addition, shareholders in Cayman Islands companies may not have standing to initiate a shareholder derivative action in U.S. federal courts. As a result, our public shareholders may have more difficulty in protecting their interests through actions against us, our management, our directors or our major shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States such as Delaware.
It may be difficult to enforce any civil judgments against us or our Board of Directors or officers, because most of our operating and/or fixed assets are located outside the United States.
We are incorporated in the Cayman Islands, all of our assets are located outside the United States, and a substantial portion of our operations are conducted in the PRC. In addition, most of our directors and executive officers are nationals and residents of countries other than the United States (primarily the PRC or Hong Kong) and most, if not all, of the assets of these persons are located outside the United States. As a result, it may be difficult for holders of our ADSs to effect service of process within the United States upon these persons. It may also be difficult for holders of our ADSs to enforce in Cayman Islands courts or PRC courts judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws or of the securities laws of any state of the United States against us and our officers and directors.
The trading prices of our ADSs and of the common stock of our predecessor Sohu.com Inc. have been volatile, and the trading price of our ADSs will likely continue to be volatile. The price of our ADSs may fluctuate significantly, which may make it difficult for shareholders to sell our ADSs when desired or at attractive prices.
Our ADSs, each representing one ordinary share, have traded on the NASDAQ Global Select Market in place of the common stock of Sohu.com Inc. since the dissolution of Sohu.com Inc. on May 31, 2018. During 2017 the trading price of Sohu.com Inc.’s common stock ranged from a low of $34.59 per share to a high of $70.86 per share, and during 2018, the trading price per share of Sohu.com Inc.’s common stock, until May 31, 2018, and the trading price of our ADSs, after May 31, 2018, ranged from a low of $15.89 per ADS to a high of $47.98 per ADS. During 2019, the trading price of our ADSs ranged from a low of $8.79 to a high of $22.71. During 2020, the trading price of our ADSs ranged from a low of $5.41 to a high of $25.71. During 2021, the trading price of our ADSs ranged from a low of $14.64 to a high of $24.99. On February 26, 2021,March 11, 2022, the closing price of our ADSs was $18.26$14.90 per ADS.
In addition, stock exchanges, including the NASDAQ Global Select Market, and the NYSE have from time to time experienced significant price and volume fluctuations that have affected the market prices for the securities of technology companies, and particularly Internet-related companies. For example, the actual and perceived worldwide economic effect of the
COVID-19
pandemic caused a significant drop in prices on global stock markets in the spring of 2020, and appeared to have similarly had an adverse impact on the market price of our ADSs at that time.
The price for our ADSs may fluctuate in response to a number of events and factors, such as quarterly variations in operating results, announcements of technological innovations or new products and media properties by us or our competitors, changes in financial estimates and recommendations by securities analysts, the operating and stock price performance of other companies that investors may deem comparable to us, and news reports relating to trends in our markets or general economic conditions, and the occurrence of an event that causes the Tencent/Sohu Sogou Share Purchase Agreement and/or the Sogou Merger Agreement to be terminated without the Tencent/Sohu Sogou Share Purchase and the Sogou Merger being completed.conditions. Further, volatility or a lack of positive performance in our ADS price may adversely affect our ability to retain key employees, all of whom have been granted share options or other share incentive awards.
It is possible that Sogou’s currently pending going-private transaction with Tencent will not be completed, which could have an adverse effect on the market price of Sohu’s ADSs and Sogou’s ADSs.
It is possible that the Tencent/Sohu Sogou Share Purchase and the Sogou Merger will not occur as planned if events arise that result in the termination of the Tencent/Sohu Sogou Share Purchase Agreement and the Sogou Merger Agreement, or if one or more of the various closing conditions to the Tencent/Sohu Sogou Share Purchase and the Sohu Merger, including anti-trust clearance of the Tencent/Sohu Sogou Share Purchase under PRC law, are not satisfied or waived. We have incurred, and will continue to incur, significant costs, expenses, and fees for professional services and other transaction costs in connection with the Tencent/Sohu Sogou Share Purchase and the Sogou Merger. All the fees and costs in connection with the Tencent/Sohu Sogou Share Purchase and the Sogou Merger will be payable by us and/or Sogou, even if the transactions are not completed. If the Tencent/Sohu Sogou Share Purchase and the Sogou Merger are not completed, we will not receive the proposed purchase price from the Tencent/Sohu Sogou Share Purchase and the prices of our ADSs and Sogou’s ADSs could decline.
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Holders of our ADSs may be subject to limitations on transfer of their ADSs.
Our ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems it expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deem it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the Deposit Agreement governing our ADSs (the “Deposit Agreement”), which was filed as an exhibit to our Registration Statement on Form
F-4
(File
No. 333-224069)
filed with the Securities and Exchange Commission (the “SEC”) on April 19, 2018 and is filed as an exhibit to this annual report, or for any other reason.
Holders of ADSs have limited voting rights and may not receive voting materials in time to be able to exercise their right to vote.
Except as described in this annual report and in the Deposit Agreement, holders of our ADSs will not be able to exercise voting rights attaching to the shares represented by our ADSs on an individual basis. Holders of our ADSs may instruct the depositary how to exercise the voting rights attaching to the shares represented by the ADSs. Holders of our ADSs may not receive voting materials in time to instruct the depositary to vote, and it is possible that direct holders of ADSs, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote.
ADS holders’ right to participate in any future rights offerings may be limited, which may cause dilution to their holdings and ADS holders may not receive cash dividends if it is impractical to make them available to such holders.
We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights available to ADS holders in the United States unless we register the securities to which the rights relate under the Securities Act of 1933 (the “Securities Act”), or an exemption from registration requirements is available. Also, under the Deposit Agreement, the depositary bank will not make rights available to ADS holders unless the distribution to ADS holders of both the rights and any related securities are either registered under the Securities Act or exempted from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective. Moreover, we may not be able to establish an exemption from registration under the Securities Act. Accordingly, holders of our ADSs may be unable to participate in our rights offerings and may experience dilution in their holdings.
In addition, the depositary of our ADSs has agreed to pay to ADS holders the cash dividends or other distributions it or the custodian receives on our ordinary shares or other deposited securities after deducting its fees and expenses. ADS holders will receive these distributions in proportion to the number of ordinary shares such holders’ ADSs represent. However, the depositary may, at its discretion, decide that it is inequitable or impractical to make a distribution available to any holders of ADSs. For example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributions may be less than the cost of mailing them, or that the distribution requires certain governmental approval, such as requirement for registration or approval for currency conversion. In these cases, the depositary may decide not to distribute that property and ADSs holders will not receive that distribution.
ADS holders will experience dilution if additional share options are granted and exercised.
As of December 31, 2020,2021, there were no outstanding options for the purchase of our ordinary shares, restricted shares or other share-based awards. However, ADS holders will experience dilution to the extent that additional ordinary shares are issued upon exercise or settlement of options, restricted shares or other share-based awards that we may grant from time to time.
We may need additional capital and may sell additional ADSs or other equity securities or incur indebtedness, which could result in additional dilution to our shareholders or increase our debt service obligations.
We may require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our cash resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity securities or equity-linked debt securities could result in additional dilution to our shareholders. The incurrence of indebtedness would result in debt service obligations and could result in operating and financing covenants that would restrict our operations. We cannot assure yoube certain that financing will be available in amounts or on terms acceptable to us, if at all.
Substantial future sales of our ADSs or ordinary shares in the public market, or the perception that these sales could occur, could cause the price of our ADSs to decline.
Additional sales of our ADSs or ordinary shares in the public market, or the perception that these sales could occur, could cause the market price of our ADSs to decline. As of December 31, 2020,2021, there were 39,306,32338,220,845 of our ordinary shares outstanding, and there were no outstanding options for the purchase of our ordinary shares or other share-based awards. However, we may grant or sell additional options, restricted shares or other share-based awards in the future under our share incentive plan to members of our management, our employees and other persons, the settlement and sale of which would dilute our outstanding shares, which could drive down the price of our ADSs.
 
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We believe that we may be classified as a passive foreign investment company (a “PFIC”), for the 20202021 taxable year, which would likely result in adverse United States federal income tax consequences to U.S. holders of our ADSs or ordinary shares.
We believe that we may have been classified as a PFIC for United States federal income tax purposes for our taxable year ended November 30, 2020.2021. There can be no assurance that we will not continue to be classified as a PFIC in the current taxable year or in any future taxable year. The determination of whether we would continue to be treated as a PFIC is based in significant part on our operations and the composition of our earnings and assets (including goodwill) for a given taxable year, including the valuation of our assets based on the market price of our ADSs.
If we are treated as a PFIC for any taxable year during which a U.S. holder (as defined under “Taxation - United States Federal Income Taxation - Passive Foreign Investment Company”) holds an ADS or an ordinary share, certain adverse United States federal income tax consequences likely would apply to such U.S. holder. See “Taxation-United States Federal Income Taxation - Passive Foreign Investment Company” in Item 10 of this annual report.
If we are a PFIC, a U.S. holder of our ADSs or ordinary shares could make a variety of elections that might alleviate certain of the tax consequences referred to above, and certain of these, certain elections may be made retroactively. However, it is expected that the conditions necessary for making certain of such elections will not apply in the case of our ADSs or ordinary shares. See “Taxation - United States Federal Income Taxation - Passive Foreign Investment Company” in Item 10 of this annual report.
U.S. holders and prospective holders of our ADSs are urged to consult their own tax advisors regarding the application of the PFIC rules to an investment in our ADSs or ordinary shares.
Press reports in 2011 concerning possible increased scrutiny by Chinese authorities of the VIE structure used by us and various other Chinese companies publicly-traded in the United States appear to have created concern at the time among investors and to have caused the price of the ADSs of various Chinese companies, including us, that are publicly traded in the United States to drop, and similar reports in the future could have a similar adverse effect on the price of our ADSs.
In 2011 various prominent western news outlets reported that the MOFCOM and the China Securities Regulatory Commission (the “CSRC”),CSRC, among other Chinese regulatory authorities, might be considering increased scrutiny or enhanced regulation of Chinese companies that use VIE structures, such as we do, as a means of complying with Chinese laws restricting foreign ownership of certain businesses in China, including online game businesses such as ours. Some of such news reports also sought to draw a connection between accounting issues at certain Chinese companies, which were widely reported at the time, and the use of VIE structures. Such news reports appear to have had the effect of causing significant drops at the time in the market prices of the shares of many Chinese companies, including us. It is possibleRecently there has been, and it appears likely that in the future there will continue to be, increased scrutiny or enhanced regulation by Chinese regulatory authorities of Chinese companies, including us, that use VIE structures. See “If the PRC government determines that the VIE structure for operating our business does not comply with applicable PRC government restrictions on foreign investment in telecommunication industry, we could face severe penalties.” In addition, while we are not aware of any causal connection between the reported accounting scandals and the use of VIE structures, it is possible that holders or potential purchasers of our ADSs will believe that such a connection exists. Any of such circumstances could lead to further loss of investor confidence in Chinese companies and cause fluctuations in the market prices of our ADSs and, if such prices were to drop sharply, could subject us to shareholder litigation, which could cause the price for our shares to drop further.
A small group of our existing shareholders, whose interests may differ from other shareholders, hold a significant percentage of our outstanding shares.
Dr. Charles Zhang, our Chairman and Chief Executive Officer, is our largest shareholder and beneficially ownsowned approximately 26.1%30.3% of our outstanding ordinary shares and is our largest shareholder.as of March 11, 2022. Our executive officers and members of our Board of Directors as a group, including Dr. Zhang, beneficially ownowned approximately 26.7%30.8% of our outstanding ordinary shares.shares as of March 11, 2022. Accordingly, these shareholders will have significant influence in determining the outcome of any corporate transaction or other matters submitted to the shareholders for approval, including mergers, consolidations, the sale of all or substantially all of our assets, election of directors and other significant corporate actions. They will also have significant influence in preventing or causing a change in control. In addition, without the consent of these shareholders, we may be prevented from entering into transactions that could be beneficial to us. The interests of these shareholders may differ from the interests of the other shareholders.
Certain provisions of our Memorandum and Articles of Association, Cayman Islands law regarding mergers and similar arrangements, and our Shareholders’ Rights Agreement could delay or deter a change in control.
Some provisions of our Memorandum and Articles of Association may make it more difficult to acquire our company or effect a change in control of our company, even if an acquisition or change in control would be in the interest of our shareholders or if an acquisition or change in control would provide our shareholders or holders of our ADSs with a premium for their shares over then current market prices. For example, our Memorandum and Articles of Association provides for the division of our Board of Directors into two classes with staggered
two-year
terms and provides that shareholders have no right to take action by written consent and may not call extraordinary general meeting of shareholders. In addition, under Cayman Islands law, a merger of our company with another company would require approval of the holderholders of not less than
two-thirds
of our outstanding ordinary shares.shares that are present and voting at the requisite shareholders meeting convened to consider the merger. Each of these provisions may make it more difficult for a third party to gain control of our board in connection with, or obtain any necessary shareholder approval for, a proposed acquisition or change in control.
 
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In addition, in January 2019 we entered into a Shareholders’ Rights Agreement with The Bank of New York Mellon, as Rights Agent, pursuant to which if a person or group acquires more than 15% or more of our outstanding ordinary shares (including ordinary shares represented by our ADSs), except as specifically permitted under the agreement, all our other shareholders and holders of our ADSs would have the right to purchase securities from us at a substantial discount to those securities’ fair market value, thus causing substantial dilution to the holdings of the person or group which acquires more than 15%. The Shareholders’ Rights Agreement may inhibit a change in control and, therefore, could adversely affect our shareholders’ ability to realize a premium over the then-prevailing market price for our ADSs in connection with such a transaction.
The power of our Board of Directors to designate and issue preferred shares could have an adverse effect on holders of our ordinary shares and ADSs.
Our Memorandum and Articles of Association authorizes our Board of Directors to designate and issue one or more series of preferred shares, having rights and preferences as the board may determine, and any such designations and issuances could have an adverse effect on the rights of holders of our ordinary shares and our ADSs.
The U.S. Holding Foreign Companies Accountable Act, which was signed into law by the U.S. President in December 2020, could result in the delisting of our ADSs from NASDAQ or of Sogou’s ADSs from the NYSE and the prohibition of their trading in the U.S.
over-the-counter
markets.
Starting in 2011, we and the PRC affiliates of the “big four” accounting firms, including our independent registered public accounting firm, have been affected by a conflict between U.S. and PRC law. Specifically, for certain U.S.-listed companies operating and audited in mainland China, the SEC and the U.S. Public Company Accounting Oversight Board (the “PCAOB”) sought to obtain from the PRC big four affiliate firms access to their audit work papers and related documents. However, the firms were advised and directed that under PRC law they could not respond directly to the U.S. regulators on those requests, and that requests by foreign regulators for access to such papers in China had to be channeled through the CSRC. On December 18, 2020, the U.S. President signed the Holding Foreign Companies Accountable Act, which, among other things, directs the SEC to prohibit trading on U.S. stock exchanges and in the U.S.
over-the-counter
markets the securities of foreign-based companies if their financial statements are audited by accounting firms that the PCAOB determines it has been unable to inspect or investigate completely for a period of three consecutive audit years, because of a position taken by the authorities in a foreign jurisdiction in which the accounting firms are based. Also on December 18, 2020 the Chair of the SEC, in response to the enactment of the Holding Foreign Companies Accountable Act, reported in a published statement that he had directed the staff of the SEC to consider providing a single consolidated proposal for the SEC’s consideration on issues related to the PCAOB’s access to audit work papers, exchange listing standards, and trading prohibitions. If the PCAOB determines that it has been unable to inspect or investigate completely our independent registered public accounting firm for a period of three consecutive audit years, the Holding Foreign Companies Accounting Act, together with any rules promulgated by the SEC pursuant to the statute, could require that our ADSs and Ordinary Shares be delisted from NASDAQ and not traded in the
over-the-counter
market, which would substantially reduce or effectively terminate the trading of our ADSs in the United States. In addition, the provisions of the Holding Foreign Companies Accounting Act could cause investors and potential investors in our ADSs to lose confidence in our audit procedures and reported financial information and the quality of our financial statements.
Proceedings instituted by the SEC against PRC affiliates of the “big four” could also result in the delisting of our ADSs from NASDAQ or of Sogou’s ADSs from the NYSE and the prohibition of their trading in the U.S.
over-the-counter
markets
In late 2012, the SEC commenced administrative proceedings under Rule 102(e) of its Rules of Practice and under the Sarbanes-Oxley Act of 2002 against the PRC big four affiliate accounting firms, including our independent registered public accounting firm. In February 2015, the firms reached a settlement with the SEC pursuant to which the SEC accepted that future requests by the SEC for the production of documents would be made to the CSRC. The firms were to receive matching requests, and were required to abide by a detailed set of procedures with respect to such requests, which in substance required them to facilitate production of the requested documents via the CSRC. If the firms failed to meet specified criteria during a period of four years starting from the settlement date, the SEC retained the authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure. Under the terms of the settlement, the underlying proceedings against the four China-based accounting firms were deemed dismissed with prejudice four years after entry of the settlement. The four-year mark occurred on February 6, 2019. However, we cannot predict if the SEC will further challenge the four China-based accounting firms’ compliance with U.S. law. If such a further challenge resulted in our independent registered public accounting firm being denied, even temporarily, the ability to practice before the SEC, and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in compliance with the requirements of the Securities Exchange Act of 1934 (the “Exchange Act”). Such a determination could lead to the delisting of our ADSs and Ordinary Shares from NASDAQ and/or termination of their registration under the Exchange Act. In addition, news about any such future proceedings against these PRC big four affiliate accounting firms could cause investor uncertainty regarding China-based, U.S.-listed companies and the market price of our ADSs could be adversely affected.
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Risks Related to Our Financing Activities
Sogou’s status as a publicly-traded company that is controlled, but less than wholly-owned, by us could have an adverse effect on Sohu
.
Sogou’s American depositary shares (“Sogou ADSs”) are listed and traded on the New York Stock Exchange. Given that Sogou is not a wholly-owned subsidiary of Sohu, it is possible that Sohu’s and Sogou’s interests could diverge in the future, as we may need to consider the interests of shareholders of Sogou other than Sohu. If Sogou’s interests differ from, or are contrary to, our interests, our business operations may be adversely affected, and Sohu may have disagreements with Sogou on certain matters that could also have an adverse effect on our business. Also see “Item 4. Information on the Company-History and Development of the Company” for a description of the currently pending going-private transaction with respect to Sogou.
If we default on loans that we have taken out to fund our acquisition of the
non-controlling
interests in our subsidiary Changyou, or if Changyou defaults on its existing loans, we could lose valuable assets that we have pledged to secure the loans, which include a building in Beijing, as well as other valuable assets.
In order to fund our acquisition of the
non-controlling
interests in our subsidiary Changyou, we entered into loan arrangements with Industrial and Commercial Bank of China Limited (“ICBC”) and Industrial and Commercial Bank of China Limited, Tokyo Branch (“ICBC Tokyo”), secured by pledges of deposit certificates evidencing the RMB equivalent to the principal amount of the loan outstanding at an exchange rate of RMB7.20 to $1.00.
In addition, Changyou entered into a loan arrangement with China Merchants Bank (“CMB”) secured by (i) a mortgage on a building owned by us and (ii) pledges by Changyou of deposit certificates evidencing RMB deposits with CMB at least equivalent to the principal amount of the loan outstanding from time to time.
If we or Changyou were to default under any of these loan arrangements, the affected lender or lenders would be entitled, among other remedies, to seize the corresponding pledged assets, all of which have significant value, and could potentially also seize other valuable assets of ours, to cover any shortfalls in amounts due under the loans. See Note 10 “Fair Value Measurements - Short Term Receivables and Payables - Short Term Bank Loans” to our audited consolidated financial statements, which begin on page
F-1
of this report.
Risks Related to Changyou.com Limited
Risks Related to Changyou’s Business
Overall Risks
The markets for Changyou’s products and services are evolving rapidly and significantly, which makes evaluating its business and prospects difficult.
Changyou’s two primary businesses are the online game business and the platform channel business, which consists primarily of online advertising and mobile game distribution services. Changyou’s businesses and the industries in which it operates are evolving rapidly. Changyou was incorporated on August 6, 2007 in the Cayman Islands and began its online game business as an indirect wholly-owned subsidiary of Sohu.com Inc. In 2007 Sohu transferred all of its PC game business to Changyou. In 2011 Changyou acquired 7Road and began generating Web game revenues. In 2012, Changyou began to develop and operate mobile games, but did not begin to generate any significant revenues from mobile games until late in 2014 when Changyou launched TLBB 3D; and in May 2017, Changyou launched another
in-house
developed mobile game, Legacy TLBB Mobile. In August 2015, as revenues from Changyou’s Web games Wartune and DDTank had begun to decline, Changyou sold 7Road’s operating entity, and as a result Changyou has no remaining significant Web games in operation or development. In 2011, Changyou began to expand into the platform channel business with its acquisition from Sohu of the 17173.com Website, which operates Changyou’s online advertising business. In December 2013, Changyou acquired RaidCall, which operated free social communication software; and in July 2014 Changyou acquired a majority interest in MoboTap Inc. (“MoboTap”), which operated the Dolphin Browser. However, Changyou’s acquisitions of RaidCall and MoboTap were not successful, and Changyou sold MoboTap in 2018 and ceased operating the RaidCall business in March 2019. In 2011, Changyou acquired the entities that operated its cinema advertising business. Although Changyou’s cinema advertising business initially experienced growth, it generated significant net losses in each of 2017, 2018 and 2019, and as a result Changyou discontinued the business in August 2019.
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Changyou’s past successes in its online games business with PC games may not provide a meaningful basis to evaluate its current business and prospects, as a substantial number of game players have migrated from personal computers to mobile devices to access online games and the relative popularity of PC games continues to decline. In response to such rapid migration, Changyou has devoted and Changyou expects to continue to devote substantial resources to the development of its mobile games as a critical component of its business strategy. However, Changyou’s mobile games strategy has not been proven, and presents very different challenges from those presented in the past by its operation of PC games and Web games. Despite the early success of Changyou’s mobile game TLBB 3D after Changyou introduced it in late 2014 and of Changyou’s mobile game Legacy TLBB Mobile after Changyou launched it in May 2017, the popularity of, and the revenues generated from, TLBB 3D and Legacy TLBB Mobile continued to decline from 2019 through 2020.2020, and were flat in 2021. We cannot be certain that Changyou will be successful in its efforts to launch additional mobile games that generate sufficient revenues and income to sustain or grow Changyou’s mobile game business.
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There are additional risks and uncertainties that may be experienced by companies operating in a rapidly developing and evolving industry. Some of these risks and uncertainties relate to Changyou’s ability to:
 
raise Changyou’s brand recognition and game players’ loyalty;
 
develop, license or operate new games that are appealing to game players; adapt to new trends and game player tastes; meet Changyou’s expected timetables for their launch; and, if they are successful, have acceptably long lifespans and result in an acceptable level of profit for Changyou;
 
successfully adapt to evolving business models, industry trends and market environments by developing and investing in new business strategies, products, services and technologies, including, in particular, virtual reality, or VR, technology, for Changyou’s new games;
 
arrange for its mobile games to be distributed through popular mobile application stores with commercial terms, including revenue-sharing arrangements, that are favorable enough to Changyou and allow it to achieve an acceptable level of profit from the games;
 
integrate new technologies, businesses and personnel of acquired entities, and generate sufficient revenues to offset the costs and expenses of such acquisitions; and
 
maintain or expand Changyou’s marketing efforts to attract more game players to its games and to the game information portal of the 17173.com Website in a rapidly changing and increasingly competitive business environment, and generate sufficient revenues to offset the costs and expenses of such marketing efforts; and reverse the recent decline in Changyou’s revenues from the 17173.com Website, particularly in view of the rapid emergence of mobile games and the decline in the relative popularity of PC games and Web games as users switched to mobile devices.
If Changyou does not adapt its business to address these risks and uncertainties, its ability to continue its past success or to expand its business in the future is likely to be impeded.
Changyou’s business may not succeed in a highly competitive market.
Competition in the online game market in China is becoming increasingly intense. Changyou competes primarily with other online game developers in China, such as Tencent and NetEase, Inc. Many of Changyou’s competitors have, or may over time be able to gain, competitive advantages over Changyou in terms of:
 
greater financial and technical resources;
 
more aggressive and effective strategies for hiring talent for game development, which may make it difficult for Changyou to retain its existing employees and attract new employees, which are necessary for Changyou to be able to grow its business;
 
substantially greater financial resources and more effective methods for acquiring exclusive license rights to the titles, characters, themes and story lines of popular works in order to adapt online games from such works (which has become increasingly important for new online games to be successful);
 
more aggressive and effective marketing strategies for promoting their online games and penetrating the mobile game market; and
 
more capability for developing and releasing new software for mobile devices to attract a growing number of game players that access Internet products and services through mobile devices.
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The 17173.com Website derives revenue primarily from providing online advertising services to advertisers that develop, operate and distribute PC games. As the market demand for PC games continues to decline, the 17173.com Website faces intense competition, particularly from mobile application stores and other Internet platforms through which game players access mobile games, for advertising business targeting online players of mobile games. Changyou competes with other game information portals, such as duowan.com,Duowan.com, operated by YYJOYY Inc., and game.qq.com,Game.sina.com.cn, operated by Tencent,Sina Corporation, and other Internet portals which have, or may over time be able to build, competitive advantages over Changyou in terms of:
 
greater brand recognition among game players and advertising clients;
 
larger user and customer bases;
 
more extensive and well -developed marketing and sales networks;
 
more attractive mobile versions of their game information portals and more extensive mobile game-related products and services, such as mobile game discussion forums, in response to the rapid migration of users of Internet services from PCs to mobile devices such as tablets and mobile phones, and the unique preferences and demands of mobile users and mobile game players; and
 
substantially greater financial and technical resources.
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In order to compete effectively in the PRC, as well as in the worldwide market, Changyou must continue to invest in research and development, to enhance its technology and its existing games, advertising and other services, and to introduce new game products and services in order for it to adapt to industry trends and shifting demands of game players and advertising clients and to remain competitive. If Changyou’s products and services are not responsive to the needs of its game players and advertisers, are not appropriately timed with market opportunities, or are not effectively brought to market, or if its competitors are more successful than Changyou is in developing compelling products or in attracting and retaining game players and advertisers, Changyou may not be able to compete effectively.
Changyou’s business could suffer if Changyou does not successfully manage any future growth.
Changyou experienced a period of rapid growth and expansion through 2013 that placed strain on its management personnel, systems and resources. In addition, to accommodate any future growth, Changyou anticipates that it will need to implement a variety of new and upgraded operational and financial systems, including procedures and controls, and improvement of its accounting and other internal management systems and security systems related to the foregoing, all of which require substantial management efforts and financial resources. Changyou will also need to continue to train, manage and motivate its workforce, and manage its relationships with its third-party operators, distributors and service providers and its game player base. All of these endeavors will require substantial management effort and skills and the incurrence of additional expenditures. Changyou may not be able to efficiently or effectively implement its growth strategies and manage the growth of its operations, and any failure to do so may limit its future growth and hamper its business strategy.
Changyou may not be able to avoid slowing growth or declines in its revenues, or future losses.
Changyou’s revenues grew significantly in a relatively short period of time prior to 2014, but its revenue growth stalled in 2014 and 2015, and its revenues decreased in 2016. Changyou’s revenue increased slightly in 2017, but decreased in 2018. While Changyou’s revenues increased for the years ended December 31, 2019 and 2020 as a result of improved performance of some of its older games and the successful launch of new games, Changyou is not likely to experience rates of revenue growth in the future similar to those that it experienced prior to 2014, in 2019, and in 2020. Changyou’s net income attributable to Changyou.com Limited also decreased in 2017, 2018 and 2020, while increasing slightly in 2019.
Changyou may experience declines in its revenues or suffer net losses in the future due to a number of factors, including, among other things, expected continued declines in revenues from TLBB, Legacy TLBB Mobile, and TLBB 3D; the uncertain level of popularity of Changyou’s future games; uncertainty as to Changyou’s ability to develop and launch high-quality mobile games that are commercially successful; the relatively higher game development and distribution costs generally associated with mobile games; the need to expend greater amounts in order to develop or acquire new games, technologies, assets, and businesses; and uncertainty as to Changyou’s ability to integrate such newly acquired games, technologies, assets and businesses. Accordingly, you should not rely on the results of any prior period as an indication of Changyou’s future financial and operating performance.
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Changyou’s previous and any future acquisitions and/or strategic alliances may have an adverse effect on its ability to manage its business and may also result in impairment charges.
Changyou has made acquisitions of, and may potentially acquire in the future, technologies, businesses or assets that are complementary to its business and/or enter into strategic alliances in order to leverage its position in the China market and expand its business domestically and internationally. Such acquisitions or strategic alliances may expose Changyou to potential risks, including risks associated with the integration of new technologies, businesses and personnel including its continued reliance on the management teams of the acquisition targets to operate the acquired businesses, unforeseen or hidden liabilities, the diversion of management attention and resources from its existing business, and the inability to generate sufficient revenues to offset the costs and expenses of acquisitions or strategic alliances. Any difficulties encountered in the acquisition and strategic alliance process may have an adverse effect on Changyou’s ability to manage its business. In addition, acquired businesses may not perform to Changyou’s expectations for various reasons, including the loss of key personnel or key clients, and Changyou’s strategic focus may change. As a result, Changyou may not realize the benefits it anticipated. If Changyou fails to integrate acquired technologies, businesses and assets or realize the expected benefits, Changyou may not receive a return on its investment and its transaction costs for such acquisitions. The benefits of an acquisition or investment may also take considerable time to develop, and we cannot be certain that any particular acquisition or investment will produce the intended benefits, which could adversely affect its business and operating results. Acquisitions could result in contingent liabilities or amortization expenses related to intangible assets or write-offs of goodwill and/or intangible assets, and/or result in impairment losses related to assets of acquired businesses, which could adversely affect Changyou’s results of operations. For example, in 2018 Changyou recognized a $16.4 million impairment loss for goodwill relating to the 17173.com Website and Changyou sold MoboTap; and in 2019 Changyou ceased operation of its cinema advertising business, as the business had generated significant net losses in 2017 and 2018 and Changyou’s efforts to eliminate the losses were unsuccessful, and recognized a $17.0 million impairment loss related to the assets of the business.
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Changyou is dependent upon its management and upon its key development and technical personnel, and Changyou’s business may be disrupted if it loses the services of any of them.
Changyou’s future success depends substantially on the services of the members of its management and its key development and technical personnel, such as Changyou’s Chief Executive Officer Dewen Chen and its key game development personnel. If one or more of the members of Changyou’s management or key development or technical personnel were unable or unwilling to continue in their present positions, Changyou might not be able to replace them easily, or at all. If any of the members of Changyou’s management or its key employees joins a competitor or forms a competing company, not only would Changyou lose
know-how,
key professionals, staff members and suppliers, but such members of Changyou’s management and key employees could develop and operate games and other services that could compete with and take game players and users away from its existing and future business. Although each of these members of Changyou’s management and key personnel has entered into an employment agreement with
non-competition
provisions, these
non-competition
provisions may not be enforceable in China.
Changyou’s prospects for growth may be adversely affected if Changyou cannot successfully manage and make timely adjustments to its hiring needs to support its business strategies.
The Internet industry in China is characterized by high demand and intense competition for talent, particularly for game developers and related technical personnel, and Changyou’s success in the implementation of its growth strategies depends on Changyou’s ability to successfully manage, and make timely adjustments to, its hiring needs. The number of Changyou’s employees decreased by 13% in 2017, by 14% in 2018, and by 15% in 2019, as Changyou emphasized the development of mobile games and laid off a number of employees who had been focused primarily on international markets and the platform channel business. Although the number of Changyou’s employees stayed stable in 2020 and 2021, there may be further layoffs. Any such layoffs could have an adverse effect on Changyou’s remaining employees’ morale and their loyalty to Changyou, and cause Changyou to lose employees whose talent and experience are important for its business, and could also have a negative impact on its reputation as an employer and its ability to attract qualified employees in the future.
Laid-off
employees could also make claims against Changyou for additional compensation, causing Changyou to incur additional expense.
Changyou may not have exclusive rights to trademarks, designs and technologies that are crucial to its business.
Changyou has applied for initial registrations in the PRC and overseas, and/or changes in registrations relating to transfers of its key trademarks in the PRC, including ChangYou.com, cyou.com, New Blade Online, 17173, and the corresponding Chinese versions of the marks, so as to establish and protect its exclusive rights to these trademarks. Changyou has succeeded in registering the trademarks ChangYou.com, cyou.com, and 17173 in the PRC under certain classes. The applications for initial registration, and/or changes in registrations relating to transfers, of other marks and/or of some of these marks under other classes are still under examination by the Trademark Office of the CNIPA, and relevant authorities overseas. Changyou has the license rights to use the trademarks TLBB, TLBB logos and TLBB 3D for its mobile games TLBB 3D, Legacy TLBB Mobile, and TLBB Honor and for its PC game TLBB under its existing license agreements with the holder of the intellectual property rights with respect to the popular Chinese martial arts novel Tian Long Ba Bu written by Louis Cha, who died in 2018. After the expiration of their terms, Changyou may not be able to renew these license agreements with commercial terms that are favorable to Changyou, if at all, and Changyou’s inability to renew these license agreements could force it to lose the right to use the trademarks related to those games. Changyou has applied for patents relating to the design of its games and to technology intended to enhance the functionalities of its games. Changyou has various patent applications under examination by the Patent Office of the CNIPA. Approvals of Changyou’s initial trademark registration applications, and/or of changes in registrations relating to such transfers, or of Changyou’s patent applications, are subject to determinations by the Trademark Office of the CNIPA, the Patent Office of the CNIPA and relevant authorities overseas that there are no prior rights in the applicable territory. Changyou cannot be certain that these applications will be approved. Any rejection of these applications could adversely affect Changyou’s rights to the affected marks, designs and technologies. In addition, even if these applications are approved, we cannot assure you that any registered trademark or issued patent will be sufficient in scope to provide adequate protection of Changyou’s rights.
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Changyou may need to incur significant expenses to enforce its proprietary rights, and if it is unable to protect such rights, its competitive position and financial performance could be harmed.
Changyou regards its intellectual property and proprietary rights as critical to its success. In particular, Changyou has spent a significant amount of time and resources in developing its current games and possible future games. Changyou’s ability to protect its proprietary rights in connection with its games is critical for their success and Changyou’s overall financial performance. While Changyou has registered software in China for copyright protection and has taken various measures to protect its source codes, such measures may not be sufficient to protect its proprietary information and intellectual property. Intellectual property rights and confidentiality protection in China may not be as effective as they are in the United States and other developed countries. Policing unauthorized use of proprietary technology is difficult and expensive. In addition, while Changyou has registered some trademarks relating to its games in the PRC and other jurisdictions, and has applied for additional registrations of trademarks, in some instances Changyou may not succeed in obtaining registration of trademarks that it has applied for in different languages, such as English. We cannot assure that these pending or future trademark applications will be approved. Any failure to register trademarks in any country or region may limit Changyou’s ability to protect its rights in such country or region under relevant trademark laws, and Changyou may need to change the name of the relevant trademark in certain cases, which may adversely affect Changyou’s branding and marketing efforts.
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Despite Changyou’s efforts to protect its intellectual property, online game developers may copy Changyou’s ideas and designs, and other third parties may infringe Changyou’s intellectual property rights. For example, certain third parties have misappropriated the source codes of previous versions of TLBB and have set up unauthorized servers in China and elsewhere to operate TLBB to compete with Changyou. The existence of unauthorized servers may attract game players away from Changyou’s games and may result in decreases in Changyou’s revenues. Any measures Changyou takes in response may not be successful in eliminating these unauthorized servers. Litigation relating to intellectual property rights may result in substantial costs to Changyou and diversion of resources and management attention away from its business, and may not be successful. In addition, Changyou’s ideas and certain of its designs, if not fixed in a tangible form of expression or registered with the appropriate PRC authorities, may not be protected by patents or other intellectual property rights. As a result, Changyou may be limited in its ability to assert intellectual property rights against online game developers who independently develop ideas and designs that compete with Changyou.
Changyou may be exposed to infringement or misappropriation claims by third parties, which, if determined adversely to it, could subject it to significant liabilities and other costs.
Changyou’s success depends largely on its ability to use and develop its technology and
know-how
without infringing the intellectual property rights of third parties. We cannot assure yoube certain that third parties will not assert intellectual property claims against Changyou. Changyou is subject to additional risks if entities licensing to it intellectual property, including, for example, game source codes, do not have adequate rights in any such licensed materials. The validity and scope of claims relating to the intellectual property of game development and technology involve complex scientific, legal and factual questions and analyses and, therefore, tend to be uncertain. If third parties assert copyright or patent infringement or violation of other intellectual property rights against it, Changyou will have to defend itself in litigation or administrative proceedings, which can be both costly and time consuming and may significantly divert the efforts and resources of Changyou’s technical and management personnel. An adverse determination or settlement in any such litigation or proceedings to which Changyou may become a party could subject it to significant liability to third parties, or require it to seek licenses from third parties, pay ongoing royalties, or redesign its games or subject it to injunctions prohibiting the development and operation of its games.
Risk Related to Online Games
There are uncertainties regarding the future growth of the online game industry in China.
The online game industry, from which Changyou derives most of its revenues, is a rapidly evolving industry. The growth of the online game industry and the level of demand and market acceptance of Changyou’s games are subject to a high degree of uncertainty. Changyou’s future operating results will depend on numerous factors affecting the online game industry, many of which are beyond Changyou’s control, including:
 
whether the online game industry, particularly in China and the rest of the Asia-Pacific region, continues to grow and the rate of any such growth;
 
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the availability and popularity of other forms of entertainment, particularly games on console systems, which are already popular in developed countries and may gain popularity in China;
 
growth in users of the Internet and broadband and penetration in China and other markets in which Changyou offers its games, and the rate of any such growth;
 
whether recent declines in the use of personal computers and growth in users of mobile devices such as smart phones and tablets in general, and for purposes of accessing online games in particular, continue or accelerate in China and other markets in which Changyou offers its games;
 
changes in consumer demographics and public tastes and preferences; and
 
general economic conditions in China, particularly economic conditions adversely affecting discretionary consumer spending, such as the slowdown in China’s economic growth that occurred between the first quarter of 2010 and the third quarter of 2012 and from 2014 through 2020.spending.
There is no assurance that online games in general will continue to be popular in China or elsewhere. If the current decline in the popularity of PC games continues or accelerates as users increasingly switch to mobile devices, Changyou’s revenues from its PC games may decrease significantly; and if the PC games that Changyou has launched, or expects to launch in the future, are not successful, Changyou may not be able to recoup the investments in its development and marketing of those games.
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Changyou currently depends on TLBB PC and Legacy TLBB Mobile for a significant portion of its revenues, and continued decrease in the popularity of TLBB PC and Legacy TLBB Mobile or interruption in itstheir operation will adversely affect Changyou’s results of operations.
Changyou currently relies on TLBB PC and Legacy TLBB Mobile for a significant portion of its revenues. Changyou launched TLBB PC in May 2007 and despiteLegacy TLBB Mobile in May 2017. Despite Changyou’s efforts to improve TLBB PC and Legacy TLBB Mobile, and some relatively positive results during the past two quarters,recently, TLBB PC’s game players have nevertheless lost interest in it over time as the relative popularity of PC games (which are accessed through personal computers) continues to decline, and Legacy TLBB Mobile has continued to decline. Accordingly, the popularity, revenues, and profitability of TLBB PC and Legacy TLBB Mobile can be expected to continue to decline in the long run. See “Changyou may not be successful in operating and improving its games to satisfy the changing demands of game players.”
To prolong TLBB’s lifespanTLBB PC and Legacy TLBB Mobile’s lifespans and slow down the pace of itstheir decline, Changyou needs to continually improve and update itthem on a timely basis with new features, including enhanced social interaction features, that appeal to existing game players, attract new game players (including those who played earlier versions of TLBB)TLBB PC and Legacy TLBB Mobile), and improve player stickiness to the game. If Changyou fails to improve and update TLBB PC and Legacy TLBB Mobile on a timely basis, or if itsChangyou’s competitors introduce more popular PC games includingand mobile games, catering to itsChangyou’s game player base, the decline in TLBB’sTLBB PC and Legacy TLBB Mobile’s popularity can be expected to accelerate, which would cause Changyou’s revenues to decrease at a faster pace. Furthermore, if there are any interruptions in TLBB’sTLBB PC and Legacy TLBB Mobile’s operation due to unexpected server interruptions, network failures or other factors, game players may be prevented or deterred from making purchases of virtual items, which could also cause significant decreases in Changyou’s revenues.
The market demand for PC games in general, and for the PC games that Changyou operates in particular, can be expected to continue to decline and the number of game players of PC games can be expected to continue to decrease, which will have an adverse effect on Changyou’s online game business and prospects.
A significant portion of Changyou’s online game revenues is generated from its PC games, and from TLBB in particular. However, the popularity of PC games continues to decline and an increasing number of online game developers are delaying or suspending their plans to develop and launch new PC games, as a substantial number of game players have switched to mobile devices to access online games. It has become increasingly difficult for PC game developers and operators to retain existing players of their games and the number of game players who are willing to spend time and money to play new PC games continues to decrease. If this downward trend accelerates, it may make it increasingly difficult for Changyou’s existing PC games in general, and TLBB in particular, to slow the decline in their popularity and for Changyou’s new PC games to ever become commercially successful; the game player base of Changyou’s PC games in general, and of TLBB in particular, may shrink at a more rapid pace, which would accelerate and increase Changyou’s costs to acquire and retain players of its PC games and would have a negative impact on its online game revenues. In addition, Changyou’s PC games generally produce relatively higher profit margins for it than do its mobile games, because Changyou must distribute its mobile games through third-party mobile game distributors or mobile application stores and enter into revenue-sharing arrangements with such distributors or mobile application stores. Accordingly, any decrease in Changyou’s revenues from its PC games may have a relatively larger negative impact on its overall profits.
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As mobile devices such as tablets, mobile phones, and other devices other than personal computers are increasingly used to access online games, Changyou must continue to acquire or develop increasing numbers of mobile games that work on such devices.
Devices other than personal computers, such as mobile phones and tablets, are used increasingly in China and in overseas markets. We believe that, forFor its business to be successful, Changyou will need to continue to develop versions of its existing games and any future games that work well with such devices. The games that Changyou develops for such devices may not function as smoothly as its existing games, and may not be attractive to game players in other ways. In addition, manufacturers of such devices may establish restrictive conditions for developers of applications to be used on such devices, and as a result Changyou’s games may not work well, or at all, on such devices. As new devices are released or updated, Changyou may encounter problems in developing versions of its games for use on such devices and Changyou may need to devote significant resources to the development, support, and maintenance of games for such devices. Since 2014 Changyou has been investing, and it expects to continue to invest, significant amounts in the development, promotion and operation of games for mobile devices. If Changyou is unable to successfully expand the types of devices on which its existing and future games are available, or if mobile versions of games that Changyou develops for such devices do not function well or are not attractive to users and game players; if the popularity and revenues of Changyou’s mobile game Legacy TLBB Mobile continue to decline; or if other mobile games that Changyou has launched, or expects to launch in the future, are not successful, Changyou may not be able to maintain or increase its revenues and recoup its investments in the mobile market.
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Changyou’s mobile game Legacy TLBB Mobile is currently generating a significant portion of its revenues. Changyou increasingly relies on dominant third-party game distributors and operators that obtain licenses from it to market, distribute, and operate its mobile games, including Legacy TLBB Mobile, which is operated by Tencent under a license from Changyou. If Changyou is not able to establish and maintain collaborative relationships with Tencent and other dominant third-party game distributors and operators for its existing and future mobile games, it is likely that Changyou will not be able to maintain or expand its mobile game business.
Changyou’s mobile game Legacy TLBB Mobile has been generating a significant portion of Changyou’s revenues since Legacy TLBB Mobile’sits launch in May 2017. For the year ended December 31, 2020, revenues from Legacy TLBB Mobile were $88.3 million, accounting for approximately 16% of Changyou’s online game revenues and approximately 16% of Changyou’s total revenues. For the year ended December 31, 2021, revenues from Legacy TLBB Mobile were $79.5 million, accounting for approximately 12% of Changyou’s online game revenues and approximately 12% of its total revenues. Changyou increasingly relies on dominant third-party game distributors and operators with large user bases, leading big data analytical capabilities, and track records and experience with successful operation of mobile games to operate its mobile games. For example, Tencent, which is an Internet conglomerate with a very large user base and is a dominant game developer and distributor in China, is the exclusive operator and distributor of Legacy TLBB Mobile under license from Changyou, and shares with Changyou the revenues generated by the game. For the year ended December 31, 2019, revenues from Legacy TLBB Mobile were $101.1 million, accounting for approximately 23% of Changyou’s online game revenues and approximately 22% of its total revenues. For the year ended December 31, 2020, revenues from Legacy TLBB Mobile were $88.3 million, accounting for approximately 16% of Changyou’s online game revenues and approximately 16% of its total revenues. If Tencent terminates the current licensing arrangements with Changyou for Legacy TLBB Mobile or curtails Tencent’s marketing efforts to promote Legacy TLBB Mobile, or if Changyou is not able to establish and maintain collaborative relationships with other dominant game distributors and operators in China for its existing and future mobile games on commercial terms that are acceptable to Changyou, it will be difficult for Changyou to maintain or expand its mobile game business. In addition, Changyou relies on Tencent and other third-party operators to collect payments from game players for their purchases of virtual items in Changyou’s mobile games, and to pay to Changyou the
pre-agreed
revenue-sharing amounts, and there is usually a delay between the time of a game player’s purchase and the time when the operator pays Changyou, which has placed, and may continue to place, constraints on Changyou’s cash flow.
Changyou’s business will suffer if it is unable to develop successful high-quality games for mobile devices, expand its game portfolio with a variety of genres that are appealing to game players, monetize mobile games that Changyou develops, or acquire and maintain for a reasonable period the popularity and revenue levels of any of Changyou’s mobile games that are successful.
Developing high-quality games for mobile devices is an important component of Changyou’s online game strategy. China’s mobile games market recently has been dominated by a small number of high -quality games, which collectively generate a substantial majority of the total revenues and profits of all mobile games in the market. Changyou has devoted and Changyou expects to continue to devote substantial resources to the development of its mobile games, focusing on those that Changyou believes have the potential to become high-quality games. Despite the early success of Changyou’s mobile game Legacy TLBB Mobile, we cannot guarantee that Changyou will be able to develop additional high-quality games that appeal to players or, even if Changyou is able to develop high-quality games that are successful, that such games will have lifespans that are long enough to generate an acceptable level of revenues, as mobile games tend to have relatively shorter lifespans than PC games. In addition, Changyou may encounter difficulty in integrating features into games developed for mobile devices that a sufficient number of players will pay for, or in otherwise sufficiently monetizing mobile games. As the mobile-device market in China is saturated or near saturation, mobile-game developers and operators have increasingly devoted substantial resources to the expansion of their mobile-game portfolios with a variety of genres, such as massively multiplayer online role-playing games (“MMORPGs”), multiplayer online battle arena (“MOBA”) games, or first person shooter (“FPS”) games, that are appealing in the mobile game market, in order to acquire and retain game players and maintain or increase revenues from the games. However, Changyou has not been successful in the development of mobile games other than those in the MMORPG genre. If Changyou is unable to develop successful high-quality games and expand its game portfolio with games in a variety of genres that are in line with market trends, or implement successful monetization strategies for its mobile games in general, its ability to maintain or grow revenues will be adversely affected.
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Changyou’s ability to successfully develop and monetize games for mobile devices will depend on its ability to:
 
expand the portfolio of mobile games, and particularly high -quality games, in a variety of genres that Changyou develops
in-house
and licenses from third-party developers;
 
effectively develop new mobile games for multiple mobile operating systems and mobile devices;
 
anticipate and effectively respond to the growing number of players switching to mobile games, the changing mobile landscape and the interests of players;
 
attract, retain and motivate talented game designers, product managers and engineers with experience in developing games for mobile devices;
 
minimize launch delays and cost overruns on the development of new games;
 
effectively monetize mobile games without degrading the social game experience for its players;
 
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develop games that provide for a compelling and optimal user experience through existing and developing third-party technologies, including third-party software and middleware utilized by its players; and
 
acquire and successfully integrate high- quality mobile game assets, personnel, and companies.
Further, even if Changyou develops or acquires license rights to a mobile game that is successful, the game’s lifespan may be short, as even successful mobile games tend to have less sustained user loyalty than do successful PC games. For example, the revenues generated from Changyou’s mobile game Legacy TLBB Mobile, which was launched in May 2017, declined sequentially from 2018 through 2020,2021, which is typical for a mobile game. In addition, although a relatively large number of the mobile games available at any given time may be
low-quality
games that attract fewer game players than do high-quality games, such games may on an aggregate level have the effect of attracting away a significant number of game players who would otherwise play high-quality mobile games. In view of the uncertain lifespans of mobile games and the large quantity of mobile games competing for game players, it is necessary for Changyou to make considerable investments in order to have a number of mobile games, and particularly mobile games that have the potential to become high-quality hit games, in its pipeline.
If Changyou is unable to develop or acquire new mobile games in general, and high -quality games in particular, that are successful, or to maintain for a reasonable period the popularity and revenue levels of any mobile games that Changyou develops or acquires that are successful, Changyou may not be able to recoup its development and acquisition costs and its ability to expand its business in the future is likely to be impeded.
We believe that the chance of success for online games is improved if they are adapted from the titles, characters, themes, and story lines of popular works of Chinese and foreign authors. However, there are many risks and uncertainties related to obtaining the rights to adapt such works for online games, and Changyou’s games adapted from such works may not be successful.
We believe that, in order for many of the new online games that Changyou develops to be successful in China, it is important for it to obtain license rights, and preferably exclusive license rights, to adapt the titles, characters, themes and story lines of popular works for use in the games. For example, Changyou developed and it operates its PC game TLBB and its mobile games Legacy TLBB Mobile and TLBB 3D with various features that are included in reliance on rights under its existing license agreements with respect to the late Chinese martial arts author Louis Cha’s popular novel Tian Long Ba Bu. We believe that these features have had a critical role in attracting and retaining many of the players of TLBB, Legacy TLBB Mobile, and TLBB 3D. However, it can be difficult to identify a sufficient number of such works that are suitable for adaptation for use in online games, and Changyou faces significant competition for the rights to such works from other online game companies that also adapt their online games from popular works. Obtaining license rights, and particularly exclusive license rights, to adapt suitable works for use in online games can involve significant expense, as the license fees, and the percentage of revenues from the games adapted from such works, payable to authors have continued to rise as competition for such license rights has intensified. In addition, Changyou has previously obtained, and intends to continue to seek to obtain, license rights for works from certain authors in foreign countries, and its ability to obtain such rights has previously been, and may be in the future be, adversely affected by greater scrutiny of such works, and a stricter approval process for permission to obtain such rights, by relevant Chinese authorities compared to the scrutiny of and approval process applicable to domestic works.
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Even if Changyou obtains license rights for works, we cannot assure yoube certain that games that Changyou adapts from such works will be popular and commercial successes and that Changyou will be able to recoup the amounts it pays for the license rights. Obtaining such rights and adapting such works for mobile games present additional risks, because of the relatively short lifespans of mobile games. Moreover, after the expiration of the terms of Changyou’s existing license agreements with the holder of the copyrights to Tian Long Ba Bu and other holders of copyrights, Changyou may not be able to renew the agreements with commercial terms that are favorable to it, if at all. Changyou’s inability to renew such agreements could force it to discontinue the related online games or, in the case of games based on Tian Long Ba Bu, to lose the rights to trademarks that Changyou has claimed as to various features and character names based on or inspired by Tian Long Ba Bu, and have a significant adverse impact on its online game operations and revenues.
Changyou may not be able to distribute its mobile games through its desired Internet platforms, its profits from any successful mobile games can be expected to be relatively lower than the profits Changyou has enjoyed historically from PC games and its mobile game revenues are subject to additional risks as Changyou relies on mobile application stores to collect payments from players of its mobile games.
Changyou may not be able to arrange for its mobile games to be distributed through its desired popular third-party mobile application stores with commercial terms, including revenue-sharing arrangements that are favorable enough to it to allow it to achieve an acceptable level of profit from the games. Changyou’s profits from mobile games, even if the games are successful, are likely to be relatively lower than the profits it generates from PC games, because, in order to gain access for its games on mobile application stores, Changyou must enter into revenue-sharing arrangements that generally result in lower profit margins than those generated from its PC games. Due to market competition and pressures, only a handful of third-party mobile application stores and other game distribution channel providers have survived and, of the remaining providers, an even smaller number of key providers, including Tencent and Mobile Hardcore Alliance, collectively control a substantial share of the market. As a result, Changyou has reduced leverage and weaker bargaining power in business negotiations with game distribution channel providers, which may lead to Changyou being forced to agree to receive relatively low revenue-sharing percentages for many of its mobile games.
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Changyou relies on mobile application stores to collect payments from game players for their purchases of its virtual items and to pay to Changyou
pre-agreed
revenue-sharing amounts. If mobile application stores cease to offer Changyou’s games over their platforms, change their user payment policies, such as return policies, or fail to make revenue-sharing payments that are due to Changyou, Changyou’s revenues will be adversely affected. When Changyou distributes its games through smaller, less well-known application stores, Changyou may not receive revenue-sharing payments when they are due to it.due. In addition, the
iOS-based
mobile application store allows game players to use foreign currency to purchase virtual items or game points in Changyou’s games, and the store pays to Changyou
pre-agreed
revenue-sharing amounts after converting the foreign-currency denominated revenues from such purchases into RMB using an exchange rate effective at the time of the payment. Since there is usually a delay between the time of a game player’s purchase and the time when the store pays Changyou, if the foreign currency used has depreciated against the RMB during the delay Changyou will receive lower share-sharing amounts at the time of the payment than Changyou would have received if the payment had been made at the time of the game player’s purchase.
Changyou’s new mobile games will be less likely to be successful if Changyou cannot adopt and implement innovative and effective marketing strategies to attract attention to its games from game players in its targeted demographic groups.
A relatively large number of mobile games are typically available at any given time in the markets in which Changyou launches and operates its mobile games, and such games compete for attention from the same game player population that it targets. Changyou’s ability to successfully promote and monetize its mobile games will depend on its ability to adopt and effectively implement innovative marketing strategies, and particularly precision marketing through new media, such as Weibo, WeChat, Douyin, Bilibili.com Website and other online game forums, targeting potential mobile game players in general, and game players in specific demographic groups for certain games in particular, and Changyou’s ability to cross-market mobile games to players of its current PC games and mobile games. If Changyou fails to adopt and implement such marketing and cross-marketing strategies, or if the marketing strategies of Changyou’s competitors are more innovative and effective than Changyou’s, its mobile games will be less likely to be successful and as a result Changyou may not be able to achieve an acceptable level of revenue from those games.
Changyou’s development and operation of mobile games may be adversely affected by the promulgation of new, and the implementation and interpretation of existing, PRC laws and regulations affecting mobile games.
As mobile games are a relatively new type of online game in China, developers and operators of mobile games, including Changyou, have been facing increasingly intense regulatory scrutiny from PRC regulatory authorities regarding the development and operation of mobile games. Substantial uncertainties exist regarding the timing of the promulgation of, and any changes to, current and future PRC laws and regulations and the effect of the interpretation and implementation thereof, which may, among other things:
 
have an adverse impact on the way Changyou designs its games and game features, which may make the games less attractive to game players;
 
have an adverse impact on Changyou’s ability to achieve an acceptable level of revenues and profit from its mobile games;
 
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make it harder to access Changyou’s mobile games and cause a decrease in its player base;
 
increase the cost of the development and operation of Changyou’s mobile games; and
 
require substantial management attention and effort in monitoring the development of, and ensuring Changyou’s compliance with, existing and future PRC laws and regulations affecting the mobile games business.
For a discussion of the risks associated with PRC laws and regulations affecting online games in general and mobile games in particular, see “Risks Related to Doing Business in China” in this Item 3 of this annual report.
Changyou’s new games may attract game players away from its existing games.
With Changyou’s increasingly diversified game portfolio, we cannot assure yoube certain that players of Changyou’s existing games will not be attracted to play other newly launched games, including its new mobile games. If this occurs, it will decrease Changyou’s existing games’ player bases, which could in turn make these games less attractive to other game players, resulting in decreased revenues from its existing games. For example, revenues generated from Changyou’s mobile game TLBB 3D decreased significantly in the second quarter of 2017, and we believe that this may have been due in part to the launch of Changyou’s mobile game Legacy TLBB Mobile in May 2017. Game players who switch from playing Changyou’s existing games to its new games may also spend less money to purchase virtual items in its new games than they would have spent if they had continued playing Changyou’s existing games, resulting in an adverse effect on its overall revenues. In addition, game players’ switching from playing Changyou’s existing PC games to its new mobile games, as well as from its
in-house
developed games to its licensed games, could cause Changyou’s overall online game profits to be relatively lower, as its profits from mobile games and licensed games tend to be relatively lower as a result of revenue-sharing arrangements.
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Changyou relies on recorded data for game revenue recognition and tracking of game players’ consumption patterns of virtual items. If its data systems fail to operate effectively, such failure will affect the completeness and accuracy of its revenue recognition, and also its ability to design and improve virtual items that appeal to game players.
Changyou’s game operation revenues are generated through the direct online sale of game points and sale of its prepaid game cards, and its recognition of those revenues depends on such factors as whether the virtual items purchased by game players are considered consumable or perpetual. Changyou’s revenue recognition policy with respect to perpetual virtual items is based on its best estimate of the lives of the items. Changyou considers the average period that paying players typically play its games and other player behavior patterns to arrive at its best estimate of the lives of these perpetual items. However, given the fast-evolving nature of the game industry and the various types of online games that Changyou offers to players with different tastes and preferences, its estimate of the period that players typically play its games may not accurately reflect the actual lives of these perpetual virtual items. Changyou revises its estimates as it obtains additional operating data, and it attempts to refine its estimation process accordingly. Any future revisions to these estimates could adversely affect the time period during which Changyou recognizes revenues from these items. For example, an increase in the estimated lives of these perpetual virtual items would increase the period over which revenues from these items are recognized.
Changyou relies on its data systems to record and monitor the purchase and consumption of virtual items by its game players and the types of virtual items purchased. If its data systems fail to accurately record the purchase and consumption information of the virtual items, Changyou may not be able to accurately recognize its revenues. In addition, Changyou relies on its billing systems to capture such historical game player behavior patterns and other information. If such information is not accurately recorded, or if Changyou does not have sufficient information due to the short operating history of any of its games, Changyou will not be able to accurately estimate the lives of, or the estimated average period the game players play its games with respect to, the perpetual virtual items, which will also affect its ability to accurately recognize its revenues from such perpetual virtual items. If Changyou’s data systems were damaged by system failure, network interruption, or virus infection, or attacked by a hacker, the integrity of data would be compromised, which could adversely affect its revenue recognition and the completeness and accuracy of its recognized revenues.
In addition, Changyou relies on its data systems to record game player purchase and consumption patterns, based on which Changyou improves its existing virtual items and designs new virtual items. For example, Changyou intends to increase development efforts on the number and variety of virtual items that its game players like to purchase, and Changyou may also adjust prices accordingly. If its data systems fail to record data accurately, its ability to improve existing virtual items or design new virtual items that are appealing to its game players may be adversely affected, which could in turn adversely affect its revenues.
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Changyou could be liable for breaches in the security of its online payment platforms and those of third parties with whom Changyou transacts business, and any such breaches could cause its customers to lose confidence in the integrity of the payment systems that Changyou uses.
Currently, Changyou sells a substantial portion of its virtual game points and prepaid game cards to its game players through third-party online payment platforms. In these online transactions, secure transmission of confidential information, such as customers’ credit card numbers and expiration dates, personal information and billing addresses, over public networks is essential if Changyou is to maintain its consumers’ confidence in it. In addition, Changyou expects that an increasing amount of its sales will be conducted over the Internet as a result of the growing use of online payment systems. As a result, the risk of associated online crime will increase. Changyou’s current security measures and those of the third-party online payment platforms with whom Changyou transacts business may not be adequate. Changyou must be prepared to increase its security measures and efforts so that its game players have confidence in the reliability of the online payment systems that it uses, which will require Changyou to incur additional expense. Such increased security measures may still not make its online payment systems completely safe. In addition, Changyou does not have control over the security measures of its third-party online payment vendors. Breaches in the security of online payment systems that Changyou uses could expose it to litigation and liability for failing to secure confidential customer information, and could harm its reputation, ability to attract customers and ability to encourage customers to purchase virtual items.
Any failure of third-party developers of online games that Changyou licenses from or jointly develops with them to fulfill their obligations under Changyou’s license or joint operation agreements with them could have an adverse effect on Changyou’s operation of and revenues from those games.
Changyou derives a portion of its revenues from PC games and mobile games that Changyou licenses from, or jointly develops with, third-party developers. Under its license and joint development agreements for these games, Changyou relies on the third-party developers to provide game updates, enhancements and new versions, provide materials and other assistance in promoting the games and resolving game programming errors and issues with “bots” and other intrusions. Any failure of third-party developers to provide game updates, enhancements and new versions in a timely manner and that are appealing to game players, provide assistance that enables Changyou to effectively promote the games, or otherwise fulfill their obligations under Changyou’s license and joint development agreements could adversely affect the game-playing experience of Changyou’s game players, damage its reputation, or shorten the life-spans of those games, any of which could result in the loss of game players, acceleration of Changyou’s amortization of the license fees it has paid for those games, or a decrease in or elimination of its revenues from those games.
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Furthermore, for games that Changyou licenses from or jointly develops with third parties, Changyou may not have access to the game source codes during the initial period of the license, or at all. Without the source codes, Changyou has to rely on the licensors to provide updates and enhancements, giving it less control over the quality and timeliness of updates and enhancements. If Changyou’s game players are not satisfied with the level of services they receive, they may choose to not play the games.
There are additional risks associated with Changyou’s licensing from overseas developers of online games that are successful only in particular overseas markets, because such games may not be successful in the China market and other markets if Changyou is not able to successfully customize the games to adapt to differences in culture and user preferences in the China market and other markets.
Changyou receives relatively lower profits from the operation of online games that it licenses from or jointly develops with third-party developers.
Changyou’s revenue-sharing arrangements for games that Changyou licenses from or jointly develops with third-party developers provide Changyou with relatively less profit than games that Changyou develops
in-house,
and in some cases Changyou may not be able to recoup its investments in such games. Moreover, to secure the rights to games from third-party developers, Changyou often must pay
up-front
fees and also commit to pay additional fees in the future. Changyou also has invested in mobile game development studios in order to assure access to an extensive pipeline of mobile games. Changyou often must make such commitments and investments without knowing whether the games Changyou is licensing or jointly developing will be successful and generate sufficient revenues to enable Changyou to recoup its costs or for the games to be profitable.
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Changyou faces significant risks and incurs substantial costs when it licenses its games to, or jointly operates them with, third-party operators, and Changyou faces additional risks and costs when it directly operates its games or licenses its games to, or jointly operates its games with, third-party operators in overseas markets.
Changyou currently, and expects to continue to, exclusively license to, or jointly operate with, third-party operators some of its games, including an increasing number of its mobile games, in markets that Changyou selects, including overseas markets. Changyou faces significant risks associated with the licensing or joint operation of Changyou’s games, including:
 
difficulties in identifying appropriate markets;
 
difficulties in identifying, negotiating and maintaining good relationships with licensees or joint operators who are knowledgeable about, and can effectively operate Changyou’s games in, particular markets;
 
difficulties in maintaining Changyou’s reputation and the reputation of its games when its games are operated by licensees or joint operators pursuant to their own standards; and
 
difficulties in protecting Changyou’s intellectual property.
Changyou currently licenses and operates, and expects to continue to expand the licensing and operation of, some of its existing and future games, either directly or jointly with third-party operators, in selected overseas markets. Additional risks associated with the licensing or direct or joint operation of Changyou’s games overseas include:
 
difficulties and significant costs in protecting Changyou’s intellectual property in overseas markets;
 
difficulties in retaining and maintaining local management and key development and technical personnel who are experienced and knowledgeable about, and can effectively operate Changyou’s games in, particular markets;
 
uncertainties relating to Changyou’s ability to develop its games and/or expansion packs catering to particular overseas markets;
 
uncertainties relating to Changyou’s ability to renew its license and joint operation agreements with licensees and joint operators upon their expiration;
 
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for Changyou’s direct operation of its games overseas, interruptions in the operation of the games due to cross-border Internet connection or other system failures;
 
significant costs for translation of its games into the local languages of, or customization of its games for, the overseas markets in which Changyou plans to license or jointly operate its games;
 
limited choices of third-party Internet platforms to distribute Changyou’s mobile games in certain overseas markets;
 
difficulty for Changyou’s management to exercise timely and effective supervision and administration of local management and employees in general, and their interactions with local third-party Internet platforms or other service providers in particular, in order to identify and prevent any sloppy, dishonest or illegal activities, which could harm Changyou’s business and reputation or subject Changyou to penalties;
 
significant marketing costs to promote Changyou’s games in certain overseas markets where third-party Internet platforms do not include marketing services as part of the revenue-sharing arrangements;
 
different game player preferences in certain overseas markets;
 
difficulties and significant costs relating to compliance with the different legal requirements and commercial terms, such as game export regulatory procedures, taxes and other restrictions and expenses, in the overseas markets in which Changyou licenses or directly or jointly operates its games;
 
exposure to different regulatory systems governing the protection of intellectual property and the regulation of online games, the Internet and the export of technology;
 
costs for compliance with different legal requirements and commercial terms in overseas markets;
 
difficulties in verifying revenues generated from Changyou’s games by its licensees for purposes of determining royalties payable to Changyou;
 
difficulties and delays in contract enforcement and collection of receivables through the use of foreign legal systems;
 
changes in the political, regulatory or economic conditions, or public policy, affecting online games in particular foreign countries or regions;
 
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the risk that regulatory authorities in foreign countries or administrative regions may impose withholding taxes, or place restrictions on repatriation of Changyou’s profits; and
 
fluctuations in currency exchange rates.
If Changyou is unable to manage these risks and control these costs effectively, its ability to license or operate its games in China or in regions and countries outside of Mainland China, either directly or jointly with third-party joint operators, may be impaired.
Changyou may not be successful in operating and improving its games to satisfy the changing demands of game players.
Changyou depends on purchases and continual consumption of virtual items by its game players to generate revenues, which in turn depend on the continued attractiveness of its games to the game players and their satisfactory game-playing experience. Various issues could arise that would cause its games to be less attractive to its game players or could limit the continued attractiveness of its games. For example:
 
Changyou may fail to provide game updates, expansion packs and other enhancements in a timely manner due to technological or resource limitations, or other factors;
 
Changyou’s game updates, expansion packs and new versions may contain programming errors, and their installation may create other unforeseen issues that adversely affect the game-playing experience;
 
Changyou may fail to timely respond and/or resolve complaints from its game players;
 
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Changyou may fail to eliminate computer “bots” which can disrupt its games’ smooth operation and reduce the attractiveness of its games; and
 
Changyou’s game updates, expansion packs and other enhancements may change rules or other aspects of its games that its game players do not welcome, resulting in a reduction in the active accounts or active paying accounts of its online games.
Changyou’s failure to address these issues could adversely affect the game-playing experience of its game players, damage the reputation of its games, shorten the lifespans of its games, and result in the loss of game players and a decrease in its revenues.
Changyou may fail to launch new games according to its timetable, and its new games may not be commercially successful.
All online games have limited lifespans. Changyou must launch new games that can generate additional revenue and diversify its revenue sources in order to remain competitive. Changyou will not generate any meaningful revenue from a game in development until it is commercially launched after open beta testing, and we cannot assure yoube certain that Changyou will be able to meet its timetable for new game launches or that its new games will be successful. A number of factors, including technical difficulties, lack of sufficient game development capabilities, personnel and other resources, failure to obtain or delays in obtaining relevant governmental authorities’ approvals and adverse developments in Changyou’s relationships with the licensors or third-party operators of its new games could result in delayed launching of its new games or the cancellation of the development of its pipeline games. In addition, we cannot assure yoube certain that Changyou’s new games will be as well received in the market as TLBB, Legacy TLBB Mobile, and TLBB 3D have been, and you should not view Changyou’s historical game revenues or the success of TLBB, Legacy TLBB Mobile, and TLBB 3D as indications of the commercial success of any of its new or future games. Changyou may fail to anticipate and adapt to future technical trends, new business models and changed game player preferences and requirements, fail to effectively plan and organize marketing and promotion activities, or fail to differentiate its new games from its existing games. If the new games Changyou introduces are not commercially successful, Changyou may not be able to generate sufficient revenues from new games to sustain or grow its revenues or to recover its product development costs and sales and marketing expenses, which can be significant. If Changyou acquires and pays for a license giving it the right to adapt an online game from an author’s work, but does not complete the development and introduction into the market of the game, or Changyou introduces the game but it is not successful, Changyou may not be able to recover the license fees it has paid.
Changyou generates all of its game revenues under the item-based revenue model, which presents risks related to consumer preferences and regulatory restrictions.
All of Changyou’s games, including PC games and mobile games, are operated under the item-based revenue model. Under this revenue model, Changyou’s game players are able to play the games for free, but are charged for the purchase of virtual items in the games. The item-based revenue model requires Changyou to design games that not only attract game players to spend more time playing, but also encourage them to purchase virtual items. The sale of virtual items requires Changyou to track closely consumer tastes and preferences, especially as to
in-game
consumption patterns. If Changyou fails to design and price virtual items so as to incentivize game players to purchase them, Changyou may not be able to effectively translate its game player base and their playing time into revenues. In addition, the item-based revenue model may cause additional concerns with PRC regulators who have been implementing regulations designed to reduce the amount of time that Chinese youths spend on online games and intended to limit the total amount of virtual currency issued by online game operators and the amount purchased by individual game players. A revenue model that does not charge for time played may be viewed by the PRC regulators as inconsistent with these goals. The item-based revenue model may not continue to be commercially successful and in the future Changyou may need to change its revenue model to a time-based or other revenue model. Any change in revenue model could result in disruption of Changyou’s game operations, a decrease in the number of its game players and a decline in its revenues.
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Undetected programming errors or defects in Changyou’s games could harm its reputation and adversely affect its results of operations.
Changyou makes frequent improvement and updates to its online games, which may contain bugs or flaws that become apparent only after the updated games are accessed by users, particularly as Changyou launches new updates under tight time constraints. If for any reason programming bugs or flaws are not resolved in a timely fashion, Changyou may lose some of its users, and third-party operators that license or jointly operate its games may seek to recover damages from it, which could have an adverse effect on Changyou’s results of operations, and could harm its reputation and the market acceptance of its games.
Breaches in the security of Changyou’s server network, or cloud-based servers that it leases from third-party operators, could cause disruptions in its service or operations, facilitate piracy of its intellectual property, or compromise confidential information of its game players and its business.
Changyou stores on its servers, including physical servers that Changyou owns or rent and cloud-based servers that Changyou leases from third-party operators, and transmits over the Internet considerable and continually increasing amounts of data, much of which is essential to the operation of its business and some of which is highly confidential information concerning its business and its game players. In addition, the expansion of Changyou’s business to include mobile games and its need to comply with PRC regulations requiring real-name registration of its game players are likely to cause the amount of personal data concerning its game players that is transmitted over its networks to increase over time. Any breaches by hackers of Changyou’s network or of cloud-based servers Changyou leases from third-party operators could cause severe disruptions in its game development and operations and other business activities, allow piracy of the source code used in the operation of its games and allow pirated versions of its games to enter the marketplace, or result in the release of confidential personal or financial information of its game players or confidential information concerning Changyou’s business, any of which could have an adverse impact on Changyou’s business, its revenues, and its reputation among game players. In order to minimize the likelihood of such breaches as Changyou’s business expands and the amount of confidential and sensitive data increases, we expect that Changyou will need to expend considerable resources to maintain and enhance the effectiveness of its security systems.
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Rapid technological changes may increase Changyou’s game development costs.
Technological development in online game industry is evolving rapidly, so Changyou needs to anticipate new technologies and evaluate their possible market acceptance. For example, the use of VR technology has become prevalent in the industry, and an increasing number of game players hope to have VR included in online games that they access. Changyou has begun investing, and expects to continue to invest in the future, resources to develop VR technology and online games using VR technology. However, Changyou is not aware of any proven business or monetization model for online games using VR technology, and playing online games with VR technology generally requires devices with particularly high-level technical specifications, which may limit the number of players. If online games using VR technology that Changyou develops and launches are not well received by game players, Changyou may not be able to recoup its related development costs. In addition, government authorities or industry organizations may adopt new technical standards that apply to game development. Any new technologies and new standards may require increases in expenditures for PC game and mobile game development and operations and continuing professional training of Changyou’s development and technical personnel, and Changyou will need to adapt its business and prepare its workforce to cope with the changes and support these new services to be successful. If Changyou falls behind in adopting new technologies or standards, its existing games may lose popularity, and its newly developed games may not be well received in the marketplace.
The proliferation of “cheating” programs and scam offers that seek to exploit Changyou’s games and players harms the game-playing experience and may lead players to stop playing its games.
Third parties have developed, and may continue to develop, “cheating” programs that enable players to exploit Changyou’s games, play the games in an automated way or obtain unfair advantages over other players who play fairly. These programs harm the experience of players who play fairly and may disrupt the economics of Changyou’s games. In addition, unrelated third parties may attempt to scam Changyou’s players with fake offers for virtual items. Changyou needs to devote significant resources to discover, disable and prevent such programs and activities, and if Changyou is unable to do so quickly its operations may be disrupted, its reputation may be damaged and players may stop playing its games. This may lead to lost revenue and increased costs for Changyou to develop technological measures to combat such programs and activities.
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Game players’ spending on Changyou’s games may be adversely affected by slower growth in the Chinese economy and adverse conditions in the global economy.
Changyou relies for its revenues on the spending of its game players, which in turn depends on the players’ level of disposable income, perceived future earnings capabilities and willingness to spend. The real estate market in the PRC and the level of exports from the PRC have both experienced significant declines recently and, accordingAccording to the National Bureau of Statistics of China, the growth rate of China’s gross domestic product, compared to that of the previous year, went from 6.6% in 2018, to 6.0% in 2019, to 2.2% in 2020 and to 2.3%8.1% in 2020.2021. Such growth rate may also slowfluctuate in the future, whichand a slowdown of the growth rate could in turn result in a reduction in spending by Changyou’s game players.
In addition, the global economy has experienced significant instability and there has been volatility in global financial and credit markets in recent years, recent growth in the United States economy may not be sustainable and some analysts are concerned that the European Community may experience a sustained downturn. It is unclear how long such instability and volatility will continue, whether it will increase, whether it will lead to a renewed worldwide economic downturn such as the one that began in 2008, and how much adverse impact such instability and volatility or any such downturn might have on the economies of China and other jurisdictions where Changyou operates its games. Any such instability, volatility or adverse impact in China or in overseas markets could cause Changyou’s game players to reduce their spending on its games in China or overseas and reduce its revenues.
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Risks Related to the Platform Channel Business
Notwithstanding Changyou’s significant investment in its platform channel business, Changyou was unable to successfully monetize it beyond the operation of Changyou’s 17173.com Website, and Changyou was not able to recoup all of its investment. Changyou may have similar adverse experiences with future investments.
During 2013 and 2014 Changyou made significant investments in acquiring assets and marketing, including both domestic and overseas marketing, and spent considerable sums to increase its staffing levels, with the goal of expanding and promoting its platform channel business beyond the operation of the 17173.com Website. However, Changyou did not generate meaningful revenues from such additions to its platform channel business as its efforts to monetize those products and services were not successful, and Changyou does not expect to be able to make its platform channel business apart from the 17173.com Website profitable or to recoup the investments it made in assets, marketing and staffing for the platform channel business. For example, after Changyou’s acquisition of a majority interest in MoboTap, Changyou’s management concluded that the Dolphin Browser operated by MoboTap would not be able to provide expected synergies with Changyou’s platform channel business, and Changyou recognized substantial impairment charges as a result and sold MoboTap in 2018. Also see “Changyou’s previous and any future acquisitions and/or strategic alliances may have an adverse effect on its ability to manage its business and may also result in impairment charges.”
Online advertising revenues from the 17173.com Website could fail to grow, or could decline further, as a result of the shift from PC games to mobile games in the online games market and uncertainties in the online advertising market.
Changyou’s online advertising revenues of $11.6$10.7 million for the year ended December 31, 2020,2021, which were mainly derived from the operation of the 17173.com Website, represented 2% of Changyou’s total revenues for the year, and represented a decline of $2.1$0.9 million, or 15%8%, from its online advertising revenues for the year ended December 31, 2019.2020. Changyou’s ability to avoid further declines in, or grow, its online advertising revenues may be adversely affected by any of the following risk factors:
 
Changes in government policy could restrict or curtail Changyou’s online advertising services;
 
The decline in the demand for online advertising services from developers and operators of PC games, as the relative popularity of such games continues to decline;
 
Advertising clients may adopt new methods and strategies other than online advertising to promote their brands, which would have an adverse impact on Changyou’s advertising revenues; and
 
The acceptance of the Internet as a medium for advertising depends on the development of a measurement standard. No standards for the measurement of the effectiveness of online advertising have been widely accepted. Industry-wide standards may not develop sufficiently to support the Internet as an effective advertising medium. If these standards do not develop, advertisers may choose not to advertise on the Internet in general, or through Changyou’s Websites.
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In addition, Changyou’s ability to generate and maintain significant online advertising revenues will also depend upon:
 
the development of a large base of users possessing demographic characteristics attractive to advertising clients;
 
the development of successful mobile versions of the 17173.com Website and the provision of extensive mobile game-related products and services in response to the rapid migration of users of Internet services from PCs to mobile devices, such as tablets and mobile phone;
 
the acceptance of online advertisements, either through PCs or mobile devices, as an effective method of business marketing;
 
the effectiveness of Changyou’s advertising delivery, tracking and reporting systems;
 
the extent of resistance from existing or potential customers to online advertising prices; and
 
the development of new formats for online advertising, such as streaming video.
The expansion of Internet advertisement blocking software may result in a decrease in advertising revenues.
The development of Web software that blocks Internet advertisements before they appear on a user’s screen may hinder the growth of online advertising. The expansion of advertisement blocking on the Internet may decrease Changyou’s revenues from the 17173.com Website because, when an advertisement is blocked, it is not downloaded from the server, which means that it will not be tracked as a delivered advertisement. In addition, advertisers may choose not to advertise on the Internet or on Changyou’s 17173.com Website because of the use by third parties of Internet advertisement blocking software.
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Changyou relies on advertising agencies to sell online advertising services on the 17173.com Website. If current trends of consolidation of advertising agencies in the China market continue, the bargaining power of the large advertising agencies resulting from such consolidation may permit them to require that Changyou pay higher sales rebates, which would adversely affect Changyou’s online advertising revenues.
Most of the online advertising services of the 17173.com Website are distributed by, and most of the online advertising revenues of the 17173.com Website are derived from, advertising agencies. For example, in 20202021 Changyou engaged fivefour advertising agencies, which contributed approximately 93%76% of the online advertising revenues of the 17173.com Website. In consideration for these agencies’ services, Changyou is required to pay certain percentages of revenues as sales rebates. If the online advertising market is consolidated and effectively controlled by a small number of large advertising agencies, such advertising agencies may be in a position to demand higher sales rebates based on increased bargaining power, which could negatively affect Changyou’s online advertising growth, as Changyou books its online advertising revenue net of its sales rebates to advertising agencies.
Risks Related to Doing Business in China
The SAPPRFT’s, the MIIT’s, and other PRC authorities’ regulatory supervision of the online game industry may adversely affect Changyou’s online game operations.
The SAPPRFT has issued a series of regulations affecting the online game industry and providing guidance regarding online game operations. The SAPPRFT issued a notice in September 2009 stating that the SAPPRFT would be the only governmental agency with the authority to review and approve online games, including reviewing and approving the importation of online games from offshoreOffshore copyright owners, and that all online game operators must obtain an Internet publishing license in order to operate online games and related services and obtain additional
pre-approval
from the SAPPRFT to make any changes to, or any new versions or expansion packs of, the originally approved online games. The
Measures of Internet Publication Service Administration
issued by the SAPPRFT and the MIIT, or the New Internet Publication Measures, which became effective on March 10, 2016 and replaced the
Temporary Measures for Internet Publication Administration
that had become effective in 2002, require that entities in the Internet publishing business apply for an online publishing service license, instead of an Internet publishing license, that entities holding an Internet publishing license apply for an online publishing service license within a specified period of time to replace their Internet publishing license, and that all such entities obtain approval from the SAPPRFT prior to the publication of new online games. On May 24, 2016, the SAPPRFT issued a
Notice of the SAPPRFT on Administration of Mobile Game Publishing Services
, or the Mobile Game Notice, which became effective on July 1, 2016. The Mobile Game Notice provides that the content of mobile games is subject to review, and that mobile game publishers and operators must apply for publishing and authorization codes for the games. Under the Mobile Game Notice, significant upgrades and expansion packs for mobile games that have previously been approved for publishing may be regarded as new works, and the operators will be required to obtain approval for such upgrades and expansion packs before they are released. In the event of any failure to meet these license and approval requirements, an operator may face heavy penalties, such as being ordered to stop operation, or having its business license revoked. In addition, the State Press Publication Administration (the “SPPA”),SPPA, a successor agency to SAPPRFT, first delayed, and then suspended, its review of, and issuance of publishing and authorization codes for, online games, as was the case between April 2018 and December 2018, and has2018; continued to delay such review and issuance during 2019.2019; and has again, since July 2021 delayed the issuance of publishing and authorization codes for online games. Changyou’s online game business may be adversely affected by these SAPPRFT and MIIT notices and related implementation measures, as the launch of online games, new versions, expansion packs and imported games might be delayed because of the approval required. Such delays may result in higher costs for Changyou’s online game operation and have an adverse effect on its game revenue. If any of Changyou’s online game operating entities are unable to comply with the requirements of any PRC governmental department regarding the online game industry, it may be subject to various penalties and its online game business may be adversely affected.
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PRC law and regulations governing the online game industry in China are evolving and subject to future changes. Changyou may fail to obtain or maintain all applicable permits, approvals, registrations and filings.
The online game industry in China is highly regulated by the PRC government. Various regulatory authorities of the PRC central government, such as the State Council, the MIIT, the SPPA, the MCT and the MPS, have the power to issue and implement regulations governing various aspects of the online game industry.
Changyou is required to obtain applicable permits and approvals and file registrations with different regulatory authorities in order to operate its online games. For example, in order to distribute games through the Internet in China, the VIEs through which Changyou conducts its businesses under the VIE arrangements must obtain an ICP license from the MIIT and an Online publishing service license from the SPPA. Any online game Changyou operates needs to be approved by the SPPA prior to its launch. Once a new online game or any upgrade, expansion pack or new version of any existing game is launched, approval of the online publication of such new game or such upgrade must be obtained from the SPPA. If Changyouany such VIE fails to maintain any required permits or approvals, or to obtain any new permits or approvals on a timely basis, Changyou may be subject to various penalties, including fines and a requirement that it discontinues or limits its operations.
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As the online game industry is at an early stage of developmentcontinues to develop in China, new law and regulations may be adopted from time to time to require additional licenses and permits other than those Changyou currently has, and address new issues that arise. In addition, substantial uncertainties exist regarding the interpretation and implementation of current and any future PRC law and regulations applicable to the online game industry. Furthermore, as mobile games are a relatively new type of online game, there are uncertainties relating to whether a game developer, such as Changyou, which provides mobile games to mobile device users, needs to obtain a separate operating license in addition to the ICP license that it has already obtained. For any mobile games Changyou launches, Changyou may be required to apply for a separate operating license for the mobile applications. Therefore, it may not be able to obtain timely, or at all, required licenses or any other new license required in the future, and it may be found to be in violation of current or future PRC law and regulations, which could impede its ability to conduct business.
Changyou operates some of its existing games, and plans to operate certain of its future games, with Internet authorization codes that it obtained through third-party electronic publishing entities. If the SPPA challenges the commercial operation of any of Changyou’s games that are operated with Internet authorization codes obtained through third-party publishing entities, Changyou may be subject to various penalties, including restrictions on its operations.
Under regulations issued by the SAPPRFT and the MIIT, online game operators are required to have an online publishing service license (or before the New Internet Publication Measures became effective on March 10, 2016, an Internet publishing license), and an authorization code obtained under such a license is required for each game in operation and publicly available in the PRC. Changyou publishes certain of its existing games with authorization codes obtained under Internet publishing licenses held by third parties. See “Government“Governmental Regulation and Legal Uncertainties—Specific Statutes and Regulations—Regulation of Online Games Services—Online Games and Cultural Products.” Current PRC regulations are not clear as to the consequence of obtaining authorization codes through the licenses of third-party entities. Changyou’s past and expected future practices might be challenged by the SPPA, a successor agency to the SAPPRFT, which could subject Changyou to various penalties, including fines, confiscation of publishing equipment and the revenues generated from the publishing activities, the revocation of its business license, or the forced discontinuation of or restrictions on its operations.
Restrictions on virtual currency may adversely affect Changyou’s online game revenues.
Changyou’s online game revenues are collected through the online sale of game points and sale of its prepaid cards, which are considered to be the “virtual currency” as such term is defined in the
Notice on Strengthening the Administration of Online Game Virtual Currency
, or the Virtual Currency Notice, which was jointly issued by the MCT and the MOFCOM in 2009. PRC laws and regulations, including the Virtual Currency Notice, have provided various restrictions on virtual currency and imposed various requirements and obligations on online game operators with respect to the virtual currency used in their games, including that (i) the total amount of virtual currency issued by online game operators and the amount purchased by individual users in the PRC is subject to limits, and online game operators are required to report the total amount of their issued virtual currency on a quarterly basis and are prohibited from issuing disproportionate amounts of virtual currency in order to generate revenues; (ii) virtual currency may only be provided to users in exchange for payment in RMB and may only be used to pay for virtual goods and services of the issuer of the currency, and online game operators are required to keep transaction data records for no less than 180 days; (iii) online game operators are prohibited from providing lucky draws or lotteries that are conducted on the condition that participants contribute cash or virtual currency in exchange for game props or virtual currencies; (iv) online game operators are prohibited from providing virtual currency trading services to minors; and (v) companies involved with virtual currency in the PRC must be either issuers or trading platforms, and may not operate simultaneously as issuers and as trading platforms. Changyou must tailor its business model carefully, including designing and operating its databases to maintain users’ information for the minimum required period, in order to comply with the requirements of current PRC laws and regulations, including the Virtual Currency Notice, in a manner that in many cases can be expected to result in relatively lower sales of its game coins and an adverse impact on its online game revenues. Although the MCT Approval Scope Notice provides that the MCT is no longer responsible for regulating the online game industry, as of the date of this annual report the Virtual Currency Notice have not been abolished, and their validity and future enforceability remain uncertain.
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Changyou’s business may be adversely affected by public opinion and governmental policies in China as well as in other jurisdictions where Changyou operates its online games or licenses its online games to third parties.
Currently, most of Changyou’s game players in China are young males, many of whom are students. Due to relatively easy access to personal computers and Internet cafés, the increasing use and popularity of mobile devices such as smart phones and tablets connected to the Internet, and the lack of other appealing forms of entertainment in China, many teenagers and other minors in China frequently play online games. This may result in these teenagers spendingConcern that this can cause minors to spend less time on or refrainingrefrain from other activities, including education, vocational training, sports, and resting, which could resulthas resulted in adverse public reaction and stricter government regulation.regulation over the years. For example, the PRC government has promulgated anti-fatigue-related regulations to limit the amount of time minors can play online games.
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Adverse public opinion could discourage game players from playing Changyou’sonline games, and could result in government regulations that impose additional limitations on the operations of online games as well as game players’ access to online games. For example, under the Monitor System Circular online game operators are required to adopt various measures to maintain a system to communicate with the parents of minors playing online games and are required to monitor the activities of minors and suspend the accounts of minors if so requested by their parents. The
Notice on Preventing Minors From Indulging in Online Games
(the “Indulgence Prevention Notice”), which the SAPPRFT issued on October 25, 2019 and became effective on November 1, 2019, requires online game operators to implement measures to not give minors access to online game services during specified periods of the day, imposes daily limits on minors’ length of use and spending for paid online game services, and prohibits online game operators from providing paid game services to minors under the age of eight. On August 30, 2021, the NPPA issued the
Notice on Further Strengthening the Administration of the Prevention of Minors from Indulging in Online Games.
On October 20, 2021, the Ministry of Education of the People’s Republic of China (“MOE”), the SAMR and several other PRC authorities jointly issued the
Notice on Further Strengthening the Administration of the Prevention of Primary and Secondary School Students’ Addiction to Online Games
(the “Further Indulgence Prevention Notice”), which provides that online game operators may only provide online game services to minors on Fridays, Saturdays, Sundays and PRC statutory holidays for one hour per day from 8:00 p.m. to 9:00 p.m. In addition, the Indulgence Prevention Notice and the Further Indulgence Prevention Notice state that online game operators may not provide game services to any users who have not registered using their real names. Changyou authorizes third parties to operate its mobile games, and Changyou receives a certain percentage of the third-party operators’ monthly revenues from the games as royalty payments. Third parties have the right to decide the games’ operating strategies, including whether to provide access to the games to minors. If the games are provided with minors, the third parties are required to impose stringent limits in accordance with the governmental policies discussed above, which may lead to a reduction in the third parties’ revenues from minor game players, which would in turn reduce Changyou’s monthly revenue-based royalty payments. If Changyou’s third-party licensees were to determine that the subject matter, story lines, plots, and/or gameplay of Changyou’s games are not appropriate for minors and stop providing access to the games to minors, there would be no longer any revenues generated from minors from such games, and Changyou would not receive the correspondent monthly revenue-based royalty payments.
In addition, the PRC State Administration of Taxation (“the SAT”), has announced that it will tax game players on the income derived from the trading of virtual currencies at the rate of 20%. It is currently unclear how the tax will be collected or if there will be any effect on Changyou’s game players or its business, but collection of such a tax might discourage players who are interested in trading virtual currencies from playing its games, which could reduce its revenues.
Moreover, similar adverse public reaction may arise, and similar government policies may be adopted, in other jurisdictions where Changyou licenses or operates its games, which could similarly adversely affect its revenues.
Regulation and censorship of information disseminated over the Internet in China may adversely affect our business, and Changyou may be liable for information displayed on, retrieved from or linked to its Websites.
The PRC government has adopted regulations governing Internet access and the distribution of news and other information over the Internet. Under these regulations, Internet content providers and Internet publishers are prohibited from posting or displaying over the Internet any content that, among other things, violates PRC law and regulations, impairs the national dignity of China, or is obscene, superstitious, fraudulent or defamatory. When Internet content providers and Internet publishers, including online game operators, find that information falling within the above scope is transmitted on their Websites or is stored in their electronic bulletin service systems, they are required to terminate the transmission of such information or delete such information immediately, keep records, and report to relevant authorities. Failure to comply with these requirements could result in the revocation of Changyou’s ICP license and other required licenses and the closure of its Websites. Internet content providers may also be held liable for prohibited information displayed on, retrieved from or linked to their Websites.
In addition, the MIIT has published regulations that subject Internet content providers to potential liability for the actions of game players and others using their Websites, including liability for violations of PRC law prohibiting the dissemination of content deemed to be socially destabilizing. As these regulations are subject to interpretation by the relevant authorities, it is not possible for Changyou to determine in all cases the type of content that could result in liability for it as a developer and operator of online games, and as an operator of the 17173.com Website. In addition, Changyou may not be able to control or restrict the content of other Internet content providers linked to or accessible through its Websites, or content generated or placed on its Websites by its game players, despite its attempt to monitor such content. To the extent that regulatory authorities find any portion of its content objectionable, they may require Changyou to curtail its games, which may reduce its game player base, the amount of time its games are played or the purchases of virtual items.
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There are currently no specific laws or regulations in the PRC governing property rights with respect to virtual assets and therefore it is not clear what liabilities, if any, Changyou may have relating to the loss of virtual assets by its game players.
In the course of playing Changyou’s games, game players can acquire and accumulate virtual assets, such as game player experience, skills and weaponry. Such virtual assets can be highly valued by game players and in some cases are traded among game players for real money or assets. In practice, virtual assets can be lost for various reasons, such as data loss caused by delay of network service by a network crash, or by hacking activities. There are currently no specific PRC laws or regulations governing property rights with respect to virtual assets. On May 28, 2020, the National People’s Congress issued the
Civil Code of the PRC
(the “Civil Code”), which came into effect on January 1, 2021 and provides only a general principle that if any further law or regulation contains specific provisions in respect of the protection of virtual property, such provisions shall apply. As a result, it is unclear under PRC law and regulations as in effect as of the date of this annual report who the legal owner of virtual assets is and whether the ownership of virtual assets is protected by law. In addition, it is unclear under PRC law and regulations whether an operator of online games such as Changyou would have any liability (whether in contract, tort or otherwise) for loss of such virtual assets by game players. Based on several judgments regarding the liabilities of online game operators for loss of virtual assets by game players, the courts have generally required the online game operators to provide well-developed security systems to protect such virtual assets owned by game players. In the event of a loss of virtual assets, Changyou may be sued by game players and may be held liable for damages.
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Changyou’s online game operations may be adversely affected by implementation of anti-fatigue-related regulations.
The PRC government may decide to adopt more stringent policies to monitor the online game industry as a result of adverse public reaction to perceived addiction to online games, particularly by minors. Eight PRC government authorities, including the SAPPRFT, the Ministry of Education and the MIIT, jointly issued regulations, or the Anti-Fatigue Notice, requiring all Chinese online game operators to adopt an “anti-fatigue system” in an effort to curb addiction to online games by minors. Under the anti-fatigue system, three hours or less of continuous play is defined to be “healthy,” three to five hours is defined to be “fatiguing,” and five hours or more is defined to be “unhealthy.” Game operators are required to reduce the value of game benefits for minor game players by half when those game players reach the “fatiguing” level, and to zero when they reach the “unhealthy” level. In addition, online game players in China are now required to register their identity card numbers before they can play an online game. This system allows game operators to identify which game players are minors. These restrictions could limit Changyou’s ability to increase its business among minors. If these restrictions were expanded to apply to adult game players in the future, Changyou’s revenues could be adversely affected.
These eight PRC government authorities subsequently promulgated additional regulations, including a
Notice on Initializing the verification of Real-name Registration for Anti-Fatigue System on Internet Games
, or the Real-name Registration Notice, to strengthen the implementation of the anti-fatigue system and real-name registration. The Real-name Registration Notice’s main focus is to prevent minors from using an adult’s identity to play Internet games and, accordingly, provides stringent punishment for online game operators for not implementing the anti-fatigue and real name registration measures properly and effectively. The most severe punishment contemplated by the Real-name Registration Notice is termination of the operation of the online game if it is found to be in violation of the Anti-Fatigue Notice, the Real-name Registration Notice or the circular entitled
Implementation of Online Game Monitor System of the Guardians of Minors
(“the Monitor System Circular”). The Indulgence Prevention Notice requiresand the Further Indulgence Prevention Notice require an online game operator to maintain and implement a user real-name registration system, and to not provide online-game services to any user who is not so registered. system.
The Real-name Registration Notice, and the Indulgence Prevention Notice, the Further Indulgence Prevention Notice and other regulations increase Changyou’s operating risks, as it will cause the loss of consumers and be required to spend more resources on the real-name verification and anti-fatigue system, which will lead to an increase in its operating costs. In addition, the amount of time that minors will be able to spend playing online games such as Changyou’s will be further limited. The Indulgence Prevention Notice requires online game operators not to give minors access to online game services during a specified period of a day, imposes specified daily limits on minors’ period of use and spending for paid online game services, and prohibits online game operators from providing paid game services to minors under eight. For example, it is required under the Further Indulgence Prevention Notice that online game operators may only provide online game services to minors on Fridays, Saturdays, Sundays or PRC statutory holidays for one hour per day from 8:00 p.m. to 9:00 p.m. Furthermore, if it is found to be violating these regulations, Changyou may be required to suspend or discontinue its online game operations.
In February 2013, 15 PRC government authorities, including the SAPPRFT, the Ministry of Education, the MCT and the MIIT, jointly issued
the Work Plan for the Integrated Prevention of Minors Online Game Addiction
, or the Work Plan, implementing integrated measures by different authorities to prevent minors from being addicted to online games. Under the Work Plan, the current relevant regulations will be further clarified and additional implementation rules will be issued by relevant authorities. As a result, Changyou may have to impose more stringent limits for minor game players, which may lead to an increase in its operating expenses and a reduction in its revenues from minor game players.
In July 2014, the SAPPRFT issued the
Notice on Further Launch Verification of Real-name Registration for Anti-Fatigue System on Internet Games
, stating that, in view of some of the hardware and functionality limitations inherent in mobile devices, anti-fatigue system requirements applicable to Internet games do not currently apply to mobile games. If the SPPA, as a successor agency to the SAPPRFT, in the future decides to expand the anti-fatigue system requirements to mobile games, Changyou’s operating expenses would be likely to increase.
 
ITEM 4.
INFORMATION ON THE COMPANY
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Risks Related to Sogou Inc.
Risks Related to Sogou’s Business
The online search industry in China is extremely competitive, and if Sogou is unable to compete successfully, it will be difficult for Sogou to maintain or increase Sogou’s revenues and profitability.
Sogou operates its business in an extremely competitive industry. Sogou faces intense competition in every aspect of its business, including competition for users, advertisers, technology, and talent. Sogou faces competition for its search and search-related services in China primarily from Baidu Inc. (“Baidu”), and ShenMa, operated by UCWeb Inc. (“UCWeb”), which is a subsidiary of Alibaba Group Holding Limited (“Alibaba”). Both Baidu and Alibaba have considerably greater financial and technical resources available to them than Sogou does. Sogou also faces competition for both users and advertisers from websites and mobile applications that provide specialized search services in China, including travel services and information platforms such as Ctrip and Qunar;
group-buy
platforms such as Meituan Dianping; online classified advertisement platforms such as 58.com; and short-video platforms such as Douyin and Kuaishou. Sogou competes for advertisers not only with Internet companies, but also with other types of advertising media such as newspapers and magazines, billboards and bus advertisements, television, and radio. It is also possible that multinational businesses with considerably greater financial and other resources than Sogou’s could expand their offerings in China, making it harder for Sogou to gain market share.
Sogou’s existing and potential competitors compete with it for users and advertisers on the basis of the quality and quantity of search results; the features, availability, and ease of use of products and services; and the number and quality of advertising distribution channels. They also compete with Sogou for talent with technological expertise, which is critical to the sustained development of Sogou’s products and services. If Sogou is unable to differentiate itself from its competitors in each of these areas, Sogou may not be able to maintain or increase its user and advertiser base, which would have an adverse impact on its business, results of operations, and growth potential. In addition, Sogou may have difficulty in successfully promoting and differentiating its new products, services, and features as a result of the market power of its competitors.
Sogou must expand its user base to grow its business, and Sogou must continually innovate and adapt its business in an evolving online search industry in order to do so. If Sogou fails to continue to innovate and introduce products and services to enhance user experience, Sogou may not be able to generate sufficient user traffic to remain competitive.
The Internet industry in general and the online search industry in particular have been undergoing rapid changes in technology and in user preferences. Sogou’s future success in expanding its user base will depend on its ability to respond to, as well as anticipate and apply, rapidly evolving technologies. Sogou must adapt its existing products and services and develop new products and product areas that will meet the evolving demands of users, deliver attractive experiences for its users that enhance user engagement, and cause its users to return to its services and increase the frequency of their searches on Sogou’s platforms. Sogou’s development and introduction of new products, features, and services are subject to additional risks and uncertainties. Unexpected technical, operational, distribution, or other problems could delay or prevent the development and introduction of one or more of Sogou’s currently planned and any future new products and services. There are constant innovations in the market regarding search services, search and
search-related
advertising, and providing information to users. If Sogou is unable to predict user preferences or industry changes, or if Sogou is unable to modify its products and services on a timely basis, Sogou may lose users. Sogou’s operating results will also suffer if its innovations are not responsive to the needs of its users, are not appropriately timed with market opportunity, or are not effectively brought to market. As search technology continues to develop, there may be offered in the China market products and services that are, or that are perceived to be, substantially similar to or better than those generated by Sogou’s search services. As worldwide focus on the development of AI technologies has intensified, it has become increasingly important to apply AI technologies to online search products and features in order to attract and retain users, and we cannot be sure that Sogou will be able to apply such technologies successfully.
Sogou’s competitors may develop and offer new products, services, and features that are similar to Sogou’s and such new offerings from its competitors may be found by users to be more attractive than Sogou’s. Moreover, Sogou’s competitors may introduce new products, services, and features to the market before Sogou can, and we cannot be sure that any of Sogou’s new products, services, and features will attract additional users and lead to the generation of incremental revenue.
As users increasingly use mobile devices to access search services and other Internet services in China, Sogou will need to continue to design, develop, promote, and operate new products and services tailored for mobile devices. Sogou’s design and development of new products and services that are optimized for mobile devices may not be successful. Sogou may encounter difficulties with the installation and delivery of such new products and services, and they may not function smoothly. As new mobile devices are released or updated, Sogou may encounter problems in developing and upgrading its products and services for the new releases and updates, and Sogou may need to devote significant resources to such development and upgrades. If Sogou is not successful in adapting its offerings for mobile devices, maintenance and growth of its business will be impeded.
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If Sogou’s collaboration with Tencent is terminated or curtailed, Sogou’s business and prospects for growth will be adversely affected.
Sogou has extensive collaboration with Tencent, one of its largest shareholders. Sogou Search is the default general search engine in various Tencent products that provide general search offerings, such as Mobile QQ Browser,
qq.com
, and the PC Web directories
daohang.qq.com
and
hao.qq.com
. Approximately 39% of Sogou’s total search traffic, measured by page views, was contributed by Tencent’s Internet properties in December 2020. Sogou Weixin Search is currently the sole general search engine with access to all content published on Weixin Official Accounts, but it is possible that Tencent will grant such access to other general search engines. We cannot assure you that Sogou will be able to maintain the current level of cooperation with Tencent in the future. If Sogou’s collaborative relationship with Tencent is terminated or curtailed due to Tencent’s initiating its own general search service or partnering with other search engine companies, or if any of the commercial terms were to be revised or made less favorable to Sogou, or if Tencent does not continue to deliver to Sogou an adequate level of access to its platforms or adequately promote Sogou’s products and services, Sogou’s business and prospects will be adversely affected.
Sogou’s efforts to expand its collaboration with Tencent may not be successful.HISTORY AND DEVELOPMENT OF THE COMPANY
In August 1996, Sohu.com Inc., our predecessor, was incorporated in Delaware as Internet Technologies China Incorporated, and in January 1997 we launched our original Website, itc.com.cn. In February 1998, we
re-launched
our Website under the domain name Sohu.com and, in September 1999, we renamed our company Sohu.com Inc. On July 17, 2000, we completed our IPO on NASDAQ trading under the symbol “SOHU.” In 2003, Sohu.com Limited was incorporated in the Cayman Islands as a direct wholly-owned subsidiary of Sohu.com Inc. On May 31, 2018, Sogou and Tencent agreedpursuant to extend until September 2023 the period during which Sogou Search will be the default general search engine for Tencent’s products that provide general search offerings in accordance with Sogou’s existing business collaboration arrangements with Tencent. In addition, Sogou and Tencent have agreed to continue from September 2020 until September 2021 Sogou’s initiativea proposal (the “Liquidation Proposal”) for the integration into the existing Weixin/WeChat search servicedissolution of Sohu.com Inc. and adoption of a search function poweredplan of complete liquidation and dissolution of Sohu.com Inc. that was approved by Sogou Search that allows Weixin/WeChat users to access Internet information outside Weixin/WeChat and have agreed that Sogou Search will be the preferred third-party search function to power suchstockholders of Sohu.com Inc. at a Weixin/WeChat search function for that period provided Sogou Search meets “Tencent’s requirements for user experience,” and that the arrangement may be extended for additional successive
one-year
periods through September 2023 if offering Sogou Search will not “harm the user experience.” It is difficult for us to predict the potential impactspecial meeting of stockholders held on May 29, 2018, Sohu.com Inc. was dissolved, all outstanding shares of the integrationcommon stock of Sogou SearchSohu.com Inc. were delisted and cancelled, and ADSs representing all outstanding ordinary shares of Sohu.com Limited were distributed on a
share-for-share
basis to power such a Weixin/WeChat search function measuredthe stockholders of Sohu.com Inc. On June 1, 2018 our ADSs began trading on the NASDAQ Global Select Market under the standards of “Tencent’s requirements for user experience” and/or “harm the user experience.” The potential for growth of Sogou’s business through such integration will be limited if Tencent does not make Sogou Search the preferred search function or decides not to extend the arrangement for such integration and a Tencent search function or a search function of one of Sogou’s competitors is given priority over Sogou’ssame “SOHU” symbol in Weixin/WeChat.
The announcement and pendency of Sogou’s going-private transaction with Tencent could have an adverse effect on Sogou’s business, results of operations, and financial condition.
The process of consummating the pending Tencent/Sohu Sogou Share Purchase and Sogou Merger could cause disruptions in Sogou’s business and divert Sogou’s management’s attention and other resources from day-to-day operations, which could have an adverse effect on Sogou’s business, results of operations, and financial condition. The Sogou Merger Agreement, by its terms, imposes restrictions on Sogou’s conduct of business prior to the completionplace of the Sogou Merger, which may delay or prevent Sogou from undertaking certain business opportunities that may arise pendingcommon stock of Sohu.com Inc. Sohu.com Limited replaced Sohu.com Inc. as the completion
top-tier,
publicly-traded holding company of the Sogou Merger. In addition, Sogou may be subject to claimsSohu Group. The Liquidation Proposal is described in detail in Sohu.com Inc.’s and legal actions arising in connectionour joint proxy statement/prospectus filed with the Sogou Merger, and such claims and legal actions, with or without merit, may be expensive to defend, may divert Sogou’s management’s attention, and may have an adverse impactSEC on Sogou’s reputation. For example, a complaint was filed against Sogou in the United States District Court for the Southern District of New York by a single plaintiff. The complaint alleges, in sum and substance, that a Transaction Statement on Schedule 13E-3 filed by Sogou on December 1, 2020 regarding Sogou’s contemplated going-private transaction contained certain statements regarding dissenters’ rights that were allegedly rendered false by a subsequent judgment by the Grand Court of the Cayman Islands. The plaintiff seeks an injunction to prevent the Sogou Merger as well as attorneys’ fees and costs. Further, current and prospective employees and members of Sogou management could become uncertain about their future roles with Sogou in the event the Sogou Merger is completed. This uncertainty could adversely affect Sogou’s ability to retain and hire employees and members of Sogou management. In addition, the announcement and pendency of the Sogou Merger could have an adverse effect on Sogou’s relationships with Sogou’s customers, suppliers, and other third-party service providers and business partners. For example, Sogou’s search and search-related revenues for the three months ended September 30, 2020 decreased, in part as a result of uncertainties on the part of certain advertisers with respect to Sogou’s business strategies and policies following the announcement of the Sogou Merger. If Sogou’s collaborations and relationships with business partners are terminated or curtailed, Sogou’s business, results of operations, and financial condition will be adversely affected.
Sogou’s existing business and its expansion strategy depend on certain additional key collaborative arrangements, and any inability to maintain or develop such relationships could have an adverse effect on Sogou’s business and prospects for growth.
Sogou’s existing business, and its strategy for developing its business, involve maintaining and developing various types of collaborations with third parties, which provide it with access to additional user traffic, search services, products, and technology. For example, Sogou’s Wise Doctor delivers healthcare information, and receives healthcare data, through partnerships that provide Sogou with access to articles written by physicians and to a
PRC-government
sponsored healthcare encyclopedia; Sogou’s partnership with Zhihu Technology Limited, a company that engages primarily in the business of operating an online question and answer-based knowledge and information sharing platform (“Zhihu”), provides Sogou with access to a
knowledge-sharing
platform; Sogou’s partnership with Microsoft’s Bing provides Sogou with the technology to provide its users with English content on the Internet that Sogou translates to Chinese in connection with its
cross-language
search service; and Sogou’s partnership with China Literature Limited, an online literature platform, enables its users to access literature from a large online collection. In addition, Sogou’s various partnerships with
third-party
Internet properties provide its advertisers significant exposure to users beyond its core search user base. We consider these collaborations to be important to Sogou’s ability to deliver attractive service, product, and content offerings to its users, in order to maintain and expand its user and advertiser bases, and we believe that it will continue to be important for Sogou to develop similar partnerships in the future. Sogou’s inability to maintain and grow such relationships could have an adverse impact on its existing business and its growth prospects.
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Sogou also has existing, and hopes to develop additional, relationships with mobile device manufacturers for
pre-installation
of its search, input method, and related applications. If Sogou is unable to maintain and expand such relationships, the quality and reach of delivery of its services will be adversely affected, and it may also be difficult for Sogou to maintain and expand its user base and enhance awareness of its brand. In addition, Sogou’s competitors may establish the same relationships as those Sogou has, which would tend to diminish any advantage Sogou might otherwise gain from these relationships.
If Sogou fails to maintain and expand its collaborations with
third-party
operators of Internet properties, its revenues and growth may be adversely affected.
Sogou places certain of its advertisers’ promotional links on the Internet properties of third parties, thereby expanding the base of users accessing the advertisements beyond Sogou’s own user base, and increasing Sogou’s
pay-for-click
revenues. If these third parties decide to use a competitor’s or their own online search services, or do not prominently display Sogou’s advertisements in comparison to those of other advertisers on their properties, or if Sogou fails to attract additional
third-party
operators of Internet properties, Sogou’s advertising revenues and growth may be adversely affected.
Sogou may not be able to resume its historical growth or successfully manage any future growth.
Sogou’s revenues were $1.12 billion, $1.17 billion, and $924.7 million for the years ended December 31, 2018, 2019, and 2020, respectively. The decrease in Sogou’s revenues from 2019 to 2020 resulted from uncertainties with respect to Sogou’s business policies among certain advertisers as a result of the currently pending Tencent/Sohu Sogou Share Purchase and Sogou Merger, unfavorable macroeconomic conditions resulting from the
COVID-19
pandemic, and regulatory headwinds in the Internet industry in China. In addition, although Sogou’s traffic acquisition costs increased only moderately for 2020, if they trend higher in the future as they did prior to 2019 due to intensifying competition for channel partnerships, it could be difficult for Sogou to sustain expenditures for traffic acquisition at the same level as Sogou’s competitors, which could result in slower or flat growth, or even a reduction, in Sogou’s user traffic, which would have a negative impact on Sogou’s revenues and revenue growth prospects. Sogou may not be able to resume growth in future periods similar to that it experienced prior to 2020, and Sogou’s revenues may continue decline. Accordingly, you should not rely on the results of any prior period as an indication of Sogou’s future financial and operating performance.
Sogou is exploring and implementing, and expects to continue to explore and implement in the future, new business initiatives, including in industries in which Sogou has limited or no experience, as well as new business models. Developing new businesses and initiatives requires significant investments of time and resources, and may present new and difficult technological, operational, and legal challenges, as well as subject Sogou to additional regulatory risks. Any failure to effectively manage these risks may limit Sogou’s future growth and hamper Sogou’s business strategy.
Sogou depends on online advertising for a significant majority of its revenues. If Sogou fails to retain existing advertisers or attract new advertisers for its online advertising services, its business and growth prospects could be harmed.
Sogou earns most of its revenues from its search and search related advertising services. Advertisers will not use Sogou’s services if they do not find them to be effective in producing a sufficient volume of
click-throughs
and desired results for advertisers. Sogou’s advertisers are generally able to terminate their relationships with it at any time without penalty if they are not satisfied with its services, choose its competitors for similar services, or advertise in media channels other than Internet search. Therefore, it could be difficult for Sogou to maintain or increase its advertiser base, and its revenues and profits could decline or fail to increase.
Sogou relies on
third-party
advertising agencies for most of its online advertising revenues.
Sogou relies heavily on third-party advertising agencies for its sales to its advertisers. It is important that Sogou maintain good relationships with these agencies. Sogou does not enter into long-term agreements with any of the advertising agencies and we cannot assure you that Sogou will continue to maintain favorable relationships with them. Further, Sogou provides various types of discounts and rebates to advertising agencies in order to incentivize them to maximize the volume of advertising business that they bring to Sogou. In order to retain or properly incentivize Sogou’s advertising agencies, it may become necessary in the future for Sogou to increase the levels of such rebates and discounts, which could have an adverse effect on its results of operations.
If Sogou fails to maintain and enhance awareness of and loyalty to its brand, it will be difficult for Sogou to maintain and increase its user and advertiser bases.
It is critical for Sogou to maintain and further enhance its brand if Sogou is to succeed in expanding its user and advertiser bases. Sogou’s success in promoting and enhancing its brand, and its ability to remain competitive, will depend on its success in delivering superior user experience and on its marketing efforts. Enhancing Sogou’s brand awareness may require substantial marketing and promotion expenses. If Sogou is unable to maintain and enhance its brand, or incur significant marketing and promotion expenses that do not achieve anticipated business growth, or is subject to negative publicity that harms its brand, Sogou’s business and results of operations may be adversely affected.
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Sogou’s success depends on the continuing efforts of its senior management team and key employees, and Sogou’s business may be harmed if Sogou loses their services.
Sogou’s business heavily depends upon the services of its key executives, particularly Xiaochuan Wang, its Chief Executive Officer. If any of Sogou’s key executives is unable or unwilling to continue in his or her present position, joins a competitor, or forms a competing company, Sogou’s business may be severely disrupted. Although Sogou’s executive officers have entered into employment agreements, confidentiality agreements, and
non-competition
agreements with Sogou, the degree of protection afforded to an employer pursuant to confidentiality and
non-competition
undertakings by persons employed in the PRC may be more limited when compared to the degree of protection afforded with respect to employees in some other jurisdictions. Sogou does not maintain
key-man
life insurance for any of its key executives.
Sogou also relies on key
highly-skilled
personnel for its business. Given the competitive nature of the industry, and in particular Sogou’s competitors’ increasingly aggressive efforts to provide competitive compensation packages to attract talent in the markets where Sogou operates, it may be difficult for Sogou to recruit and retain qualified personnel, and the risk of members of Sogou’s key staff leaving it is high. Any such departure could have a disruptive impact on Sogou’s operations, and if Sogou is unable to recruit, retain and motivate key personnel, it may not be able to grow effectively.
Sogou’s strategy of investments in and acquiring complementary businesses and assets may fail, which could result in impairment losses.
In addition to organic growth, Sogou may take advantage of opportunities to invest in or acquire additional businesses, services, assets or technologies. However, Sogou may fail to select appropriate investment or acquisition targets, or Sogou may not be able to negotiate optimal arrangements, including arrangements to finance any acquisitions. Acquisitions and the subsequent integration of new assets and businesses into Sogou could require significant management attention and could result in a diversion of resources away from Sogou’s existing business. Investments and acquisitions could result in the use of substantial amounts of cash, increased leverage, potentially dilutive issuances of equity securities, goodwill impairment charges, amortization expenses for other intangible assets and exposure to potential liabilities of the acquired business, and the invested or acquired assets or businesses may not generate the financial results Sogou expects. For example, the private companies that Sogou has invested in could be adversely affected by the
COVID-19
outbreak, which may lead to impairment in the fair values of Sogou’s investments and in turn adversely affect Sogou’s financial condition and operating results. Moreover, the costs of identifying and consummating these transactions may be significant. In addition to obtaining the necessary corporate governance approvals, Sogou may also need to obtain approvals and licenses from relevant governmental authorities for the acquisitions to comply with applicable laws and regulations, which could result in increased costs and delays.
Requirements of U.S. GAAP regarding the recognition of
share-based
compensation expense may adversely affect Sogou’s results of operations and its competitiveness in the employee marketplace.
Sogou’s performance is largely dependent on talented and
highly-skilled
individuals. Sogou’s future success depends on its continuing ability to identify, develop, motivate, and retain
highly-skilled
personnel. Sogou has a history of using low or
nominally-priced
employee share options as an important component of competitive pay packages, in order to align Sogou’s employees’ interests with the interests of Sogou and its shareholders and to encourage quality employees to join and remain with Sogou. Sogou has adopted guidance on accounting for
share-based
compensation that requires the measurement and recognition of compensation expense for all
share-based
compensation based on estimated fair values. As a result, Sogou’s operating results contain charges for
share-based
compensation expense related to employee share options. The historical and future recognition of
share-based
compensation in Sogou’s statements of comprehensive income has had and will have an impact on its results of operations. On the other hand, if Sogou alters its employee share incentive plans to minimize the corresponding
share-based
compensation expense, it may limit Sogou’s ability to continue to use
share-based
awards as a tool to attract and retain its employees, and it may adversely affect Sogou’s operations. In addition, there may be future changes in the U.S. GAAP requirements for recognition of
share-based
compensation expense, which could have similar effects on Sogou’s results operations and its competitiveness in the market for key employees.
Sogou’s user metrics and other estimates are subject to inherent challenges in measuring its operating performance, which may harm its reputation.
Sogou regularly reviews DAU, MAU, number of advertisers, page views, and other operating metrics to evaluate growth trends, measure its performance, and make strategic decisions. These metrics are calculated using internal company data, have not been validated by an independent third party, and may not be indicative of Sogou’s future financial results. While these numbers are based on what we believe to be reasonable estimates for the applicable period of measurement, there are inherent challenges in measuring how Sogou’s platforms are used across a large population in China. For example, Sogou may not be able to distinguish individual users who have multiple accounts. Errors or inaccuracies in Sogou’s metrics or data could result in incorrect business decisions and inefficiencies. For instance, if a significant understatement or overstatement of active users were to occur, Sogou might expend resources to implement unnecessary business measures or fail to take required actions to remedy an unfavorable trend. If partners or investors do not perceive Sogou’s user, geographic, or other operating metrics to accurately represent Sogou’s user base, or if Sogou discovers inaccuracies in its user, geographic, or other operating metrics, its reputation may be harmed.
April 23, 2018.
 
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We have not independently verifiedIn 2006, we undertook a reorganization of our search and search-related businesses. As part of the accuracy or completenessreorganization, we transferred most of data, estimates,our search and projectionssearch-related businesses to Sogou Inc., a Cayman Islands exempted company that was incorporated in this annual report that2005 by us. In 2010, we undertook another reorganization, and transferred other businesses and employees related to the search and search-related businesses to Sogou. On November 13, 2017, Sogou obtained from third party sources, and such information involves assumptions and limitations.
completed its IPO on NYSE, trading under the symbol “SOGO.”
Certain facts, forecasts,
In 2007, we reorganized our online games business. As part of the reorganization, Changyou.com Limited was incorporated in the Cayman Islands on August 6, 2007 as our indirect wholly-owned subsidiary to hold the PC games business of the Group. We transferred to Changyou, effective December 1, 2007, all of the assets and other statisticsoperations relating to the industriesPC games business, and Changyou assumed all the liabilities associated with our games business. On April 2, 2009, Changyou completed its IPO on NASDAQ, trading under the symbol “CYOU.”
On April 17, 2020, we completed the acquisition of all outstanding shares of Changyou that we did not already beneficially own, through the Changyou Merger, in which our newly-formed indirectly wholly-owned subsidiary Changyou Merger Co. merged with and into Changyou.com Limited, with Changyou.com Limited being the surviving company. Pursuant to the plan of merger for the Changyou Merger, each Class A ordinary share of Changyou (each, a “Changyou Class A Ordinary Share”) issued and outstanding immediately prior to the effectiveness of the Changyou Merger, other than the Class A ordinary shares held by us, was cancelled in exchange for the right to receive $5.40 in cash without interest, and each outstanding American depositary share of Changyou (each a “Changyou ADS,” representing two Changyou Class A Ordinary Shares) was cancelled in exchange for the right to receive $10.80 in cash without interest. Because Changyou Merger Co. owned over 90% of the voting power represented by all issued and outstanding shares of Changyou prior to the effectiveness of the Changyou Merger, the Changyou Merger was in the form of a short-form merger in accordance with section 233(7) of the Companies Act of the Cayman Islands, and the Changyou Merger was not subject to a vote of the shareholders of Changyou. As a result of the Changyou Merger, Changyou has become a privately-owned company wholly owned directly and indirectly by us and Changyou ADSs are no longer listed on the NASDAQ Global Select Market.
On September 23, 2021, we completed the Tencent/Sohu Sogou competesShare Purchase contemplated by the Tencent/Sohu Sogou Share Purchase Agreement, in which our indirect wholly-owned subsidiary Sohu Search sold all of the Class A ordinary shares of Sogou and Class B ordinary shares of Sogou owned by Sohu Search to Tencent Merger Sub at a purchase price of $9.00 per share. We received gross consideration of approximately $1.18 billion in cash from the Tencent/Sohu Sogou Share Purchase, and we no longer have any beneficial ownership interest in Sogou.
Our principal executive offices are located at Sohu.com Media Plaza, Block 3, No. 2, Kexueyuan South Road, Haidian District, Beijing, 100190, People’s Republic of China. Our telephone number at this address is +86
10-6272-6666.
Our registered office in the Cayman Islands is located at the offices of Maples Corporate Services Limited, P.O. Box 309, Ugland House, Grand Cayman,
KY1-1104,
Cayman Islands.
We are subject to the periodic reporting and other informational requirements of the Exchange Act. Under the Exchange Act, we are required to file with or furnish to the SEC reports and other information. Copies of such reports and other information, when so filed or furnished, may be inspected without charge and may be obtained at prescribed rates at the public reference facilities maintained by the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain information regarding the Washington, D.C. Public Reference Room by calling the SEC at
1-800-SEC-0330.
The SEC also maintains a Website at www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system. As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in this annual report have been derived from various public data sources and a commissioned
third-party
industry report. In connection with our preparation of this annual report, Sogou commissioned iResearch to provide market research concerning the online search industry in China. In deriving the market size of this industry, iResearch may have adopted different assumptions and estimates for certain metrics from what others might have adopted. While we generally believe the report to be reliable, neither we nor Sogou has independently verified the accuracy or completeness of such information. Such report may not be prepared on a comparable basis or may not be consistent with other sources.
Industry data and projections involve a number of assumptions and limitations. Industry data and market share data should be interpreted in the lightSection 16 of the defined industries in which Sogou operates. Any discrepancy in the interpretation of such data could lead to different measurements and projections, and actual results could differ from the projections.
Exchange Act.
Sogou may not be able to prevent others from making unauthorized use of its intellectual property, which could harm Sogou’s business and competitive position.BUSINESS OVERVIEW
We regard Sogou’s patents, copyrights, trademarks, trade secrets,are a leading Chinese online media, video, and game business group providing comprehensive online products and services on PCs and mobile devices in China. Our businesses are conducted by the Sohu Group, which consists of Sohu and Changyou. Sohu is a leading Chinese language online media content and services provider, and Changyou is a leading online game developer and operator in China that 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.
Through the operation of Sohu and Changyou, we generate brand advertising revenues, online game revenues and other intellectual property as critical to its business. Unauthorized userevenues. Brand advertising and online games are our core businesses. For the year ended December 31, 2021, total revenues generated by Sohu and Changyou were approximately $835.6 million, including total brand advertising revenues of Sogou’s intellectual property by third parties may adversely affect its business$135.0 million, total online game revenues of $638.2 million, and reputation. Sogou relies on a combinationtotal other revenues of intellectual property laws and contractual arrangements to protect its proprietary rights. It is often difficult to register, maintain, and enforce intellectual property rights in the PRC. Statutory laws and regulations are subject to judicial interpretation and enforcement and may not be applied consistently due to the lack of clear guidance on statutory interpretation in the PRC. In addition, contractual agreements may be breached by counterparties, and there may not be adequate remedies available to it for any such breach. Accordingly, Sogou may not be able to effectively protect its intellectual property rights or to enforce its contractual rights in China. Policing any unauthorized use of Sogou’s intellectual property is difficult and costly and the steps Sogou has taken may be inadequate to prevent the misappropriation of its intellectual property. In the event that Sogou resorts to litigation to enforce its intellectual property rights, such litigation could result in substantial costs and a diversion of its managerial and financial resources. We can provide no assurance that Sogou will prevail in such litigation. In addition, Sogou’s trade secrets may be leaked or otherwise become available to, or be independently discovered by, its competitors.
Pending or future litigation could have an adverse impact on Sogou’s financial condition and results of operations.
From time to time, Sogou has been, and may in the future be, subject to lawsuits brought by its competitors, individuals, or other entities against it. Sogou is currently involved in several lawsuits in PRC courts where its competitors instituted proceedings or asserted counterclaims against it and Sogou instituted proceedings or asserted counterclaims against its competitors. For example, there are a number of legal proceedings currently pending between Sogou and Baidu in which Sogou alleges that Baidu’s input method infringes certain of Sogou’s patents relating to Sogou Input Method and seeks monetary damages, while Baidu has asserted in counterclaims or in a legal proceeding that Baidu initiated against Sogou that Sogou Input Method infringes certain of Baidu’s patents, and seeks monetary damages. There is also a lawsuit pending against Sogou in which Shanghai Cishu Publications Ltd. has alleged that Sogou used vocabulary content without permission and seeks monetary damages.
In addition, PRC courts decided in Baidu’s favor a case in which Baidu had alleged that certain functions of Sogou Input Method unfairly divert users to Sogou. There are also two putative class action lawsuits that were filed against Sogou in the United States, one in a State court in the State of California and one in the United States District Court for the Southern District of New York, that alleged violations of U.S. securities laws in connection with Sogou’s IPO in 2017. Although the plaintiffs’ complaint filed in the United States District Court in New York was found by the court to be without merit, and the lawsuit was dismissed with prejudice, the lawsuit in state court in California remains pending. In addition, a complaint was filed against Sogou in the United States District Court for the Southern District of New York by a single plaintiff, who alleges that the initial Schedule 13E-3 filed with the SEC for the Sogou Merger was false and misleading, purports to demand that certain language be added to the Schedule 13E-3, and seeks an injunction to prevent the Sogou Merger as well as attorneys’ fees and costs.
Where Sogou can make a reasonable estimate of the liability relating to pending litigation against it and determine that an adverse result for Sogou from such litigation is probable, Sogou records a related contingent liability. As additional information becomes available, Sogou assesses the potential liability and revise estimates as appropriate. However, due to the inherent uncertainties relating to litigation, the amount of Sogou’s estimates may be inaccurate, in which case Sogou’s financial condition and results of operation may be adversely affected. In addition, the outcomes of actions Sogou institutes may not be successful or favorable to it. Lawsuits against Sogou may also generate negative publicity that significantly harms its reputation, which may adversely affect its user and advertiser base. In addition to the related cost, managing and defending litigation and related indemnity obligations can significantly divert Sogou’s management’s and Board of Directors’ attention from operating its business. Sogou may also need to pay damages or settle lawsuits with a substantial amount of cash. While we do not believe that any currently pending proceedings are likely to have a material adverse effect on Sogou’s business, financial condition, results of operations, and cash flows, if there were adverse determinations in legal proceedings against Sogou, Sogou could be required to pay substantial monetary damages or adjust its business practices, which could have an adverse effect on its financial condition and results of operations, and cash flows.$62.4 million.
 
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Sohu: total revenues generated by Sohu were $186.6 million.
-
$124.2 million in brand advertising revenues, of which $75.4 million was from Sohu Media Portal, $26.8 million was from Sohu Video, and $22.0 million was from Focus; and
-
$62.4 million in other revenues, mainly attributable to revenues from paid subscription services, interactive broadcasting services, and revenue sharing from other platforms.
Changyou: total revenues generated by Changyou were $649.0 million.
-
$638.2 million in online game revenues, of which $469.3 million was from PC games, and $168.9 million was from mobile games; and
-
$10.8 million in brand advertising revenues, mainly attributable to Changyou’s 17173.com Website.
Sohu’s Business
Brand Advertising Business
Sohu’s 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 mobile phones, tablets and PCs. The majority of our products and services are provided in China through Sohu Media Portal, Sohu Video and Focus.
Sohu Media Portal.
Sohu Media Portal is a leading online news, information and content services provider in China. It provides users with access to comprehensive content through the mobile phone application Sohu News APP, the mobile portal m.sohu.com and www.sohu.com for PCs;
Sohu Video.
Sohu Video is an online video content and services provider in China through the mobile phone application Sohu Video APP, tv.sohu.com, and the PC video application ifox for PCs; and
Focus.
Focus (www.focus.cn) is an 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.
Other Sohu Business
Sohu also engages in the other business, which consists primarily of paid subscription services, interactive broadcasting services, and revenue sharing from other platforms. Revenues generated by Sohu from the other business are classified as other revenues in our consolidated statements of comprehensive income.
Changyou’s Business
Changyou’s business lines consist of the online game business and the platform channel business, which consists primarily of online advertising and mobile game distribution services. Before ceasing its operations in August 2019, Changyou also operated a cinema advertising business, which consisted primarily of the acquisition from operators of movie theaters, and the sale to advertisers, of
pre-film
advertising slots.
Online Game Business
Changyou’s online game business offers PC games and mobile games to game players. All of Changyou’s games are operated under the item-based revenue model, meaning that game players can play the games for free, but may choose to pay for virtual items, which are
non-physical
items that game players can purchase and use within a game, such as characters, weapons, gems, pets, skills, fashion items and other
in-game
consumables, features and functionalities. Revenues derived from the operation of online games are classified as online game revenues in our consolidated statements of comprehensive income.
PC Games
PC games 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. Changyou’s dominant game is TLBB PC, a PC based
client-end
game. For the year ended December 31, 2021, revenues from TLBB PC were $421.7 million, accounting for approximately 66% of Changyou’s online game revenues, approximately 65% of Changyou’s total revenues, and approximately 50% of the Sohu Group’s total revenues.
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Mobile Games
Mobile games are played on mobile devices and require an Internet connection. In the second quarter of 2017, Changyou launched a mobile game, Legacy TLBB Mobile, which is operated by Tencent under license from Changyou. For the year ended December 31, 2021, revenues from Legacy TLBB Mobile were $79.5 million, accounting for approximately 12% of Changyou’s online game revenues, approximately 12% of Changyou’s total revenues, and approximately 10% of the Sohu Group’s total revenues.
Platform Channel Business
Changyou’s platform channel business consists primarily of the operation of the 17173.com Website. Prior to RaidCall’s ceasing operations in March 2019, Changyou’s platform channel business also included RaidCall.
17173.com Website
The 17173.com Website provides news, electronic forums, online videos, and other online game information services to game players, as well as mobile game distribution services. Changyou generates online advertising revenues from providing advertising services to third-party advertisers on the 17173.com Website and online game revenues from mobile game distribution services.
RaidCall
Prior to ceasing operations in March 2019, RaidCall provided online music and entertainment services, primarily in Taiwan. IVAS revenues that were generated by RaidCall are classified as other revenues in our consolidated statements of comprehensive income.
Cinema Advertising Business (Discontinued)
Prior to ceasing its operations in August 2019, Changyou also operated a cinema advertising business, which consisted primarily of the acquisition from operators of movie theaters, and the sale to advertisers, of
pre-film
advertising slots. Revenues that were generated by Changyou’s cinema advertising business are reflected as discontinued operations in our consolidated statements of comprehensive income.
Changyou’s Share Structure
As a result of the completion of the Changyou Merger on April 17, 2020, we beneficially held and controlled, and continue to beneficially hold and control, 100% of the combined total of Changyou’s outstanding ordinary shares and 100% of the total voting power in Changyou. We consolidate Changyou in our consolidated financial statements and, prior to the completion of the Changyou Merger on April 17, 2020, also provided for noncontrolling interests reflecting ordinary shares in Changyou held by shareholders other than us (“Changyou noncontrolling shareholders”).
Sogou’s Business (Discontinued)
Between our entry into the Tencent/Sohu Sogou Share Purchase Agreement on September 29, 2020 and the completion of the Tencent/Sohu Sogou Share Purchase on September 23, 2021, Sogou met the criteria for discontinued operations. Accordingly, the results of Sogou’s operations were excluded from our results from continuing operations, and revenues that were generated by Sogou are reflected as discontinued operations, in our consolidated statements of comprehensive income. We ceased consolidating Sogou in our consolidated financial statements after September 23, 2021. Retrospective adjustments to our historical statements have been made in order to provide a consistent basis of comparison.
Search and Search-related Business
Prior to the completion of the Tencent/Sohu Sogou Share Purchase on September 23, 2021, our search and search-related business consisted primarily of search and search-related advertising services offered by Sogou. Search and search-related advertising services enabled advertisers’ promotional links to be displayed on Sogou’s search results pages and other Internet properties and third parties’ Internet properties where the links were relevant to the subject and content of searches and such properties. Sogou’s advertising services expanded distribution of advertisers’ promotional links and advertisements by leveraging traffic on third parties’ Internet properties, including Web content, software, and mobile applications.
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Other Sogou Business
Sogou also offered IVAS, primarily with respect to the operation of Web games and mobile games developed by third parties, and offered other products and services.
PRODUCTS AND SERVICES
Sohu’s Business
Brand Advertising Business
Sohu’s main business is currently subjectthe 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 mobile phones, tablets and PCs. The majority of our products and services are provided in China through Sohu Media Portal, Sohu Video and Focus.
Sources
Sohu Media Portal
Sohu Media Portal is a leading online news, information and content services provider in China. We provide users comprehensive content by aggregating content from professional media organizations and partnering with independent contributors. We recommend to users personalized content that may interest them, and encourage them to interact with each other based on our social distribution features. We provide content through the mobile phone application Sohu News APP, the mobile portal m.sohu.com and www.sohu.com for PCs.
Sohu Video
Sohu Video is an online video content and service provider in China. We provide users free access to the majority of our extensive and comprehensive video content library, which includes popular domestic and overseas television programs, such as movies, animations, and documentaries, purchased from third parties; self-developed video content; variety shows; UGC; PGC; and other content generated through live broadcasting. We also offer selected
fee-based
content from which we generate subscription revenues. Users can access our video content via mobile devices by visiting our mobile video site or installing Sohu Video APP, our mobile video application, or via PCs through tv.sohu.com or ifox, our PC video application.
Focus
Focus (www.focus.cn) is an online real estate information and services provider in China. Focus provides diversified online content consisting of new homes for sale, properties for
re-sale
and home furnishing services, and other comprehensive services and solutions for real estate developers, house seekers and homeowners.
Business Model
In the brand advertising business, we enjoy a strong competitive position as one of the leading Internet companies in China. Through the platforms described above, we have built a sizeable user base through good user experiences provided by our products and services. This user base is appealing to advertisers. Through mobile devices and PCs, we provide advertisement placements to our advertisers on different Internet platforms and in different formats. We rely on both direct sales by our internal sales force and sales by advertising agents for advertising on our Internet platforms. Our advertisers include multinational companies and Chinese domestic
medium-sized
and small companies.
Currently we have three main types of pricing models, consisting of the futureFixed Price model, the Cost Per Impression (“CPM”) model, and the Cost Per Click (“CPC”) model.
Fixed Price model
Under the Fixed Price model, a contract is signed to establish a fixed price for the advertising services to be provided. Given that advertisers benefit from displayed advertisements evenly over the period the advertisements are displayed, we recognize revenue on a straight-line basis over the period of display, provided all revenue recognition criteria have been met.
CPM model
Under the CPM model, the unit price for each qualifying display is fixed and 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. Given that the fees are priced consistently throughout the contract and the unit prices are fixed in accordance with our pricing practices for similar advertisers, we recognize revenue based on the fixed unit prices and the number of qualifying displays upon their occurrence, provided all revenue recognition criteria have been met.
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CPC model
Under the CPC model, there is no fixed price for advertising services stated in the contract with the advertiser and the unit price for each click is auction-based. We charge advertisers on a
per-click
basis, when the users click on the advertisements. Given that the fees are priced consistently throughout the contract and the unit prices are fixed in accordance with our pricing practices for similar advertisers, we recognize revenue based on qualifying clicks and the unit price upon the occurrence of the clicks, provided all revenue recognition criteria have been met.
Other Sohu Business
Sohu also engages in the other business, which consists primarily of paid subscription services, interactive broadcasting services, and revenue sharing from other platforms. Revenues generated by Sohu from the other business are classified as other revenues in our consolidated statements of comprehensive income.
Changyou’s Business
Online Game Business
Business Model
Changyou’s game players typically access Changyou’s games through personal computers and mobile devices, such as mobile phones and tablets, connected to the Internet. In order to access Changyou’s PC games, game access software must be installed in the computer being used. Game players using PCs can typically download Changyou’s game access software, interim updates and expansion packs directly from its main game Website. Game players access Changyou’s mobile games by downloading its mobile game applications, primarily from third-party mobile application stores or, to a lesser extent, from Changyou’s game Website.
Changyou’s online games consist primarily of MMORPGs. Changyou is also expanding its game portfolio with additional types of card-based role-playing games (“RPGs”), casual games and strategy games. MMORPGs are massive multiplayer online role -playing games that allow a large number of players to take on the role of a character and interact with one another within a virtual world. Card-based RPGs are RPGs in which players collect characters or other virtual items in the form of cards. Casual games generally involve simpler rules, shorter sessions, and require less learned skills. Strategy games are simulation games that allow players to control, manage and use game characters and items and to design and implement their own strategies to win the games.
Changyou’s games are operated under the item-based revenue model, meaning game players can play Changyou’s games for free, but may choose to pay for virtual items, which are
non-physical
items that game players can purchase and use within a game, such as characters, weapons, gems, pets, skills, fashion items and other
in-game
consumables, features and functionalities. Through virtual items, players are able to enhance their squad or characters, accelerate their progress in Changyou’s games, and share and trade with friends.
For players who choose to purchase virtual goods, Changyou delivers enhanced gameplay experiences and benefits, such as:
Accelerated Progress.
Many of Changyou’s games offer players the option to purchase items that can accelerate their progress in the game and increase their capabilities, so that they level up more quickly and compete more effectively against others in the game. While Changyou sells many items that accelerate progress in its games, Changyou monitors and carefully balances the disparity in capabilities between paying and
non-paying
game players to avoid discouraging
non-paying
game players and to keep the game challenging and interesting for paying game players.
Enhanced Social Interaction.
Changyou uses a variety of virtual items to promote interaction and to facilitate relationship-building among game players in its games.
Personalized and Customized Appearance.
Many of Changyou’s games offer players the option to purchase decorative and functional items to customize the appearance of their characters, pets, vehicles, houses and other
in-game
possessions to express their individuality.
Gifts.
Many of Changyou’s games offer players the option to purchase gift items to send to their friends. Examples of gift items include decorative items and time-limited items for special holiday events and festivals, such as Valentine’s Day, Spring Festival (Chinese New Year) and Christmas.
Changyou’s online game business includes games that it self-operates and games that it licenses out to third-party operators.
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Self-Operated Games
For self-operated games, Changyou determines the price of virtual items based on the demand or expected demand for such virtual items. Changyou may change the pricing of certain virtual items based on its consumption patterns. Changyou hosts the games on its own servers and is responsible for sales and marketing of the games as well as customer service. Changyou’s self-operated games include PC games and mobile games developed in house as well as PC games and mobile games that Changyou licenses from timeor jointly develops with third party developers.
Licensed-Out
Games
Changyou also authorizes third parties to time face,operate its online games. Changyou has granted an exclusive license to Tencent to distribute and operate its mobile game Legacy TLBB Mobile within China, and has licensed its PC game TLBB and mobile games Legacy TLBB Mobile and TLBB 3D to third-party operators in selected overseas markets outside of China, including Vietnam, Singapore, and Malaysia.
The
licensed-out
games include PC games and mobile games developed in house as well as mobile games licensed from and jointly developed with third-party developers. Under Changyou’s licensing arrangements with third-party operators, the operators pay Changyou upfront license fees and Changyou has revenue sharing rights over the terms of the licenses. The licenses are typically for a term of one to three years. Changyou provides updates and expansion packs for the licensed games, typically after it launches the updates and expansion packs in China.
For
licensed-out
games, the third-party operators are responsible for all operations and costs, including marketing and customer service, as well as the leasing and maintenance of servers.
Platform Channel Business
Changyou’s platform channel business consists primarily of the operation of the 17173.com Website. Prior to RaidCall’s ceasing operations in March 2019, Changyou’s platform channel business also included RaidCall.
17173.com Website
The 17173.com Website provides news, electronic forums, online videos, and other online game information services to game players, as well as mobile game distribution services. Changyou generates online advertising revenues from providing advertising services to third-party advertisers on the 17173.com Website and online game revenues from mobile game distribution services.
RaidCall
Prior to ceasing operations in March 2019, RaidCall provided online music and entertainment services, primarily in Taiwan. IVAS revenues that were generated by RaidCall are classified as other revenues in our consolidated statements of comprehensive income.
Cinema Advertising Business (Discontinued)
Prior to ceasing its operations in August 2019, Changyou also operated a cinema advertising business, which consisted primarily of the acquisition from operators of movie theaters, and the sale to advertisers, of
pre-film
advertising slots. Revenues that were generated by Changyou’s cinema advertising business are reflected as discontinued operations in our consolidated statements of comprehensive income.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We regard our patents, copyrights, service marks, trademarks, trade secrets and other intellectual property infringement claims, whichas critical to our success. We rely on patent, trademark and copyright law, trade secret protection,
non-competition
and confidentiality and/or license agreements with our employees, customers, partners and others to protect our intellectual property rights. Before we launch any new products or services, we generally apply for registration of related patents, trademarks, and software copyrights. Despite our precautions, it may be possible for third parties to obtain and use our intellectual property without authorization. Furthermore, the validity, enforceability and scope of protection of intellectual property rights in Internet-related industries are uncertain and still evolving. The laws of the PRC and certain other countries do not protect intellectual property to the same extent as do the laws of the United States.
We have been issued 267 patents in China covering inventions, utility models, and designs; we have 176 patent applications currently pending in China; and we intend to apply for more patents in China and in countries and regions outside of China to protect our core technologies and intellectual property.
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We have registered three service marks with the U.S. Patent and Trademark Office of the CNIPA, consisting of Sohu.com, registered on August 1, 2000; Sohu.com (stylized), registered on August 1, 2000; and Sohu, registered on June 13, 2000. We have registered 3,678 trademarks with the Trademark Office of the CNIPA, including the marks “SOHU.com,” “ChangYou.com,” and “cyou.com” and marks relating to our products such as Sohu.com logos, Sohu Fox logos, GoodFeel logos, Go2Map, Sohu Focus, Blade Online, and 17173, and the corresponding Chinese versions of the marks; and we are in the process of applying for the registration of 134 other trademarks. We are the registered owner of 372 registered trademarks and have also applied for 49 trademarks in countries and regions outside of China. In addition, we are in the process of applying for recognition of certain of our marks as famous Beijing trademarks and well-known Chinese trademarks. We also filed registration of trademarks relating to our subsidiary companies’ names and Changyou’s online games and other businesses in various countries and regions, such as the United States, European Union, Turkey, Japan, South Korea, Malaysia, Indonesia, Vietnam, Thailand, Brazil, Taiwan and Hong Kong. Our rights to these marks could be
time-consuming
affected adversely if any of our applications are rejected. It is possible that our competitors will adopt product or service names similar to ours, thereby impeding our ability to distinguish our brand and costlypossibly leading to defend,customer confusion. In addition, Changyou has the license rights to use the trademarks, such as TLBB, TLBB logos and TLBB 3D, for its mobile games TLBB 3D and Legacy TLBB Mobile and for its PC game TLBB under its existing license agreements with the holder of the intellectual property rights with respect to the popular Chinese martial arts novel Tian Long Ba Bu written by Louis Cha. After the expiration of their terms Changyou may not be able to renew these license agreements with commercial terms that are favorable to Changyou, if at all, and Changyou’s inability to renew these license agreements could have an adverse impact oncause Changyou to lose the right to use the trademarks related to those games to the extent that they relate to Tian Long Ba Bu. See “Risk Factors—Risks Related to Changyou.com Limited—Risks Related to Changyou’s Business—Overall Risks—Changyou may need to incur significant expenses to enforce its financialproprietary rights, and if it is unable to protect such rights, its competitive position and resultsfinancial performance could be harmed” and “- Changyou may not have exclusive rights to trademarks, designs and technologies that are crucial to its business” in Item 3.
We are the registered owner of operations, particularly if Sogou is required840 software copyrights and 590 copyrights for works in China, each of which we have registered with the State Copyright Bureau of China and its local branches. In addition to paythe above, we have also registered the copyrights for 20 works in countries and regions outside of China.
We own the rights to 309 domain names that we use in connection with the operation of our business, including the Sohu and Changyou websites.
Many parties are actively developing chat, search, AI technologies, Web directory and related Web technologies. We expect these parties to continue to take steps to protect these technologies, including seeking patent protection. There may be patents issued or pending that are held by others and cover significant damagesparts of our technology, business methods or cease offering anyservices. For example, we are aware that a number of its products or curtail any key featurespatents have been issued in the areas of its products.
e-commerce,
Web-based
information indexing and retrieval and online direct marketing. Disputes over rights to these technologies may arise in the future. We cannot be certain that theour products services and intellectual property used in Sogou’s normal course of business do not or will not infringe valid patents, copyrights or other intellectual property rights held by third parties. Sogou currently is, andWe may in the future be subject to claims and legal proceedings and claims, from time to time, relating to the intellectual property of others in the ordinary course of its business,our business. See “Item 8. Financial Information—Legal Proceedings”.
We also intend to continue licensing technology from third parties. The market is evolving and we may in the future be requiredneed to pay damages orlicense additional technologies to agree to restrict its activities. See “-Pending or future litigation could have an adverse impact on Sogou’s financial condition and results of operations.” In particular, if Sogou is found to have violated the intellectual property rights of others, Sogou may be enjoined from using such intellectual property, may be ordered to pay damages, and may incur licensing fees or be forced to develop alternatives. Sogou may incur substantial expense in defending against
third-party
infringement claims, regardless of their merit. Successful infringement claims against Sogou may result in substantial monetary liability or may materially disrupt the conduct of its business by restricting or prohibiting its use of the intellectual property in question.
Sogou may not have exclusive rights to technology, trademarks, and designs that are crucial to its business.
Sogou has applied for various patents relating to its business. While Sogou has succeeded in obtaining some patents, some of its patent applications are still under examination by the Patent Office of the CNIPA. Approvals of its patent applications are subject to determinations by the Patent Office of the CNIPA and relevant overseas authorities that there are no prior rights in the applicable territory. In addition, Sogou has applied for initial registrations in the PRC and overseas, and/or changes in registrations relating to transfers of its Sogou logos and other of its key trademarks in the PRC, and the corresponding Chinese versions of the trademarks, so as to establish and protect its exclusive rights to these trademarks. While Sogou has succeeded in registering the trademarks for most of these marks in the PRC under certain classes, the applications for initial registration, and/or changes in registrations relating to transfers, of some marks and/or of some of trademarks under other classes are still under examination by the Trademark Office of the CNIPA, and relevant overseas authorities. Approvals of Sogou’s initial trademark registration applications, and/or of changes in registrations relating to such transfers, are subject to determinations by the Trademark Office of the CNIPA and relevant overseas authorities that there are no prior rights in the applicable territories.remain competitive. We cannot assure you that these patent and trademark applications will be approved. Any rejection of these applications could adversely affect Sogou’s rights to the affected technology, marks, and designs. In addition, even if these applications are approved, we cannot assure you that any issued patents or registered trademarks will be sufficient in scope to provide adequate protection of Sogou’s rights.
If Sogou’s search results contain information that is inaccurate or harmful to its users, its business and reputation may be adversely affected.
Sogou could be exposed to liability arising from its search results listings if information accessed through its services contains errors, and third parties may make claims against it for losses incurred in reliance on that information. Investigating and defending such claims could be expensive even if they did not result in liability, and Sogou does not carry any liability insurance against such risks.
In addition, if users do not perceive information that they access through Sogou’s search services to be authoritative, useful, and trustworthy, Sogou may not be able to retainlicense these technologies on commercially reasonable terms or at all. In addition, we may fail to successfully integrate any licensed technology into our services. Our inability to obtain any of these licenses could delay product and service development until alternative technologies can be identified, licensed and integrated.
TECHNOLOGY INFRASTRUCTURE
The Sohu Group has built what we believe is a reliable and secure network infrastructure, that will fully support our operations. We have professional technical support teams to maintain our current technology infrastructure and online operating platform, as well as develop new software features to further enhance the functionality of our management and security systems. We monitor the operation of our server network 24 hours a day, seven days a week. Our remote control system allows us to track our concurrent online users in real time, and discover and fix hardware or attract additionalsoftware problems on our server network in a timely fashion.
Sohu
As of December 31, 2021, Sohu maintained approximately 10,618 servers in China. To fully support the operation of Sohu’s content and services, Sohu established these data centers primarily through China Mobile, China United Network Communication Group Company Limited (“China Unicom”), and China Telecom Corporation (“China Telecom”), which are the three largest Internet connection service providers in China, to support most of Sohu’s core services. In addition, Sohu has established branch nodes in different provinces throughout China through different telecommunication operators in order to establish national coverage and provide fast and stable access to Sohu’s Internet platforms properties to users across China. In addition, Sohu has developed cooperation with several smaller private Internet service providers.
Sohu has developed close working relationships with China Mobile, China Unicom, China Telecom and
smaller-size
telecommunication operators. Sohu’s operations depend on the ability of China Mobile, China Unicom, and China Telecom to protect Sohu’s systems against damage from fire, power loss, telecommunications failure,
break-ins
and other events. These telecommunication operators provide Sohu with support services twenty-four hours per day, seven days per week. They also provide connectivity for Sohu’s servers through multiple high-speed connections. All facilities are protected by Uninterruptible Power Supplies.
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For reliability, availability, and serviceability, Sohu has created an environment in which each server can function independently. Key components of Sohu’s server architecture are served by multiple redundant machines. Sohu also uses
in-house
and third-party monitoring software. Sohu’s reporting and tracking systems generate daily traffic, demographic and advertising reports. Sohu deploys load balance equipment and cloud computing to avoid single point failure.
Sohu’s operations must accommodate a high volume of traffic and deliver frequently updated information. Components or features of Sohu’s products and services have in the past suffered outages or experienced slower response times because of equipment or software down time. These events have not had a material adverse effect on Sohu’s business to date, but such events could have a material adverse effect in the future.
Changyou
Changyou supports its operations with a network of reliable and secure physical and cloud-based servers that have fully supported its operations for many years. As of December 31, 2021, Changyou maintained for its online game business approximately 2,000 physical servers in Mainland China, and 3,000 cloud-based servers that are spread across Mainland China, Hong Kong, other Asia-pacific regions, Europe and North America. In order to enhance Changyou’s game players’ experience and to improve connectivity, Changyou has located its physical game servers in a number of regions throughout China. This allows its players to connect to the nearest servers that are located in their region without exchanging data across the national backbone network. Furthermore, to ensure high quality services for its game players, Changyou works with leading domestic cloud technology firms to provide efficient and stable game services using cloud-based resources.
MARKETING
Sohu
As Sohu is a leading Chinese online media company, our brand effectively provides us with
built-in
word-of-mouth
marketing and we have significantly benefited from this recognition of our brand in China. Applying our advanced livestreaming technologies, we also host high-quality marketing events, both online and offline, with the goal of strengthening our brand influence across certain verticals by consolidating our position as a mainstream media source, and enhancing our core competitiveness and credibility by leveraging high-quality content across our platform, thereby attracting both users and advertisers. Further, we continually promote our self-produced video programs across diversified online social media platforms to attract users to our platform.
We work closely with mobile application stores as well as performance-based online advertising platforms. We also cooperate with market-dominant mobile phone manufacturers to
pre-install
our Mobile Apps into their mobile phones to enhance our market influence and enlarge our user base.
Changyou
For self-operated games, Changyou employs a variety of innovative online and offline marketing methods, including online and offline advertising, social media, and
in-game
marketing. Changyou uses different methods to target different demographic groups of game players.
For online marketing, Changyou is able to leverage its reputation, business,game information portal, the 17173.com Website, as well as other game Websites to promote its games. Changyou is able to leverage its affiliation with Sohu, and resultstarget Sohu’s large user base as potential players of operationits games, by advertising on Sohu’s various Websites, which typically provide a direct link to its games. For games that Changyou believes are likely to be successful, Changyou may be harmed.seek celebrity endorsements and work with Internet celebrities on live broadcasting platforms to create additional publicity for the games.Changyou accesses online social media by advertising in online videos and marketing its games through various social networking Websites, mobile applications and online forums to create a vital effect among game players.
For offline marketing, Changyou organizes a variety of offline activities, such as player meetups, offline competitions and carnival events, to connect with players, increase the popularity of its games, and establish its brand image. In addition, ifChangyou launches
in-game
promotional events. Changyou also creates
in-game
events to attract existing and new game players through event-related features, such content contains inaccuracies, itas offering special holiday-edition virtual items to enhance game player participation at holiday time.
For mobile games in particular, Changyou designs and implements different marketing strategies for different game genres to attract the genres’ target players. Changyou works closely with performance-based online advertising platforms such as Ocean Engine, Guang Dian Tong, and Fen Si Tong where Changyou can target different user groups. Changyou also works with the Apple store and Android mobile application stores to market its games. For games with a specific user group, Changyou advertises on mobile applications, websites and other media outlets that cater to the same user group.
Changyou promotes its games in overseas markets with a targeted marketing approach, leveraging its data collection and analysis system. Changyou’s overseas marketing strategies also include using social media platforms and search engine management to promote its games.
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COMPETITION
The Internet and Internet-related markets in China are rapidly evolving. We believe the increase in China’s online population will draw more attention to the PRC Internet market from both domestic and multinational competitors. Our existing competitors may in the future achieve greater market acceptance and gain additional market share. It is also possible that users will seek to hold Sogou liable for damages, because Sogou provides links to such content, even though such content is provided by third partiesnew competitors may emerge and any negative publicity regarding the accuracy of such content could harm its reputation, and reduce user traffic.acquire significant market share. In addition, any negative publicity or incident involving Sogou’s peer companies could have an adverse impact on its industryour competitors may leverage their existing Internet platforms to cross-sell newly launched products and services. It is also possible that, as a whole, whichresult of deficiencies in turn could harm its reputation and reduce its user traffic. For example,legal protections afforded intellectual property in early 2016 it was widely reported that an unsuccessful experimental cancer treatment had been promoted in a sponsored search listing on a third party’sthe Internet property. Even though Sogou’s search results listings were not involved, we believe that the broad negative publicity surrounding the incident adversely affected the reputation of the online search industry in China, or inadequate enforcement of existing PRC laws protecting such intellectual property, we may not be able to prevent existing or new competitors from accessing and using our
in-house
developed Web content or technologies.
Competition for Sohu’s Business
In the PRC Internet space, competition for brand advertising business is intense and is expected to increase significantly in generalthe future. We compete with an adverse impactour peers and competitors in China primarily on Sogou’s userthe following basis:
access to financial resources;
gateway to host of Internet users’ activities;
technological advancements;
attractiveness of products;
brand recognition;
volume of traffic and results of operations in 2016.users;
quality of Internet platforms and content;
quality and quantity of purchased video content, self-developed video content, and user-generated content;
strategic relationships;
quality of services;
effectiveness of sales and marketing efforts;
talent of staff; and
pricing.
Over time, our competitors may gradually build certain competitive advantages over us in terms of:
greater brand recognition among Internet users and clients;
better products and services;
larger user and advertiser bases;
more extensive and
well-developed
marketing and sales networks; and
substantially greater financial and technical resources.
There are a number of existing or new PRC Internet companies, which include companies controlled or sponsored by private entities and by PRC government entities. As an Internet portal, we compete with 58.com, Alibaba, Autohome, Baidu, BitAuto, Bilibili, Douyin, Douyu, Fang, Huya, iQIYI, JOYY, Kuaishou, Leju, Mango TV, Momo, NetEase, Phoenix, Qutoutiao, Sina, Tencent, TouTiao, and Youku.
We also compete with traditional forms of media, such as newspapers, magazines, radio and television, for advertisers, advertising revenues and content. Some of these traditional media, such as CCTV, Xinhua News Agency and People’s Daily, have extended their businesses into the Internet market. As a result, we expect to face more intense competition with traditional media companies in both their traditional media and in the Internet-related markets.
Competition for Changyou’s Business
Online Game Business
In the online game industry, Changyou competes principally with online game developers and operators in China, such as Archosaur, Giant, IGG, Lilith, miHoYo, NetDragon, NetEase, Perfect World and Tencent.
Platform Channel Business
In the platform channel business, Changyou’s game information portal operated through the 17173.com Website competes in China with other game information portals, such as Duowan.com, operated by JOYY Inc., and Game.sina.com.cn, operated by Sina Corporation.
The existing and potential competitors in the online games industry compete with Changyou for talent, game player spending, time spent on game playing, marketing activities, quality of games, and distribution network. The existing and potential competitors in the online advertising industry compete with Changyou for talent, advertiser spending, number of unique visitors, number of page views, visitors’ time spent on Websites, and quality of service.
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FACILITIES
Sohu
In February 2007, we purchased an office building of approximately 18,265 square meters in Beijing, for consideration of approximately $35.3 million, of which approximately 18,228 square meters have been leased to Sogou may be subjectsince November 2013.
In November 2009, we entered into a contract for the purchase and development of an office building of approximately 41,283 square meters in Beijing to regulatory investigationsserve as our headquarters, for consideration of approximately $162 million. The office building was placed in service in May 2013.
As of December 31, 2021, we leased office space of approximately 9,379 square meters in the PRC.
Changyou
In August 2009, Changyou purchased an office building of approximately 14,950 square meters in Beijing, for consideration of approximately $33.4 million. Since January 1, 2016, Changyou has leased out this building to third-party business tenants.
In August 2010, Changyou entered into a contract for the purchase and sanctionsdevelopment of an office building of approximately 56,549 square meters in Beijing to serve as its headquarters, for inappropriate or illegal content that is accessed through its search results.consideration of approximately $171 million. The office building was placed in service in December 2013.
As of December 31, 2021, Changyou leased office space in Beijing of approximately 407 square meters. Changyou also leased office space of approximately 4,491 square meters in other cities in the PRC and in other countries.
GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES
The online searchfollowing description of PRC laws and regulations is based upon the opinion of Haiwen & Partners, or Haiwen, our PRC legal counsel. The laws and regulations affecting China’s Internet industry and other aspects of our business are at an early stage of development and are evolving. There are substantial uncertainties regarding the interpretation and enforcement of PRC laws and regulations. We cannot be certain that the PRC regulatory authorities would find that our corporate structure and business operations strictly comply with PRC laws and regulations. If we are found to be in China is subject to extensive regulation. If content accessed through Sogou’s search services includes information thatviolation of PRC governmental authorities find illegal or inappropriate, such as obscenity, pornography, gambling, superstition, terrorlaws and violence content, Sogouregulations by the PRC government, we may be required to curtailpay fines, obtain additional or even shut down its searchdifferent licenses or permits, and/or change, suspend or discontinue our business operations until we are found to comply with applicable laws. For a description of legal risks relating to our ownership structure and business, see “Item 3. Key Information—Risk Factors.”
Overview
The Chinese government has enacted an extensive regulatory scheme governing Internet-related areas, such as telecommunications, Internet information services, international connections to computer information networks, online game services, information security and Sogou may be subject to other penalties or suffer loss in revenues, allcensorship.
Various aspects of which could harm Sogou’s reputation and may negatively affect Sogou’s business, financial condition, and results of operations and prospects. Although Sogou seeks to prevent fraudulent or otherwise illegal or inappropriate websites and information from being included in its search results, such measures may not be effective. Further, even with such measures it may not be possible for Sogou to prevent fraudulent or otherwise illegal or inappropriate content from being includedthe PRC Internet industry are regulated by Sogou’s advertisers in products and services they provide. For example, Sogou suspended part of Sogou’s advertising services for 10 days in July 2018 in order to implement remedial measures to ensure compliance with government regulations following a government investigation into certain non-compliant advertisements created by a third party unrelated to Sogou and displayed on Sogou’s platform in June 2018. See “Risks Related to China’s Regulatory and Economic Environment—Regulation and censorship of information distribution in China may adversely affect our business”; and “Risks Related to China’s Regulatory and Economic Environment—Thevarious PRC government may prevent us from distributing, and we may be subject to liability for, content that it believes is inappropriate.”governmental authorities, including, among others:
 
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the MIIT, which resulted from the merger of the former Ministry of Information Industry and other governmental departments;
the MCT, which was established in March 2018 and resulted from the merger of the former Ministry of Culture (the “MOC”), and the former China National Tourism Administration (the “CNTA”). The “MCT” as used in this report refers to the governmental authority that resulted from the merger, as well as to the MOC and the CNTA separately for periods prior to the merger;
the MPS;
the MOFCOM;
the SAMR, which resulted from the merger of, and assumed the responsibilities previously held by, the State Administration for Industry and Commerce (the “SAIC”), the General Administration of Quality Supervision, Inspection and Quarantine (the “AQSIQ”) the Certification and Accreditation Administration, the Standardization Administration of China (the “SAC”), and the State Food and Drug Administration (the “SFDA”). The “SAMR” as used in this report refers to the governmental authority that resulted from the merger, as well as to the SAIC, the AQSIQ, the SAC, and the SFDA separately for periods prior to the merger;
the SAPPRFT was reorganized into three separate governmental authorities, the NRTA, the NFA, and the SPPA, in March 2018. The SAPPRFT had resulted from the merger of the former General Administration of Press and Publication (the “GAPP”) with the former State Administration of Radio, Film and Television (the “SARFT”) in March 2013. The “NRTA,” the “NFA” and the “SPPA” as used in this report refer to the respective governmental authorities after the reorganization; the “SAPPRFT” as used in this report refers to the governmental authority that resulted from the merger for the period after the merger and prior to the reorganization, as well as to the GAPP and the SARFT separately for periods prior to the merger;
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Sogouthe PRC State Council Information Office (the “SCIO”);
the CAOC;
the SAFE; and
the China Banking and Insurance Regulatory Commission (the “CBIRC”), which resulted from the merger of, and assumed the responsibilities previously held by, the China Banking Regulatory Commission (the “CBRC”) and the China Insurance Regulatory Commission (the “CIRC”). The “CBIRC” as used in this report refers to the governmental authority that resulted from the merger, as well as to the CBRC and the CIRC separately for periods prior to the merger.
Specific Statutes and Regulations
Requirements for Establishment of WFOEs
Under the Law of the People’s Republic of China on Foreign Investment Enterprises (the “Foreign Investment Enterprises Law”), promulgated on April 12, 1986 and amended on October 31, 2000, the establishment of a WFOE was required to be approved by MOFCOM or one of its local branches. On September 3, 2016, the Foreign Investment Enterprises Law was further amended by the Decision of the Standing Committee of the National People’s Congress on Amending Four Laws including the Law of the People’s Republic of China on Wholly Foreign-Owned Enterprises, issued by the Standing Committee of the National People’s Congress, and on October 8, 2016 MOFCOM issued the Interim Measures for the Administration of Filing for Establishment and Change of the Foreign Investment Enterprises (the “Interim Filing Measures”), which were further amended on July 30, 2017 and June 29, 2018, respectively. The Foreign Investment Enterprises Law and the Interim Filing Measures provide that, with certain exceptions, the establishment of FIEs is only subject to certain filing requirements with, and no longer requires prior approval by, MOFCOM or its local branches.
On March 15, 2019, the Standing Committee of the National People’s Congress issued the
Foreign Investment Law, which took effect on January 1, 2020 and replaced the Foreign Investment Enterprises Law and other laws relating to foreign investment. The stated purpose of the Foreign Investment Law is to expand China’s opening up to the outside world, promoting and regulating foreign investment, and protecting the rights and interests of foreign investors. The Foreign Investment Law defines “foreign investment” as investment activity in China conducted directly or indirectly by foreign investors through any of the following methods: (i) the foreign investor, by itself or together with other investors, establishes an FIE in China; (ii) the foreign investor acquires shares or the equity securities, asset tranches, or similar rights or interests in enterprises in China; (iii) the foreign investor, by itself or together with other investors, invests and establishes a new project in China; or (iv) the foreign investor invests in China by any other means specified by laws, administrative regulations, or provisions prescribed by the State Council. In addition, the Foreign Investment Law provides, for example, that treatment of foreign investors and their investments during the investment access stage may not be inferior to treatment afforded to PRC domestic investors and their investments, except where a foreign investment is in a category of restricted investments. The Foreign Investment Law also provides that the PRC government will establish an information reporting system, and that foreign investors and FIEs will be required to submit investment information through an enterprise registration system and an enterprise credit information publicity system. On December 30, 2019 the MOFCOM issued the
Measures for the Reporting of Foreign Investment Information
(the “Reporting Measures”), which took effect on January 1, 2020, the same date as the effective date of the Foreign Investment Law to implement the information reporting system and replace the Interim Filing Measures. The Reporting Measures require that foreign investors establishing FIEs in China submit an initial report through the enterprise registration system; there is no longer any filing requirement with MOFCOM or its local branches under the Reporting Measures. On December 12, 2019, the State Council also issued the
Implementing Regulations of the Foreign Investment Law
and, on December 26, 2019, the Supreme People’s Court issued the
Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of the Foreign Investment Law of the People’s Republic of China
, both of which became effective on January 1, 2020. As the Foreign Investment Law and the related implementing regulations are newly-issued, their impact upon the existing procedures required for the establishment of an FIE remains unclear, pending further clarification and guidance from the MOFCOM and other relevant governmental authorities. On December 19, 2020, the National Development and Reform Commission (the “NDRC”) and the MOFCOM promulgated the Security Review Measures, which became effective on January 18, 2021. The Security Review Measures stipulate that investment by foreign investors in specified industries within the PRC that affects or may affect national security will be subject to security review by relevant governmental authorities.
Each of our WFOEs established before September 3, 2016 was established with proper approval, and the two WFOEs that were established by Changyou on April 13, 2020 and November 12, 2020 have fulfilled their reporting obligations under the Reporting Measures.
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Requirements for Obtaining Business Licenses
All China-based companies may commence operations only upon the issuance of a business license by the relevant local branch of the SAMR. All of our China-based subsidiaries and VIEs have been issued business licenses by the relevant local branches of the SAMR.
In the opinion of Haiwen, our principal China-based subsidiaries and principal VIEs have satisfied the requirements for business licenses.
Regulation of Value-added Telecommunications Services
The
Telecommunications Regulations of the People’s Republic of China (“Telecom Regulations”)
, implemented on September 25, 2000 and amended on July 29, 2014 and February 2, 2016, are the primary PRC law governing telecommunication services, and set out the general framework for the provision of telecommunication services by domestic PRC companies. The Telecom Regulations require that telecommunications service providers procure operating licenses prior to commencing operations. The Telecom Regulations draw a distinction between “basic telecommunications services,” which we generally do not provide, and “value-added telecommunications services.” The Telecom Regulations define value-added telecommunications services as telecommunications and information services provided through public networks. The
Catalogue of Telecommunications Business (“Catalogue”),
which was issued as an attachment to the Telecom Regulations and updated in February 2003, December 2015 and June 2019, identifies Internet data centers, content delivery networks, domestic Internet virtual private networks, Internet access, online data and transaction processing,
on-demand
voice and image communications, message storage and forwarding (including voice mailbox,
e-mail
and online fax services), call centers, and online information and data search as value-added telecommunications services. We engage in various types of business activities that are value-added telecommunications services as defined and described by the Telecom Regulations and the Catalogue.
On July 3, 2017, the MIIT issued the
Administration Measures for Telecommunications Business Operating Permits (the “Telecom License Measures”)
, which became effective on September 1, 2017, to supplement the Telecom Regulations and replace the previous
Measures on the Administration of Telecommunications Business Operating Permits
promulgated in 2009
.
The Telecom License Measures provide requirements and procedures for obtaining licenses for value-added telecommunications services, and stipulate that the competent governmental authorities will mandate improved credit management mechanisms for telecommunication business operators, and will establish an online platform in connection with telecommunication business operating permits. The Telecom License Measures also confirm that there are two types of telecom operating licenses for operators in China, one for basic telecommunications services and one for value-added telecommunications services. A distinction is also made as to whether a license is granted for “intra-provincial” or “trans-regional” (inter-provincial) activities. An appendix to each license granted will detail the permitted activities of the enterprise to which it was granted. An approved telecommunication services operator must conduct its business (whether basic or value-added) in accordance with the specifications recorded in its Telecommunications Services Operating License.
The business activities of Sohu Internet include providing content to mobile phone users through the platforms of China’s main three telecommunications operators. On April 25, 2004, the MIIT issued a notice stating that China mobile network operators may only provide mobile network access to those mobile Internet service providers which have obtained licenses from the relevant local arm of the MIIT before conducting operations. On the basis of the notice, China Mobile Communication Corporation (“China Mobile”) has required each of its mobile Internet service providers to first obtain a license for trans-regional value-added telecommunications services in order to gain full access to its mobile network, which is a nationwide policy in line with a similar notice issued by the Beijing branch of China Mobile on April 12, 2004.
On August 8, 2014, the MIIT issued to Sohu Internet a Value-Added Telecommunication Services Operating License, which was renewed on July 23, 2019, that authorizes the provision of Internet data center services, Internet content distribution services, and Internet access services, all of which are classified as value-added telecommunication services. On January 30, 2015, the MIIT issued to Guangzhou Qianjun a Value-Added Telecommunications Services Operating License, which was renewed on November 23, 2019, that authorizes the provision of Internet information services, which are also classified as value-added telecommunication services.
Regulation of Foreign Direct Investment in Value-Added Telecommunications Companies
Various PRC regulations currently restrict foreign-invested entities from engaging in value-added telecommunication services, including providing Internet information services and operating online games. Foreign direct investment in telecommunications companies in China is regulated by the
Regulations for the Administration of Foreign-Invested Telecommunications Enterprises (“FITE Regulations”)
, which were issued by the PRC State Council, or State Council, on December 11, 2001, became effective on January 1, 2002 and were amended on September 10, 2008 and February 6, 2016. The FITE Regulations stipulate that foreign invested telecommunications enterprises in the PRC (“FITEs”) must be established as Sino-foreign equity joint ventures. Under the FITE Regulations and in accordance with
WTO-related
agreements, the foreign party to a FITE engaging in value-added telecommunications services may hold up to 50% of the equity of the FITE, with no geographic restrictions on the FITE’s operations. On June 30, 2016, the MIIT issued an
Announcement of the Ministry of Industry and Information Technology on Issues concerning the Provision of Telecommunication Services in the Mainland by Service Providers from Hong Kong and Macao
(the “MIIT Announcement”), which provides that investors from Hong Kong and Macau may hold more than 50% of the equity in FITEs engaging in certain specified categories of value-added telecommunications services.
For a FITE to acquire any equity interest in a value-added telecommunications business in China, it must satisfy a number of stringent performance and operational experience requirements, including demonstrating a track record and experience in operating a value-added telecommunications business overseas. FITEs that meet these requirements must obtain approvals from the MIIT or its authorized local counterparts, which retain considerable discretion in granting approvals.
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The
Notice of the Ministry of Information Industry on Intensifying the Administration of Foreign Investment in Value-added Telecommunications Services (the “MIIT Notice”)
, which reiterates certain provisions of the FITE Regulations, was issued on July 13, 2006. Under the MIIT Notice, if a FITE intends to invest in a PRC value-added telecommunications business, the FITE must be established and must apply for a telecommunications business license applicable to the business. Under the MIIT Notice, a domestic company that holds a license for the provision of Internet content services, or an ICP license, is considered to be a type of value-added telecommunications business in China, and is prohibited from leasing, transferring or selling the license to foreign investors in any form, and from providing any assistance, including providing resources, sites or facilities, to foreign investors to conduct value-added telecommunications businesses illegally in China. Trademarks and domain names that are used in the provision of Internet content services must be owned by the ICP license holder or its shareholders. The MIIT Notice requires each ICP license holder to have appropriate facilities for its approved business operations and to maintain such facilities in the regions covered by its license. In addition, all value-added telecommunications service providers are required to maintain network and information security in accordance with standards set forth in relevant PRC regulations. Some of the VIEs through which we operate, rather than our subsidiaries, hold ICP licenses, own our domain names, and hold or have applied for registration in the PRC of trademarks related to our business and own and maintain facilities that we believe are appropriate for our business operations.
On November 27, 2017, the MIIT promulgated the
Notice Regulating the Use of Domain Names in the Provision of Internet-based Information Services
, or the Domain Names Notice, which became effective on January 1, 2018. Under the Domain Names Notice, a domain name used by a provider of Internet-based information services must be registered and owned by the provider or, if the provider is an entity, by a shareholder or senior management of the provider.
In view of these restrictions on foreign direct investment in the value-added telecommunications sector, we established or acquired several domestic VIEs to engage in value-added telecommunications services. For a detailed discussion of our VIEs, please refer to “Our Corporate Structure” above. Due to a lack of interpretative materials from the relevant PRC authorities, there are uncertainties regarding whether PRC authorities would consider our corporate structure and contractual arrangements to constitute foreign ownership of a value-added telecommunications business. See “Risks Related to Our Corporate Structure.” In order to comply with PRC regulatory requirements, we operate our main business through companies with which we have contractual relationships but in which we do not have an actual ownership interest. If our current ownership structure is found to be in violation of current or future PRC laws, rules or regulations regarding the legality of foreign investment in the PRC Internet sector, we could be subject to severe penalties.
In the opinion of Haiwen, subject to the uncertainties and risks disclosed elsewhere in this report under the heading “Risk Factors” and “Governmental Regulation and Legal Uncertainties,” the ownership structures of our principal PRC Subsidiaries and our principal VIEs comply with all existing laws, rules and regulations of the PRC and each of such companies has the full legal right, power and authority, and has been duly approved, to carry on and engage in the business described in its business license.
Regulation of the Provision of Internet Content
Internet Information Services
On September 25, 2000, the State Council issued the
Measures for the Administration of Internet Information Services (“ICP Measures”),
which were amended on January 8, 2011. Under the ICP Measures, entities that provide commercial information services to online users on the Internet (“ICPs”) are obliged to obtain an operating license from the MIIT or its local branch at the provincial or municipal level in accordance with the Telecom Regulations described above.
The ICP Measures further stipulate that entities providing online information services regarding news, publishing, education, medicine, health, pharmaceuticals and medical equipment must procure the consent of the national authorities responsible for such areas prior to applying for an operating license from the MIIT or its local branch at the provincial or municipal level. Moreover, ICPs must display their operating license numbers in conspicuous locations on their home pages. ICPs are required to police their Internet platforms and remove certain prohibited content. Many of these requirements mirror Internet content restrictions that have been announced previously by PRC ministries, such as the MIIT, the MCT, and the SAPPRFT, that derive their authority from the State Council.
Sohu Internet, Guangzhou Qianjun, Shanghai ICE, Guanyou Gamespace, and Gamease hold Telecommunications and Information Services Operating Licenses (each an “ICP license”), each of which is subject to the filing of an annual report. The ICP license held by Sohu Internet includes a permit for operating Internet information services at “focus.cn.”
In 2000, the MIIT promulgated the
Internet Electronic Bulletin Service Administrative Measures
(“BBS Measures”). The BBS Measures required ICPs to obtain specific approvals before they provided BBS services, which included electronic bulletin boards, electronic forums, message boards and chat rooms. On September 23, 2014, the MIIT abolished the BBS Measures in a
Decision on Abolishment and Amendment Certain Regulations and Rules
. However, in practice certain local authorities still require operating companies to obtain approvals or make filings for the operation of BBS services. The ICP licenses held by Sohu Internet, Gamease, and Guanyou Gamespace include such specific approval of the BBS services that they provide.
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On December 29, 2011, the MIIT issued
Several Provisions for Standardizing the Market Order of Internet Information Services
(the “Several Provisions”) which took effect on March 15, 2012. With the aim of promoting the healthy development of the Internet information services market in China, the Several Provisions strengthen the regulation of the operations of Internet information service providers, including prohibiting Internet information service providers from infringing the rights and interests of other Internet information service providers, regulating evaluations provided by Internet information service providers regarding the services and products of other Internet information service providers, and regulating the installation and running of software by Internet information service providers. The Several Provisions also provide various rules to protect the interests of Internet information users, such as requesting Internet information service providers to take measures to protect the privacy information of their users and prohibiting Internet information service providers from cheating and misleading their users.
On August 25, 2017, the CAOC issued the
Administration Measures for Internet Forum Community Service
, effective on October 1, 2017, to regulate the provision of online interactive social network services for information dissemination. On August 25, 2017, the CAOC issued the
Administration Measures for Internet Comment Thread Services
, effective on October 1, 2017, regulating the provision of services by websites, applications, interactive broadcasting platforms, and other communication platforms with news and media characteristics that allow users to release text, photos, audio, and video. On February 20, 2018, the CAOC issued the
Administrative Provisions on Micro-blogging and Blogging Information Services
, effective on March 20, 2018, further regulating the provision of platform services for publishing and distributing information through micro-blogs and blogs. On September 7, 2017, the CAOC issued the
Administration Measures for Internet Chat Group Services
, effective on October 8, 2017, to regulate the provision of platform services for that allow Internet user groups to exchange information online. On September 7, the CAOC issued the
Administration Measures for Internet Users’ Social Account Information Services
, which were effective on October 8, 2017 and amended on January 22, 2021. These measures provide, among other things, that Internet platform operators providing the covered services will be responsible for the security of information and content published over their platforms, and provide enhanced requirements for user registration, information review, emergency response, security, personal information protection, and intellectual property protection.
On November 15, 2018, the CAOC promulgated the
Provisions on the Security Assessment of Internet-based Information Services with Attribute of Public Opinions or Capable of Social Mobilization
, which require that Internet information service providers that provide Internet services with the potential to influence public opinion or provoke social movement, including BBS, blog, and micro-blog services, must conduct a security self-assessment and file with the local office of the CAOC a self-assessment report regarding such Internet services and supporting technologies, their user base characteristics, and any significant changes in user opinions and potential risks concerning public security issues.
On October 26, 2021, the CAOC issued the
Notice on Further Strengthening the Regulation on Online Information of Entertainment Celebrities
, which requires internet platforms to, among other things, monitor online information of entertainment celebrities so as to timely identify hot topics that could involve illegal actions and promptly report to competent authorities. On August 25, 2021, the CAOC issued the
Notice on Further Strengthening the Management of Chaos in Fan Groups,
which is intended to rectify behavior in the online fan groups for entertainment celebrities, specifically, in features such as entertainment celebrity rankings, hot topics, fan communities, and fans interactive functions, so as to curb verbal abuse, stigmatization, instigation, confrontation, insults, slander, rumors, malicious marketing and the spread of other harmful information.
Online News Dissemination and Online News Search Services
In May 2017, the
Administrative Regulations for Internet News Information Services
and
Implementation Rules on the Administration of Internet News Information Services Permits
(collectively the “News Regulations”) were promulgated by the CAOC to replace the
Administrative Rules for Internet News Information Services
promulgated by the SCIO in 2005 (the “Old News Rules”). The News Regulations stipulate that Internet news information services include production, publishing, and republishing services and platforms providing for the dissemination of news over the Internet, and specify that platforms providing for the dissemination of news over the Internet will be required to obtain an Internet news information services permit.
Requirements of News Regulations include, among other things, the following:
Internet news information service providers must be entities duly incorporated within the territory of the PRC;
Managers and chief editors of Internet news information service providers must be Chinese citizens;
Internet news information service providers must have personnel who have appropriate qualification and professional training;
Internet news information service providers must have sound Internet news information service management systems;
Internet news information service providers must have rigorous information security management systems;
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Internet news information service providers must have facilities that are suitable for their proposed services, and must be adequately funded; and
Internet news information service providers may only republish news published by governmental news agencies and must ensure the original sources are traceable.
On July 3, 2016, the CAOC issued a Notice on Further Strengthening the Management and Prevention of Fake News (the “Fake News Notice”). The Fake News Notice requires all providers of online news services, including news applications, Weibo, and WeChat, to establish and maintain rigorous internal supervision and management systems and to not provide any news without identifying the sources of the news, invent news, report news based on hearsay, or distort facts.
On May 11, 2004, Sohu Internet obtained from the Information Office of the Beijing Municipal Government (the local arm of the SCIO) an Internet news information services permit, which was updated by the SCIO on June 6, 2006, April 4, 2018 and April 4, 2021, respectively. There is uncertainty as to whether the provision of news search services and aggregation of news links fit within the definition of news dissemination services.
Internet Publishing
On February 4, 2016, the SAPPRFT and MIIT jointly issued the Rules for the Administration for Internet Publishing Services (the “Internet Publishing Rules”), which took effect on March 10, 2016, to replace the Provisional Rules for the Administration for Internet Publishing that had been jointly issued by the SAPPRFT and the MIIT on June 27, 2002. The Internet Publishing Rules define “Internet publications” as digital works that are edited, produced or processed to be published and provided to the public through the Internet, including (i) original digital works, such as pictures, maps, games, and comics; (ii) digital works with content that is consistent with the type of content that, prior to the Internet age, typically was published in media such as books, newspapers, periodicals, audio-visual products, and electronic publications; (iii) digital works in the form of online databases compiled by selecting, arranging and compiling other types of digital works; and (iv) other types of digital works identified by the SAPPRFT. Under the Internet Publishing Rules, Internet operators distributing such Internet publications via information networks, including Web portals such as ours, are required to apply to and register with the SAPPRFT before distributing Internet publications.
On June 5, 2020, the National Press and Publication Administration issued the
Notice on Further Strengthening the Administration of Online Literature Publishing
. This notice provides that a platform publishing online literary works must (i) require writers to provide real identity information; (ii) review the works before they are published on the platform; and (iii) take appropriate and timely measures to prevent dissemination through the platform of false or misleading information.
On December 22, 2010, Sohu Internet obtained an Internet publishing license issued by the SAPPRFT, which was renewed on October 1, 2019. The renewed license expired on December 21, 2021. As of the date of this annual report, Sohu Internet is in the process of applying for renewal of the license, but there is uncertainty as to whether Sohu Internet will be able to renew it. For the details of the Internet publishing licenses held by Changyou’s VIEs, see “Specific Statutes and Regulations—Regulation of Online Game Services—Online Games and Cultural Products.”
Online Audiovisual Transmission Through the Public Internet
On December 20, 2007, the SAPPRFT and the MIIT jointly issued
Rules for the Administration of Internet Audiovisual Program Services
(“Document 56”), which came into effect as of January 31, 2008 and was amended on August 28, 2015. Document 56 requires all online audio and video service providers to be either state-owned or state-controlled and to obtain a permit for the Network Transmission of Audiovisual Programs. However, at a press conference held on February 3, 2008 the SAPPRFT and the MIIT clarified that online audio-visual service providers that were already lawfully operating prior to the issuance of Document 56 may
re-register
and continue to operate without becoming state-owned or controlled, provided that such providers do not engage in any unlawful activities. This exemption will not be granted to service providers set up after Document 56 was issued. As we were already engaged in online audiovisual transmission prior to the issuance of Document 56, we are presumably exempted from the requirement of being state-owned or state-controlled. Sohu Internet and Guangzhou Qianjun currently hold permits, both for PC and for Mobile Apps, for the Network Transmission of Audiovisual Programs.
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On March 30, 2009, the SAPPRFT released a
Notice on Strengthening the Administration of Online Audiovisual Content
(the “March 2009 SAPPRFT notice”). March 2009 SAPPRFT notice requires the operators of audiovisual Websites to enhance their processes for protecting copyrights, and to take appropriate measures to protect the rights and interests of copyright holders. Operators of such sites must hold, or have a license to, the copyright to all content that they transmit. In addition, the March 2009 SAPPRFT notice stipulates that only those films or TV programs that have already obtained from the SAPPRFT a Film Public Screening Permit, TV Drama Distribution Permit, TV Animation Distribution Permit, or TV Documentary Film Screening Permit are allowed to be transmitted via audiovisual Websites. These permits are mandatory for all films and programs shown on TV and in cinemas in China and must be obtained before such film or TV or program is allowed to be released. The approval applications for the Film Public Screening Permit, Television Drama Distribution Permit, Television Animation Distribution Permit or Television Documentary Film Screening Permit are extremely difficult and time-consuming, and the SAPPRFT previously did not enforce very strictly the requirements regarding these permits. However, on September 2, 2014, the SAPPRFT issued a
Notice on Further Strengthening the Administration of Online Foreign Audiovisual Content
(“September 2014 SAPPRFT Notice”), which requires that operators of audiovisual Websites to obtain from the SAPPRFT a Film Public Screening Permit, TV Drama Distribution Permit, or TV Animation Distribution Permit for all foreign films and TV dramas before they are transmitted via the Internet in China. The September 2014 SAPPRFT Notice further stipulates that before any foreign films or TV dramas for transmission exclusively via the Internet are purchased after the promulgation of the September 2014 SAPPRFT Notice, operators of audiovisual Websites must declare their annual purchasing plans with the SAPPRFT before the end of the year preceding the year of the intended broadcast and obtain the SAPPRFT’s approval. The September 2014 SAPPRFT Notice also states that the number of foreign films and TV dramas to be purchased by an operator and transmitted via its Website in a single year may not exceed 30% of the total amount of the Chinese films and TV dramas purchased and transmitted by the same Website in the previous year.
On March 17, 2010, SAPPRFT issued a
Catalogue of Classification of Internet Audio-Video Program Services (Trial)
(the “Internet Audio-Video Program Catalogue”), which was amended on March 10, 2017. The Internet Audio-Video Program Catalogue classifies Internet audio-video program services (excluding IPTV, Internet TV and mobile TV services) provided to computer and mobile phone users the Internet into four categories, consisting of (i) Internet audio-video programs sponsored and broadcast through Internet radio and television stations, including political news, political talk shows, self-produced news programs and live programs of vital political, military, economic, social and sports activities; (ii) reprints of political news, Internet hosting, interviews, report and commentary services in entertainment, technology, financial, sports and educational audio-video programs, production and broadcasting of Internet dramas, compilation and broadcasting of entertainment, technology, financial, sports and education audio-video programs, and live broadcasting of cultural and sports activities; (iii) the aggregation of Internet audio-video programs, which means editing and arranging Internet
audio-visual
programs on the same website, providing search and viewing services to public users, and broadcasting user-uploaded audio-video programs; and (iv) retransmission of Internet audio-video programs. A permit for the Network Transmission of Audiovisual Programs specifies the scope of the services under one or more of these categories that the holder of the permit is allowed to provide. Sohu Internet’s permit for the Network Transmission of Audiovisual Programs allows Sohu Internet to provide services mostly under the categories described in clauses (ii), (iii), and (iv) above. Guangzhou Qianjun’s permit for the Network Transmission of Audiovisual Programs allows Guangzhou Qianjun to provide certain services under the categories described in clauses (ii) and (iii) above.
On July 6, 2012, the SAPPRFT and the CAOC jointly issued a
Notice on Further Strengthening the Administration of Internet Dramas, Micro Movies and Other Internet Audiovisual programs
(the “2012 SAPPRFT Notice 53”), which reiterates that online audio-visual service providers must obtain a Permit for the Network Transmission of Audiovisual Programs from the SAPPRFT. The 2012 SAPPRFT Notice 53 further stipulates that online audio-visual service providers must review the content of Internet audiovisual programs prior to their transmission and must file certain information, such as the names of the Internet audiovisual programs, summaries of their content, and names of the persons conducting the reviews, with the appropriate provincial office of the SAPPRFT. On January 9, 2019, the China Netcasting Services Association, an industry self-regulatory association, issued
Management Standards for Internet Short Video Platforms
and
Detailed Standard Rules for Reviewing the Content of Internet Short Videos
, for the stated purpose of strengthening the responsibility of online platforms to examine the content of short videos before their transmission. On February 21, 2020, the China Netcasting Services Association issued the
Detailed Standard Rules for Reviewing the Content of Internet Variety Shows
,
which provide guidelines regarding such content matters as the choice of crew and cast and their behavior, and wardrobe and props, in variety shows, and provide detailed instructions for the examination of Internet variety shows.
On January 2, 2014, the SAPPRFT issued a
Supplemental Notice on 2012 SAPPRFT Notice 53
, which stipulates that producers of Internet dramas, micro movies and other Internet audiovisual programs must obtain a Permit for Radio and Television Program Production and Operation. Online audio-visual service providers may only retransmit dramas and micro movies produced and uploaded by individuals whose identities have been verified and the content of which complies with relevant regulations. Online audio-visual service providers must file with the provincial SAPPRFT the content of Internet audiovisual programs proposed for transmission prior to transmitting the programs.
On November 4, 2016, the SAPPRFT issued a
Notice on Further Strengthening the Planning, Development and Administration of Original Internet Audiovisual Programs
(“Document 198”). Document 198 stipulates that if online service providers plan to produce and disseminate audiovisual programs that are considered to be key audiovisual programs under Document 198, the service providers must, during the early planning and development stage, file a summary of the programs and their titles, producer names, themes, and duration with the SAPPRFT and, for audiovisual programs with sensitive themes such as politics, military, diplomacy, national security, national sovereignty, religion, the PRC justice system and public security, consult with designated PRC governmental authorities before production of the programs. On June 26, 2017, SAPPRFT and other several governmental authorities issued a
Notice on Several Policies Concerning the Prosperity and Development of Television Dramas
that confirms filing procedures with respect to key Internet dramas. In accordance with the
Notice on Upgrading the Filing System of the Online Audiovisual Programs
issued by the NRTA, effective December 27, 2018, producers of key audiovisual programs must make filings prior to the commencement of the production that include a summary of specified details concerning the programs and, following the completion of the production, submit the completed programs to the NRTA or its competent provincial counterpart and make filings with additional information concerning the programs.
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On March 16, 2018, the SAPPRFT issued a
Notice on Further Regulating the Distribution Order of Internet Audiovisual Programs,
which prohibits operators of audiovisual Websites from editing or adapting audiovisual programs of third-party content providers, broadcasting illegally edited and/or adapted audiovisual programs on their audiovisual Websites, and/or entering into business collaboration arrangements for online audiovisual services with providers without a Permit of Network Transmission of Audiovisual Programs.
On November 18, 2019, the CAOC, the SAPPRFT, and the MCT jointly issued the
Provisions on the Administration of Internet Audio-video Information Services
(the “2019 Notice 3”), pursuant to which Internet audiovisual information services providers are required to identify and conspicuously mark for users of their platforms non-reality-based audiovisual information created using deep learning, virtual reality, and other new technologies and applications. In addition, the 2019 Notice 3 stipulates that Internet audiovisual information service providers are obliged to establish and implement an anti-rumor mechanism to detect and prevent disseminating rumors generated using such technologies and applications, and report such information and rumors to the CAOC, the SAPPRFT, and the MCT.
Protection of Minors
On March 29, 2019, the SAPPRFT issued the
Administrative Regulations Regarding Programs
for Minors
(the “Programs for Minors Regulations”), which took effect on April 30, 2019 and was amended on October 8, 2021. Under the Programs for Minors Regulations, programs for minors refer to Internet audiovisual programs and radio and television programs with minors as the main participants or the target audience. Under the Programs for Minors Regulations, providers of online audiovisual program services are required to adopt a number of measures to protect the physical and psychological well-being of minors, including establishing separate zones on their online platforms for audiovisual programs suitable for minors; prohibiting the advertising in such separate zones of pharmaceuticals, medical equipment, cosmetics, alcohol, cosmetic surgery, and other specified categories not considered suitable for minors; displaying break reminders in a prominent position during programs for minors; and deleting, blocking, and disconnecting links and adopting other necessary measures. Online audiovisual program services providers are also required to conduct pre-broadcasting reviews of programs for minors and advertisements to be directed to minors, and to form committees consisting of minor protection experts and representatives of parent and teacher groups to periodically evaluate programs for minors and such advertisements.
On October 17, 2020, the Standing Committee of the National People’s Congress amended the Minors Protection Law of the PRC (as amended, the “Minors Protection Law”) effective as of June 1, 2021. The Minors Protection Law promotes Internet literacy among minors, protects personal information of minors, and strengthens the protection of minors from cyber bullying and from addictive behaviors related to Internet services and products.
On May 15, 2020, the Supreme People’s Court issued several guiding opinions on civil cases. The opinions stipulate that if minors pay reward money on live online performance platforms without the consent of their guardians and the money is spent in a way that is not appropriate for their age or intelligence, their guardians may require the Internet service providers to refund the money.
Private Network and Targeted Communication Audiovisual Program Services
On April 25, 2016, the SAPPRFT issued
the Provisions on the Administration of Private Network and Targeted Communication Audiovisual Program Services
(the “Private Network Audiovisual Programs Administration Provisions”), which were amended effective March 23, 2021, to replace the
Measures for the Administration of the Transmission of Audiovisual Programs over Internet and other Information Networks
that had been
issued by the SAPPRFT on July 6, 2004. The Private Network Audiovisual Programs Administration Provisions stipulate that private network and targeted communication audiovisual program services include the provision, integrated control, transmission and distribution of audiovisual content through IPTV, targeted mobile television, television network and other targeted channels. The Private Network Audiovisual Programs Administration Provisions provide that operators engaging in private network and targeted communication audiovisual program services must obtain a permit for the Network Transmission of Audiovisual Programs from the SAPPRFT. The Private Network Audiovisual Programs Administration Provisions provide that only PRC state-owned or state-controlled entities may engage in private network and targeted communication audiovisual program services. We provide a small amount of audiovisual program services through private network and/or targeted communication channels, such as IPTVs and television networks. In order to comply with the Private Network Audiovisual Programs Administration Provisions, we partner with PRC state-owned entities for the provision of such services through private network and targeted communication channels. According to a press conference of SAPPRFT regarding the Private Network Audiovisual Programs Administration Provisions, Internet audiovisual program services provided through the public Internet, which include our main online video services, other than private network and targeted communication channels should comply with Document 56. See “Governmental Regulation and Legal Uncertainties - Specific Statutes and Regulations - Regulation of the Provision of Internet Content - Online Audiovisual Transmission through the Public Internet” for a description of regulations affecting Internet Audio-video program services provided through the public Internet.
Online Cultural Products
On May 10, 2003, the MCT issued the
Provisional Regulations for the Administration of Online Culture
(“Online Culture Regulations”), which took effect on July 1, 2003 and were amended on July 1, 2004. On February 17, 2011, the MCT issued the new
Provisional Regulations for the Administration of Online Culture
(“New Online Culture Regulations”), which took effect on April 1, 2011 and were amended on December 15, 2017, to replace the previous regulations. The New Online Culture Regulations apply to entities engaging in activities related to “Internet cultural products,” which include those cultural products that are produced specially for Internet use, such as online music and entertainment, online games, online plays, online performances, online works of art and Web animations, and those cultural products that, through technical means, produce or reproduce music, entertainment, games, plays and other art works for Internet dissemination. Pursuant to the New Online Culture Regulations, commercial entities are required to apply to the relevant local branch of the MCT for an Online Culture Operating Permit if they engage in any of the following types of activities:
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the production, duplication, importation, release or broadcasting of Internet cultural products;
the dissemination of online cultural products on the Internet or transmission thereof via Internet or mobile phone networks to users’ terminals such as computers, fixed-line or mobile phones, television sets, gaming consoles and Internet surfing service sites such as Internet cafés for the purpose of browsing, using or downloading such products; or
the exhibition or holding of contests related to Internet cultural products.
On November 11, 2021, the MCT issued the
Administrative Measures on Credit for the Cultural and Tourism Market
(the “Credit Measures”)
to replace the
Measures for the Administration of a National Cultural Market Blacklist
issued on June 19, 2018. The Credit Measures classify entities that engage in activities in the cultural and tourism markets that are determined to be dishonest into entities that are determined to have engaged in egregiously dishonest activities and entities that are determined to have engaged in activities that, though dishonest, are relatively less dishonest and further stipulate standards and procedures for identifying entities that engage in such dishonest activities. In addition, operators identified as engaging in dishonest activities under the Credit Measures may be subject to potential liabilitya series of regulatory measures, such as strict daily supervision and frequent random inspection from MCT or its local counterparts.
On July 1, 2016, the MCT issued a
Notice on Strengthening the Administration of Online Performanc
e (the “Online Performance Notice”) and on December 2, 2016, issued the
Measures of Administration of Online Performance Operating Activities
(the “Online Performance Measures”), which became effective on January 1, 2017. The Online Performance Notice and the Online Performance Measures both stipulate that online performance service providers must obtain an Online Culture Operating Permit and that online performances must not contain any content that is horrific, cruel, violent, vulgar or humiliating in nature, mocks persons with disabilities, includes photographs or video clips that infringe third parties’ privacy or other rights, features animal abuse, or presents characters and other features of online games that have not been registered and approved for claimspublication by applicable PRC governmental authorities.
On September 2, 2021, the NRTA issued the
Notice on Further Strengthening the Management of Arts and Their Personnel
, under which online audio-visual platforms are required to strictly control the selection of actors and are prohibited from engaging actors with political positions considered to be wrong or who engage in deeds or use words considered to be immoral, actors considered to not be adhering to an acceptable level of social fairness and justice, or actors violating laws, regulations, or the public order.
Sohu Internet, Guangzhou Qianjun currently hold Online Culture Operating Permits. The Online Culture Operating Permit obtained by Sohu Internet includes a permit for operating Internet information services at “focus.cn.”
On September 2, 2016, the SAPPRFT issued the
Notice on Strengthening the Management of Live Online Social Video Services
(the “Live Online Notice”), which requires interactive broadcasting service providers to procure a permit for the Network Transmission of Audiovisual Programs. Sohu Internet and Guangzhou Qianjun currently hold permits for the Network Transmission of Audiovisual Programs. The Live Online Notice also stipulates that search results violatea service provider must make a filing with the intellectual propertylocal SAPPRFT branch at least five days before making any live broadcast of any significant political, military, economic, social, cultural or sports activities and at least 48 hours before making any live broadcast of other cultural or sports activities. On November 4, 2016, the CAOC issued the Provisions on the Administration of Online Live Social Video Services (the “Live Social Video Provisions”) effective December 1, 2016. The Live Social Video Provisions provide that business entities such as us that offer interactive broadcasting services on their Internet platforms have the primary responsibility for monitoring content disseminated by interactive broadcasting hosts and viewers through such services, and must allocate sufficient staff in line with the scale of such services and establish and maintain adequate internal policies and procedures for, among other things, content review, information security management, emergency management and technical support. The Live Social Video Provisions also require that Internet providers verify the real-name identity of interactive broadcasting hosts and viewers before allowing them to establish user accounts with the Internet providers and take appropriate remedial actions, such as issuing warnings, removing posted content, or terminating the user’s account, with respect to interactive broadcasting content or activity that is prohibited by the Live Social Video Provisions. Internet providers are subject to administrative penalties and other sanctions for noncompliance with the Live Social Video Provisions. On August 1, 2018, the MIIT and several other governmental authorities issued a
Notice on Strengthening the Administration of Live Online Social Video Services
, which stipulates that providers of Internet access services and APP stores must not provide Internet access and APP distribution services for online interactive broadcasting service providers that do not hold requisite permits from or complete the requisite filing procedure with the applicable governmental agencies. On November 12, 2020, the NRTA promulgated the
Notice on Strengthening the Management of Live Broadcast of Online Shows and
E-commerce
Live Broadcast
, which requires live show online broadcasting platforms and
e-commerce
live online broadcasting platforms to enter information concerning their operating entities and business operations in a nationwide online system. Under the notice, live online broadcasting platforms are also required to classify their broadcast programs into, and label them according to, specified categories such as “music,” “dance,” and “travelling.” The notice and the
Guidance on Strengthening Supervision of
E-commerce
Live Online Broadcasting Activities
issued by the SAMR in November 2020 also provide that
e-commerce
live online broadcasting platforms should verify the qualifications and real-name identities of the entities and individuals selling goods and services on such platforms, and ensure such sales to comply with the New Advertising Law and the
E-commerce
Law. On April 23, 2021, the CAOC and six other governmental authorities issued the
Administrative Measures for
E-commerce
Live Online broadcasting (for Trial Implementation)
,
which further stipulate that live online broadcasting platforms must take certain specified measures, such as arranging special personnel to conduct real-time inspections and extending the storage time for live broadcast content with respect to key live online broadcasting operators. The live online broadcasting platforms are also required to establish a sound risk identification model and take appropriate actions to prevent suspected violations of laws and regulations in regard to high-risk marketing activities, such as issuing violation warnings, limiting traffic and suspending live online broadcasting. In addition, relevant governmental authorities may share information regarding
e-commerce
live online broadcasting entities with records of serious violations and may carry out joint enforcement and punishment.
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On February 9, 2021, the CAOC and six other governmental authorities issued the
Guiding Opinions on Strengthening the Ratification and Administration of Live Online Broadcasting
(the
“
Guiding Opinions”). The Guiding Opinions stipulate that live online broadcasting platforms must (i) classify and rank accounts for live online broadcasting based on factors such as the nature of the account holders, the content of performances, the number of followers and the popularity of the broadcast programs, (ii) set reasonable limits on the duration of, the amount of money to be received in, and commodities to be sold in each broadcast program based on the accounts’ categories and rankings, and (iii) set reasonable limits on the maximum amount of money paid by the Internet users for a single virtual commodity or reward in connection with a live online broadcast.
On April 19, 2019, the China Alliance of Radio, Film, and Television issued the
Notice on Strictly Implementing the Proportional Allocation of Production Costs for Television and Internet Dramas
(the “Production Costs Notice”), which specifies that the aggregate compensation paid to cast members of a television
or
Internet drama may not exceed 40% of the total production costs of the drama and that the aggregate compensation paid to key members of the cast may not exceed 70% of the aggregate compensation paid to all of the cast members. Payment of amounts above the specified limits without reasonable grounds may result in the suspension or cancellation of the broadcast of the drama and/or the production permits of the producer.
Mobile Internet Applications Information Services
On June 28, 2016, the CAOC issued the
Provisions on the Administration of Mobile Internet Applications Information Services
(the “APP Provisions”), which became effective on August 1, 2016. Under the APP Provisions, mobile application providers and application store service providers are prohibited from engaging in any activity that may endanger national security, disturb the social order, or infringe the legal rights of third parties.parties, and may not produce, copy, issue or disseminate through mobile applications any content prohibited by laws and regulations. The APP Provisions also require application providers to procure relevant approval to provide services through such applications and require application store service providers to register with local branch offices of the CAOC within 30 days after they start providing application store services. We have procured the required approvals for services that we provide through our mobile applications. If we, as a provider of information services through Apps, violate these regulations, mobile application stores through which we distribute our Apps may issue warnings to us, suspend the release, or terminate the sale, of our Apps, and/or report our violations to governmental authorities.
Internet Medical, Health and Pharmaceuticals Information Dissemination
ItUnder the
Measures for the Administration of Internet Pharmaceuticals Information Services
(the “Pharmaceuticals Information Services Measures”) issued by the SAMR on July 8, 2004, which were amended on November 17, 2017, formal approval from the SAMR or one of its local branches is possible that content that is made available by Sogou through its search resultsrequired before a Website may violatedisseminate information concerning pharmaceuticals.
Under the intellectual property rights of third parties. PRC lawsPharmaceuticals Information Services Measures, medical, health and regulations are evolving, and uncertainties existpharmaceutical information (including information with respect to medical equipment) provided by Websites must be scientific and accurate and must indicate the legal standardssources of such information. Websites that have received approval to disseminate such information must also publish or reprint health policies, information on epidemics and major health-related incidents, and other health-related information in accordance with law. Furthermore, medical and pharmaceutical advertisements (including advertisements for determiningmedical equipment) published by such Websites must not exaggerate the efficacy or promote the medical uses of such products.
The VIEs Sohu Internet and Guangzhou Qianjun received renewed approval from the SAMR, on June 13, 2019 and November 23, 2018, respectively, to disseminate pharmaceuticals information over the Internet.
Regulation of Brand Advertising Services
On April 24, 2015, the Standing Committee of the National People’s Congress enacted the
Advertising Law of the People
’
s Republic of China
(the “New Advertising Law”), which became effective on September 1, 2015 and was amended on October 26, 2018 and April 29, 2021. The New Advertising Law, which was a major overhaul of an advertising law enacted in 1994, increases the potential legal liability of providers of advertising services, and includes provisions intended to strengthen identification of false advertising and the power of regulatory authorities. On July 4, 2016, the SAMR issued the
Interim Measures of the Administration of Online Advertising
(the “SAMR Interim Measures”), effective on September 1, 2016. The New Advertising Law and the SAMR Interim Measures both provide that advertisements posted or published through the Internet may not affect users’ normal usage of a network, and advertisements published in the form of
pop-up
windows on the Internet must display a “close” sign prominently and ensure
one-key
closing of the
pop-up
windows. The SAMR Interim Measures provide that all online search service providers for advertisements must be marked “Advertisement” so that viewers can easily identify them as such. Moreover, the SAMR Interim Measures treat
pay-for-click
search results as advertisements that are subject to PRC advertisement laws, require that
pay-for-click
search results be conspicuously identified on search result pages as advertisements and subject revenues from such advertisements to a 3% PRC tax that is applied to advertising revenues. The New Advertising Law and SAMR Interim Measures will require us to conduct more stringent examination and monitoring of our advertisers and the content of their advertisements.
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On November 26, 2021, the SAMR issued the
Administrative
Measures for Online Advertising (Draft for public comments)
(the “Draft Online Advertising Measures”). The Draft Online Advertising Measures provide linksthat
pre-roll,
embedded and
pop-up
online advertisements must clearly display a “close” button which enables users to contentclose the advertisements with one click and prohibit the practice of forcing users to wait for a timer countdown to finish before they can close the advertisements.
On April 13, 2016, the SAMR and sixteen other PRC government agencies jointly issued a
Notice of Campaign to Crack Down on
third-party
websites that infringes copyrights Illegal Internet Finance Advertisements and Other Financial Activities in the Name of third parties. In December 2012, Investment Management
(the Supreme People’s Court‘‘Campaign Notice’’), pursuant to which a campaign was conducted between April 2016 and January 2017 targeting, among other things, online advertisements for Internet finance and other financial activities posted on Internet search portals and other portal, financial, real estate, P2P and investment product sales services Websites. On March 22, 2019, the SAMR issued the
Notice of a Campaign to Deepen the Rectification of Online Advertisements
, which targets false advertising related to the physical health or the protection of property of the public in areas such as pharmaceuticals, health food, and real estate and financial investments by Internet portals, search engines, and
e-commerce
platforms with significant social influence and wide coverage, as well as by Internet media such as mobile client applications and new media accounts. The
Notice of Key Areas of Work in 2020 of the Inter-Ministerial Joint Meeting on Rectification of False and Illegal Advertisements,
jointly issued by SAMR and ten other PRC promulgated a judicial interpretation providing that PRC courts will placegovernment agencies on March 9, 2020, further emphasizes the burden onresponsibility of Internet service providers to removeverify and examine the content and supporting documents of online advertisements and prevent the dissemination of false and illegal online advertisements.
On August 31, 2018, the Standing Committee of the National People’s Congress enacted the
E-commerce
Law of the People’s Republic of China
(the
“E-commerce
Law”), which took effect on January 1, 2019 and which stipulates, among other things, that although an
e-commerce
business operator may provide an Internet consumer with search results for goods or services based on such consumer’s preferences or consumption habits, the operator must also provide such consumer with options that are not based on such consumer’s preferences or habits, in order to respect and protect the rights and interests of such consumer, and reiterates that
e-commerce
business operators that distribute online advertisements to consumers must comply with the New Advertising Law.
Regulation of Online Game Services
Online Games and Cultural Products
In September 2009, the SAPPRFT, together with the National Copyright Administration and the National Office of Combating Pornography and Illegal Publications, jointly issued a
Notice on Further Strengthening the Administration of
Pre-examination
and Approval of Online Games and the Examination and Approval of Imported Online Games
, or the SAPPRFT Online Game Notice. The SAPPRFT Online Game Notice states that foreign investors are not permitted to invest in online game operating businesses in China via wholly foreign-owned entities, China-foreign equity joint ventures or cooperative joint ventures or to exercise control over or participate in the operation of domestic online game businesses through indirect means, such as other joint venture companies or contractual or technical arrangements. If the VIE structures of Changyou were deemed under the SAPPRFT Online Game Notice to be an “indirect means” for foreign investors to exercise control over or participate in the operation of a domestic online game business, the VIE structures of Changyou might be challenged by the SPPA, a successor agency to the SAPPRFT. We are not aware of any online game companies which use the same or similar VIE contractual arrangements as those Changyou use having been challenged by the SAPPRFT or the SPPA as using those VIE arrangements as an “indirect means” for foreign investors to exercise control over or participate in the operation of a domestic online game business or having been penalized or ordered to terminate operations since the SAPPRFT Online Game Notice first became effective. However, it is unclear whether and how the SAPPRFT Online Game Notice might be interpreted or implemented in the future.
On February 21, 2008, the SAPPRFT issued the
Rules for the Administration of Electronic Publications
, or the Electronic Publication Rules, which were amended on August 28, 2015. The Electronic Publication Rules regulate the production, publishing and importation of electronic publications in the PRC and outline a licensing system for business operations involving electronic publishing. Under the Electronic Publication Rules and other related regulations issued by the SAPPRFT, online games are classified as a type of electronic publication or Internet publication that may only links or content that has been
specifically-mentioned
in noticesbe provided by a licensed electronic publishing entity with a standard publication code, and the establishment of infringement from persons andan electronic publishing entity must be approved by the SAPPRFT. Electronic publishing entities claiming copyright in such content, but also links or contentare responsible for assuring that the providers “shouldcontent of electronic publications comply with relevant PRC law and regulations, and must obtain the approval of the SPPA, a successor agency to the SAPPRFT, before publishing foreign electronic publications. The New Internet Publication Measures, which became effective on March 10, 2016 and replaced the
Temporary Measures for Internet Publication Administration
that had become effective in 2002, require that entities in the Internet publishing business apply for an online publishing services license instead of an Internet publishing license, that entities holding an Internet publishing license apply for an online publishing service license within a specified period of time to replace their Internet publishing license, and that all such entities obtain approval from the SAPPRFT or the SPPA prior to the publication of new online games. In addition, under the New Internet Publication Measures, Sino-foreign joint ventures and foreign-invested entities are not permitted to engage in Internet publication services, and the legal representative of an entity providing Internet publication services may not be a foreigner.
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Gamease, which is the operator of TLBB, Blade Online and certain other licensed PC games, and Guanyou Gamespace, which provides online game services, obtained Internet publishing licenses on December 10, 2010 and October 13, 2011, respectively, and Gamease and Guanyou Gamespace have known” contained infringing content. Thisobtained online publishing services licenses under the New Internet Publication Measures to replace the Internet publishing licenses previously held by them. TLBB, Blade Online and some of Changyou’s other games were historically published through third parties that were licensed electronic publishing entities, because Gamease had not obtained an Internet publishing license at the time those online games were made publicly available. TLBB, Blade Online and certain of Changyou’s other existing games are currently published under an Internet publishing license held by Gamease. As of the date of this annual report, the Internet publishing licenses held by Gamease and Guanyou Gamespace have expired, and Gamease and Guanyou Gamespace are in the process of applying for renewal of their respective licenses. There is uncertainty as to whether Gamease and Guanyou Gamespace will be able to renew such licenses. Current PRC regulations are not clear as to the consequences of obtaining authorization codes through third-party electronic publishing entities. While we believe that arrangements like Changyou’s are acknowledged by the SAPPRFT or SPPA, in view of the lack of formal interpretation regarding this issue, the SPPA might challenge Changyou’s current and past practices and could subject SogouChangyou to significant administrative burdensvarious penalties, including fines, confiscation of publishing equipment and might expose itthe revenues generated from the publishing activities, the revocation of Changyou’s business license, or the forced discontinuation of or restrictions on its operations.
On May 24, 2016, the SAPPRFT issued the Mobile Game Notice, which became effective on July 1, 2016 and sets forth requirements for the publication and operation of mobile games online, including requiring that mobile game publishers and operators, including joint operators, review the content of the games that they publish and operate, and apply for publication and authorization codes at least 20 business days before first publishing and operating domestic recreational and educational mobile games through open beta testing. The Mobile Game Notice, as updated by a subsequent notice, specifies that game publishers and game operators were required to civil liabilityreview the content of mobile games that were published and penalties. Further, Sogou relies on content provided by professional researchersoperated online before July 1, 2016, and writers, either developedto complete approval procedures for those games before December 31, 2016, or to cease operating the games. The Changyou VIEs completed prior to December 31, 2016 all of the approval procedures required by the outlets themselvesSAPPRFT for Changyou’s mobile games that were in operation before July 1, 2016.
The MCT issued the
New Provisional Regulations for the Administration of Online Culture
, or adaptedthe Online Culture Regulations, which took effect on April 1, 2011 and was amended on December 15, 2017 and replaced the
Provisional Regulations for the Administration of Online Culture
. The Online Culture Regulations apply to entities engaging in activities related to “Internet cultural products,” which include cultural products that are produced specifically for Internet use, such as online music and entertainment, online games, online plays, online performances, online works of art and Web animation, and other online cultural products that through technical means, produce or reproduce music, entertainment, games, plays and other art works for Internet dissemination. Under the New Online Culture Regulations, commercial entities are required to apply to the relevant local branch of the MCT for an Online Culture Operating Permit if they engage in the production, duplication, importation, release or broadcasting of Internet cultural products; the dissemination of online cultural products on the Internet or the transmission of such products via Internet or mobile phone networks to user terminals, such as computers, phones, television sets and gaming consoles, or Internet surfing service sites such as Internet cafés; or the holding or exhibition of contests related to Internet cultural products. On May 14, 2019, the MCT issued the MCT Approval Scope Notice, pursuant to which the MCT is no longer responsible for regulating the online-game industry and its local branches are no longer responsible for granting new Online Culture Operating Permits for online games, or renewing existing permits after their expiration. It is not clear whether another PRC governmental agency will be designated to supervise the online game industry and whether a new permit or license that is similar to Online Cultural Operating Permit will be required for the operation of online games. On December 9, 2019, the Comprehensive Market Enforcement Supervision Bureau of MCT issued the
Notice on Law Enforcement in the Online Game Market
, which stipulates that the investigation and processing of online game cases will be under the
Measures of Internet Publication Service Administration,
and that the
Interim Measures for Online Games Administration
, which became effective on August 1, 2010 and were repealed on July 10, 2019, will no longer apply to such cases. In January 2008 Gamease obtained an Online Culture Operating Permit, which was
re-certified
in October 2015 and December 2017; and in December 2010 Shanghai ICE obtained an Online Culture Operating Permit, which was
re-certified
in January 2014.
The
Notice on Strengthening the Approval and Administration of Imported Online Games
, or the Imported Online Game Notice, which was issued by the SAPPRFT and took effect in July 2009, states that the SAPPRFT was, and the SPPA as a successor to the SAPPRFT is, the only governmental department authorized by the State Council to approve the importation of online games from contentOffshore copyright owners, and that any enterprise which engages in online game publication and operation services within China must have the game examined and approved by the SAPPRFT or the SPPA and receive from the SAPPRFT or the SPPA an Internet publishing license (or after the New Internet Publication Measures became effective on March 10, 2016, an online publishing services license). Changyou’s VIEs Gamease and Guanyou Gamespace obtained Internet publishing licenses from the SAPPRFT and they have obtained online publishing services licenses under the New Internet Publication Measures to replace the Internet publishing licenses previously held by them. In addition, the Imported Online Game Notice states that activities which involve the showing, exhibition, trading and promotion of parties separate from such outlets,Offshore online games in China must be examined and it is difficultapproved by the SAPPRFT or the SPPA.
The
Administrative Measures for SogouContent Self-review by Internet Culture Business Entities
, or the Content Self-review Administrative Measure, which took effect in December 2013, require Internet culture business entities to fully monitor suchreview the content which could make Sogou more vulnerable to potential infringement claims.
Sogou may be subject to legal liability associated with online activities on its platforms.
Sogou hosts and provides a wide variety of products and services that enable advertisers to advertise productsbe provided prior to providing such content and services and users to exchange information and engage in various online activities. Sogou may be subject to claims, investigations, or negative publicity relating to such activities. PRC laws and regulations relating to the liabilitypublic. The content management system of providers of online products and services for activities of their users are not fully developed, and their current and future reachan Internet culture business entity is unclear. Also see “-Sogou may be subject to regulatory investigations and sanctions for inappropriate or illegal content that is accessed through its search results.” Sogou also places advertisements on
third-party
Internet properties, and Sogou offers products and services developed or created by third parties. Sogou may be subject to claims concerning these products and services based on its involvement in providing access to them, even if Sogou does not offer the products and services directly. Sogou could be required to spend considerable financialspecify the responsibilities, standards and managerial resources defending any such claims,processes for content review as well as accountability measures, and they could result in Sogou’s having to pay monetary damages or penalties or ceasing certain aspectsis required be filed with the local provincial branch of its business, which could have an adverse effect on its business and resultsthe MCT.
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Privacy concerns or security breaches relating to Sogou’s platforms could damage its reputation, deter current and potential users and advertisers from using its products and services, and expose Sogou to legal penalties and liability.
Registration of Software Copyrights
Sogou collects, processes, and stores on its servers significant amountsThe
Measures Concerning Registration of data concerning its users. While Sogou has taken steps to protect its user data, its security measures could be compromised, because techniques used to sabotageComputer Software Copyright
, or obtain unauthorized access to systems change frequently and generally are not recognized until they are launched against a target, and Sogou may be unable to anticipate these techniques or to implement adequate preventative measures. In addition, Sogou is subject to various regulatory requirements relating to the security and privacy of such data, including restrictions onSoftware Copyright Measures, issued by the collection and use of personal information of users and steps Sogou must take to prevent personal data from being divulged, stolen, or tampered with. Regulatory requirements regarding the protection of such data are constantly evolving and can be subject to significant change, making the extent of Sogou’s responsibility in that regard uncertain. For example, the PRC Cybersecurity LawNational Copyright Administration, which became effective in June 2017, but itFebruary 2002, encourage the registration of software and afford greater protection to registered software than that afforded to unregistered software. Changyou has registered software copyrights covering all of its significant copyrightable products and enhancements.
Regulation of Internet Content
The PRC government has promulgated measures relating to Internet content through a number of government authorities, including the MIIT, the MCT, the SPPA, the NRTA and the MPS. These measures prohibit certain Internet activities, including the operation of online games that result in the publication of any content which is unclear asfound to, among other things, propagate obscenity, gambling or violence, instigate crimes, undermine public morality or the circumstances and standard under which the law would apply and violations would be found, and there are great uncertainties as to the interpretation and applicationcultural traditions of the law. It is possible that Sogou’s data protection practice isPRC, or will be inconsistent with regulatory requirements. See ‘‘Government Regulation and Legal Uncertainties—Miscellaneous—Laws and Regulations Related to Consumer Protection and Privacy Protection—Privacy Protection.” and “Government Regulation and Legal Uncertainties—Miscellaneous—Laws and Regulations Related to Security and Censorship.” In addition,compromise State security or secrets. If an ICP license holder violates these measures, the PRC government may promulgate new laws or regulations regarding the protection of personal data. For example, onrevoke its ICP license and shut down its Websites.
On May 28, 2019,2, 2017, the CAOC, issued for public comment draftthe
Administrative MeasuresEnforcement Procedures for Data Securitythe Administration of Internet-based Information Content
, or the Enforcement Procedures, effective June 1, 2017. Pursuant to the Enforcement Procedures, the CAOC and its local branch offices have the authority to enforce, and impose administrative sanctions on activities prohibited by, applicable administrative laws and regulations concerning Internet-based information content.
Protection of Minors
On August 16,30, 2021, the NPPA issued the
Notice on Further Strengthening the Administration of the Prevention of Minors from Indulging in Online Games.
On October 20, 2021, the MOE, the SAMR and several other PRC authorities jointly issued the
Notice on Further Strengthening the Administration of the Prevention of Primary and Secondary School Students’ Addiction to Online Games
(the “Further Indulgence Prevention Notice”), which provides that online game operators may only provide online game services to minors on Fridays, Saturdays, Sundays and PRC statutory holidays for one hour per day from 8:00 p.m. to 9:00 p.m. In addition, the Indulgence Prevention Notice and the Further Indulgence Prevention Notice require that that online game operators may not provide game services to any users who have not registered using their real names.
On October 17, 2020, the Standing Committee of the National People’s Congress issued the Minor Protection Law, which took effect on June 1, 2021 and has enhanced the requirements for the protection of minors from addictive online-game playing behaviors. Also see “Governmental Regulation and Legal Uncertainties - Regulation of the Provision of Internet Content—Protection of Minors.”
On May 15, 2020, the Supreme People’s Court issued several guiding opinions on civil cases. The opinions stipulate that if minors participate in online games that are not free to play without the consent of their guardians and spend the money in a way that is not suitable for their age or intelligence, the guardians may request the online game or live game platform operators to refund the money.
On April 15, 2007, the SAPPRFT and several other governmental authorities issued a circular requiring the implementation of an “anti-fatigue system” and a real-name registration system by all PRC online game operators, in an effort to curb addictive online game play behaviors of minors. Under the anti-fatigue system, three hours or less of continuous play by minors is considered to be “healthy,” three to five hours to be “fatiguing,” and five hours or more to be “unhealthy.” Game operators are required to reduce the value of
in-game
benefits to a game player by half if the game player has reached “fatiguing” level, and to zero in the case of “unhealthy” level.
To identify whether a game player is a minor and thus subject to the anti-fatigue system, there was adopted a real-name registration system, which requires online game players to register their real identity information before they play online games and requires online game operators such as Changyou to submit the identity information of game players to the public security authorities for verification. On July 1, 2011, the SAPPRFT, the MIIT, the Ministry of Education and five other governmental authorities issued
a Notice on Initializing the verification of Real-name Registration for Anti-Fatigue System on Internet Games
, or the Real-name Registration Notice”), which took effect on October 1, 2011, to strengthen the implementation of the anti-fatigue system and real-name registration. The Real-name Registration Notice’s main focus is to prevent minors from using an adult’s ID to play Internet games and, accordingly, the notice imposes stringent punishments on online game operators that do not implement the required anti-fatigue and real-name registration measures properly and effectively. The most severe punishment contemplated by the Real-name Registration Notice is to require termination of the operation of the online game if it is found to be in violation of the Anti-Fatigue Notice, the Monitor System Circular or the Real-name Registration Notice. Changyou developed anti-fatigue and real-name registration systems for its games, and implemented them beginning in 2007. Under the systems of Changyou, game players must use real identification in order to create accounts, and in this way Changyou generally are able to tell which of their game players are minors and thus subject to these regulations. For game players who do not register, Changyou assume that they are minors. As required by the anti-fatigue rules, Changyou reduces the value of
in-game
benefits of game players under 18 years based on the amount of their continuous play. In order to comply with the
anti-fatigue
rules, game players under 18 years of age only receive half of the experience time they actually earn after three hours of play. And, after five hours of play, minors receive no experience points.
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On January 15, 2011, the MCT, the MIIT and six other central government authorities jointly issued a circular entitled
Implementation of Online Game Monitor System of the Guardians of Minors
, or the Monitor System Circular, aiming to provide protection measures to monitor the online game activities of minors and curb addictive online game playing behaviors of minors. Under the Monitor System Circular, online game operators are required to adopt various measures to maintain a system to communicate with the parents or other guardians of minors playing online games and online game operators are required to monitor the online game activities of minors, and must suspend the account of a minor if so requested by the minor’s parents or guardians. The monitor system was formally implemented commencing March 1, 2011.
In February 2013, 15 PRC government authorities, including the SAPPRFT, the Ministry of Education, the MCT and the MIIT, jointly issued the Work Plan implementing integrated measures by different authorities to prevent minors from being addicted to online games. Under the Work Plan, the current relevant regulations regarding online games will be further clarified and additional implementation rules will be issued; and as a result, online game operators will be required to implement measures to protect minors.
On July 25, 2014, the SAPPRFT promulgated a
Notice on Further Carrying out the Verification of Real-name Registration for Anti-Fatigue System on Internet Games
, or the Verification of Real-name Registration Notice, which took effect on October 1, 2014. The Verification of Real-name Registration Notice requires local press and publication administrative departments to strengthen their administration over enterprises engaged in online game publication and operations, and requires such enterprises to abide by anti-fatigue and real-name registration requirements when developing and promoting online games, excluding, at present, mobile games.
The Indulgence Prevention Notice requires online game operators to implement measures to not give minors access to online game services during specified periods of the day, imposes daily limits on minors’ length of use and spending for paid online game services, and prohibits online game operators from providing paid game services to minors under the age of eight. The Indulgence Prevention Notice also stipulates that online game operators must require real name registration by their users and must not provide game services to users who have not completed their real-name registrations.
Information Security and Censorship
Internet content in China is also regulated and restricted from a State security standpoint. The Standing Committee of the National People’s Congress enacted the
Decision on Internet Security Protection
in 2000, and amended it in August, 2009. The decision makes it unlawful to: (i) gain improper entry into a computer or system of strategic importance; (ii) disseminate politically disruptive information; (iii) leak State secrets; (iv) spread false commercial information; or (v) infringe intellectual property rights. The MPS has promulgated measures that prohibit the use of the Internet in ways which, among other things, result in a leakage of State secrets or distribution of socially destabilizing content. The MPS has supervision and inspection rights in this regard, and Changyou may be subject to the jurisdiction of local security bureaus. If an ICP license holder violates these measures, the PRC government may revoke its ICP license and shut down its Websites. On November 7, 2016, the Standing Committee of the National People’s Congress issued the Internet Security Law, which took effect on June 1, 2017. The Internet Security Law requires providers of services over Internet networks to keep user information that they have collected in strict confidence and to establish improved systems for the protection of user information. Such service providers must provide notice of the purpose, methods and scope of their collection and use of user information, and obtain the consent of each person whose personal information will be collected. Service providers may not collect any personal information that is not related to the services they provide, or disclose or tamper with personal information that they have collected, unless such information is encoded to prevent identification of individuals whose information is so disclosed or tampered with. Service providers who do not comply with the Internet Security Law may be subject to fines, suspension of their businesses, shutdown of their websites, and revocation of their business licenses.
In 2005, the MCT and the MIIT promulgated the
Opinions on the Development and Administration of Online Games
emphasizing the PRC government’s intent to foster and control the development of the online game industry in China and providing that the MCT will censor online games that “threaten state security,” “disturb the social order,” or contain “obscenity” or “violence.” Although the MCT Approval Scope Notice provides that the MCT is no longer responsible for regulating the online game industry, it is not clear whether the MIIT or another PRC governmental agency will be designated to censor online games under the
Opinions on the Development and Administration of Online Games.
In November 2018, the MPS issued the
Regulations for Internet Security Supervision and Inspection by Public Security Authority
, which specifies the standards for the inspection of network operators and the legal responsibilities of network operators that provide internet content.
Virtual Currency
On February 15, 2007, the MCT, the People’s Bank of China, or the PBOC, and other relevant government authorities jointly issued the
Notice on the Reinforcement of the Administration of Internet Cafés and Online Games
, or the Internet Cafés Notice. Under the Internet Cafés Notice, the PBOC is directed to strengthen the administration of virtual currency in online games to avoid any adverse impact on the economy and financial system. The Internet Cafés Notice limits the total amount of virtual currency that may be issued by online game operators and the amount that may be purchased by individual game players, and includes a clear division between virtual transactions and real transactions carried out by way of electronic commerce. The Internet Cafés Notice also provides that virtual currency may only be used to purchase virtual items.
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On June 4, 2009, the MCT and the MOFCOM jointly issued the Virtual Currency Notice, to regulate the trading of online game virtual currencies. The Virtual Currency Notice defines the meaning of virtual currency and places a set of restrictions on the trading and issuance of virtual currency. The Virtual Currency Notice also states that online game operators are not allowed to give out virtual items or virtual currency through lottery-based activities, such as lucky draws, betting or random computer sampling, in exchange for user’s cash or virtual money. The Virtual Currency Notice is mainly targeted at lottery-based activities relating to the “treasure boxes” found in some online games.
On July 20, 2009, the MCT promulgated the
Filing Guidelines for Online Game Virtual Currency Issuing Enterprises and Online Game Virtual Currency Trading Enterprises
(the “Virtual Currency Guidelines”), which define the terms “issuing enterprise” and “trading enterprise” and stipulate that the same enterprise may not be both an issuing enterprise and a trading enterprise.
Import and Export of Software Technology
China imposes controls on the import and export of technology and software products. Under the
Regulations on Administration of Import and Export of Technologies
promulgated by the State Council, which were amended on November 29, 2020, the term “technology import and export” is defined to include, among other things, the transfer or licensing of patents and
know-how,
and the provision of services related to technology. Depending on the nature of the relevant technology, the import and export of technology require either approval by or registration with the relevant PRC governmental authorities. Under the
Software Export Management and Statistics Measures
promulgated in October 2001, if a company is classified as a software enterprise and has a minimum of RMB1.0 million (or approximately $144,904) in registered capital, it may engage in an export business after being registered with the relevant PRC governmental authorities. All contracts which relate to the export of software products, transfer of technology or provision of related services must be filed with the relevant PRC governmental authorities. The
Measures for the Administration of Registration of Technology Import and Export Contracts,
issued by the MOFCOM in February 2009, specify registration requirements related to the import and export of technology.
Changyou has entered into license agreements with third parties outside of China to license its games, which may be deemed to constitute the export of technology under the regulations. As a result, such licenses are required to be registered with applicable PRC governmental authorities. Although there are no explicit penalties set forth in these regulations for lack of such registration, failure to register an agreement where such registration is required may result in restrictions concerning foreign exchange, banking and taxation matters relating to such agreements. Changyou has not registered all of the game license agreements under which it authorizes overseas third-party online game operators to operate its online games, and so far Changyou has not encountered any problems with respect to foreign exchange, banking or taxation matters relating to its license agreements, nor has Changyou received any notice from any governmental authority requiring it to complete the registration of its game license agreements.
Regulation of Other Services
Real Estate Services
On December 27, 2021, the NDRC and the MOFCOM issued the
Special Administrative Measures for Admittance of Foreign Investment (Restricted List) (2021 Edition)
(the “2021 Restricted List”), which became effective on January 1, 2022. The 2021 Restricted List removed from the category of industries where foreign investment is restricted real estate agency and brokerage services, which had been included in the restricted category in the previous Foreign Investment Industrial Guidance Catalogue issued in 2011. The 2020 Restricted List loosened existing restrictions on foreign ownership of real estate agency and brokerage services in China, and as a result we may conduct real estate agency and brokerage services directly.
On April 4, 2001, the Ministry of Housing and Urban-Rural Development (the “MHURD,” formerly the Ministry of Construction) promulgated the
Regulatory Measures on the Sale of Commercial Houses
, pursuant to which a real estate developer may engage a real estate services organization as a broker to
pre-sell
or sell primary residential housing. The regulatory measures provide that a real estate broker must not make any false statements regarding a property to clients and must present clients with relevant title certificates or sale permits for the properties and a related letter of authorization.
On December 29, 2006, the MHURD and the PBOC jointly issued the
Circular Concerning Strengthening the Management of Real Estate Services and Regulating the Trade Settlement Capital Account
, which provides a number of directives regulating the real estate services industry. Under the circular, a real estate services company is not permitted to receive cash purchase payments on behalf of clients in secondary real estate transactions and is required to establish separate security deposit accounts for clients.
On January 20, 2011, MHURD, the NDRC, and the Ministry of Human Resources and Social Security jointly issued the
Measures for Administration on Real Estate Brokerage
(the “Brokerage Measures”), which became effective on April 1, 2011 and were amended on April 1, 2016, and govern the activities of real estate brokerages and real estate brokerage personnel in providing intermediary, agency and related services and charging commissions. Furthermore, pursuant to the Brokerage Measures, a real estate brokerage company and its branches must have a sufficient number of licensed real estate brokers. The Brokerage Measures also require real estate brokerage companies to file with real estate regulatory authorities at the county level or above within 30 days after their business registration with the relevant local counterparts of the SAMR. Focus Interactive has made the required filings.
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On July 29, 2016, the MHURD and six other governmental authorities jointly issued the
Opinions on Strengthening the Administration of Sound Development of Real Estate Brokerage
(the “MHURD Opinions”), to further regulate real estate brokerage services. The MHURD Opinions stipulate that real estate brokers are obligated to censor specified real estate-related information, including ownership, price, area, and location, and may not provide, directly or through agencies, loans for down payments and other similar financial services.
On September 30, 2016, Beijing MHURD and five other governmental authorities jointly issued the
Measures for the Promotion of Stable and Healthy Development of the Local Real Estate Market
(the “Beijing Measures”), with the goal of tempering rampant increases in housing prices by balancing land supply in favor of residential use and owner-occupied apartments, providing guidance for real estate developers and brokers as to the setting of prices and the conduct of advertising, selling and financing activities, and providing for enhanced enforcement measures with respect to false and misleading advertisements and pricing information and other illegal selling and financing activities in the local real estate market. Certain other cities, including Tianjin, Suzhou, Zhengzhou, Chengdu, Hefei, and Wuhan, adopted similar measures. One effect of these regulations has been to make real estate developers more cautious with respect to advertising housing on Internet platforms and cooperating on real estate-related
e-commerce
programs with Internet service providers.
On May 19, 2018, the MHURD issued a
Notice on Further Improving Relevant Issues Concerning the Regulation and Control of the Real Estate Market,
to prohibit certain behaviors by real estate developers and brokers, such as hoarding property for speculation. On June 25, 2018, the MHURD and six other government agencies jointly issued a
Notice on Launching Special Actions to Combat the Infringement of the Interests of the Masses and Regulating the Real Estate Market in Some Cities
, to prohibit certain additional behaviors of real estate developers and brokers, such as price manipulation and false advertising, in specified cities including Beijing, Shanghai, Guangzhou, and Tianjin.
Online Payment Services
On June 14, 2010, the PBOC issued the
Measures for the Administration of Payment Services Provided by
Non-financial
Institutions
(the “Payment Services Measures”), which took effect on September 1, 2010 and were amended on February 3, 2016 and April 29, 2020. On December 1, 2010, the PBOC promulgated the
Implementing Rules for the Payment Services Measures
, which was last amended on September 1, 2021. The Payment Services Measures and their implementing rules require any
non-financial
institution engaging in payment services, such as online payments, issuance and acceptance of prepaid cards, and bill collection via bank cards, to obtain a Payment Service License. Applications for Payment Service Licenses are examined by the local branches of the PBOC and then submitted to the PBOC for approval. To further regulate the operation of online payment services, the PBOC issued the
Administration of Online Payment Services Provided by
Non-Bank
Payment Institutions
(the “Online Payment Services Measures”), which took effect on July 1, 2016. The Online Payment Services Measures classify personal payment accounts at entities that already hold a Payment Service License into three categories based on the extent to which the holders of the accounts have completed identity verification procedures, and provide that those account holders who have completed more of the identity verification process are entitled to a broader range of payment options through their accounts. The Online Payment Services Measures prohibit
non-bank
payment institutions from engaging in securities, insurance, financing, trusts and other unauthorized financial business.
Non-bank
payment institutions are also required to develop risk control systems, including a risk rating system for users, a dispute resolution system, and a risk reserve.
In addition, on April 29, 2019, the SAFE issued the
Administrative Measures for Foreign Exchange Services of Payment Institutions
, replacing the
Notice of the State Administration of Foreign Exchange on the Pilot Scheme of Cross-border Foreign Exchange Payment Services Provided by Payment Institutions
issued by the SAFE on January 20, 2015, pursuant to which a payment institution is required to obtain approval from the local branches of SAFE and to be registered in the Enterprise Directory for Foreign Exchange Receipts and Payments in Trade in order to provide foreign exchange payment services for cross-border
e-commerce
transactions. Any institution applying for such registration and approval must first obtain a Payment Services License that authorizes it to engage in the online payments business.
Lottery Sales
On May 4, 2009, the State Council issued the
Regulation on Administration of Lottery
stating that “lottery issuance agencies” and “lottery sales agencies” may authorize other entities to conduct lottery sales. On September 26, 2010, the Ministry of Finance (the “MOF”) issued the
Interim Measures on the Administration of Internet Lottery Sale
(the “Lottery Measures”), which set forth detailed requirements for the administration of online lottery sales as well as requirements for qualified online lottery service providers. Pursuant to the Lottery Measures, the MOF is the supervisory and regulatory department for online lottery sales. Lottery issuance agencies may collaborate with other entities or authorize lottery sales agencies to conduct online lottery sales, or appoint qualified entities as their online lottery sales agents. The Lottery Measures require qualified online lottery service providers to meet certain criteria, including having obtained an Internet content provider license. Lottery issuance agencies are required to apply to the MOF for approval of online lottery service providers that the lottery service agencies propose to engage to conduct an online lottery business.
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On January 18, 2012, the MOF, the Ministry of Civil Affairs and the General Administration of Sports jointly issued the
Implementing Rules of the Regulation on Administration of Lottery
(the “Lottery Implementing Rules”), which became effective on March 1, 2012 and were amended on August 16, 2018. The Lottery Implementing Rules stipulate that lotteries sold through the Internet or sold without the MOF’s approval and a lottery issuing agency’s or a lottery sales agency’s authorization may be categorized as illegal lotteries.
On February 28, 2012, the General Administration of Sports issued the
Urgent Notice on the Strengthening Execution of the Lottery Implementing Rules
, reiterating that lotteries sold via the Internet without the approval of the MOF will be deemed to be illegal lotteries.
On March 27, 2014, the MOF issued the
Interim Measures on the Administration of the Sale of Lotteries via Telephone
(the “Telephone Lottery Measures”) to replace the MOF’s former version promulgated on September 26, 2010. Under the Telephone Lottery Measures, “sale of lotteries via telephone” refers to the use of fixed-line telephones and mobile telephones to sell lotteries through short messages, voice calls and applications. Properly qualified lottery sales agencies may authorize other entities (“Telephone Sales Agents”) to carry out the business of sale of lotteries via telephone. The lottery sales agencies and the Telephone Sales Agent must enter into a commission agreement. A qualified Telephone Sales Agent is required to meet certain criteria, including having obtained a Value-Added Telecommunications Services Operating License. The Telephone Lottery Measures further provide that a Telephone Sales Agent must conduct business in accordance with parameters approved by the MOF and pursuant to a commission agreement.
On January 15, 2015, the MOF, the Ministry of Civil Affairs and the General Administration of Sports jointly promulgated
the Notice related to Self-inspection and Self-Remedy of Unauthorized Online Lottery Sales
(the “Self-inspection Notice”), which requires provincial and municipal government branches, including financial, civil affairs and sports bureaus, to conduct inspections and take remedial measures for unauthorized online lottery sales within their respective jurisdictions. The scope of inspection includes, among other things, commission contracts, online lottery products, exchange of lottery sales data, online lottery sales channels, and sales commission fees in connection with unauthorized engagements of online sales agents by lottery sales agencies. The Notice further requires that a formal report on the result of the inspections and the remedial measures be submitted by each provincial or municipal government to the MOF, the Ministry of Civil Affairs and the General Administration of Sports by March 1, 2015.
On April 3, 2015, eight governmental authorities consisting of the MOF, the MPS, the SAMR, the MIIT, the Ministry of Civil Affairs, the PBOC, the General Administration of Sports and the CBIRC jointly released a public announcement with regard to unauthorized online lottery sales (the “Public Announcement”). The Public Announcement provides, among other things, that (i) all lottery institutions, internet companies, and other institutions or individuals provide unauthorized online lottery sales services, either directly or through agents, must immediately cease such services; (ii) the local governmental authorities for finance, civil affairs and sports must investigate and sanction unauthorized online lottery sales in their respective jurisdictions in accordance with applicable laws and regulations; (iii) the local governmental authorities for public commentsecurity and industry and commerce must investigate any issuances or sales of illegal lotteries within their respective jurisdictions, with necessary assistance from local governmental authorities for finance, communication, banking regulation, civil affairs and sports, and local branches of the PBOC, and report any criminal activities to judicial authorities for prosecution; (iv) the lottery issuance authorities that plan to sell lottery products online must obtain approval from the Ministry of Civil Affairs or the General Administration of Sports by submitting an application to the MOF for written approval, and (v) no entity may provide online lottery sales services without the approval of the MOF. On April 28, 2016, the MOF, the MPS, the Ministry of Civil Affairs, the General Administration of Sports, and the SAMR, and on May 5, 2015 the SAMR, issued notices regarding unauthorized online lottery sales and further emphasized the requirements specified in the Public Announcement. Online lottery sales are an insignificant business for us.
On August 8, 2018, the MOF and several other government agencies jointly issued an
Announcement on Further Regulating the Order of the Lottery Market and Comprehensively Managing the Sale of Lotteries through the Internet
, which further emphasizes that business entities and individuals may not sell lottery tickets or conduct any other form of lottery business over the Internet without the approval of the MOF.
Production of Radio and Telecommunications Equipment
On September 11, 1993, the State Council and Central Military Commission jointly issued the
Regulations on the Management of Radio Operations
, which were amended on November 11, 2016, under which the working frequencies, bands, and related technical indices of radio transmission equipment must conform to relevant regulations regarding radio and are required to be submitted to the state radio administration authority or its local branches for approval, and failure to submit such information for approval will result in the imposition of a draftfine.
On October 7, 1997, the State Radio Regulatory Bureau (formerly the State Radio Regulatory Commission), together with the SAMR (formerly the AQSIQ), promulgated
Regulations on the Production of Radio Transmitting Equipment
(the “Radio Transmitting Equipment Regulations”), which took effect on January 1, 1999. Pursuant to the Radio Transmitting Equipment Regulations, each type of radio transmission equipment is subject to approval from State Radio Regulatory Bureau (“SRRC Certificate”) prior to production.
On May 10, 2001, MIIT promulgated the
Administration Measures of the Network Entry of Telecommunication Equipment
(the “Telecommunication Equipment Measures”), which was amended on September 23, 2014. Pursuant to the Telecommunication Equipment Measures, the State requires all telecommunications terminal equipment to be connected to a public telecommunications network to obtain network connection permits. A Permit of Network Connection, or China Type Approval Certificate (“CTA Certificate”), issued by the MIIT must be obtained for such telecommunications equipment. When a producer of such telecommunications terminal equipment applies for a CTA Certificate, it must submit a test report or product quality certificate (namely SRRC Certificate). If a CTA Certificate has not been obtained for such equipment, it may not be connected to a public telecommunications network and may not be used or sold domestically.
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Miscellaneous
Laws and Regulations Related to International Connections for Computer Information Networks
The State Council and the MIIT have promulgated regulations governing international connections for PRC computer networks, including:
Provisional Regulations of the People’s Republic of China for the Administration of International Connections to Computer Information Networks
(1997) and related Implementing Measures (1998); and
Administrative Measures for International Communications Gateways
(2002)
.
Under the above regulations, any entity wishing to access international connections for their computer information networks in the PRC must comply with the following requirements:
be a PRC legal person;
have the appropriate equipment, facilities and technical and administrative personnel;
have implemented and registered a system of information security and censorship; and
effect all international connections through an international communications gateway established with the approval of the MIIT.
We have adopted measures necessary to ensure that we are in compliance with all of these requirements.
Laws and Regulations Related to Intellectual Property Protection
China has adopted comprehensive legislation governing intellectual property rights, including copyrights, patents and trademarks.
Copyright
On September 7, 1990, the Standing Committee of the National People’s Congress promulgated
the Copyright Law
, which took effect on June 1, 1991 and was amended in 2001, 2010, and 2020. The 2020 amended Copyright Law, which took effect on June 1, 2021, extends copyright protection to Internet activities, products disseminated over the Internet, and software products. In addition, there is a voluntary registration system administered by the China Copyright Protection Center. The amended Copyright Law also requires registration of the pledge of a copyright. The latest amended Copyright Law clarifies the scope of works entitled to copyright protection and provides for more stringent enforcement measures against copyright infringement.
In order to further implement the
Computer Software Protection Regulations
, promulgated by the State Council on December 20, 2001 and amended on May 19, 2004 and January 30, 2013, the NCA issued
Computer Software Copyright Registration Procedures
on February 20, 2002 and amended it on May 19, 2004, which specify detailed procedures and requirements with respect to the registration of software copyrights.
To address the problem of copyright infringement related to content posted or transmitted over the Internet, on April 29, 2005 the NCA and the MIIT jointly promulgated the
Measures for Administrative Protection of Copyright Related to Internet
, which became effective on May 30, 2005. These measures apply to situations where an ICP operator (i) allows another person to post or store any works, recordings, audio or video programs on the Websites operated by such ICP operator, or (ii) provides links to, or search results for, the works, recordings, audio or video programs posted or transmitted by such person, without editing, revising or selecting the content of such material. Upon receipt of an infringement notice from a legitimate copyright holder, an ICP operator must take remedial actions immediately by removing or disabling access to the infringing content. If an ICP operator knowingly transmits infringing content or fails to take remedial actions after receipt of a notice of infringement harming public interest, the ICP operator could be subject to administrative penalties, including an order to cease infringing activities; confiscation by the authorities of all income derived from the infringement activities; or payment of fines.
On May 18, 2006, the State Council promulgated the
Regulations on the Protection of the Right to Network Dissemination of Information
(as amended in 2013). Under these regulations, an owner of the network dissemination rights with respect to written works or audio or video recordings who believes that information storage, search or link services provided by an Internet service provider infringe his or her rights may require that the Internet service provider delete, or disconnect the links to, such works or recordings.
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Since 2005, the NCA, together with certain other PRC governmental authorities, have jointly launched annual campaigns, which normally last for three to four months every year, specifically aiming to crack down on Internet copyright infringement and piracy in China. According to the
Notice of 2010 Campaign to Crack Down on Internet Infringement and Piracy
promulgated by the NCA, the MPS and the MIIT on July 19, 2010, one of the main targets, among others, of the 2010 campaign was Internet audio and video programs. From the time the 2010 campaign commenced in late July, the local branches of the NCA focused on popular movies and television series, newly published books, online games and animation, music and software and illegal uploading or transmission of a third party’s works without proper license or permission, sales of pirated audio/video and software through
e-commerce
platforms, providing search links, information storage, Web hosting or Internet access services for third parties engaging in copyright infringement or piracy and infringement by the use of mobile media. In serious cases, the operating permits of the Websites engaging in illegal activities may be revoked, and such Websites may be ordered to shut down. The Jian Wang Campaign for 2021, which targets copyright infringement related to the online transmission of short videos, live online broadcasting of sporting events, and online education and aims to enhance the existing campaign with respect to the protection of news works, online music, and online literature and in the field of
e-commerce
platforms, was launched in June 2021.
On April 17, 2015, the NCA issued
the
Circular on Regulating the Order of Internet Reproduction of Copyrighted
Works
(“Internet Reproduction Circular”). Under the Internet Reproduction Circular, in order to reproduce the work of others, Internet media companies must comply with relevant provisions of the copyright laws and regulations, and, unless provided otherwise by law or regulation, must obtain permission from and pay remuneration to the owner of the copyright to the work, and must indicate the name of the author, as well as the title and the source of the work, and may not infringe any other rights or interests of the copyright owner. Moreover, when reproducing the work of others, Internet media companies may not make material alterations to the content; and may not make editorial modifications or abridgments of the work that change the work’s title or its original intent. When reproducing the work of others, we will need to comply with these strict requirements of the Internet Reproduction Circular.
We have adopted measures to mitigate copyright infringement risks, such as real-time monitoring and mechanisms for fast removal upon receipt of notices of infringement.
On May 28, 2020, the National People’s Congress approved the Civil Code, which came into effect on January 1, 2021 and replaced the
Torts Liability Law
and eight other civil laws and regulations. Under the Civil Code, both Internet users and Internet service providers may be liable for the wrongful acts of users who infringe the lawful rights of other parties. If an Internet user infringes the rights of another party, the holder of the rights that are infringed may request the provider of the Internet service through which the rights were infringed to take necessary measures, such as removing or blocking the content, or disabling the links thereto, to prevent or stop the infringement. The notice from the holder of the rights to the service provider is required to include preliminary evidence of infringement and identify the holder of the rights, and the Internet service provider is then required to notify the infringer of the request by the holder of the rights and to take necessary measures. If the Internet service provider does not take necessary measures, it will be jointly liable for any further damages suffered by the holder of the rights. Furthermore, if an Internet service provider fails to take necessary measures when it knows or should have known that an Internet user has used the provider’s Internet services to infringe the lawful rights of other parties, it will be jointly liable with the Internet user for damages resulting from the infringement.
On December 17, 2012, PRC Supreme People’s Court promulgated the
Provisions on Several Issues Concerning the Application of Law for Trial of Civil Dispute Cases Involving Infringement of the Right to Network Dissemination of Information
(“Network Dissemination of Information Provision”), which were most recently amended on December 29, 2020. The Network Dissemination of Information Provisions stipulate that the dissemination by network users or network service providers of written works, performances or audio or video recordings without the permission of the holder of the rights to such dissemination will constitute infringement of such rights, and that network service providers that aid or abet any network user’s infringement of the rights of another to network dissemination of any works or recordings may be liable for such network user’s infringing activities.
Patent
On March 12, 1984, the Standing Committee of the National People’s Congress promulgated the
Patent Law
, which was amended in 1992, 2000, 2008 and 2020. The 2020 amended Patent Law took effect on June 1, 2021. On June 15, 2001, the State Council promulgated the
Implementation Regulation for the Patent Law
, which was lately amended in January 9, 2010. According to these laws and regulations, the Patent Office of the CNIPA is responsible for administering patents in the PRC. The Chinese patent system adopts a “first to file” principle, which means that where more than one person files a patent application for the same invention, a patent will be granted to the person who filed the application first. To be patentable, invention or utility models must meet three conditions: novelty, inventiveness and practical applicability. A patent is valid for twenty years in the case of an invention, ten years in the case of utility models and designs. From June 1, 2021, in the case of designs, a patent will be valid for fifteen years from the date of the filing of the patent application. A third-party user must obtain consent or a proper license from the patent owner to use the patent. Otherwise, third-party use constitutes an infringement of patent rights.
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Trademark
On August 23, 1982, the Standing Committee of the National People’s Congress promulgated the
Trademark Law
(the “Trademark Law”), which was amended in 1993, 2001, 2013, and 2019. On August 3, 2002, the State Council promulgated the
Implementation Regulation for
the Trademark Law
, which was amended in April 29, 2014. Under the Trademark Law and the implementing regulation, the Trademark Office is responsible for the registration and administration of trademarks and resolving trademark disputes. As with patents, China has adopted a
“first-to-file”
principle for trademark registration. If two or more applicants apply for registration of identical or similar trademarks for the same or similar commodities, the application that was filed first will receive preliminary approval and will be publicly announced. For applications filed on the same day, the trademark that was first used will receive preliminary approval and will be publicly announced. Registered trademarks are valid for ten years from the date the registration is approved. A registrant may apply to renew a registration within twelve months before the expiration date of the registration. If the registrant fails to apply in a timely manner, a grace period of six additional months may be granted. If the registrant fails to apply before the grace period expires, the registered trademark shall be deregistered. Renewed registrations are valid for ten years. The amendment of the Trademark Law that became effective on November 1, 2019 provides for enhanced procedures for the prevention of malicious registration of trademarks and increases the amount of fines that may be imposed for trademark infringements.
Laws and Regulations Related to Encryption Software
In October 1999, the State Council promulgated the
Regulations for the Administration of Commercial Encryption
, most recently amended on February 3, 2016, followed in November 1999 by the
Notice of the General Office of the State Encryption Administration Commission
promulgated by the State Commission for the Administration of Cryptography. Both of these regulations address the use in China of software with encryption functions.
These regulations require that encryption products purchased for use be reported. Violation of the encryption regulations may result in the issuance of a warning, levying of a penalty, confiscation of the encryption products and even criminal liabilities. On March 18, 2000, the Office of the State Commission for the Administration of Cryptography issued a public announcement regarding the implementation of the regulations. The announcement states that only specialized hardware and software, the core functions of which are encryption and decoding, fall within the administrative scope of the regulations as “encryption products and equipment containing encryption technology.” Other products, such as wireless telephone, Windows software and browsers do not fall within this scope.
The State Commission for the Administration of Cryptography changed its name to the State Cryptography Administration Bureau (“SCAB”) in March 2005. The SCAB maintains authority over the importation, research, production, sale and use of cryptographic products in China (“products” are defined to include any cryptographic technologies and products to be applied in the encryption or secure authentication of information, other than state secrets). Legislation was issued to restrict the importation, research, production and sale of encryption products and requiring that the encryption functions of such products be placed in escrow with the SCAB for reasons of national security.
We are in full compliance with current PRC legislation governing encryption software.
Laws and Regulations Related to Consumer Protection and Privacy Protection
Consumer Protection
The MIIT set forth various requirements for consumer protection in a notice, issued on April 15, 2004, which addresses certain problems in the telecommunications sector, including ambiguity in billing practices for premium services, poor quality of connections and unsolicited SMS messages, all of which impinge upon the rights of consumers.
This trend was continued with the issuance of the
Notice Regarding the Ratification and Administration of Mobile Information Services Fees and Charges Method
by the MIIT on September 8, 2006.
On March 15, 2021, the SAMR issued the
Measures for the Supervision and Administration for Online Transactions
(the “Online Transaction Measures”), which became effective on May 1, 2021, to replace the
Administrative Measures on Online Transactions
promulgated on January 26, 2014. The Online Transaction Measures apply to the sale of commodities and provision of services through the Internet, including through social networking and live online broadcasting within the territory of the PRC; aim at creating a fairer competitive environment for online transaction operators and a safer consumption environment for users in online transactions; and specify the responsibilities of platform operators in the course of providing online shows and
e-commerce
live broadcast services. Under the Online Transaction Measures, online transactions operators must comply with laws and regulations, fairly participate in market competition, and accept public supervision. In addition, the Online Transaction Measures have strengthened the protection of consumer interests and set forth more specific obligations for online transaction operators with respect to the display of their licenses and the collection of consumer personal information. On May 26, 2016, the MIIT issued the Measures on the Complaint Settlement of the Telecommunication Services Users (the “Complaint Settlement Measures”), which took effect on July 30, 2016. The Complaint Settlement Measures require telecommunication services providers to respond to their users within fifteen days upon the receipt of any complaint delivered by such users, the failure of which will give the complaining users the right to file a complaint against the service providers with the provincial branch offices of the MIIT.
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We are aware of the increasingly strict legal environment covering consumer protection in China, and we strive to adopt all measures necessary to ensure that our business complies with these evolving standards.
Privacy Protection
The PRC Constitution states that PRC law protects the freedom and privacy of the communications of citizens and prohibits infringement of such rights. In recent years, PRC government authorities have issued various regulations on the use of the Internet that are designed to protect personal information from unauthorized disclosure. For example, the ICP Measures prohibit an Internet information services provider from insulting or slandering a third party or infringing upon the lawful rights and interests of a third party. In addition, PRC regulations authorize PRC telecommunication authorities to demand rectification of unauthorized disclosure by ICPs.
Chinese law does not prohibit ICPs from collecting and analyzing personal information from their users. The PRC government, however, has the power and authority to order ICPs to submit personal information of an Internet user if such user posts any prohibited content or engages in illegal activities on the Internet. In addition, the Several Provisions stipulate that ICPs must not, without the users’ consent, collect information on users that can be used, alone or in combination with other information, to identify the user, or User Personal Information, and may not provide any User Personal Information to third parties without prior user consent. ICPs may only collect User Personal Information necessary to provide their services and must expressly inform the users of the method, content and purpose of the collection and processing of such User Personal Information. In addition, an ICP may use User Personal Information only for the stated purposes under the ICP’s scope of services. ICPs are also required to ensure the proper security of User Personal Information, and take immediate remedial measures if User Personal Information is suspected to have been disclosed. If the consequences of any such disclosure are expected to be serious, the ICP must immediately report the incident to the telecommunications regulatory authorities and cooperate with the authorities in their investigations. We require our users to accept a user agreement whereby they agree to provide certain personal information to us. If we violate these regulations, the MIIT or its local bureaus may impose penalties and we may be liable for damage caused to our users.
On December 28, 2012, the Standing Committee of the National People’s Congress enacted the
Decision to Enhance the Protection of Network Information
(“Information Protection Decision”), to further enhance the protection of User Personal Information in electronic form. The Information Protection Decision provides that ICPs must expressly inform their users of the purpose, manner and scope of the ICPs’ collection and use of User Personal Information, publish the ICPs’ standards for their collection and use of User Personal Information, and collect and use User Personal Information only with the consent of the users and only within the scope of such consent. The Information Protection Decision also mandates that ICPs and their employees must keep strictly confidential User Personal Information that they collect, and that ICPs must take such technical and other measures as are necessary to safeguard the information against disclosure.
On July 16, 2013, the MIIT issued the
Order for the Protection of Telecommunication and Internet User Personal Information
(the “Order”). Most of the requirements under the Order that are relevant to ICP operators are consistent with the requirements already established under the MIIT provisions discussed above, except that under the Order the requirements are often stricter and have a wider scope. If an ICP operator wishes to collect or use personal information, it may do so only if such collection is necessary for the services it provides. Further, it must disclose to its users the purpose, method and scope of any such collection or use, and must obtain consent from the users whose information is being collected or used. ICP operators are also required to establish and publish their protocols relating to personal information collection or use, keep any collected information strictly confidential, and take technological and other measures to maintain the security of such information. ICP operators are required to cease any collection or use of the user personal information, and
de-register
the relevant user account, when a given user stops using the relevant Internet service. ICP operators are further prohibited from divulging, distorting or destroying any such personal information, or selling or providing such information unlawfully to other parties. In addition, if an ICP operator appoints an agent to undertake any marketing or technical services that involve the collection or use of personal information, the ICP operator is still required to supervise and manage the protection of the information. The Order states, in broad terms, that violators may face warnings, fines, and disclosure to the public and, in the most severe cases, criminal liability.
On January 5, 2015, the SAMR promulgated the Measures on Punishment for Infringement of Consumer Rights, which were amended on October 23, 2020. Under the Measures on Punishment for Infringement of Consumer Rights, business operators collecting and using personal information of consumers must comply with the principles of legitimacy, propriety and necessity, specify the purpose, method and scope of collection and use of the information, and obtain the consent of the consumers whose personal information is to be collected. Business operators may not: (i) collect or use personal information of consumers without their consent; (ii) unlawfully divulge, sell or provide personal information of consumers to others; (iii) send commercial information to consumers without their consent or request, or when a consumer has explicitly declined to receive such information.
On August 29, 2015, the Standing Committee of the National People’s Congress issued Amendment (IX) to the Criminal Law of the People’s Republic of China (“Amendment (IX)”), which strengthens the protection of personal information. Pursuant to Amendment (IX), network service providers and others who unlawfully sell or otherwise provide personal information and cause serious adverse consequences may be sentenced to prison for up to seven years. In addition, network service providers who disseminate such user information and cause serious adverse consequences, and who do not rectify the problem after they receive notice of such
non-compliance
from relevant regulatory authorities may be sentenced to prison for up to three years, and may also be subject to public surveillance and fines. On October 21, 2019, the Supreme People’s Court of the PRC and the Supreme People’s Procurator of the PRC issued the
Interpretations of the Supreme People’s
Court and the Supreme People’s Procuratorate on Several Issues Concerning the Application of Law in Criminal Cases Involving Illegal Use of Information Networks and Assistance in Criminal Activities Committed through Information Networks
, which clarifies the types of network service providers and the standards for judging whether the consequences of divulging personal information are serious and adverse.
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On May 8, 2017, the Supreme People’s Court of the PRC and the Supreme People’s Procurator of the PRC issued the
Interpretation of the Supreme People’s Court
and the Supreme People’s Procurator on Several Issues Concerning the Applicable Law for Criminal Cases with Respect to Infringement of Citizen’s Personal Information
, which defines “personal information,” “the provision of personal information,” and “the illegal collection of personal information.”
The SAMR (formerly the AQSIQ and SAC) issued the
Information Security Technology—Personal Information Security Specification
, which came into effect on October 1, 2020. The specification clarifies the principles and security requirements for personal information processing activities, such as collection, storage, use, sharing, transfer, public disclosure, and deletion, that are applicable to the standardization of personal information processing activities of various organizations. On April 10, 2019, the MPS and the Beijing Network Industry Association issued the
Guidelines for
Protection of the Security of Personal Information on the Internet,
which provides guidelines and recommends procedures concerning the protection of personal information applicable to enterprises providing services via the Internet as well as organizations and individuals who control and process personal information in private and
non-networked
environments. On June 1, 2019, the National Information Security Standardization Technical Committee issued the
Internet Security Practice Guidelines—Specification of Information Necessary for Basic Business Functions of Apps
, which provides further guidelines for the use and collection of personal information by network operators, and specifies the types of personal information deemed to be necessary for the operation of online services for areas such as online payment, short videos, Internet news information, and real estate transactions. On March 12, 2021, CAOC, MIIT, MPS and SAMR jointly issued the
Rules on the Scope of Necessary Personal Information for Common Types of Mobile Internet Applications,
to further clarify the scope of essential personal information for common types of applications.
On January 23, 2019, the OCLGCA, the MIIT, the MPS, and the SAMR jointly issued the Public Announcement Concerning the Illegal Collection of Personal Information by Apps, which emphasizes that APP operators must comply strictly with the Internet Security Law in connection with their collection and use of personal information. On March 13, 2019, the SAMR issued the
Notice on the Launch of Special Enforcement Actions to Protect Consumers
and
Crack Down on Violations of Personal Information of Consumers
and the
Announcement of the Implementation of App Security Certifications
, and on October 31, 2019,
the SAMR and the CAOC
issued the
Notice of a Special Campaign to Rectify the Infringement of Legal Rights and Interests of App Users
so as to further protect the rights of the APP users in and to their personal information and clarify the requirements for APP security certification. In addition, a number of relevant governmental authorities and industry associations have published a series of guidelines and standards, such as the
Guidelines for Self-Assessment of Illegal Collection and Use of Personal Information by Apps
issued by the Special Working Group Supervising the Illegal Collection and Use of Personal Information on March 3, 2019, and the
Methods for Identification of the Illegal Collection and Use of Personal Information by Apps
issued by the CAOC and three other PRC government authorities on December 30, 2019, pursuant to which APP operators are encouraged to conduct self-inspection and self-rectification to enhance the protection of personal information. On November 1, 2021, the MIIT issued the
Notice on Launching Action to Enhance User Awareness and Experience in Information and Communication Services
, under which relevant enterprises are required to establish a list of collected personal information and a list of personal information shared with third parties and to display such two lists in their Apps.
On August 22, 2019, the CAOC issued the
Provisions on the Protection of the Personal Information of Minors on the Internet
, effective on August 22, 2019, to regulate activities regarding the collection, use, and disclosure of minors’ personal information on the Internet.
On May 28, 2020, the National People’s Congress approved the Civil Code, which came into effect on January 1, 2021. The Civil Code specifies that the personal information of a natural person must be protected, and in particular provides that an organization or individual may obtain such personal information only when necessary; must ensure the safety of such information; and may not illegally collect, use, process or transmit such personal information or illegally purchase or sell, provide or make public such personal information.
On August 20, 2021, the Standing Committee of the National People’s Congress promulgated the PIPL, effective November 1, 2021, which accentuates the importance of processors’ obligations and responsibilities for personal information protection. The PIPL provides that personal information processors must disclose to their users the purpose, method and scope of their collection or use of such information, and, with certain exceptions, must obtain consent from their users. The PIPL also requires processors to: (i) develop internal management systems and operating procedures; (ii) implement categorized management of personal information; (iii) take appropriate security measures such as encryption and
de-identification;
and (iv) conduct personal information protection impact assessments in advance when conducting personal information processing activities that have a significant effect on individuals, such as processing sensitive personal information, using personal information to conduct automated decision-making, providing personal information to other personal information processors or disclosing personal information to the public. In addition, processors who provide specified internet platform services with large user bases and complex business types are subject to additional obligations, including but not limited to establishing independent bodies composed primarily of external members to supervise the protection of personal information by processors and regularly publishing social responsibility reports on the protection of personal information by processors and accepting supervision from the public. The PIPL also specifies that the definition of “sensitive personal information” is personal information that, once disclosed or illegally used, is likely to infringe the human dignity of natural persons or endanger them or their property, including biometrics, religious beliefs, specific identity, medical health, financial accounts, whereabouts and other information, as well as the personal information of minors under the age of 14. When processing sensitive personal information, processors must adopt strict protective measures, and obtain the users’ separate consent. Our current security measures and those of the third parties with whom we transact business may not be adequate for the protection of user personal information. In addition, we do not have control over the security measures of our third-party online payment vendors. Security breaches of our system and the online payment systems that we use could expose us to litigation and liability for failing to secure confidential customer information and could harm our reputation, ability to attract customers and ability to encourage customers to purchase virtual items.
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Laws and Regulations Related to Security and Censorship
The principal pieces of PRC legislation concerning information security and censorship are:
The
Internet Security Law
(2017);
The Measures for Cybersecurity Review
(2022);
The Regulations on Security Protection of Critical Information Infrastructure
(2021);
The
Data Security LawBUSINESS OVERVIEW
(such draft administrative measures
We are a leading Chinese online media, video, and draft law together,game business group providing comprehensive online products and services on PCs and mobile devices in China. Our businesses are conducted by the “Draft Data Security Laws”),Sohu Group, which purport to regulateconsists of Sohu and Changyou. Sohu is a leading Chinese language online media content and services provider, and Changyou is a leading online game developer and operator in China that engages primarily in the collection, storage, transmission, processing,development, operation, and usagelicensing of dataonline games for PCs and mobile devices. Most of our operations are conducted through our China-based subsidiaries and VIEs.
Through the operation of Sohu and Changyou, we generate brand advertising revenues, online game revenues and other related data activities withinrevenues. Brand advertising and online games are our core businesses. For the year ended December 31, 2021, total revenues generated by Sohu and Changyou were approximately $835.6 million, including total brand advertising revenues of $135.0 million, total online game revenues of $638.2 million, and total other revenues of $62.4 million.
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Sohu: total revenues generated by Sohu were $186.6 million.
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$124.2 million in brand advertising revenues, of which $75.4 million was from Sohu Media Portal, $26.8 million was from Sohu Video, and $22.0 million was from Focus; and
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$62.4 million in other revenues, mainly attributable to revenues from paid subscription services, interactive broadcasting services, and revenue sharing from other platforms.
Changyou: total revenues generated by Changyou were $649.0 million.
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$638.2 million in online game revenues, of which $469.3 million was from PC games, and $168.9 million was from mobile games; and
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$10.8 million in brand advertising revenues, mainly attributable to Changyou’s 17173.com Website.
Sohu’s Business
Brand Advertising Business
Sohu’s 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 mobile phones, tablets and PCs. The majority of our products and services are provided in China but itthrough Sohu Media Portal, Sohu Video and Focus.
Sohu Media Portal.
Sohu Media Portal is unclear whether and/or whena leading online news, information and content services provider in China. It provides users with access to comprehensive content through the Draft Data Security Laws will be enacted. On October 21, 2020,mobile phone application Sohu News APP, the Standing Committeemobile portal m.sohu.com and www.sohu.com for PCs;
Sohu Video.
Sohu Video is an online video content and services provider in China through the mobile phone application Sohu Video APP, tv.sohu.com, and the PC video application ifox for PCs; and
Focus.
Focus (www.focus.cn) is an 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.
Other Sohu Business
Sohu also engages in the other business, which consists primarily of paid subscription services, interactive broadcasting services, and revenue sharing from other platforms. Revenues generated by Sohu from the other business are classified as other revenues in our consolidated statements of comprehensive income.
Changyou’s Business
Changyou’s business lines consist of the National People’s Congress issued for public comment a draft
Personal Information Protection Law
(the “Draft Personal Information Protection Law”), which purports to regulate the collection, transmission, processing, and usage of personal information, the processing of sensitive personal information,online game business and the cross-border provisionplatform channel business, which consists primarily of online advertising and mobile game distribution services. Before ceasing its operations in August 2019, Changyou also operated a cinema advertising business, which consisted primarily of the acquisition from operators of movie theaters, and the sale to advertisers, of
pre-film
advertising slots.
Online Game Business
Changyou’s online game business offers PC games and mobile games to game players. All of Changyou’s games are operated under the item-based revenue model, meaning that game players can play the games for free, but may choose to pay for virtual items, which are
non-physical
items that game players can purchase and use within a game, such as characters, weapons, gems, pets, skills, fashion items and other
in-game
consumables, features and functionalities. Revenues derived from the operation of online games are classified as online game revenues in our consolidated statements of comprehensive income.
PC Games
PC games 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. Changyou’s dominant game is TLBB PC, a PC based
client-end
game. For the year ended December 31, 2021, revenues from TLBB PC were $421.7 million, accounting for approximately 66% of Changyou’s online game revenues, approximately 65% of Changyou’s total revenues, and approximately 50% of the Sohu Group’s total revenues.
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Mobile Games
Mobile games are played on mobile devices and require an Internet connection. In the second quarter of 2017, Changyou launched a mobile game, Legacy TLBB Mobile, which is operated by Tencent under license from Changyou. For the year ended December 31, 2021, revenues from Legacy TLBB Mobile were $79.5 million, accounting for approximately 12% of Changyou’s online game revenues, approximately 12% of Changyou’s total revenues, and approximately 10% of the Sohu Group’s total revenues.
Platform Channel Business
Changyou’s platform channel business consists primarily of the operation of the 17173.com Website. Prior to RaidCall’s ceasing operations in March 2019, Changyou’s platform channel business also included RaidCall.
17173.com Website
The 17173.com Website provides news, electronic forums, online videos, and other online game information services to game players, as well as mobile game distribution services. Changyou generates online advertising revenues from providing advertising services to third-party advertisers on the 17173.com Website and includesonline game revenues from mobile game distribution services.
RaidCall
Prior to ceasing operations in March 2019, RaidCall provided online music and entertainment services, primarily in Taiwan. IVAS revenues that were generated by RaidCall are classified as other relevant rulesrevenues in our consolidated statements of comprehensive income.
Cinema Advertising Business (Discontinued)
Prior to ceasing its operations in August 2019, Changyou also operated a cinema advertising business, which consisted primarily of the acquisition from operators of movie theaters, and regulations, but it is unclear whether and/or when the Draft Personal Information Protection Law will be enacted. If current or future lawssale to advertisers, of
pre-film
advertising slots. Revenues that were generated by Changyou’s cinema advertising business are reflected as discontinued operations in our consolidated statements of comprehensive income.
Changyou’s Share Structure
As a result of the completion of the Changyou Merger on April 17, 2020, we beneficially held and regulations are interpretedcontrolled, and appliedcontinue to beneficially hold and control, 100% of the combined total of Changyou’s outstanding ordinary shares and 100% of the total voting power in a manner that limits or prohibits anyChangyou. We consolidate Changyou in our consolidated financial statements and, prior to the completion of the Changyou Merger on April 17, 2020, also provided for noncontrolling interests reflecting ordinary shares in Changyou held by shareholders other than us (“Changyou noncontrolling shareholders”).
Sogou’s Business (Discontinued)
Between our entry into the Tencent/Sohu Sogou Share Purchase Agreement on September 29, 2020 and the completion of the Tencent/Sohu Sogou Share Purchase on September 23, 2021, Sogou met the criteria for discontinued operations. Accordingly, the results of Sogou’s current practices, or if additional or different requirementsoperations were excluded from our results from continuing operations, and revenues that were generated by Sogou are imposedreflected as discontinued operations, in our consolidated statements of comprehensive income. We ceased consolidating Sogou in our consolidated financial statements after September 23, 2021. Retrospective adjustments to our historical statements have been made in order to provide a consistent basis of comparison.
Search and Search-related Business
Prior to the completion of the Tencent/Sohu Sogou Share Purchase on September 23, 2021, our search and search-related business consisted primarily of search and search-related advertising services offered by these lawsSogou. Search and regulations, complying withsearch-related advertising services enabled advertisers’ promotional links to be displayed on Sogou’s search results pages and other Internet properties and third parties’ Internet properties where the links were relevant to the subject and content of searches and such interpretations, applications,properties. Sogou’s advertising services expanded distribution of advertisers’ promotional links and requirements could cause Sogou to incur substantial expense or require Sogou to alter its practices in a manner that could harm its business. We cannot assure you that Sogou’s existing user information protection systemsadvertisements by leveraging traffic on third parties’ Internet properties, including Web content, software, and technical measures will be considered sufficient under current and future applicable laws and regulations. Any systems failure or compromise of Sogou’s security, including through employee error, that results in the release of its user data could seriously harm its reputation and brand, impair its ability to retain and attract users and advertisers, expose it to liability to users whose data is released, and subject it to sanctions and penalties from governmental authorities. Sogou also could be liable for any security breaches of its advertisers’ confidential information. Any security breaches exposing such information could damage Sogou’s reputation and deter current and potential users and advertisers from using its services.mobile applications.
 
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Sogou’s network operations may be vulnerable to hacking and viruses, which may reduce the use of its products and services and expose it to liability.
Other Sogou Business
Sogou’s user traffic may decline if any
well-publicized
compromise of security occurs. “Hacking” involves efforts to gain unauthorized access to information or systems or to cause intentional malfunctions or loss or corruption of data, software, hardware, or other computer equipment. Techniques used by hackers to obtain unauthorized access or sabotage systems change frequently and often are not recognized until launched against a target, which means that Sogou may be unable to anticipate new hacking methods or implement adequate security measures. Hackers, if successful, could misappropriate proprietary information or cause disruptions in Sogou’s service. Sogou may be required to expend capital and other resources to protect its Internet platforms against hackers, and measures Sogou may take may not be effective. In addition, the inadvertent transmission of computer viruses could expose Sogou to a risk of loss or litigation and possible liability, as well as damage its reputation and decrease its user traffic.
Sogou’s business may be adversely affected by
third-party
software applications or practices that interferealso offered IVAS, primarily with its receipt of information from, or provision of information to, its users, which may impair its users’ experience.
Sogou’s business may be adversely affected by
third-party
software applications, which may be unintentional or malicious, that make changes to its users’ PCs or mobile devices and interfere with its products and services. These software applications may change Sogou’s users’ experience by hijacking queries, altering or replacing its search results, or otherwise interfering with its ability to connect with its users. Such interference can occur without disclosure to or consent from users, and users may associate any resulting negative experience with Sogou’s products and services. Such software applications are often designed to be difficult to remove, block, or disable. Further, software loaded on or added to mobile devices on which Sogou’s search or other applications, such as Sogou Input Method, are
pre-installed
may be incompatible with or interfere with or prevent the operation of such applications, which might deter the owners of such devices from using Sogou’s services.
In addition,
third-party
website owners, content providers, and developers may implement applications and systems that interfere with Sogou’s ability to crawl and index their webpages and content, which is criticalrespect to the operation of its searchWeb games and mobile games developed by third parties, and offered other products and services. If Sogou
PRODUCTS AND SERVICES
Sohu’s Business
Brand Advertising Business
Sohu’s main business is unablethe brand advertising business, which offers to successfully prevent or limit any such applications or systems that interfere with itsusers, over our matrices of Chinese language online media, various content, products and services across multiple Internet-enabled devices, such as mobile phones, tablets and PCs. The majority of our products and services are provided in China through Sohu Media Portal, Sohu Video and Focus.
Sources
Sohu Media Portal
Sohu Media Portal is a leading online news, information and content services provider in China. We provide users comprehensive content by aggregating content from professional media organizations and partnering with independent contributors. We recommend to users personalized content that may interest them, and encourage them to interact with each other based on our social distribution features. We provide content through the mobile phone application Sohu News APP, the mobile portal m.sohu.com and www.sohu.com for PCs.
Sohu Video
Sohu Video is an online video content and service provider in China. We provide users free access to the majority of our extensive and comprehensive video content library, which includes popular domestic and overseas television programs, such as movies, animations, and documentaries, purchased from third parties; self-developed video content; variety shows; UGC; PGC; and other content generated through live broadcasting. We also offer selected
fee-based
content from which we generate subscription revenues. Users can access our video content via mobile devices by visiting our mobile video site or ifinstalling Sohu Video APP, our mobile video application, or via PCs through tv.sohu.com or ifox, our PC video application.
Focus
Focus (www.focus.cn) is an online real estate information and services provider in China. Focus provides diversified online content consisting of new homes for sale, properties for
re-sale
and home furnishing services, and other comprehensive services and solutions for real estate developers, house seekers and homeowners.
Business Model
In the brand advertising business, we enjoy a significantstrong competitive position as one of the leading Internet companies in China. Through the platforms described above, we have built a sizeable user base through good user experiences provided by our products and services. This user base is appealing to advertisers. Through mobile devices and PCs, we provide advertisement placements to our advertisers on different Internet platforms and in different formats. We rely on both direct sales by our internal sales force and sales by advertising agents for advertising on our Internet platforms. Our advertisers include multinational companies and Chinese domestic
medium-sized
and small companies.
Currently we have three main types of pricing models, consisting of the Fixed Price model, the Cost Per Impression (“CPM”) model, and the Cost Per Click (“CPC”) model.
Fixed Price model
Under the Fixed Price model, a contract is signed to establish a fixed price for the advertising services to be provided. Given that advertisers benefit from displayed advertisements evenly over the period the advertisements are displayed, we recognize revenue on a straight-line basis over the period of display, provided all revenue recognition criteria have been met.
CPM model
Under the CPM model, the unit price for each qualifying display is fixed and 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. Given that the fees are priced consistently throughout the contract and the unit prices are fixed in accordance with our pricing practices for similar advertisers, we recognize revenue based on the fixed unit prices and the number of
third-party
website owners, content providers, and developers prevent Sogou from indexing and including qualifying displays upon their webpages and content in its search results, Sogou’s ability to deliver
high-quality
search results and a satisfactory user experience will be impeded.
Adoption of Internet advertisement blocking technologies mayoccurrence, provided all revenue recognition criteria have an adverse impact on Sogou’s business and results of operations.been met.
The development of software that blocks Internet advertisements before they appear on a user’s screen may hinder the growth of online advertising. Since Sogou’s advertising revenues are generally based on user
click-throughs,
the expansion of
advertisement-blocking
on the Internet may decrease its advertising revenues, because when advertisements are blocked they are not downloaded from the server, which means such advertisements will not be tracked as a delivered advertisement. In addition, advertisers may choose not to advertise on the Internet or on or through Sogou’s sites because of the use by third parties of Internet advertisement blocking measures. In addition, increasing numbers of browsers include technical barriers designed to prevent Internet information service providers such as Sogou to track the browsing history of their Internet users, which is also likely to adversely affect the growth of online advertising and hence Sogou’s business and growth prospects.
If Sogou fails to detect
click-through
fraud, it could lose the confidence of its advertisers and its revenues could decline.
Sogou’s business is exposed to the risk of
click-through
fraud on its paid search results.
Click-through
fraud occurs when a person clicks paid search results for a reason other than to view the underlying content of search results. If Sogou fails to detect significant fraudulent clicks or otherwise is unable to prevent significant fraudulent activity, the affected search advertisers may experience a reduced return on their investment in its
pay-for-click
services and lose confidence in the integrity of its
pay-for-click
service systems, and Sogou may have to issue refunds to its advertisers and may lose their future business. If this happens, Sogou may be unable to retain existing advertisers and attract new advertisers for its
pay-for-click
services, and its search revenues could decline. In addition, affected advertisers may also file legal actions against it claiming that Sogou has
over-charged
or failed to refund them. Any such claims or similar claims, regardless of their merit, could be
time-consuming
and costly for Sogou to defend against and could also adversely affect its brand and its search advertisers’ confidence in the integrity of its
pay-for-click
services and systems.
 
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Web spam
CPC model
Under the CPC model, there is no fixed price for advertising services stated in the contract with the advertiser and content farms, as well as Sogou’s attempts to block them, could decrease the qualityunit price for each click is auction-based. We charge advertisers on a
per-click
basis, when the users click on the advertisements. Given that the fees are priced consistently throughout the contract and the unit prices are fixed in accordance with our pricing practices for similar advertisers, we recognize revenue based on qualifying clicks and the unit price upon the occurrence of its search results, and could deter its current and potential users from using its products and services.the clicks, provided all revenue recognition criteria have been met.
Other Sohu Business
The proliferationSohu also engages in the other business, which consists primarily of search engine spam websites, commonly referredpaid subscription services, interactive broadcasting services, and revenue sharing from other platforms. Revenues generated by Sohu from the other business are classified as other revenues in our consolidated statements of comprehensive income.
Changyou’s Business
Online Game Business
Business Model
Changyou’s game players typically access Changyou’s games through personal computers and mobile devices, such as mobile phones and tablets, connected to the Internet. In order to access Changyou’s PC games, game access software must be installed in the computer being used. Game players using PCs can typically download Changyou’s game access software, interim updates and expansion packs directly from its main game Website. Game players access Changyou’s mobile games by downloading its mobile game applications, primarily from third-party mobile application stores or, to a lesser extent, from Changyou’s game Website.
Changyou’s online games consist primarily of MMORPGs. Changyou is also expanding its game portfolio with additional types of card-based role-playing games (“RPGs”), casual games and strategy games. MMORPGs are massive multiplayer online role -playing games that allow a large number of players to take on the role of a character and interact with one another within a virtual world. Card-based RPGs are RPGs in which players collect characters or other virtual items in the form of cards. Casual games generally involve simpler rules, shorter sessions, and require less learned skills. Strategy games are simulation games that allow players to control, manage and use game characters and items and to design and implement their own strategies to win the games.
Changyou’s games are operated under the item-based revenue model, meaning game players can play Changyou’s games for free, but may choose to pay for virtual items, which are
non-physical
items that game players can purchase and use within a game, such as Web spam, which attemptcharacters, weapons, gems, pets, skills, fashion items and other
in-game
consumables, features and functionalities. Through virtual items, players are able to manipulate search indexingenhance their squad or characters, accelerate their progress in Changyou’s games, and share and trade with friends.
For players who choose to cause thempurchase virtual goods, Changyou delivers enhanced gameplay experiences and benefits, such as:
Accelerated Progress.
Many of Changyou’s games offer players the option to appear higherpurchase items that can accelerate their progress in search results ranking hierarchies thanthe game and increase their capabilities, so that they would without such manipulation, can havelevel up more quickly and compete more effectively against others in the effect of weakening the integrity of Sogou’s search results and causing users to lose confidencegame. While Changyou sells many items that accelerate progress in its search productsgames, Changyou monitors and services. “Content farm” websites, which commission very large amounts of content, often of low quality,carefully balances the disparity in capabilities between paying and
non-paying
game players to avoid discouraging
non-paying
game players and to keep the game challenging and interesting for the purpose, similar to that of Web spam, of causing such content farms’ links to obtain relatively high ranking in Internet providers’ search results, can have similar adverse effects.
While Sogou uses, and continually improves, technology designed to detect and block Web spam, the algorithms Sogou applies may nevertheless result in excessive filtering that blocks desirable websites from its search results. Therefore, both the existence of Web spam and content farms, and Sogou’s attempts to block them, could deter its current and potential users from using its products and services. In addition, as some of Sogou’s third-party Internet-property collaborators could include Web spam or content farm websites, its advertising revenues could be reduced by its efforts to filter such websites. If Sogou’s efforts to combat these and other types of index spamming are unsuccessful, its reputation for delivering relevant information could be diminished. This could result in a decline in user traffic, which would damage Sogou’s business.
paying game players.
The successful operationEnhanced Social Interaction.
Changyou uses a variety of Sogou’s business depends upon the performancevirtual items to promote interaction and reliability of the Internet infrastructure in China.
Sogou’s growth will depend in part on the PRC government and
state-owned
telecommunications services providers maintaining and expanding Internet and telecommunications infrastructure, standards, protocols, and complementary products and services to facilitate Sogou’s reaching a broader base of Internet usersrelationship-building among game players in China.
Almost all access to the Internet in China is maintained through China Mobile, China Unicom and China Telecom under the administrative control and regulatory supervision of the MIIT. Sogou relies on this infrastructure and China Mobile, China Unicom, and China Telecom to provide data communications capacity primarily through local telecommunications lines. Although the government has announced aggressive plans to develop the national information infrastructure, this infrastructure may not be developed and the Internet infrastructure in China may not be able to support the continued growth of Internet usage. In addition, Sogou will be unlikely to have access to alternative networks and services on a timely basis, if at all, in the event of any infrastructure disruption or failure.
its games.
Interruption or failurePersonalized and Customized Appearance.
Many of Sogou’s information technologyChangyou’s games offer players the option to purchase decorative and communications systems may result in reduced user trafficfunctional items to customize the appearance of their characters, pets, vehicles, houses and harmother
in-game
possessions to its reputationexpress their individuality.
Gifts.
Many of Changyou’s games offer players the option to purchase gift items to send to their friends. Examples of gift items include decorative items and business.
Interruption or failure of any of Sogou’s information technologytime-limited items for special holiday events and communications systems or those of the operators of
third-party
Internet properties with which it collaborates could impede or prevent its ability to provide its searchfestivals, such as Valentine’s Day, Spring Festival (Chinese New Year) and
search-related
services. In addition, Sogou’s operations are vulnerable to natural disasters and other events. Sogou’s disaster recovery plan for its servers cannot fully ensure safety in the event of damage from fire, floods, typhoons, earthquakes, power loss, telecommunications failures, hacking, and similar events. If any of the foregoing occurs, Sogou may experience a partial or complete system shutdown. Furthermore, Sogou’s servers, which are hosted at
third-party
Internet data centers, are also vulnerable to
break-ins,
sabotage and vandalism. Some of Sogou’s systems are not fully redundant, and its disaster recovery planning does not account for all possible scenarios. The occurrence of a natural disaster or a closure of an Internet data center by a
third-party
provider without adequate notice could result in lengthy service interruptions. Christmas.
Any system failure or inadequacyChangyou’s online game business includes games that causes interruptions in the availability of Sogou’s services, or increases the response time of its services, could have an adverse impact on its users’ experienceit self-operates and reduce its users’ satisfaction, its attractivenessgames that it licenses out to users and advertisers, and future user traffic and advertising on its platform.
Furthermore, Sogou does not carry any business interruption insurance. To improve the performance and to prevent disruption of its services, Sogou may have to make substantial investments to deploy additional servers or one or more copies of its Internet platforms to mirror its online resources.third-party operators.
 
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Self-Operated Games
Sogou
For self-operated games, Changyou determines the price of virtual items based on the demand or expected demand for such virtual items. Changyou may change the pricing of certain virtual items based on its consumption patterns. Changyou hosts the games on its own servers and is responsible for sales and marketing of the games as well as customer service. Changyou’s self-operated games include PC games and mobile games developed in house as well as PC games and mobile games that Changyou licenses from or jointly develops with third party developers.
Licensed-Out
Games
Changyou also authorizes third parties to operate its online games. Changyou has granted an exclusive license to Tencent to distribute and operate its mobile game Legacy TLBB Mobile within China, and has licensed its PC game TLBB and mobile games Legacy TLBB Mobile and TLBB 3D to third-party operators in selected overseas markets outside of China, including Vietnam, Singapore, and Malaysia.
The
licensed-out
games include PC games and mobile games developed in house as well as mobile games licensed from and jointly developed with third-party developers. Under Changyou’s licensing arrangements with third-party operators, the operators pay Changyou upfront license fees and Changyou has revenue sharing rights over the terms of the licenses. The licenses are typically for a term of one to three years. Changyou provides updates and expansion packs for the licensed games, typically after it launches the updates and expansion packs in China.
For
licensed-out
games, the third-party operators are responsible for all operations and costs, including marketing and customer service, as well as the leasing and maintenance of servers.
Platform Channel Business
Changyou’s platform channel business consists primarily of the operation of the 17173.com Website. Prior to RaidCall’s ceasing operations in March 2019, Changyou’s platform channel business also included RaidCall.
17173.com Website
The 17173.com Website provides news, electronic forums, online videos, and other online game information services to game players, as well as mobile game distribution services. Changyou generates online advertising revenues from providing advertising services to third-party advertisers on the 17173.com Website and online game revenues from mobile game distribution services.
RaidCall
Prior to ceasing operations in March 2019, RaidCall provided online music and entertainment services, primarily in Taiwan. IVAS revenues that were generated by RaidCall are classified as other revenues in our consolidated statements of comprehensive income.
Cinema Advertising Business (Discontinued)
Prior to ceasing its operations in August 2019, Changyou also operated a cinema advertising business, which consisted primarily of the acquisition from operators of movie theaters, and the sale to advertisers, of
pre-film
advertising slots. Revenues that were generated by Changyou’s cinema advertising business are reflected as discontinued operations in our consolidated statements of comprehensive income.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We regard our patents, copyrights, service marks, trademarks, trade secrets and other intellectual property as critical to our success. We rely on patent, trademark and copyright law, trade secret protection,
non-competition
and confidentiality and/or license agreements with our employees, customers, partners and others to protect our intellectual property rights. Before we launch any new products or services, we generally apply for registration of related patents, trademarks, and software copyrights. Despite our precautions, it may be possible for third parties to obtain and use our intellectual property without authorization. Furthermore, the validity, enforceability and scope of protection of intellectual property rights in Internet-related industries are uncertain and still evolving. The laws of the PRC and certain other countries do not protect intellectual property to the same extent as do the laws of the United States.
We have been issued 267 patents in China covering inventions, utility models, and designs; we have 176 patent applications currently pending in China; and we intend to apply for more patents in China and in countries and regions outside of China to protect our core technologies and intellectual property.
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We have registered three service marks with the U.S. Patent and Trademark Office of the CNIPA, consisting of Sohu.com, registered on August 1, 2000; Sohu.com (stylized), registered on August 1, 2000; and Sohu, registered on June 13, 2000. We have registered 3,678 trademarks with the Trademark Office of the CNIPA, including the marks “SOHU.com,” “ChangYou.com,” and “cyou.com” and marks relating to our products such as Sohu.com logos, Sohu Fox logos, GoodFeel logos, Go2Map, Sohu Focus, Blade Online, and 17173, and the corresponding Chinese versions of the marks; and we are in the process of applying for the registration of 134 other trademarks. We are the registered owner of 372 registered trademarks and have also applied for 49 trademarks in countries and regions outside of China. In addition, we are in the process of applying for recognition of certain of our marks as famous Beijing trademarks and well-known Chinese trademarks. We also filed registration of trademarks relating to our subsidiary companies’ names and Changyou’s online games and other businesses in various countries and regions, such as the United States, European Union, Turkey, Japan, South Korea, Malaysia, Indonesia, Vietnam, Thailand, Brazil, Taiwan and Hong Kong. Our rights to these marks could be affected adversely if any of our applications are rejected. It is possible that our competitors will adopt product or service names similar to ours, thereby impeding our ability to distinguish our brand and possibly leading to customer confusion. In addition, Changyou has the license rights to use the trademarks, such as TLBB, TLBB logos and TLBB 3D, for its mobile games TLBB 3D and Legacy TLBB Mobile and for its PC game TLBB under its existing license agreements with the holder of the intellectual property rights with respect to the popular Chinese martial arts novel Tian Long Ba Bu written by Louis Cha. After the expiration of their terms Changyou may not be able to renew these license agreements with commercial terms that are favorable to Changyou, if at all, and Changyou’s inability to renew these license agreements could cause Changyou to lose the right to use the trademarks related to those games to the extent that they relate to Tian Long Ba Bu. See “Risk Factors—Risks Related to Changyou.com Limited—Risks Related to Changyou’s Business—Overall Risks—Changyou may need to incur significant expenses to enforce its proprietary rights, and if it is unable to protect such rights, its competitive position and financial performance could be harmed” and “- Changyou may not have exclusive rights to trademarks, designs and technologies that are crucial to its business” in Item 3.
We are the registered owner of 840 software copyrights and 590 copyrights for works in China, each of which we have registered with the State Copyright Bureau of China and its local branches. In addition to the above, we have also registered the copyrights for 20 works in countries and regions outside of China.
We own the rights to 309 domain names that we use in connection with the operation of our business, including the Sohu and Changyou websites.
Many parties are actively developing chat, search, AI technologies, Web directory and related Web technologies. We expect these parties to continue to take steps to protect these technologies, including seeking patent protection. There may be patents issued or pending that are held by others and cover significant parts of our technology, business methods or services. For example, we are aware that a number of patents have been issued in the areas of
e-commerce,
Web-based
information indexing and retrieval and online direct marketing. Disputes over rights to these technologies may arise in the future. We cannot be certain that our products do not or will not infringe valid patents, copyrights or other intellectual property rights held by third parties. We may be subject to legal proceedings and claims, from time to time, relating to the intellectual property of others in the ordinary course of our business. See “Item 8. Financial Information—Legal Proceedings”.
We also intend to continue licensing technology from third parties. The market is evolving and we may need to license additional technologies to remain competitive. We may not be able to license these technologies on commercially reasonable terms or at all. In addition, we may fail to successfully integrate any licensed technology into our services. Our inability to obtain any of these licenses could delay product and service development until alternative technologies can be identified, licensed and integrated.
TECHNOLOGY INFRASTRUCTURE
The Sohu Group has built what we believe is a reliable and secure network infrastructure, that will fully support our operations. We have professional technical support teams to maintain our current technology infrastructure and online operating platform, as well as develop new software features to further enhance the functionality of our management and security systems. We monitor the operation of our server network 24 hours a day, seven days a week. Our remote control system allows us to track our concurrent online users in real time, and discover and fix hardware or software problems on our server network in a timely fashion.
Sohu
As of December 31, 2021, Sohu maintained approximately 10,618 servers in China. To fully support the operation of Sohu’s content and services, Sohu established these data centers primarily through China Mobile, China United Network Communication Group Company Limited (“China Unicom”), and China Telecom Corporation (“China Telecom”), which are the three largest Internet connection service providers in China, to support most of Sohu’s core services. In addition, Sohu has established branch nodes in different provinces throughout China through different telecommunication operators in order to establish national coverage and provide fast and stable access to Sohu’s Internet platforms properties to users across China. In addition, Sohu has developed cooperation with several smaller private Internet service providers.
Sohu has developed close working relationships with China Mobile, China Unicom, China Telecom and
smaller-size
telecommunication operators. Sohu’s operations depend on the ability of China Mobile, China Unicom, and China Telecom to protect Sohu’s systems against damage from fire, power loss, telecommunications failure,
break-ins
and other events. These telecommunication operators provide Sohu with support services twenty-four hours per day, seven days per week. They also provide connectivity for Sohu’s servers through multiple high-speed connections. All facilities are protected by Uninterruptible Power Supplies.
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For reliability, availability, and serviceability, Sohu has created an environment in which each server can function independently. Key components of Sohu’s server architecture are served by multiple redundant machines. Sohu also uses
in-house
and third-party monitoring software. Sohu’s reporting and tracking systems generate daily traffic, demographic and advertising reports. Sohu deploys load balance equipment and cloud computing to avoid single point failure.
Sohu’s operations must accommodate a high volume of traffic and deliver frequently updated information. Components or features of Sohu’s products and services have in the past suffered outages or experienced slower response times because of equipment or software down time. These events have not had a material adverse effect on Sohu’s business to date, but such events could have a material adverse effect in the future.
Changyou
Changyou supports its operations with a network of reliable and secure physical and cloud-based servers that have fully supported its operations for many years. As of December 31, 2021, Changyou maintained for its online game business approximately 2,000 physical servers in Mainland China, and 3,000 cloud-based servers that are spread across Mainland China, Hong Kong, other Asia-pacific regions, Europe and North America. In order to enhance Changyou’s game players’ experience and to improve connectivity, Changyou has located its physical game servers in a number of regions throughout China. This allows its players to connect to the nearest servers that are located in their region without exchanging data across the national backbone network. Furthermore, to ensure high quality services for its game players, Changyou works with leading domestic cloud technology firms to provide efficient and stable game services using cloud-based resources.
MARKETING
Sohu
As Sohu is a leading Chinese online media company, our brand effectively provides us with
built-in
word-of-mouth
marketing and we have significantly benefited from this recognition of our brand in China. Applying our advanced livestreaming technologies, we also host high-quality marketing events, both online and offline, with the goal of strengthening our brand influence across certain verticals by consolidating our position as a mainstream media source, and enhancing our core competitiveness and credibility by leveraging high-quality content across our platform, thereby attracting both users and advertisers. Further, we continually promote our self-produced video programs across diversified online social media platforms to attract users to our platform.
We work closely with mobile application stores as well as performance-based online advertising platforms. We also cooperate with market-dominant mobile phone manufacturers to
pre-install
our Mobile Apps into their mobile phones to enhance our market influence and enlarge our user base.
Changyou
For self-operated games, Changyou employs a variety of innovative online and offline marketing methods, including online and offline advertising, social media, and
in-game
marketing. Changyou uses different methods to target different demographic groups of game players.
For online marketing, Changyou is able to leverage its game information portal, the 17173.com Website, as well as other game Websites to promote its games. Changyou is able to leverage its affiliation with Sohu, and target Sohu’s large user base as potential players of its games, by advertising on Sohu’s various Websites, which typically provide a direct link to its games. For games that Changyou believes are likely to be successful, Changyou may seek celebrity endorsements and work with Internet celebrities on live broadcasting platforms to create additional publicity for the games.Changyou accesses online social media by advertising in online videos and marketing its games through various social networking Websites, mobile applications and online forums to create a vital effect among game players.
For offline marketing, Changyou organizes a variety of offline activities, such as player meetups, offline competitions and carnival events, to connect with players, increase the popularity of its games, and establish its brand image. In addition, Changyou launches
in-game
promotional events. Changyou also creates
in-game
events to attract existing and new game players through event-related features, such as offering special holiday-edition virtual items to enhance game player participation at holiday time.
For mobile games in particular, Changyou designs and implements different marketing strategies for different game genres to attract the genres’ target players. Changyou works closely with performance-based online advertising platforms such as Ocean Engine, Guang Dian Tong, and Fen Si Tong where Changyou can target different user groups. Changyou also works with the Apple store and Android mobile application stores to market its games. For games with a specific user group, Changyou advertises on mobile applications, websites and other media outlets that cater to the same user group.
Changyou promotes its games in overseas markets with a targeted marketing approach, leveraging its data collection and analysis system. Changyou’s overseas marketing strategies also include using social media platforms and search engine management to promote its games.
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COMPETITION
The Internet and Internet-related markets in China are rapidly evolving. We believe the increase in China’s Regulatoryonline population will draw more attention to the PRC Internet market from both domestic and Economic Environmentmultinational competitors. Our existing competitors may in the future achieve greater market acceptance and gain additional market share. It is also possible that new competitors may emerge and acquire significant market share. In addition, our competitors may leverage their existing Internet platforms to cross-sell newly launched products and services. It is also possible that, as a result of deficiencies in legal protections afforded intellectual property in the Internet industry in China, or inadequate enforcement of existing PRC laws protecting such intellectual property, we may not be able to prevent existing or new competitors from accessing and using our
in-house
developed Web content or technologies.
Competition for Sohu’s Business
In the PRC Internet space, competition for brand advertising business is intense and is expected to increase significantly in the future. We compete with our peers and competitors in China primarily on the following basis:
access to financial resources;
gateway to host of Internet users’ activities;
technological advancements;
attractiveness of products;
brand recognition;
volume of traffic and users;
quality of Internet platforms and content;
quality and quantity of purchased video content, self-developed video content, and user-generated content;
strategic relationships;
quality of services;
effectiveness of sales and marketing efforts;
talent of staff; and
pricing.
Over time, our competitors may gradually build certain competitive advantages over us in terms of:
greater brand recognition among Internet users and clients;
better products and services;
larger user and advertiser bases;
more extensive and
well-developed
marketing and sales networks; and
substantially greater financial and technical resources.
There are a number of existing or new PRC Internet companies, which include companies controlled or sponsored by private entities and by PRC government entities. As an Internet portal, we compete with 58.com, Alibaba, Autohome, Baidu, BitAuto, Bilibili, Douyin, Douyu, Fang, Huya, iQIYI, JOYY, Kuaishou, Leju, Mango TV, Momo, NetEase, Phoenix, Qutoutiao, Sina, Tencent, TouTiao, and Youku.
We also compete with traditional forms of media, such as newspapers, magazines, radio and television, for advertisers, advertising revenues and content. Some of these traditional media, such as CCTV, Xinhua News Agency and People’s Daily, have extended their businesses into the Internet market. As a result, we expect to face more intense competition with traditional media companies in both their traditional media and in the Internet-related markets.
Competition for Changyou’s Business
Online Game Business
In the online game industry, Changyou competes principally with online game developers and operators in China, such as Archosaur, Giant, IGG, Lilith, miHoYo, NetDragon, NetEase, Perfect World and Tencent.
Platform Channel Business
In the platform channel business, Changyou’s game information portal operated through the 17173.com Website competes in China with other game information portals, such as Duowan.com, operated by JOYY Inc., and Game.sina.com.cn, operated by Sina Corporation.
The existing and potential competitors in the online games industry compete with Changyou for talent, game player spending, time spent on game playing, marketing activities, quality of games, and distribution network. The existing and potential competitors in the online advertising industry compete with Changyou for talent, advertiser spending, number of unique visitors, number of page views, visitors’ time spent on Websites, and quality of service.
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FACILITIES
Sohu
In February 2007, we purchased an office building of approximately 18,265 square meters in Beijing, for consideration of approximately $35.3 million, of which approximately 18,228 square meters have been leased to Sogou since November 2013.
In November 2009, we entered into a contract for the purchase and development of an office building of approximately 41,283 square meters in Beijing to serve as our headquarters, for consideration of approximately $162 million. The office building was placed in service in May 2013.
As of December 31, 2021, we leased office space of approximately 9,379 square meters in the PRC.
Changyou
In August 2009, Changyou purchased an office building of approximately 14,950 square meters in Beijing, for consideration of approximately $33.4 million. Since January 1, 2016, Changyou has leased out this building to third-party business tenants.
In August 2010, Changyou entered into a contract for the purchase and development of an office building of approximately 56,549 square meters in Beijing to serve as its headquarters, for consideration of approximately $171 million. The office building was placed in service in December 2013.
As of December 31, 2021, Changyou leased office space in Beijing of approximately 407 square meters. Changyou also leased office space of approximately 4,491 square meters in other cities in the PRC and in other countries.
GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES
The following description of PRC laws and regulations is based upon the opinion of Haiwen & Partners, or Haiwen, our PRC legal counsel. The laws and regulations affecting China’s Internet industry and other aspects of our business are at an early stage of development and are evolving. There are substantial uncertainties regarding the interpretation and enforcement of PRC laws and regulations. We cannot be certain that the PRC regulatory authorities would find that our corporate structure and business operations strictly comply with PRC laws and regulations. If we are found to be in violation of PRC laws and regulations by the PRC government, we may be required to pay fines, obtain additional or different licenses or permits, and/or change, suspend or discontinue our business operations until we are found to comply with applicable laws. For a description of legal risks relating to sponsored search have had,our ownership structure and may continue to have, an adverse effect on Sogou’s results of operations.business, see “Item 3. Key Information—Risk Factors.”
Overview
On April 13, 2016,
The Chinese government has enacted an extensive regulatory scheme governing Internet-related areas, such as telecommunications, Internet information services, international connections to computer information networks, online game services, information security and censorship.
Various aspects of the PRC Internet industry are regulated by various PRC governmental authorities, including, among others:
the MIIT, which resulted from the merger of the former Ministry of Information Industry and other governmental departments;
the MCT, which was established in March 2018 and resulted from the merger of the former Ministry of Culture (the “MOC”), and the former China National Tourism Administration (the “CNTA”). The “MCT” as used in this report refers to the governmental authority that resulted from the merger, as well as to the MOC and the CNTA separately for periods prior to the merger;
the MPS;
the MOFCOM;
the SAMR, which resulted from the merger of, and assumed the responsibilities previously held by, the State Administration for Industry and Commerce (the “SAIC”), the General Administration of Market Regulation (“SAMR”Quality Supervision, Inspection and Quarantine (the “AQSIQ”) the Certification and Accreditation Administration, the Standardization Administration of China (the “SAC”), and the State Food and Drug Administration (the “SFDA”). The “SAMR” as used in this report refers to the governmental authority that resulted from the merger, as well as to the SAIC, the AQSIQ, the SAC, and the SFDA separately for periods prior to the merger;
the SAPPRFT was reorganized into three separate governmental authorities, the NRTA, the NFA, and the SPPA, in March 2018. The SAPPRFT had resulted from the merger of the former General Administration of Press and Publication (the “GAPP”) with the former State Administration of Radio, Film and Television (the “SARFT”) in March 2013. The “NRTA,” the “NFA” and the “SPPA” as used in this report refer to the respective governmental authorities after the reorganization; the “SAPPRFT” as used in this report refers to the governmental authority that resulted from the merger for the period after the merger and prior to the reorganization, as well as to the GAPP and the SARFT separately for periods prior to the merger;
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the PRC State Council Information Office (the “SCIO”);
the CAOC;
the SAFE; and
the China Banking and Insurance Regulatory Commission (the “CBIRC”), which resulted from the merger of, and assumed the responsibilities previously held by, the China Banking Regulatory Commission (the “CBRC”) and sixteenthe China Insurance Regulatory Commission (the “CIRC”). The “CBIRC” as used in this report refers to the governmental authority that resulted from the merger, as well as to the CBRC and the CIRC separately for periods prior to the merger.
Specific Statutes and Regulations
Requirements for Establishment of WFOEs
Under the Law of the People’s Republic of China on Foreign Investment Enterprises (the “Foreign Investment Enterprises Law”), promulgated on April 12, 1986 and amended on October 31, 2000, the establishment of a WFOE was required to be approved by MOFCOM or one of its local branches. On September 3, 2016, the Foreign Investment Enterprises Law was further amended by the Decision of the Standing Committee of the National People’s Congress on Amending Four Laws including the Law of the People’s Republic of China on Wholly Foreign-Owned Enterprises, issued by the Standing Committee of the National People’s Congress, and on October 8, 2016 MOFCOM issued the Interim Measures for the Administration of Filing for Establishment and Change of the Foreign Investment Enterprises (the “Interim Filing Measures”), which were further amended on July 30, 2017 and June 29, 2018, respectively. The Foreign Investment Enterprises Law and the Interim Filing Measures provide that, with certain exceptions, the establishment of FIEs is only subject to certain filing requirements with, and no longer requires prior approval by, MOFCOM or its local branches.
On March 15, 2019, the Standing Committee of the National People’s Congress issued the
Foreign Investment Law, which took effect on January 1, 2020 and replaced the Foreign Investment Enterprises Law and other laws relating to foreign investment. The stated purpose of the Foreign Investment Law is to expand China’s opening up to the outside world, promoting and regulating foreign investment, and protecting the rights and interests of foreign investors. The Foreign Investment Law defines “foreign investment” as investment activity in China conducted directly or indirectly by foreign investors through any of the following methods: (i) the foreign investor, by itself or together with other investors, establishes an FIE in China; (ii) the foreign investor acquires shares or the equity securities, asset tranches, or similar rights or interests in enterprises in China; (iii) the foreign investor, by itself or together with other investors, invests and establishes a new project in China; or (iv) the foreign investor invests in China by any other means specified by laws, administrative regulations, or provisions prescribed by the State Council. In addition, the Foreign Investment Law provides, for example, that treatment of foreign investors and their investments during the investment access stage may not be inferior to treatment afforded to PRC domestic investors and their investments, except where a foreign investment is in a category of restricted investments. The Foreign Investment Law also provides that the PRC government agencies jointlywill establish an information reporting system, and that foreign investors and FIEs will be required to submit investment information through an enterprise registration system and an enterprise credit information publicity system. On December 30, 2019 the MOFCOM issued the
Measures for the Reporting of Foreign Investment Information
(the “Reporting Measures”), which took effect on January 1, 2020, the same date as the effective date of the Foreign Investment Law to implement the information reporting system and replace the Interim Filing Measures. The Reporting Measures require that foreign investors establishing FIEs in China submit an initial report through the enterprise registration system; there is no longer any filing requirement with MOFCOM or its local branches under the Reporting Measures. On December 12, 2019, the State Council also issued the
Implementing Regulations of the Foreign Investment Law
and, on December 26, 2019, the Supreme People’s Court issued the
Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of the Foreign Investment Law of the People’s Republic of China
, both of which became effective on January 1, 2020. As the Foreign Investment Law and the related implementing regulations are newly-issued, their impact upon the existing procedures required for the establishment of an FIE remains unclear, pending further clarification and guidance from the MOFCOM and other relevant governmental authorities. On December 19, 2020, the National Development and Reform Commission (the “NDRC”) and the MOFCOM promulgated the Security Review Measures, which became effective on January 18, 2021. The Security Review Measures stipulate that investment by foreign investors in specified industries within the PRC that affects or may affect national security will be subject to security review by relevant governmental authorities.
Each of our WFOEs established before September 3, 2016 was established with proper approval, and the two WFOEs that were established by Changyou on April 13, 2020 and November 12, 2020 have fulfilled their reporting obligations under the Reporting Measures.
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Requirements for Obtaining Business Licenses
All China-based companies may commence operations only upon the issuance of a business license by the relevant local branch of the SAMR. All of our China-based subsidiaries and VIEs have been issued business licenses by the relevant local branches of the SAMR.
In the opinion of Haiwen, our principal China-based subsidiaries and principal VIEs have satisfied the requirements for business licenses.
Regulation of Value-added Telecommunications Services
The
Telecommunications Regulations of the People’s Republic of China (“Telecom Regulations”)
, implemented on September 25, 2000 and amended on July 29, 2014 and February 2, 2016, are the primary PRC law governing telecommunication services, and set out the general framework for the provision of telecommunication services by domestic PRC companies. The Telecom Regulations require that telecommunications service providers procure operating licenses prior to commencing operations. The Telecom Regulations draw a distinction between “basic telecommunications services,” which we generally do not provide, and “value-added telecommunications services.” The Telecom Regulations define value-added telecommunications services as telecommunications and information services provided through public networks. The
Catalogue of Telecommunications Business (“Catalogue”),
which was issued as an attachment to the Telecom Regulations and updated in February 2003, December 2015 and June 2019, identifies Internet data centers, content delivery networks, domestic Internet virtual private networks, Internet access, online data and transaction processing,
on-demand
voice and image communications, message storage and forwarding (including voice mailbox,
e-mail
and online fax services), call centers, and online information and data search as value-added telecommunications services. We engage in various types of business activities that are value-added telecommunications services as defined and described by the Telecom Regulations and the Catalogue.
On July 3, 2017, the MIIT issued the
Administration Measures for Telecommunications Business Operating Permits (the “Telecom License Measures”)
, which became effective on September 1, 2017, to supplement the Telecom Regulations and replace the previous
Measures on the Administration of Telecommunications Business Operating Permits
promulgated in 2009
.
The Telecom License Measures provide requirements and procedures for obtaining licenses for value-added telecommunications services, and stipulate that the competent governmental authorities will mandate improved credit management mechanisms for telecommunication business operators, and will establish an online platform in connection with telecommunication business operating permits. The Telecom License Measures also confirm that there are two types of telecom operating licenses for operators in China, one for basic telecommunications services and one for value-added telecommunications services. A distinction is also made as to whether a license is granted for “intra-provincial” or “trans-regional” (inter-provincial) activities. An appendix to each license granted will detail the permitted activities of the enterprise to which it was granted. An approved telecommunication services operator must conduct its business (whether basic or value-added) in accordance with the specifications recorded in its Telecommunications Services Operating License.
The business activities of Sohu Internet include providing content to mobile phone users through the platforms of China’s main three telecommunications operators. On April 25, 2004, the MIIT issued a notice stating that China mobile network operators may only provide mobile network access to those mobile Internet service providers which have obtained licenses from the relevant local arm of the MIIT before conducting operations. On the basis of the notice, China Mobile Communication Corporation (“China Mobile”) has required each of its mobile Internet service providers to first obtain a license for trans-regional value-added telecommunications services in order to gain full access to its mobile network, which is a nationwide policy in line with a similar notice issued by the Beijing branch of China Mobile on April 12, 2004.
On August 8, 2014, the MIIT issued to Sohu Internet a Value-Added Telecommunication Services Operating License, which was renewed on July 23, 2019, that authorizes the provision of Internet data center services, Internet content distribution services, and Internet access services, all of which are classified as value-added telecommunication services. On January 30, 2015, the MIIT issued to Guangzhou Qianjun a Value-Added Telecommunications Services Operating License, which was renewed on November 23, 2019, that authorizes the provision of Internet information services, which are also classified as value-added telecommunication services.
Regulation of Foreign Direct Investment in Value-Added Telecommunications Companies
Various PRC regulations currently restrict foreign-invested entities from engaging in value-added telecommunication services, including providing Internet information services and operating online games. Foreign direct investment in telecommunications companies in China is regulated by the
Regulations for the Administration of Foreign-Invested Telecommunications Enterprises (“FITE Regulations”)
, which were issued by the PRC State Council, or State Council, on December 11, 2001, became effective on January 1, 2002 and were amended on September 10, 2008 and February 6, 2016. The FITE Regulations stipulate that foreign invested telecommunications enterprises in the PRC (“FITEs”) must be established as Sino-foreign equity joint ventures. Under the FITE Regulations and in accordance with
WTO-related
agreements, the foreign party to a FITE engaging in value-added telecommunications services may hold up to 50% of the equity of the FITE, with no geographic restrictions on the FITE’s operations. On June 30, 2016, the MIIT issued an
Announcement of the Ministry of Industry and Information Technology on Issues concerning the Provision of Telecommunication Services in the Mainland by Service Providers from Hong Kong and Macao
(the “MIIT Announcement”), which provides that investors from Hong Kong and Macau may hold more than 50% of the equity in FITEs engaging in certain specified categories of value-added telecommunications services.
For a FITE to acquire any equity interest in a value-added telecommunications business in China, it must satisfy a number of stringent performance and operational experience requirements, including demonstrating a track record and experience in operating a value-added telecommunications business overseas. FITEs that meet these requirements must obtain approvals from the MIIT or its authorized local counterparts, which retain considerable discretion in granting approvals.
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The
Notice of Campaignthe Ministry of Information Industry on Intensifying the Administration of Foreign Investment in Value-added Telecommunications Services (the “MIIT Notice”)
, which reiterates certain provisions of the FITE Regulations, was issued on July 13, 2006. Under the MIIT Notice, if a FITE intends to Crack Down on Illegalinvest in a PRC value-added telecommunications business, the FITE must be established and must apply for a telecommunications business license applicable to the business. Under the MIIT Notice, a domestic company that holds a license for the provision of Internet Finance Advertisementscontent services, or an ICP license, is considered to be a type of value-added telecommunications business in China, and Other Financial Activitiesis prohibited from leasing, transferring or selling the license to foreign investors in any form, and from providing any assistance, including providing resources, sites or facilities, to foreign investors to conduct value-added telecommunications businesses illegally in China. Trademarks and domain names that are used in the Nameprovision of Investment
Internet content services must be owned by the ICP license holder or its shareholders. The MIIT Notice requires each ICP license holder to have appropriate facilities for its approved business operations and to maintain such facilities in the regions covered by its license. In addition, all value-added telecommunications service providers are required to maintain network and information security in accordance with standards set forth in relevant PRC regulations. Some of the VIEs through which we operate, rather than our subsidiaries, hold ICP licenses, own our domain names, and hold or have applied for registration in the PRC of trademarks related to our business and own and maintain facilities that we believe are appropriate for our business operations.
On November 27, 2017, the MIIT promulgated the
Management
Notice Regulating the Use of Domain Names in the Provision of Internet-based Information Services
, or the CampaignDomain Names Notice, pursuantwhich became effective on January 1, 2018. Under the Domain Names Notice, a domain name used by a provider of Internet-based information services must be registered and owned by the provider or, if the provider is an entity, by a shareholder or senior management of the provider.
In view of these restrictions on foreign direct investment in the value-added telecommunications sector, we established or acquired several domestic VIEs to engage in value-added telecommunications services. For a detailed discussion of our VIEs, please refer to “Our Corporate Structure” above. Due to a lack of interpretative materials from the relevant PRC authorities, there are uncertainties regarding whether PRC authorities would consider our corporate structure and contractual arrangements to constitute foreign ownership of a value-added telecommunications business. See “Risks Related to Our Corporate Structure.” In order to comply with PRC regulatory requirements, we operate our main business through companies with which a campaign was conducted between April 2016we have contractual relationships but in which we do not have an actual ownership interest. If our current ownership structure is found to be in violation of current or future PRC laws, rules or regulations regarding the legality of foreign investment in the PRC Internet sector, we could be subject to severe penalties.
In the opinion of Haiwen, subject to the uncertainties and January 2017 targeting, among other things, online advertisements forrisks disclosed elsewhere in this report under the heading “Risk Factors” and “Governmental Regulation and Legal Uncertainties,” the ownership structures of our principal PRC Subsidiaries and our principal VIEs comply with all existing laws, rules and regulations of the PRC and each of such companies has the full legal right, power and authority, and has been duly approved, to carry on and engage in the business described in its business license.
Regulation of the Provision of Internet finance and other financial activities posted on online search portals such as Sogou’s. TheContent
CAOC,
Internet Information Services
On September 25, 2000, the State Council issued the
Measures for the Administration of Internet Information Services (“ICP Measures”),
which were amended on January 8, 2011. Under the ICP Measures, entities that provide commercial information services to online users on the Internet (“ICPs”) are obliged to obtain an operating license from the MIIT or its local branch at the provincial or municipal level in accordance with the Telecom Regulations described above.
The ICP Measures further stipulate that entities providing online information services regarding news, publishing, education, medicine, health, pharmaceuticals and medical equipment must procure the consent of the national authorities responsible for such areas prior to applying for an operating license from the MIIT or its local branch at the provincial or municipal level. Moreover, ICPs must display their operating license numbers in conspicuous locations on their home pages. ICPs are required to police their Internet platforms and remove certain prohibited content. Many of these requirements mirror Internet content restrictions that have been announced previously by PRC ministries, such as the MIIT, the MCT, and the SAPPRFT, that derive their authority from the State Council.
Sohu Internet, Guangzhou Qianjun, Shanghai ICE, Guanyou Gamespace, and Gamease hold Telecommunications and Information Services Operating Licenses (each an “ICP license”), each of which is subject to the filing of an annual report. The ICP license held by Sohu Internet includes a permit for operating Internet information services at “focus.cn.”
In 2000, the MIIT promulgated the
Internet Electronic Bulletin Service Administrative Measures
(“BBS Measures”). The BBS Measures required ICPs to obtain specific approvals before they provided BBS services, which included electronic bulletin boards, electronic forums, message boards and chat rooms. On September 23, 2014, the MIIT abolished the BBS Measures in a
Decision on Abolishment and Amendment Certain Regulations and Rules
. However, in practice certain local authorities still require operating companies to obtain approvals or make filings for the operation of BBS services. The ICP licenses held by Sohu Internet, Gamease, and Guanyou Gamespace include such specific approval of the BBS services that they provide.
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On December 29, 2011, the MIIT issued
Several Provisions for Standardizing the Market Order of Internet Information Services
(the “Several Provisions”) which took effect on March 15, 2012. With the aim of promoting the healthy development of the Internet information services market in China, the Several Provisions strengthen the regulation of the operations of Internet information service providers, including prohibiting Internet information service providers from infringing the rights and interests of other Internet information service providers, regulating evaluations provided by Internet information service providers regarding the services and products of other Internet information service providers, and regulating the installation and running of software by Internet information service providers. The Several Provisions also provide various rules to protect the interests of Internet information users, such as requesting Internet information service providers to take measures to protect the privacy information of their users and prohibiting Internet information service providers from cheating and misleading their users.
On August 25, 2017, the CAOC issued the
Administration Measures for Internet Forum Community Service
, effective on October 1, 2017, to regulate the provision of online interactive social network services for information dissemination. On August 25, 2017, the CAOC issued the
Administration Measures for Internet Comment Thread Services
, effective on October 1, 2017, regulating the provision of services by websites, applications, interactive broadcasting platforms, and other communication platforms with news and media characteristics that allow users to release text, photos, audio, and video. On February 20, 2018, the CAOC issued the
Administrative Provisions on Micro-blogging and Blogging Information Services
, effective on March 20, 2018, further regulating the provision of platform services for publishing and distributing information through micro-blogs and blogs. On September 7, 2017, the CAOC issued the
Administration Measures for Internet Chat Group Services
, effective on October 8, 2017, to regulate the provision of platform services for that allow Internet user groups to exchange information online. On September 7, the CAOC issued the
Administration Measures for Internet Users’ Social Account Information Services
, which were effective on October 8, 2017 and amended on January 22, 2021. These measures provide, among other things, that Internet platform operators providing the covered services will be responsible for the security of information and content published over their platforms, and provide enhanced requirements for user registration, information review, emergency response, security, personal information protection, and intellectual property protection.
On November 15, 2018, the CAOC promulgated the
Provisions on the Security Assessment of Internet-based Information Services with Attribute of Public Opinions or Capable of Social Mobilization
, which require that Internet information service providers that provide Internet services with the potential to influence public opinion or provoke social movement, including BBS, blog, and micro-blog services, must conduct a security self-assessment and file with the local office of the CAOC a self-assessment report regarding such Internet services and supporting technologies, their user base characteristics, and any significant changes in user opinions and potential risks concerning public security issues.
On October 26, 2021, the CAOC issued the
Notice on Further Strengthening the Regulation on Online Information of Entertainment Celebrities
, which requires internet platforms to, among other things, monitor online information of entertainment celebrities so as to timely identify hot topics that could involve illegal actions and promptly report to competent authorities. On August 25, 2021, the CAOC issued the
Notice on Further Strengthening the Management of Chaos in Fan Groups,
which is intended to rectify behavior in the online fan groups for entertainment celebrities, specifically, in features such as entertainment celebrity rankings, hot topics, fan communities, and fans interactive functions, so as to curb verbal abuse, stigmatization, instigation, confrontation, insults, slander, rumors, malicious marketing and the spread of other harmful information.
Online News Dissemination and Online News Search Services
In May 2017, the
Administrative Regulations for Internet News Information Services
and
Implementation Rules on the Administration of Internet News Information Services Permits
(collectively the “News Regulations”) were promulgated by the CAOC to replace the
Administrative Rules for Internet News Information Services
promulgated by the SCIO in 2005 (the “Old News Rules”). The News Regulations stipulate that Internet news information services include production, publishing, and republishing services and platforms providing for the dissemination of news over the Internet, and specify that platforms providing for the dissemination of news over the Internet will be required to obtain an Internet news information services permit.
Requirements of News Regulations include, among other things, the following:
Internet news information service providers must be entities duly incorporated within the territory of the PRC;
Managers and chief editors of Internet news information service providers must be Chinese citizens;
Internet news information service providers must have personnel who have appropriate qualification and professional training;
Internet news information service providers must have sound Internet news information service management systems;
Internet news information service providers must have rigorous information security management systems;
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Internet news information service providers must have facilities that are suitable for their proposed services, and must be adequately funded; and
Internet news information service providers may only republish news published by governmental news agencies and must ensure the original sources are traceable.
On July 3, 2016, the CAOC issued a Notice on Further Strengthening the Management and Prevention of Fake News (the “Fake News Notice”). The Fake News Notice requires all providers of online news services, including news applications, Weibo, and WeChat, to establish and maintain rigorous internal supervision and management systems and to not provide any news without identifying the sources of the news, invent news, report news based on hearsay, or distort facts.
On May 11, 2004, Sohu Internet obtained from the Information Office of the Beijing Municipal Government (the local arm of the SCIO) an Internet news information services permit, which was updated by the SCIO on June 6, 2006, April 4, 2018 and April 4, 2021, respectively. There is uncertainty as to whether the provision of news search services and aggregation of news links fit within the definition of news dissemination services.
Internet Publishing
On February 4, 2016, the SAPPRFT and MIIT jointly issued the Rules for the Administration for Internet Publishing Services (the “Internet Publishing Rules”), which took effect on March 10, 2016, to replace the Provisional Rules for the Administration for Internet Publishing that had been jointly issued by the SAPPRFT and the MIIT on June 27, 2002. The Internet Publishing Rules define “Internet publications” as digital works that are edited, produced or processed to be published and provided to the public through the Internet, including (i) original digital works, such as pictures, maps, games, and comics; (ii) digital works with content that is consistent with the type of content that, prior to the Internet age, typically was published in media such as books, newspapers, periodicals, audio-visual products, and electronic publications; (iii) digital works in the form of online databases compiled by selecting, arranging and compiling other types of digital works; and (iv) other types of digital works identified by the SAPPRFT. Under the Internet Publishing Rules, Internet operators distributing such Internet publications via information networks, including Web portals such as ours, are required to apply to and register with the SAPPRFT before distributing Internet publications.
On June 5, 2020, the National Press and Publication Administration issued the
Notice on Further Strengthening the Administration of Online Literature Publishing
. This notice provides that a platform publishing online literary works must (i) require writers to provide real identity information; (ii) review the works before they are published on the platform; and (iii) take appropriate and timely measures to prevent dissemination through the platform of false or misleading information.
On December 22, 2010, Sohu Internet obtained an Internet publishing license issued by the SAPPRFT, which was renewed on October 1, 2019. The renewed license expired on December 21, 2021. As of the date of this annual report, Sohu Internet is in the process of applying for renewal of the license, but there is uncertainty as to whether Sohu Internet will be able to renew it. For the details of the Internet publishing licenses held by Changyou’s VIEs, see “Specific Statutes and Regulations—Regulation of Online Game Services—Online Games and Cultural Products.”
Online Audiovisual Transmission Through the Public Internet
On December 20, 2007, the SAPPRFT and the MIIT jointly issued
Rules for the Administration of Internet Audiovisual Program Services
(“Document 56”), which came into effect as of January 31, 2008 and was amended on August 28, 2015. Document 56 requires all online audio and video service providers to be either state-owned or state-controlled and to obtain a permit for the Network Transmission of Audiovisual Programs. However, at a press conference held on February 3, 2008 the SAPPRFT and the MIIT clarified that online audio-visual service providers that were already lawfully operating prior to the issuance of Document 56 may
re-register
and continue to operate without becoming state-owned or controlled, provided that such providers do not engage in any unlawful activities. This exemption will not be granted to service providers set up after Document 56 was issued. As we were already engaged in online audiovisual transmission prior to the issuance of Document 56, we are presumably exempted from the requirement of being state-owned or state-controlled. Sohu Internet and Guangzhou Qianjun currently hold permits, both for PC and for Mobile Apps, for the Network Transmission of Audiovisual Programs.
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On March 30, 2009, the SAPPRFT released a
Notice on Strengthening the Administration of Online Audiovisual Content
(the “March 2009 SAPPRFT notice”). March 2009 SAPPRFT notice requires the operators of audiovisual Websites to enhance their processes for protecting copyrights, and to take appropriate measures to protect the rights and interests of copyright holders. Operators of such sites must hold, or have a license to, the copyright to all content that they transmit. In addition, the March 2009 SAPPRFT notice stipulates that only those films or TV programs that have already obtained from the SAPPRFT a Film Public Screening Permit, TV Drama Distribution Permit, TV Animation Distribution Permit, or TV Documentary Film Screening Permit are allowed to be transmitted via audiovisual Websites. These permits are mandatory for all films and programs shown on TV and in cinemas in China and must be obtained before such film or TV or program is allowed to be released. The approval applications for the Film Public Screening Permit, Television Drama Distribution Permit, Television Animation Distribution Permit or Television Documentary Film Screening Permit are extremely difficult and time-consuming, and the SAPPRFT previously did not enforce very strictly the requirements regarding these permits. However, on September 2, 2014, the SAPPRFT issued a
Notice on Further Strengthening the Administration of Online Foreign Audiovisual Content
(“September 2014 SAPPRFT Notice”), which requires that operators of audiovisual Websites to obtain from the SAPPRFT a Film Public Screening Permit, TV Drama Distribution Permit, or TV Animation Distribution Permit for all foreign films and TV dramas before they are transmitted via the Internet in China. The September 2014 SAPPRFT Notice further stipulates that before any foreign films or TV dramas for transmission exclusively via the Internet are purchased after the promulgation of the September 2014 SAPPRFT Notice, operators of audiovisual Websites must declare their annual purchasing plans with the SAPPRFT before the end of the year preceding the year of the intended broadcast and obtain the SAPPRFT’s approval. The September 2014 SAPPRFT Notice also states that the number of foreign films and TV dramas to be purchased by an operator and transmitted via its Website in a single year may not exceed 30% of the total amount of the Chinese films and TV dramas purchased and transmitted by the same Website in the previous year.
On March 17, 2010, SAPPRFT issued a
Catalogue of Classification of Internet Audio-Video Program Services (Trial)
(the “Internet Audio-Video Program Catalogue”), which was amended on March 10, 2017. The Internet Audio-Video Program Catalogue classifies Internet audio-video program services (excluding IPTV, Internet TV and mobile TV services) provided to computer and mobile phone users the Internet into four categories, consisting of (i) Internet audio-video programs sponsored and broadcast through Internet radio and television stations, including political news, political talk shows, self-produced news programs and live programs of vital political, military, economic, social and sports activities; (ii) reprints of political news, Internet hosting, interviews, report and commentary services in entertainment, technology, financial, sports and educational audio-video programs, production and broadcasting of Internet dramas, compilation and broadcasting of entertainment, technology, financial, sports and education audio-video programs, and live broadcasting of cultural and sports activities; (iii) the aggregation of Internet audio-video programs, which means editing and arranging Internet
audio-visual
programs on the same website, providing search and viewing services to public users, and broadcasting user-uploaded audio-video programs; and (iv) retransmission of Internet audio-video programs. A permit for the Network Transmission of Audiovisual Programs specifies the scope of the services under one or more of these categories that the holder of the permit is allowed to provide. Sohu Internet’s permit for the Network Transmission of Audiovisual Programs allows Sohu Internet to provide services mostly under the categories described in clauses (ii), (iii), and (iv) above. Guangzhou Qianjun’s permit for the Network Transmission of Audiovisual Programs allows Guangzhou Qianjun to provide certain services under the categories described in clauses (ii) and (iii) above.
On July 6, 2012, the SAPPRFT and the CAOC jointly issued a
Notice on Further Strengthening the Administration of Internet Dramas, Micro Movies and Other Internet Audiovisual programs
(the “2012 SAPPRFT Notice 53”), which reiterates that online audio-visual service providers must obtain a Permit for the Network Transmission of Audiovisual Programs from the SAPPRFT. The 2012 SAPPRFT Notice 53 further stipulates that online audio-visual service providers must review the content of Internet audiovisual programs prior to their transmission and must file certain information, such as the names of the Internet audiovisual programs, summaries of their content, and names of the persons conducting the reviews, with the appropriate provincial office of the SAPPRFT. On January 9, 2019, the China Netcasting Services Association, an industry self-regulatory association, issued
Management Standards for Internet Short Video Platforms
and
Detailed Standard Rules for Reviewing the Content of Internet Short Videos
, for the stated purpose of strengthening the responsibility of online platforms to examine the content of short videos before their transmission. On February 21, 2020, the China Netcasting Services Association issued the
Detailed Standard Rules for Reviewing the Content of Internet Variety Shows
,
which provide guidelines regarding such content matters as the choice of crew and cast and their behavior, and wardrobe and props, in variety shows, and provide detailed instructions for the examination of Internet variety shows.
On January 2, 2014, the SAPPRFT issued a
Supplemental Notice on 2012 SAPPRFT Notice 53
, which stipulates that producers of Internet dramas, micro movies and other Internet audiovisual programs must obtain a Permit for Radio and Television Program Production and Operation. Online audio-visual service providers may only retransmit dramas and micro movies produced and uploaded by individuals whose identities have been verified and the content of which complies with relevant regulations. Online audio-visual service providers must file with the provincial SAPPRFT the content of Internet audiovisual programs proposed for transmission prior to transmitting the programs.
On November 4, 2016, the SAPPRFT issued a
Notice on Further Strengthening the Planning, Development and Administration of Original Internet Audiovisual Programs
(“Document 198”). Document 198 stipulates that if online service providers plan to produce and disseminate audiovisual programs that are considered to be key audiovisual programs under Document 198, the service providers must, during the early planning and development stage, file a summary of the programs and their titles, producer names, themes, and duration with the SAPPRFT and, for audiovisual programs with sensitive themes such as politics, military, diplomacy, national security, national sovereignty, religion, the PRC justice system and public security, consult with designated PRC governmental authorities before production of the programs. On June 26, 2017, SAPPRFT and other several governmental authorities issued a
Notice on Several Policies Concerning the Prosperity and Development of Television Dramas
that confirms filing procedures with respect to key Internet dramas. In accordance with the
Notice on Upgrading the Filing System of the Online Audiovisual Programs
issued by the NRTA, effective December 27, 2018, producers of key audiovisual programs must make filings prior to the commencement of the production that include a summary of specified details concerning the programs and, following the completion of the production, submit the completed programs to the NRTA or its competent provincial counterpart and make filings with additional information concerning the programs.
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On March 16, 2018, the SAPPRFT issued a
Notice on Further Regulating the Distribution Order of Internet Audiovisual Programs,
which prohibits operators of audiovisual Websites from editing or adapting audiovisual programs of third-party content providers, broadcasting illegally edited and/or adapted audiovisual programs on their audiovisual Websites, and/or entering into business collaboration arrangements for online audiovisual services with providers without a Permit of Network Transmission of Audiovisual Programs.
On November 18, 2019, the CAOC, the SAPPRFT, and the MCT jointly issued the
Provisions on the Administration of Internet Audio-video Information Services
(the “2019 Notice 3”), pursuant to which Internet audiovisual information services providers are required to identify and conspicuously mark for users of their platforms non-reality-based audiovisual information created using deep learning, virtual reality, and other new technologies and applications. In addition, the 2019 Notice 3 stipulates that Internet audiovisual information service providers are obliged to establish and implement an anti-rumor mechanism to detect and prevent disseminating rumors generated using such technologies and applications, and report such information and rumors to the CAOC, the SAPPRFT, and the MCT.
Protection of Minors
On March 29, 2019, the SAPPRFT issued the
Administrative Regulations Regarding Programs
for Minors
(the “Programs for Minors Regulations”), which took effect on April 30, 2019 and was amended on October 8, 2021. Under the Programs for Minors Regulations, programs for minors refer to Internet audiovisual programs and radio and television programs with minors as the main participants or the target audience. Under the Programs for Minors Regulations, providers of online audiovisual program services are required to adopt a number of measures to protect the physical and psychological well-being of minors, including establishing separate zones on their online platforms for audiovisual programs suitable for minors; prohibiting the advertising in such separate zones of pharmaceuticals, medical equipment, cosmetics, alcohol, cosmetic surgery, and other specified categories not considered suitable for minors; displaying break reminders in a prominent position during programs for minors; and deleting, blocking, and disconnecting links and adopting other necessary measures. Online audiovisual program services providers are also required to conduct pre-broadcasting reviews of programs for minors and advertisements to be directed to minors, and to form committees consisting of minor protection experts and representatives of parent and teacher groups to periodically evaluate programs for minors and such advertisements.
On October 17, 2020, the Standing Committee of the National People’s Congress amended the Minors Protection Law of the PRC (as amended, the “Minors Protection Law”) effective as of June 1, 2021. The Minors Protection Law promotes Internet literacy among minors, protects personal information of minors, and strengthens the protection of minors from cyber bullying and from addictive behaviors related to Internet services and products.
On May 15, 2020, the Supreme People’s Court issued several guiding opinions on civil cases. The opinions stipulate that if minors pay reward money on live online performance platforms without the consent of their guardians and the money is spent in a way that is not appropriate for their age or intelligence, their guardians may require the Internet service providers to refund the money.
Private Network and Targeted Communication Audiovisual Program Services
On April 25, 2016, the SAPPRFT issued
the Provisions on the Administration of Private Network and Targeted Communication Audiovisual Program Services
(the “Private Network Audiovisual Programs Administration Provisions”), which were amended effective March 23, 2021, to replace the
Measures for the Administration of the Transmission of Audiovisual Programs over Internet and other Information Networks
that had been
issued by the SAPPRFT on July 6, 2004. The Private Network Audiovisual Programs Administration Provisions stipulate that private network and targeted communication audiovisual program services include the provision, integrated control, transmission and distribution of audiovisual content through IPTV, targeted mobile television, television network and other targeted channels. The Private Network Audiovisual Programs Administration Provisions provide that operators engaging in private network and targeted communication audiovisual program services must obtain a permit for the Network Transmission of Audiovisual Programs from the SAPPRFT. The Private Network Audiovisual Programs Administration Provisions provide that only PRC state-owned or state-controlled entities may engage in private network and targeted communication audiovisual program services. We provide a small amount of audiovisual program services through private network and/or targeted communication channels, such as IPTVs and television networks. In order to comply with the Private Network Audiovisual Programs Administration Provisions, we partner with PRC state-owned entities for the provision of such services through private network and targeted communication channels. According to a press conference of SAPPRFT regarding the Private Network Audiovisual Programs Administration Provisions, Internet audiovisual program services provided through the public Internet, which include our main online video services, other than private network and targeted communication channels should comply with Document 56. See “Governmental Regulation and Legal Uncertainties - Specific Statutes and Regulations - Regulation of the Provision of Internet Content - Online Audiovisual Transmission through the Public Internet” for a description of regulations affecting Internet Audio-video program services provided through the public Internet.
Online Cultural Products
On May 10, 2003, the MCT issued the
Provisional Regulations for the Administration of Online Culture
(“Online Culture Regulations”), which took effect on July 1, 2003 and were amended on July 1, 2004. On February 17, 2011, the MCT issued the new
Provisional Regulations for the Administration of Online Culture
(“New Online Culture Regulations”), which took effect on April 1, 2011 and were amended on December 15, 2017, to replace the previous regulations. The New Online Culture Regulations apply to entities engaging in activities related to “Internet cultural products,” which include those cultural products that are produced specially for Internet use, such as online music and entertainment, online games, online plays, online performances, online works of art and Web animations, and those cultural products that, through technical means, produce or reproduce music, entertainment, games, plays and other art works for Internet dissemination. Pursuant to the New Online Culture Regulations, commercial entities are required to apply to the relevant local branch of the MCT for an Online Culture Operating Permit if they engage in any of the following types of activities:
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the production, duplication, importation, release or broadcasting of Internet cultural products;
the dissemination of online cultural products on the Internet or transmission thereof via Internet or mobile phone networks to users’ terminals such as computers, fixed-line or mobile phones, television sets, gaming consoles and Internet surfing service sites such as Internet cafés for the purpose of browsing, using or downloading such products; or
the exhibition or holding of contests related to Internet cultural products.
On November 11, 2021, the MCT issued the
Administrative Measures on Credit for the Cultural and Tourism Market
(the “Credit Measures”)
to replace the
Measures for the Administration of a National Cultural Market Blacklist
issued on June 19, 2018. The Credit Measures classify entities that engage in activities in the cultural and tourism markets that are determined to be dishonest into entities that are determined to have engaged in egregiously dishonest activities and entities that are determined to have engaged in activities that, though dishonest, are relatively less dishonest and further stipulate standards and procedures for identifying entities that engage in such dishonest activities. In addition, operators identified as engaging in dishonest activities under the Credit Measures may be subject to a series of regulatory measures, such as strict daily supervision and frequent random inspection from MCT or its local counterparts.
On July 1, 2016, the MCT issued a
Notice on Strengthening the Administration of Online Performanc
e (the “Online Performance Notice”) and on December 2, 2016, issued the
Measures of Administration of Online Performance Operating Activities
(the “Online Performance Measures”), which became effective on January 1, 2017. The Online Performance Notice and the Online Performance Measures both stipulate that online performance service providers must obtain an Online Culture Operating Permit and that online performances must not contain any content that is horrific, cruel, violent, vulgar or humiliating in nature, mocks persons with disabilities, includes photographs or video clips that infringe third parties’ privacy or other rights, features animal abuse, or presents characters and other features of online games that have not been registered and approved for publication by applicable PRC governmental authorities.
On September 2, 2021, the NRTA issued the
Notice on Further Strengthening the Management of Arts and Their Personnel
, under which online audio-visual platforms are required to strictly control the selection of actors and are prohibited from engaging actors with political positions considered to be wrong or who engage in deeds or use words considered to be immoral, actors considered to not be adhering to an acceptable level of social fairness and justice, or actors violating laws, regulations, or the public order.
Sohu Internet, Guangzhou Qianjun currently hold Online Culture Operating Permits. The Online Culture Operating Permit obtained by Sohu Internet includes a permit for operating Internet information services at “focus.cn.”
On September 2, 2016, the SAPPRFT issued the
Notice on Strengthening the Management of Live Online Social Video Services
(the “Live Online Notice”), which requires interactive broadcasting service providers to procure a permit for the Network Transmission of Audiovisual Programs. Sohu Internet and Guangzhou Qianjun currently hold permits for the Network Transmission of Audiovisual Programs. The Live Online Notice also stipulates that a service provider must make a filing with the local SAPPRFT branch at least five days before making any live broadcast of any significant political, military, economic, social, cultural or sports activities and at least 48 hours before making any live broadcast of other cultural or sports activities. On November 4, 2016, the CAOC issued the Provisions on the Administration of Online Live Social Video Services (the “Live Social Video Provisions”) effective December 1, 2016. The Live Social Video Provisions provide that business entities such as us that offer interactive broadcasting services on their Internet platforms have the primary responsibility for monitoring content disseminated by interactive broadcasting hosts and viewers through such services, and must allocate sufficient staff in line with the scale of such services and establish and maintain adequate internal policies and procedures for, among other things, content review, information security management, emergency management and technical support. The Live Social Video Provisions also require that Internet providers verify the real-name identity of interactive broadcasting hosts and viewers before allowing them to establish user accounts with the Internet providers and take appropriate remedial actions, such as issuing warnings, removing posted content, or terminating the user’s account, with respect to interactive broadcasting content or activity that is prohibited by the Live Social Video Provisions. Internet providers are subject to administrative penalties and other sanctions for noncompliance with the Live Social Video Provisions. On August 1, 2018, the MIIT and several other governmental authorities issued a
Notice on Strengthening the Administration of Live Online Social Video Services
, which stipulates that providers of Internet access services and APP stores must not provide Internet access and APP distribution services for online interactive broadcasting service providers that do not hold requisite permits from or complete the requisite filing procedure with the applicable governmental agencies. On November 12, 2020, the NRTA promulgated the
Notice on Strengthening the Management of Live Broadcast of Online Shows and
E-commerce
Live Broadcast
, which requires live show online broadcasting platforms and
e-commerce
live online broadcasting platforms to enter information concerning their operating entities and business operations in a nationwide online system. Under the notice, live online broadcasting platforms are also required to classify their broadcast programs into, and label them according to, specified categories such as “music,” “dance,” and “travelling.” The notice and the
Guidance on Strengthening Supervision of
E-commerce
Live Online Broadcasting Activities
issued by the SAMR in November 2020 also provide that
e-commerce
live online broadcasting platforms should verify the qualifications and real-name identities of the entities and individuals selling goods and services on such platforms, and ensure such sales to comply with the New Advertising Law and the
E-commerce
Law. On April 23, 2021, the CAOC and six other governmental authorities issued the
Administrative Measures for
E-commerce
Live Online broadcasting (for Trial Implementation)
,
which further stipulate that live online broadcasting platforms must take certain specified measures, such as arranging special personnel to conduct real-time inspections and extending the storage time for live broadcast content with respect to key live online broadcasting operators. The live online broadcasting platforms are also required to establish a sound risk identification model and take appropriate actions to prevent suspected violations of laws and regulations in regard to high-risk marketing activities, such as issuing violation warnings, limiting traffic and suspending live online broadcasting. In addition, relevant governmental authorities may share information regarding
e-commerce
live online broadcasting entities with records of serious violations and may carry out joint enforcement and punishment.
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On February 9, 2021, the CAOC and six other governmental authorities issued the
Guiding Opinions on Strengthening the Ratification and Administration of Live Online Broadcasting
(the
“
Guiding Opinions”). The Guiding Opinions stipulate that live online broadcasting platforms must (i) classify and rank accounts for live online broadcasting based on factors such as the nature of the account holders, the content of performances, the number of followers and the popularity of the broadcast programs, (ii) set reasonable limits on the duration of, the amount of money to be received in, and commodities to be sold in each broadcast program based on the accounts’ categories and rankings, and (iii) set reasonable limits on the maximum amount of money paid by the Internet users for a single virtual commodity or reward in connection with a live online broadcast.
On April 19, 2019, the China Alliance of Radio, Film, and Television issued the
Notice on Strictly Implementing the Proportional Allocation of Production Costs for Television and Internet Dramas
(the “Production Costs Notice”), which specifies that the aggregate compensation paid to cast members of a television
or
Internet drama may not exceed 40% of the total production costs of the drama and that the aggregate compensation paid to key members of the cast may not exceed 70% of the aggregate compensation paid to all of the cast members. Payment of amounts above the specified limits without reasonable grounds may result in the suspension or cancellation of the broadcast of the drama and/or the production permits of the producer.
Mobile Internet Applications Information Services
On June 28, 2016, the CAOC issued the
Provisions on the Administration of Mobile Internet Applications Information Services
(the “APP Provisions”), which became effective on August 1, 20162016. Under the APP Provisions, mobile application providers and application store service providers are prohibited from engaging in any activity that may endanger national security, disturb the social order, or infringe the legal rights of third parties, and may not produce, copy, issue or disseminate through mobile applications any content prohibited by laws and regulations. The APP Provisions also require application providers to procure relevant approval to provide services through such applications and require application store service providers to register with local branch offices of the CAOC within 30 days after they start providing application store services. We have procured the required approvals for services that we provide through our mobile applications. If we, as a provider of information services through Apps, violate these regulations, mobile application stores through which we distribute our Apps may issue warnings to us, suspend the release, or terminate the sale, of our Apps, and/or report our violations to governmental authorities.
Internet Medical, Health and Pharmaceuticals Information Dissemination
Under the
Measures for the Administration of Internet Pharmaceuticals Information Services
(the “Pharmaceuticals Information Services Measures”) issued by the SAMR on July 8, 2004, which were amended on November 17, 2017, formal approval from the SAMR or one of its local branches is required before a Website may disseminate information concerning pharmaceuticals.
Under the Pharmaceuticals Information Services Measures, medical, health and pharmaceutical information (including information with respect to medical equipment) provided by Websites must be scientific and accurate and must indicate the sources of such information. Websites that have received approval to disseminate such information must also publish or reprint health policies, information on epidemics and major health-related incidents, and other health-related information in accordance with law. Furthermore, medical and pharmaceutical advertisements (including advertisements for medical equipment) published by such Websites must not exaggerate the efficacy or promote the medical uses of such products.
The VIEs Sohu Internet and Guangzhou Qianjun received renewed approval from the SAMR, on June 13, 2019 and November 23, 2018, respectively, to disseminate pharmaceuticals information over the Internet.
Regulation of Brand Advertising Services
On April 24, 2015, the Standing Committee of the National People’s Congress enacted the
Advertising Law of the People
’
s Republic of China
(the “New Advertising Law”), which became effective on September 1, 2015 and was amended on October 26, 2018 and April 29, 2021. The New Advertising Law, which was a major overhaul of an advertising law enacted in 1994, increases the potential legal liability of providers of online searchadvertising services, verifyand includes provisions intended to strengthen identification of false advertising and the credentialspower of
pay-for-click
advertisers, specify a maximum percentage that
pay-for-click
search results may represent of results on a search page, and require that providers of search services conspicuously identify
pay-for-click
search results as such. The regulatory authorities. On July 4, 2016, the SAMR issued the
Interim Measures forof the Administration of Online Advertising
(the “SAMR Interim Measures”), which became effective on September 1, 20162016. The New Advertising Law and the SAMR Interim Measures both provide that advertisements posted or published through the Internet may not affect users’ normal usage of a network, and advertisements published in the form of
pop-up
windows on the Internet must display a “close” sign prominently and ensure
one-key
closing of the
pop-up
windows. The SAMR Interim Measures provide that all online advertisements must be marked “Advertisement” so that viewers can easily identify them as such. Moreover, the SAMR Interim Measures treat
pay-for-click
search results as advertisements that are subject to PRC advertisement laws, governing advertisements, require that
pay-for-click
search results be conspicuously identified on search result pages as advertisements and subject revenues from such advertisements to a 3% PRC tax that is applied to advertising revenues. In orderThe New Advertising Law and SAMR Interim Measures will require us to comply with these regulations, Sogou has establishedconduct more stringent standards for selecting advertisers for its
pay-for-click
servicesexamination and has turned down certain existingmonitoring of our advertisers and has lowered the percentage that
pay-for-click
search results representcontent of results on its search pages, which had an adverse impact on Sogou’s search and search-related revenues and overall results of operations for 2016 and, along with the tax on advertising, are likely to continue to have such an impact. We cannot assure you that PRC governmental authorities will not issue new laws or regulations specifically regulating sponsored search services, which could further impact Sogou’s revenues.
Sogou may not have conducted its online lending and microcredit business in accordance with PRC laws, rules, regulations, and governmental policies.
PRC laws, rules, regulations, and governmental policies governing the online lending industry and microcredit businesses are at a relatively early stage, and can be expected to continue to evolve.
Although Sogou has not made new loans to borrowers since September 30, 2020, and while Sogou was making loans it implemented measures intended to comply with applicable PRC laws and regulations regarding the online lending industry and microcredit businesses, due to the lack of clear interpretation and rules regarding the implementation of such laws and regulations, the measures it took may not have been sufficient to ensure such compliance. Failure to comply with such laws and regulations could result in its being subject to, among other things, regulatory warnings, fines, or criminal penalties. See “Government Regulation and Legal Uncertainties—Specific Statutes and Regulations—Regulation of Other Services—Regulation of Online Lending and Microcredit Services.”
The Notice on Regulating and Rectifying the “Cash Loan” Business
(“Circular 141”), issued jointly by the Head Office for Special Rectification against Internet Finance Risks and the Head Office for Special Rectification against
Peer-to-Peer
Online Lending Risks on December 1, 2017, stipulates that a banking financial institution that offers cash loans through loan facilitation is prohibited from (i) accepting credit enhancement or other similar services from third parties that lack requisite licenses to provide guarantees; (ii) outsourcing credit assessment, risk control, and other key functions to a loan facilitation operator; and (iii) allowing the loan facilitation operator to charge any interest or fees from the borrower. On October 9, 2019, the China Banking and Insurance Regulatory Commission (the “CBIRC”), together with other eight governmental authorities, promulgated the
Notice of the Promulgation of Supplementary Provisions for the Supervision and Administration of Financing Guarantee Companies
(“CBIRC Circular 37”), which states that institutions that provide services such as customer recommendations and evaluation of credit to lending institutions may not provide financial guarantee services without approval of regulatory authorities. Based on its understanding of industry practice, Sogou does not believe that its operation of online lending and microcredit loan facilitation business consisted of the operation of a financial guarantee business. However, due to a lack of sufficient interpretation of Circular 141 and CBIRC Circular 37, the exact definition and scope of operating a financial guarantee business remain unclear. If Sogou was deemed to have been operating a financial guarantee business in violation of Circular 141 and CBIRC Circular 37, it could be subject to penalties, sanctions, and other liabilities.
In addition, the
Provisions on Several Issues Concerning Laws Applicable to Trials of Private Lending Cases
(the “Private Lending Judicial Interpretations”), which were issued by the Supreme People’s Court effective September 1, 2015, (i) prohibit loans with interest rates exceeding 36% per annum, and provide that any excess paid must be returned to the borrower and (ii) provide that loans with interest rates between 24% and 36% per annum are generally permissible as long as they do not damage the interests of the state, the community, or any third parties other than the borrower. For loans Sogou extended or facilitated prior to September 30, 2020, if PRC governmental authorities or courts were to determine that any of such loans had an interest rate exceeding 24% per annum, Sogou may not be able to collect the portion of the interest deemed to exceed 24%. Further, on August 19, 2020, the Supreme People’s Court promulgated the Provisions on Several Issues Concerning Laws Applicable to Trials of Private Lending Cases (Revised in 2020), which were revised on December 29, 2020 (as amended, the “Revised Private Lending Judicial Interpretations”). The Revised Private Lending Judicial Interpretations provide that, beginning August 20, 2020, PRC courts will not enforce the collection of interest on
one-year
loans to the extent that the interest exceeds four times the prime rate for
one-year
loans published by the National Interbank Funding Center. In addition,
the Reply of the Supreme People
’
s Court to the Application of Law to the Provisions Applicable to Private Lending Cases
promulgated by the Supreme People’s Court on December 29, 2020 stipulates that microcredit companies are financial institutions established with the approval of the financial regulatory authorities and that the Revised Private Lending Judicial Interpretations are not directly applicable to the loan business of microcredit companies. However, it remains uncertain whether PRC courts will use the Revised Private Lending Judicial Interpretations for reference in the future. As a result, if the
one-year
loans that Sogou extended or facilitated on or after August 20, 2020 carry interest that exceeds the specified limit and the courts determine that Sogou’s loan business is subject to the Revised Private Lending Judicial Interpretations, Sogou may not be able to recover the amount of the excess.their advertisements.
 
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ITEM 4.
INFORMATION ON THE COMPANY
HISTORY AND DEVELOPMENT OF THE COMPANY
In August 1996, Sohu.com Inc., our predecessor, was incorporated in Delaware as Internet Technologies China Incorporated, and in January 1997 we launched our original Website, itc.com.cn. In February 1998, we
re-launched
our Website under the domain name Sohu.com and, in September 1999, we renamed our company Sohu.com Inc. On July 17, 2000, we completed our IPO on NASDAQ trading under the symbol “SOHU.” In 2003, Sohu.com Limited was incorporated in the Cayman Islands as a direct wholly-owned subsidiary of Sohu.com Inc. On May 31, 2018, pursuant to a proposal (the “Liquidation Proposal”) for the dissolution of Sohu.com Inc. and adoption of a plan of complete liquidation and dissolution of Sohu.com Inc. that was approved by the stockholders of Sohu.com Inc. at a special meeting of stockholders held on May 29, 2018, Sohu.com Inc. was dissolved, all outstanding shares of the common stock of Sohu.com Inc. were delisted and cancelled, and ADSs representing all outstanding ordinary shares of Sohu.com Limited were distributed on a
share-for-share
basis to the stockholders of Sohu.com Inc. On June 1, 2018 our ADSs began trading on the NASDAQ Global Select Market under the same “SOHU” symbol in place of the common stock of Sohu.com Inc. Sohu.com Limited replaced Sohu.com Inc. as the
top-tier,
publicly-traded holding company of the Sohu Group. The Liquidation Proposal is described in detail in Sohu.com Inc.’s and our joint proxy statement/prospectus filed with the SEC on April 23, 2018.
In 2006, we undertook a reorganization of our search and search-related businesses. As part of the reorganization, we transferred most of our search and search-related businesses to Sogou Inc., a Cayman Islands company that was incorporated in 2005 by us. In 2010, we undertook another reorganization in preparation for Sogou’s issuance of Sogou
Pre-IPO
Series A Preferred Shares in a financing transaction, and transferred other businesses and employees related to the search and search-related businesses to Sogou. On November 13, 2017, Sogou completed its IPO on NYSE, trading under the symbol “SOGO.”
In 2007, we reorganized our online games business. As part of the reorganization, Changyou.com Limited was incorporated in the Cayman Islands on August 6, 2007 as our indirect wholly-owned subsidiary to hold the PC games business of the Group. We transferred to Changyou, effective December 1, 2007, all of the assets and operations relating to the PC games business, and Changyou assumed all the liabilities associated with our games business. On April 2, 2009, Changyou completed its IPO on NASDAQ, trading under the symbol “CYOU.”
On April 17, 2020, we completed the acquisition of all outstanding shares of Changyou that we did not already beneficially own, through the Changyou Merger, in which our newly-formed indirectly wholly-owned subsidiary Changyou Merger Co. merged with and into Changyou.com Limited, with Changyou.com Limited being the surviving company. Pursuant to the plan of merger for the Changyou Merger, each Class A ordinary share of Changyou (each, a “Changyou Class A Ordinary Share”) issued and outstanding immediately prior to the effectiveness of the Changyou Merger, other than the Class A ordinary shares held by us, was cancelled in exchange for the right to receive $5.40 in cash without interest, and each outstanding American depositary share of Changyou (each a “Changyou ADS,” representing two Changyou Class A Ordinary Shares) was cancelled in exchange for the right to receive $10.80 in cash without interest. Because Changyou Merger Co. owned over 90% of the voting power represented by all issued and outstanding shares of Changyou prior to the effectiveness of the Changyou Merger, the Changyou Merger was in the form of a short-form merger in accordance with section 233(7) of the Companies Act of the Cayman Islands, and the Changyou Merger was not subject to a vote of the shareholders of Changyou. As a result of the Changyou Merger, Changyou has become a privately-owned company wholly owned directly and indirectly by us and Changyou ADSs are no longer listed on the NASDAQ Global Select Market.
On September 29, 2020, Sogou entered into the Sogou Merger Agreement with Tencent’s indirect wholly-owned subsidiaries THL, Tencent Merger Sub, and TML, pursuant to which Tencent will acquire all of outstanding Sogou shares that Tencent does not already beneficially own in an
all-cash
transaction. Pursuant to the terms of the Sogou Merger Agreement, at the effective time of the Sogou Merger (the “Sogou Merger Effective Time”) each Sogou Class A Ordinary Share, including Sogou Class A Ordinary Shares represented by Sogou ADSs, issued and outstanding immediately prior to the Sogou Merger Effective Time, other than the Sogou Class A Ordinary Shares owned or beneficially owned by Tencent, will be cancelled and cease to exist, in exchange for the right to receive $9.00 in cash per share or ADS, without interest. On or about the same time the Sogou Merger Agreement was signed, we, Sohu Search, and Tencent Merger Sub entered into the Tencent/Sohu Sogou Share Purchase Agreement, pursuant to which Sohu Search agreed to sell all of the Sogou Class A Ordinary Shares and Sogou Class B Ordinary Shares owned by us to Tencent Merger Sub at the same purchase price of $9.00 per share. The Tencent/Sohu Sogou Share Purchase is expected to be completed shortly prior to the completion of the Sogou Merger. If the Tencent/Sohu Sogou Share Purchase and the Sogou Merger are completed, we will no longer have any beneficial ownership interest in Sogou, and Sogou will become a privately-owned company wholly owned indirectly by Tencent and Sogou ADSs will no longer be listed on the NYSE. As of the date of this annual report, the Tencent/Sohu Sogou Share Purchase and the Sogou Merger have not been completed, and are subject to the satisfaction or waiver of the closing conditions set forth in the Tencent/Sohu Sogou Share Purchase Agreement and the Sogou Merger Agreement, including anti-trust clearance of the Tencent/Sohu Sogou Share Purchase under PRC law.
Our principal executive offices are located at Sohu.com Media Plaza, No. 2, Kexueyuan South Road, Haidian District, Beijing, 100190, People’s Republic of China. Our telephone number at this address is +86
10-6272-6666.
Our registered office in the Cayman Islands is located at the offices of Maples Corporate Services Limited, P.O. Box 309, Ugland House, Grand Cayman,
KY1-1104,
Cayman Islands.
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On November 26, 2021, the SAMR issued the
Administrative
Measures for Online Advertising (Draft for public comments)
(the “Draft Online Advertising Measures”). The Draft Online Advertising Measures provide that
pre-roll,
embedded and
pop-up
online advertisements must clearly display a “close” button which enables users to close the advertisements with one click and prohibit the practice of forcing users to wait for a timer countdown to finish before they can close the advertisements.
On April 13, 2016, the SAMR and sixteen other PRC government agencies jointly issued a
Notice of Campaign to Crack Down on Illegal Internet Finance Advertisements and Other Financial Activities in the Name of Investment Management
(the ‘‘Campaign Notice’’), pursuant to which a campaign was conducted between April 2016 and January 2017 targeting, among other things, online advertisements for Internet finance and other financial activities posted on Internet search portals and other portal, financial, real estate, P2P and investment product sales services Websites. On March 22, 2019, the SAMR issued the
Notice of a Campaign to Deepen the Rectification of Online Advertisements
, which targets false advertising related to the physical health or the protection of property of the public in areas such as pharmaceuticals, health food, and real estate and financial investments by Internet portals, search engines, and
e-commerce
platforms with significant social influence and wide coverage, as well as by Internet media such as mobile client applications and new media accounts. The
Notice of Key Areas of Work in 2020 of the Inter-Ministerial Joint Meeting on Rectification of False and Illegal Advertisements,
jointly issued by SAMR and ten other PRC government agencies on March 9, 2020, further emphasizes the responsibility of Internet service providers to verify and examine the content and supporting documents of online advertisements and prevent the dissemination of false and illegal online advertisements.
On August 31, 2018, the Standing Committee of the National People’s Congress enacted the
E-commerce
Law of the People’s Republic of China
(the
“E-commerce
Law”), which took effect on January 1, 2019 and which stipulates, among other things, that although an
e-commerce
business operator may provide an Internet consumer with search results for goods or services based on such consumer’s preferences or consumption habits, the operator must also provide such consumer with options that are not based on such consumer’s preferences or habits, in order to respect and protect the rights and interests of such consumer, and reiterates that
e-commerce
business operators that distribute online advertisements to consumers must comply with the New Advertising Law.
Regulation of Online Game Services
Online Games and Cultural Products
In September 2009, the SAPPRFT, together with the National Copyright Administration and the National Office of Combating Pornography and Illegal Publications, jointly issued a
Notice on Further Strengthening the Administration of
Pre-examination
and Approval of Online Games and the Examination and Approval of Imported Online Games
, or the SAPPRFT Online Game Notice. The SAPPRFT Online Game Notice states that foreign investors are not permitted to invest in online game operating businesses in China via wholly foreign-owned entities, China-foreign equity joint ventures or cooperative joint ventures or to exercise control over or participate in the operation of domestic online game businesses through indirect means, such as other joint venture companies or contractual or technical arrangements. If the VIE structures of Changyou were deemed under the SAPPRFT Online Game Notice to be an “indirect means” for foreign investors to exercise control over or participate in the operation of a domestic online game business, the VIE structures of Changyou might be challenged by the SPPA, a successor agency to the SAPPRFT. We are not aware of any online game companies which use the same or similar VIE contractual arrangements as those Changyou use having been challenged by the SAPPRFT or the SPPA as using those VIE arrangements as an “indirect means” for foreign investors to exercise control over or participate in the operation of a domestic online game business or having been penalized or ordered to terminate operations since the SAPPRFT Online Game Notice first became effective. However, it is unclear whether and how the SAPPRFT Online Game Notice might be interpreted or implemented in the future.
On February 21, 2008, the SAPPRFT issued the
Rules for the Administration of Electronic Publications
, or the Electronic Publication Rules, which were amended on August 28, 2015. The Electronic Publication Rules regulate the production, publishing and importation of electronic publications in the PRC and outline a licensing system for business operations involving electronic publishing. Under the Electronic Publication Rules and other related regulations issued by the SAPPRFT, online games are classified as a type of electronic publication or Internet publication that may only be provided by a licensed electronic publishing entity with a standard publication code, and the establishment of an electronic publishing entity must be approved by the SAPPRFT. Electronic publishing entities are responsible for assuring that the content of electronic publications comply with relevant PRC law and regulations, and must obtain the approval of the SPPA, a successor agency to the SAPPRFT, before publishing foreign electronic publications. The New Internet Publication Measures, which became effective on March 10, 2016 and replaced the
Temporary Measures for Internet Publication Administration
that had become effective in 2002, require that entities in the Internet publishing business apply for an online publishing services license instead of an Internet publishing license, that entities holding an Internet publishing license apply for an online publishing service license within a specified period of time to replace their Internet publishing license, and that all such entities obtain approval from the SAPPRFT or the SPPA prior to the publication of new online games. In addition, under the New Internet Publication Measures, Sino-foreign joint ventures and foreign-invested entities are not permitted to engage in Internet publication services, and the legal representative of an entity providing Internet publication services may not be a foreigner.
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Gamease, which is the operator of TLBB, Blade Online and certain other licensed PC games, and Guanyou Gamespace, which provides online game services, obtained Internet publishing licenses on December 10, 2010 and October 13, 2011, respectively, and Gamease and Guanyou Gamespace have obtained online publishing services licenses under the New Internet Publication Measures to replace the Internet publishing licenses previously held by them. TLBB, Blade Online and some of Changyou’s other games were historically published through third parties that were licensed electronic publishing entities, because Gamease had not obtained an Internet publishing license at the time those online games were made publicly available. TLBB, Blade Online and certain of Changyou’s other existing games are currently published under an Internet publishing license held by Gamease. As of the date of this annual report, the Internet publishing licenses held by Gamease and Guanyou Gamespace have expired, and Gamease and Guanyou Gamespace are in the process of applying for renewal of their respective licenses. There is uncertainty as to whether Gamease and Guanyou Gamespace will be able to renew such licenses. Current PRC regulations are not clear as to the consequences of obtaining authorization codes through third-party electronic publishing entities. While we believe that arrangements like Changyou’s are acknowledged by the SAPPRFT or SPPA, in view of the lack of formal interpretation regarding this issue, the SPPA might challenge Changyou’s current and past practices and could subject Changyou to various penalties, including fines, confiscation of publishing equipment and the revenues generated from the publishing activities, the revocation of Changyou’s business license, or the forced discontinuation of or restrictions on its operations.
On May 24, 2016, the SAPPRFT issued the Mobile Game Notice, which became effective on July 1, 2016 and sets forth requirements for the publication and operation of mobile games online, including requiring that mobile game publishers and operators, including joint operators, review the content of the games that they publish and operate, and apply for publication and authorization codes at least 20 business days before first publishing and operating domestic recreational and educational mobile games through open beta testing. The Mobile Game Notice, as updated by a subsequent notice, specifies that game publishers and game operators were required to review the content of mobile games that were published and operated online before July 1, 2016, and to complete approval procedures for those games before December 31, 2016, or to cease operating the games. The Changyou VIEs completed prior to December 31, 2016 all of the approval procedures required by the SAPPRFT for Changyou’s mobile games that were in operation before July 1, 2016.
The MCT issued the
New Provisional Regulations for the Administration of Online Culture
, or the Online Culture Regulations, which took effect on April 1, 2011 and was amended on December 15, 2017 and replaced the
Provisional Regulations for the Administration of Online Culture
. The Online Culture Regulations apply to entities engaging in activities related to “Internet cultural products,” which include cultural products that are produced specifically for Internet use, such as online music and entertainment, online games, online plays, online performances, online works of art and Web animation, and other online cultural products that through technical means, produce or reproduce music, entertainment, games, plays and other art works for Internet dissemination. Under the New Online Culture Regulations, commercial entities are required to apply to the relevant local branch of the MCT for an Online Culture Operating Permit if they engage in the production, duplication, importation, release or broadcasting of Internet cultural products; the dissemination of online cultural products on the Internet or the transmission of such products via Internet or mobile phone networks to user terminals, such as computers, phones, television sets and gaming consoles, or Internet surfing service sites such as Internet cafés; or the holding or exhibition of contests related to Internet cultural products. On May 14, 2019, the MCT issued the MCT Approval Scope Notice, pursuant to which the MCT is no longer responsible for regulating the online-game industry and its local branches are no longer responsible for granting new Online Culture Operating Permits for online games, or renewing existing permits after their expiration. It is not clear whether another PRC governmental agency will be designated to supervise the online game industry and whether a new permit or license that is similar to Online Cultural Operating Permit will be required for the operation of online games. On December 9, 2019, the Comprehensive Market Enforcement Supervision Bureau of MCT issued the
Notice on Law Enforcement in the Online Game Market
, which stipulates that the investigation and processing of online game cases will be under the
Measures of Internet Publication Service Administration,
and that the
Interim Measures for Online Games Administration
, which became effective on August 1, 2010 and were repealed on July 10, 2019, will no longer apply to such cases. In January 2008 Gamease obtained an Online Culture Operating Permit, which was
re-certified
in October 2015 and December 2017; and in December 2010 Shanghai ICE obtained an Online Culture Operating Permit, which was
re-certified
in January 2014.
The
Notice on Strengthening the Approval and Administration of Imported Online Games
, or the Imported Online Game Notice, which was issued by the SAPPRFT and took effect in July 2009, states that the SAPPRFT was, and the SPPA as a successor to the SAPPRFT is, the only governmental department authorized by the State Council to approve the importation of online games from Offshore copyright owners, and that any enterprise which engages in online game publication and operation services within China must have the game examined and approved by the SAPPRFT or the SPPA and receive from the SAPPRFT or the SPPA an Internet publishing license (or after the New Internet Publication Measures became effective on March 10, 2016, an online publishing services license). Changyou’s VIEs Gamease and Guanyou Gamespace obtained Internet publishing licenses from the SAPPRFT and they have obtained online publishing services licenses under the New Internet Publication Measures to replace the Internet publishing licenses previously held by them. In addition, the Imported Online Game Notice states that activities which involve the showing, exhibition, trading and promotion of Offshore online games in China must be examined and approved by the SAPPRFT or the SPPA.
The
Administrative Measures for Content Self-review by Internet Culture Business Entities
, or the Content Self-review Administrative Measure, which took effect in December 2013, require Internet culture business entities to review the content of products and services to be provided prior to providing such content and services to the public. The content management system of an Internet culture business entity is required to specify the responsibilities, standards and processes for content review as well as accountability measures, and is required be filed with the local provincial branch of the MCT.
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Registration of Software Copyrights
The
Measures Concerning Registration of Computer Software Copyright
, or the Software Copyright Measures, issued by the National Copyright Administration, which became effective in February 2002, encourage the registration of software and afford greater protection to registered software than that afforded to unregistered software. Changyou has registered software copyrights covering all of its significant copyrightable products and enhancements.
Regulation of Internet Content
The PRC government has promulgated measures relating to Internet content through a number of government authorities, including the MIIT, the MCT, the SPPA, the NRTA and the MPS. These measures prohibit certain Internet activities, including the operation of online games that result in the publication of any content which is found to, among other things, propagate obscenity, gambling or violence, instigate crimes, undermine public morality or the cultural traditions of the PRC, or compromise State security or secrets. If an ICP license holder violates these measures, the PRC government may revoke its ICP license and shut down its Websites.
On May 2, 2017, the CAOC, issued the
Administrative Enforcement Procedures for the Administration of Internet-based Information Content
, or the Enforcement Procedures, effective June 1, 2017. Pursuant to the Enforcement Procedures, the CAOC and its local branch offices have the authority to enforce, and impose administrative sanctions on activities prohibited by, applicable administrative laws and regulations concerning Internet-based information content.
Protection of Minors
On August 30, 2021, the NPPA issued the
Notice on Further Strengthening the Administration of the Prevention of Minors from Indulging in Online Games.
On October 20, 2021, the MOE, the SAMR and several other PRC authorities jointly issued the
Notice on Further Strengthening the Administration of the Prevention of Primary and Secondary School Students’ Addiction to Online Games
(the “Further Indulgence Prevention Notice”), which provides that online game operators may only provide online game services to minors on Fridays, Saturdays, Sundays and PRC statutory holidays for one hour per day from 8:00 p.m. to 9:00 p.m. In addition, the Indulgence Prevention Notice and the Further Indulgence Prevention Notice require that that online game operators may not provide game services to any users who have not registered using their real names.
On October 17, 2020, the Standing Committee of the National People’s Congress issued the Minor Protection Law, which took effect on June 1, 2021 and has enhanced the requirements for the protection of minors from addictive online-game playing behaviors. Also see “Governmental Regulation and Legal Uncertainties - Regulation of the Provision of Internet Content—Protection of Minors.”
On May 15, 2020, the Supreme People’s Court issued several guiding opinions on civil cases. The opinions stipulate that if minors participate in online games that are not free to play without the consent of their guardians and spend the money in a way that is not suitable for their age or intelligence, the guardians may request the online game or live game platform operators to refund the money.
On April 15, 2007, the SAPPRFT and several other governmental authorities issued a circular requiring the implementation of an “anti-fatigue system” and a real-name registration system by all PRC online game operators, in an effort to curb addictive online game play behaviors of minors. Under the anti-fatigue system, three hours or less of continuous play by minors is considered to be “healthy,” three to five hours to be “fatiguing,” and five hours or more to be “unhealthy.” Game operators are required to reduce the value of
in-game
benefits to a game player by half if the game player has reached “fatiguing” level, and to zero in the case of “unhealthy” level.
To identify whether a game player is a minor and thus subject to the anti-fatigue system, there was adopted a real-name registration system, which requires online game players to register their real identity information before they play online games and requires online game operators such as Changyou to submit the identity information of game players to the public security authorities for verification. On July 1, 2011, the SAPPRFT, the MIIT, the Ministry of Education and five other governmental authorities issued
a Notice on Initializing the verification of Real-name Registration for Anti-Fatigue System on Internet Games
, or the Real-name Registration Notice”), which took effect on October 1, 2011, to strengthen the implementation of the anti-fatigue system and real-name registration. The Real-name Registration Notice’s main focus is to prevent minors from using an adult’s ID to play Internet games and, accordingly, the notice imposes stringent punishments on online game operators that do not implement the required anti-fatigue and real-name registration measures properly and effectively. The most severe punishment contemplated by the Real-name Registration Notice is to require termination of the operation of the online game if it is found to be in violation of the Anti-Fatigue Notice, the Monitor System Circular or the Real-name Registration Notice. Changyou developed anti-fatigue and real-name registration systems for its games, and implemented them beginning in 2007. Under the systems of Changyou, game players must use real identification in order to create accounts, and in this way Changyou generally are able to tell which of their game players are minors and thus subject to these regulations. For game players who do not register, Changyou assume that they are minors. As required by the anti-fatigue rules, Changyou reduces the value of
in-game
benefits of game players under 18 years based on the amount of their continuous play. In order to comply with the
anti-fatigue
rules, game players under 18 years of age only receive half of the experience time they actually earn after three hours of play. And, after five hours of play, minors receive no experience points.
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On January 15, 2011, the MCT, the MIIT and six other central government authorities jointly issued a circular entitled
Implementation of Online Game Monitor System of the Guardians of Minors
, or the Monitor System Circular, aiming to provide protection measures to monitor the online game activities of minors and curb addictive online game playing behaviors of minors. Under the Monitor System Circular, online game operators are required to adopt various measures to maintain a system to communicate with the parents or other guardians of minors playing online games and online game operators are required to monitor the online game activities of minors, and must suspend the account of a minor if so requested by the minor’s parents or guardians. The monitor system was formally implemented commencing March 1, 2011.
In February 2013, 15 PRC government authorities, including the SAPPRFT, the Ministry of Education, the MCT and the MIIT, jointly issued the Work Plan implementing integrated measures by different authorities to prevent minors from being addicted to online games. Under the Work Plan, the current relevant regulations regarding online games will be further clarified and additional implementation rules will be issued; and as a result, online game operators will be required to implement measures to protect minors.
On July 25, 2014, the SAPPRFT promulgated a
Notice on Further Carrying out the Verification of Real-name Registration for Anti-Fatigue System on Internet Games
, or the Verification of Real-name Registration Notice, which took effect on October 1, 2014. The Verification of Real-name Registration Notice requires local press and publication administrative departments to strengthen their administration over enterprises engaged in online game publication and operations, and requires such enterprises to abide by anti-fatigue and real-name registration requirements when developing and promoting online games, excluding, at present, mobile games.
The Indulgence Prevention Notice requires online game operators to implement measures to not give minors access to online game services during specified periods of the day, imposes daily limits on minors’ length of use and spending for paid online game services, and prohibits online game operators from providing paid game services to minors under the age of eight. The Indulgence Prevention Notice also stipulates that online game operators must require real name registration by their users and must not provide game services to users who have not completed their real-name registrations.
Information Security and Censorship
Internet content in China is also regulated and restricted from a State security standpoint. The Standing Committee of the National People’s Congress enacted the
Decision on Internet Security Protection
in 2000, and amended it in August, 2009. The decision makes it unlawful to: (i) gain improper entry into a computer or system of strategic importance; (ii) disseminate politically disruptive information; (iii) leak State secrets; (iv) spread false commercial information; or (v) infringe intellectual property rights. The MPS has promulgated measures that prohibit the use of the Internet in ways which, among other things, result in a leakage of State secrets or distribution of socially destabilizing content. The MPS has supervision and inspection rights in this regard, and Changyou may be subject to the jurisdiction of local security bureaus. If an ICP license holder violates these measures, the PRC government may revoke its ICP license and shut down its Websites. On November 7, 2016, the Standing Committee of the National People’s Congress issued the Internet Security Law, which took effect on June 1, 2017. The Internet Security Law requires providers of services over Internet networks to keep user information that they have collected in strict confidence and to establish improved systems for the protection of user information. Such service providers must provide notice of the purpose, methods and scope of their collection and use of user information, and obtain the consent of each person whose personal information will be collected. Service providers may not collect any personal information that is not related to the services they provide, or disclose or tamper with personal information that they have collected, unless such information is encoded to prevent identification of individuals whose information is so disclosed or tampered with. Service providers who do not comply with the Internet Security Law may be subject to fines, suspension of their businesses, shutdown of their websites, and revocation of their business licenses.
In 2005, the MCT and the MIIT promulgated the
Opinions on the Development and Administration of Online Games
emphasizing the PRC government’s intent to foster and control the development of the online game industry in China and providing that the MCT will censor online games that “threaten state security,” “disturb the social order,” or contain “obscenity” or “violence.” Although the MCT Approval Scope Notice provides that the MCT is no longer responsible for regulating the online game industry, it is not clear whether the MIIT or another PRC governmental agency will be designated to censor online games under the
Opinions on the Development and Administration of Online Games.
In November 2018, the MPS issued the
Regulations for Internet Security Supervision and Inspection by Public Security Authority
, which specifies the standards for the inspection of network operators and the legal responsibilities of network operators that provide internet content.
Virtual Currency
On February 15, 2007, the MCT, the People’s Bank of China, or the PBOC, and other relevant government authorities jointly issued the
Notice on the Reinforcement of the Administration of Internet Cafés and Online Games
, or the Internet Cafés Notice. Under the Internet Cafés Notice, the PBOC is directed to strengthen the administration of virtual currency in online games to avoid any adverse impact on the economy and financial system. The Internet Cafés Notice limits the total amount of virtual currency that may be issued by online game operators and the amount that may be purchased by individual game players, and includes a clear division between virtual transactions and real transactions carried out by way of electronic commerce. The Internet Cafés Notice also provides that virtual currency may only be used to purchase virtual items.
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On June 4, 2009, the MCT and the MOFCOM jointly issued the Virtual Currency Notice, to regulate the trading of online game virtual currencies. The Virtual Currency Notice defines the meaning of virtual currency and places a set of restrictions on the trading and issuance of virtual currency. The Virtual Currency Notice also states that online game operators are not allowed to give out virtual items or virtual currency through lottery-based activities, such as lucky draws, betting or random computer sampling, in exchange for user’s cash or virtual money. The Virtual Currency Notice is mainly targeted at lottery-based activities relating to the “treasure boxes” found in some online games.
On July 20, 2009, the MCT promulgated the
Filing Guidelines for Online Game Virtual Currency Issuing Enterprises and Online Game Virtual Currency Trading Enterprises
(the “Virtual Currency Guidelines”), which define the terms “issuing enterprise” and “trading enterprise” and stipulate that the same enterprise may not be both an issuing enterprise and a trading enterprise.
Import and Export of Software Technology
China imposes controls on the import and export of technology and software products. Under the
Regulations on Administration of Import and Export of Technologies
promulgated by the State Council, which were amended on November 29, 2020, the term “technology import and export” is defined to include, among other things, the transfer or licensing of patents and
know-how,
and the provision of services related to technology. Depending on the nature of the relevant technology, the import and export of technology require either approval by or registration with the relevant PRC governmental authorities. Under the
Software Export Management and Statistics Measures
promulgated in October 2001, if a company is classified as a software enterprise and has a minimum of RMB1.0 million (or approximately $144,904) in registered capital, it may engage in an export business after being registered with the relevant PRC governmental authorities. All contracts which relate to the export of software products, transfer of technology or provision of related services must be filed with the relevant PRC governmental authorities. The
Measures for the Administration of Registration of Technology Import and Export Contracts,
issued by the MOFCOM in February 2009, specify registration requirements related to the import and export of technology.
Changyou has entered into license agreements with third parties outside of China to license its games, which may be deemed to constitute the export of technology under the regulations. As a result, such licenses are required to be registered with applicable PRC governmental authorities. Although there are no explicit penalties set forth in these regulations for lack of such registration, failure to register an agreement where such registration is required may result in restrictions concerning foreign exchange, banking and taxation matters relating to such agreements. Changyou has not registered all of the game license agreements under which it authorizes overseas third-party online game operators to operate its online games, and so far Changyou has not encountered any problems with respect to foreign exchange, banking or taxation matters relating to its license agreements, nor has Changyou received any notice from any governmental authority requiring it to complete the registration of its game license agreements.
Regulation of Other Services
Real Estate Services
On December 27, 2021, the NDRC and the MOFCOM issued the
Special Administrative Measures for Admittance of Foreign Investment (Restricted List) (2021 Edition)
(the “2021 Restricted List”), which became effective on January 1, 2022. The 2021 Restricted List removed from the category of industries where foreign investment is restricted real estate agency and brokerage services, which had been included in the restricted category in the previous Foreign Investment Industrial Guidance Catalogue issued in 2011. The 2020 Restricted List loosened existing restrictions on foreign ownership of real estate agency and brokerage services in China, and as a result we may conduct real estate agency and brokerage services directly.
On April 4, 2001, the Ministry of Housing and Urban-Rural Development (the “MHURD,” formerly the Ministry of Construction) promulgated the
Regulatory Measures on the Sale of Commercial Houses
, pursuant to which a real estate developer may engage a real estate services organization as a broker to
pre-sell
or sell primary residential housing. The regulatory measures provide that a real estate broker must not make any false statements regarding a property to clients and must present clients with relevant title certificates or sale permits for the properties and a related letter of authorization.
On December 29, 2006, the MHURD and the PBOC jointly issued the
Circular Concerning Strengthening the Management of Real Estate Services and Regulating the Trade Settlement Capital Account
, which provides a number of directives regulating the real estate services industry. Under the circular, a real estate services company is not permitted to receive cash purchase payments on behalf of clients in secondary real estate transactions and is required to establish separate security deposit accounts for clients.
On January 20, 2011, MHURD, the NDRC, and the Ministry of Human Resources and Social Security jointly issued the
Measures for Administration on Real Estate Brokerage
(the “Brokerage Measures”), which became effective on April 1, 2011 and were amended on April 1, 2016, and govern the activities of real estate brokerages and real estate brokerage personnel in providing intermediary, agency and related services and charging commissions. Furthermore, pursuant to the Brokerage Measures, a real estate brokerage company and its branches must have a sufficient number of licensed real estate brokers. The Brokerage Measures also require real estate brokerage companies to file with real estate regulatory authorities at the county level or above within 30 days after their business registration with the relevant local counterparts of the SAMR. Focus Interactive has made the required filings.
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On July 29, 2016, the MHURD and six other governmental authorities jointly issued the
Opinions on Strengthening the Administration of Sound Development of Real Estate Brokerage
(the “MHURD Opinions”), to further regulate real estate brokerage services. The MHURD Opinions stipulate that real estate brokers are obligated to censor specified real estate-related information, including ownership, price, area, and location, and may not provide, directly or through agencies, loans for down payments and other similar financial services.
On September 30, 2016, Beijing MHURD and five other governmental authorities jointly issued the
Measures for the Promotion of Stable and Healthy Development of the Local Real Estate Market
(the “Beijing Measures”), with the goal of tempering rampant increases in housing prices by balancing land supply in favor of residential use and owner-occupied apartments, providing guidance for real estate developers and brokers as to the setting of prices and the conduct of advertising, selling and financing activities, and providing for enhanced enforcement measures with respect to false and misleading advertisements and pricing information and other illegal selling and financing activities in the local real estate market. Certain other cities, including Tianjin, Suzhou, Zhengzhou, Chengdu, Hefei, and Wuhan, adopted similar measures. One effect of these regulations has been to make real estate developers more cautious with respect to advertising housing on Internet platforms and cooperating on real estate-related
e-commerce
programs with Internet service providers.
On May 19, 2018, the MHURD issued a
Notice on Further Improving Relevant Issues Concerning the Regulation and Control of the Real Estate Market,
to prohibit certain behaviors by real estate developers and brokers, such as hoarding property for speculation. On June 25, 2018, the MHURD and six other government agencies jointly issued a
Notice on Launching Special Actions to Combat the Infringement of the Interests of the Masses and Regulating the Real Estate Market in Some Cities
, to prohibit certain additional behaviors of real estate developers and brokers, such as price manipulation and false advertising, in specified cities including Beijing, Shanghai, Guangzhou, and Tianjin.
Online Payment Services
On June 14, 2010, the PBOC issued the
Measures for the Administration of Payment Services Provided by
Non-financial
Institutions
(the “Payment Services Measures”), which took effect on September 1, 2010 and were amended on February 3, 2016 and April 29, 2020. On December 1, 2010, the PBOC promulgated the
Implementing Rules for the Payment Services Measures
, which was last amended on September 1, 2021. The Payment Services Measures and their implementing rules require any
non-financial
institution engaging in payment services, such as online payments, issuance and acceptance of prepaid cards, and bill collection via bank cards, to obtain a Payment Service License. Applications for Payment Service Licenses are examined by the local branches of the PBOC and then submitted to the PBOC for approval. To further regulate the operation of online payment services, the PBOC issued the
Administration of Online Payment Services Provided by
Non-Bank
Payment Institutions
(the “Online Payment Services Measures”), which took effect on July 1, 2016. The Online Payment Services Measures classify personal payment accounts at entities that already hold a Payment Service License into three categories based on the extent to which the holders of the accounts have completed identity verification procedures, and provide that those account holders who have completed more of the identity verification process are entitled to a broader range of payment options through their accounts. The Online Payment Services Measures prohibit
non-bank
payment institutions from engaging in securities, insurance, financing, trusts and other unauthorized financial business.
Non-bank
payment institutions are also required to develop risk control systems, including a risk rating system for users, a dispute resolution system, and a risk reserve.
In addition, on April 29, 2019, the SAFE issued the
Administrative Measures for Foreign Exchange Services of Payment Institutions
, replacing the
Notice of the State Administration of Foreign Exchange on the Pilot Scheme of Cross-border Foreign Exchange Payment Services Provided by Payment Institutions
issued by the SAFE on January 20, 2015, pursuant to which a payment institution is required to obtain approval from the local branches of SAFE and to be registered in the Enterprise Directory for Foreign Exchange Receipts and Payments in Trade in order to provide foreign exchange payment services for cross-border
e-commerce
transactions. Any institution applying for such registration and approval must first obtain a Payment Services License that authorizes it to engage in the online payments business.
Lottery Sales
On May 4, 2009, the State Council issued the
Regulation on Administration of Lottery
stating that “lottery issuance agencies” and “lottery sales agencies” may authorize other entities to conduct lottery sales. On September 26, 2010, the Ministry of Finance (the “MOF”) issued the
Interim Measures on the Administration of Internet Lottery Sale
(the “Lottery Measures”), which set forth detailed requirements for the administration of online lottery sales as well as requirements for qualified online lottery service providers. Pursuant to the Lottery Measures, the MOF is the supervisory and regulatory department for online lottery sales. Lottery issuance agencies may collaborate with other entities or authorize lottery sales agencies to conduct online lottery sales, or appoint qualified entities as their online lottery sales agents. The Lottery Measures require qualified online lottery service providers to meet certain criteria, including having obtained an Internet content provider license. Lottery issuance agencies are required to apply to the MOF for approval of online lottery service providers that the lottery service agencies propose to engage to conduct an online lottery business.
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On January 18, 2012, the MOF, the Ministry of Civil Affairs and the General Administration of Sports jointly issued the
Implementing Rules of the Regulation on Administration of Lottery
(the “Lottery Implementing Rules”), which became effective on March 1, 2012 and were amended on August 16, 2018. The Lottery Implementing Rules stipulate that lotteries sold through the Internet or sold without the MOF’s approval and a lottery issuing agency’s or a lottery sales agency’s authorization may be categorized as illegal lotteries.
On February 28, 2012, the General Administration of Sports issued the
Urgent Notice on the Strengthening Execution of the Lottery Implementing Rules
, reiterating that lotteries sold via the Internet without the approval of the MOF will be deemed to be illegal lotteries.
On March 27, 2014, the MOF issued the
Interim Measures on the Administration of the Sale of Lotteries via Telephone
(the “Telephone Lottery Measures”) to replace the MOF’s former version promulgated on September 26, 2010. Under the Telephone Lottery Measures, “sale of lotteries via telephone” refers to the use of fixed-line telephones and mobile telephones to sell lotteries through short messages, voice calls and applications. Properly qualified lottery sales agencies may authorize other entities (“Telephone Sales Agents”) to carry out the business of sale of lotteries via telephone. The lottery sales agencies and the Telephone Sales Agent must enter into a commission agreement. A qualified Telephone Sales Agent is required to meet certain criteria, including having obtained a Value-Added Telecommunications Services Operating License. The Telephone Lottery Measures further provide that a Telephone Sales Agent must conduct business in accordance with parameters approved by the MOF and pursuant to a commission agreement.
On January 15, 2015, the MOF, the Ministry of Civil Affairs and the General Administration of Sports jointly promulgated
the Notice related to Self-inspection and Self-Remedy of Unauthorized Online Lottery Sales
(the “Self-inspection Notice”), which requires provincial and municipal government branches, including financial, civil affairs and sports bureaus, to conduct inspections and take remedial measures for unauthorized online lottery sales within their respective jurisdictions. The scope of inspection includes, among other things, commission contracts, online lottery products, exchange of lottery sales data, online lottery sales channels, and sales commission fees in connection with unauthorized engagements of online sales agents by lottery sales agencies. The Notice further requires that a formal report on the result of the inspections and the remedial measures be submitted by each provincial or municipal government to the MOF, the Ministry of Civil Affairs and the General Administration of Sports by March 1, 2015.
On April 3, 2015, eight governmental authorities consisting of the MOF, the MPS, the SAMR, the MIIT, the Ministry of Civil Affairs, the PBOC, the General Administration of Sports and the CBIRC jointly released a public announcement with regard to unauthorized online lottery sales (the “Public Announcement”). The Public Announcement provides, among other things, that (i) all lottery institutions, internet companies, and other institutions or individuals provide unauthorized online lottery sales services, either directly or through agents, must immediately cease such services; (ii) the local governmental authorities for finance, civil affairs and sports must investigate and sanction unauthorized online lottery sales in their respective jurisdictions in accordance with applicable laws and regulations; (iii) the local governmental authorities for public security and industry and commerce must investigate any issuances or sales of illegal lotteries within their respective jurisdictions, with necessary assistance from local governmental authorities for finance, communication, banking regulation, civil affairs and sports, and local branches of the PBOC, and report any criminal activities to judicial authorities for prosecution; (iv) the lottery issuance authorities that plan to sell lottery products online must obtain approval from the Ministry of Civil Affairs or the General Administration of Sports by submitting an application to the MOF for written approval, and (v) no entity may provide online lottery sales services without the approval of the MOF. On April 28, 2016, the MOF, the MPS, the Ministry of Civil Affairs, the General Administration of Sports, and the SAMR, and on May 5, 2015 the SAMR, issued notices regarding unauthorized online lottery sales and further emphasized the requirements specified in the Public Announcement. Online lottery sales are an insignificant business for us.
On August 8, 2018, the MOF and several other government agencies jointly issued an
Announcement on Further Regulating the Order of the Lottery Market and Comprehensively Managing the Sale of Lotteries through the Internet
, which further emphasizes that business entities and individuals may not sell lottery tickets or conduct any other form of lottery business over the Internet without the approval of the MOF.
Production of Radio and Telecommunications Equipment
On September 11, 1993, the State Council and Central Military Commission jointly issued the
Regulations on the Management of Radio Operations
, which were amended on November 11, 2016, under which the working frequencies, bands, and related technical indices of radio transmission equipment must conform to relevant regulations regarding radio and are required to be submitted to the state radio administration authority or its local branches for approval, and failure to submit such information for approval will result in the imposition of a fine.
On October 7, 1997, the State Radio Regulatory Bureau (formerly the State Radio Regulatory Commission), together with the SAMR (formerly the AQSIQ), promulgated
Regulations on the Production of Radio Transmitting Equipment
(the “Radio Transmitting Equipment Regulations”), which took effect on January 1, 1999. Pursuant to the Radio Transmitting Equipment Regulations, each type of radio transmission equipment is subject to approval from State Radio Regulatory Bureau (“SRRC Certificate”) prior to production.
On May 10, 2001, MIIT promulgated the
Administration Measures of the Network Entry of Telecommunication Equipment
(the “Telecommunication Equipment Measures”), which was amended on September 23, 2014. Pursuant to the Telecommunication Equipment Measures, the State requires all telecommunications terminal equipment to be connected to a public telecommunications network to obtain network connection permits. A Permit of Network Connection, or China Type Approval Certificate (“CTA Certificate”), issued by the MIIT must be obtained for such telecommunications equipment. When a producer of such telecommunications terminal equipment applies for a CTA Certificate, it must submit a test report or product quality certificate (namely SRRC Certificate). If a CTA Certificate has not been obtained for such equipment, it may not be connected to a public telecommunications network and may not be used or sold domestically.
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Miscellaneous
Laws and Regulations Related to International Connections for Computer Information Networks
The State Council and the MIIT have promulgated regulations governing international connections for PRC computer networks, including:
Provisional Regulations of the People’s Republic of China for the Administration of International Connections to Computer Information Networks
(1997) and related Implementing Measures (1998); and
Administrative Measures for International Communications Gateways
(2002)
.
Under the above regulations, any entity wishing to access international connections for their computer information networks in the PRC must comply with the following requirements:
be a PRC legal person;
have the appropriate equipment, facilities and technical and administrative personnel;
have implemented and registered a system of information security and censorship; and
effect all international connections through an international communications gateway established with the approval of the MIIT.
We have adopted measures necessary to ensure that we are in compliance with all of these requirements.
Laws and Regulations Related to Intellectual Property Protection
China has adopted comprehensive legislation governing intellectual property rights, including copyrights, patents and trademarks.
Copyright
On September 7, 1990, the Standing Committee of the National People’s Congress promulgated
the Copyright Law
, which took effect on June 1, 1991 and was amended in 2001, 2010, and 2020. The 2020 amended Copyright Law, which took effect on June 1, 2021, extends copyright protection to Internet activities, products disseminated over the Internet, and software products. In addition, there is a voluntary registration system administered by the China Copyright Protection Center. The amended Copyright Law also requires registration of the pledge of a copyright. The latest amended Copyright Law clarifies the scope of works entitled to copyright protection and provides for more stringent enforcement measures against copyright infringement.
In order to further implement the
Computer Software Protection Regulations
, promulgated by the State Council on December 20, 2001 and amended on May 19, 2004 and January 30, 2013, the NCA issued
Computer Software Copyright Registration Procedures
on February 20, 2002 and amended it on May 19, 2004, which specify detailed procedures and requirements with respect to the registration of software copyrights.
To address the problem of copyright infringement related to content posted or transmitted over the Internet, on April 29, 2005 the NCA and the MIIT jointly promulgated the
Measures for Administrative Protection of Copyright Related to Internet
, which became effective on May 30, 2005. These measures apply to situations where an ICP operator (i) allows another person to post or store any works, recordings, audio or video programs on the Websites operated by such ICP operator, or (ii) provides links to, or search results for, the works, recordings, audio or video programs posted or transmitted by such person, without editing, revising or selecting the content of such material. Upon receipt of an infringement notice from a legitimate copyright holder, an ICP operator must take remedial actions immediately by removing or disabling access to the infringing content. If an ICP operator knowingly transmits infringing content or fails to take remedial actions after receipt of a notice of infringement harming public interest, the ICP operator could be subject to administrative penalties, including an order to cease infringing activities; confiscation by the authorities of all income derived from the infringement activities; or payment of fines.
On May 18, 2006, the State Council promulgated the
Regulations on the Protection of the Right to Network Dissemination of Information
(as amended in 2013). Under these regulations, an owner of the network dissemination rights with respect to written works or audio or video recordings who believes that information storage, search or link services provided by an Internet service provider infringe his or her rights may require that the Internet service provider delete, or disconnect the links to, such works or recordings.
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Since 2005, the NCA, together with certain other PRC governmental authorities, have jointly launched annual campaigns, which normally last for three to four months every year, specifically aiming to crack down on Internet copyright infringement and piracy in China. According to the
Notice of 2010 Campaign to Crack Down on Internet Infringement and Piracy
promulgated by the NCA, the MPS and the MIIT on July 19, 2010, one of the main targets, among others, of the 2010 campaign was Internet audio and video programs. From the time the 2010 campaign commenced in late July, the local branches of the NCA focused on popular movies and television series, newly published books, online games and animation, music and software and illegal uploading or transmission of a third party’s works without proper license or permission, sales of pirated audio/video and software through
e-commerce
platforms, providing search links, information storage, Web hosting or Internet access services for third parties engaging in copyright infringement or piracy and infringement by the use of mobile media. In serious cases, the operating permits of the Websites engaging in illegal activities may be revoked, and such Websites may be ordered to shut down. The Jian Wang Campaign for 2021, which targets copyright infringement related to the online transmission of short videos, live online broadcasting of sporting events, and online education and aims to enhance the existing campaign with respect to the protection of news works, online music, and online literature and in the field of
e-commerce
platforms, was launched in June 2021.
On April 17, 2015, the NCA issued
the
Circular on Regulating the Order of Internet Reproduction of Copyrighted
Works
(“Internet Reproduction Circular”). Under the Internet Reproduction Circular, in order to reproduce the work of others, Internet media companies must comply with relevant provisions of the copyright laws and regulations, and, unless provided otherwise by law or regulation, must obtain permission from and pay remuneration to the owner of the copyright to the work, and must indicate the name of the author, as well as the title and the source of the work, and may not infringe any other rights or interests of the copyright owner. Moreover, when reproducing the work of others, Internet media companies may not make material alterations to the content; and may not make editorial modifications or abridgments of the work that change the work’s title or its original intent. When reproducing the work of others, we will need to comply with these strict requirements of the Internet Reproduction Circular.
We have adopted measures to mitigate copyright infringement risks, such as real-time monitoring and mechanisms for fast removal upon receipt of notices of infringement.
On May 28, 2020, the National People’s Congress approved the Civil Code, which came into effect on January 1, 2021 and replaced the
Torts Liability Law
and eight other civil laws and regulations. Under the Civil Code, both Internet users and Internet service providers may be liable for the wrongful acts of users who infringe the lawful rights of other parties. If an Internet user infringes the rights of another party, the holder of the rights that are infringed may request the provider of the Internet service through which the rights were infringed to take necessary measures, such as removing or blocking the content, or disabling the links thereto, to prevent or stop the infringement. The notice from the holder of the rights to the service provider is required to include preliminary evidence of infringement and identify the holder of the rights, and the Internet service provider is then required to notify the infringer of the request by the holder of the rights and to take necessary measures. If the Internet service provider does not take necessary measures, it will be jointly liable for any further damages suffered by the holder of the rights. Furthermore, if an Internet service provider fails to take necessary measures when it knows or should have known that an Internet user has used the provider’s Internet services to infringe the lawful rights of other parties, it will be jointly liable with the Internet user for damages resulting from the infringement.
On December 17, 2012, PRC Supreme People’s Court promulgated the
Provisions on Several Issues Concerning the Application of Law for Trial of Civil Dispute Cases Involving Infringement of the Right to Network Dissemination of Information
(“Network Dissemination of Information Provision”), which were most recently amended on December 29, 2020. The Network Dissemination of Information Provisions stipulate that the dissemination by network users or network service providers of written works, performances or audio or video recordings without the permission of the holder of the rights to such dissemination will constitute infringement of such rights, and that network service providers that aid or abet any network user’s infringement of the rights of another to network dissemination of any works or recordings may be liable for such network user’s infringing activities.
Patent
On March 12, 1984, the Standing Committee of the National People’s Congress promulgated the
Patent Law
, which was amended in 1992, 2000, 2008 and 2020. The 2020 amended Patent Law took effect on June 1, 2021. On June 15, 2001, the State Council promulgated the
Implementation Regulation for the Patent Law
, which was lately amended in January 9, 2010. According to these laws and regulations, the Patent Office of the CNIPA is responsible for administering patents in the PRC. The Chinese patent system adopts a “first to file” principle, which means that where more than one person files a patent application for the same invention, a patent will be granted to the person who filed the application first. To be patentable, invention or utility models must meet three conditions: novelty, inventiveness and practical applicability. A patent is valid for twenty years in the case of an invention, ten years in the case of utility models and designs. From June 1, 2021, in the case of designs, a patent will be valid for fifteen years from the date of the filing of the patent application. A third-party user must obtain consent or a proper license from the patent owner to use the patent. Otherwise, third-party use constitutes an infringement of patent rights.
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Trademark
On August 23, 1982, the Standing Committee of the National People’s Congress promulgated the
Trademark Law
(the “Trademark Law”), which was amended in 1993, 2001, 2013, and 2019. On August 3, 2002, the State Council promulgated the
Implementation Regulation for
the Trademark Law
, which was amended in April 29, 2014. Under the Trademark Law and the implementing regulation, the Trademark Office is responsible for the registration and administration of trademarks and resolving trademark disputes. As with patents, China has adopted a
“first-to-file”
principle for trademark registration. If two or more applicants apply for registration of identical or similar trademarks for the same or similar commodities, the application that was filed first will receive preliminary approval and will be publicly announced. For applications filed on the same day, the trademark that was first used will receive preliminary approval and will be publicly announced. Registered trademarks are valid for ten years from the date the registration is approved. A registrant may apply to renew a registration within twelve months before the expiration date of the registration. If the registrant fails to apply in a timely manner, a grace period of six additional months may be granted. If the registrant fails to apply before the grace period expires, the registered trademark shall be deregistered. Renewed registrations are valid for ten years. The amendment of the Trademark Law that became effective on November 1, 2019 provides for enhanced procedures for the prevention of malicious registration of trademarks and increases the amount of fines that may be imposed for trademark infringements.
Laws and Regulations Related to Encryption Software
In October 1999, the State Council promulgated the
Regulations for the Administration of Commercial Encryption
, most recently amended on February 3, 2016, followed in November 1999 by the
Notice of the General Office of the State Encryption Administration Commission
promulgated by the State Commission for the Administration of Cryptography. Both of these regulations address the use in China of software with encryption functions.
These regulations require that encryption products purchased for use be reported. Violation of the encryption regulations may result in the issuance of a warning, levying of a penalty, confiscation of the encryption products and even criminal liabilities. On March 18, 2000, the Office of the State Commission for the Administration of Cryptography issued a public announcement regarding the implementation of the regulations. The announcement states that only specialized hardware and software, the core functions of which are encryption and decoding, fall within the administrative scope of the regulations as “encryption products and equipment containing encryption technology.” Other products, such as wireless telephone, Windows software and browsers do not fall within this scope.
The State Commission for the Administration of Cryptography changed its name to the State Cryptography Administration Bureau (“SCAB”) in March 2005. The SCAB maintains authority over the importation, research, production, sale and use of cryptographic products in China (“products” are defined to include any cryptographic technologies and products to be applied in the encryption or secure authentication of information, other than state secrets). Legislation was issued to restrict the importation, research, production and sale of encryption products and requiring that the encryption functions of such products be placed in escrow with the SCAB for reasons of national security.
We are in full compliance with current PRC legislation governing encryption software.
Laws and Regulations Related to Consumer Protection and Privacy Protection
Consumer Protection
The MIIT set forth various requirements for consumer protection in a notice, issued on April 15, 2004, which addresses certain problems in the telecommunications sector, including ambiguity in billing practices for premium services, poor quality of connections and unsolicited SMS messages, all of which impinge upon the rights of consumers.
This trend was continued with the issuance of the
Notice Regarding the Ratification and Administration of Mobile Information Services Fees and Charges Method
by the MIIT on September 8, 2006.
On March 15, 2021, the SAMR issued the
Measures for the Supervision and Administration for Online Transactions
(the “Online Transaction Measures”), which became effective on May 1, 2021, to replace the
Administrative Measures on Online Transactions
promulgated on January 26, 2014. The Online Transaction Measures apply to the sale of commodities and provision of services through the Internet, including through social networking and live online broadcasting within the territory of the PRC; aim at creating a fairer competitive environment for online transaction operators and a safer consumption environment for users in online transactions; and specify the responsibilities of platform operators in the course of providing online shows and
e-commerce
live broadcast services. Under the Online Transaction Measures, online transactions operators must comply with laws and regulations, fairly participate in market competition, and accept public supervision. In addition, the Online Transaction Measures have strengthened the protection of consumer interests and set forth more specific obligations for online transaction operators with respect to the display of their licenses and the collection of consumer personal information. On May 26, 2016, the MIIT issued the Measures on the Complaint Settlement of the Telecommunication Services Users (the “Complaint Settlement Measures”), which took effect on July 30, 2016. The Complaint Settlement Measures require telecommunication services providers to respond to their users within fifteen days upon the receipt of any complaint delivered by such users, the failure of which will give the complaining users the right to file a complaint against the service providers with the provincial branch offices of the MIIT.
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We are aware of the increasingly strict legal environment covering consumer protection in China, and we strive to adopt all measures necessary to ensure that our business complies with these evolving standards.
Privacy Protection
The PRC Constitution states that PRC law protects the freedom and privacy of the communications of citizens and prohibits infringement of such rights. In recent years, PRC government authorities have issued various regulations on the use of the Internet that are designed to protect personal information from unauthorized disclosure. For example, the ICP Measures prohibit an Internet information services provider from insulting or slandering a third party or infringing upon the lawful rights and interests of a third party. In addition, PRC regulations authorize PRC telecommunication authorities to demand rectification of unauthorized disclosure by ICPs.
Chinese law does not prohibit ICPs from collecting and analyzing personal information from their users. The PRC government, however, has the power and authority to order ICPs to submit personal information of an Internet user if such user posts any prohibited content or engages in illegal activities on the Internet. In addition, the Several Provisions stipulate that ICPs must not, without the users’ consent, collect information on users that can be used, alone or in combination with other information, to identify the user, or User Personal Information, and may not provide any User Personal Information to third parties without prior user consent. ICPs may only collect User Personal Information necessary to provide their services and must expressly inform the users of the method, content and purpose of the collection and processing of such User Personal Information. In addition, an ICP may use User Personal Information only for the stated purposes under the ICP’s scope of services. ICPs are also required to ensure the proper security of User Personal Information, and take immediate remedial measures if User Personal Information is suspected to have been disclosed. If the consequences of any such disclosure are expected to be serious, the ICP must immediately report the incident to the telecommunications regulatory authorities and cooperate with the authorities in their investigations. We require our users to accept a user agreement whereby they agree to provide certain personal information to us. If we violate these regulations, the MIIT or its local bureaus may impose penalties and we may be liable for damage caused to our users.
On December 28, 2012, the Standing Committee of the National People’s Congress enacted the
Decision to Enhance the Protection of Network Information
(“Information Protection Decision”), to further enhance the protection of User Personal Information in electronic form. The Information Protection Decision provides that ICPs must expressly inform their users of the purpose, manner and scope of the ICPs’ collection and use of User Personal Information, publish the ICPs’ standards for their collection and use of User Personal Information, and collect and use User Personal Information only with the consent of the users and only within the scope of such consent. The Information Protection Decision also mandates that ICPs and their employees must keep strictly confidential User Personal Information that they collect, and that ICPs must take such technical and other measures as are necessary to safeguard the information against disclosure.
On July 16, 2013, the MIIT issued the
Order for the Protection of Telecommunication and Internet User Personal Information
(the “Order”). Most of the requirements under the Order that are relevant to ICP operators are consistent with the requirements already established under the MIIT provisions discussed above, except that under the Order the requirements are often stricter and have a wider scope. If an ICP operator wishes to collect or use personal information, it may do so only if such collection is necessary for the services it provides. Further, it must disclose to its users the purpose, method and scope of any such collection or use, and must obtain consent from the users whose information is being collected or used. ICP operators are also required to establish and publish their protocols relating to personal information collection or use, keep any collected information strictly confidential, and take technological and other measures to maintain the security of such information. ICP operators are required to cease any collection or use of the user personal information, and
de-register
the relevant user account, when a given user stops using the relevant Internet service. ICP operators are further prohibited from divulging, distorting or destroying any such personal information, or selling or providing such information unlawfully to other parties. In addition, if an ICP operator appoints an agent to undertake any marketing or technical services that involve the collection or use of personal information, the ICP operator is still required to supervise and manage the protection of the information. The Order states, in broad terms, that violators may face warnings, fines, and disclosure to the public and, in the most severe cases, criminal liability.
On January 5, 2015, the SAMR promulgated the Measures on Punishment for Infringement of Consumer Rights, which were amended on October 23, 2020. Under the Measures on Punishment for Infringement of Consumer Rights, business operators collecting and using personal information of consumers must comply with the principles of legitimacy, propriety and necessity, specify the purpose, method and scope of collection and use of the information, and obtain the consent of the consumers whose personal information is to be collected. Business operators may not: (i) collect or use personal information of consumers without their consent; (ii) unlawfully divulge, sell or provide personal information of consumers to others; (iii) send commercial information to consumers without their consent or request, or when a consumer has explicitly declined to receive such information.
On August 29, 2015, the Standing Committee of the National People’s Congress issued Amendment (IX) to the Criminal Law of the People’s Republic of China (“Amendment (IX)”), which strengthens the protection of personal information. Pursuant to Amendment (IX), network service providers and others who unlawfully sell or otherwise provide personal information and cause serious adverse consequences may be sentenced to prison for up to seven years. In addition, network service providers who disseminate such user information and cause serious adverse consequences, and who do not rectify the problem after they receive notice of such
non-compliance
from relevant regulatory authorities may be sentenced to prison for up to three years, and may also be subject to public surveillance and fines. On October 21, 2019, the Supreme People’s Court of the PRC and the Supreme People’s Procurator of the PRC issued the
Interpretations of the Supreme People’s
Court and the Supreme People’s Procuratorate on Several Issues Concerning the Application of Law in Criminal Cases Involving Illegal Use of Information Networks and Assistance in Criminal Activities Committed through Information Networks
, which clarifies the types of network service providers and the standards for judging whether the consequences of divulging personal information are serious and adverse.
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On May 8, 2017, the Supreme People’s Court of the PRC and the Supreme People’s Procurator of the PRC issued the
Interpretation of the Supreme People’s Court
and the Supreme People’s Procurator on Several Issues Concerning the Applicable Law for Criminal Cases with Respect to Infringement of Citizen’s Personal Information
, which defines “personal information,” “the provision of personal information,” and “the illegal collection of personal information.”
The SAMR (formerly the AQSIQ and SAC) issued the
Information Security Technology—Personal Information Security Specification
, which came into effect on October 1, 2020. The specification clarifies the principles and security requirements for personal information processing activities, such as collection, storage, use, sharing, transfer, public disclosure, and deletion, that are applicable to the standardization of personal information processing activities of various organizations. On April 10, 2019, the MPS and the Beijing Network Industry Association issued the
Guidelines for
Protection of the Security of Personal Information on the Internet,
which provides guidelines and recommends procedures concerning the protection of personal information applicable to enterprises providing services via the Internet as well as organizations and individuals who control and process personal information in private and
non-networked
environments. On June 1, 2019, the National Information Security Standardization Technical Committee issued the
Internet Security Practice Guidelines—Specification of Information Necessary for Basic Business Functions of Apps
, which provides further guidelines for the use and collection of personal information by network operators, and specifies the types of personal information deemed to be necessary for the operation of online services for areas such as online payment, short videos, Internet news information, and real estate transactions. On March 12, 2021, CAOC, MIIT, MPS and SAMR jointly issued the
Rules on the Scope of Necessary Personal Information for Common Types of Mobile Internet Applications,
to further clarify the scope of essential personal information for common types of applications.
On January 23, 2019, the OCLGCA, the MIIT, the MPS, and the SAMR jointly issued the Public Announcement Concerning the Illegal Collection of Personal Information by Apps, which emphasizes that APP operators must comply strictly with the Internet Security Law in connection with their collection and use of personal information. On March 13, 2019, the SAMR issued the
Notice on the Launch of Special Enforcement Actions to Protect Consumers
and
Crack Down on Violations of Personal Information of Consumers
and the
Announcement of the Implementation of App Security Certifications
, and on October 31, 2019,
the SAMR and the CAOC
issued the
Notice of a Special Campaign to Rectify the Infringement of Legal Rights and Interests of App Users
so as to further protect the rights of the APP users in and to their personal information and clarify the requirements for APP security certification. In addition, a number of relevant governmental authorities and industry associations have published a series of guidelines and standards, such as the
Guidelines for Self-Assessment of Illegal Collection and Use of Personal Information by Apps
issued by the Special Working Group Supervising the Illegal Collection and Use of Personal Information on March 3, 2019, and the
Methods for Identification of the Illegal Collection and Use of Personal Information by Apps
issued by the CAOC and three other PRC government authorities on December 30, 2019, pursuant to which APP operators are encouraged to conduct self-inspection and self-rectification to enhance the protection of personal information. On November 1, 2021, the MIIT issued the
Notice on Launching Action to Enhance User Awareness and Experience in Information and Communication Services
, under which relevant enterprises are required to establish a list of collected personal information and a list of personal information shared with third parties and to display such two lists in their Apps.
On August 22, 2019, the CAOC issued the
Provisions on the Protection of the Personal Information of Minors on the Internet
, effective on August 22, 2019, to regulate activities regarding the collection, use, and disclosure of minors’ personal information on the Internet.
On May 28, 2020, the National People’s Congress approved the Civil Code, which came into effect on January 1, 2021. The Civil Code specifies that the personal information of a natural person must be protected, and in particular provides that an organization or individual may obtain such personal information only when necessary; must ensure the safety of such information; and may not illegally collect, use, process or transmit such personal information or illegally purchase or sell, provide or make public such personal information.
On August 20, 2021, the Standing Committee of the National People’s Congress promulgated the PIPL, effective November 1, 2021, which accentuates the importance of processors’ obligations and responsibilities for personal information protection. The PIPL provides that personal information processors must disclose to their users the purpose, method and scope of their collection or use of such information, and, with certain exceptions, must obtain consent from their users. The PIPL also requires processors to: (i) develop internal management systems and operating procedures; (ii) implement categorized management of personal information; (iii) take appropriate security measures such as encryption and
de-identification;
and (iv) conduct personal information protection impact assessments in advance when conducting personal information processing activities that have a significant effect on individuals, such as processing sensitive personal information, using personal information to conduct automated decision-making, providing personal information to other personal information processors or disclosing personal information to the public. In addition, processors who provide specified internet platform services with large user bases and complex business types are subject to additional obligations, including but not limited to establishing independent bodies composed primarily of external members to supervise the periodic reportingprotection of personal information by processors and other informational requirementsregularly publishing social responsibility reports on the protection of personal information by processors and accepting supervision from the Exchange Act. Underpublic. The PIPL also specifies that the Exchange Act, we are requireddefinition of “sensitive personal information” is personal information that, once disclosed or illegally used, is likely to file withinfringe the human dignity of natural persons or furnish to the SEC reports and other information. Copies of such reportsendanger them or their property, including biometrics, religious beliefs, specific identity, medical health, financial accounts, whereabouts and other information, when so filed or furnished, may be inspected without charge and may be obtained at prescribed rates atas well as the public reference facilities maintained by the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtainpersonal information regarding the Washington, D.C. Public Reference Room by calling the SEC at
1-800-SEC-0330.
The SEC also maintains a Website at www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system. As a foreign private issuer, we are exempt from the rulesof minors under the Exchange Act prescribingage of 14. When processing sensitive personal information, processors must adopt strict protective measures, and obtain the furnishingusers’ separate consent. Our current security measures and content of quarterly reports and proxy statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16those of the Exchange Act.third parties with whom we transact business may not be adequate for the protection of user personal information. In addition, we do not have control over the security measures of our third-party online payment vendors. Security breaches of our system and the online payment systems that we use could expose us to litigation and liability for failing to secure confidential customer information and could harm our reputation, ability to attract customers and ability to encourage customers to purchase virtual items.
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Laws and Regulations Related to Security and Censorship
The principal pieces of PRC legislation concerning information security and censorship are:
The
Internet Security Law
(2017);
The Measures for Cybersecurity Review
(2022);
The Regulations on Security Protection of Critical Information Infrastructure
(2021);
The
BUSINESS OVERVIEW
We are a leading Chinese online media, video, and game and search servicebusiness group providing comprehensive online products and services on PCs and mobile devices in China. Our businesses are conducted by the Sohu Group, which consists of Sohu Changyou and Sogou.Changyou. Sohu is a leading Chinese language online media content and services provider, and Changyou is a leading online game developer and operator in China that engages primarily in the development, operation, and licensing of online games for PCs and mobile devices, and Sogou is an innovator in search and a leader in China’s Internet industry.devices. Most of our operations are conducted through our China-based subsidiaries and VIEs.
Because of our entry into the Tencent/Sohu Sogou Share Purchase Agreement, the results of operations for Sogou are excluded from continuing operations in our consolidated financial statements and are presented in separate line items as discontinued operations. Retrospective adjustments to our historical financial statements have been made in order to provide a consistent basis of comparison. See “Item 4. Information on the Company-History and Development of the Company” for a more detailed description of the transactions contemplated by the Tencent/Sohu Sogou Share Purchase Agreement and the Sogou Merger Agreement.
Through the operation of Sohu and Changyou, we generate brand advertising revenues, online gamesgame revenues and other revenues. Brand advertising and online games are our core businesses. For the year ended December 31, 2020,2021, total revenues generated by Sohu and Changyou were approximately $749.9$835.6 million, including total brand advertising revenues of $146.5$135.0 million, total online game revenues of $536.7$638.2 million, and total other revenues of $66.7$62.4 million.
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Sohu: total revenues generated by Sohu were $201.5$186.6 million.
 
$134.9 million in brand advertising revenues, of which $86.3 million was from Sohu Media Portal, $25.3 million was from Sohu Video, and $23.3
-
$124.2 million in brand advertising revenues, of which $75.4 million was from Sohu Media Portal, $26.8 million was from Sohu Video, and $22.0 million was from Focus; and
 
$66.6 million in other revenues, mainly attributable to revenues from paid subscription services, interactive broadcasting services, and
sub-licensing
of purchased video content to third parties.
-
$62.4 million in other revenues, mainly attributable to revenues from paid subscription services, interactive broadcasting services, and revenue sharing from other platforms.
Changyou: total revenues generated by Changyou were $548.3 million (excluding revenues generated from Changyou’s discontinued cinema advertising business).$649.0 million.
 
$536.7 million in online game revenues, of which $353.7 million was from PC games, and $183.0
-
$638.2 million in online game revenues, of which $469.3 million was from PC games, and $168.9 million was from mobile games; and
 
$11.6
-
$10.8 million in brand advertising revenues, mainly attributable to Changyou’s 17173.com Website.
Sohu’s Business
Brand Advertising Business
Sohu’s 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 mobile phones, tablets and PCs. The majority of our products and services are provided in China through Sohu Media Portal, Sohu Video and Focus.
 
Sohu Media Portal.
Sohu Media Portal is a leading online news, information and informationcontent services provider in China. It provides users with access to comprehensive content through the mobile phone application Sohu News APP, the mobile portal m.sohu.com and www.sohu.com for PCs;
 
Sohu Video.
Sohu Video is an online video content and serviceservices provider in China through the mobile phone application Sohu Video APP, tv.sohu.com, and the PC video application ifox for PCs; and
 
Focus.
Focus (www.focus.cn) is an 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.
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Other Sohu Business
Sohu also engages in the other business, which consists primarily of paid subscription services, interactive broadcasting services, and
sub-licensing
of purchased video content to third parties. revenue sharing from other platforms. Revenues generated by Sohu from the other business are classified as other revenues in our consolidated statements of comprehensive income.
Changyou’s Business
Changyou’s business lines consist of the online game business and the platform channel business, which consists primarily of online advertising and mobile game distribution services. Before ceasing its operations in August 2019, Changyou also operated a cinema advertising business, which consisted primarily of the acquisition from operators of movie theaters, and the sale to advertisers, of
pre-film
advertising slots.
Online Game Business
Changyou’s online game business offers PC games and mobile games to game players. All of Changyou’s games are operated under the item-based revenue model, meaning that game players can play the games for free, but may choose to pay for virtual items, which are
non-physical
items that game players can purchase and use within a game, such as characters, weapons, gems, pets, skills, fashion items magic medicine, riding animals, hierograms, skill books and fireworks.other
in-game
consumables, features and functionalities. Revenues derived from the operation of online games are classified as online game revenues in our consolidated statements of comprehensive income.
PC Games
PC games 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. Changyou’s dominant game is TLBB PC, a PC based
client-end
game. For the year ended December 31, 2020,2021, revenues from TLBB PC were $309.7$421.7 million, accounting for approximately 58%66% of Changyou’s online game revenues, approximately 56%65% of Changyou’s total revenues, and approximately 41%50% of the Sohu Group’s total revenues.
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Mobile Games
Mobile games are played on mobile devices and require an Internet connection. In the second quarter of 2017, Changyou launched a mobile game, Legacy TLBB Mobile, which is operated by Tencent under license from Changyou. For the year ended December 31, 2020,2021, revenues from Legacy TLBB Mobile were $88.3$79.5 million, accounting for approximately 16%12% of Changyou’s online game revenues, approximately 16%12% of Changyou’s total revenues, and approximately 12%10% of the Sohu Group’s total revenues.
Platform Channel Business
Changyou’s platform channel business consists primarily of the operation of the 17173.com Website. Prior to RaidCall’s ceasing operations in March 2019, and the sale of MoboTap in March 2018, Changyou’s platform channel business also included RaidCall and MoboTap.RaidCall.
17173.com Website
The 17173.com Website provides news, electronic forums, online videos, and other online game information services to game players, as well as mobile game distribution services. Changyou generates online advertising revenues from providing advertising services to third-party advertisers on the 17173.com Website and online game revenues from mobile game distribution services.
RaidCall
Prior to ceasing operations in March 2019, RaidCall provided online music and entertainment services, primarily in Taiwan. IVAS revenues that were generated by RaidCall are classified as other revenues in our consolidated statements of comprehensive income.
Cinema Advertising Business (Discontinued)
Prior to ceasing its operations in August 2019, Changyou also operated a cinema advertising business, which consisted primarily of the acquisition from operators of movie theaters, and the sale to advertisers, of
pre-film
advertising slots. Revenues that were generated by Changyou’s cinema advertising business are reflected as discontinued operations in our consolidated statements of comprehensive income.
Changyou’s Share Structure
As a result of the completion of the Changyou Merger on April 17, 2020, we beneficially held and controlled, and continue to beneficially hold and control, 100% of the combined total of Changyou’s outstanding ordinary shares and 100% of the total voting power in Changyou. We consolidate Changyou in our consolidated financial statements and, prior to the completion of the Changyou Merger on April 17, 2020, also provided for noncontrolling interests reflecting ordinary shares in Changyou held by shareholders other than us (“Changyou noncontrolling shareholders”).
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Sogou’s Business (Discontinued)
On September 29, 2020, Sohu, Sohu Search, and Tencent Merger Sub enteredBetween our entry into the Tencent/Sohu Sogou Share Purchase Agreement. UponAgreement on September 29, 2020 and the signingcompletion of the Tencent/Sohu Sogou Share Purchase Agreement,on September 23, 2021, Sogou met the criteria for discontinued operations. Accordingly, the results of Sogou’s operations for Sogou’s search and search-related business and other business have beenwere excluded from our results from continuing operations. Revenuesoperations, and revenues that were generated by Sogou’s search and search-related business and other businessSogou are reflected as discontinued operations, in our consolidated statements of comprehensive income. We ceased consolidating Sogou in our consolidated financial statements after September 23, 2021. Retrospective adjustments to our historical statements have been made in order to provide a consistent basis of comparison.
Search and Search-related Business
ThePrior to the completion of the Tencent/Sohu Sogou Share Purchase on September 23, 2021, our search and search-related business consistsconsisted primarily of search and search-related advertising services offered by Sogou. Search and search-related advertising services enableenabled advertisers’ promotional links to be displayed on Sogou’s search results pages and other Internet properties and third parties’ Internet properties where the links arewere relevant to the subject and content of searches and such properties. Sogou’s advertising services expandexpanded 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 Sogou’s collaboration with Tencent, which provides Sogou access to traffic and content generated from products and services provided by Tencent.
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Other Sogou Business
Sogou also offersoffered IVAS, primarily with respect to the operation of Web games and mobile games developed by third parties, and offersoffered other products and services, including smart hardware products and online lending and microcredit services.
Initial Public Offering of Sogou
On November 13, 2017, Sogou completed its IPO on the NYSE, trading under the symbol “SOGO.” Proceeds to Sogou from the IPO were approximately $622.1 million, after deducting underwriting discounts and commissions and offering expenses. Following the completion of Sogou’s IPO, pursuant to the Voting Agreement among Sohu, Tencent, and Sogou (the “Voting Agreement”) that took effect upon the completion of Sogou’s IPO, we have the right to appoint a majority of Sogou’s Board of Directors, and we continue to consolidate Sogou in our financial statements and provide for noncontrolling interests reflecting ordinary shares in Sogou held by shareholders other than us. In the fourth quarter of 2017, we recognized a
one-time
credit to additional
paid-in
capital of $278.4 million in shareholders’ equity in our consolidated balance sheets to reflect the increase in the value of our equity in Sogou that resulted from the completion of Sogou’s IPO.
Sogou’s Share Structure
Sogou’s Ordinary Shares are divided into Sogou Class A Ordinary Shares and Sogou Class B Ordinary Shares. Holders of Sogou Class A Ordinary Shares and holders of Sogou Class B Ordinary Shares have identical rights with the exception of voting and conversion rights. Each Sogou Class A Ordinary Share is entitled to one vote per share and is not convertible. Each Sogou Class B Ordinary Share is entitled to ten votes per share and is convertible into one Sogou Class A Ordinary Share at any time.
As of December 31, 2020, Sogou had a combined total of 387,590,916 Sogou Class A and Class B Ordinary Shares issued and outstanding, consisting of:
(i)
Sohu.com Limited: 127,200,000 Sogou Class B Ordinary Shares held by Sohu for its own account, and 3,717,250 Sogou Class A Ordinary Shares held by Sohu for the purpose of issuance upon the exercise of outstanding share-based awards and future share-based awards;
(ii)
Tencent: 151,557,875 Sogou Class B Ordinary Shares;
(iii)
Photon, an investment vehicle of the Sohu Group’s Chairman and Chief Executive Officer Charles Zhang: 24,686,863 Sogou Class A Ordinary Shares; and
(iv)
Shareholders other than Sohu, Tencent, and Photon: 80,428,928 Sogou Class A Ordinary Shares, including Sogou Class A Ordinary Shares represented by Sogou ADSs.
The total number of Sogou outstanding shares listed above include 1,899,000 Sogou Class A Ordinary Shares that are outstanding for legal purposes, but have been determined to be Sogou treasury stock for accounting purposes. See Note 18 to our audited consolidated financial statements, which begin on page
F-1
of this annual report.
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Voting Agreement between Sohu, Tencent and Sogou
Pursuant to the Voting Agreement, Sohu and Tencent agreed that, subject to certain exceptions, (1) within three years following the completion of Sogou’s IPO, Sohu will vote all Sogou Class B Ordinary Shares and any Sogou Class A Ordinary Shares held by it and Tencent will vote 45,578,896 of its Sogou Class B Ordinary Shares to elect a Board of Directors consisting of seven directors, four of whom will be appointed by Sohu, two of whom will be appointed by Tencent, and the seventh of whom will be Sogou’s then chief executive officer, and (2) after three years following the completion of Sogou’s IPO, Sohu will be entitled to choose to change the size and composition of Sogou’s Board of Directors, subject to Tencent’s right to appoint at least one director. The effect of these provisions is to give Sohu the power to appoint a majority of Sogou’s Board of Directors, and to give Tencent the power to appoint two directors within three years following the completion of Sogou’s IPO and at least one director after three years after the completion of Sogou’s IPO. The Voting Agreement also provides that, subject to certain conditions, for so long as Sohu and Tencent together hold more than 50% of the total voting power of the Sogou Class A Ordinary Shares and the Sogou Class B Ordinary Shares, Sohu or Tencent may remove and replace any director appointed by it. These provisions of the Voting Agreement are also reflected in Sogou’s Third Amended and Restated Memorandum of Association (“Sogou’s Amended and Restated Memorandum of Association”) and Seventh Amended and Restated Articles of Association (“Sogou’s Amended and Restated Articles of Association”).
Due to the additional voting power of the Sogou Class B Ordinary Shares held by Sohu and Tencent, as of the date of this report Sohu holds approximately 34% of the total of Sogou’s outstanding Class A and Class B Ordinary Shares and controls approximately 44% of the total voting power of the combined total of Sogou’s outstanding Class A and Class B Ordinary Shares; Tencent has an indirect shareholding of approximately 39% of the total of Sogou’s outstanding Class A and Class B Ordinary Shares and controls approximately 52% of the total voting power of the combined total of Sogou’s outstanding Class A and Class B Ordinary Shares; and Sohu and Tencent together have the power to decide all matters that may be brought to a vote of Sogou’s shareholders.
The Voting Agreement and Sogou’s Amended and Restated Articles of Association also specify that for so long as Sohu or Tencent holds not less than 15% of Sogou’s issued shares (calculated on a fully diluted basis), consent from the holder of 15% or more (either or both of Sohu or Tencent, as the case may be) will be required (1) to amend Sogou’s Amended and Restated Memorandum of Association or Amended and Restated Articles of Association, (2) to make material changes in Sogou’s principal lines of business, (3) to issue any additional Sogou Class B Ordinary Shares, (4) to create any new class or series of shares that is pari passu with or senior to the Sogou Class A Ordinary Shares, (5) for Sogou to approve a liquidation, dissolution or winding up of Sogou, or a merger or consolidation resulting in a change in control, or any disposition of all or substantially all of Sogou’s assets, or (6) for Sogou to enter into any transactions with affiliates of Sohu, other than in the ordinary course of business. Of these corporate actions that are subject to consent of Sohu or Tencent (as applicable), shareholder approval is required under the Companies Act of the Cayman Islands for any amendment of Sogou’s Amended and Restated Memorandum of Association or Amended and Restated Articles of Association, any
winding-up
of Sogou Inc., or any merger or consolidation with a third-party entity. The Voting Agreement and Sogou’s Amended and Restated Articles of Association further provide that if Sogou’s shareholders have voted in favor of any of these actions requiring the approval of Sogou’s shareholders but consent from Sohu or Tencent (as applicable) has not been obtained, then the holders of all classes of Sogou’s shares who have voted against such action will be deemed to have such number of votes as are equal to the aggregate number of votes cast in favor of such actions plus one additional vote. Under these provisions of the Voting Agreement and Sogou’s Amended and Restated Articles of Association, if an action is proposed for which the consent of either Tencent or Sohu is required, the failure to obtain the consent of Tencent or Sohu will have the effect of the proposed action’s not being approved, even if Sogou’s other shareholders approve it.
The Voting Agreement and Sogou’s Amended and Restated Articles of Association also specify that if at any time Sohu alone holds more than 50% of the total voting power of the Sogou Class A Ordinary Shares and Class B Ordinary Shares, the voting arrangements with respect to the size and composition of Sogou’s Board of Directors will be automatically suspended until such time within five years after the completion of Sogou’s IPO as Sohu’s voting power again drops to 50% or less, in which case the original voting arrangements will be reinstated, provided that Tencent will only be required to vote the lower of 45,578,896 Sogou Class B Ordinary Shares held by it or such number as would give Sohu combined voting power of 50.1%. If such a suspension continues after the fifth anniversary of the completion of Sogou’s IPO, the voting arrangements with respect to the size and composition of Sogou’s Board of Directors will terminate.
All of the Sogou Class B Ordinary Shares held by Sohu will be converted into Sogou Class A Ordinary Shares if there is a transaction resulting in change of control of Sohu that was not approved by Sohu’s Board of Directors, if specified competitors of Tencent control Sohu, or if a majority of Sohu’s Board of Directors consist of nominees of specified competitors of Tencent. The provisions with respect to the size and composition of Sogou’s Board of Directors set out in the Voting Agreement and Sogou’s Amended and Restated Articles of Association will terminate upon occurrence of any such event. Such arrangements will also terminate (1) if Dr. Charles Zhang, the chairman of the Board of Directors and chief executive officer of Sohu, both ceases being the chairman of the Board of Directors of Sohu and ceases being the single largest beneficial owner of Sohu’s outstanding shares; (2) if Sohu transfers 30% or more of the Sogou Class B Ordinary Shares that Sohu held upon the completion of Sogou’s IPO; (3) if Sogou fails to provide irrevocable instructions to the person maintaining Sogou’s register of members to accept instructions from Tencent, under certain circumstances, with respect to the conversion of Sogou Class B Ordinary Shares held by Sohu; (4) or Sogou changes, without Tencent’s consent, the person that maintains Sogou’s register of members; (5) or if Tencent ceases to own any Sogou Class B Ordinary Shares.
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Under the Voting Agreement, Sohu and Tencent are subject to certain restrictions on transfer of their Sogou Class A and Class B Ordinary Shares. In particular, a transfer of Sogou Class B Ordinary Shares by either Sohu or Tencent, respectively, to any person or entity that is not a direct or indirect wholly-owned subsidiary of Sohu or Tencent, respectively, will cause such Sogou Class B Ordinary Shares to be converted into Sogou Class A Ordinary Shares.
Voting Agreement between Sohu, Photon and Sogou Management
Sohu may be deemed to have beneficial ownership attributable to shared voting power of Sogou Class A Ordinary Shares beneficially owned by Photon Group Limited (“Photon”), an investment vehicle of our Chairman and Chief Executive Officer Charles Zhang, Sogou’s chief executive officer Xiaochuan Wang, and certain other members of the Sogou management as a result of a voting agreement by and among Sohu, Photon, Mr. Wang, and the other members of Sogou management, pursuant to which Photon, Mr. Wang, and the other members of Sogou Management have agreed to vote their Sogou Class A Ordinary Shares (not including shares acquired by Mr. Wang in the public market following Sogou’s IPO) to elect Sohu’s designees to Sogou’s Board of Directors.
PRODUCTS AND SERVICES
Sohu’s Business
Brand Advertising Business
Sohu’s 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 mobile phones, tablets and PCs. The majority of our products and services are provided in China through Sohu Media Portal, Sohu Video and Focus.
Sources
Sohu Media Portal
Sohu Media Portal is a leading online news, information and informationcontent services provider in China. We provide users comprehensive content by aggregating content from otherprofessional media organizations and partnering with independent contributors, and also use content generated by our
in-house
editorial teams.contributors. We use algorithms to recommend to users personalized content that may interest them.them, and encourage them to interact with each other based on our social distribution features. We provide content through the mobile phone application Sohu News APP, the mobile portal m.sohu.com and www.sohu.com for PCs.
Sohu Video
Sohu Video is an online video content and service provider in China. We deliver self-developed video content, purchased video content, UGC, and value livestreaming in various verticals. We provide users free access to the majority of our extensive and comprehensive video content library, which includes popular domestic and overseas television dramas the licenses to which we purchaseprograms, such as movies, animations, and documentaries, purchased from third parties,parties; self-developed video content; variety shows; UGC; PGC; and other content variety shows, movies, animations, documentaries, UGC, and interactivegenerated through live broadcasting. We also offer selected
fee-based
content which includes self-developed video content, overseas television dramas and movies the licenses tofrom which we purchase from third parties.generate subscription revenues. Users can access our video content via mobile devices by visiting our mobile video site or installing Sohu Video APP, our mobile video application, or via PCs through tv.sohu.com or ifox, our PC video application.
Focus
Focus (www.focus.cn) is an online real estate information and services provider in China. Focus provides diversified online content consisting of new homes for sale, properties for
re-sale
and home furnishing services, and other comprehensive services and solutions for real estate developers, house seekers and homeowners. Focus has also developed a transaction platform to offer online and offline services that facilitate the purchase of new homes by buyers.
Business Model
In the brand advertising business, we enjoy a strong competitive position as one of the leading Internet companies in China. Through the platforms described above, we have built a sizeable user base through good user experiences provided by our products and services. This user base is appealing to advertisers. Through mobile devices and PCs, 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, and other formats. We rely on both direct sales by our internal sales force and sales by advertising agents for advertising on our Internet platforms. Our advertisers include multinational companies and Chinese domestic
medium-sized
and small companies.
Currently we have three main types of pricing models, consisting of the Fixed Price model, the Cost Per Impression (“CPM”) model, and the Cost Per Click (“CPC”) model.
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Fixed Price model
Under the Fixed Price model, a contract is signed to establish a fixed price for the advertising services to be provided. Given that advertisers benefit from displayed advertisements evenly over the period the advertisements are displayed, we recognize revenue on a straight-line basis over the period of display, provided all revenue recognition criteria have been met.
CPM model
Under the CPM model, the unit price for each qualifying display is fixed and 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. Given that the fees are priced consistently throughout the contract and the unit prices are fixed in accordance with our pricing practices for similar advertisers, we recognize revenue based on the fixed unit prices and the number of qualifying displays upon their occurrence, provided all revenue recognition criteria have been met.
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CPC model
Under the CPC model, there is no fixed price for advertising services stated in the contract with the advertiser and the unit price for each click is auction-based. We charge advertisers on a
per-click
basis, when the users click on the advertisements. Given that the fees are priced consistently throughout the contract and the unit prices are fixed in accordance with our pricing practices for similar advertisers, we recognize revenue based on qualifying clicks and the unit price upon the occurrence of the clicks, provided all revenue recognition criteria have been met.
Other Sohu Business
Sohu also engages in the other business, which consists primarily of paid subscription services, interactive broadcasting services, and
sub-licensing
of purchased video content to third parties. revenue sharing from other platforms. Revenues generated by Sohu from the other business are classified as other revenues in our consolidated statements of comprehensive income.
Changyou’s Business
Online Game Business
Business Model
Changyou’s game players typically access Changyou’s games through personal computers and mobile devices, such as mobile phones and tablets, connected to the Internet. In order to access Changyou’s PC games, game access software must be installed in the computer being used. Game players using PCs can typically download Changyou’s game access software, interim updates and expansion packs directly from its main game Website. Game players access Changyou’s mobile games by downloading its mobile game applications, primarily from third-party mobile application stores or, to a lesser extent, from Changyou’s game Website. Prior to the sale of Shenzhen 7Road in August 2015, Changyou’s online games also included Web games, which became a relatively insignificant part of its online games business following the sale.
Changyou’s online games consist primarily of MMORPGs. Changyou is also developing, and plans to expandexpanding its game portfolio with additional types of card-based role-playing games (“RPGs”), casual games and strategy games and collectible card games (“CCGs”).games. MMORPGs are massive multiplayer online role -playing games that allow a large number of players to take on the role of a character and interact with one another within a virtual world. Card-based RPGs are RPGs in which players collect characters or other virtual items in the form of cards. Casual games include Match 3generally involve simpler rules, shorter sessions, and require less learned skills. Strategy games which are puzzle games where players place a given number of tiles, often three, of the same type so that they can connect to each other and disappear; and strategy games, which are simulation games that allow players to control, manage and use game characters and items and to design and implement their own strategies to win the games. CCGs are collectible card games in which players collect cards and compete to win by using card sets with different functions.
Changyou’s games are operated under the item-based revenue model, meaning game players can play Changyou’s games for free, but may choose to pay for virtual items, which are
non-physical
items that game players can purchase and use within a game, such as characters, weapons, gems, pets, skills, fashion items magic medicine, riding animals, hierograms, skill books and fireworks.other
in-game
consumables, features and functionalities. Through virtual items, players are able to enhance or personalize their game environmentssquad or game characters, accelerate their progress in Changyou’s games, and share and trade with friends.
For players who choose to purchase virtual goods, Changyou delivers enhanced gameplay experiences and benefits, such as:
Accelerated Progress.
Many of Changyou’s games offer players the option to purchase items that can accelerate their progress in the game and increase their capabilities, so that they level up more quickly and compete more effectively against others in the game. While Changyou sells many items that accelerate progress in its games, Changyou monitors and carefully balances the disparity in capabilities between paying and
non-paying
game players to avoid discouraging
non-paying
game players and to keep the game challenging and interesting for paying game players.
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Enhanced Social Interaction.
Changyou uses a variety of virtual items to promote interaction and to facilitate relationship-building among game players in its games.
Personalized and Customized Appearance.
Many of Changyou’s games offer players the option to purchase decorative and functional items to customize the appearance of their characters, pets, vehicles, houses and other
in-game
possessions to express their individuality.
Gifts.
Many of Changyou’s games offer players the option to purchase gift items to send to their friends. Examples of gift items include decorative items and time-limited items for special holiday events and festivals, such as Valentine’s Day, Spring Festival (Chinese New Year) and Christmas.
Changyou’s online game business includes games that it self-operates and games that it licenses out to third-party operators.
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Self-Operated Games
For self-operated games, Changyou determines the price of virtual items based on the demand or expected demand for such virtual items. Changyou may change the pricing of certain virtual items based on its consumption patterns. Changyou hosts the games on its own servers and is responsible for sales and marketing of the games as well as customer service. Changyou’s self-operated games include PC games and mobile games developed in house as well as PC games and mobile games that Changyou licenses from or jointly develops with third party developers.
Licensed-Out
Games
Changyou also authorizes third parties to operate its online games. In 2016, Changyou entered into an agreement with Tencent pursuant to which Changyouhas granted an exclusive license to Tencent to distribute and operate within China its mobile game Legacy TLBB Mobile which was launched in May 2017. In addition, Changyou licenseswithin China, and has licensed its PC game TLBB and mobile games Legacy TLBB Mobile and TLBB 3D to third-party operators in selected overseas markets outside of China, including Hong Kong, Taiwan, Vietnam, Singapore, and Malaysia.
The
licensed-out
games include PC games and mobile games developed in house as well as mobile games licensed from and jointly developed with third-party developers. Under Changyou’s licensing arrangements with third-party operators, the operators pay Changyou upfront license fees and Changyou has revenue sharing rights over the terms of the licenses. The licenses are typically for a term of one to three years. Changyou provides updates and expansion packs for the licensed games, typically after it launches the updates and expansion packs in China.
For
licensed-out
games, the third-party operators are responsible for all operations and costs, including marketing and customer service, as well as the leasing and maintenance of servers.
Platform Channel Business
Changyou’s platform channel business consists primarily of the operation of the 17173.com Website. Prior to RaidCall’s ceasing operations in March 2019, and the sale of MoboTap in March 2018, Changyou’s platform channel business also included RaidCall and MoboTap.RaidCall.
17173.com Website
The 17173.com Website provides news, electronic forums, online videos, and other online game information services to game players, as well as mobile game distribution services. Changyou generates online advertising revenues from providing advertising services to third-party advertisers on the 17173.com Website and online game revenues from mobile game distribution services.
RaidCall
Prior to ceasing operations in March 2019, RaidCall provided online music and entertainment services, primarily in Taiwan. IVAS revenues that were generated by RaidCall are classified as other revenues in our consolidated statements of comprehensive income.
Cinema Advertising Business (Discontinued)
Prior to ceasing its operations in August 2019, Changyou also operated a cinema advertising business, which consisted primarily of the acquisition from operators of movie theaters, and the sale to advertisers, of
pre-film
advertising slots. Revenues that were generated by Changyou’s cinema advertising business are reflected as discontinued operations in our consolidated statements of comprehensive income.
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Sogou’s Business (Discontinued)
Search and Search-related Business
Products and Services for Users
Sogou’s suite of products and services for users focuses on search and search related services that cover a wide variety of use cases, from online search to input methods.
Sogou Search
Sogou Search makes information easily accessible for Chinese Internet users. Through Sogou Search, Sogou enables its users to conveniently find relevant, high-quality, and comprehensive information anytime, anywhere. Sogou Search offers users general and vertical search services through its website
sogou.com
and its mobile search application. In addition, Sogou Search is the default general search engine for popular Internet portals such as
qq.com
and
sohu.com
, and popular browsers such as the Mobile QQ Browser and the Sogou Browser. Sogou Search was the second largest search engine in China by mobile queries in December 2020, according to iResearch.
Sogou Search strives to offer differentiated content in its search products and services in order to improve its search results and provide an enhanced search experience for its users. Through collaborations with
industry-leading
content providers, it offers a variety of vertical search services. For example, Sogou Weixin Search is the sole general search engine with access to search all content published on Weixin Official Accounts. Sogou Healthcare Search provides reliable and trustworthy healthcare information through collaboration with national healthcare authorities and
third-party
healthcare information platforms. Sogou English is the
cross-language
search service that enables Chinese users to discover English content on the Internet by querying in Chinese and reading content that Sogou has translated into Chinese. Through a collaboration with Zhihu, the leading online
knowledge-sharing
platform in China according to iResearch, Sogou provides users with
up-to-date
knowledge, experience, and insights shared within the Zhihu Community.
Sogou Input Method
Sogou Input Method, the first
cloud-based
Chinese language input software, was launched in 2006 and has become an indispensable Chinese language input software tool for PC and mobile users. It was the most widely used PC software in China by DAU and the number one Chinese language input software for PC users in terms of MAU in December 2020, according to iResearch. Sogou Mobile Keyboard, the mobile application of Sogou Input Method was the third most widely used mobile application in China by DAU and the number one Chinese language input application for mobile users in terms of MAU in December 2020, according to iResearch. Sogou are also committed to evolving Sogou Mobile Keyboard into an AI communication assistant. In 2020, Sogou enriched its AI smart input function and extended its vertical use cases. For AI smart input, Sogou refined its “Smart Wangzai”, an
AI-enabled
communication function within Sogou Mobile Keyboard, to allow users to easily input their conversations on Weixin/WeChat, QQ and other
e-commerce
platforms. Sogou also expanded vertical use cases of Sogou Mobile Keyboard from handwriting, multi-language, to barrier-free inputs, with the latter focusing on helping visually-impaired users improve input efficiency. In addition, Sogou rolled out more AI input services ranging from voice, optical character recognition (“OCR”), to translation, which helped reinforce Mobile Keyboard’s position as the largest voice recognition app in China. As of the end of December 2020, it had processed up to 941 million voice requests and handled millions of translation requests per day. Sogou Mobile Keyboard possesses a large library of language data, with over 120 billion Chinese character inputs per day that Sogou’s users have generated across a wide variety of Internet use cases, such as social media, news, entertainment, shopping, travel, and financial services.
Other Products
Sogou Browser
Sogou Browser is designed to make Web navigation fast and easy. Sogou continually upgrades the browser to expand functionality from a browsing tool to a content distribution platform for an enriched user experience. In addition to a range of vertical services, Sogou also provides personalized newsfeeds leveraging Sogou’s big data capabilities based on users browsing habits and history.
Sogou Web Directory
Sogou Web Directory, a content aggregation and distribution platform, is a
one-stop
shop for navigation of the Chinese Web.
Sogou Translation
Sogou Translation is a multi-language translation solution that incorporates neural machine translation technology and a massive linguistic database to deliver language translation. It is
web-based
and also available as a mobile application. In addition to written text translation, the Sogou Translation mobile application supports speech, document, OCR, and augmented reality translation. Also, with Exam Dictionaries, which Sogou developed
in-house,
Sogou Translation provides high quality content that users may access to prepare for their academic examinations.
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Monetization
Sogou generates revenue primarily from its search and search-related advertising services. Search and search-related advertising services enable advertisers’ promotional links to be displayed on Sogou’s search result pages and other properties and third parties’ Internet properties where the links are relevant to search queries and such properties. Sogou’s large user base and big data capabilities allow Sogou to enhance the effectiveness of its targeted advertising services, thereby strengthening its monetization capabilities.
Search and search related advertising services consist primarily of auction-based
pay-for-click
services, for which Sogou charges advertisers on a per click basis when users click on the advertisers’ promotional links displayed on Sogou’s and third parties’ Internet properties. Other monetization models from Sogou mainly consist of operating third-party games on Sogou Game Center and Sogou Mobile Assistant, sales of Sogou’s various smart devices and online lending and microcredit services through mobile applications.
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 and online lending and microcredit services.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We regard our patents, copyrights, service marks, trademarks, trade secrets and other intellectual property as critical to our success. We rely on patent, trademark and copyright law, trade secret protection,
non-competition
and confidentiality and/or license agreements with our employees, customers, partners and others to protect our intellectual property rights. Before we launch any new products or services, we generally apply for registration of related patents, trademarks, and software copyrights. Despite our precautions, it may be possible for third parties to obtain and use our intellectual property without authorization. Furthermore, the validity, enforceability and scope of protection of intellectual property rights in Internet-related industries are uncertain and still evolving. The laws of the PRC and certain other countries do not protect intellectual property to the same extent as do the laws of the United States.
We have been issued 1,555267 patents in China and 82 patents in countries and regions outside of China covering inventions, utility models, and designs; we have 1,586176 patent applications currently pending in China and 56 patent applications currently pending in countries and regions outside of China; we have submitted 89 international patent applications through the procedures under the Patent Cooperation Treaty, or PCT; and we intend to apply for more patents in China and in countries and regions outside of China to protect our core technologies and intellectual property.
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We have registered three service marks with the U.S. Patent and Trademark Office of the CNIPA, consisting of Sohu.com, registered on August 1, 2000; Sohu.com (stylized), registered on August 1, 2000; and Sohu, registered on June 13, 2000. We have registered 4,5093,678 trademarks with the Trademark Office of the CNIPA, including the marks “SOHU.com,” “ChangYou.com,” “cyou.com” and “Sogou”“cyou.com” and marks relating to our products such as Sohu.com logos, Sohu Fox logos, GoodFeel logos, Go2Map, Sohu Focus, Blade Online, 17173, Sogou logos, Sogou Input Method, Sogou Map, and Teemo,17173, and the corresponding Chinese versions of the marks; and we are in the process of applying for the registration of 487134 other trademarks. We are the registered owner of 581372 registered trademarks and have also applied for 19849 trademarks in countries and regions outside of China. In addition, we are in the process of applying for recognition of certain of our marks as famous Beijing trademarks and well-known Chinese trademarks. We also filed registration of trademarks relating to our subsidiary companies’ names and Changyou’s online games and other businesses in various countries and regions, such as the United States, European Union, Turkey, Japan, South Korea, Malaysia, Indonesia, Vietnam, Thailand, Brazil, Taiwan and Hong Kong. Our rights to these marks could be affected adversely if any of our applications are rejected. It is possible that our competitors will adopt product or service names similar to ours, thereby impeding our ability to distinguish our brand and possibly leading to customer confusion. In addition, Changyou has the license rights to use the trademarks, such as TLBB, TLBB logos and TLBB 3D, for its mobile games TLBB 3D and Legacy TLBB Mobile and for its PC game TLBB under its existing license agreements with the holder of the intellectual property rights with respect to the popular Chinese martial arts novel Tian Long Ba Bu written by Louis Cha. After the expiration of their terms Changyou may not be able to renew these license agreements with commercial terms that are favorable to Changyou, if at all, and Changyou’s inability to renew these license agreements could cause Changyou to lose the right to use the trademarks related to those games to the extent that they relate to Tian Long Ba Bu. See “Risk Factors-RisksFactors—Risks Related to Changyou.com Limited-RisksLimited—Risks Related to Changyou’s Business-Overall Risks-ChangyouBusiness—Overall Risks—Changyou may need to incur significant expenses to enforce its proprietary rights, and if it is unable to protect such rights, its competitive position and financial performance could be harmed” and “-Changyou“- Changyou may not have exclusive rights to trademarks, designs and technologies that are crucial to its business” in Item 3.
We are the registered owner of 991840 software copyrights and 658590 copyrights for works in China, each of which we have registered with the State Copyright Bureau of China and its local branches. In addition to the above, we have also registered the copyrights for 20 works in countries and regions outside of China.
We own the rights to 480309 domain names that we use in connection with the operation of our business, including the Sohu Changyou, and SogouChangyou websites.
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Many parties are actively developing chat, search, AI technologies, Web directory and related Web technologies. We expect these parties to continue to take steps to protect these technologies, including seeking patent protection. There may be patents issued or pending that are held by others and cover significant parts of our technology, business methods or services. For example, we are aware that a number of patents have been issued in the areas of
e-commerce,
Web-based
information indexing and retrieval and online direct marketing. Disputes over rights to these technologies may arise in the future. We cannot be certain that our products do not or will not infringe valid patents, copyrights or other intellectual property rights held by third parties. We may be subject to legal proceedings and claims, from time to time, relating to the intellectual property of others in the ordinary course of our business. See “Item 8. Financial Information—Legal Proceedings”.
We also intend to continue licensing technology from third parties. The market is evolving and we may need to license additional technologies to remain competitive. We may not be able to license these technologies on commercially reasonable terms or at all. In addition, we may fail to successfully integrate any licensed technology into our services. Our inability to obtain any of these licenses could delay product and service development until alternative technologies can be identified, licensed and integrated.
TECHNOLOGY INFRASTRUCTURE
The Sohu Group has built what we believe is a reliable and secure network infrastructure, that will fully support our operations. We have professional technical support teams to maintain our current technology infrastructure and online operating platform, as well as develop new software features to further enhance the functionality of our management and security systems. We monitor the operation of our server network 24 hours a day, seven days a week. Our remote control system allows us to track our concurrent online users in real time, and discover and fix hardware or software problems on our server network in a timely fashion.
Sohu
As of December 31, 2020,2021, Sohu maintained approximately 11,90010,618 servers in China. To fully support the operation of Sohu’s content and services, Sohu established these data centers primarily through China Mobile, China United Network Communication Group Company Limited (“China Unicom”), and China Telecom Corporation (“China Telecom”), which are the three largest Internet connection service providers in China, to support most of Sohu’s core services. In addition, Sohu has established branch nodes in different provinces throughout China through different telecommunication operators in order to establish national coverage and provide fast and stable access to Sohu’s Internet platforms properties to users across China. In addition, Sohu has developed cooperation with several smaller private Internet service providers.
Sohu has developed close working relationships with China Mobile, China Unicom, China Telecom and
smaller-size
telecommunication operators. Sohu’s operations depend on the ability of China Mobile, China Unicom, and China Telecom to protect Sohu’s systems against damage from fire, power loss, telecommunications failure,
break-ins
and other events. These telecommunication operators provide Sohu with support services twenty-four hours per day, seven days per week. They also provide connectivity for Sohu’s servers through multiple high-speed connections. All facilities are protected by Uninterruptible Power Supplies.
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For reliability, availability, and serviceability, Sohu has created an environment in which each server can function independently. Key components of Sohu’s server architecture are served by multiple redundant machines. Sohu also uses
in-house
and third-party monitoring software. Sohu’s reporting and tracking systems generate daily traffic, demographic and advertising reports. Sohu deploys load balance equipment and cloud computing to avoid single point failure.
Sohu’s operations must accommodate a high volume of traffic and deliver frequently updated information. Components or features of Sohu’s products and services have in the past suffered outages or experienced slower response times because of equipment or software down time. These events have not had a material adverse effect on Sohu’s business to date, but such events could have a material adverse effect in the future.
Changyou
Changyou supports its operations with a network of reliable and secure physical and cloud-based servers that have fully supported its operations for many years. As of December 31, 2020,2021, Changyou maintained for its online game business approximately 2,000 physical servers in mainlandMainland China, and 2,8003,000 cloud-based servers that are spread across mainlandMainland China, Hong Kong, other Asia-pacific regions, Europe and North America. In order to enhance Changyou’s game players’ experience and to improve connectivity, Changyou has located its physical game servers in a number of regions throughout China. This allows its players to connect to the nearest servers that are located in their region without exchanging data across the national backbone network. Furthermore, to ensure high quality services for its game players, Changyou works with leading domestic cloud technology firms to provide efficient and stable game services using cloud-based resources.
Sogou
As of December 31, 2020, Sogou owned approximately 30,809 servers located in six Internet data centers in China. Sogou has also obtained what it believes is a sufficient amount of connectivity bandwidth to meet the current and anticipated needs of its operations, and has established a large-scale Graphics Processing Unit (“GPU”) service cluster to provide computing power for its AI technologies.
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MARKETING
Sohu
As Sohu is a leading Chinese online media company, our brand effectively provides us with
built-in
word-of-mouth
marketing and we have significantly benefited from this recognition of our brand in China. WeApplying our advanced livestreaming technologies, we also host high-quality marketing events, both online and offline, with the goal of strengthening our brand influence across certain verticals by consolidating our position as a mainstream media source, and enhancing our core competitiveness and credibility by leveraging high-quality content across our platform, and our advanced livestreaming technologies, thereby attracting both users and advertisers. Further, we continually promote our self-produced video programs across diversified online social media platforms to attract more users to our platform. For offline marketing channels, we
We work closely with mobile application stores as well as performance-based online advertising platforms. Moreover, to strengthen our precision marketing, we reach out and seek cooperationWe also cooperate with market-dominant mobile phone manufacturers to
pre-install
our mobile APPsMobile Apps into certain models of their mobile phones.phones to enhance our market influence and enlarge our user base.
Changyou
For self-operated games, Changyou employs a variety of innovative online and offline marketing methods, including online and offline advertising, social media, and
in-game
marketing. Changyou uses different methods to target different demographic groups of game players.
For online marketing, Changyou is able to leverage its game information portal, the 17173.com Website, as well as other game Websites to promote its games. Changyou is able to leverage its affiliation with Sohu, and target Sohu’s large user base as potential players of its games, by advertising on Sohu’s various Websites, which typically provide a direct link to its games. For games that Changyou believes are likely to be successful, Changyou may seek celebrity endorsements and work with Internet celebrities on live broadcasting platforms to create additional publicity for the games.Changyou accesses online social media by advertising in online videos and marketing its games through various social networking Websites, mobile applications and online forums to create a vital effect among game players.
For offline marketing, Changyou organizes a variety of offline activities, such as player meetups, offline competitions and carnival events, to connect with players, increase the popularity of its games, and establish its brand image. In addition, Changyou launches
in-game
promotional events. Changyou also creates
in-game
events to attract existing and new game players through event-related features, such as offering special holiday-edition virtual items to enhance game player participation at holiday time.
For mobile games in particular, Changyou works closely with Apple store and Android mobile application stores to market its games. Changyou designs and implements different marketing strategies for different game genres to attract the genres’ target players. Changyou works closely with performance-based online advertising platforms such as Ocean Engine, Guang Dian Tong, and Fen Si Tong and Ocean Engine where Changyou can target different user groups by gender, region, age groupgroups. Changyou also works with the Apple store and other categories.Android mobile application stores to market its games. For games with a specific user group, Changyou advertises on mobile applications, websites and other media outlets that cater to the same user group.
Changyou also promotes its games in overseas markets with a targeted marketing approach, leveraging its data collection and analysis system. Changyou’s overseas marketing strategies also include using social media platforms and search engine management to promote its games.
Sogou
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Sogou focuses on delivering superior user experience through better products and services, which Sogou believes can expand its user base and enhance its brand. Since inception, its user base has grown primarily through
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word-of-mouth
referrals; thus, Sogou has built its brand with modest marketing costs.
While Sogou has benefitted significantly from
word-of-mouth
marketing, it has also launched marketing campaigns designed to further promote its brand, products, and technologies. In 2020, Sogou focused on marketing its technology through industry-specific applications. This was designed to demonstrate Sogou’s technological advantages and enhance Sogou’s brand image as a leading
AI-based
solution provider. For example, Sogou has expanded the application of its AI Vocational Avatar technology in various sectors, including AI News Anchors in news broadcasting, AI Virtual Judge in legal services, and AI Customer Service Avatar in financial services. Sogou’s proprietary AI Vocational Avatar served as a hostess at various industry summits and its AI-powered Simultaneous Interpretation solutions supported a number of international conferences in such areas as technology, finance, and healthcare.
COMPETITION
The Internet and Internet-related markets in China are rapidly evolving. We believe the increase in China’s online population will draw more attention to the PRC Internet market from both domestic and multinational competitors. Our existing competitors may in the future achieve greater market acceptance and gain additional market share. It is also possible that new competitors may emerge and acquire significant market share. In addition, our competitors may leverage their existing Internet platforms to cross-sell newly launched products and services. It is also possible that, as a result of deficiencies in legal protections afforded intellectual property in the Internet industry in China, or inadequate enforcement of existing PRC laws protecting such intellectual property, we may not be able to prevent existing or new competitors from accessing and using our
in-house
developed Web content or technologies.
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Competition for Sohu’s Business
In the PRC Internet space, competition for brand advertising business is intense and is expected to increase significantly in the future. We compete with our peers and competitors in China primarily on the following basis:
 
access to financial resources;
 
gateway to host of Internet users’ activities;
 
technological advancements;
 
attractiveness of products;
 
brand recognition;
 
volume of traffic and users;
 
quality of Internet platforms and content;
 
quality and quantity of purchased video content, self-developed video content, and user-generated content;
 
strategic relationships;
 
quality of services;
 
effectiveness of sales and marketing efforts;
 
talent of staff; and
 
pricing.
Over time, our competitors may gradually build certain competitive advantages over us in terms of:
 
greater brand recognition among Internet users and clients;
 
better products and services;
 
larger user and advertiser bases;
 
more extensive and well
-developedwell-developed
marketing and sales networks; and
 
substantially greater financial and technical resources.
There are a number of existing or new PRC Internet companies, which include companies controlled or sponsored by private entities and by PRC government entities. As an Internet portal, we compete with various portals, including58.com, Alibaba, Autohome, Baidu, NetEase, Phoenix, Qutoutiao, Sina, Tencent, and TouTiao, and with vertical sites such as 58.com, Autohome, BitAuto, Bilibili, Douyin, Douyu, Fang, Huya, iQIYI, JOYY, Kuaishou, Leju, Mango TV, Youku,Momo, NetEase, Phoenix, Qutoutiao, Sina, Tencent, TouTiao, and YY.Youku.
We also compete with traditional forms of media, such as newspapers, magazines, radio and television, for advertisers, advertising revenues and content. Some of these traditional media, such as CCTV, Xinhua News Agency and People’s Daily, have extended their businesses into the Internet market. As a result, we expect to face more intense competition with traditional media companies in both their traditional media and in the Internet-related markets.
Competition for Changyou’s Business
Online Game Business
In the online game industry, Changyou competes principally with the following three groups of competitors in China:
online game developers and/orand operators in China that are publicly traded in the United States and in Hong Kong, including IGG Inc., Kingsoft Corporation Limited, NetEase, Inc., and Tencent;
other companies in China devoted to game development and/or operation that are publicly traded in China, such as Beijing Kunlun Tech Co., Ltd.,Archosaur, Giant, Network Group Co., Ltd.,IGG, Lilith, miHoYo, NetDragon, NetEase, Perfect World Co., Ltd., Wuhu 37 Interactive Entertainment Network Technology Group Co., Ltd., YOOZOO Games Co., Ltd., and Zhejiang Century Huatong Group Co., Ltd. (formerly known as Shanda Games Limited); andTencent.
international competitors.
Platform Channel Business
In the platform channel business, Changyou’s game information portal operated through the 17173.com Website currently competes in China with among others, the followingother game information portals:
portals, such as Duowan.com, operated by JOYY Inc.;, and
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Game.sina.com.cn, operated by Sina Corporation.
The existing and potential competitors in the online games industry compete with Changyou for talent, game player spending, time spent on game playing, marketing activities, quality of games, and distribution network. The existing and potential competitors in the online advertising industry compete with Changyou for talent, advertiser spending, number of unique visitors, number of page views, visitors’ time spent on Websites, and quality of service.
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Competition for Sogou’s Business
Sogou’s business consists primarily of search and search-related services. Sogou faces intense competition in these areas for both users and advertisers, primarily from Baidu, TouTiao, and ShenMa of Alibaba. Sogou also faces competition from vertical search service providers, including travel services and information platforms such as Ctrip and Qunar;
group-buy
platforms such as Meituan Dianping; online classified advertisement platforms such as 58.com; and short video platforms such as Douyin and Kuaishou. Sogou competes for advertisers not only with Internet companies, but also with other types of advertising media such as newspapers and magazines, billboards, bus advertisements, television, and radio.
Sogou’s existing and potential competitors compete with Sogou for users and advertisers on the basis of the quality and quantity of search results; the features, availability, and ease of use of products and services; and the number and quality of advertising distribution channels. They also compete with Sogou for talent with technological expertise, which is critical to the sustained development of Sogou’s products and services.
FACILITIES
Sohu
In February 2007, we purchased an office building of approximately 18,265 square meters in Beijing, for consideration of approximately $35.3 million, of which approximately 18,228 square meters have been leased to Sogou since November 2013.
In November 2009, we entered into a contract for the purchase and development of an office building of approximately 41,283 square meters in Beijing to serve as our headquarters, for consideration of approximately $162 million. The office building was placed in service in May 2013.
As of December 31, 2020,2021, we leased office space of approximately 9,2989,379 square meters in the PRC.
Changyou
In August 2009, Changyou purchased an office building of approximately 14,950 square meters in Beijing, for consideration of approximately $33.4 million. Since January 1, 2016, Changyou has leased out this building to third-party business tenants.
In August 2010, Changyou entered into a contract for the purchase and development of an office building of approximately 56,549 square meters in Beijing to serve as its headquarters, for consideration of approximately $171 million. The office building was placed in service in December 2013.
As of December 31, 2020,2021, Changyou leased office space in Beijing of approximately 531407 square meters. Changyou also leased office space of approximately 4,7994,491 square meters in other cities in the PRC and in other countries.
Sogou
As of December 31, 2020, Sogou leased approximately 7,081 square meters of office space in Beijing, in addition to office space that Sogou leased from Sohu. Sogou also leased office space of approximately 13,365 square meters in other cities in the PRC.
GOVERNMENTGOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES
The following description of PRC laws and regulations is based upon the opinion of Haiwen & Partners, or Haiwen, our PRC legal counsel. The laws and regulations affecting China’s Internet industry and other aspects of our business are at an early stage of development and are evolving. There are substantial uncertainties regarding the interpretation and enforcement of PRC laws and regulations. We cannot assure yoube certain that the PRC regulatory authorities would find that our corporate structure and business operations strictly comply with PRC laws and regulations. If we are found to be in violation of PRC laws and regulations by the PRC government, we may be required to pay fines, obtain additional or different licenses or permits, and/or change, suspend or discontinue our business operations until we are found to comply with applicable laws. For a description of legal risks relating to our ownership structure and business, see “Item 3. Key Information-RiskInformation—Risk Factors.”
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Overview
The Chinese government has enacted an extensive regulatory scheme governing Internet-related areas, such as telecommunications, Internet information services, international connections to computer information networks, online game services, information security and censorship.
Various aspects of the PRC Internet industry are regulated by various PRC governmental authorities, including:including, among others:
 
the Ministry of Industry and Information Technology (the “MIIT”),MIIT, which resulted from the merger of the former Ministry of Information Industry and other governmental departments;
 
the Ministry of Culture and Tourism of the People’s Republic of China (the “MCT”),MCT, which was established in March 2018 and resulted from the merger of the former Ministry of Culture (the “MOC”), and the former China National Tourism Administration (the “CNTA”). The “MCT” as used in this report refers to the governmental authority that resulted from the merger, as well as to the MOC and the CNTA separately for periods prior to the merger;
 
the Ministry of Public Security (“MPS”);MPS;
 
the Ministry of Commerce (“MOFCOM”);MOFCOM;
 
the State Administration of Market Regulation (the “SAMR”),SAMR, which resulted from the merger of, and assumed the responsibilities previously held by, the State Administration for Industry and Commerce (the “SAIC”), the General Administration of Quality Supervision, Inspection and Quarantine (the “AQSIQ”) the Certification and Accreditation Administration, the Standardization Administration of China (the “SAC”), and the State Food and Drug Administration (the “SFDA”). The “SAMR” as used in this report refers to the governmental authority that resulted from the merger, as well as to the SAIC, the AQSIQ, the SAC, and the SFDA separately for periods prior to the merger;
 
the State Administration of Press, Publication, Radio, Film and Television (the “SAPPRFT”)SAPPRFT was reorganized into three separate governmental authorities, the National Radio and Television Administration (“NRTA”),NRTA, the National Film Administration (the “NFA”),NFA, and the State Press Publication Administration (the “SPPA”),SPPA, in March 2018. The SAPPRFT had resulted from the merger of the former General Administration of Press and Publication (the “GAPP”) with the former State Administration of Radio, Film and Television (the “SARFT”) in March 2013. The “NRTA,” the “NFA” and the “SPPA” as used in this report refer to the respective governmental authorities after the reorganization; the “SAPPRFT” as used in this report refers to the governmental authority that resulted from the merger for the period after the merger and prior to the reorganization, as well as to the GAPP and the SARFT separately for periods prior to the merger;
 
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the PRC State Council Information Office (the “SCIO”);
 
the Cyberspace Administration of China (the “CAOC”);CAOC;
 
the State Administration of Foreign Exchange (the “SAFE”);SAFE; and
 
the China Banking and Insurance Regulatory Commission (the “CBIRC”), which resulted from the merger of, and assumed the responsibilities previously held by, the China Banking Regulatory Commission (the “CBRC”) and the China Insurance Regulatory Commission (the “CIRC”). The “CBIRC” as used in this report refers to the governmental authority that resulted from the merger, as well as to the CBRC and the CIRC separately for periods prior to the merger.
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Specific Statutes and Regulations
Requirements for Establishment of WFOEs
Under the Law of the People’s Republic of China on Foreign Investment Enterprises (the “Foreign Investment Enterprises Law”), promulgated on April 12, 1986 and amended on October 31, 2000, the establishment of a WFOE was required to be approved by MOFCOM or one of its local branches. On September 3, 2016, the Foreign Investment Enterprises Law was further amended by the Decision of the Standing Committee of the National People’s Congress on Amending Four Laws including the Law of the People’s Republic of China on Wholly Foreign-Owned Enterprises, issued by the Standing Committee of the National People’s Congress, and on October 8, 2016 MOFCOM issued the Interim Measures for the Administration of Filing for Establishment and Change of the Foreign Investment Enterprises (the “Interim Filing Measures”), which were further amended on July 30, 2017 and June 29, 2018, respectively. The Foreign Investment Enterprises Law and the Interim Filing Measures provide that, with certain exceptions, the establishment of foreign-invested enterprisesFIEs is only subject to certain filing requirements with, and no longer requires prior approval by, MOFCOM or its local branches.
On March 15, 2019, the Standing Committee of the National People’s Congress issued the
Law of the People’s Republic of China on
Foreign Investment
(the “Foreign Investment Law”), Law, which took effect on January 1, 2020 and replaced the Foreign Investment Enterprises Law and other laws relating to foreign investment. The stated purpose of the Foreign Investment Law is to expand China’s opening up to the outside world, promoting and regulating foreign investment, and protecting the rights and interests of foreign investors. The Foreign Investment Law defines “foreign investment” as investment activity in China conducted directly or indirectly by foreign investors through any of the following methods: (i) the foreign investor, by itself or together with other investors, establishes an FIE in China; (ii) the foreign investor acquires shares or the equity securities, asset tranches, or similar rights or interests in enterprises in China; (iii) the foreign investor, by itself or together with other investors, invests and establishes a new project in China; or (iv) the foreign investor invests in China by any other means specified by laws, administrative regulations, or provisions prescribed by the State Council. In addition, the Foreign Investment Law provides, for example, that treatment of foreign investors and their investments during the investment access stage may not be inferior to treatment afforded to PRC domestic investors and their investments, except where a foreign investment is in a category of restricted investments. The Foreign Investment Law also provides that the PRC government will establish an information reporting system, and that foreign investors and
foreign-invested
enterprises FIEs will be required to submit investment information through an enterprise registration system and an enterprise credit information publicity system. On December 30, 2019 the MOFCOM issued the
Measures for the Reporting of Foreign Investment Information
(the “Reporting Measures”), which took effect on January 1, 2020, the same date as the effective date of the Foreign Investment Law to implement the information reporting system and replace the Interim Filing Measures. The Reporting Measures require that foreign investors establishing foreign investment enterprisesFIEs in China submit an initial report through the enterprise registration system; there is no longer any filing requirement with MOFCOM or its local branches under the Reporting Measures. On December 12, 2019, the State Council also issued the
Implementing Regulations of the Foreign Investment Law
and, on December 26, 2019, the Supreme People’s Court issued the
Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of the Foreign Investment Law of the People’s Republic of China
, both of which became effective on January 1, 2020. As the Foreign Investment Law and the related implementing regulations are newly-issued, their impact upon the existing procedures required for the establishment of a foreign-invested enterprisean FIE remains unclear, pending further clarification and guidance from the MOFCOM and other relevant governmental authorities. On December 19, 2020, the National Development and Reform Commission (the “NDRC”) and the MOFCOM promulgated the Security Review Measures, which became effective on January 18, 2021. The Security Review Measures stipulate that investment by foreign investors in specified industries within the PRC that affects or may affect national security will be subject to security review by relevant governmental authorities.
Each of our WFOEs established before September 3, 2016 was established with proper approval, and the two WFOEs that were established by Changyou on April 13, 2020 and November 12, 2020 have fulfilled their reporting obligations under the Reporting Measures.
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Requirements for Obtaining Business Licenses
All China-based companies may commence operations only upon the issuance of a business license by the relevant local branch of the SAMR. All of our China-based subsidiaries and VIEs have been issued business licenses by the relevant local branches of the SAMR.
In the opinion of Haiwen, our principal China-based subsidiaries and principal VIEs have satisfied the requirements for business licenses.
Regulation of Value-added Telecommunications Services
The
Telecommunications Regulations of the People’s Republic of China (“Telecom Regulations”)
, implemented on September 25, 2000 and amended on July 29, 2014 and February 2, 2016, are the primary PRC law governing telecommunication services, and set out the general framework for the provision of telecommunication services by domestic PRC companies. The Telecom Regulations require that telecommunications service providers procure operating licenses prior to commencing operations. The Telecom Regulations draw a distinction between “basic telecommunications services,” which we generally do not provide, and “value-added telecommunications services.” The Telecom Regulations define value-added telecommunications services as telecommunications and information services provided through public networks. The
Catalogue of Telecommunications Business (“Catalogue”),
which was issued as an attachment to the Telecom Regulations and updated in February 2003, December 2015 and June 2019, identifies Internet data centers, content delivery networks, domestic Internet virtual private networks, Internet access, online data and transaction processing,
on-demand
voice and image communications, message storage and forwarding (including voice mailbox,
e-mail
and online fax services), call centers, and online information and data search as value-added telecommunications services. We engage in various types of business activities that are value-added telecommunications services as defined and described by the Telecom Regulations and the Catalogue.
On July 3, 2017, the MIIT issued the
Administration Measures for Telecommunications Business Operating Permits (the “Telecom License Measures”)
, which became effective on September 1, 2017, to supplement the Telecom Regulations and replace the previous
Measures on the Administration of Telecommunications Business Operating Permits
promulgated in 2009
.
The Telecom License Measures provide requirements and procedures for obtaining licenses for value-added telecommunications services, and stipulate that the competent governmental authorities will mandate improved credit management mechanisms for telecommunication business operators, and will establish an online platform in connection with telecommunication business operating permits. The Telecom License Measures also confirm that there are two types of telecom operating licenses for operators in China, one for basic telecommunications services and one for value-added telecommunications services. A distinction is also made as to whether a license is granted for “intra-provincial” or “trans-regional” (inter-provincial) activities. An appendix to each license granted will detail the permitted activities of the enterprise to which it was granted. An approved telecommunication services operator must conduct its business (whether basic or value-added) in accordance with the specifications recorded in its Telecommunications Services Operating License.
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The business activities of Sohu Internet and Sogou Information include providing content to mobile phone users through the platforms of China’s main three telecommunications operators. The business activities of Sogou Information also include providing search services to mobile phone users through the platforms of China’s main three telecommunications operators. On April 25, 2004, the MIIT issued a notice stating that China mobile network operators may only provide mobile network access to those mobile Internet service providers which have obtained licenses from the relevant local arm of the MIIT before conducting operations. On the basis of the notice, China Mobile Communication Corporation (“China Mobile”) has required each of its mobile Internet service providers to first obtain a license for trans-regional value-added telecommunications services in order to gain full access to its mobile network, which is a nationwide policy in line with a similar notice issued by the Beijing branch of China Mobile on April 12, 2004.
On August 8, 2014, the MIIT issued to Sohu Internet a Value-Added Telecommunication Services Operating License, which werewas renewed on July 23, 2019, that authorizeauthorizes the provision of Internet data center services, Internet content distribution services, and Internet access services, all of which are classified as value-added telecommunication services. On January 30, 2015, the MIIT issued to Guangzhou Qianjun a Value-Added Telecommunications Services Operating License, which was renewed on November 23, 2019, that authorizes the provision of Internet information services, which are also classified as value-added telecommunication services. On June 2, 2016, the MIIT issued to Sogou Information a
Value-Added
Telecommunications Services Operating License, which was renewed on January 13, 2020, that authorizes the provision of Internet data center services and Internet access services.
Regulation of Foreign Direct Investment in Value-Added Telecommunications Companies
Various PRC regulations currently restrict foreign-invested entities from engaging in value-added telecommunication services, including providing Internet information services and operating online games. Foreign direct investment in telecommunications companies in China is regulated by the
Regulations for the Administration of Foreign-Invested Telecommunications Enterprises (“FITE Regulations”)
, which were issued by the PRC State Council, or State Council, on December 11, 2001, became effective on January 1, 2002 and were amended on September 10, 2008 and February 6, 2016. The FITE Regulations stipulate that foreign invested telecommunications enterprises in the PRC (“FITEs”) must be established as Sino-foreign equity joint ventures. Under the FITE Regulations and in accordance with
WTO-related
agreements, the foreign party to a FITE engaging in value-added telecommunications services may hold up to 50% of the equity of the FITE, with no geographic restrictions on the FITE’s operations. On June 30, 2016, the MIIT issued an
Announcement of the Ministry of Industry and Information Technology on Issues concerning the Provision of Telecommunication Services in the Mainland by Service Providers from Hong Kong and Macao
(the “MIIT Announcement”), which provides that investors from Hong Kong and Macau may hold more than 50% of the equity in FITEs engaging in certain specified categories of value-added telecommunications services.
For a FITE to acquire any equity interest in a value-added telecommunications business in China, it must satisfy a number of stringent performance and operational experience requirements, including demonstrating a track record and experience in operating a value-added telecommunications business overseas. FITEs that meet these requirements must obtain approvals from the MIIT and the MOFCOM or theirits authorized local counterparts, which retain considerable discretion in granting approvals.
On July 13, 2006, the
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The
Notice of the Ministry of Information Industry on Intensifying the Administration of Foreign Investment in Value-added Telecommunications Services (the “MIIT Notice”)
, which reiterates certain provisions of the FITE Regulations, was issued.issued on July 13, 2006. Under the MIIT Notice, if a FITE intends to invest in a PRC value-added telecommunications business, the FITE must be established and must apply for a telecommunications business license applicable to the business. Under the MIIT Notice, a domestic company that holds a license for the provision of Internet content services, or an ICP license, is considered to be a type of value-added telecommunications business in China, and is prohibited from leasing, transferring or selling the license to foreign investors in any form, and from providing any assistance, including providing resources, sites or facilities, to foreign investors to conduct value-added telecommunications businesses illegally in China. Trademarks and domain names that are used in the provision of Internet content services must be owned by the ICP license holder or its shareholders. The MIIT Notice requires each ICP license holder to have appropriate facilities for its approved business operations and to maintain such facilities in the regions covered by its license. In addition, all value-added telecommunications service providers are required to maintain network and information security in accordance with standards set forth in relevant PRC regulations. OurSome of the VIEs through which we operate, rather than our subsidiaries, hold ICP licenses, own our domain names, and hold or have applied for registration in the PRC of trademarks related to our business and own and maintain facilities that we believe are appropriate for our business operations.
On November 27, 2017, the MIIT promulgated the
Notice Regulating the Use of Domain Names in the Provision of Internet-based Information Services
, or the Domain Names Notice, which became effective on January 1, 2018. Under the Domain Names Notice, a domain name used by a provider of Internet-based information services must be registered and owned by the provider or, if the provider is an entity, by a shareholder or senior management of the provider.
In view of these restrictions on foreign direct investment in the value-added telecommunications sector, we established or acquired several domestic VIEs to engage in value-added telecommunications services. For a detailed discussion of our VIEs, please refer to “Our Corporate Structure” above. Due to a lack of interpretative materials from the relevant PRC authorities, there are uncertainties regarding whether PRC authorities would consider our corporate structure and contractual arrangements to constitute foreign ownership of a value-added telecommunications business. See “Risks Related to Our Corporate Structure.” In order to comply with PRC regulatory requirements, we operate our main business through companies with which we have contractual relationships but in which we do not have an actual ownership interest. If our current ownership structure is found to be in violation of current or future PRC laws, rules or regulations regarding the legality of foreign investment in the PRC Internet sector, we could be subject to severe penalties.
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In the opinion of Haiwen, subject to the uncertainties and risks disclosed elsewhere in this report under the heading “Risk Factors” and “Government“Governmental Regulation and Legal Uncertainties,” the ownership structures of our principal PRC Subsidiaries and our principal VIEs comply with all existing laws, rules and regulations of the PRC and each of such companies has the full legal right, power and authority, and has been duly approved, to carry on and engage in the business described in its business license.
Regulation of the Provision of Internet Content
Internet Information Services
On September 25, 2000, the State Council issued the
Measures for the Administration of Internet Information Services (“ICP Measures”),
which were amended on January 8, 2011. Under the ICP Measures, entities that provide commercial information services to online users on the Internet (“ICPs”) are obliged to obtain an operating license from the MIIT or its local branch at the provincial or municipal level in accordance with the Telecom Regulations described above.
The ICP Measures further stipulate that entities providing online information services regarding news, publishing, education, medicine, health, pharmaceuticals and medical equipment must procure the consent of the national authorities responsible for such areas prior to applying for an operating license from the MIIT or its local branch at the provincial or municipal level. Moreover, ICPs must display their operating license numbers in conspicuous locations on their home pages. ICPs are required to police their Internet platforms and remove certain prohibited content. Many of these requirements mirror Internet content restrictions that have been announced previously by PRC ministries, such as the MIIT, the MCT, and the SAPPRFT, that derive their authority from the State Council.
Sohu Internet, Guangzhou Qianjun, Shanghai ICE, Guanyou Gamespace, Gamease, and Sogou InformationGamease hold Telecommunications and Information Services Operating Licenses (each an “ICP license”), each of which is subject to the filing of an annual report. The ICP license held by Sohu Internet includes a permit for operating Internet information services at “focus.cn.”
In 2000, the MIIT promulgated the
Internet Electronic Bulletin Service Administrative Measures
(“BBS Measures”). The BBS Measures required ICPs to obtain specific approvals before they provided BBS services, which included electronic bulletin boards, electronic forums, message boards and chat rooms. On September 23, 2014, the MIIT abolished the BBS Measures in a
Decision on Abolishment and Amendment Certain Regulations and Rules
. However, in practice certain local authorities still require operating companies to obtain approvals or make filings for the operation of BBS services. The ICP licenses held by Sohu Internet, Gamease, and Guanyou Gamespace include such specific approval of the BBS services that they provide.
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On December 29, 2011, the MIIT issued
Several Provisions for Standardizing the Market Order of Internet Information Services
(the “Several Provisions”) which took effect on March 15, 2012. With the aim of promoting the healthy development of the Internet information services market in China, the Several Provisions strengthen the regulation of the operations of Internet information service providers, including prohibiting Internet information service providers from infringing the rights and interests of other Internet information service providers, regulating evaluations provided by Internet information service providers regarding the services and products of other Internet information service providers, and regulating the installation and running of software by Internet information service providers. The Several Provisions also provide various rules to protect the interests of Internet information users, such as requesting Internet information service providers to take measures to protect the privacy information of their users and prohibiting Internet information service providers from cheating and misleading their users.
On August 25, 2017, the CAOC issued the
Administration Measures for Internet Forum Community Service
, effective on October 1, 2017, to regulate the provision of online interactive social network services for information dissemination. On August 25, 2017, the CAOC issued the
Administration Measures for Internet Comment Thread Services
, effective on October 1, 2017, regulating the provision of services by websites, applications, interactive broadcasting platforms, and other communication platforms with news and media characteristics that allow users to release text, photos, audio, and video. On February 20, 2018, the CAOC issued the
Administrative Provisions on Micro-blogging and Blogging Information Services
, effective on March 20, 2018, further regulating the provision of platform services for publishing and distributing information through micro-blogs and blogs. On September 7, 2017, the CAOC issued the
Administration Measures for Internet Chat Group Services
, effective on October 8, 2017, to regulate the provision of platform services for that allow Internet user groups to exchange information online. On September 7, the CAOC issued the
Administration Measures for Internet Users’ Social Account Information Services
, which were effective on October 8, 2017 and amended on January 22, 2021. These measures provide, among other things, that Internet platform operators providing the covered services will be responsible for the security of information and content published over their platforms, and provide enhanced requirements for user registration, information review, emergency response, security, personal information protection, and intellectual property protection.
On November 15, 2018, the CAOC promulgated the
Provisions on the Security Assessment of Internet-based Information Services with Attribute of Public Opinions or Capable of Social Mobilization
, which require that Internet information service providers that provide Internet services with the potential to influence public opinion or provoke social movement, including BBS, blog, and micro-blog services, must conduct a security self-assessment and file with the local office of the CAOC a self-assessment report regarding their such Internet services and supporting technologies, their user base characteristics, and any significant changes in user opinions and potential risks concerning public security issues.
On October 26, 2021, the CAOC issued the
Notice on Further Strengthening the Regulation on Online Information of Entertainment Celebrities
, which requires internet platforms to, among other things, monitor online information of entertainment celebrities so as to timely identify hot topics that could involve illegal actions and promptly report to competent authorities. On August 25, 2021, the CAOC issued the
83Notice on Further Strengthening the Management of Chaos in Fan Groups,
Tablewhich is intended to rectify behavior in the online fan groups for entertainment celebrities, specifically, in features such as entertainment celebrity rankings, hot topics, fan communities, and fans interactive functions, so as to curb verbal abuse, stigmatization, instigation, confrontation, insults, slander, rumors, malicious marketing and the spread of Contentsother harmful information.
Online News Dissemination and Online News Search Services
In May 2017, the
Administrative Regulations for Internet News Information Services
and
Implementation Rules on the Administration of Internet News Information Services Permits
(collectively the “News Regulations”) were promulgated by the CAOC to replace the
Administrative Rules for Internet News Information Services
promulgated by the SCIO in 2005 (the “Old News Rules”). The News Regulations stipulate that Internet news information services include production, publishing, and republishing services and platforms providing for the dissemination of news over the Internet, and specify that platforms providing for the dissemination of news over the Internet will be required to obtain an Internet news information services permit.
Requirements of News Regulations include, among other things, the following:
 
Internet news information service providers must be entities duly incorporated within the territory of the PRC;
 
Managers and chief editors of Internet news information service providers must be Chinese citizens;
 
Internet news information service providers must have personnel who have appropriate qualification and professional training;
 
Internet news information service providers must have sound Internet news information service management systems;
 
Internet news information service providers must have rigorous information security management systems;
 
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Internet news information service providers must have facilities that are suitable for their proposed services, and must be adequately funded; and
 
Internet news information service providers may only republish news published by governmental news agencies and must ensure the original sources are traceable.
On July 3, 2016, the CAOC issued a Notice on Further Strengthening the Management and Prevention of Fake News (the “Fake News Notice”). The Fake News Notice requires all providers of online news services, including news applications, Weibo, and WeChat, to establish and maintain rigorous internal supervision and management systems and to not provide any news without identifying the sources of the news, invent news, report news based on hearsay, or distort facts.
On May 11, 2004, Sohu Internet obtained from the Information Office of the Beijing Municipal Government (the local arm of the SCIO) an Internet news information services permit, which was updated by the SCIO on June 6, 2006, April 4, 2018 and April 4, 2018,2021, respectively. There is uncertainty as to whether the provision of news search services and aggregation of news links fit within the definition of news dissemination services. Sogou Information is currently in the process of applying for an online news services license.
Internet Publishing
On February 4, 2016, the SAPPRFT and MIIT jointly issued the Rules for the Administration for Internet Publishing Services (the “Internet Publishing Rules”), which took effect on March 10, 2016, to replace the Provisional Rules for the Administration for Internet Publishing that had been jointly issued by the SAPPRFT and the MIIT on June 27, 2002. The Internet Publishing Rules define “Internet publications” as digital works that are edited, produced or processed to be published and provided to the public through the Internet, including (a)(i) original digital works, such as pictures, maps, games, and comics; (b)(ii) digital works with content that is consistent with the type of content that, prior to the Internet age, typically was published in media such as books, newspapers, periodicals, audio-visual products, and electronic publications; (c)(iii) digital works in the form of online databases compiled by selecting, arranging and compiling other types of digital works; and (d)(iv) other types of digital works identified by the SAPPRFT. Under the Internet Publishing Rules, Internet operators distributing such Internet publications via information networks, including Web portals such as ours, are required to apply to and register with the SAPPRFT before distributing Internet publications.
On June 5, 2020, the National Press and Publication Administration issued the
Notice on Further Strengthening the Administration of Online Literature Publishing
. This notice provides that a platform publishing online literatureliterary works must (a)(i) require writers to provide real identity information; (b)(ii) review the works before they are published on the platform; and (c)(iii) take appropriate and timely measures to prevent dissemination through the platform of false or misleading information.
On December 22, 2010, Sohu Internet obtained an Internet publishing license issued by the SAPPRFT, which was renewed on October 1, 2019. The renewed license expired on December 21, 2021. As of the date of this annual report, Sohu Internet is in the process of applying for renewal of the license, but there is uncertainty as to whether Sohu Internet will be able to renew it. For the details of the Internet publishing licenses held by Changyou’s VIEs, see “Specific Statutes and Regulations—Regulation of Online Game Services—Online Games and Cultural Products.” Sogou Information plans to apply for an Internet publishing license.
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Online Audiovisual Transmission Through the Public Internet
On December 20, 2007, the SAPPRFT and the MIIT jointly issued
Rules for the Administration of Internet Audiovisual Program Services
(“Document 56”), which came into effect as of January 31, 2008 and was amended on August 28, 2015. Document 56 requires all online audio and video service providers to be either state-owned or state-controlled and to obtain a permit for the Network Transmission of Audiovisual Programs. However, at a press conference held on February 3, 2008 the SAPPRFT and the MIIT clarified that online audio-visual service providers that were already lawfully operating prior to the issuance of Document 56 may
re-register
and continue to operate without becoming state-owned or controlled, provided that such providers do not engage in any unlawful activities. This exemption will not be granted to service providers set up after Document 56 was issued. As we were already engaged in online audiovisual transmission prior to the issuance of Document 56, we are presumably exempted from the requirement of being state-owned or state-controlled. Sohu Internet and Guangzhou Qianjun currently hold permits, both for PC and for Mobile Apps, for the Network Transmission of Audiovisual Programs.
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On March 30, 2009, the SAPPRFT released a
Notice on Strengthening the Administration of Online Audiovisual Content
(the “March 2009 SAPPRFT notice”). March 2009 SAPPRFT notice requires the operators of audiovisual Websites to enhance their processes for protecting copyrights, and to take appropriate measures to protect the rights and interests of copyright holders. Operators of such sites must hold, or have a license to, the copyright to all content that they transmit. In addition, the March 2009 SAPPRFT notice stipulates that only those films or TV programs that have already obtained from the SAPPRFT a Film Public Screening Permit, TV Drama Distribution Permit, TV Animation Distribution Permit, or TV Documentary Film Screening Permit are allowed to be transmitted via audiovisual Websites. These permits are mandatory for all films and programs shown on TV and in cinemas in China and must be obtained before such film or TV or program is allowed to be released. The approval applications for the Film Public Screening Permit, Television Drama Distribution Permit, Television Animation Distribution Permit or Television Documentary Film Screening Permit are extremely difficult and time-consuming, and the SAPPRFT previously did not enforce very strictly the requirements regarding these permits. However, on September 2, 2014, the SAPPRFT issued a
Notice on Further Strengthening the Administration of Online Foreign Audiovisual Content
(“September 2014 SAPPRFT Notice”), which requires that operators of audiovisual Websites to obtain from the SAPPRFT a Film Public Screening Permit, TV Drama Distribution Permit, or TV Animation Distribution Permit for all foreign films and TV dramas before they are transmitted via the Internet in China. The September 2014 SAPPRFT Notice further stipulates that before any foreign films or TV dramas for transmission exclusively via the Internet are purchased after the promulgation of the September 2014 SAPPRFT Notice, operators of audiovisual Websites must declare their annual purchasing plans with the SAPPRFT before the end of the year preceding the year of the intended broadcast and obtain the SAPPRFT’s approval. The September 2014 SAPPRFT Notice also states that the number of foreign films and TV dramas to be purchased by an operator and transmitted via its Website in a single year may not exceed 30% of the total amount of the Chinese films and TV dramas purchased and transmitted by the same Website in the previous year.
On March 17, 2010, SAPPRFT issued a
Catalogue of Classification of Internet Audio-Video Program Services (Trial)
(the “Internet Audio-Video Program Catalogue”), which was amended on March 10, 2017. The Internet Audio-Video Program Catalogue classifies Internet audio-video program services (excluding IPTV, Internet TV and mobile TV services) provided to computer and mobile phone users the Internet into four categories, consisting of (i) Internet audio-video programs sponsored and broadcast through Internet radio and television stations, including political news, political talk shows, self-produced news programs and live programs of vital political, military, economic, social and sports activities; (ii) reprints of political news, Internet hosting, interviews, report and commentary services in entertainment, technology, financial, sports and educational audio-video programs, production and broadcasting of Internet dramas, compilation and broadcasting of entertainment, technology, financial, sports and education audio-video programs, and live broadcasting of cultural and sports activities; (iii) the aggregation of Internet audio-video programs, which means editing and arranging Internet
audio-visual
programs on the same website, providing search and viewing services to public users, and broadcasting user-uploaded audio-video programs; and (iv) retransmission of Internet audio-video programs. A permit for the Network Transmission of Audiovisual Programs specifies the scope of the services under one or more of these categories that the holder of the permit is allowed to provide. OurSohu Internet’s permit for the Network Transmission of Audiovisual Programs allows usSohu Internet to provide services mostly under the categories described in clauses (ii), (iii), and (iv) above. Sogou information is currently in the process of negotiating with an entity that holds aGuangzhou Qianjun’s permit for the Network Transmission of Audiovisual Programs allows Guangzhou Qianjun to provide certain services under the categories described in order to acquire all of the equity interests in such entity, which is a common market practice for companies, such as Sogou, that are not wholly state-owned or state-controlled entities.clauses (ii) and (iii) above.
On July 6, 2012, the SAPPRFT and the CAOC jointly issued a
Notice on Further Strengthening the Administration of Internet Dramas, Micro Movies and Other Internet Audiovisual programs
(the “2012 SAPPRFT Notice 53”), which reiterates that online audio-visual service providers must obtain a Permit for the Network Transmission of Audiovisual Programs from the SAPPRFT. The 2012 SAPPRFT Notice 53 further stipulates that online audio-visual service providers must review the content of Internet audiovisual programs prior to their transmission and must file certain information, such as the names of the Internet audiovisual programs, summaries of their content, and names of the persons conducting the reviews, with the appropriate provincial office of the SAPPRFT. On January 9, 2019, the China Netcasting Services Association, an industry self-regulatory association, issued
Management Standards for Internet Short Video Platforms
and
Detailed Standard Rules for Reviewing the Content of Internet Short Videos
, for the stated purpose of strengthening the responsibility of online platforms to examine the content of short videos before their transmission. On February 21, 2020, the China Netcasting Services Association issued the
Detailed Standard Rules for Reviewing the Content of Internet Variety Shows
,
which provide guidelines regarding such content matters as the choice of crew and cast and their behavior, and wardrobe and props, in variety shows, and provide detailed instructions for the examination of Internet variety shows.
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On January 2, 2014, the SAPPRFT issued a
Supplemental Notice on 2012 SAPPRFT Notice 53
, which stipulates that producers of Internet dramas, micro movies and other Internet audiovisual programs must obtain a Permit for Radio and Television Program Production and Operation. Online audio-visual service providers may only retransmit dramas and micro movies produced and uploaded by individuals whose identities have been verified and the content of which complies with relevant regulations. Online audio-visual service providers must file with the provincial SAPPRFT the content of Internet audiovisual programs proposed for transmission prior to transmitting the programs.
On November 4, 2016, the SAPPRFT issued a
Notice on Further Strengthening the Planning, Development and Administration of Original Internet Audiovisual Programs
(“Document 198”). Document 198 stipulates that if online service providers plan to produce and disseminate audiovisual programs that are considered to be key audiovisual programs under Document 198, the service providers must, during the early planning and development stage, file a summary of the programs and their titles, producer names, themes, and duration with the SAPPRFT and, for audiovisual programs with sensitive themes such as politics, military, diplomacy, national security, national sovereignty, religion, the PRC justice system and public security, consult with designated PRC governmental authorities before production of the programs. On June 26, 2017, SAPPRFT and other several governmental authorities issued a
Notice on Several Policies Concerning the Prosperity and Development of Television Dramas
that confirms filing procedures with respect to key Internet dramas. In accordance with the
Notice on Upgrading the Filing System of the Online Audiovisual Programs
issued by the NRTA, effective December 27, 2018, producers of key audiovisual programs must make filings prior to the commencement of the production that include a summary of specified details concerning the programs and, following the completion of the production, submit the completed programs to the NRTA or its competent provincial counterpart and make filings with additional information concerning the programs.
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On March 16, 2018, the SAPPRFT issued a
Notice on Further Regulating the Distribution Order of Internet Audiovisual Programs,
which prohibits operators of audiovisual Websites from editing or adapting audiovisual programs of third-party content providers, broadcasting illegally edited and/or adapted audiovisual programs on their audiovisual Websites, and/or entering into business collaboration arrangements for online audiovisual services with providers without a Permit of Network Transmission of Audiovisual Programs.
On November 18, 2019, the CAOC, the SAPPRFT, and the MCT jointly issued the
Provisions on the Administration of Internet Audio-video Information Services
(the “2019 Notice 3”), pursuant to which Internet audiovisual information services providers are required to identify and conspicuously mark for users of their platforms
non-reality-based
audiovisual information created using deep learning, virtual reality, and other new technologies and applications. In addition, the 2019 Notice 3 stipulates that Internet audiovisual information service providers are obliged to establish and implement an anti-rumor mechanism to detect and prevent disseminating rumors generated using such technologies and applications, and report such information and rumors to the CAOC, the SAPPRFT, and the MCT.
Protection of Minors
On March 29, 2019, the SAPPRFT issued the
Administrative Regulations Regarding Programs
for Minors
(the “Programs for Minors Regulations”), which took effect on April 30, 2019.2019 and was amended on October 8, 2021. Under the Programs for Minors Regulations, programs for minors refer to Internet audiovisual programs and radio and television programs with minors as the main participants or the target audience. Under the Programs for Minors Regulations, providers of online audiovisual program services are required to adopt a number of measures to protect the physical and psychological well-being of minors, including establishing separate zones on their online platforms for audiovisual programs suitable for minors; prohibiting the advertising in such separate zones of pharmaceuticals, medical equipment, cosmetics, alcohol, cosmetic surgery, and other specified categories not considered suitable for minors; displaying break reminders in a prominent position during programs for minors; and deleting, blocking, and disconnecting links and adopting other necessary measures. Online audiovisual program services providers are also required to conduct
pre-broadcasting
reviews of programs for minors and advertisements to be directed to minors, and to form committees consisting of minor protection experts and representatives of parent and teacher groups to periodically evaluate programs for minors and such advertisements.
On October 17, 2020, the Standing Committee of the National People’s Congress amended the Minors Protection Law of the PRC (as amended, the “Minors Protection Law”) effective as of June 1, 2021. The Minors Protection Law promotes Internet literacy among minors, protects personal information of minors, and strengthens the protection of minors from cyber bullying and from addictive behaviors related to Internet services and products.
On May 15, 2020, the Supreme People’s Court issued several guiding opinions on civil cases. The opinions stipulate that if minors pay reward money on live online performance platforms without the consent of their guardians and the money is spent in a way that is not appropriate for their age or intelligence, their guardians may require the Internet service providers to refund the money.
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Private Network and Targeted Communication Audiovisual Program Services
On April 25, 2016, the SAPPRFT issued
the Provisions on the Administration of Private Network and Targeted Communication Audiovisual Program Services
(the “Private Network Audiovisual Programs Administration Provisions”), which were amended effective on June 1, 2016,March 23, 2021, to replace the
Measures for the Administration of the Transmission of Audiovisual Programs over Internet and other Information Networks
that had been
issued by the SAPPRFT on July 6, 2004. The Private Network Audiovisual Programs Administration Provisions stipulate that private network and targeted communication audiovisual program services include the provision, integrated control, transmission and distribution of audiovisual content through IPTV, targeted mobile television, television network and other targeted channels. The Private Network Audiovisual Programs Administration Provisions provide that operators engaging in private network and targeted communication audiovisual program services must obtain a permit for the Network Transmission of Audiovisual Programs from the SAPPRFT. The Private Network Audiovisual Programs Administration Provisions provide that only PRC state-owned or state-controlled entities may engage in private network and targeted communication audiovisual program services. We provide a small amount of audiovisual program services through private network and/or targeted communication channels, such as IPTVs and television networks. In order to comply with the Private Network Audiovisual Programs Administration Provisions, we partner with PRC state-owned entities for the provision of such services through private network and targeted communication channels. According to a press conference of SAPPRFT regarding the Private Network Audiovisual Programs Administration Provisions, Internet audiovisual program services provided through the public Internet, which include our main online video services, other than private network and targeted communication channels should comply with Document 56. See “Government“Governmental Regulation and Legal Uncertainties—Uncertainties - Specific Statutes and Regulations—Regulations - Regulation of the Provision of Internet Content—Content - Online Audiovisual Transmission through the Public Internet” for a description of regulations affecting Internet Audio-video program services provided through the public Internet.
Online Cultural Products
On May 10, 2003, the MCT issued the
Provisional Regulations for the Administration of Online Culture
(“Online Culture Regulations”), which took effect on July 1, 2003 and were amended on July 1, 2004. On February 17, 2011, the MCT issued the new
Provisional Regulations for the Administration of Online Culture
(“New Online Culture Regulations”), which took effect on April 1, 2011 and were amended on December 15, 2017, to replace the previous regulations. The New Online Culture Regulations apply to entities engaging in activities related to “Internet cultural products,” which include those cultural products that are produced specially for Internet use, such as online music and entertainment, online games, online plays, online performances, online works of art and Web animations, and those cultural products that, through technical means, produce or reproduce music, entertainment, games, plays and other art works for Internet dissemination. Pursuant to the New Online Culture Regulations, commercial entities are required to apply to the relevant local branch of the MCT for an Online Culture Operating Permit if they engage in any of the following types of activities:
 
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the production, duplication, importation, release or broadcasting of Internet cultural products;
 
the dissemination of online cultural products on the Internet or transmission thereof via Internet or mobile phone networks to users’ terminals such as computers, fixed-line or mobile phones, television sets, gaming consoles and Internet surfing service sites such as Internet cafés for the purpose of browsing, using or downloading such products; or
 
the exhibition or holding of contests related to Internet cultural products.
On June 19, 2018,November 11, 2021, the MCT issued the
Administrative Measures on Credit for the Cultural and Tourism Market
(the “Credit Measures”)
to replace the
Measures for the Administration of a National Cultural Market Blacklist
(the “Blacklist Measures”) to replace the Trial Measures for the Administration of a Cultural Market Blacklist issued on January 6, 2016.June 19, 2018. The Blacklist measures stipulateCredit Measures classify entities that a provider or operator of cultural products and services that engagesengage in illegal activities specified in the Blacklistcultural and tourism markets that are determined to be dishonest into entities that are determined to have engaged in egregiously dishonest activities and entities that are determined to have engaged in activities that, though dishonest, are relatively less dishonest and further stipulate standards and procedures for identifying entities that engage in such dishonest activities. In addition, operators identified as engaging in dishonest activities under the Credit Measures willmay be listed insubject to a “cultural market blacklist” published by the MCT. Any future application made to theseries of regulatory measures, such as strict daily supervision and frequent random inspection from MCT or its local branches by a provider or operator whose name is listed in the cultural market blacklist will be subject to heightened scrutiny.counterparts.
On July 1, 2016, the MCT issued a
Notice on Strengthening the Administration of Online Performanc
e (the “Online Performance Notice”) and on December 2, 2016, issued the
Measures of Administration of Online Performance Operating Activities
(the “Online Performance Measures”), which became effective on January 1, 2017. The Online Performance Notice and the Online Performance Measures both stipulate that online performance service providers must obtain an Online Culture Operating Permit and that online performances must not contain any content that is horrific, cruel, violent, vulgar or humiliating in nature, mocks persons with disabilities, includes photographs or video clips that infringe third parties’ privacy or other rights, features animal abuse, or presents characters and other features of online games that have not been registered and approved for publication by applicable PRC governmental authorities.
On September 2, 2021, the NRTA issued the
Notice on Further Strengthening the Management of Arts and Their Personnel
, under which online audio-visual platforms are required to strictly control the selection of actors and are prohibited from engaging actors with political positions considered to be wrong or who engage in deeds or use words considered to be immoral, actors considered to not be adhering to an acceptable level of social fairness and justice, or actors violating laws, regulations, or the public order.
Sohu Internet, Guangzhou Qianjun Gamease, Guanyou Gamespace, Shanghai ICE, and Sogou Information currently hold Online Culture Operating Permits. The Online Culture Operating Permit obtained by Sohu Internet includes a permit for operating Internet information services at “focus.cn.”
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On September 2, 2016, the SAPPRFT issued the
Notice on Strengthening the Management of Live Online Social Video Services
(the “Live Online Notice”), which requires interactive broadcasting service providers to procure a permit for the Network Transmission of Audiovisual Programs. Sohu Internet and Guangzhou Qianjun currently hold permits for the Network Transmission of Audiovisual Programs. The Live Online Notice also stipulates that a service provider must make a filing with the local SAPPRFT branch at least five days before making any live broadcast of any significant political, military, economic, social, cultural or sports activities and at least 48 hours before making any live broadcast of other cultural or sports activities. On November 4, 2016, the CAOC issued the Provisions on the Administration of Online Live Social Video Services (the “Live Social Video Provisions”) effective December 1, 2016. The Live Social Video Provisions provide that business entities such as us that offer interactive broadcasting services on their Internet platforms have the primary responsibility for monitoring content disseminated by interactive broadcasting hosts and viewers through such services, and must allocate sufficient staff in line with the scale of such services and establish and maintain adequate internal policies and procedures for, among other things, content review, information security management, emergency management and technical support. The Live Social Video Provisions also require that Internet providers verify the real-name identity of interactive broadcasting hosts and viewers before allowing them to establish user accounts with the Internet providers and take appropriate remedial actions, such as issuing warnings, removing posted content, or terminating the user’s account, with respect to interactive broadcasting content or activity that is prohibited by the Live Social Video Provisions. Internet providers are subject to administrative penalties and other sanctions for noncompliance with the Live Social Video Provisions. On August 1, 2018, the MIIT and several other governmental authorities issued a
Notice on Strengthening the Administration of Live Online Social Video Services
, which stipulates that providers of Internet access services and APP stores must not provide Internet access and APP distribution services for online interactive broadcasting service providers that do not hold requisite permits from or complete the requisite filing procedure with the applicable governmental agencies. On November 12, 2020, the NRTA promulgated the
Notice on Strengthening the Management of Live Broadcast of Online Shows and
E-commerce
Live Broadcast
, which requires live show online broadcasting platforms and
e-commerce
live online broadcasting platforms to enter information concerning their operating entities and business operations in a nationwide online system. Under the notice, live online broadcasting platforms are also required to classify their broadcast programs into, and label them according to, specified categories such as “music,” “dance,” and “travelling.” The notice and the
Guidance on Strengthening
Supervision of
E-commerce
Live Online Broadcasting Activities
issued by the SAMR in November 2020 also provide that
e-commerce
live online broadcasting platforms should verify the qualifications and real-name identities of the entities and individuals selling goods and services on such platforms, and ensure such sales to comply with the New Advertising Law and the
E-commerce
Law. On April 23, 2021, the CAOC and six other governmental authorities issued the
Administrative Measures for
E-commerce
Live Online broadcasting (for Trial Implementation)
,
which further stipulate that live online broadcasting platforms must take certain specified measures, such as arranging special personnel to conduct real-time inspections and extending the storage time for live broadcast content with respect to key live online broadcasting operators. The live online broadcasting platforms are also required to establish a sound risk identification model and take appropriate actions to prevent suspected violations of laws and regulations in regard to high-risk marketing activities, such as issuing violation warnings, limiting traffic and suspending live online broadcasting. In addition, relevant governmental authorities may share information regarding
e-commerce
live online broadcasting entities with records of serious violations and may carry out joint enforcement and punishment.
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On February 9, 2021, the CAOC and six other governmental authorities issued the
Guiding Opinions on Strengthening the Ratification and Administration of Live Online Broadcasting
(the
“
Guiding Opinions”). The Guiding Opinions stipulate that live online broadcasting platforms must (a)(i) classify and rank accounts for live online broadcasting based on factors such as the nature of the account holders, the content of performances, the number of followers and the popularity of the broadcast programs, (b)(ii) set reasonable limits on the duration of, the amount of money to be received in, and commodities to be sold in each broadcast program based on the accounts’ categories and rankings, and (c)(iii) set reasonable limits on the maximum amount of money paid by the Internet users for a single virtual commodity or reward in connection with a live online broadcast.
On March 15, 2021, the SAMR issued the
Measures for the Supervision and Administration for Online
Transactions
, which will take effect on May 1, 2021. The measures aim at creating a fairer competitive environment for online transaction operators and a safer consumption environment for users in online transactions, and specify the responsibilities of platform operators in the course of providing online shows and e-commerce live broadcast services.
On April 19, 2019, the China Alliance of Radio, Film, and Television issued the
Notice on Strictly Implementing the Proportional Allocation of Production Costs for Television and Internet Dramas
(the “Production Costs Notice”), which specifies that the aggregate compensation paid to cast members of a television
or
Internet drama may not exceed 40% of the total production costs of the drama and that the aggregate compensation paid to key members of the cast may not exceed 70% of the aggregate compensation paid to all of the cast members. Payment of amounts above the specified limits without reasonable grounds may result in the suspension or cancellation of the broadcast of the drama and/or the production permits of the producer.
Mobile Internet Applications Information Services
On June 28, 2016, the CAOC issued the
Provisions on the Administration of Mobile Internet Applications Information Services
(the “APP Provisions”), which became effective on August 1, 2016. Under the APP Provisions, mobile application providers and application store service providers are prohibited from engaging in any activity that may endanger national security, disturb the social order, or infringe the legal rights of third parties, and may not produce, copy, issue or disseminate through mobile applications any content prohibited by laws and regulations. The APP Provisions also require application providers to procure relevant approval to provide services through such applications and require application store service providers to register with local branch offices of the CAOC within 30 days after they start providing application store services. We have procured the required approvals for services that we provide through our mobile applications. If we, as a provider of information services through Apps, violate these regulations, mobile application stores through which we distribute our Apps may issue warnings to us, suspend the release, or terminate the sale, of our Apps, and/or report our violations to governmental authorities. Sogou Information has filed an application for registration with the applicable local branch of the CAOC with respect to its provision of application store services.
Internet Map Services
Under the
Opinions on Strengthening the Supervision of Internet Map and Geographic Information Services
and the
Notices on Further Strengthening the Management of Internet Map Services Permit
issued on February 25, 2008 and December 23, 2011, respectively, by the State Administration of Surveying, Mapping and
Geo-information
(the “SASMG,” formerly known as the State Bureau of Surveying and Mapping), and six other governmental authorities and the
Administrative Regulations on Maps
issued by the State Council on November 26, 2015, effective on January 1, 2016, any provider of Internet map services that is not a professional surveying and mapping enterprise must obtain the approval of the SASMG or its local branches and a Surveying and Mapping Qualification Certificate in order to provide such services. In addition, providers of Internet map services must use maps obtained through government-approved channels and display the SASMG approval number, the Surveying and Mapping Qualification Certificate number and the Telecommunications Services Operating License number in conspicuous locations on their Websites.
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On July 1, 2014, the SASMG issued the
Administrative Regulations on Surveying and Mapping Qualification Certificate and Classification Standard on Surveying and Mapping Qualification Certificate
(the “SASMG Regulations and Standards”) effective on August 1, 2014, to replace previous regulations and standards issued on April 16, 2004 and March 12, 2009. Under the SASMG Regulations and Standards, there are two types of Surveying and Mapping Qualification certificates that may be issued to providers of Internet map services. A Class A certificate allows a holder to provide
(i) map-location
services,
(ii) geo-information
uploading and dimension services, and
(iii) geo-information
database development services, while a holder of a Class B certificate may only provide the first two types of services.
On July 26, 2016, the SASMG and the Office of the Central Leading Group for Cyberspace Affairs (the “OCLGCA”) jointly issued a
Notice on Standardizing the Usage of Maps by Internet Services Providers
(the “Maps Usage Notice”), which stipulates that all the Internet service providers must review and use maps in accordance with the PRC
Surveying and Mapping Law
and
Administrative Regulations on Maps
. The Maps Usage Notice requires that maps displayed by Internet service providers be obtained through government-approved channels and identify their sources and censor numbers. Internet service providers are prohibited from using maps obtained from unaccredited sources, including foreign Websites. All maps, other than scenic maps, block maps, subway maps and other simple maps, must be reviewed by PRC governmental authorities before they are published, and must not contain any information or content specified as prohibited in the Maps Usage Notice.
On January 1, 2015, Sogou Information obtained a renewed Class A Certificate of Surveying and Mapping Qualification from the SASMG.
Internet Medical, Health and Pharmaceuticals Information Dissemination
Under the
Measures for the Administration of Internet Pharmaceuticals Information Services
(the “Pharmaceuticals Information Services Measures”) issued by the SAMR on July 8, 2004, which were amended on November 17, 2017, formal approval from the SAMR or one of its local branches is required before a Website may disseminate information concerning pharmaceuticals.
Under the Pharmaceuticals Information Services Measures, medical, health and pharmaceutical information (including information with respect to medical equipment) provided by Websites must be scientific and accurate and must indicate the sources of such information. Websites that have received approval to disseminate such information must also publish or reprint health policies, information on epidemics and major health-related incidents, and other health-related information in accordance with law. Furthermore, medical and pharmaceutical advertisements (including advertisements for medical equipment) published by such Websites must not exaggerate the efficacy or promote the medical uses of such products.
The VIEs Sohu Internet and Guangzhou Qianjun and Sogou Information received renewed approval from the SAMR, on June 13, 2019 and November 23, 2018, and September 18, 2020, respectively, to disseminate pharmaceuticals information over the Internet.
Regulation of Brand Advertising Services
On April 24, 2015, the Standing Committee of the National People’s Congress enacted the
Advertising Law of the People
’
s Republic of China
(the “New Advertising Law”), which became effective on September 1, 2015 and was amended on October 26, 2018.2018 and April 29, 2021. The New Advertising Law, which was a major overhaul of an advertising law enacted in 1994, increases the potential legal liability of providers of advertising services, and includes provisions intended to strengthen identification of false advertising and the power of regulatory authorities. On July 4, 2016, the SAMR issued the
Interim Measures of the Administration of Online Advertising
(the “SAMR Interim Measures”), effective on September 1, 2016. The New Advertising Law and the SAMR Interim Measures both provide that advertisements posted or published through the Internet may not affect users’ normal usage of a network, and advertisements published in the form of
pop-up
windows on the Internet must display a “close” sign prominently and ensure
one-key
closing of the
pop-up
windows. The SAMR Interim Measures provide that all online advertisements must be marked “Advertisement” so that viewers can easily identify them as such. Moreover, the SAMR Interim Measures treat
pay-for-click
search results as advertisements that are subject to PRC advertisement laws, require that
pay-for-click
search results be conspicuously identified on search result pages as advertisements and subject revenues from such advertisements to a 3% PRC tax that is applied to advertising revenues. The New Advertising Law and SAMR Interim Measures will require us to conduct more stringent examination and monitoring of our advertisers and the content of their advertisements. In order
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On November 26, 2021, the SAMR issued the
Administrative
Measures for Online Advertising (Draft for public comments)
(the “Draft Online Advertising Measures”). The Draft Online Advertising Measures provide that
pre-roll,
embedded and
pop-up
online advertisements must clearly display a “close” button which enables users to complyclose the advertisements with these regulations, Sogou has established more stringent standardsone click and prohibit the practice of forcing users to wait for selecting advertisers for
pay-for-click
services, has turned down certain existing advertisers, and has lowereda timer countdown to finish before they can close the percentage that
pay-for-click
search results represent of results on Sogou search pages.advertisements.
On April 13, 2016, the SAMR and sixteen other PRC government agencies jointly issued a
Notice of Campaign to Crack Down on Illegal Internet Finance Advertisements and Other Financial Activities in the Name of Investment Management
(the ‘‘Campaign Notice’’), pursuant to which a campaign was conducted between April 2016 and January 2017 targeting, among other things, online advertisements for Internet finance and other financial activities posted on Internet search portals and other portal, financial, real estate, P2P and investment product sales services Websites. On March 22, 2019, the SAMR issued the
Notice of a Campaign to Deepen the Rectification of Online Advertisements
, which targets false advertising related to the physical health or the protection of property of the public in areas such as pharmaceuticals, health food, and real estate and financial investments by Internet portals, search engines, and
e-commerce
platforms with significant social influence and wide coverage, as well as by Internet media such as mobile client applications and new media accounts. The
Notice of Key Areas of Work in 2020 of the Inter-Ministerial Joint Meeting on Rectification of False and Illegal Advertisements,
jointly issued by SAMR and ten other PRC government agencies on March 9, 2020, further emphasizes the responsibility of Internet service providers to verify and examine the content and supporting documents of online advertisements and prevent the dissemination of false and illegal online advertisements.
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On August 31, 2018, the Standing Committee of the National People’s Congress enacted the
E-commerce
Law of the People’s Republic of China
(the
“E-commerce
Law”), which took effect on January 1, 2019 and which stipulates, among other things, that although an
e-commerce
business operator may provide an Internet consumer with search results for goods or services based on such consumer’s preferences or consumption habits, the operator must also provide such consumer with options that are not based on such consumer’s preferences or habits, in order to respect and protect the rights and interests of such consumer, and reiterates that
e-commerce
business operators that distribute online advertisements to consumers must comply with the New Advertising Law.
Regulation of Online Game Services
Online Games and Cultural Products
In September 2009, the SAPPRFT, together with the National Copyright Administration and the National Office of Combating Pornography and Illegal Publications, jointly issued a
Notice on Further Strengthening the Administration of
Pre-examination
and Approval of Online Games and the Examination and Approval of Imported Online Games
, or the SAPPRFT Online Game Notice. The SAPPRFT Online Game Notice states that foreign investors are not permitted to invest in online game operating businesses in China via wholly foreign-owned entities, China-foreign equity joint ventures or cooperative joint ventures or to exercise control over or participate in the operation of domestic online game businesses through indirect means, such as other joint venture companies or contractual or technical arrangements. If the VIE structures of Changyou and Sogou were deemed under the SAPPRFT Online Game Notice to be an “indirect means” for foreign investors to exercise control over or participate in the operation of a domestic online game business, the VIE structures of Changyou and Sogou might be challenged by the SPPA, a successor agency to the SAPPRFT. We are not aware of any online game companies which use the same or similar VIE contractual arrangements as those Changyou and Sogou use having been challenged by the SAPPRFT or the SPPA as using those VIE arrangements as an “indirect means” for foreign investors to exercise control over or participate in the operation of a domestic online game business or having been penalized or ordered to terminate operations since the SAPPRFT Online Game Notice first became effective. However, it is unclear whether and how the SAPPRFT Online Game Notice might be interpreted or implemented in the future.
On February 21, 2008, the SAPPRFT issued the
Rules for the Administration of Electronic Publications
, or the Electronic Publication Rules, which were amended on August 28, 2015. The Electronic Publication Rules regulate the production, publishing and importation of electronic publications in the PRC and outline a licensing system for business operations involving electronic publishing. Under the Electronic Publication Rules and other related regulations issued by the SAPPRFT, online games are classified as a type of electronic publication or Internet publication that may only be provided by a licensed electronic publishing entity with a standard publication code, and the establishment of an electronic publishing entity must be approved by the SAPPRFT. Electronic publishing entities are responsible for assuring that the content of electronic publications comply with relevant PRC law and regulations, and must obtain the approval of the SPPA, a successor agency to the SAPPRFT, before publishing foreign electronic publications. The New Internet Publication Measures, which became effective on March 10, 2016 and replaced the
Temporary Measures for Internet Publication Administration
that had become effective in 2002, require that entities in the Internet publishing business apply for an online publishing services license instead of an Internet publishing license, that entities holding an Internet publishing license apply for an online publishing service license within a specified period of time to replace their Internet publishing license, and that all such entities obtain approval from the SAPPRFT or the SPPA prior to the publication of new online games. In addition, under the New Internet Publication Measures, Sino-foreign joint ventures and foreign-invested entities are not permitted to engage in Internet publication services, and the legal representative of an entity providing Internet publication services may not be a foreigner.
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Gamease, which is the operator of TLBB, BO, BH2Blade Online and certain other licensed PC games, and Guanyou Gamespace, which provides online game services, obtained Internet publishing licenses on December 10, 2010 and October 13, 2011, respectively, and Gamease and Guanyou Gamespace have obtained online publishing services licenses under the New Internet Publication Measures to replace the Internet publishing licenses previously held by them. TLBB, BO, BH2Blade Online and some of Changyou’s other games were historically published through third parties that were licensed electronic publishing entities, because Gamease had not obtained an Internet publishing license at the time those online games were made publicly available. TLBB, BO and BH2Blade Online and certain of Changyou’s other existing games are currently published under an Internet publishing license held by Gamease. As of the date of this annual report, the Internet publishing licenses held by Gamease and Guanyou Gamespace have expired, and Gamease and Guanyou Gamespace are in the process of applying for renewal of their respective licenses. There is uncertainty as to whether Gamease and Guanyou Gamespace will be able to renew such licenses. Current PRC regulations are not clear as to the consequences of obtaining authorization codes through third-party electronic publishing entities. While we believe that arrangements like Changyou’s are acknowledged by the SAPPRFT or SPPA, in view of the lack of formal interpretation regarding this issue, the SPPA might challenge Changyou’s current and past practices and could subject Changyou to various penalties, including fines, confiscation of publishing equipment and the revenues generated from the publishing activities, the revocation of Changyou’s business license, or the forced discontinuation of or restrictions on its operations.
On May 24, 2016, the SAPPRFT issued the Mobile Game Notice, which became effective on July 1, 2016 and sets forth requirements for the publication and operation of mobile games online, including requiring that mobile game publishers and operators, including joint operators, review the content of the games that they publish and operate, and apply for publication and authorization codes at least 20 business days before first publishing and operating domestic recreational and educational mobile games through open beta testing. The Mobile Game Notice, as updated by a subsequent notice, specifies that game publishers and game operators were required to review the content of mobile games that were published and operated online before July 1, 2016, and to complete approval procedures for those games before December 31, 2016, or to cease operating the games. The Changyou VIEs completed prior to December 31, 2016 all of the approval procedures required by the SAPPRFT for itsChangyou’s mobile games that were in operation before July 1, 2016.
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The MCT issued the
New Provisional Regulations for the Administration of Online Culture
, or the Online Culture Regulations, which took effect on April 1, 2011 and was amended on December 15, 2017 and replaced the
Provisional Regulations for the Administration of Online
Culture
. The Online Culture Regulations apply to entities engaging in activities related to “Internet cultural products,” which include cultural products that are produced specifically for Internet use, such as online music and entertainment, online games, online plays, online performances, online works of art and Web animation, and other online cultural products that through technical means, produce or reproduce music, entertainment, games, plays and other art works for Internet dissemination. Under the New Online Culture Regulations, commercial entities are required to apply to the relevant local branch of the MCT for an Online Culture Operating Permit if they engage in the production, duplication, importation, release or broadcasting of Internet cultural products; the dissemination of online cultural products on the Internet or the transmission of such products via Internet or mobile phone networks to user terminals, such as computers, phones, television sets and gaming consoles, or Internet surfing service sites such as Internet cafés; or the holding or exhibition of contests related to Internet cultural products. On May 14, 2019, the MCT issued the MCT Approval Scope Notice, pursuant to which the MCT is no longer responsible for regulating the online-game industry and its local branches are no longer responsible for granting new Online Culture Operating Permits for online games, or renewing existing permits after their expiration. It is not clear whether another PRC governmental agency will be designated to supervise the online game industry and whether a new permit or license that is similar to Online Cultural Operating Permit will be required for the operation of online games. On December 9, 2019, the Comprehensive Market Enforcement Supervision Bureau of MCT issued the
Notice on Law Enforcement in the Online Game Market
, which stipulates that the investigation and processing of online game cases will be under the
Measures of Internet Publication Service Administration,
and that the
Interim Measures for Online Games Administration
, which became effective on August 1, 2010 and were repealed on July 10, 2019, will no longer apply to such cases. In January 2008 Gamease obtained an Online Culture Operating Permit, which was
re-certified
in October 2015 and December 2017; and in December 2010 Shanghai ICE obtained an Online Culture Operating Permit, which was
re-certified
in January 2014.
The
Notice on Strengthening the Approval and Administration of Imported Online Games
, or the Imported Online Game Notice, which was issued by the SAPPRFT and took effect in July 2009, states that the SAPPRFT was, and the SPPA as a successor to the SAPPRFT is, the only governmental department authorized by the State Council to approve the importation of online games from Offshore copyright owners, and that any enterprise which engages in online game publication and operation services within China must have the game examined and approved by the SAPPRFT or the SPPA and receive from the SAPPRFT or the SPPA an Internet publishing license (or after the New Internet Publication Measures became effective on March 10, 2016, an online publishing services license). Changyou’s VIEs Gamease and Guanyou Gamespace obtained Internet publishing licenses from the SAPPRFT and they have obtained online publishing services licenses under the New Internet Publication Measures to replace the Internet publishing licenses previously held by them. In addition, the Imported Online Game Notice states that activities which involve the showing, exhibition, trading and promotion of Offshore online games in China must be examined and approved by the SAPPRFT or the SPPA.
The
Administrative Measures for Content Self-review by Internet Culture Business Entities
, or the Content Self-review Administrative Measure, which took effect in December 2013, require Internet culture business entities to review the content of products and services to be provided prior to providing such content and services to the public. The content management system of an Internet culture business entity is required to specify the responsibilities, standards and processes for content review as well as accountability measures, and is required be filed with the local provincial branch of the MCT.
In January 2014, the SAIC promulgated the
Administrative Measures for Online Trading
, or the Online Trading Measures, which took effect on March 15, 2014, and replaced the Interim Measures for the
Administration of Online Commodities Trading and Relevant Services
, issued by the SAIC, which had taken effect on July 1, 2010. The Online Trading Measures regulate online commodity trading and related activities. The Online Trading Measures require that online transactions in commodities or services comply with the provisions of all applicable laws, regulations and rules. When selling commodities or providing services to consumers, online operators must comply with all applicable laws with respect to the protection of consumer rights and interests, the protection of intellectual property rights of others and the prevention of unfair competition. Information provided with respect to commodities and services provided by online commodity operators or related service operators must be authentic and accurate. If Changyou fails to comply with all requirements of the Online Trading Measures, the local branch of the SAIC or SAMR or another governmental authority with jurisdiction might impose penalties on it, such as fines.
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Registration of Software Copyrights
The
Measures Concerning Registration of Computer Software Copyright
, or the Software Copyright Measures, issued by the National Copyright Administration, which became effective in February 2002, encourage the registration of software and afford greater protection to registered software than that afforded to unregistered software. Changyou has registered software copyrights covering all of its significant copyrightable products and enhancements.
Regulation of Internet Content
The PRC government has promulgated measures relating to Internet content through a number of government authorities, including the MIIT, the MCT, the SPPA, the NRTA and the MPS. These measures prohibit certain Internet activities, including the operation of online games that result in the publication of any content which is found to, among other things, propagate obscenity, gambling or violence, instigate crimes, undermine public morality or the cultural traditions of the PRC, or compromise State security or secrets. If an ICP license holder violates these measures, the PRC government may revoke its ICP license and shut down its Websites.
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On May 2, 2017, the CAOC, issued the
Administrative Enforcement Procedures for the Administration of Internet-based Information Content
, or the Enforcement Procedures, effective June 1, 2017. Pursuant to the Enforcement Procedures, the CAOC and its local branch offices have the authority to enforce, and impose administrative sanctions on activities prohibited by, applicable administrative laws and regulations concerning Internet-based information content.
Protection of Minors
On August 30, 2021, the NPPA issued the
Notice on Further Strengthening the Administration of the Prevention of Minors from Indulging in Online Games.
On October 20, 2021, the MOE, the SAMR and several other PRC authorities jointly issued the
Notice on Further Strengthening the Administration of the Prevention of Primary and Secondary School Students’ Addiction to Online Games
(the “Further Indulgence Prevention Notice”), which provides that online game operators may only provide online game services to minors on Fridays, Saturdays, Sundays and PRC statutory holidays for one hour per day from 8:00 p.m. to 9:00 p.m. In addition, the Indulgence Prevention Notice and the Further Indulgence Prevention Notice require that that online game operators may not provide game services to any users who have not registered using their real names.
On October 17, 2020, the Standing Committee of the National People’s Congress issued the Minor Protection Law, which will taketook effect on June 1, 2021 and which will strengthenhas enhanced the requirements for the protection of minors from addictive online-game playing behaviors. Also see “Government“Governmental Regulation and Legal Uncertainties - Regulation of the Provision of Internet Content—Protection of Minors.”
On May 15, 2020, the Supreme People’s Court issued several guiding opinions on civil cases. The opinions stipulate that if minors participate in online games that are not free to play without the consent of their guardians and spend the money in a way that is not suitable for their age or intelligence, the guardians may request the online game or live game platform operators to refund the money.
On April 15, 2007, the SAPPRFT and several other governmental authorities issued a circular requiring the implementation of an “anti-fatigue system” and a real-name registration system by all PRC online game operators, in an effort to curb addictive online game play behaviors of minors. Under the anti-fatigue system, three hours or less of continuous play by minors is considered to be “healthy,” three to five hours to be “fatiguing,” and five hours or more to be “unhealthy.” Game operators are required to reduce the value of
in-game
benefits to a game player by half if the game player has reached “fatiguing” level, and to zero in the case of “unhealthy” level.
To identify whether a game player is a minor and thus subject to the anti-fatigue system, there was adopted a real-name registration system, which requires online game players to register their real identity information before they play online games and requires online game operators such as Changyou and Sogou to submit the identity information of game players to the public security authorities for verification. On July 1, 2011, the SAPPRFT, the MIIT, the Ministry of Education and five other governmental authorities issued
a Notice on Initializing the verification of Real-name Registration for Anti-Fatigue System on Internet Games
, or the Real-name Registration Notice”), which took effect on October 1, 2011, to strengthen the implementation of the anti-fatigue system and real-name registration. The Real-name Registration Notice’s main focus is to prevent minors from using an adult’s ID to play Internet games and, accordingly, the notice imposes stringent punishments on online game operators that do not implement the required anti-fatigue and real-name registration measures properly and effectively. The most severe punishment contemplated by the Real-name Registration Notice is to require termination of the operation of the online game if it is found to be in violation of the Anti-Fatigue Notice, the Monitor System Circular or the Real-name Registration Notice. Changyou and Sogou developed anti-fatigue and real-name registration systems for theirits games, and implemented them beginning in 2007. Under the systems of Changyou, and Sogou, game players must use real identification in order to create accounts, and in this way Changyou and Sogou generally are able to tell which of their game players are minors and thus subject to these regulations. For game players who do not register, Changyou and Sogou assume that they are minors. As required by the anti-fatigue rules, Changyou reduces the value of
in-game
benefits of game players under 18 years based on the amount of their continuous play. In order to comply with the
anti-fatigue
rules, game players under 18 years of age only receive half of the experience time they actually earn after three hours of play. And, after five hours of play, minors receive no experience points. Sogou uses this system to disincentivize minors from playing in excess
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On January 15, 2011, the MCT, the MIIT and six other central government authorities jointly issued a circular entitled
Implementation of Online Game Monitor System of the Guardians of Minors
, or the Monitor System Circular, aiming to provide protection measures to monitor the online game activities of minors and curb addictive online game playing behaviors of minors. Under the Monitor System Circular, online game operators are required to adopt various measures to maintain a system to communicate with the parents or other guardians of minors playing online games and online game operators are required to monitor the online game activities of minors, and must suspend the account of a minor if so requested by the minor’s parents or guardians. The monitor system was formally implemented commencing March 1, 2011.
In February 2013, 15 PRC government authorities, including the SAPPRFT, the Ministry of Education, the MCT and the MIIT, jointly issued the Work Plan implementing integrated measures by different authorities to prevent minors from being addicted to online games. Under the Work Plan, the current relevant regulations regarding online games will be further clarified and additional implementation rules will be issued; and as a result, online game operators will be required to implement measures to protect minors.
On July 25, 2014, the SAPPRFT promulgated a
Notice on Further Carrying out the Verification of Real-name Registration for Anti-Fatigue System on Internet Games
, or the Verification of Real-name Registration Notice, which took effect on October 1, 2014. The Verification of Real-name Registration Notice requires local press and publication administrative departments to strengthen their administration over enterprises engaged in online game publication and operations, and requires such enterprises to abide by anti-fatigue and real-name registration requirements when developing and promoting online games, excluding, at present, mobile games.
The Indulgence Prevention Notice requires online game operators to implement measures to not give minors access to online game services during specified periods of the day, imposes daily limits on minors’ length of use and spending for paid online game services, and prohibits online game operators from providing paid game services to minors under the age of eight. The Indulgence Prevention Notice also stipulates that online game operators must require real name registration by their users and must not provide game services to users who have not completed their real-name registrations.
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Information Security and Censorship
Internet content in China is also regulated and restricted from a State security standpoint. The Standing Committee of the National People’s Congress enacted the
Decision on Internet Security Protection
in 2000, and amended it in August, 2009. The decision makes it unlawful to: (i) gain improper entry into a computer or system of strategic importance; (ii) disseminate politically disruptive information; (iii) leak State secrets; (iv) spread false commercial information; or (v) infringe intellectual property rights. The MPS has promulgated measures that prohibit the use of the Internet in ways which, among other things, result in a leakage of State secrets or distribution of socially destabilizing content. The MPS has supervision and inspection rights in this regard, and Changyou may be subject to the jurisdiction of local security bureaus. If an ICP license holder violates these measures, the PRC government may revoke its ICP license and shut down its Websites. On November 7, 2016, the Standing Committee of the National People’s Congress issued the Internet Security Law, which took effect on June 1, 2017. The Internet Security Law requires providers of services over Internet networks to keep user information that they have collected in strict confidence and to establish improved systems for the protection of user information. Such service providers must provide notice of the purpose, methods and scope of their collection and use of user information, and obtain the consent of each person whose personal information will be collected. Service providers may not collect any personal information that is not related to the services they provide, or disclose or tamper with personal information that they have collected, unless such information is encoded to prevent identification of individuals whose information is so disclosed or tampered with. Service providers who do not comply with the Internet Security Law may be subject to fines, suspension of their businesses, shutdown of their websites, and revocation of their business licenses.
In 2005, the MCT and the MIIT promulgated the
Opinions on the Development and Administration of Online Games
emphasizing the PRC government’s intent to foster and control the development of the online game industry in China and providing that the MCT will censor online games that “threaten state security,” “disturb the social order,” or contain “obscenity” or “violence.” Although the MCT Approval Scope Notice provides that the MCT is no longer responsible for regulating the online game industry, it is not clear whether the MIIT or another PRC governmental agency will be designated to censor online games under the
Opinions on the Development and Administration of Online Games.
In November 2018, the MPS issued the
Regulations for Internet Security Supervision and Inspection by Public Security Authority
, which specifies the standards for the inspection of network operators and the legal responsibilities of network operators that provide internet content.
Virtual Currency
On February 15, 2007, the MCT, the People’s Bank of China, or the PBOC, and other relevant government authorities jointly issued the
Notice on the Reinforcement of the Administration of Internet Cafés and Online Games
, or the Internet Cafés Notice. Under the Internet Cafés Notice, the PBOC is directed to strengthen the administration of virtual currency in online games to avoid any adverse impact on the economy and financial system. The Internet Cafés Notice limits the total amount of virtual currency that may be issued by online game operators and the amount that may be purchased by individual game players, and includes a clear division between virtual transactions and real transactions carried out by way of electronic commerce. The Internet Cafés Notice also provides that virtual currency may only be used to purchase virtual items.
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On June 4, 2009, the MCT and the MOFCOM jointly issued the Virtual Currency Notice, to regulate the trading of online game virtual currencies. The Virtual Currency Notice defines the meaning of virtual currency and places a set of restrictions on the trading and issuance of virtual currency. The Virtual Currency Notice also states that online game operators are not allowed to give out virtual items or virtual currency through lottery-based activities, such as lucky draws, betting or random computer sampling, in exchange for user’s cash or virtual money. The Virtual Currency Notice is mainly targeted at lottery-based activities relating to the “treasure boxes” found in some online games.
On July 20, 2009, the MCT promulgated the
Filing Guidelines for Online Game Virtual Currency Issuing Enterprises and Online Game Virtual Currency Trading Enterprises
(the “Virtual Currency Guidelines”), which define the terms “issuing enterprise” and “trading enterprise” and stipulate that the same enterprise may not be both an issuing enterprise and a trading enterprise.
Import and Export of Software Technology
China imposes controls on the import and export of technology and software products. Under the
Regulations on Administration of Import and Export of Technologies
promulgated by the State Council, which were amended on March 2, 2019,November 29, 2020, the term “technology import and export” is defined to include, among other things, the transfer or licensing of patents and
know-how,
and the provision of services related to technology. Depending on the nature of the relevant technology, the import and export of technology require either approval by or registration with the relevant PRC governmental authorities. Under the
Software Export Management and Statistics Measures
promulgated in October 2001, if a company is classified as a software enterprise and has a minimum of RMB1.0 million (or approximately $144,904) in registered capital, it may engage in an export business after being registered with the relevant PRC governmental authorities. All contracts which relate to the export of software products, transfer of technology or provision of related services must be filed with the relevant PRC governmental authorities. The
Measures for the Administration of Registration of Technology Import and Export Contracts,
issued by the MOFCOM in February 2009, specify registration requirements related to the import and export of technology.
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Changyou has entered into license agreements with third parties outside of China to license its games, which may be deemed to constitute the export of technology under the regulations. As a result, such licenses are required to be registered with applicable PRC governmental authorities. Although there are no explicit penalties set forth in these regulations for lack of such registration, failure to register an agreement where such registration is required may result in restrictions concerning foreign exchange, banking and taxation matters relating to such agreements. Changyou has not registered all of the game license agreements under which it authorizes overseas third-party online game operators to operate its online games, and so far Changyou has not encountered any problems with respect to foreign exchange, banking or taxation matters relating to its license agreements, nor has Changyou received any notice from any governmental authority requiring it to complete the registration of its game license agreements.
Regulation of Search and search-related Services
On October 23, 2015, the MCT issued a
Notice on Further Strengthening and Improving the Administration of Content of Online Music
(the “MCT Further Notice”) which became effective on January 1, 2016. The MCT Further Notice provides that providing direct links to online music will constitute engaging in the online music business, and that therefore an Online Culture Operating Permit is required for providing such search services. Sogou Information held an Online Culture Operating Permit pursuant to regulations that were in effect before the MCT Further Notice became effective. The permit was renewed on August 20, 2020 pursuant to the MCT Further Notice.
On June 25, 2016, the CAOC issued
Measures for the Administration of Online Information Search Services
(the “CAOC Measures”), which came into effect on August 1, 2016. The CAOC Measures, like the SAMR Interim Measures, require that providers of online search services verify the credentials of
pay-for-click
advertisers, specify a maximum percentage that
pay-for-click
search results may represent of results on a search page, and require that providers of search services conspicuously identify
pay-for-click
search results as such.
Regulation of Other Services
Real Estate Services
On June 23, 2020,December 27, 2021, the NDRC and the MOFCOM issued the
Special Administrative Measures for Admittance of Foreign Investment (Restricted List) (2020(2021 Edition)
(the “2020“2021 Restricted List”), which became effective on July 23, 2020.January 1, 2022. The 20202021 Restricted List removed from the category of industries where foreign investment is restricted real estate agency and brokerage services, which had been included in the restricted category in the previous Foreign Investment Industrial Guidance Catalogue issued in 2011. The 2020 Restricted List loosened existing restrictions on foreign ownership of real estate agency and brokerage services in China, and as a result we may conduct real estate agency and brokerage services directly.
On April 4, 2001, the Ministry of Housing and Urban-Rural Development (the “MHURD,” formerly the Ministry of Construction) promulgated the
Regulatory Measures on the Sale of Commercial Houses
, pursuant to which a real estate developer may engage a real estate services organization as a broker to
pre-sell
or sell primary residential housing. The regulatory measures provide that a real estate broker must not make any false statements regarding a property to clients and must present clients with relevant title certificates or sale permits for the properties and a related letter of authorization.
On December 29, 2006, the MHURD and the PBOC jointly issued the
Circular Concerning Strengthening the Management of Real Estate Services and Regulating the Trade Settlement Capital Account
, which provides a number of directives regulating the real estate services industry. Under the circular, a real estate services company is not permitted to receive cash purchase payments on behalf of clients in secondary real estate transactions and is required to establish separate security deposit accounts for clients.
On January 20, 2011, MHURD, the NDRC, and the Ministry of Human Resources and Social Security jointly issued the
Measures for Administration on Real Estate Brokerage
(the “Brokerage Measures”), which became effective on April 1, 2011 and were amended on April 1, 2016, and govern the activities of real estate brokerages and real estate brokerage personnel in providing intermediary, agency and related services and charging commissions. Furthermore, pursuant to the Brokerage Measures, a real estate brokerage company and its branches must have a sufficient number of licensed real estate brokers. The Brokerage Measures also require real estate brokerage companies to file with real estate regulatory authorities at the county level or above within 30 days after their business registration with the relevant local counterparts of the SAMR. Focus Interactive has made the required filings.
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On July 29, 2016, the MHURD and six other governmental authorities jointly issued the
Opinions on Strengthening the Administration of Sound Development of Real Estate Brokerage
(the “MHURD Opinions”), to further regulate real estate brokerage services. The MHURD Opinions stipulate that real estate brokers are obligated to censor specified real estate-related information, including ownership, price, area, and location, and may not provide, directly or through agencies, loans for down payments and other similar financial services.
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On September 30, 2016, Beijing MHURD and five other governmental authorities jointly issued the
Measures for the Promotion of Stable and Healthy Development of the Local Real Estate Market
(the “Beijing Measures”), with the goal of tempering rampant increases in housing prices by balancing land supply in favor of residential use and owner-occupied apartments, providing guidance for real estate developers and brokers as to the setting of prices and the conduct of advertising, selling and financing activities, and providing for enhanced enforcement measures with respect to false and misleading advertisements and pricing information and other illegal selling and financing activities in the local real estate market. Certain other cities, including Tianjin, Suzhou, Zhengzhou, Chengdu, Hefei, and Wuhan, adopted similar measures. One effect of these regulations has been to make real estate developers more cautious with respect to advertising housing on Internet platforms and cooperating on real estate-related
e-commerce
programs with Internet service providers.
On May 19, 2018, the MHURD issued a
Notice on Further Improving Relevant Issues Concerning the Regulation and Control of the Real Estate Market,
to prohibit certain behaviors by real estate developers and brokers, such as hoarding property for speculation. On June 25, 2018, the MHURD and six other government agencies jointly issued a
Notice on Launching Special Actions to Combat the Infringement of the Interests of the Masses and Regulating the Real Estate Market in Some Cities
, to prohibit certain additional behaviors of real estate developers and brokers, such as price manipulation and false advertising, in specified cities including Beijing, Shanghai, Guangzhou, and Tianjin.
Online Payment Services
On June 14, 2010, the PBOC issued the
Measures for the Administration of Payment Services Provided by
Non-financial
Institutions
(the “Payment Services Measures”), which took effect on September 1, 2010 and were amended on February 3, 2016 and April 29, 2020. On December 1, 2010, the PBOC promulgated the
Implementing Rules for the Payment Services Measures
., which was last amended on September 1, 2021. The Payment Services Measures and their implementing rules require any
non-financial
institution engaging in payment services, such as online payments, issuance and acceptance of prepaid cards, and bill collection via bank cards, to obtain a Payment Service License. Applications for Payment Service Licenses are examined by the local branches of the PBOC and then submitted to the PBOC for approval. To further regulate the operation of online payment services, the PBOC issued the
Administration of Online Payment Services Provided by
Non-Bank
Payment Institutions
(the “Online Payment Services Measures”), which took effect on July 1, 2016, and was amended on June 2, 2020 and November 12, 2020, respectively.2016. The Online Payment Services Measures classify personal payment accounts at entities that already hold a Payment Service License into three categories based on the extent to which the holders of the accounts have completed identity verification procedures, and provide that those account holders who have completed more of the identity verification process are entitled to a broader range of payment options through their accounts. The Online Payment Services Measures prohibit
non-bank
payment institutions from engaging in securities, insurance, financing, trusts and other unauthorized financial business.
Non-bank
payment institutions are also required to develop risk control systems, including a risk rating system for users, a dispute resolution system, and a risk reserve.
In addition, on April 29, 2019, the SAFE issued the
Administrative Measures for Foreign Exchange Services of Payment Institutions
, replacing the
Notice of the State Administration of Foreign Exchange on the Pilot Scheme of Cross-border Foreign Exchange Payment Services Provided by Payment Institutions
issued by the SAFE on January 20, 2015, pursuant to which a payment institution is required to obtain approval from the local branches of SAFE and to be registered in the Enterprise Directory for Foreign Exchange Receipts and Payments in Trade in order to provide foreign exchange payment services for cross-border
e-commerce
transactions. Any institution applying for such registration and approval must first obtain a Payment Services License that authorizes it to engage in the online payments business.
Lottery Sales
On May 4, 2009, the State Council issued the
Regulation on Administration of Lottery
stating that “lottery issuance agencies” and “lottery sales agencies” may authorize other entities to conduct lottery sales. On September 26, 2010, the Ministry of Finance (the “MOF”) issued the
Interim Measures on the Administration of Internet Lottery Sale
(the “Lottery Measures”), which set forth detailed requirements for the administration of online lottery sales as well as requirements for qualified online lottery service providers. Pursuant to the Lottery Measures, the MOF is the supervisory and regulatory department for online lottery sales. Lottery issuance agencies may collaborate with other entities or authorize lottery sales agencies to conduct online lottery sales, or appoint qualified entities as their online lottery sales agents. The Lottery Measures require qualified online lottery service providers to meet certain criteria, including having obtained an Internet content provider license. Lottery issuance agencies are required to apply to the MOF for approval of online lottery service providers that the lottery service agencies propose to engage to conduct an online lottery business.
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On January 18, 2012, the MOF, the Ministry of Civil Affairs and the General Administration of Sports jointly issued the
Implementing Rules of the Regulation on Administration of Lottery
(the “Lottery Implementing Rules”), which became effective on March 1, 2012 and were amended on August 16, 2018. The Lottery Implementing Rules stipulate that lotteries sold through the Internet or sold without the MOF’s approval and a lottery issuing agency’s or a lottery sales agency’s authorization may be categorized as illegal lotteries.
On February 28, 2012, the General Administration of Sports issued the
Urgent Notice on the Strengthening Execution of the Lottery Implementing Rules
, reiterating that lotteries sold via the Internet without the approval of the MOF will be deemed to be illegal lotteries.
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On March 27, 2014, the MOF issued the
Interim Measures on the Administration of the Sale of Lotteries via Telephone
(the “Telephone Lottery Measures”) to replace the MOF’s former version promulgated on September 26, 2010. Under the Telephone Lottery Measures, “sale of lotteries via telephone” refers to the use of fixed-line telephones and mobile telephones to sell lotteries through short messages, voice calls and applications. Properly qualified lottery sales agencies may authorize other entities (“Telephone Sales Agents”) to carry out the business of sale of lotteries via telephone. The lottery sales agencies and the Telephone Sales Agent must enter into a commission agreement. A qualified Telephone Sales Agent is required to meet certain criteria, including having obtained a Value-Added Telecommunications Services Operating License. The Telephone Lottery Measures further provide that a Telephone Sales Agent must conduct business in accordance with parameters approved by the MOF and pursuant to a commission agreement.
On January 15, 2015, the MOF, the Ministry of Civil Affairs and the General Administration of Sports jointly promulgated
the Notice related to Self-inspection and Self-Remedy of Unauthorized Online Lottery Sales (the
(the “Self-inspection Notice”), which requires provincial and municipal government branches, including financial, civil affairs and sports bureaus, to conduct inspections and take remedial measures for unauthorized online lottery sales within their respective jurisdictions. The scope of inspection includes, among other things, commission contracts, online lottery products, exchange of lottery sales data, online lottery sales channels, and sales commission fees in connection with unauthorized engagements of online sales agents by lottery sales agencies. The Notice further requires that a formal report on the result of the inspections and the remedial measures be submitted by each provincial or municipal government to the MOF, the Ministry of Civil Affairs and the General Administration of Sports by March 1, 2015.
On April 3, 2015, eight governmental authorities consisting of the MOF, the MPS, the SAMR, the MIIT, the Ministry of Civil Affairs, the PBOC, the General Administration of Sports and the CBIRC jointly released a public announcement with regard to unauthorized online lottery sales (the “Public Announcement”). The Public Announcement provides, among other things, that (i) all lottery institutions, internet companies, and other institutions or individuals provide unauthorized online lottery sales services, either directly or through agents, must immediately cease such services; (ii) the local governmental authorities for finance, civil affairs and sports must investigate and sanction unauthorized online lottery sales in their respective jurisdictions in accordance with applicable laws and regulations; (iii) the local governmental authorities for public security and industry and commerce must investigate any issuances or sales of illegal lotteries within their respective jurisdictions, with necessary assistance from local governmental authorities for finance, communication, banking regulation, civil affairs and sports, and local branches of the PBOC, and report any criminal activities to judicial authorities for prosecution; (iv) the lottery issuance authorities that plan to sell lottery products online must obtain approval from the Ministry of Civil Affairs or the General Administration of Sports by submitting an application to the MOF for written approval, and (v) no entity may provide online lottery sales services without the approval of the MOF. On April 28, 2016, the MOF, the MPS, the Ministry of Civil Affairs, the General Administration of Sports, and the SAMR, and on May 5, 2015 the SAMR, issued notices regarding unauthorized online lottery sales and further emphasized the requirements specified in the Public Announcement. Online lottery sales are an insignificant business for us.
On August 8, 2018, the MOF and several other government agencies jointly issued an
Announcement on Further Regulating the Order of the Lottery Market and Comprehensively Managing the Sale of Lotteries through the Internet
, which further emphasizes that business entities and individuals may not sell lottery tickets or conduct any other form of lottery business over the Internet without the approval of the MOF.
Production of Radio and Telecommunications Equipment
On September 11, 1993, the State Council and Central Military Commission jointly issued the
Regulations on the Management of Radio Operations
, which were amended on November 11, 2016, under which the working frequencies, bands, and related technical indices of radio transmission equipment must conform to relevant regulations regarding radio and are required to be submitted to the state radio administration authority or its local branches for approval, and failure to submit such information for approval will result in the imposition of a fine.
On October 7, 1997, the State Radio Regulatory Bureau (formerly the State Radio Regulatory Commission), together with the SAMR (formerly the AQSIQ), promulgated
Regulations on the Production of Radio Transmitting Equipment
(the “Radio Transmitting Equipment Regulations”), which took effect on January 1, 1999. Pursuant to the Radio Transmitting Equipment Regulations, each type of radio transmission equipment is subject to approval from State Radio Regulatory Bureau (“SRRC Certificate”) prior to production.
On May 10, 2001, MIIT promulgated the
Administration Measures of the Network Entry of Telecommunication Equipment
(the “Telecommunication Equipment Measures”), which was amended on September 23, 2014. Pursuant to the Telecommunication Equipment Measures, the State requires all telecommunications terminal equipment to be connected to a public telecommunications network to obtain network connection permits. A Permit of Network Connection, or China Type Approval Certificate (“CTA Certificate”), issued by the MIIT must be obtained for such telecommunications equipment. When a producer of such telecommunications terminal equipment applies for a CTA Certificate, it must submit a test report or product quality certificate (namely SRRC Certificate). If a CTA Certificate has not been obtained for such equipment, it may not be connected to a public telecommunications network and may not be used or sold domestically.
 
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Regulation of Online Lending and Microcredit Services
Online Lending and Microcredit Services
On July 18, 2015, the Guidelines on Promoting the Healthy Development of the Online Finance Industry (the
“Fin-Tech
Guidelines”) were jointly promulgated by ten PRC governmental authorities, including the PBOC, the MIIT, and the CBRC. The
Fin-Tech
Guidelines actively encourage innovation in internet financial platforms, products, and services for the purpose of increasing market vitality. The
Fin-Tech
Guidelines also require companies providing Internet finance services to, among other requirements, engage eligible banking institutions to act as fund depositories for client funds; have adequate procedures for the protection of the personal information of clients; and to not improperly buy, sell, or disclose such personal information.
Circular 141, which was jointly issued by the Head Office for Special Rectification against Internet Finance Risks and the Head Office for Special Rectification against
Peer-to-Peer
Online Lending Risks on December 1, 2017, stipulates general requirements for “cash loan” businesses conducted by online microcredit companies, banking institutions, and online lending information intermediaries, and specifies general requirements and guidelines with respect to cash loan businesses, such as governmental
pre-approval
requirements, limits on interest rates and overall costs to borrowers, “know-your-customer” requirements, borrower eligibility assessment requirements, a prohibition on collection of loans using violence, and protection of customers’ personal information. The aggregate borrowing costs charged to borrowers by cash loan business in the form of interest and various fees must comply with guidelines on interest rates applicable to private lending issued from time to time by the Supreme People’s Court, such as those set forth in the Private Lending Judicial Interpretations. In addition, Circular 141 prohibits online microcredit companies from facilitating loans to students, making loans that are not made with the use of proceeds specified or that are to be used for down payments or speculative trading, and funding loans using illegal sources of funds.
Circular 141 also stipulates that a banking institution that offers cash loans through loan facilitation is prohibited from (i) accepting credit enhancement or other similar services from third parties that lack requisite licenses to provide guarantees; (ii) outsourcing credit assessment, risk control, and other key functions to a loan facilitation operator; and (iii) allowing the loan facilitation operator to charge any interest or fees from the borrower. In addition, CBIRC Circular 37 states that institutions that provide services such as customer recommendations and evaluation of credit to lending institutions may not provide financial guarantee services without approval of regulatory authorities. Although Sogou believes that its operation of its online lending and microcredit loan facilitation business should not be deemed to be operation of a financial guarantee business, relevant PRC regulatory authorities might not share the same view as theirs, as the exact definition and scope of operating a financial guarantee business remain unclear. If Sogou was deemed to be operating a financial guarantee business, it would be subject to PRC laws and regulations, such as Circular 141 and CBIRC Circular 37, concerning the financial guarantee business.
The
Guidance on the Pilot Establishment of Microcredit Companies
jointly promulgated by the CBRC and the PBOC on May 4, 2008 (the “Pilot Guidance”) provides guidance on capital source and utilization requirements and restrictions and on the management and operation of microcredit companies. The Pilot Guidance also provides that the establishment of a microcredit company is subject to approval of the competent governmental authority at the provincial level. The People’s Government of Guangdong Province promulgated the
Guidance on the Implementation of Pilot Microcredit Companies
, on January 14, 2009, and the
Interim Administrative Measures on Microcredit Companies of Guangdong Province
, on January 23, 2009, which specify the principles, scope, and timeline of a pilot program and pilot joint meeting system; the role of certain governmental authorities; requirements for the establishment, organization and management of microcredit companies; and supervision and risk prevention rules with respect to microcredit companies in Guangdong province. On March 6, 2017, the Financial Work Bureau of the People’s Government of Shantou, which is a city in Guangdong Province, promulgated
the Regulatory Guidance on Online Microcredit Companies Established in Shantou (for Trial Implementation)
, which sets forth regulatory requirements for the establishment, business requirements, submission of information, and management of risks of online microcredit companies established in Shantou.
Sogou’s subsidiary Sogou (Shantou) Internet Microcredit Co., Ltd. (“Sogou Microcredit”) has obtained the key governmental approvals and licenses required under current PRC laws and regulations for the conduct of a microcredit business. However, as the regulatory regime and practices with respect to online microcredit companies are evolving, there is uncertainty as to how the various requirements discussed above will be interpreted and implemented and whether there will be new rules issued which would establish further requirements and restrictions on microcredit companies.
Loans and Interest Rates
The Civil Code recognizes the validity of loan agreements between natural persons, provides that a loan agreement becomes effective when an individual lender provides a loan under the agreement to an individual borrower, and requires interest rates charged under a loan agreement to comply with applicable PRC laws and regulations. The
Private Lending Judicial Interpretations issued by the Supreme People’s Court in August 2015 and effective in September 2015 specify that loan agreements for loans with annual interest rates below 24% are valid and enforceable. With respect to a loan with an annual interest rate between 24% and 36%, if the interest on the loan has already been paid to the lender and such payment has not caused damage to the interests of the state, the community, or any third parties, the Private Lending Judicial Interpretations indicate that courts will be likely to dismiss a borrower’s demand for return of the interest payments. If the annual interest rate of a private loan is higher than 36%, the portion of the interest exceeding the maximum interest rate is invalid. The Revised Private Lending Judicial Interpretations provide that, beginning August 20, 2020, PRC courts will not enforce the collection of interest on
one-year
loans to the extent that the interest exceeds four times the prime rate for
one-year
loans published by the National Interbank Funding Center.The
Reply of the Supreme People
’
s Court to the Application of Law to the Provisions Applicable to Private Lending Cases
promulgated by the Supreme People’s Court on December 29, 2020 stipulates that microcredit companies are financial institutions established with the approval of the financial regulatory authorities and that the Revised Private Lending Judicial Interpretations are not directly applicable to the loan business of microcredit companies.
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Miscellaneous
Laws and Regulations Related to International Connections for Computer Information Networks
The State Council and the MIIT have promulgated regulations governing international connections for PRC computer networks, including:
 
Provisional Regulations of the People’s Republic of China for the Administration of International Connections to Computer Information Networks
(1997) and related Implementing Measures (1998); and
 
Administrative Measures for International Communications Gateways
(2002)
.
Under the above regulations, any entity wishing to access international connections for their computer information networks in the PRC must comply with the following requirements:
 
be a PRC legal person;
 
have the appropriate equipment, facilities and technical and administrative personnel;
 
have implemented and registered a system of information security and censorship; and
 
effect all international connections through an international communications gateway established with the approval of the MIIT.
We have adopted measures necessary to ensure that we are in compliance with all of these requirements.
Laws and Regulations Related to Intellectual Property Protection
China has adopted comprehensive legislation governing intellectual property rights, including copyrights, patents and trademarks.
Copyright
On September 7, 1990, the Standing Committee of the National People’s Congress promulgated
the Copyright Law
, which took effect on June 1, 1991 and was amended in 2001, 2010, and 2020. The 2020 amended Copyright Law, which will taketook effect on June 1, 2021, extends copyright protection to Internet activities, products disseminated over the Internet, and software products. In addition, there is a voluntary registration system administered by the China Copyright Protection Center. The amended Copyright Law also requires registration of the pledge of a copyright. The latest amended Copyright Law clarifies the scope of works entitled to copyright protection and provides for more stringent enforcement measures against copyright infringement.
In order to further implement the
Computer Software Protection Regulations
, promulgated by the State Council on December 20, 2001 and amended on May 19, 2004 and January 30, 2013, the NCA issued
Computer Software Copyright Registration Procedures
on February 20, 2002 and amended it on May 19, 2004, which specify detailed procedures and requirements with respect to the registration of software copyrights.
To address the problem of copyright infringement related to content posted or transmitted over the Internet, on April 29, 2005 the NCA and the MIIT jointly promulgated the
Measures for Administrative Protection of Copyright Related to Internet
, which became effective on May 30, 2005. These measures apply to situations where an ICP operator (i) allows another person to post or store any works, recordings, audio or video programs on the Websites operated by such ICP operator, or (ii) provides links to, or search results for, the works, recordings, audio or video programs posted or transmitted by such person, without editing, revising or selecting the content of such material. Upon receipt of an infringement notice from a legitimate copyright holder, an ICP operator must take remedial actions immediately by removing or disabling access to the infringing content. If an ICP operator knowingly transmits infringing content or fails to take remedial actions after receipt of a notice of infringement harming public interest, the ICP operator could be subject to administrative penalties, including an order to cease infringing activities; confiscation by the authorities of all income derived from the infringement activities; or payment of fines.
On May 18, 2006, the State Council promulgated the
Regulations on the Protection of the Right to Network Dissemination of Information
(as amended in 2013). Under these regulations, an owner of the network dissemination rights with respect to written works or audio or video recordings who believes that information storage, search or link services provided by an Internet service provider infringe his or her rights may require that the Internet service provider delete, or disconnect the links to, such works or recordings.
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Since 2005, the NCA, together with certain other PRC governmental authorities, have jointly launched annual campaigns, which normally last for three to four months every year, specifically aiming to crack down on Internet copyright infringement and piracy in China.
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According to the
Notice of 2010 Campaign to Crack Down on Internet Infringement and Piracy
promulgated by the NCA, the MPS and the MIIT on July 19, 2010, one of the main targets, among others, of the 2010 campaign was Internet audio and video programs. From the time the 2010 campaign commenced in late July, the local branches of the NCA focused on popular movies and television series, newly published books, online games and animation, music and software and illegal uploading or transmission of a third party’s works without proper license or permission, sales of pirated audio/video and software through
e-commerce
platforms, providing search links, information storage, Web hosting or Internet access services for third parties engaging in copyright infringement or piracy and infringement by the use of mobile media. In serious cases, the operating permits of the Websites engaging in illegal activities may be revoked, and such Websites may be ordered to shut down. The Jian Wang Campaign for 2020,2021, which targets copyright infringement related to the online transmission of games, music,short videos, live online broadcasting of sporting events, and other copyrighted audio-visual works on or through
e-commerce,
online education knowledge sharing, and other social platforms, and aims to strengthenenhance the existing campaign with respect to the protection of news works, online music, and online literature application software and other copyrighted content,in the field of
e-commerce
platforms, was launched onin June 12, 2020.2021.
On April 17, 2015, the NCA issued
the
Circular on Regulating the Order of Internet Reproduction of Copyrighted
Works
(“Internet Reproduction Circular”). Under the Internet Reproduction Circular, in order to reproduce the work of others, Internet media companies must comply with relevant provisions of the copyright laws and regulations, and, unless provided otherwise by law or regulation, must obtain permission from and pay remuneration to the owner of the copyright to the work, and must indicate the name of the author, as well as the title and the source of the work, and may not infringe any other rights or interests of the copyright owner. Moreover, when reproducing the work of others, Internet media companies may not make material alterations to the content; and may not make editorial modifications or abridgments of the work that change the work’s title or its original intent. When reproducing the work of others, we will need to comply with these strict requirements of the Internet Reproduction Circular.
We have adopted measures to mitigate copyright infringement risks, such as real-time monitoring and mechanisms for fast removal upon receipt of notices of infringement.
On May 28, 2020, the National People’s Congress approved the Civil Code, which came into effect on January 1, 2021 and replaced the
Torts Liability Law
and eight other civil laws and regulations. Under the Civil Code, both Internet users and Internet service providers may be liable for the wrongful acts of users who infringe the lawful rights of other parties. If an Internet user infringes the rights of another party, the holder of the rights that are infringed may request the provider of the Internet service through which the rights were infringed to take necessary measures, such as removing or blocking the content, or disabling the links thereto, to prevent or stop the infringement. The notice from the holder of the rights to the service provider is required to include preliminary evidence of infringement and identify the holder of the rights, and the Internet service provider is then required to notify the infringer of the request by the holder of the rights and to take necessary measures. If the Internet service provider does not take necessary measures, it will be jointly liable for any further damages suffered by the holder of the rights. Furthermore, if an Internet service provider fails to take necessary measures when it knows or should have known that an Internet user has used the provider’s Internet services to infringe the lawful rights of other parties, it will be jointly liable with the Internet user for damages resulting from the infringement.
On December 17, 2012, PRC Supreme People’s Court promulgated the
Provisions on Several Issues Concerning the Application of Law for Trial of Civil Dispute Cases Involving Infringement of the Right to Network Dissemination of Information
(“Network Dissemination of Information Provision”), which were most recently amended on December 29, 2020. The Network Dissemination of Information Provisions stipulate that the dissemination by network users or network service providers of written works, performances or audio or video recordings without the permission of the holder of the rights to such dissemination will constitute infringement of such rights, and that network service providers that aid or abet any network user’s infringement of the rights of another to network dissemination of any works or recordings may be liable for such network user’s infringing activities.
Patent
On March 12, 1984, the Standing Committee of the National People’s Congress promulgated the
Patent Law
, which was amended in 1992, 2000, 2008 and 2020. The 2020 amended Patent Law will taketook effect on June 1, 2021. On June 15, 2001, the State Council promulgated the
Implementation Regulation for the Patent Law
, which was lately amended in January 9, 2010. According to these laws and regulations, the Patent Office of the CNIPA is responsible for administering patents in the PRC. The Chinese patent system adopts a “first to file” principle, which means that where more than one person files a patent application for the same invention, a patent will be granted to the person who filed the application first. To be patentable, invention or utility models must meet three conditions: novelty, inventiveness and practical applicability. A patent is valid for twenty years in the case of an invention, ten years in the case of utility models and designs. From June 1, 2021, in the case of designs, a patent will be valid for fifteen years from the date of the filing of the patent application. A third-party user must obtain consent or a proper license from the patent owner to use the patent. Otherwise, third-party use constitutes an infringement of patent rights.
 
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Trademark
On August 23, 1982, the Standing Committee of the National People’s Congress promulgated the
Trademark Law
(the “Trademark Law”), which was amended in 1993, 2001, 2013, and 2019. On August 3, 2002, the State Council promulgated the
Implementation Regulation for
the Trademark Law
, which was amended in April 29, 2014. Under the Trademark Law and the implementing regulation, the Trademark Office is responsible for the registration and administration of trademarks and resolving trademark disputes. As with patents, China has adopted a
“first-to-file”
principle for trademark registration. If two or more applicants apply for registration of identical or similar trademarks for the same or similar commodities, the application that was filed first will receive preliminary approval and will be publicly announced. For applications filed on the same day, the trademark that was first used will receive preliminary approval and will be publicly announced. Registered trademarks are valid for ten years from the date the registration is approved. A registrant may apply to renew a registration within twelve months before the expiration date of the registration. If the registrant fails to apply in a timely manner, a grace period of six additional months may be granted. If the registrant fails to apply before the grace period expires, the registered trademark shall be deregistered. Renewed registrations are valid for ten years. The amendment of the Trademark Law that became effective on November 1, 2019 provides for enhanced procedures for the prevention of malicious registration of trademarks and increases the amount of fines that may be imposed for trademark infringements.
Laws and Regulations Related to Encryption Software
In October 1999, the State Council promulgated the
Regulations for the Administration of Commercial Encryption
, most recently amended on February 3, 2016, followed in November 1999 by the
Notice of the General Office of the State Encryption Administration Commission
promulgated by the State Commission for the Administration of Cryptography. Both of these regulations address the use in China of software with encryption functions.
These regulations require that encryption products purchased for use be reported. Violation of the encryption regulations may result in the issuance of a warning, levying of a penalty, confiscation of the encryption products and even criminal liabilities. On March 18, 2000, the Office of the State Commission for the Administration of Cryptography issued a public announcement regarding the implementation of the regulations. The announcement states that only specialized hardware and software, the core functions of which are encryption and decoding, fall within the administrative scope of the regulations as “encryption products and equipment containing encryption technology.” Other products, such as wireless telephone, Windows software and browsers do not fall within this scope.
The State Commission for the Administration of Cryptography changed its name to the State Cryptography Administration Bureau (“SCAB”) in March 2005. The SCAB maintains authority over the importation, research, production, sale and use of cryptographic products in China (“products” are defined to include any cryptographic technologies and products to be applied in the encryption or secure authentication of information, other than state secrets). Legislation was issued to restrict the importation, research, production and sale of encryption products and requiring that the encryption functions of such products be placed in escrow with the SCAB for reasons of national security.
We are in full compliance with current PRC legislation governing encryption software.
Laws and Regulations Related to Consumer Protection and Privacy Protection
Consumer Protection
The MIIT set forth various requirements for consumer protection in a notice, issued on April 15, 2004, which addresses certain problems in the telecommunications sector, including ambiguity in billing practices for premium services, poor quality of connections and unsolicited SMS messages, all of which impinge upon the rights of consumers.
This trend was continued with the issuance of the
Notice Regarding the Ratification and Administration of Mobile Information Services Fees and Charges Method
by the MIIT on September 8, 2006.
On January 26, 2014,March 15, 2021, the SAMR issued the
Administrative Measures onfor the Supervision and Administration for Online Transactions
(the “Online Transaction Measures”), which took effect on March 15, 2014, to regulate online commodity trading and related online services and replace the previous
Interim Measures for the Administration of Online Commodities Trading and Relevant Services
issuedbecame effective on May 31, 2010.1, 2021, to replace the
Administrative Measures on Online Transactions
promulgated on January 26, 2014. The Online Transaction Measures stipulate various obligationsapply to the sale of commodities and provision of services through the Internet, including through social networking and live online service providers, includingbroadcasting within the obligation to protectterritory of the interestsPRC; aim at creating a fairer competitive environment for online transaction operators and a safer consumption environment for users in online transactions; and specify the responsibilities of customers.platform operators in the course of providing online shows and
e-commerce
live broadcast services. Under the Online Transaction Measures, commodities or relevant services transacted online must comply with relevant laws, regulations and rules. When selling commodities or providing services to consumers, online commoditytransactions operators must comply with all applicable laws and regulations, fairly participate in market competition, and accept public supervision. In addition, the Online Transaction Measures have strengthened the protection of consumer interests and set forth more specific obligations for online transaction operators with respect to the protectiondisplay of their licenses and the collection of consumer rights/interests, intellectual property rights of others and the prevention of unfair competition. Information on commodities or services provided by online commodity operators or related service operators must be authentic and accurate.
personal information. On May 26, 2016, the MIIT issued the Measures on the Complaint Settlement of the Telecommunication Services Users (the “Complaint Settlement Measures”), which took effect on July 30, 2016. The Complaint Settlement Measures require telecommunication services providers to respond to their users within fifteen days upon the receipt of any complaint delivered by such users, the failure of which will give the complaining users the right to file a complaint against the service providers with the provincial branch offices of the MIIT.
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We are aware of the increasingly strict legal environment covering consumer protection in China, and we strive to adopt all measures necessary to ensure that our business complies with these evolving standards.
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Privacy Protection
The PRC Constitution states that PRC law protects the freedom and privacy of the communications of citizens and prohibits infringement of such rights. In recent years, PRC government authorities have issued various regulations on the use of the Internet that are designed to protect personal information from unauthorized disclosure. For example, the ICP Measures prohibit an Internet information services provider from insulting or slandering a third party or infringing upon the lawful rights and interests of a third party. In addition, PRC regulations authorize PRC telecommunication authorities to demand rectification of unauthorized disclosure by ICPs.
Chinese law does not prohibit ICPs from collecting and analyzing personal information from their users. The PRC government, however, has the power and authority to order ICPs to submit personal information of an Internet user if such user posts any prohibited content or engages in illegal activities on the Internet. In addition, the Several Provisions stipulate that ICPs must not, without the users’ consent, collect information on users that can be used, alone or in combination with other information, to identify the user, or User Personal Information, and may not provide any User Personal Information to third parties without prior user consent. ICPs may only collect User Personal Information necessary to provide their services and must expressly inform the users of the method, content and purpose of the collection and processing of such User Personal Information. In addition, an ICP may use User Personal Information only for the stated purposes under the ICP’s scope of services. ICPs are also required to ensure the proper security of User Personal Information, and take immediate remedial measures if User Personal Information is suspected to have been disclosed. If the consequences of any such disclosure are expected to be serious, the ICP must immediately report the incident to the telecommunications regulatory authorities and cooperate with the authorities in their investigations. We require our users to accept a user agreement whereby they agree to provide certain personal information to us. If we violate these regulations, the MIIT or its local bureaus may impose penalties and we may be liable for damage caused to our users.
On December 28, 2012, the Standing Committee of the National People’s Congress enacted the
Decision to Enhance the Protection of Network Information
(“Information Protection Decision”), to further enhance the protection of User Personal Information in electronic form. The Information Protection Decision provides that ICPs must expressly inform their users of the purpose, manner and scope of the ICPs’ collection and use of User Personal Information, publish the ICPs’ standards for their collection and use of User Personal Information, and collect and use User Personal Information only with the consent of the users and only within the scope of such consent. The Information Protection Decision also mandates that ICPs and their employees must keep strictly confidential User Personal Information that they collect, and that ICPs must take such technical and other measures as are necessary to safeguard the information against disclosure.
On July 16, 2013, the MIIT issued the
Order for the Protection of Telecommunication and Internet User Personal Information
(the “Order”). Most of the requirements under the Order that are relevant to ICP operators are consistent with the requirements already established under the MIIT provisions discussed above, except that under the Order the requirements are often stricter and have a wider scope. If an ICP operator wishes to collect or use personal information, it may do so only if such collection is necessary for the services it provides. Further, it must disclose to its users the purpose, method and scope of any such collection or use, and must obtain consent from the users whose information is being collected or used. ICP operators are also required to establish and publish their protocols relating to personal information collection or use, keep any collected information strictly confidential, and take technological and other measures to maintain the security of such information. ICP operators are required to cease any collection or use of the user personal information, and
de-register
the relevant user account, when a given user stops using the relevant Internet service. ICP operators are further prohibited from divulging, distorting or destroying any such personal information, or selling or providing such information unlawfully to other parties. In addition, if an ICP operator appoints an agent to undertake any marketing or technical services that involve the collection or use of personal information, the ICP operator is still required to supervise and manage the protection of the information. The Order states, in broad terms, that violators may face warnings, fines, and disclosure to the public and, in the most severe cases, criminal liability.
On January 5, 2015, the SAMR promulgated the Measures on Punishment for Infringement of Consumer Rights, which were amended on October 23, 2020. Under the Measures on Punishment for Infringement of Consumer Rights, business operators collecting and using personal information of consumers must comply with the principles of legitimacy, propriety and necessity, specify the purpose, method and scope of collection and use of the information, and obtain the consent of the consumers whose personal information is to be collected. Business operators may not: (i) collect or use personal information of consumers without their consent; (ii) unlawfully divulge, sell or provide personal information of consumers to others; (iii) send commercial information to consumers without their consent or request, or when a consumer has explicitly declined to receive such information.
On August 29, 2015, the Standing Committee of the National People’s Congress issued Amendment (IX) to the Criminal Law of the People’s Republic of China (“Amendment (IX)”), which strengthens the protection of personal information. Pursuant to Amendment (IX), network service providers and others who unlawfully sell or otherwise provide personal information and cause serious adverse consequences may be sentenced to prison for up to seven years. In addition, network service providers who disseminate such user information and cause serious adverse consequences, and who do not rectify the problem after they receive notice of such
non-compliance
from relevant regulatory authorities may be sentenced to prison for up to three years, and may also be subject to public surveillance and fines. On October 21, 2019, the Supreme People’s Court of the PRC and the Supreme People’s Procurator of the PRC issued the
Interpretations of the Supreme People’s
Court and the Supreme People’s Procuratorate on Several Issues Concerning the Application of Law in Criminal Cases Involving Illegal Use of Information Networks and Assistance in Criminal Activities Committed through Information Networks
, which clarifies the types of network service providers and the standards for judging whether the consequences of divulging the personal information are serious and adverse.
 
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On May 8, 2017, the Supreme People’s Court of the PRC and the Supreme People’s Procurator of the PRC issued the
Interpretation of the Supreme People’s Court
and the Supreme People’s Procurator on Several Issues Concerning the Applicable Law for Criminal Cases with Respect to Infringement of Citizen’s Personal Information
, which defines “personal information,” “the provision of personal information,” and “the illegal collection of personal information.”
The SAMR (formerly the AQSIQ and SAC) issued the
Information Security Technology—Personal Information Security Specification
, which came into effect on October 1, 2020. The specification clarifies the principles and security requirements for personal information processing activities, such as collection, storage, use, sharing, transfer, public disclosure, and deletion, that are applicable to the standardization of personal information processing activities of various organizations. On April 10, 2019, the MPS and the Beijing Network Industry Association issued the
Guidelines for
Protection of the Security of Personal Information on the Internet,
which provides guidelines and recommends procedures concerning the protection of personal information applicable to enterprises providing services via the Internet as well as organizations and individuals who control and process personal information in private and
non-networked
environments. On June 1, 2019, the National Information Security Standardization Technical Committee issued the
Internet Security Practice Guidelines—Specification of Information Necessary for Basic Business Functions of APPsApps
, which provides further guidelines for the use and collection of personal information by network operators, and specifies the types of personal information deemed to be necessary for the operation of online services for areas such as online payment, short videos, Internet news information, and real estate transactions. On March 12, 2021, CAOC, MIIT, MPS and SAMR jointly issued the
Rules on the Scope of Necessary Personal Information for Common Types of Mobile Internet Applications,
to further clarify the scope of essential personal information for common types of applications.
On January 23, 2019, the OCLGCA, the MIIT, the MPS, and the SAMR jointly issued the Public Announcement Concerning the Illegal Collection of Personal Information by APPs,Apps, which emphasizes that APP operators must comply strictly with the Internet Security Law with in connection with their collection and use of personal information. On March 13, 2019, the SAMR issued the
Notice on the Launch of Special Enforcement Actions to Protect Consumers
and
Crack Down on Violations of Personal Information of Consumers
and the
Announcement of the Implementation of App Security Certifications
, and on October 31, 2019,
the SAMR and the CAOC
issued the
Notice of a Special Campaign to Rectify the Infringement of Legal Rights and Interests of APPApp Users
so as to further protect the rights of the APP users in and to their personal information and clarify the requirements for APP security certification. In addition, a number of relevant governmental authorities and industry associations have published a series of guidelines and standards, such as the
Guidelines for Self-Assessment of Illegal Collection and Use of Personal Information by APPsApps
issued by the Special Working Group Supervising the Illegal Collection and Use of Personal Information on March 3, 2019, and the
Methods for Identification of the Illegal Collection and Use of Personal Information by APPsApps
issued by the CAOC and three other PRC government authorities on December 30, 2019, pursuant to which APP operators are encouraged to conduct self-inspection and self-rectification to enhance the protection of personal information. On November 1, 2021, the MIIT issued the
Notice on Launching Action to Enhance User Awareness and Experience in Information and Communication Services
, under which relevant enterprises are required to establish a list of collected personal information and a list of personal information shared with third parties and to display such two lists in their Apps.
On August 22, 2019, the CAOC issued the
Provisions on the Protection of the Personal Information of Minors on the Internet
, effective on August 22, 2019, to regulate activities regarding the collection, use, and disclosure of minors’ personal information on the Internet.
On May 28, 2020, the National People’s Congress approved the Civil Code, which came into effect on January 1, 2021. The Civil Code specifies that the personal information of a natural person must be protected, and in particular provides that an organization or individual may obtain such personal information only when necessary; must ensure the safety of such information; and may not illegally collect, use, process or transmit such personal information or illegally purchase or sell, provide or make public such personal information.
On August 20, 2021, the Standing Committee of the National People’s Congress promulgated the PIPL, effective November 1, 2021, which accentuates the importance of processors’ obligations and responsibilities for personal information protection. The PIPL provides that personal information processors must disclose to their users the purpose, method and scope of their collection or use of such information, and, with certain exceptions, must obtain consent from their users. The PIPL also requires processors to: (i) develop internal management systems and operating procedures; (ii) implement categorized management of personal information; (iii) take appropriate security measures such as encryption and
de-identification;
and (iv) conduct personal information protection impact assessments in advance when conducting personal information processing activities that have a significant effect on individuals, such as processing sensitive personal information, using personal information to conduct automated decision-making, providing personal information to other personal information processors or disclosing personal information to the public. In addition, processors who provide specified internet platform services with large user bases and complex business types are subject to additional obligations, including but not limited to establishing independent bodies composed primarily of external members to supervise the protection of personal information by processors and regularly publishing social responsibility reports on the protection of personal information by processors and accepting supervision from the public. The PIPL also specifies that the definition of “sensitive personal information” is personal information that, once disclosed or illegally used, is likely to infringe the human dignity of natural persons or endanger them or their property, including biometrics, religious beliefs, specific identity, medical health, financial accounts, whereabouts and other information, as well as the personal information of minors under the age of 14. When processing sensitive personal information, processors must adopt strict protective measures, and obtain the users’ separate consent. Our current security measures and those of the third parties with whom we transact business may not be adequate for the protection of user personal information. In addition, we do not have control over the security measures of our third-party online payment vendors. Security breaches of our system and the online payment systems that we use could expose us to litigation and liability for failing to secure confidential customer information and could harm our reputation, ability to attract customers and ability to encourage customers to purchase virtual items.
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Laws and Regulations Related to Security and Censorship
The principal pieces of PRC legislation concerning information security and censorship are:
The
Internet Security Law
(2017);
The Measures for Cybersecurity Review
(2022);
The Regulations on Security Protection of Critical Information Infrastructure
(2021);
The
Data Security Law
(2021);
The
Draft Data Security Regulations
(2021);
 
The Law of the People’s Republic of China on the Preservation of State Secrets
(1988, as amended in 2010) and related Implementing Rules (2014);
 
The Law of the People’s Republic of China Regarding
Anti-spy
(2014);
The Working Regulations
for the
Anti-spy
Security Precautions
(2021);
 
Rules of the People’s Republic of China for Protecting the Security of Computer Information Systems
(1994, as amended in 2011);
 
Administrative Regulations for the Protection of Secrecy on Railway Computer Information Systems Connected to International Networks
(1999);
 
Regulations for the Protection of State Secrets for Computer Information Systems on the Internet
(2000);
 
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Notice issued by the Ministry of Public Security of the People’s Republic of China Regarding Issues Relating to the Implementation of the Administrative Measure for the Security Protection of International Connections to Computer Information Networks
(2000); and
 
The Decision of the Standing Committee of the National People’s Congress Regarding the Safeguarding of Internet Security
(2000) which has been amended in 2009.
These pieces of legislation specifically prohibit the use of Internet infrastructure where it results in a breach of public security, the provision of socially destabilizing content or the divulgence of State secrets, as follows:
 
“A breach of public security”
includes a breach of national security or disclosure of state secrets; infringement on state, social or collective interests or the legal rights and interests of citizens or illegal or criminal activities.
 
“Socially destabilizing content”
includes any action that incites defiance or violation of Chinese laws; incites subversion of state power and the overturning of the socialist system; fabricates or distorts the truth, spreads rumors or disrupts social order; advocates cult activities; spreads feudal superstition; involves obscenities, pornography, gambling, violence, murder, or horrific acts; or instigates criminal acts.
 
“State secrets”
are defined as “matters that affect the security and interest of the state.” The term covers such broad areas as national defense, diplomatic affairs, policy decisions on state affairs, national economic and social development, political parties and “other State secrets that the State Secrecy Bureau has determined should be safeguarded.”
Under the aforementioned legislation, it is mandatory for Internet companies in the PRC to complete security filing procedures with the local public security bureau and for them provide regular updates to the local public security bureau regarding information security and censorship systems for their Websites. In this regard, on October 1, 2004, the
Administrative Rules on the Filing of Commercial Websites
(“Commercial Websites Filing Rules”) were promulgated by the Beijing Administration of Market Regulation (the “Beijing AMR”) to replace the
Detailed Implementing Rules for the Measures for the Administration of Commercial Website Filings for the Record
promulgated by the Beijing AMR on September 1, 2000. The Commercial Websites Filing Rules state that operators of commercial Websites must comply with the following requirements:
 
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filing with the Beijing AMR and obtain electronic registration marks for the Websites;
 
placing the registration marks on the Websites’ homepages; and
 
registering the Website names with the Beijing AMR.
Sohu Internet and Gamease have successfully registered the Sohu.com website, the Changyou.com website and the cy.com website with the Beijing AMR and the electronic registration marks for these websites are displayed prominently on the homepages of these websites.
On November 7, 2016, the Standing Committee of the National People’s Congress issued the
Internet Security Law,
(the “Internet Security Law”), which took effect on June 1, 2017. The Internet Security Law requires providers of services over Internet networks to keep user information that they have collected in strict confidence and to establish improvedrigorous systems for the protection of user information. Such service providers must provide notice of the purpose, methods and scope of their collection and use of user information, and obtain the consent of each person whose personal information will be collected. Providers of services over Internet networks may not collect any personal information that is not related to the services they provide, or disclose or tamper with personal information that they have collected, unless such information is encoded to prevent identification of individuals whose information is so disclosed or tampered with. The Internet Security Law provides that providers of services over Internet networks must set up internal security management systems that meet the requirements of a classified protection system for cyber security, including appointing dedicated cyber security personnel; taking technical measures to prevent computer viruses, network attacks and intrusions; taking technical measures to monitor and record network operation status and cyber security incidents; and taking data security measures such as data classification, backups and encryption. Providers of services over Internet networks are also obliged to take immediate remedial measures and report relevant information to authorities when security defects or loophole risks in the network products or services are found. The Internet Security Law sets stringent requirements for the operators of “critical information infrastructure.” These include requirements, among others, that personal information and important business data must be stored in the PRC, and requirements for national security review of any network products or services that may impact national security. Service providers who do not comply with the Internet Security Law may be subject to fines, suspension of their businesses, shutdown of their websites, and revocation of their business licenses.
On July 30, 2021, the State Council promulgated the
Sohu InternetRegulations on Security Protection of Critical Information Infrastructure
(the “CII Regulations”), effective on September 1, 2021. According to the CII Regulations, “critical information infrastructure” means an important network facility and Changyou have successfully registeredinformation system in important industries such as public communications and information services, as well as other important network facilities and information systems that may seriously endanger national security, the Sohu.com Website,national economy, people’s livelihoods, or the Changyou.com Websitepublic interest in the event of damage, loss of function, or data leakage. The competent governmental authorities and supervision and management authorities of the above-mentioned industries will be responsible for (i) organizing the identification of critical information infrastructures in their respective industries in accordance with certain identification rules, and (ii) promptly notifying the identified CIIOs and the cy.com WebsiteState Council’s public security department of the results.
On December 28, 2021, several PRC governmental authorities, including the CAOC, issued the Measures for Cybersecurity Review, which took effect on February 15, 2022 and replaced the previous version promulgated on April 13, 2020. Under the Measures for Cybersecurity Review, the following activities are subject to a cybersecurity review: (i) the purchase by critical information infrastructure operators of Internet products and services which affect or may affect national security, (ii) listings abroad by Internet platform operators that hold personal information of over one million users, and (iii) Internet platform operators’ data processing activities which affect or may affect national security. In addition, the relevant PRC governmental authorities may initiate a cybersecurity review if they determine that the network products or services, or data processing activities, affect or may affect national security. Under the Measures for Cybersecurity Review, “Internet products and services” primarily refers to core network equipment, high-performance computers and servers, mass storage equipment, large databases and applications, network security equipment, critical communication products, cloud computing services, and other network products and services that may have a significant impact on the security of critical information infrastructure cybersecurity and data security. Under the Measures for Cybersecurity Review, before purchasing any network products or services, CIIOs must assess potential national security risks that may arise from the launch or use of such products or services, and apply for a cybersecurity review with the Beijing AMRCAOC if national security will or may be affected.
On June 10, 2021, the Standing Committee of the National People’s Congress promulgated the Data Security Law, which took effect on September 1, 2021. The Data Security Law establishes a classified and tiered system for data protection based on the level of importance of the data in economic and social development, as well as the level of danger the data presents to national security, public interests, or the legal interests of individuals and organizations in the event of any manipulation, destruction, leakage, illegal acquisition or illegal usage. Under the Data Security Law, data processing activities must be carried out in accordance with PRC laws and regulations, and data processors must establish and continually improve data security management covering all of their processes, organize and carry out data security education and training, and take corresponding technical measures and other measures necessary to guarantee data security. The Data Security Law provides a national data security review system, under which data processing activities that affect or may affect national security are subject to national security review. Furthermore, processors of important data must carry out regular risk assessments of their data processing activities and submit risk assessment reports to the competent authorities. Organizations and individuals who engage in data processing activities that violate the Data Security Law may be subject to civil, administrative, or criminal penalties, depending on the circumstances.
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On November 14, 2021, the CAOC issued for public comment the Draft Data Security Regulations, which provide specific requirements with respect to the protection of personal data, maintenance of the safety of significant data, and obligations of internet platform operators in connection with processing Internet data. For example, data processors must delete or anonymize personal information within fifteen business days if (i) the purpose for processing the personal information has been achieved or the personal information is no longer needed; (ii) the period for the storage of information agreed to by the processors and the electronic registration marks forusers or specified in the Websites are prominently placed onprocessors’ personal information processing standards has expired; (iii) the homepagesservice has been terminated or the account has been cancelled by the individual; or (iv) personal information was collected unnecessarily or without the consent of the Sohu.com Websiteindividual, through unavoidable methods such as the processors’ use of automatic data collection technology. For the processing of significant data, among other specific requirements under the Draft Data Security Regulations, data processors must specify the persons who will be in charge of and responsible for data safety, establish a data safety management department and make related informational filings with the competent office of the CAOC within fifteen business days after important data are identified by the data processors. The Internet platform operators are also required to solicit public comments on their official websites and personal information protection related sections for no less than 30 working days when they formulate platform rules or privacy policies or make any amendments that may have a significant impact on users’ rights and interests. In addition, the Draft Data Security Regulations define large Internet platforms as the Internet platform operators that have more than 50 million users, process a large amount of personal information and important data, and have strong social mobilization capabilities and a dominant market position. Under the Draft Data Security Regulations, large Internet platforms are obliged to, among other things, entrust a third party to conduct an annual audit of the platform’s data security, implementation of the platform’s rules and commitments, protection of personal information, and the Changyou.com Websitedevelopment and the cy.com Website. Sogou Informationutilization of data and to disclose such audit results. The CAOC has successfully registered the sogou.com Website with the Beijing AMR.been soliciting comments on this draft, but there is no timetable as to when it will be enacted.
In addition, the State Security Bureau has issued regulations authorizing the blocking of access to any site it deems to be leaking State secrets or failing to comply with legislation regarding the protection of State secrets in the distribution of information online. Specifically, Internet companies in China with message boards, chat rooms or similar services, such as Sohu does through VIEs, must apply for the approval of the State Secrets Bureau prior to operating such services.
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Amendment (IX) provides, among other things discussed elsewhere in this report, that network service providers who do not comply with laws and regulations regarding the safe management of information on their networks and fail to correct their conduct after they receive notice of such
non-compliance
from relevant regulatory authorities, with results such as the dissemination of a substantial amount of illegal information or serious loss of evidence in criminal cases, may be convicted of the crime of failing to fulfill their obligations for the safe management of information on the Internet. In addition, entities and individuals are prohibited from offering such technical and other support for Internet access, online data storage, and communication transmission while knowing that recipients of any such support are conducting criminal activities through the Internet. The
Interpretation of the Supreme People’s Court and the Supreme People’s Procuratorate
on Several Issues Concerning the Application of Law in of Criminal Cases Involving Illegal Use of Information Networks and Assistance in Criminal Activities Committed through Information Networks
, issued on October 21, 2019,
further clarifies standards for conviction of the crimes of failing to fulfill obligations for the safe management of information on the Internet and assisting in criminal activities related to information networks.
Accordingly, we have established an internal security committee and adopted security maintenance measures, employed a full-time supervisor and exchanged information on a regular basis with the local public security bureau with regard to sensitive or censored information and Websites.
On December 31, 2021, the CAOC, MIIT, MPS and SAMR jointly issued the
Administrative Provisions on Algorithm Recommendations by Internet Information Services (
the “Algorithm Recommendation Provisions”), which took effect on March 1, 2022. The Algorithm Recommendation Provisions provide that providers of algorithm recommendation services are not allowed to use algorithms to create fake registered user accounts, block information, or give excessive recommendations. In addition, providers of algorithm recommendation services that have the potential to influence public opinions or provoke social movement must conduct security self-assessments and enter certain information, such as the names of the service providers, the types of algorithms, and the algorithm self-assessment reports in a nationwide online system within 10 days after they start providing algorithm recommendation services. Under the Algorithm Recommendation Provisions, providers of algorithm recommendation services are required to clearly disclose to users the basic principles, purposes and primary operating mechanisms of the algorithm recommendation services. Providers of algorithm recommendation services must also provide their users with options that are not based on the users’ preferences or habits, and must cease providing the relevant algorithmic recommendation services when users choose to terminate them.
Internet Content and Anti-Pornography
The PRC government has promulgated measures relating to Internet content through a number of government authorities, including the MIIT, the MCT, the SAPPRFT and the MPS. These measures specifically prohibit certain Internet activities, including the operation of online games, which results in the publication of any content which is found to, among other things, propagate obscenity, gambling or violence, instigate crimes, undermine public morality or the cultural traditions of the PRC, or compromise State security or secrets. If an ICP license holder violates these measures, the PRC government may revoke its ICP license and shut down its Websites.
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In addition, the PRC government has issued several regulations concerning the installation of filter software to filter out unhealthy and vulgar content from the Internet. In April 1, 2009, the Ministry of Education, the MIIT and certain other PRC ministries and agencies issued a notice requiring that, by the end of May 2009, all computer terminals connected with the Internet at all elementary and secondary schools be able to include and operate Green
Dam-Youth
Escort, which is software aimed at filtering out unhealthy and vulgar content in text and graphics from the Internet and which, according to the Website for the software, may be used to control time spent on the Internet, prohibit access to computer games, and filter out unhealthy Websites. The MIIT further expanded the scope of required use of this filter software by issuing a notice on May 19, 2009 requiring that, effective as of July 1, 2009, all computers manufactured and sold in China have the latest available version of Green
Dam-Youth
Escort preinstalled when they leave the factory and that all imported computers have the latest available version of Green
Dam-Youth
Escort preinstalled before being sold in China.
Green-Dam
Youth Escort is to be preinstalled on the hard drive of the computer or in the form of a CD accompanying the computer and is also to be included in the backup partition and system restore CD. However, on June 30, 2009, the MIIT postponed the implementation of this requirement regarding
pre-installation
of Green
Dam-Youth
Escort.
On December 4, 2009, the MIIT and three other PRC government authorities jointly issued the
Incentives Measures for Report of Pornographic, Obscene and Vulgar Messages on Internet and Mobile Media
(“Anti-Pornography Notice”), to crack down on online pornography. Pursuant to the Anti-Pornography Notice, rewards of up to RMB10,000 will be provided to Internet users who report Websites that feature pornography, and a committee has been established to review such reports to determine an appropriate award. During a PRC anti-pornography campaign, which continued during 2014, many Websites (including mobile Websites) that contained pornography were closed down. In addition, China Mobile announced a temporary suspension of billing for Wireless Application Protocol (“WAP”) services, as a means of fighting against Websites providing pornographic content.
On April 13, 2014, the National Working Group on Anti-Pornography and three other PRC government authorities jointly issued the
Proclamation of Special Action Regarding Crackdown on Online Pornographic Content
(the “Anti-Pornography Proclamation”). Under the Anti-Pornography Proclamation, Internet service providers must immediately remove texts, images, video, advertisements and other information that contain pornographic content. The relevant government authority may order enterprises or individuals who flagrantly produce or disseminate pornographic content to stop conducting business, and may revoke relevant administrative permits. Moreover, an enterprise or individual who provides telecom operation services, network access services, advertising services or payment services to facilitate dissemination of pornographic content may have criminal or civil penalties imposed under the PRC Criminal Law and other relevant laws and regulations.
Laws and Regulations Related to Unfair Competition
Pursuant to the
Unfair Competition Law of the PRC
(the “Unfair Competition Law”) adopted by the Standing Committee of the National People’s Congress on November 4, 2017 and effective on April 23, 2019, a business operator is prohibited from taking any of the following actions:
 
unauthorized use of marks that are the same as or similar to the names, packaging, or decoration of another party’s products;
 
unauthorized use of another party’s organizational name or the name of an individual;
 
unauthorized use of another party’s domain name, website name, or webpage; and
 
other actions causing a third party to mistakenly believe that another party’s product is that of the business operator.
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The Unfair Competition Law forbids business operators to pay bribes in order to gain an opportunity or competitive advantage in a business transaction or to misappropriate the trade secrets of another. “Trade secrets,” as defined in the Unfair Competition Law, refers to technical information, operating information, and other commercial information with commercial value that has not been released to the public, and is subject to appropriate measures to protect its confidentiality. On September 10, 2020, the Supreme People’s Court promulgated the
Regulations on Several Issues Concerning the Application of Law in the Trial of Civil Cases of Infringement of Trade Secrets
, which clarify the definition of trade secrets under the Unfair Competition Law, and provides guidance concerning, among other matters, confidentiality obligations, determination of infringement, and civil liabilities.

The Unfair Competition Law also stipulates that an Internet business operator may not, without the consent of another Internet business operator, insert links into the Internet products and services of such other Internet business operator in order to
re-direct
user traffic; may not mislead or compel users to modify, terminate, or
un-install
any Internet products or services of another Internet business operator; and may not take actions in bad faith to cause an Internet product or service of another Internet business operator to be unusable by users of the other business operator’s properties.
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An amendment of the Unfair Competition Law that became effective on January 1, 2018 increases the maximum amount of administrative penalties that may be imposed for violations. An additional amendment of the Unfair Competition Law that became effective on April 23, 2019 increases the amount of administrative penalties that may be imposed for malicious misappropriation of trade secrets.
In addition, on March 16, 2022, the Supreme People’s Court promulgated anthe
Interpretation of the Supreme People’s Court on Several Issues Relating toConcerning the Application of Law in Civil Trials ofthe Unfair Competition CasesLaw of the People’s Republic of China
, which became effective as of February 1, 2007 and was most recently amended on December 29, 2020.March
20, 2022. This interpretation provides guidance on how to conduct trials involving unfair competition, protect the legal rights and
interests of business operators, and maintain orderly market competition.
Regulation of M&A and Overseas Listings
On August 8, 2006, six PRC regulatory agencies, including the MOFCOM, the State Assets Supervision and Administration Commission, the State Administration of Taxation (“SAT”), the SAMR, the China Securities Regulatory Commission (the “CSRC”),CSRC, and the SAFE, jointly issued the
Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors
(“M&A Rule”), which became effective on September 8, 2006 and amended on June 22, 2009. The M&A Rule includes provisions that purport to require that an Offshore special purpose vehicle formed for purposes of the overseas listing of equity interests in PRC companies and controlled directly or indirectly by PRC companies or individuals obtain the approval of the CSRC prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange.
On September 21, 2006, the CSRC published on its official Website procedures regarding its approval of overseas listings by special purpose vehicles. The CSRC approval procedures require the filing of a number of documents with the CSRC. The application of this PRC regulation remains unclear, with no consensus currently existing among leading PRC law firms regarding the scope of the applicability of the CSRC approval requirement.
On July 6, 2021, several PRC authorities jointly promulgated the
Opinions on Strictly Combating Illegal Securities Activities in Accordance with the Law
, which called for the enhanced administration and supervision of China-based companies listing outside the PRC, proposed to revise the relevant regulations governing the issuance and listing of shares outside the PRC by such companies, and clarified the related responsibilities of competent PRC industry regulators and government authorities. On December 24, 2021, the CRSC published two draft regulations relating to listings outside the PRC, consisting of the
Provisions of the State Council on the Administration of Overseas Securities Offering and Listing
by Domestic Companies (Draft for Comments)
and
Administrative Measures for the Filing of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments)
. Pursuant to such draft regulations, PRC companies that wish to conduct direct or indirect initial listings or
follow-on
securities offerings outside the PRC are required to make filings with and report to the CRSC. The CRSC may take up to 20 working days to review such initial listings or
follow-on
offerings after all required documents are submitted.
The
2021 Restricted List
issued by the NDRC and MOFCOM on December 27, 2021 stipulates that any domestic enterprise engaging in any of the prohibited fields specified in the 2021 Restricted List must obtain the consent of the relevant governmental authorities if it wishes to conduct securities offerings and listings outside of Mainland China, overseas investors are not permitted to participate in the operation and management of the domestic enterprise, and overseas investors’ shareholding percentage in the domestic enterprise will be subject to relevant provisions with respect to the administration of domestic securities investment by overseas investors.
The M&A Rules also establish procedures and requirements that could make some acquisitions of Chinese companies by foreign investors more time-consuming and complex, including requirements in some instances that the MOFCOM be notified in advance of any
change-of-control
transaction in which a foreign investor takes control of a Chinese domestic enterprise.
In February 2011, the General Office of the State Council promulgated Circular 6, which established a security review system for mergers and acquisitions of domestic enterprises by foreign investors. Under Circular 6, a security review is required for mergers and acquisitions by foreign investors having “national defense and security” concerns and mergers and acquisitions by which foreign investors may acquire “de facto control” of domestic enterprises with “national security” concerns. In August 2011, the MOFCOM promulgated the
Rules on Implementation of Security Review System
(“MOFCOM Security Review Rules
”),
to replace the
Interim Provisions of the Ministry of Commerce on Matters Relating to the Implementation of the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors
promulgated by the MOFCOM in March 2011. The MOFCOM Security Review Rules, which came into effect on September 1, 2011, provide that the MOFCOM will look into the substance and actual impact of a transaction and prohibit foreign investors from bypassing the security review requirement by structuring transactions through proxies, trusts, indirect investments, leases, loans, control through contractual arrangements or Offshore transactions.
On October 23, 2019, the SAFE issued
the Notice of the State Administration of Foreign Exchange to Further the Facilitation of Cross-border Trade and Investment
, which cancelled restrictions on the use by foreign-invested companies that are not investment companies of their capital funds for equity investments.
The Security Review Measures
, promulgated by the NDRC and MOFCOM on December 19, 2020, stipulate that where a foreign investor acquires the equity or assets of a domestic enterprise by means of merger or acquisition, or invests in China by other means, which affects or may affect national security, such merger, acquisition, or investment will be subject to a security review by relevant governmental authorities. See “Government“Governmental Regulation and Legal Uncertainties—Specific Statutes and Regulations—Requirements for Establishment of WFOEs” regarding the other provisions of the Security Review Measures.
 
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Laws and Regulations Related to Antitrust
On August 30, 2007, the Standing Committee of the National People’s Congress of the PRC adopted the PRC Anti-Monopoly Law
(“AML”)
, which took effect on August 1, 2008. Pursuant to the AML, monopolistic conduct, including entering into monopolistic agreements, abuses of dominant market position, and Concentrations of Undertakings that have the effect of eliminating or restricting competition, is prohibited. To further implement the Antitrust Law and clarify certain issues, the State Council, the MOFCOM, the NDRC, and the SAMR issued several regulations and rules, including
the Provisions on Thresholds for Prior Notification of Concentrations of Undertakings
issued by the State Council on August 3, 2008 and amended on September 18, 2018,
the Interim Regulations on the Prohibition of Monopolistic Agreements
issued by the SAMR on June 26, 2019,
the Interim Regulations on the Prohibition of Conduct Constituting an Abuse of a Dominant Market Position
issued by the SAMR on June 26, 2019,
the Declaration Rules for Concentrations of Undertakings
issued by the MOFCOM on January 5, 2009, amended on June 6, 2014, and
re-issued
by the SAMR on September 29, 2018,
the Assessment Rules for Concentration of Undertakings
issued by the MOFCOM on November 24, 2009,
the Provisional Measures on the Investigation and Handling of Concentrations Between Business Operators which Were Not Notified in Accordance with the Law
issued by the MOFCOM on December 30, 2011, and
the Interim Provisions on Reviewing Concentration of Undertakings
issued by
the SAMR on October 23, 2020.
Taken together these various laws and regulations provide for the following:
Monopolistic Agreement
: competing business operators may not enter into monopolistic agreements that eliminate or restrict competition, such as by boycotting transactions, fixing or changing the price of commodities, limiting the output of commodities, fixing the price of commodities for resale to third parties, unless such agreements satisfy the exemptions under the Antitrust Law, such as improving technologies or increasing the efficiency and competitiveness of small and
medium-sized
enterprises. Sanctions for violations include an order to cease the relevant activities, confiscation of illegal gains and fines (from 1% to 10% of sales revenue from the previous year, or RMB500,000 if the intended monopolistic agreement has not been performed).
Abuse of Dominant Market Position
: a business operator with a dominant market position may not abuse its dominant market position to conduct acts such as selling commodities at unfairly high prices or buying commodities at unfairly low prices, selling products at prices below cost without any justifiable cause, and refusing to trade with a trading party without any justifiable cause. Dominant market position refers to a market position held by a business operator having the capacity to control the price, quantity or other trading conditions of commodities in the relevant market, or to hinder or affect any other business operator to enter the relevant market, which will be determined based on the market share of the relevant business operator, capacity of a business operator to control the sales market, the degree of dependence of other business operators upon the business operator in question in transactions, and the degree of difficulty for other business operators to enter into the relevant market. Sanctions for violation of the prohibition on the abuse of dominant market position include an order to cease the relevant activities, confiscation of illegal gains and fines (from 1% to 10% of sales revenue from the previous year).
Concentration of Undertakings
: pursuant to the AML, where a Concentration of Undertakings reaches the declaration threshold stipulated by the State Council, a declaration must be lodged in advance with the antitrust authority under the State Council. Otherwise, the Concentration of Undertakings may not be effected. Concentration of Undertakings refers to (1)(i) a merger of enterprises; (2)(ii) acquiring control over other enterprises by an enterprise through acquiring equities or assets; or (3)(iii) acquiring control over, or the possibility of exercising decisive influence on, an enterprise by contract or by any other means. Under the Provisions on Thresholds for Prior Notification of Concentrations of Undertakings, the thresholds for prior notification of Concentration of Undertakings are the following:
 
the combined worldwide turnover of all of the subject enterprises in the preceding financial year is more than RMB10.00 billion (or approximately $1.45$1.55 billion), and the nationwide turnover within China of each of at least two of the subject enterprises in the preceding financial year is more than RMB400.0 million (or approximately $58.0$62.0 million); or
 
the combined nationwide turnover within China of all the subject enterprises in the preceding financial year is more than RMB2.00 billion (or approximately $289.8$309.9 million), and the nationwide turnover within China of each of at least two of the subject enterprises in the preceding financial year is more than RMB400.0 million (or approximately $58.0$62.0 million).
If business operators fail to comply with these mandatory declaration provisions, the antitrust authority is empowered to terminate and/or unwind the transaction, dispose of relevant assets, shares or businesses and impose fines up to RMB500,000 (or approximately $72,452)$77,482).
On February 7, 2021, the Anti-Monopoly Committee of the State Council issued the Platform Guidelines. The Platform Guidelines were drafted under the framework of the Antitrust Law and, while taking into account the characteristics of the Internet platform economy, give guidance for Internet platform economy operators regarding monopolistic agreements, abuses of dominance, and Concentrations of Undertakings. The Platform Guidelines also stipulate that any Concentrations of Undertakings involving VIE structures fall within the scope of anti-monopoly review.
 
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Regulation of Foreign Currency Exchange and Dividend Distribution
The principal regulations governing foreign currency exchange in China are the
Foreign Exchange Administration Regulations (“FX Regulations”)
, which were last amended in August 2008. Under the FX Regulations, the RMB is freely convertible for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions, but not for capital account items, such as direct investments, loans, repatriation of investments and investments in securities outside of China, unless the prior approval of the SAFE is obtained and prior registration with the SAFE is made. Dividends paid by a PRC subsidiary to its overseas shareholder are deemed income of the shareholder and are taxable in the PRC. Pursuant to
the Administration Rules of the Settlement, Sale and Payment of Foreign Exchange
, foreign-invested enterprisesFIEs in the PRC may purchase or remit foreign currency, subject to a cap approved by the SAFE, for settlement of current account transactions without the approval of the SAFE. Foreign currency transactions under the capital account are still subject to limitations and require approvals from, or registration with, the SAFE and other relevant PRC governmental authorities.
In July 2014, the SAFE promulgated
the Circular on Issues Concerning Foreign Exchange Administration Over the Overseas Investment and Financing and Roundtrip Investment by Domestic Residents Via Special Purpose Vehicles
(“Circular 37”) which replaced
Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Corporate Financing and Roundtrip Investment through Offshore Special Purpose Vehicles
(“Circular 75”).Circular 37 requires PRC residents, including PRC institutions and individuals, to register with the local SAFE branch in connection with their direct establishment or indirect control of an Offshore entity, referred to in Circular 37 as a “special purpose vehicle,” for the purpose of holding domestic or Offshore assets or interests. PRC residents must also file amendments to their registrations in the event of any significant changes with respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event. Under these regulations, PRC residents’ failure to comply with specified registration procedures may result in restrictions being imposed on the foreign exchange activities of the relevant PRC entity, including the payment of dividends and other distributions to its Offshore parent, as well as restrictions on capital inflows from the Offshore entity to the PRC entity, including restrictions on the ability to contribute additional capital to the PRC entity. Further, failure to comply with the various SAFE registration requirements could result in liability under PRC law for evasion of foreign exchange regulations.
Under Circular 37, if a
non-listed
special purpose vehicle uses its own equity to grant equity incentives to any directors, supervisors, senior management or any other employees directly employed by a domestic enterprise which is directly or indirectly controlled by such special purpose vehicle, or with which such an employee has established an employment relationship, related PRC residents and individuals may, prior to exercising their rights, apply to the SAFE for foreign exchange registration formalities for such special purpose vehicle. However, in practice, different local SAFE branches may have different views and procedures on the interpretation and implementation of the SAFE regulations, and since Circular 37 was the first regulation to regulate the foreign exchange registration of a
non-listed
special purpose vehicle’s equity incentives granted to PRC residents, there remains uncertainty with respect to its implementation.
On December 25, 2006, the PBOC issued the
Administration Measures on Individual Foreign Exchange Control,
and related
Implementation Rules
were issued by the SAFE on January 5, 2007 and amended on May 29, 2016. Both became effective on February 1, 2007. Under these regulations, all foreign exchange transactions involving an employee share incentive plan, share option plan, or similar plan participated in by individuals in the PRC may be conducted only with approval from the SAFE or its authorized branch. Under the
Notice of Issues Related to the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Listed Company
(“Offshore Share Incentives Rules”), which was issued by the SAFE on February 15, 2012, PRC citizens who are granted share options, restricted share units or restricted shares by an overseas publicly listed company are required to register with the SAFE or its authorized branch and to comply with a series of other requirements. In November 2011, the SAFE approved our application to designate our PRC subsidiary Sohu Media to handle the registrations and other procedures required by the Offshore Share Incentives Rules. In February 2012, the SAFE approved Changyou’s application to designate its PRC subsidiary AmazGame to handle the registrations and other procedures required by the Offshore Share Incentive Rules. If we, Changyou or the PRC employees of Changyou and us who hold options, restricted share units or restricted shares fail to comply with these registration or other procedural requirements, we, Changyou and/or such employees may be subject to fines and other legal sanctions. Sogou has registered its 2017 Share Incentive Plan with the
The SAFE promulgated Circular 19 and Sogou is in the process of applying for such registrationCircular 16, effective June 1, 2015 and June 9, 2016, to replace previous regulations limiting an FIE’s use of its 2010 Share Incentive Plan. If
RMB-settled
registered capital. Circular 19 and Circular 16 provide, among other restrictions, that an FIE may use its 2010 Share Incentive Plan is not acceptedRMB funds converted from foreign currencies through capital contributions by or loans from its overseas investor(s) only for registration bypurposes within the SAFE, SogouFIE’s approved business scope, and those who have received awardsthat violations of the regulations can result in severe penalties, including large fines. These regulations may be subject to fines and legal sanctions, and Sogou’slimit our ability to contribute additionaltransfer and use our overseas funds through capital contributions or loans to itsour PRC subsidiaries and its PRC subsidiaries’ abilitythe VIEs to distribute dividends to it may be limited.invest in or acquire other businesses.
The principal law and regulations governing distribution of dividends of foreign holding companies were the
Foreign Investment Enterprise Law
(1986), which was amended in October 2000 and October 2016, and the
Administrative Rules under the Foreign Investment Enterprise Law
(2001), which were amended in February 2014. This law and the related regulations were replaced by the Foreign Investment Law
and the
Implementing Regulations of the Foreign Investment Law,
respectively, which both became effective on January 1, 2020. Under the new law and regulations, requirements for the distribution of dividends of newly-established foreign investment enterprisesFIEs will be consistent with those that apply to domestic companies, which are included in the Company Law of the PRC. Under the Company Law of the PRC,
newly-established
foreign investment enterprisesFIEs are required to set aside 10% of their
after-tax
profits each year to fund statutory common reserves until such reserves equal 50% of the amount of registered capital.
 
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Furthermore, under the CIT Law, which became effective on January 1, 2008 and was amended on February 24, 2017 and December 29, 2018, the maximum rate for withholding tax imposed on dividend payments from PRC
foreign-invested
companies to their overseas investors that are not regarded as “resident” for tax purposes is 20%. The rate was reduced to 10% under the Implementing Regulations for the CIT Law issued by the State Council. However, a lower withholding tax rate of 5% might be applied if there is a tax treaty between China and the jurisdiction of the foreign holding companies, such as is the case with Hong Kong, and certain requirements specified by PRC tax authorities are satisfied.
Laws and Regulations Related to Employment and Labor Protection
On June 29, 2007, the National People’s Congress promulgated the
Employment Contract Law of PRC
(“Employment Contract Law”), which became effective as of January 1, 2008 and was amended on December 28, 2012. The Employment Contract Law requires employers to provide written contracts to their employees, restricts the use of temporary workers and aims to give employees long-term job security.
Pursuant to the Employment Contract Law, employment contracts lawfully concluded prior to the implementation of the Employment Contract Law and continuing as of the date of its implementation shall continue to be performed. Where an employment relationship was established prior to the implementation of the Employment Contract Law but no written employment contract was concluded, a contract must be concluded within one month after its implementation.
On September 18, 2008, the State Council promulgated the
Implementing Regulations for the PRC Employment Contract Law
which came into effect immediately. These regulations interpret and supplement the provisions of the Employment Contract Law
.
We have modified our standard employment contract to comply with the requirements of the Employment Contract Law and its implementing regulations
.
We have entered into written employment contracts with all of our employees.
Conclusion
In the opinion of Haiwen, our principal PRC Subsidiaries and principal VIEs are approved to engage in the specific online services (categorized and addressed in the above sections) as described in the respective scopes indicated in the corresponding licenses and/or permits issued to the respective companies.
ORGANIZATIONAL STRUCTURE
The charts below present the principal consolidated entities of Sohu.com Limited, not including our consolidated Changyou entities, and Sogou entities, and our principal consolidated Changyou entities and Sogou entities as of December 31, 2020.2021. Certain intermediate holding companies that are not significant to the Sohu Group have been eliminated.
As a result of the completion of the Changyou Merger on April 17, 2020, as of the date of this report, the Sohu Group holds 100% of the combined total of Changyou’s outstanding ordinary shares.
 
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Principal Subsidiaries
The following are our principal subsidiaries:
For Sohu
 
Sohu.com (Hong Kong) Ltd., or Sohu HK, established in 2000;
 
Beijing Sohu New Era Information Technology Co., Ltd., or Sohu Era, established in 2003;
 
Sohu.com (Search) Limited, or Sohu Search, established in 2005;
 
Beijing Sohu New Media Information Technology Co., Ltd., or Sohu Media, established in 2006;
 
Sohu.com (Game) Limited, or Sohu Game, established in 2008;
 
Beijing Sohu New Momentum Information Technology Co., Ltd., or Sohu New Momentum, established in 2010;
 
Fox Video Limited, or Sohu Video, established in 2011;
 
Fox Information Technology (Tianjin) Limited, or Video Tianjin, established in 2011; and
 
Sohu Focus Limited, or Sohu Focus, established in 2013.2013; and,
Sohu Focus (HK) Limited, or Focus HK, established in 2013;
For Changyou
 
Changyou.com Limited, or Changyou, established in 2007;
 
Changyou.com (HK) Limited, or Changyou HK, established in 2007;
 
Beijing AmazGame Age Internet Technology Co., Ltd., or AmazGame, established in 2007;
 
Beijing Changyou Gamespace Software Technology Co., Ltd., or Gamespace, established in 2009;
 
Changyou.com Korea LLC, or Changyou Korea, established in 2010; and
 
Beijing Changyou Chuangxiang Software Technology Co., Ltd., or Changyou Chuangxiang, established in 2016.
For Sogou
Sogou Inc., or Sogou, established in 2005;
Sogou (BVI) Limited, or Sogou BVI, established in 2005;
Beijing Sogou Technology Development Co., Ltd., or Sogou Technology, established in 2006;
Sogou Hong Kong Limited, or Sogou HK, established in 2007;
Vast Creation Advertising Media Services Limited, or Vast Creation, established in 2004 and acquired by Sogou in 2011;
Beijing Sogou Network Technology Co., Ltd., or Sogou Network, established in 2012;
Sogou (Shantou) Internet Microcredit Co., Ltd., or Sogou Microcredit, established in 2017;
Sogou (Hangzhou) Intelligent Technology Co., Ltd., or Sogou Hangzhou, established in 2018; and
Shantou Ying Zhong Bai Fu Financing Guarantee Co., Ltd., or Sogou Financing Guarantee, established in 2019.
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Principal Variable Interest Entities
The following are ourthe principal VIEs whichthat we established or acquired in China to perform value-added telecommunications services, online games, Internet publishing, online news information services, online audiovisual transmission, and certain other business activities in the PRC, because of PRC restrictions on direct foreign investment in and operation of value-added telecommunications businesses, which restrictions are discussed in “Government“Governmental Regulation and Legal Uncertainties-SpecificUncertainties—Specific Statutes and Regulations-RegulationRegulations - Regulation of Foreign Direct Investment in Value-Added Telecommunications Companies.” We entered into contractual arrangements between ourthe VIEs and our PRC Subsidiaries that govern a substantial portion of our operations, including those of the brand advertising business, the search and search-related business, the online game business and the others business. These entities are consolidated in Sohu’s consolidated financial statements, and noncontrolling interest is recognized when applicable. For a discussion of risks related to our VIE arrangements, please see Item 3. Key Information - Risks Factors - Risks Related to Our Corporate Structure. “- We depend upon contractual arrangements with the VIEs and/or their shareholders for the success of our business, these arrangements may not be as effective in providing operational control as would ownership of these businesses, and the contracts may be difficult to enforce” and “- A failure by the VIEs or their shareholders to perform their obligations under our contractual arrangements with them could have an adverse effect on our business and financial condition.”
For Sohu
 
Beijing Century High-Tech Investment Co., Ltd., or High Century, a PRC company that was incorporated in 2001. As of December 31, 2020,2021, Dr. Charles Zhang, our Chairman of the Board and Chief Executive Officer, and Wei Li, one of our employees, held 80% and 20% interests, respectively, in this entity;
 
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Beijing Heng Da Yi Tong Information Technology Co., Ltd., or Heng Da Yi Tong, a PRC company that was incorporated in 2002. As of December 31, 2020,2021, Dr. Charles Zhang and Wei Li held 80% and 20% interests, respectively, in this entity;
 
Beijing Sohu Internet Information Service Co., Ltd., or Sohu Internet, a PRC company that was incorporated in 2003. As of December 31, 2020,2021, High Century held a 100% interest in this entity;
 
Beijing Sohu Donglin Advertising Co., Ltd., or Donglin, a PRC company that was incorporated in 2010. As of December 31, 2020,2021, Sohu Internet held a 100% interest in this entity;
 
Tianjin Jinhu Culture Development Co., Ltd, or Tianjin Jinhu, a PRC company that was incorporated in 2011. As of December 31, 2020,2021, Xiufeng Deng and Xuemei Zhang, both of whom are our employees, each held a 50% interest in this entity; and
 
Beijing Focus Interactive Information Service Co., Ltd., or Focus Interactive, a PRC company that was incorporated in July 2014. As of December 31, 2020,2021, Heng Da Yi Tong held a 100% interest in this entity.entity; and
Guangzhou Qianjun Network Technology Co., Ltd, or Guangzhou Qianjun, a PRC company that we acquired in November 2014. As of December 31, 2021, Tianjin Jinhu held a 100% interest in this entity;
For Changyou
 
Beijing Gamease Age Digital Technology Co., Ltd., or Gamease, a PRC company that was incorporated in 2007. As of December 31, 2020,2021, High Century held a 100% interest in this entity;
 
Shanghai ICE Information Technology Co., Ltd., or Shanghai ICE, a PRC company that was acquired by Changyou in 2010. As of December 31, 2020,2021, Gamease held a 100% interest in this entity; and
 
Beijing Guanyou Gamespace Digital Technology Co., Ltd., or Guanyou Gamespace, a PRC company that was incorporated in 2010. As of December 31, 2020,2021, Beijing Changyou Star Digital Technology Co., Ltd (“Changyou Star”) held a 100% interest in this entity.
We have extended interest-free loans to the individual shareholders of the VIEs to fund their capital investment in the VIEs. The loans are secured by pledges of the shareholders’ equity interests in the VIEs, and can only be repaid by the shareholders by surrender of those equity interests to us. We have also entered into a series of agreements with the individual shareholders to transfer their equity interests in the VIEs to us when required to do so.
For Sogou
Beijing Sogou Information Service Co., Ltd., or Sogou Information, a PRC company that was incorporated in 2005. As of December 31, 2020, Xiaochuan Wang, Sogou’s Chief Executive Officer, High Century and Tencent held 10%, 45% and 45% interests, respectively, in this entity; and
Chengdu Easypay Technology Co., Ltd., or Chengdu Easypay, was incorporated in January 2015. As of December 31, 2020, Sogou Information held 100% of the equity interests in this entity.
 
ITEM 4A.
UNRESOLVED STAFF COMMENTS
Not applicable.
 
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ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the section entitled “Selected Consolidated Financial Data” and our consolidated financial statements and the related notes included elsewhere in this annual report. The discussion in this section contains forward-looking statements that involve risks and uncertainties. As a result of various factors, including those set forth under “Item 3. Key Information-Risk Factors” and elsewhere in this annual report on Form
20-F,
our actual future results may be materially different from what we expect.
OVERVIEW
We are a leading Chinese online media, video, and game and search servicebusiness group providing comprehensive online products and services on PCs and mobile devices in China. Our businesses are conducted by the Sohu Group, which consists of Sohu Changyou and Sogou.Changyou. Sohu is a leading Chinese language online media content and services provider. Changyou is a leading online game developer and operator in China as measured by the popularity of its PC game TLBB and its mobile game Legacy TLBB Mobile, and engages primarily in the development, operation and licensing of online games for PCs and mobile devices. Sogou is an innovator in search
Through the operation of Sohu and a leader in China’s Internet industry. With a mission to make it easy to communicateChangyou, we generate brand advertising revenues, online games revenues and get information, Sogou has grown to become the second largest search engine by mobile queries, according to CTR,other revenues. Brand advertising revenues and the fourth largest Internet company by MAU in China, according to iResearch.online games are our core businesses. Most of our operations are conducted through our China-based subsidiaries and VIEs.
Because
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Between our entry into the Tencent/Sohu Sogou Share Purchase Agreement on September 29, 2020 and the completion of the Tencent/Sohu Sogou Share Purchase on September 23, 2021, Sogou, which generated search and search related advertising revenues, met the criteria for discontinued operations. Accordingly, the results of Sogou’s operations for Sogou have beenwere excluded from continuing operations in our consolidated financial statements and are presented in separate line items as discontinued operations. We ceased consolidating Sogou in our consolidated financial statements after September 23, 2021. Retrospective adjustments to our historical financial statements have been made in order to provide a consistent basis of comparison. See “Item 4. Information on the Company—History and Development of the Company.”
Through the operation of Sohu, Changyou, we generate brand advertising revenues, online games revenues and other revenues. Brand advertising revenues and online games are our core businesses. Sogou generates search and search related advertising revenues, which are reflected in our consolidated financial statements as discontinued operations. Most of our operations are conducted through our China-based subsidiaries and VIEs.
For the year ended December 31, 2020,2021, our total revenues were approximately $749.9$835.6 million, representing an increase of 11% compared to 2019,2020, and our gross margin increased from 64%71% to 71%76%. Our brand advertising business generated revenues of $146.5$135.0 million, with a 16%an 8% annual decrease, representing 20%16% of total revenues. Our online game business generated revenues of $536.7$638.2 million, with a 22%19% annual increase, representing 72%76% of total revenues. In 2020,2021, our net lossincome from continuing operations before deducting the noncontrolling interest was $36.5$69.3 million, compared to a net loss from continuing operations of $98.5$36.5 million in 2019.2020. In 2020,2021, our net lossincome from continuing operations after deducting the
non-controlling
noncontrolling interest was $55.0$69.3 million, compared to a net loss from continuing operations of $156.7$55.0 million in 2019.2020. Diluted net lossincome from continuing operations per share attributable to Sohu.com Limited was $1.40$1.75 in 2020,2021, compared to a diluted net loss from continuing operations per share attributable to Sohu.com Limited of $4.01$1.40 in 2019.2020.
Factors and Trends Affecting our Business
With theThe range of mobile Internet services continues to expand, reflecting an accelerated shift in user activitiesactivity 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.users. At Sohu, we have focused our efforts on developing a portfolio of leading mobile products across our business lines that we believed our users would like.lines.
Smartphones have 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. To ensure we remain as a premier destination for our audience, we invested extensively in content and technology forFor Sohu Media Portal. We continually refined the technologyportal and design ofSohu Video, we have continued to refine our key product Sohu News APP,flagship Apps by introducing premium content and introduced innovative features to meet users’ appetitesuser demand and enhance the user experience. We also introduced social features into our productshave continued to improve interactions between users and stickiness. Our advertising revenues from large brand advertisers decreased through 2020, as we faced significant challenges as a result of the
COVID-19
pandemic and an uncertain macroeconomic environment in China. In response, we actively host various innovative events, using our unique live broadcasting technology, to attract attention and interest from both users and advertisers through our online platforms. Further, we also focus on upgrading our advertising systems to improve their effectiveness, with the goal of enhancing monetization and increasing small and medium enterprise (“SME”) customers’ allocations of their advertising budgets to us.
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Online video services remained one of the most popular Internet applications. Due to intensified competition among major players, the price of content, especially the prices of premium TV programs, went up sharply in the past few years. This caused industry-wide financial losses. For Sohu Video, we have changed our content procurement strategy and stopped buying expensive new TV programs. We now concentrate on self-developed content and other short-form video program categories, which are much less expensive than TV content. We have also integratedintegrate various social functions into our products to help users build and finddiscover their own unique social communities. Leveragingcommunities and easily interact with others. We have worked closely with professional media organizations and other content providers for high quality content while continuing to concentrate on our exclusiveself-developed video content with a focus on original dramas and reality shows, as well as the generation and social distribution of short-form video content. We have incurred expenditures for content acquisition and promotion of our good reputation as a producerproducts and provider of accurate, reliableservices, and professional content, we also actively explore opportunities with subscription services that we believe will become an important revenue source in addition to traditional advertising revenues. Our subscription revenues increased significantly during 2020. In addition, we prioritized in 2020, and will continue to acceleratemay increase such expenditures in the future to attract and retain users. We have also continued to integrate our advanced live broadcasting technologies into our innovative marketing events, both online and offline, which have not only generated a large amount of premium content but also attracted considerable attention and interest from users and advertisers through our online platforms, which has further strengthened our brand influence across the deployment ofmarket and consolidated our livestreaming capabilities in the distribution of our content across various verticals on our platforms. Due to the initial positive results of these initiatives, the operating loss of Sohu Video in 2020 decreased by 54%
year-on-year.
position as a mainstream media platform.
For Changyou’s online game business, bothoverall revenues continued to grow year-over-year from 2020 to 2021, with PC game andrevenues, which consists mainly of revenues generated from its flagship game TLBB PC, continuing to increase, while mobile game revenues experienced increases during 2020. In 2020,natural decline. During the year, Changyou reviewedstuck to its previous experience in mobile game development,“Top Games” strategy and streamlined its game development processes, and set higher standards in termsprioritizing the needs of the overall quality of games within the pipeline.target users. It also continued to adjustimprove the
in-game
environment of, and optimize the operational strategy for, its existing games. Going forward, Changyou plans to continue to improveenhance its capabilities in game design, game technology, and graphic quality,quality; enhance project management over the development process,process; and improve development efficiencies, as well as to further invest in talent acquisition and development. While Changyou expects that MMORPG mobile games will continue to be its strategic focus, it is also plans to developexpanding its game portfolio with additional types of card-based RPGs, casual games and strategy games, and CCGs.games. For the three months ended December 31, 2020,2021, the PC games and mobile games that Changyou operates had approximately 4.74.5 million total average monthly active accounts and approximately 1.51.4 million total active paying accounts.
For Sogou’s search and search related business, growth in the online search market in China slowed in 2020, driven by a shift in the allocation of advertising budgets, the already high penetration of mobile devices, and slower growth of mobile search traffic. Changes in the macroeconomic and regulatory environment in China have also affected, and may continue to affect, the online search industry. Sogou strengthened its competitive advantages in search as it continued to build its content and service ecosystem during 2020. It has also continued to leverage the robust ecosystem it has built and shares with Tencent. Sogou Search is the default search engine for a range of Tencent products that offer general search functions. Sogou Search also continues to be the preferred third-party search engine on Weixin/WeChat to access Internet content outside Weixin/WeChat. In addition, Sogou has made significant breakthroughs in language-centered AI technology, including speech, computer vision, machine translation, dialogue, and question answering (“Q&A”). Sogou has further leveraged these AI capabilities to enhance the search experience for users. It has also integrated these AI capabilities into industry-leading solutions and expanded their use in multiple sectors.
The process of consummating the pending Tencent/Sohu Sogou Share Purchase and Sogou Merger has caused, and may continue to cause before the completion of the Sogou Merger, disruptions in Sogou’s business. For example, the Sogou Merger Agreement, by its terms, imposes restrictions on Sogou’s conduct of business prior to the completion of the Sogou Merger, which would delay or prevent Sogou from undertaking certain business opportunities that may arise pending the completion of the Sogou Merger. In addition, the announcement and pendency of the Sogou Merger had and may continue to have an adverse effect on Sogou’s relationships with its customers, suppliers, and other third-party service providers and business partners. For example, Sogou’s search and search-related revenues for the three months ended September 30, 2020 decreased by 33% year-over-year, primarily as a result of uncertainties on the part of certain advertisers with respect to Sogou’s business strategies and policies following the announcement of the Sogou Merger.
The outbreak ofworldwide
COVID-19
which emerged in December 2019 and has rapidly spread to become a worldwide pandemic has had, and may continue to have, a significant negative impact on the Chinese economy and, on the worldwide economy as a whole, and, in particular, on advertiser spending in the China market in which we operate, which in turn has had, and may continue to have, an adverse impact on our future business and results of operations.
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 United States of America generally accepted accounting principles (“U.S. 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
We consider an accounting estimate to be critical if: (1) the accounting policiesestimate requires us to make assumptions about matters that reflect our most significantwere highly uncertain at the time the accounting estimate was made, and (2) changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates and judgments, and those that we believe arereasonably could have used in 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 and its subsidiaries and consolidated VIEs. All intra-Group transactions are eliminated except for revenues and expenses arising from intra-group transactions that are expected to continue after the disposal of the discontinued operations.
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VIE Consolidation
Our VIEs are wholly or partially owned by certain 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 shareholders. The noncontrolling interests in our consolidated financial statements primarily consist of noncontrolling interests for Changyou and Sogou.
Noncontrolling Interest for Changyou
Prior to the completion of the Changyou Merger on April 17, 2020, we consolidate Changyou in our consolidated financial statements and also recognized noncontrolling interest reflecting the economic interest in Changyou held by Changyou noncontrolling shareholders. Changyou’s 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. Changyou’s 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. As a result of the completion of Sohu’s acquisition of the noncontrolling interests in Changyou on April 17, 2020, we hold 100% of the combined total of Changyou’s outstanding ordinary shares and 100% of the total voting power in Changyou. We consolidate Changyou in our consolidated financial statements, and no noncontrolling interests are recognized except for noncontrolling interests reflecting economic interests in Changyou’s subsidiaries held by shareholders other than Changyou.
Noncontrolling Interest for Sogou
Prior to the completion of Sogou’s IPO in November 2017, we controlled the election of a majority of Sogou’s Board of Directors pursuant to a shareholders’ agreement that expired upon the completion of the IPO. Following the completion of Sogou’s IPO, pursuant to the Voting Agreement and Sogou’s Amended and Restated Articles of Association, we still have the right to appoint a majority of Sogou’s Board of Directors.
As Sogou’s controlling shareholder, we consolidate Sogou in our consolidated financial statements as discontinued operations, and recognize noncontrolling interests reflecting economic interests in Sogou held by shareholders other than us (the “Sogou noncontrolling shareholders”). Sogou’s net income/(loss) attributable to the Sogou noncontrolling interest shareholders is recorded as net income/(loss) from discontinued operations attributable to the noncontrolling interest shareholders in our consolidated statements of comprehensive income.
Sogou’s cumulative results of operations attributable to the Sogou noncontrolling shareholders, based on their share of the economic interest in Sogou, along with changes in shareholders’ equity and adjustment for share-based compensation expense in relation to share-based awards that are unvested and vested but not yet settled and adjustment for changes in our ownership percentage in Sogou, are recorded as noncontrolling interest in our consolidated balance sheets.
Segment Reporting
Our Group’s 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 our Chief Executive Officer.
Revenue Recognition
Impact of Adoption of ASC 606
On January 1, 2018, we adopted ASC 606, applying the modified retrospective method to contracts that were not completed as of January 1, 2018. The adoption of ASC 606 did notcurrent period, would have a material impact on our accumulated deficit asfinancial condition or results of January 1, 2018. Results for reporting periods beginning on or after January 1, 2018operations. There are presented under ASC 606, while prior period amountsother items within our financial statements that require estimation but are not adjusteddeemed critical, as defined above. Changes in estimates used in these and continue to be reported in accordance withother items could have a material impact on our historic accounting under ASC 605.financial statements.
Under ASC 605,
advertising-for-advertising
barter transactions for which the fair value of the advertising services was not determinable were recorded at the carrying amount of the advertising surrendered since we did not settle such barter transactions with the counterparties in cash. As ASC 605 has been superseded by ASC 606 on this subject,
advertising-for-advertising
barter transactions is to be recorded at the fair value of the advertising received by reference to the fair value of advertising services provided to other customers.
 
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Under ASC 606, revenues are recognized when control
For a detailed discussion of our significant accounting policies and related judgments, please see “Note 2—Summary of Significant Accounting Policies”. You should read the promised goodsfollowing description of critical accounting estimates in conjunction with our consolidated financial statements and other disclosures included in this annual report.
Goodwill Impairment Assessment for the Sohu Segment
Nature of estimate: The Sohu segment has only one reporting unit, which operates the brand advertising business. The goodwill balance associated with the Sohu segment was $38.6 million as of December 31, 2021.
We conduct an annual impairment test as of October 1 of each year, or services is transferred to our customers, inmore frequently if events or circumstances indicate an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. The recognition of revenues involves certain management judgments, including estimated lives of virtual items purchasedimpairment may exist. We conduct impairment tests by game players, the estimation ofquantitatively comparing the fair value of anthe reporting unit to its carrying amount.
advertising-for-advertising
barter transaction, allocation of upfront license fees for
licensed-out
games between license and post-sale services,Assumptions: The Sohu segment estimated the fair values by using the income approach and the volume sales rebates. We do not believemarket approach. The income approach considers a number of factors that significant management judgements are involvedinclude expected future cash flows, revenue growth rates, discount rates, and requires us to make certain assumptions and estimates regarding future profitability of the business. The market approach considers earnings multipliers based on market data of comparable companies engaged in revenue recognition, but the amount and timingsimilar business. The goodwill impairment assessment is sensitive to our estimates in these factors. When one of our revenues couldassumptions relating to these factors decreased/increased by 5% while holding all other assumptions constant, the result of the goodwill impairment assessment would not be differentimpacted and the fair value of the reporting unit would still be above its carrying value.
Based on the annual impairment test conducted as of October 1, 2021, the fair value of the reporting unit exceeded the carrying value, indicating that the goodwill was not impaired. Our estimate of the key assumptions did not change significantly throughout the periods presented.
See Note 2 - “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements for any period if management made different judgmentsmore information regarding goodwill. For the goodwill impairment assessment of the Changyou segment, Changyou performed a qualitative assessment and concluded that the fair value of its reporting unit exceeded the carrying value. No critical accounting estimates were applied for Changyou’s impairment assessment.
Expected Credit Losses
Nature of estimate: Effective January 1, 2020, we adopted Accounting Standards Update (ASU)
No. 2016-13,
“Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires us to record the full amount of expected credit losses for the life of a financial asset at the time it is originated or utilized different estimates.acquired, and adjusted for changes in expected lifetime credit losses subsequently, which requires earlier recognition of credit losses.
Assumptions: The provision for credit losses is estimated mainly based on past collection experience as well as consideration of current and future economic conditions and changes in our collection trends. We estimate the expected credit losses for financial assets with similar risk characteristics on a pool basis. The key assumptions used in the process of estimating the provision for credit losses include portfolio composition, loss severity and recoveries, and application of macroeconomic forecasts. The estimate of expected credit losses is sensitive to our assumptions in these factors. When one of our estimates of loss severity and recoveries and macroeconomic forecasts decreased/increased by 5% while holding all other estimates constant, there would be no significant impact to our consolidated results of operations.
Our estimate of the key assumptions did not change significantly throughout the periods presented.
See Note 2 - “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements for more information regarding expected credit losses.
RESULTS OF OPERATIONS
Unless indicated otherwise, results of operations data for all periods presented relate to our continuing operations only, and exclude results from Changyou’s cinema advertising business, which ceased operations in August 2019, and exclude results from Sogou’s businesses, as a result of the fact that in September 2021 we sold all of the Sogou ordinary shares owned by us to Tencent. The historical results of Changyou’s cinema advertising business and Sogou’s business are reported as “discontinued operations.”
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Revenues
The following table presents our revenues disaggregated by productsrevenue source and services:by proportion for the periods indicated (in thousands, except percentages):
 
   
Year Ended

December 31, 2018

(in thousands)
 
   
Sohu
   
Changyou
   
Total
 
Brand advertising:
      
Sohu Media Portal
  $127,612    0    127,612 
Sohu Video
   53,886    0    53,886 
Focus
   31,144    0    31,144 
17173.com Website
   0    19,697    19,697 
Online games:
      
PC games
   0    236,743    236,743 
Mobile games
   0    151,737    151,737 
Other games
   0    1,308    1,308 
Others
   61,974    6,074    68,048 
  
 
 
   
 
 
   
 
 
 
Total
  $274,616    415,559    690,175 
  
 
 
   
 
 
   
 
 
 
   
Year Ended

December 31, 2019

(in thousands)
 
   
Sohu
   
Changyou
   
Total
 
Brand advertising:
      
Sohu Media Portal
  $94,692    0    94,692 
Sohu Video
   34,529    0    34,529 
Focus
   32,120    0    32,120 
17173.com Website
   0    13,715    13,715 
Online games:
      
PC games
   0    267,752    267,752 
Mobile games
   0    172,718    172,718 
Other games
   0    432    432 
Others
   57,082    763    57,845 
  
 
 
   
 
 
   
 
 
 
Total
  $218,423    455,380    673,803 
  
 
 
   
 
 
   
 
 
 
   
Year Ended

December 31, 2020

(in thousands)
 
   
Sohu
   
Changyou
   
Total
 
Brand advertising:
      
Sohu Media Portal
  $86,293    0    86,293 
Sohu Video
   25,312    0    25,312 
Focus
   23,281    0    23,281 
17173.com Website
   0    11,640    11,640 
Online games:
      
PC games
   0    353,737    353,737 
Mobile games
   0    182,947    182,947 
Other games
   0    0    0 
Others
   66,658    22    66,680 
  
 
 
   
 
 
   
 
 
 
Total
  $201,544    548,346    749,890 
  
 
 
   
 
 
   
 
 
 
   
Year ended December 31,
 
   
2019
  
2020
  
2021
  
2020 VS 2019
  
2021 VS 2020
 
   Amount   Percentage  Amount   Percentage  Amount   Percentage  Amount  Incremental
ratio		  Amount  Incremental
ratio		 
Revenues:
              
Brand advertising
  $175,056    26%  $146,526    20%  $134,967    16%  $(28,530)   (16)%  $(11,559)   (8)% 
Online games
   440,902    65%   536,684    72%   638,225    76%   95,782   22%   101,541   19% 
Others
   57,845    9%   66,680    8%   62,384    8%   8,835   15%   (4,296)   (6)% 
  
 
 
   
 
 
  
 
 
   
 
 
  
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total revenues
  $673,803    100%  $749,890    100%  $835,576    100%  $76,087   11%  $85,686   11% 
  
 
 
   
 
 
  
 
 
   
 
 
  
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
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Brand Advertising Revenues
Brand advertising revenues are generated fromwere $135.0 million for 2021, compared to $146.5 million and $175.1 million, respectively, for 2020 and 2019. The
year-on-year
reduction in brand advertising services. Certain customers may receive sales rebates, which are accounted for as variable consideration. We estimate annual expected revenue volumerevenues resulted mainly from each agent with reference to its historical results. Sales rebates will reducereductions in the revenues recognized. We recognize revenue for the amount of fees we receive from our advertisers, after deducting sales rebatesSohu Media Portal, Sohu Video and net of value-added tax (“VAT”). There have not been any significant changes, and we believe that there will not be significant changes, to our estimates of variable consideration.
Brand Advertising Revenues
Focus.
Revenue Recognition of Multiple Performance ObligationsSohu
Our contracts with customers may include multiple performance obligations. For such arrangements, we allocate revenues to each performance obligation based on its relative standalone selling price. We generally determine the standalone selling price of each distinct performance obligation based on the prices charged to customers when sold on a standalone basis. Where a standalone selling price is not directly observable, we generally estimate the selling price based on the prices at which performance obligations of a similar nature and geography are charged to customers. Most of such contracts have all performance obligations completed within the same quarter.
Pricing Model
Sohu Media Portal
Through mobile devices
Revenues from Sohu Media Portal were $75.4 million for 2021, compared to $86.3 million and PCs, we provide advertisement placements$94.7 million, respectively, for 2020 and 2019. In 2021, due to ourthe challenges of the macroeconomic environment in China and the adverse impact of the
COVID-19
pandemic, many brand advertisers and SMEs shrank their total advertising budgets and shifted to sales-driven promotions. The number of advertisers for Sohu Media Portal was 1,117 for 2021, compared to 1,947 and 2,757, respectively, for 2020 and 2019. The average amount spent per advertiser was approximately $68,000 for 2021, compared to $44,000 and $34,000, respectively, for 2020 and 2019.
Sohu Video
Revenues from Sohu Video were $26.8 million for 2021, compared to $25.3 million and $34.5 million, respectively, for 2020 and 2019. The number of advertisers on different Internet platformsSohu Video was 77, 106 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,
in-feed
video infomercial ads,127, respectively, for 2021, 2020 and other formats.2019. The average amount spent per advertiser was approximately $348,000, $239,000 and $272,000, respectively, for 2021, 2020 and 2019.
Currently we have three main types of pricing models, consisting of
Focus
Revenues from Focus were $22.0 million for 2021, compared to $23.3 million and $32.1 million, respectively, for 2020 and 2019. Revenues generated from the Fixed Price model were $20.4 million for 2021, compared to $20.1 million and $29.1 million, respectively, for 2020 and 2019. The number of advertisers under the CPMFixed Price model was 1,038, 1,150 and 1,113, respectively, for 2021, 2020 and 2019. The average amount spent per advertiser was approximately $20,000, $17,000 and $26,000, respectively, for 2021, 2020 and 2019.
Changyou
17173.com Website
Revenues from the 17173.com Website were $10.8 million for 2021, compared to $11.6 million and $13.7 million, respectively, for 2020 and 2019. The number of advertisers on the 17173.com Website was 76, 108 and 82, respectively, for 2021, 2020 and 2019. The average amount spent per advertiser was approximately $142,000, $107,000 and $167,000, respectively, for 2021, 2020 and 2019.
Other information
Sales to our five largest advertising agencies and advertisers comprised approximately 29% of total brand advertising revenues for 2021, compared to 27% and 28%, respectively, for 2020 and 2019. As of December 31, 2021, 2020 and 2019, we recorded $4.5 million, $5.6 million and $7.3 million, respectively, of receipts in advance from advertisers. As of December 31, 2021, we had obligations to provide, and advertisers had obligations to purchase, advertising services under existing contracts in the amount of $5.9 million that are required to be provided during the year ending December 31, 2022.
Online Game Revenues
Revenues from the online game business were $638.2 million for 2021, compared to $536.7 million and $440.9 million, respectively, for 2020 and 2019.
PC games and Mobile Games
Revenues from PC games were $469.3 million for 2021, compared to $353.7 million and $267.8 million, respectively, for 2020 and 2019, representing 74%, 66% and 61%, respectively, of Changyou’s online game revenues for the corresponding years. The dominant PC game operated by Changyou is TLBB. In 2021, TLBB PC generated $421.7 million in revenues, accounting for approximately 66% of Changyou’s online game revenues, approximately 65% of Changyou’s total revenues and approximately 50% of the Sohu Group’s total revenues. The
year-on-year
increase in revenues from PC games was mainly due to the launch of a number of special servers for TLBB PC that used a memorable early version of the game for content (“TLBB Vintage”) in October 2020.
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Revenues from mobile games were $168.9 million for 2021, compared to $183.0 million and $172.7 million, respectively, for 2020 and 2019. The dominant mobile game operated by Changyou was Legacy TLBB Mobile. In 2021, the mobile game Legacy TLBB Mobile generated $79.5 million in revenues, accounting for approximately 12% of Changyou’s online game revenues, approximately 12% of Changyou’s total revenues, and approximately 10% of the Sohu Group’s total revenues. The
year-on-year
decrease in mobile game revenues for 2021 was $14.1 million, mainly due to a natural decline in older games. The
year-on-year
increase in mobile game revenues for 2020 was $10.3 million, mainly due to the revenue contribution from TLBB Honor, and the CPC model.revenue contribution from several new games launched during 2020.
The following table sets forth certain operating data for Changyou’s PC games and mobile games for the periods indicated:
Average Monthly Active
Accounts (1)
  
Three Months Ended
March 31
   
Three Months Ended
June 30
   
Three Months Ended
September 30
   
Three Months Ended
December 31
 
(in millions)  PC
games		   Mobile
games		   PC
games		   Mobile
games		   PC
games		   Mobile
games		   PC
games		   Mobile
games		 
2019
   1.9    2.7    2.0    2.7    2.1    3.5    2.2    3.7 
2020
   2.1    3.4    1.9    3.1    2.0    3.8    2.3    2.4 
2021
   2.3    2.0    2.1    1.9    2.0    4.6    2.0    2.5 
Quarterly Aggregate Active Paying
Accounts (2)
  
Three Months Ended
March 31
   
Three Months Ended
June 30
   
Three Months Ended
September 30
   
Three Months Ended
December 31
 
(in millions)  PC
games		   Mobile
games		   PC
games		   Mobile
games		   PC
games		   Mobile
games		   PC
games		   Mobile
games		 
2019
   0.9    0.6    0.9    0.6    1.0    1.1    1.0    1.1 
2020
   1.0    1.0    0.9    0.6    1.0    0.6    0.9    0.6 
2021
   0.9    0.5    0.9    0.5    1.0    1.0    0.9    0.5 
 
(i)(1)
Fixed Price modelAverage 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 are used at least once during the quarter.
Under the Fixed Price model, a contract is signed to establish a fixed price for the advertising services to be provided. Given that the advertisers benefit from displayed advertisements evenly over the period the advertisements are displayed, we recognize revenue on a straight-line basis over the period of display, provided all revenue recognition criteria have been met.
Other Games
(ii)
CPM model
Under the CPM model, the unit priceRevenues from games other than PC games and mobile games were nil for each qualifying display is fixed2021, compared to nil and 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. Given that the fees are priced consistently throughout the contract$0.4 million, respectively, for 2020 and the unit prices are fixed in accordance with our pricing practices for similar advertisers, we recognize revenue based on the fixed unit prices and the number of qualifying displays upon their occurrence, provided all revenue recognition criteria have been met.2019.
Other Revenues
(iii)
CPC model
Under the CPC model, there is no fixed priceRevenues from other services were $62.4 million for advertising2021, compared to $66.7 million and $57.8 million, respectively, for 2020 and 2019. The $4.3 million
year-on-year
decrease from 2020 to 2021 was mainly attributable to a $4.3 million decrease in revenue from Sohu’s
sub-licensing
of its purchased video content to third parties and a $1.7 million decrease in Sohu’s interactive broadcasting services, statedoffset by a $2.2 million increase in the contract with the advertiserSohu’s revenue sharing from other platforms. The $8.9 million
year-on-year
increase in 2020 was mainly attributable to a $12.5 million increase in revenues from paid subscription services, and the unit price for each click is auction-based. We charge advertisers on a
per-click
basis when the users click on the advertisements. Given that the fees are priced consistently throughout the contract and the unit prices are fixed $2.1 million increase in accordance with our pricing practices with similar advertisers, we recognize revenue based on qualifying clicks and unit price upon the occurrence revenues from Sohu’s
sub-licensing
of the clicks, provided all revenue recognition criteria have been met.its purchased video content to third parties, offset by a $5.1 million decrease in revenues from Sohu’s interactive broadcasting services.
 
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Online Game Revenues
Changyou’s online game revenues are generated primarily from its self-operatedCosts and
licensed-out
PC games and mobile games. Prior to the sale of the MoboTap business in 2018, Changyou also generated a small amount of revenues from online card and board games. All of Changyou’s 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.
Changyou is the principal 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 net of VAT and discounts to game card distributors where applicable. Changyou obtains revenues from the sale of
in-game
virtual items. Revenues are recognized over time for virtual items with estimated lives and upon use for items that are consumed immediately. 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.
PC Games
Proceeds from Changyou’s self-operated PC games are collected from players and third-party game card distributors through sales of Changyou’s game points on its online payment platform and prepaid game cards.
Changyou’s 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 Changyou’s cost of revenues.
Mobile Games Expenses
Self-operated 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.
Changyou’s 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 included in Changyou’s cost of revenues.
Licensed Out Mobile Games
Changyou also authorizes third parties to operate its mobile games. Licensed out games include mobile games developed in house, such as Changyou’s mobile game Legacy TLBB Mobile, and mobile games jointly developed with third-party developers. Changyou receives monthly revenue-based royalty payments from 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 Changyou’s games in specified geographic areas. Since Changyou is obligated to provide post-sale services (“PCS”), the initial license fees are allocated between the license and PCS based on relative standalone selling prices. The amount allocated to the license is recognized as revenue upon the commencement of the license period, given that Changyou’s intellectual property rights subject to the license are considered to be functional and the licensee has the right to use such intellectual property rights as they exist at the point when the license is granted, and the amount allocated to PCS is recognized as revenue ratably over the license period. Monthly revenue-based royalty payments are recognized when the relevant services are delivered, provided that collectability is reasonably assured. Changyou views the third-party licensee operators as Changyou’s 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 and keeps the balance pursuant to revenue-sharing agreements. Such revenue-sharing amounts paid to third-party developers are included in Changyou’s cost of revenues or product development expenses.
Other Revenues
Sohu
Other revenues attributable to Sohu consist primarily of revenues from paid subscription services, interactive broadcasting services, and
sub-licensing
of purchased video content to third parties.
Changyou
Other revenues attributable to Changyou are primarily from IVAS.
Revenues generated from Changyou’s IVAS were derived primarily from software applications for PCs and mobile devices offered by RaidCall, which ceased operations in March 2019. Prior to March 2018, IVAS revenues also included revenues generated from the Dolphin Browser operated by MoboTap. Revenues from IVAS are recognized during the period the services are rendered or items are consumed under the gross method, as Changyou is the principal obligor for provision of the services.
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As of August 12, 2019, we ceased consolidating Changyou’s cinema advertising business in our consolidated financial statements and, accordingly, the financial results of the cinema advertising business are excluded from our results from continuing operations and are presented in separate line items as discontinued operations in the consolidated financial statements, and retrospective adjustments to our historical audited consolidated financial statements have been made in order to provide a consistent basis of comparison.
Contract Balances
Timing of revenue recognition may differ from the timing of invoicing to customers. Accounts receivable represent amounts invoiced and revenue recognized prior to invoicing, when we have satisfied our performance obligations and have the unconditional right to payment. The allowance for credit losses is estimated based upon our assessment of various factors, including past collection experience and consideration of current and future economic conditions and other factors that may affect our customers’ ability to pay. Contract assets as of December 31, 2020 were not material. The allowance for credit losses was $7.0 million and $4.0 million, respectively, as of December 31, 2020 and December 31, 2019.
Receipts in advance and deferred revenue relate to unsatisfied performance obligations at the end of the period and primarily consist of fees received from game players in the online game business and from advertisers in the advertising business. Due to the generally short-term duration of the contracts, the majority of the performance obligations are satisfied in the following reporting period. The amount of revenue recognized that was included in the receipts in advance and deferred revenue balance at the beginning of the period was $42.6 million for the year ended December 31, 2020.
There was no significant change in the contract assets and contract liability balances during 2020.
Revenue recognized in 2020 from performance obligations related to prior years was not material.
Practical Expedients
We have used the following practical expedients as allowed under ASC 606:
(i) The transaction price allocated to performance obligations that are unsatisfied, or partially unsatisfied, has not been disclosed as substantially all of our contracts have a duration of one year or less.
(ii) Payment terms and conditions vary by contract type, although terms generally include a requirement of prepayment or payment within one year or less. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined that our contracts generally do not include a significant financing component.
(iii) We applied the portfolio approach in determining the commencement date of consumption and the estimated lives of virtual items for the recognition of games revenue given that the effect of applying a portfolio approach to a group game players’ behaviors would not differ materially from considering each one of them individually.
(iv) We generally expense sales commissions when incurred, because the amortization period would be one year or less. These costs are recorded within sales and marketing expenses.
Cost of RevenuesRESULTS OF OPERATIONS
CostUnless indicated otherwise, results of Brand Advertising Revenues
Cost of brandoperations data for all periods presented relate to our continuing operations only, and exclude results from Changyou’s cinema advertising revenues mainly consists of contentbusiness, which ceased operations in August 2019, and license costs, salary and benefits expenses, and bandwidth service costs. For self-developed video content, production costs incurred in excessexclude results from Sogou’s businesses, as a result of the amountfact that in September 2021 we sold all of revenue contracted forthe Sogou ordinary shares owned by us to Tencent. The historical results of Changyou’s cinema advertising business and Sogou’s business are expensedreported as incurred.
Cost of Online Game Revenues
Cost of online game revenues mainly consists of revenue-sharing payments, salary and benefits expenses, bandwidth service costs, tax surcharges, depreciation and amortization expenses, content and license costs, and other direct costs.
Cost of Other Revenues
Cost of other revenues mainly consists of revenue-sharing payments related to interactive broadcasting services, content and license costs related to paid subscription services, and revenue-sharing payments related to paid subscription services.“discontinued operations.”
 
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Product Development Expenses
Product development expenses mainly consist of salary and benefits expenses, content and license costs, depreciation and amortization expenses, professional fees, 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. The development costs of online games are expensed as incurred, including the development costs of online games prior to the establishment of technological feasibility and maintenance costs after the online games are available for marketing.
Sales and Marketing Expenses
Sales and marketing expenses mainly consist of advertising and promotional expenses, salary and benefits expenses, travel and entertainment expenses, and facilities expenses. Advertising and promotional expenses 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.
General and Administrative Expenses
General and administrative expenses mainly consist of salary and benefits expenses, professional fees, share-based compensation, bad debts, travel and entertainment expenses, and facilities expenses.
Share-based Compensation Expense
Sohu (excluding Sohu Video), Changyou, Sogou, and Sohu Video have incentive plans for the granting of share-based awards, including 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 shareholders’ equity or noncontrolling interest in the consolidated balance sheets. The assumptions used in share-based compensation expense recognition represent management’s 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.
After the completion of the Changyou Merger, our Board of Directors approved a modification plan for the granted but unvested share options under the Changyou 2014 Share Incentive Plan and the Changyou 2019 Share Incentive Plan (the “Changyou Plans’ Modification”).
After the Changyou Plans’ Modification, liability will be accrued over the service period based on a fixed price of $5.39 per Changyou Class A ordinary share, which equals the Changyou Merger consideration of $5.40 per Changyou Class A ordinary share minus the
per-share
exercise price of $0.01 of such options. No subsequent fair value
re-measurement
will be made given the award is an obligation based on a fixed amount underlying such vested share options.
Sohu (excluding Sohu Video), Changyou and Sogou Share-based Awards
Sohu (excluding Sohu Video) Share-based Awards
In determining the fair value of share options granted by Sohu (excluding Sohu Video) as share-based awards, the public market price of the underlying shares at each reporting date was used, and a binomial 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.
Upon the dissolution of Sohu.com Inc. on May 31, 2018, we assumed all then existing obligations of Sohu.com Inc. with respect to equity incentive awards that had been granted under Sohu.com Inc.’s Amended and Restated 2010 Stock Incentive Plan (the “Sohu 2010 Stock Incentive Plan”) and remained outstanding, and such awards were converted into the right to receive upon exercise or settlement our ordinary shares under the Sohu 2018 Share Incentive Plan rather than shares of the common stock of Sohu.com Inc., subject to the other terms of such outstanding awards. Options for the purchase of our ordinary shares, including options converted from those 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.
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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.
Changyou Share-based Awards
Options for the purchase of Changyou Class A ordinary shares contractually granted under the Changyou 2014 Share Incentive Plan and the Changyou 2019 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 estimates 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.
After the Changyou Plans’ Modification, a portion of the share options previously granted under the Changyou 2014 Share Incentive Plan that became vested after the completion of the Changyou Merger were settled by Changyou at a fixed price of $5.39 per Changyou Class A ordinary share, which equals the Changyou Merger consideration of $5.40 per Changyou Class A ordinary share minus the
per-share
exercise price of $0.01 of such options. None of the remaining share options granted under the Changyou 2014 Share Incentive Plan that became vested after the completion of the Changyou Merger or that become vested in the future, and none of the share options granted under the Changyou 2019 Share Incentive Plan, will be exercisable, but can only be repurchased by Changyou at a fixed price of $5.39 per Changyou Class A ordinary share underlying such vested share options upon termination of the option holders’ employment or upon approval of the Chairman of our Board of Directors. As a result of the Changyou Plans’ Modification, share-based compensation expense will be accrued over the service period based on the fixed price of $5.39 per Changyou Class A ordinary share. No subsequent fair value
re-measurement
will be made, given that the award is an obligation based on a fixed amount of $5.39 per Changyou Class A ordinary share.
As of December 31, 2020, 4,210,000 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. Cumulative share-based compensation expense of $15.7 million was accrued based on the fixed price of $5.39 per Changyou Class A ordinary share.
Sogou Share-based AwardsRevenues
In determining the fair value of share options grantedThe following table presents our revenues by Sogou as share-based awards, a binomial valuation model was applied. The determination of the fair value is affectedrevenue source and by the fair value of the ordinary shares underlying the options as well as assumptions regarding a number of complex and subjective variables, including risk-free interest rates, exercise multiples, expected forfeiture rates, expected share price volatility rates, and expected dividends. The fair values of the ordinary shares are determined based on the trading price of Sogou ADSs in the public market.
Before Sogou’s adoption of ASU
2018-07
“Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting” effective for fiscal years beginning after December 15, 2018, share-based compensation expense for share options granted to
non-employees
was measured at fair value at the earlier of the performance commitment date or the date service was completed and recognized over the period during which the service was provided. Sogou applied the guidance in ASC
505-50
to measure share options granted to
non-employees
based on the then-current fair value at each reporting date until the service was provided and the performance targets were met. After Sogou’s adoption of ASU
2018-07,
share-based compensation expense for share options granted to
non-employees
is recognized in accordance with the requirements of ASC 718 for employee share-based compensation awards.
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 upon the requisite service period and certain subjective performance targets being met. 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, or, after the performance target of Sogou’s completion of an IPO was met upon the completion of Sogou’s IPO on November 13, 2017, on an accelerated basis over the requisite service period, or, for options with only service period requirement, on an accelerated basis over the requisite service period. 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. Compensation expense recognized by Sogou is reflected as discontinued operations in our consolidated statements of comprehensive income. 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 recordedproportion for the number of awards so estimated.periods indicated (in thousands, except percentages):
   
Year ended December 31,
 
   
2019
  
2020
  
2021
  
2020 VS 2019
  
2021 VS 2020
 
   Amount   Percentage  Amount   Percentage  Amount   Percentage  Amount  Incremental
ratio		  Amount  Incremental
ratio		 
Revenues:
              
Brand advertising
  $175,056    26%  $146,526    20%  $134,967    16%  $(28,530)   (16)%  $(11,559)   (8)% 
Online games
   440,902    65%   536,684    72%   638,225    76%   95,782   22%   101,541   19% 
Others
   57,845    9%   66,680    8%   62,384    8%   8,835   15%   (4,296)   (6)% 
  
 
 
   
 
 
  
 
 
   
 
 
  
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total revenues
  $673,803    100%  $749,890    100%  $835,576    100%  $76,087   11%  $85,686   11% 
  
 
 
   
 
 
  
 
 
   
 
 
  
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
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Brand Advertising Revenues
Brand advertising revenues were $135.0 million for 2021, compared to $146.5 million and $175.1 million, respectively, for 2020 and 2019. The
year-on-year
reduction in brand advertising revenues resulted mainly from reductions in the revenues of Sohu Media Portal, Sohu Video Share-based Awardsand Focus.
Sohu
On January 4, 2012,
Sohu Media Portal
Revenues from Sohu Media Portal were $75.4 million for 2021, compared to $86.3 million and $94.7 million, respectively, for 2020 and 2019. In 2021, due to the challenges of the macroeconomic environment in China and the adverse impact of the
COVID-19
pandemic, many brand advertisers and SMEs shrank their total advertising budgets and shifted to sales-driven promotions. The number of advertisers for Sohu Media Portal was 1,117 for 2021, compared to 1,947 and 2,757, respectively, for 2020 and 2019. The average amount spent per advertiser was approximately $68,000 for 2021, compared to $44,000 and $34,000, respectively, for 2020 and 2019.
Sohu Video
Revenues from Sohu Video the holding entitywere $26.8 million for 2021, compared to $25.3 million and $34.5 million, respectively, for 2020 and 2019. The number of Sohu’s video division, adopted a 2011 Share Incentive Plan (the “Sohu Video Share Incentive Plan”) which provides for the issuance of up to 25,000,000 ordinary shares ofadvertisers on Sohu Video (representingwas 77, 106 and 127, respectively, for 2021, 2020 and 2019. The average amount spent per advertiser was approximately 10%$348,000, $239,000 and $272,000, respectively, for 2021, 2020 and 2019.
Focus
Revenues from Focus were $22.0 million for 2021, compared to $23.3 million and $32.1 million, respectively, for 2020 and 2019. Revenues generated from the Fixed Price model were $20.4 million for 2021, compared to $20.1 million and $29.1 million, respectively, for 2020 and 2019. The number of advertisers under the outstanding Sohu Video sharesFixed Price model was 1,038, 1,150 and 1,113, respectively, for 2021, 2020 and 2019. The average amount spent per advertiser was approximately $20,000, $17,000 and $26,000, respectively, for 2021, 2020 and 2019.
Changyou
17173.com Website
Revenues from the 17173.com Website were $10.8 million for 2021, compared to $11.6 million and $13.7 million, respectively, for 2020 and 2019. The number of advertisers on a fully-diluted basis)the 17173.com Website was 76, 108 and 82, respectively, for 2021, 2020 and 2019. The average amount spent per advertiser was approximately $142,000, $107,000 and $167,000, respectively, for 2021, 2020 and 2019.
Other information
Sales to managementour five largest advertising agencies and key employeesadvertisers comprised approximately 29% of the video divisiontotal brand advertising revenues for 2021, compared to 27% and to Sohu management.28%, respectively, for 2020 and 2019. As of December 31, 2021, 2020 grantsand 2019, we recorded $4.5 million, $5.6 million and $7.3 million, respectively, 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 December 31, 2020, 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
PRC Corporate Income Tax
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 recognizedreceipts 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.
advance from advertisers. As of December 31, 2020,2021, we had obligations to provide, and advertisers had obligations to purchase, advertising services under existing contracts in the following principal entities were qualified as HNTEs and were entitledamount of $5.9 million that are required to an income tax rate of 15%.be provided during the year ending December 31, 2022.
For
Online Game Revenues
Revenues from the online game business were $638.2 million for 2021, compared to $536.7 million and $440.9 million, respectively, for 2020 and 2019.
PC games and Mobile Games
Revenues from PC games were $469.3 million for 2021, compared to $353.7 million and $267.8 million, respectively, for 2020 and 2019, representing 74%, 66% and 61%, respectively, of Changyou’s online game revenues for the corresponding years. The dominant PC game operated by Changyou is TLBB. In 2021, TLBB PC generated $421.7 million in revenues, accounting for approximately 66% of Changyou’s online game revenues, approximately 65% of Changyou’s total revenues and approximately 50% of the Sohu Group’s total revenues. The
year-on-year
increase in revenues from PC games was mainly due to the launch of a number of special servers for TLBB PC that used a memorable early version of the game for content (“TLBB Vintage”) in October 2020.
 
Sohu New Momentum. Sohu New Momentum qualified as an HNTE for the years 2019 through 2021, and will need to
re-apply
for HNTE qualification in 2022.
Sohu Internet and Video Tianjin. Sohu Internet and Video Tianjin qualified as HNTEs for the years 2018 through 2020, and will need to
re-apply
for HNTE qualification in 2021.
Sohu Media. Sohu Media
re-applied
for HNTE qualification and received approval in December 2020. Sohu Media is entitled to continue to enjoy the beneficial tax rate as an HNTE for the years 2020 through 2022, and will need to
re-apply
for HNTE qualification in 2023.
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Revenues from mobile games were $168.9 million for 2021, compared to $183.0 million and $172.7 million, respectively, for 2020 and 2019. The dominant mobile game operated by Changyou was Legacy TLBB Mobile. In 2021, the mobile game Legacy TLBB Mobile generated $79.5 million in revenues, accounting for approximately 12% of Changyou’s online game revenues, approximately 12% of Changyou’s total revenues, and approximately 10% of the Sohu Group’s total revenues. The
For Changyou
year-on-year
decrease in mobile game revenues for 2021 was $14.1 million, mainly due to a natural decline in older games. The
year-on-year
increase in mobile game revenues for 2020 was $10.3 million, mainly due to the revenue contribution from TLBB Honor, and the revenue contribution from several new games launched during 2020.
The following table sets forth certain operating data for Changyou’s PC games and mobile games for the periods indicated:
Average Monthly Active
Accounts (1)
  
Three Months Ended
March 31
   
Three Months Ended
June 30
   
Three Months Ended
September 30
   
Three Months Ended
December 31
 
(in millions)  PC
games		   Mobile
games		   PC
games		   Mobile
games		   PC
games		   Mobile
games		   PC
games		   Mobile
games		 
2019
   1.9    2.7    2.0    2.7    2.1    3.5    2.2    3.7 
2020
   2.1    3.4    1.9    3.1    2.0    3.8    2.3    2.4 
2021
   2.3    2.0    2.1    1.9    2.0    4.6    2.0    2.5 
Quarterly Aggregate Active Paying
Accounts (2)
  
Three Months Ended
March 31
   
Three Months Ended
June 30
   
Three Months Ended
September 30
   
Three Months Ended
December 31
 
(in millions)  PC
games		   Mobile
games		   PC
games		   Mobile
games		   PC
games		   Mobile
games		   PC
games		   Mobile
games		 
2019
   0.9    0.6    0.9    0.6    1.0    1.1    1.0    1.1 
2020
   1.0    1.0    0.9    0.6    1.0    0.6    0.9    0.6 
2021
   0.9    0.5    0.9    0.5    1.0    1.0    0.9    0.5 
(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 are used at least once during the quarter.
Other Games
Revenues from games other than PC games and mobile games were nil for 2021, compared to nil and $0.4 million, respectively, for 2020 and 2019.
Other Revenues
Revenues from other services were $62.4 million for 2021, compared to $66.7 million and $57.8 million, respectively, for 2020 and 2019. The $4.3 million
year-on-year
decrease from 2020 to 2021 was mainly attributable to a $4.3 million decrease in revenue from Sohu’s
sub-licensing
of its purchased video content to third parties and a $1.7 million decrease in Sohu’s interactive broadcasting services, offset by a $2.2 million increase in Sohu’s revenue sharing from other platforms. The $8.9 million
year-on-year
increase in 2020 was mainly attributable to a $12.5 million increase in revenues from paid subscription services, and a $2.1 million increase in revenues from Sohu’s
sub-licensing
of its purchased video content to third parties, offset by a $5.1 million decrease in revenues from Sohu’s interactive broadcasting services.
 
Gamespace and Changyou Chuangxiang. Gamespace and Changyou Chuangxiang qualified as HNTEs for the years 2019 through 2021, and will need to
re-apply
for HNTE qualification in 2022.
Gamease and AmazGame. Gamease and AmazGame
re-applied
for HNTE qualification and received approval in October 2020. Gamease and AmazGame are entitled to continue to enjoy the beneficial tax rate as HNTEs for the years 2020 through 2022, and will need to
re-apply
for HNTE qualification in 2023.
For Sogou
Sogou Network. Sogou Network qualified as an HNTE for the years 2019 through 2021, and will need to
re-apply
for HNTE qualification in 2022.
Sogou Information. Sogou Information qualified as an HNTE for the years 2018 through 2020, and will need to
re-apply
for HNTE qualification in 2021.
Sogou Technology. Sogou Technology
re-applied
for HNTE qualification and received approval in December 2020. Sogou Technology is entitled to continue to enjoy the beneficial tax rate as an HNTE for the years 2020 through 2022, and will need to
re-apply
for HNTE qualification in 2023.
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 KNSE is entitled to a further reduced preferential income tax rate of 10%. Enterprises wishing to enjoy the status of a Software Enterprise or a KNSE must perform a self-assessment each year to ensure they meet the criteria for qualification and file required supporting documents with the tax authorities before using the preferential CIT rates. These enterprises will be subject to the tax authorities’ assessment each year as to whether they are entitled to use the relevant preferential CIT treatments. If at any time during the preferential tax treatment years an enterprise uses the preferential CIT rates but the relevant authorities determine that it fails to meet applicable criteria for qualification, the relevant authorities may revoke the enterprise’s Software Enterprise or KNSE status.
For Changyou
AmazGame. In 2020, AmazGame completed a self-assessment and filed required supporting documents for KNSE status for 2019. Also in 2020, AmazGame was qualified as a KNSE after the relevant government authorities’ assessment and became entitled to a preferential income tax rate of 10% for 2019. AmazGame will follow the appropriate rules and procedures of the relevant government authorities in order to maintain its KNSE status for 2020.
Changyou Chuangxiang. In 2020, Changyou Chuangxiang completed a self-assessment and filed required supporting documents for KNSE status for 2019. Also in 2020, Changyou Chuangxiang was qualified as a KNSE after the relevant government authorities’ assessment and became entitled to a preferential income tax rate of 10% for 2019. Changyou Chuangxiang will follow the appropriate rules and procedures of the relevant government authorities in order to maintain its KNSE status for 2020.
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,” 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 PRC 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 rates of 6% or 17% for the period from January 1, 2018 to April 30, 2018, at rates of 6% or 16% for the period from May 1, 2018 to March 31, 2019, and at rates of 6% or 13% after April 1, 2019) and the available input VAT amount (at the rate applicable to the supplier).
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U.S. Corporate Income Tax
Sohu.com Inc., which was formerly the
top-tier
publicly-traded parent company of the Sohu Group, was dissolvedCosts and liquidated on May 31, 2018. Sohu.com Inc. was a Delaware corporation that was subject to U.S. federal corporate income tax on its taxable income at a rate of 21% for taxable years beginning after December 31, 2017 and of up to 35% for prior tax years. U.S. federal tax legislation signed into law on December 22, 2017, commonly referred to as the Tax Cuts and Jobs Act (the “U.S. TCJA”), significantly modified the U.S. Internal Revenue Code by, among other things, reducing the maximum statutory U.S. federal corporate income tax rate from 35% to 21% for taxable years beginning after December 31, 2017; limiting and/or eliminating many business deductions; migrating the U.S. to a partial territorial tax system with a
one-time
transition tax (the “Toll Charge”) on a mandatory deemed repatriation of previously deferred foreign earnings of certain foreign subsidiaries; subject to certain limitations, generally eliminating U.S. corporate income tax on dividends from foreign subsidiaries; and providing for new taxes on certain foreign earnings. See Note 15 to our audited consolidated financial statements beginning on page
F-1
of this report.
Certain activities conducted in the PRC resulted in U.S. corporate income taxes being imposed on Sohu.com Inc. when its subsidiaries that were controlled foreign corporations (“CFCs”) generated income that was 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 the Sohu Group’s investments, were among the types of income that were subject to taxation under Subpart F. Any income taxable under Subpart F was taxable in the U.S. at the applicable federal corporate income tax rate. Subpart F income also included certain income from intra-Group transactions between Sohu.com Inc.’s
non-U.S.
subsidiaries and VIEs and Changyou’s
non-U.S.
subsidiaries and VIEs or Sogou’s
non-U.S.
subsidiaries and VIEs, or where Sohu.com Inc.’s
non-U.S.
subsidiaries or VIEs made 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. did not have to treat dividends received by its CFC subsidiaries as Subpart F income includible in Sohu.com Inc.’s taxable income in the U.S.
To the extent that portions of Sohu.com Inc.’s U.S. taxable income, such as Subpart F income or global intangible
low-taxed
income (“GILTI”), as applicable, had been determined to be from sources outside of the U.S., subject to certain limitations, Sohu.com Inc. may have been entitled to claim foreign tax credits to offset its U.S. income tax liabilities. Following the enactment of the U.S. TCJA, if dividends that Sohu.com Inc. received from its subsidiaries after January 1, 2018 were determined to be from sources outside of the U.S., subject to certain limitations, Sohu.com Inc. would generally not have been required to pay U.S. corporate income tax on those dividends. Liabilities for U.S. corporate income tax were accrued in our consolidated statements of comprehensive income and estimated tax payments were made when required by U.S. law.
Treatment of Toll Charge Related to the U.S. TCJA
Beginning in the fourth quarter of 2017, the Sohu Group had recognized a provisional amount of income tax expense for the Toll Charge of $219 million, which represented management’s estimate of the amount of the Toll Charge that would have been payable by Sohu.com Inc. based on the deemed repatriation to the United States of its share of previously deferred earnings of certain of its
non-U.S.
subsidiaries, offset by a reduction of $4 million in liability for deferred U.S. income tax, as a result of the U.S. TCJA. The Sohu Group included the provisional amount of the Toll Charge of $219 million in its interim financial statements through the quarter ended September 30, 2018, in reliance on SAB 118
.
For the fourth quarter of 2018, the Sohu Group’s management
re-evaluated
the impact on the Sohu Group of the Toll Charge under the U.S. TCJA. Management determined that it was more likely than not, based on the technical merits, that the tax position that the Sohu Group had no Toll Charge liability would be sustained. The Group recognized a tax benefit in the amount of $77 million, which was the largest amount that management determined to be greater than 50% likely to be realized upon settlement with the U.S. IRS. As a result, as of December 31, 2018, the Sohu Group had an unrecognized tax benefit in the amount of $142 million, which represented the difference between the tax benefit recognized in the fourth quarter of 2018 and management’s previous estimate of the Toll Charge. The estimate remained unchanged as of December 31, 2020. In addition, the Sohu Group accrued $8 million and $6 million, respectively, in interest on the unrecognized tax benefit for the years of 2019 and 2020.
The tax benefit recognized and the unrecognized tax benefit in relation to the Toll Charge may be subject to further adjustment in subsequent periods based on facts and circumstances that arose after December 31, 2020, such as any IRS assessments upon audit and management’s further judgment and estimates.
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Uncertain Tax Positions
Expenses
We are subject to various taxes in different jurisdictions, but primarily 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 ordinary shares outstanding during the period. Diluted net income/(loss) per share is computed using the weighted average number of ordinary shares and, if dilutive, potential ordinary shares outstanding during the period. Potential ordinary shares 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 Sohu is calculated as discussed below. The adjustment will not be made if there is an anti-dilutive effect.
Changyou’s net income/(loss) attributable to Sohu
Prior to the completion of the Changyou Merger on April 17, 2020, Changyou’s net income/(loss) attributable to Sohu was determined using the percentage that the weighted average number of Changyou shares held by Sohu represented 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 of the total economic interest in Changyou, which was used for the calculation of basic net income per share. After the completion of the Changyou Merger, Sohu holds 100% of the combined total of Changyou’s outstanding ordinary shares, so Changyou’s net income/(loss) is wholly attributable to Sohu.
As a result of the Changyou Plans’ Modification, a portion of the share options previously granted under the Changyou 2014 Share Incentive Plan that became vested after the completion of the Changyou Merger were settled by Changyou at a fixed price of $5.39 per Changyou Class A ordinary share, which equals the Changyou Merger consideration of $5.40 per Changyou Class A ordinary share minus the
per-share
exercise price of $0.01 of such options. None of the remaining share options granted under the Changyou 2014 Share Incentive Plan that became vested after the completion of the Changyou Merger or that become vested in the future, and none of the share options granted under the Changyou 2019 Share Incentive Plan, will be exercisable, but can only be repurchased by Changyou at a fixed price of $5.39 per Changyou Class A ordinary share underlying such vested share options upon termination of the option holders’ employment or upon approval of the Chairman of the Sohu Board. As a result of the Changyou Plans’ Modification, share-based compensation expense will be accrued over the service period based on the fixed price of $5.39 per Changyou Class A ordinary share. No subsequent fair value
re-measurement
will be made, given that the award is an obligation based on a fixed amount of $5.39 per Changyou Class A ordinary share.
In the calculation of our diluted net income/(loss) per share, before the Changyou Plans’ Modification, a dilutive effect should be assumed. All of Changyou’s existing unvested restricted share units and share options, and vested restricted share units and share options that have not yet been settled or exercised, 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 in Changyou to decrease. As a result, Changyou’s net income/(loss) attributable to us 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 our diluted net income/(loss) per share. As a result, Changyou’s net income/(loss) attributable to us on a diluted basis equals the number used for the calculation of our basic net income/(loss) per share.
As a result of the Changyou Plans’ Modification, all of Changyou’s previously granted share-based awards have been reclassified as obligation-based awards. Accordingly, all of those Changyou awards are excluded from the calculation of our diluted net income/(loss) per share. Changyou’s net income/(loss) attributable to us on a diluted basis equals the number used for the calculation of our basic net income/(loss) per share. There have been no diluted effects resulting from Changyou’s existing unvested share options.
Sogou’s net income/(loss) attributable to Sohu (Discontinued)
Sogou’s net income/(loss) attributable to Sohu is determined using the percentage that the weighted average number of Sogou shares held by Sohu represents of the weighted average number of Sogou 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 of the total economic interest in Sogou, which is used for the calculation of basic net income per share. Sogou’s net income/(loss) attributable to Sohu is reflected as discontinued operations in the Sohu Group’s consolidated statements of comprehensive income.
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In the calculation of Sohu’s diluted net income/(loss) per share, assuming a dilutive effect, the percentage of Sohu’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’s diluted income/(loss) per share. As a result, Sogou’s net income/(loss) attributable to Sohu on a diluted basis equals the number used for the calculation of Sohu’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 consist primarily of cash equivalents, restricted cash, short-term investments, accounts receivable, prepaid and other current assets, long-term investments, restricted time deposits, accounts payable, accrued liabilities, receipts in advance and deferred revenue, short-term bank loans, other short-term liabilities, long-term bank loans 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.
Restricted Cash and Restricted Time Deposits
Restricted cash and restricted time deposits are valued based on the prevailing interest rates in the market using the discounted cash flow method.
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 estimates of the collectability of accounts receivable. Many factors are considered in estimating the general allowance, including reviewing delinquent accounts receivable, performing a customer credit analysis, and analyzing historical bad debt records and current and future economic trends.
Accounts receivable are measured at amortized cost and reported on our consolidated balance sheets at the outstanding principals adjusted for any write-offs and any allowance for credit losses.
Allowance for credit losses
Effective on January 1, 2020, we adopted Accounting Standards Update (ASU)
2016-13,
“Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU
2016-13”)
under a modified retrospective transition. This guidance replaces the existing “incurred loss” methodology, and introduces an expected loss approach using macroeconomic forecasts, referred to as a current expected credit losses (“CECL”) methodology. Under the incurred loss methodology, credit losses are only recognized when the losses are probable of having been incurred. The CECL methodology requires that the full amount of expected credit losses for the lifetime of the financial instrument be recorded at the time it is originated or acquired, considering relevant historical experience, current conditions and reasonable and supportable macroeconomic forecasts that affect the collectability of financial assets, and adjusted for changes in expected lifetime credit losses subsequently, which may require earlier recognition of credit losses.
We adopted ASU
2016-13
using the modified retrospective transition approach and recognized a cumulative-effect adjustment to the opening balance of accumulated deficit in the consolidated financial statements. Results for reporting periods beginning after January 1, 2020 are presented using the CECL methodology while comparative information continues to be reported in accordance with the incurred loss methodology in effect for prior periods.
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The following table shows the overall adjustments recognized for each individual line item (in thousands).
   
December 31,

2019
   
ASU 2016-13

adjustment
   
January 1,

2020
 
Allowance for credit losses
      
Accounts receivable, net
  $126,081   $(3,383)   $122,698 
Accounts receivable and financing receivables, net classified as assets held for sale (1)
   134,635    (3,273)    131,362 
               
Total assets
   2,691,864    (6,656)    2,685,208 
Shareholders’ equity
      
Accumulated deficit
   (544,137)    (6,656)    (550,793) 
Note
(1): Of the total adjustment of $3.3 million, $2.5 million was related to financing receivables.
Accounts receivable, net
The allowance for credit losses reflects our estimated expected losses. We assess the allowance for credit losses, mainly based on the past collection experience as well as consideration of current and future economic conditions and changes in our collection trends. We estimate the expected credit losses for accounts receivable with similar risk characteristics on a pool basis. For each pool, we first estimate its recovery period based on relevant historical accounts receivable collection information. Then we estimate the credit allowances based on the recovery period, the historical distribution of each aging bucket, and the impact of macroeconomic factors.
Accounts receivable are written off when there is no reasonable expectation of recovery. Allowance for credit losses is presented as net impairment losses within operating profit. Subsequent recoveries of amounts previously written off are credited against the same line item.
Accounts receivable, net, as of December 31, 2019 and 2020 consisted of the following (in thousands):
   
As of December 31,
 
   
2019
   
2020
 
Accounts receivable, net
    
Accounts receivable
  $130,037   $94,528 
Less: Allowance for credit losses
   (3,956)    (7,007) 
          
  $126,081   $87,521 
The following table presents the aging analysis of accounts receivable as of December 31, 2019 and 2020 (in thousands):
   
As of December 31,
 
   
2019
   
2020
 
Less than 179 days
  $113,173   $78,805 
180-359
days
   6,516    7,569 
360 days and greater
   10,348    8,154 
          
Total
   130,037    94,528 
The movement of allowance for credit losses for the years ended December 31, 2018, 2019 and 2020 was as follows (in thousands):
   
For the year ended December 31,
 
   
2018
   
2019
   
2020
 
Balance at the beginning of year
  $4,487   $7,574   $3,956 
Changes on initial application of ASU
2016-13
(1)
   0    0    3,383 
Additional allowance for credit losses, net of recoveries
   5,449    4,724    2,419 
Write-offs
   (1,940)    (8,237)    (3,231) 
Exchange difference
   (422)    (105)    480 
               
Balance at the end of year
   7,574    3,956    7,007 
Note (1): We adopted ASU
2016-13
using the modified retrospective transition approach. The adjustments arising from the new CECL model are recognized in the opening Consolidated Balance Sheet on January 1, 2020.
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Accounts Receivable and Financing Receivables, Net classified as assets held for sale
Financing receivables, net, classified as assets held for sale consist primarily of small consumer loans that Sogou makes to individual borrowers. Sogou funds such loans either through its own capital or through a trust which was jointly established by Sogou and a third-party investor, and is administered by a third-party trust company. As the trust only invests in loans facilitated by Sogou, Sogou has power to direct the activities of the trust. Sogou also has the obligation to absorb losses and the right to receive benefits from the trust that could potentially be significant to the trust. As a result, Sogou is considered the primary beneficiary of the trust and the trust is considered a consolidated VIE (the “Consolidated Trust”) under ASC 810.
The financing receivables, net, classified as assets held for sale are recorded at the principal amount and interest accrued, net of allowance for credit losses that reflects Sogou’s best estimate of the amounts that will not be collected. Interest on loans is accrued based on the contractual interest rates of the loans when earned. The loan periods granted by Sogou to the borrowers related to the small consumer loans are generally within one year.
Sogou estimates its credit losses of the financing receivables collectively, using a pool basis within applicable credit risk classification levels of the underlying customers, mainly based on delinquency levels. The significant assumptions used in the process of estimating the allowance for credit losses include portfolio composition, loan delinquencies, loss severity and recoveries, and application of macroeconomic forecasts. The lifetime CECL allowance is measured as the product of the ending balance and two key parameters, the lifetime Probability of Default (“PD”) and Loss Given Default (“LGD”). PD represents the expected probability of payment and time to default of small consumer loans made by Sogou. LGD represents the percentage of the expected balance due at default that is not recoverable. The calibration of PD and LGD starts with the Sogou’s historical information, with PD considering vintage, recent performance, and macroeconomic factors and LGD being assessed based on portfolio delinquencies, loss severity, and future recoveries default. The estimated credit losses are further adjusted to incorporate the impact of macroeconomic conditions. To incorporate the impact based on Sogou’s macroeconomic forecasts, quantitative adjustments are applied to key parameters such as PD and LGD on a collective basis. Macroeconomic factors used in models include variables such as consumer price index and total retail sales of consumer goods.
Financing receivables are written off when there is no reasonable expectation of recovery. Allowance for credit losses is presented as net impairment losses within operating profit. Subsequent recoveries of amounts previously written off are credited against the same line item.
The accounts receivable and financing receivables, net, classified as assets held for sale as of December 31, 2019 and 2020 consisted of the following (in thousands):
   
As of December 31,
 
   
2019
   
2020
 
Accounts receivable
  $77,210   $35,975 
Financing receivables
   66,858    41,911 
Less: Allowance for credit losses (1)
   (12,255)    (6,700) 
          
  $131,813   $71,186 
Note
(1): The allowance for credit losses related to financing receivables was $6.4 million as of December 31, 2020.
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The following table summarizes the
past-due
status of the principle of financing receivables classified as assets held for sale as of December 31, 2019 and 2020 (in thousands):
December 31, 2019  
1 -30 Days

Past Due
   
31 -60 Days

Past Due
   
61 -90 Days

Past Due
   
Greater than
90 Days

Past Due
   
Total

Past Due
   
Current
   
Total
 
Financing receivables by origination year
              
2018
  $0   $0   $0   $0   $0   $1,744   $1,744 
2019
   10,606    1,635    1,176    1,709    15,126    49,988    65,114 
Total
   10,606    1,635    1,176    1,709    15,126    51,732    66,858 
December 31, 2020
              
Financing receivables by origination year
              
2018
  $0   $0   $0   $0   $0   $1,081   $1,081 
2019
   1    1    2    0    4    182    186 
2020
   7,037    576    548    501    8,662    31,982    40,644 
                                   
Total
  $7,038   $577   $550   $501   $8,666   $33,245   $41,911 
The movement of allowance for credit losses for the years ended December 31, 2018, 2019 and 2020 was as follows (in thousands):
   
For the year ended December 31,
 
   
2018
   
2019
   
2020
 
Beginning balance
  $384   $7,511   $12,255 
Change on initial application of ASU
2016-13
(1)
   0    0    3,273 
Additional allowance for credit losses, net of recoveries
   9,119    15,620    3,049 
Write-offs
   (1,908)    (11,741)    (12,517) 
Exchange difference
   (84)    865    640 
               
Balance at the end of year
  $7,511   $12,255   $6,700 
Note
(1): We adopted ASU
2016-13
using the modified retrospective transition approach. The adjustments arising from the new CECL model are recognized in the opening consolidated balance sheet on January 1, 2020.
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.
Equity Investments
Investments in entities are recorded as equity investments under long-term investments. For investments in common stock or
in-substance
common stock of entities over which we can exercise significant influence but do not own a majority equity interest or control, the equity method is applied, and 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. For those equity investments accounted for other than under the equity method or those that result in consolidation, the fair value method is applied. However, for equity investments that do not have readily determinable fair values, we choose to account for them at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. If this measurement alternative is elected, changes in the carrying value of the equity investment will be required to be made whenever there are observable price changes in transactions for identical or similar investments of the same issuer. The implementation guidance notes that an entity should make a “reasonable effort” to identify price changes that are known or that can reasonably be known.
We assess investments for impairment by considering factors including, but not limited to, current economic and market conditions, operating performance of the companies, including current earnings trends and undiscounted cash flows, and other company-specific information, such as recent financing rounds. The fair value determination, particularly for investments in privately-held companies whose revenue model is still unclear, requires significant judgment to determine appropriate estimates and assumptions. Changes in these estimates and assumptions could affect the calculation of the fair value of the investments. If the assessment indicates that an impairment exists, we estimate the fair value of the investment and write down the asset to its fair value, taking the corresponding charge to the consolidated statements of comprehensive income/(loss).
Long-Lived Assets
Long-lived assets include fixed assets and intangible assets.
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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.
Fixed Assets
Estimated Useful Lives (years)
Office buildings36-47
Leasehold improvementsLesser of term of the lease or the estimated useful lives of the assets
Vehicles4-10
Office furniture5
Computer equipment and hardware2-5
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 carrying value of the relevant assets and is recognized in operating expenses in the consolidated statements of comprehensive income.
Intangible Assets
Intangible assets mainly comprise purchased video content, operating rights for licensed games, domain names and trademarks, computer software, and developed technologies. 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. Amortization of purchased video content is computed based on the trend in viewership accumulation over the shorter of the applicable license period or two years.
The estimated useful lives of our intangible assets are listed below:
Intangible Assets
Estimated Useful Lives (years)
Purchased video content1 month to 2 years
Computer software1-5
Developed technologies3-10
Domain names and trademarks4-30
Operating rights for licensed gamesover the contract terms
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 Long-lived Assets Other Than Purchased Video Content
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. The evaluation is performed at the lowest level of identifiable cash flows independent of other assets. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If such review indicates that the carrying amount of the long-lived assets is not recoverable, the carrying amount of such assets is reduced to fair value. 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.
Impairment of Purchased Video Content
Purchased video content is stated at the lower of cost less accumulated amortization, or fair value.
In accordance with ASC
920-350-35,
if management’s expectations of the programming usefulness of a program, series, package, or program segment are revised downward, it may be necessary to write off to the income statement the amount by which the unamortized capitalized costs exceed fair value. A
write-off
from unamortized cost to fair value establishes a new cost basis. Accordingly, we measure the video content’s impairment loss by comparing the content’s carrying value to its fair value. An impairment loss will be recorded if the carrying value of video content is higher than its fair value. The impairment to be recognized is measured by the amount by which the carrying value of video content exceeds its fair value.
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Lease
We adopted ASU
No. 2016-02,
Leases (Topic 842), at the beginning of the first quarter of 2019 using the modified retrospective method, and did not restate comparable periods. Results and disclosure requirements for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts have not been adjusted and continue to be reported in accordance with our historical accounting under Topic 840.
We elected the package of practical expedients permitted under the transition guidance, which allowed us to carry forward the historical lease classification, the assessment on whether an existing or expired contract contains a lease, and the treatment of initial direct costs. We also elected to keep leases with an initial term of 12 months or less off the balance sheet.
Under the new lease guidance, we determine if an arrangement is or contains a lease at inception.
Right-of-use
assets and lease liabilities are recognized at the lease commencement date based on the present value of remaining lease payments over the lease terms. We only consider payments that are fixed and determinable at the time of lease commencement. The adoption of the new lease guidance resulted in recognition of $7.4 million of
right-of-use
assets, $6.7 million of lease liabilities, $17.9 million of
right-of-use
assets on assets held for sale and $16.2 million of lease liabilities on liabilities held for sale as of January 1, 2019.
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.
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. We adopted ASU
No. 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, and in accordance with the FASB, 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 the reporting unit with its carrying value, including goodwill. If the carrying amount of each reporting unit, including goodwill, exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, but limited to the total amount of goodwill allocated to that reporting unit.
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 and the market approach. The judgment in estimating the fair value of reporting units includes revenue growth rates and profitability in estimating future cash flows; determining appropriate discount rates and earnings multipliers based on market data of comparable companies engaged in a similar business under the market approach; 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, consists of a cumulative foreign currency translation adjustment.
Functional Currency and Foreign Currency Translation
An entity’s functional currency is the currency of the primary economic environment in which it operates, normally that is the currency of the environment in which the entity primarily generates and expends cash. Management’s judgment is essential to determine the functional currency by assessing various indicators, such as cash flows, sales price and market, expenses, financing and intra-Group transactions and arrangements. The functional currency of Sohu.com Limited, and its predecessor 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.
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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 period’s 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.
RESULTS OF OPERATIONS
Unless indicated otherwise, results of operations data for all periods presented relate to our continuing operations only, and exclude results from Changyou’s cinema advertising business, which ceased operations in August 2019, and exclude results from Sogou’s businesses, as a result of the fact that in September 20202021 we entered into the Tencent/Sohu Sogou Share Purchase Agreement, pursuant to which we agreed to sellsold all of the Sogou ordinary shares owned by us to Tencent. The historical results of Changyou’s cinema advertising business and Sogou’s business are reported as “discontinued operations.”
 
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Revenues
The following table presents our revenues by revenue source and by proportion for the periods indicated (in thousands, except percentages):
 
  
Year ended December 31,
   
Year ended December 31,
 
  
2018
 
2019
 
2020
 
2019 VS 2018
 
2020 VS 2019
   
2019
 
2020
 
2021
 
2020 VS 2019
 
2021 VS 2020
 
  Amount   Percentage Amount   Percentage Amount   Percentage Amount Incremental
ratio		 Amount Incremental
ratio		   Amount   Percentage Amount   Percentage Amount   Percentage Amount Incremental
ratio		 Amount Incremental
ratio		 
Revenues:
           ��                
Brand advertising
  $232,339    34%  $175,056    26%  $146,526    20%  $(57,283)   (25)%  $(28,530)   (16)%   $175,056    26%  $146,526    20%  $134,967    16%  $(28,530)   (16)%  $(11,559)   (8)% 
Online games
   389,788    56%   440,902    65%   536,684    72%   51,114   13%   95,782   22%    440,902    65%   536,684    72%   638,225    76%   95,782   22%   101,541   19% 
Others
   68,048    10%   57,845    9%   66,680    8%   (10,203)   (15)%   8,835   15%    57,845    9%   66,680    8%   62,384    8%   8,835   15%   (4,296)   (6)% 
  
 
    
 
    
 
    
 
  
 
  
 
  
 
   
 
   
 
  
 
   
 
  
 
   
 
  
 
  
 
  
 
  
 
 
Total revenues
  $690,175    100%  $673,803    100%  $749,890    100%  $(16,372)   (2)%  $76,087   11%   $673,803    100%  $749,890    100%  $835,576    100%  $76,087   11%  $85,686   11% 
  
 
    
 
    
 
    
 
  
 
  
 
  
 
   
 
   
 
  
 
   
 
  
 
   
 
  
 
  
 
  
 
  
 
 
 
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Brand Advertising Revenues
Brand advertising revenues were $135.0 million for 2021, compared to $146.5 million for 2020, compared toand $175.1 million and $232.3 million, respectively, for 20192020 and 2018.2019. The
year-on-year
reduction in brand advertising revenues from 2019 to 2020 resulted mainly from reductions in the revenues of Sohu Media Portal, Sohu Video and Focus. The
year-on-year
reduction in brand advertising revenues from 2018 to 2019 resulted mainly from reductions in the revenues of Sohu Media and Sohu Video.
Sohu
 
Sohu Media Portal
Revenues from Sohu Media Portal were $75.4 million for 2021, compared to $86.3 million for 2020, compared toand $94.7 million and $127.6 million, respectively, for 20192020 and 2018.2019. In 2020,2021, due to the challenges of the macroeconomic environment in China and the adverse impact of the
COVID-19
pandemic, many brand advertisers and SMEs shrank their total advertising budgets in general.and shifted to sales-driven promotions. The number of advertisers for Sohu Media Portal was 1,117 for 2021, compared to 1,947 and 2,757, respectively, for 2020 compared to 2,757 and 4,074, respectively, for 2019 and 2018.2019. The average amount spent per advertiser was approximately $68,000 for 2021, compared to $44,000 and $34,000, respectively, for 2020 compared to $34,000 and $31,000, respectively, for 2019 and 2018.
2019.
 
Sohu Video
Revenues from Sohu Video were $26.8 million for 2021, compared to $25.3 million for 2020, compared toand $34.5 million and $53.9 million, respectively, for 20192020 and 2018. The changes were mainly attributable to reductions in the average amount spent per advertiser and the number of advertisers.2019. The number of advertisers on Sohu Video was 77, 106 127 and 200,127, respectively, for 2021, 2020 2019 and 2018.2019. The average amount spent per advertiser was approximately $348,000, $239,000 $272,000 and $270,000,$272,000, respectively, for 2021, 2020 2019 and 2018.2019.
 
Focus
Revenues from Focus were $22.0 million for 2021, compared to $23.3 million for 2020, compared toand $32.1 million and $31.1 million, respectively, for 20192020 and 2018.2019. Revenues generated from the Fixed Price model were $20.4 million for 2021, compared to $20.1 million for 2020, compared toand $29.1 million and $27.5 million, respectively, for 20192020 and 2018.2019. The number of advertisers under the Fixed Price model was 1,038, 1,150 1,113 and 1,282,1,113, respectively, for 2021, 2020 2019 and 2018.2019. The average amount spent per advertiser was approximately $20,000, $17,000 $26,000 and $21,000,$26,000, respectively, for 2021, 2020 2019 and 2018.2019.
Changyou
 
17173.com Website
Revenues from the 17173.com Website were $10.8 million for 2021, compared to $11.6 million for 2020, compared toand $13.7 million and $19.7 million, respectively, for 20192020 and 2018. The decreases were primarily a result of fewer Web games, PC games and mobile games being marketed on the 17173.com Website.2019. The number of advertisers on the 17173.com Website was 76, 108 82 and 126,82, respectively, for 2021, 2020 2019 and 2018.2019. The average amount spent per advertiser was approximately $142,000, $107,000 $167,000 and $156,000,$167,000, respectively, for 2021, 2020 2019 and 2018.2019.
Other information
Sales to our five largest advertising agencies and advertisers comprised approximately 27%29% of total brand advertising revenues for 2020,2021, compared to 28%27% and 22%28%, respectively, for 20192020 and 2018.2019. As of December 31, 2021, 2020 2019 and 2018,2019, we recorded $4.5 million, $5.6 million $7.3 million and $10.3$7.3 million, respectively, of receipts in advance from advertisers. As of December 31, 2020,2021, we had obligations to provide, and advertisers had obligations to purchase, advertising services under existing contracts in the amount of $4.4$5.9 million that are required to be provided during the year ending December 31, 2021.2022.
Online Game Revenues
Revenues from the online game business were $638.2 million for 2021, compared to $536.7 million for 2020, compared toand $440.9 million and $389.8 million, respectively, for 20192020 and 2018.2019.
PC games and Mobile Games
Revenues from PC games were $469.3 million for 2021, compared to $353.7 million for 2020, compared toand $267.8 million and $236.7 million, respectively, for 2020 and 2019, and 2018, representing 66%74%, 61%66% and 61%, respectively, of Changyou’s online game revenues for the corresponding years. The dominant PC game operated by Changyou is TLBB. In 2020,2021, TLBB PC generated $309.7$421.7 million in revenues, accounting for approximately 58%66% of Changyou’s online game revenues, approximately 56%65% of Changyou’s total revenues and approximately 41%50% of the Sohu Group’s total revenues. The
year-on-year
increase in revenues from PC games was mainly due to the successful launch of a number of special servers for TLBB PC that used a memorable early version of the game for content (“TLBB Vintage”) in October 2020.
 
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Revenues from mobile games were $168.9 million for 2021, compared to $183.0 million for 2020, compared toand $172.7 million and $151.7 million, respectively, for 20192020 and 2018.2019. The dominant mobile game operated by Changyou was Legacy TLBB Mobile. In 2020,2021, the mobile game Legacy TLBB Mobile generated $88.3$79.5 million in revenues, accounting for approximately 16%12% of Changyou’s online game revenues, approximately 16%12% of Changyou’s total revenues, and approximately 12%10% of the Sohu Group’s total revenues. The
year-on-year
decrease in mobile game revenues for 2021 was $14.1 million, mainly due to a natural decline in older games. The
year-on-year
increase in mobile game revenues for 2020 was $10.3 million, mainly due to the revenue contribution from TLBB Honor, and the revenue contribution from several new games launched during 2020. The
year-on-year
increase in mobile game revenues for 2019 was $21.0 million, mainly due to the revenue contribution from TLBB Honor, which was launched in August 2019.
The following table sets forth certain operating data for Changyou’s PC games and mobile games for the periods indicated:
 
Average Monthly Active
Accounts (1)
  
Three Months Ended
March 31
   
Three Months Ended
June 30
   
Three Months Ended
September 30
   
Three Months Ended
December 31
   
Three Months Ended
March 31
   
Three Months Ended
June 30
   
Three Months Ended
September 30
   
Three Months Ended
December 31
 
(in millions)  PC games   Mobile
games		   PC games   Mobile
games		   PC games   Mobile
games		   PC games   Mobile
games		   PC
games		   Mobile
games		   PC
games		   Mobile
games		   PC
games		   Mobile
games		   PC
games		   Mobile
games		 
2018
   2.5    2.6    2.3    3.2    2.3    3.7    2.0    2.9 
2019
   1.9    2.7    2.0    2.7    2.1    3.5    2.2    3.7    1.9    2.7    2.0    2.7    2.1    3.5    2.2    3.7 
2020
   2.1    3.4    1.9    3.1    2.0    3.8    2.3    2.4    2.1    3.4    1.9    3.1    2.0    3.8    2.3    2.4 
Quarterly Aggregate
Active Paying Accounts (2)
  
Three Months Ended
March 31
   
Three Months Ended
June 30
   
Three Months Ended
September 30
   
Three Months Ended
December 31
 
(in millions)  PC games   Mobile
games		   PC games   Mobile
games		   PC games   Mobile
games		   PC games   Mobile
games		 
2018
   0.8    0.8    0.7    0.7    0.8    0.7    0.9    0.7 
2019
   0.9    0.6    0.9    0.6    1.0    1.1    1.0    1.1 
2020
   1.0    1.0    0.9    0.6    1.0    0.6    0.9    0.6 
2021
   2.3    2.0    2.1    1.9    2.0    4.6    2.0    2.5 
Quarterly Aggregate Active Paying
Accounts (2)
  
Three Months Ended
March 31
   
Three Months Ended
June 30
   
Three Months Ended
September 30
   
Three Months Ended
December 31
 
(in millions)  PC
games		   Mobile
games		   PC
games		   Mobile
games		   PC
games		   Mobile
games		   PC
games		   Mobile
games		 
2019
   0.9    0.6    0.9    0.6    1.0    1.1    1.0    1.1 
2020
   1.0    1.0    0.9    0.6    1.0    0.6    0.9    0.6 
2021
   0.9    0.5    0.9    0.5    1.0    1.0    0.9    0.5 
 
(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 are used at least once during the quarter.
Other Games
Revenues from games other than PC games and mobile games were nil for 2020,2021, compared to $0.4 millionnil and $1.3$0.4 million, respectively, for 20192020 and 2018.2019.
Other Revenues
Revenues from other services were $62.4 million for 2021, compared to $66.7 million for 2020, compared toand $57.8 million and $68.0 million, respectively, for 20192020 and 2018.2019. The $4.3 million
year-on-year
decrease from 2020 to 2021 was mainly attributable to a $4.3 million decrease in revenue from Sohu’s
sub-licensing
of its purchased video content to third parties and a $1.7 million decrease in Sohu’s interactive broadcasting services, offset by a $2.2 million increase in Sohu’s revenue sharing from other platforms. The $8.9 million year on year
year-on-year
increase in 2020 was mainly attributable to a $12.5 million increase in revenues from paid subscription services, and a $2.1 million increase in revenues from Sohu’s
sub-licensing
of its purchased video content to third parties, offset by a $5.1 million decrease in revenues from Sohu’s interactive broadcasting services. The $10.2 million year on year decrease in 2019 was mainly attributable to a $5.3 million decrease in revenues from Changyou’s IVAS business due to RaidCall having ceased operations in March 2019, and a $4.6 million decrease in revenues from content provided through the platforms of the three main telecommunications operators in China.
 
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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):
 
  
Year ended December 31,
   
Year ended December 31,
 
  
2018
 
2019
 
2020
 
2019 VS 2018
 
2020 VS 2019
   
2019
 
2020
 
2021
 
2020 VS 2019
 
2021 VS 2020
 
  Amount   Percentage Amount   Percentage Amount   Percentage Amount Incremental
ratio		 Amount Incremental
ratio		   Amount   Percentage Amount   Percentage Amount   Percentage Amount Incremental
ratio		 Amount Incremental
ratio		 
Cost of revenues:
                            
Brand advertising
  $184,473    64%  $126,406    52%  $105,604    49%  $(58,067)   (31)%  $(20,802)   (16)%   $126,406    52%  $105,604    49%  $99,522    49%  $(20,802)   (16)%  $(6,082)   (6)% 
Online games
   60,981    21%   88,992    37%   91,526    42%   28,011   46%   2,534   3%    88,992    37%   91,526    42%   87,616    43%   2,534   3%   (3,910)   (4)% 
Others
   43,562    15%   28,249    11%   20,307    9%   (15,313)   (35)%   (7,942)   (28)%    28,249    11%   20,307    9%   17,533    8%   (7,942)   (28)%   (2,774)   (14)% 
  
 
    
 
    
 
    
 
  
 
  
 
  
 
   
 
   
 
  
 
   
 
  
 
   
 
  
 
  
 
  
 
  
 
 
Total cost of revenues
  $289,016    100%  $243,647    100%  $217,437    100%  $(45,369)   (16)%  $(26,210)   (11)%   $243,647    100%  $217,437    100%  $204,671    100%  $(26,210)   (11)%  $(12,766)   (6)% 
  
 
    
 
    
 
    
 
  
 
  
 
  
 
   
 
   
 
  
 
   
 
  
 
   
 
  
 
  
 
  
 
  
 
 
 
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Cost of Brand Advertising Revenues
Cost of brand advertising revenues was $99.5 million for 2021, compared to $105.6 million for 2020, compared toand $126.4 million and $184.5 million, respectively, for 20192020 and 2018.2019.
The
year-on-year
decrease for 2021 was $6.1 million, which mainly consisted of a $7.3 million decrease in content and license cost and a $3.0 million decrease in bandwidth service cost, offset by a $5.3 million increase in salary and benefits expenses.
The
year-on-year
decrease for 2020 was $20.8 million, which mainly consistedconsisting of a $20.5 million decrease in content and license cost and a $3.9 million decrease in salary and benefits expenses, offset by a $3.2 million increase in expenses incurred for related events, and a $2.0 million increase in professional fees.
The
year-on-year
decrease for 2019 was $58.1 million, which mainly consisted of a $33.5 million decrease in content and license costs, a $12.4 million decrease in bandwidth service costs, a $6.6 million decrease in salary and benefits expenses, a $2.0 million decrease in facilities expenses, a $1.5 million decrease in depreciation and amortization expenses, and a $1.5 million decrease in professional fees.
We recognized impairment losses for Sohu Video as content and license costscost of $14,000, $1.5 million, $4.0 million, and $10.4$4.0 million, respectively, in 2021, 2020 2019 and 2018,2019, as revenues did not meet management’s expectations.
Our brand advertising gross margin was 28%26% for 2020,2021, compared to 28% and 21%28%, respectively, for 20192020 and 2018.2019.
Cost of Online Game Revenues
Cost of online game revenues was $87.6 million for 2021, compared to $91.5 million for 2020, compared toand $89.0 million and $61.0 million, respectively, for 20192020 and 2018.2019.
The
year-on-year
decrease in cost of online game revenues for 2021 was $3.9 million. The decrease included an $8.0 million decrease in revenue-sharing payments to licensors, game developers, and platforms, and a $3.0 million decrease in salary and benefits expenses, offset by a $4.2 million increase in content and license cost, a $1.9 million increase in bandwidth service cost, and a $0.8 million increase in tax surcharges.
The
year-on-year
increase in cost of online game revenues for 2020 was $2.5 million. The increase included a $5.6 million increase in revenue-sharing payments to licensors, game developers and platforms, and a $1.1 million increase in salary and benefits expenses, offset by a $4.2 million decrease in content and license cost.
The
year-on-year
increase in cost of online game revenues for 2019 was $28.0 million. The increase included an increase of $28.6 million in revenue-sharing payments to licensors, game developers, and platforms.
Our online game gross margin was 83%86%, 80%83% and 84%80%, respectively, for 2021, 2020 2019 and 2018.2019.
Cost of Other Revenues
Cost of other revenues was $17.5 million for 2021, compared to $20.3 million for 2020, compared toand $28.2 million and $43.6 million, respectively, for 20192020 and 2018.2019. The
year-on-year
decrease for 2021 was $2.8 million, which was mainly due to a $2.1 million decrease in content and license costs related to paid subscription services. The
year-on-year
decrease for 2020 was $7.9 million, which was mainly due to a $4.4 million decrease in revenue sharing payments related to interactive broadcasting services, a $2.9 million decrease in content and license costs related to paid subscription services and a $1.2 million decrease in costs of Changyou’s IVAS business, offset by a $1.4 million increase in revenue sharing payments related to paid subscription services. The
year-on-year
decrease for 2019 was $15.4 million, which was mainly due to a $6.5 million decrease in content and license costs related to paid subscription services, a $4.2 million decrease in costs of Changyou’s IVAS business and a $3.0 million decrease in revenue-sharing payments related to China mobile network operators.
 
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Operating Expenses
The following table presents our operating expenses by nature and by proportion for the periods indicated (in thousands, except percentagespercentages):
 
  
Year ended December 31,
   
Year ended December 31,
 
  
2018
 
2019
 
2020
 
2019 VS 2018
 
2020 VS 2019
   
2019
 
2020
 
2021
 
2020 VS 2019
 
2021 VS 2020
 
  Amount   Percentage Amount   Percentage Amount   Percentage Amount Incremental
ratio		 Amount Incremental
ratio		   Amount   Percentage Amount   Percentage Amount   Percentage Amount Incremental
ratio		 Amount   Incremental
ratio		 
Operating expenses:
                             
Product development
  $246,155    43%  $234,852    47%  $241,941    53%  $(11,303)   (5)%  $7,089   3%   $234,852    47%  $241,941    53%  $268,863    50%  $7,089   3%  $26,922    11% 
Sales and marketing
   236,898    42%   204,665    41%   159,787    35%   (32,233)   (14)%   (44,878)   (22)%    204,665    41%   159,787    35%   182,690    34%   (44,878)   (22)%   22,903    14% 
General and administrative
   70,129    12%   54,591    11%   57,354    12%   (15,538)   (22)%   2,763   5%    54,591    11%   57,354    12%   81,880    16%   2,763   5%   24,526    43% 
Goodwill impairment and impairment of intangible assets acquired as part of business acquisitions
   16,369    3%   7,245    1%   0    0%   (9,124)   (56)%   (7,245)   (100)%    7,245    1%   0    0%   0    0%   (7,245)   (100)%   0    0% 
  
 
    
 
    
 
    
 
  
 
  
 
  
 
   
 
    
 
    
 
    
 
  
 
  
 
   
 
 
Total operating expenses
  $569,551    100%  $501,353    100%  $459,082    100%  $(68,198)   (12)%  $(42,271)   (8)%   $501,353    100%  $459,082    100%  $533,433    100%  $(42,271)   (8)%  $74,351    16% 
  
 
    
 
    
 
    
 
  
 
  
 
  
 
   
 
    
 
    
 
    
 
  
 
  
 
   
 
 
 
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Product Development Expenses
Product development expenses were $268.9 million for 2021, compared to $241.9 million for 2020, compared toand $234.9 million and $246.2 million, respectively, for 20192020 and 2018.2019.
The
year-on-year
increase for 2021 was $27.0 million, representing a
year-on-year
increase of 11%. The increase mainly consisted of a $39.6 million increase in salary and benefits expenses, a $3.5 million increase in travel and entertainment expenses, and a $2.2 million increase in professional fees, offset by a $14.4 million decrease in content and license cost, and a $3.4 million decrease in share-based compensation expense.
The
year-on-year
increase for 2020 was $7.1 million, representing a
year-on-year
increase of 3%. The increase mainly consisted of a $17.9 million increase in content and license costs,cost, a $6.0 million increase in share-based compensation expense, and a $2.0 million increase in bad debt expenses, offset by a $13.5 million decrease in salary and benefits expenses, a $2.0 million decrease in communication expenses, a $1.4 million decrease in depreciation and amortization expenses, and a $1.3 million decrease in travel and entertainment expenses.
The
year-on-year
decrease for 2019 was $11.3 million, representing a
year-on-year
decrease of 5%. The decrease mainly consisted of a $13.7 million decrease in salary and benefits expenses, a $3.0 million decrease in advertising and promotion expenses, a $2.1 million decrease in facilities expenses, a $1.1 million decrease in bad debt expenses, and a $0.9 million decrease in depreciation and amortization expenses, offset by a $5.5 million increase in share-based compensation expense, and a $4.0 million increase in content and license costs.
Sales and Marketing Expenses
Sales and marketing expenses were $182.7 million for 2021, compared to $159.8 million for 2020, compared toand $204.7 million and $236.9 million, respectively, for 20192020 and 2018.2019.
The
year-on-year
increase for 2021 was $22.9 million, representing a
year-on-year
increase of 14%. The increase mainly consisted of a $13.8 million increase in advertising and promotional expenses, and an $8.6 increase in salary and benefits expenses.
The
year-on-year
decrease for 2020 was $44.9 million, representing a
year-on-year
decrease of 22%. The decrease mainly consisted of a $39.9 million decrease in advertising and promotional expenses, a $2.0 million decrease in travel and entertainment expenses, a $1.5 million in depreciation and amortization expenses, and a $1.2 million decrease in salary and benefits expenses.
The
year-on-year
decrease for 2019 was $32.2 million, representing a
year-on-year
decrease of 14%. The decrease mainly consisted of a $14.0 million decrease in salary and benefits expenses, a $13.1 million decrease in advertising and promotional expenses, a $3.2 million decrease in travel and entertainment expenses, and a $1.8 million decrease in facilities expenses.
General and Administrative Expenses
General and administrative expenses were $81.9 million for 2021, compared to $57.4 million for 2020, compared toand $54.6 million and $70.1 million, respectively, for 20192020 and 2018.2019.
The
year-on-year
increase for 2021 was $24.5 million, representing a
year-on-year
increase of 43%. The increase mainly consisted of a $24.7 million increase in salary and benefits expenses and a $2.4 million increase in bad debt expenses, offset by a $1.7 million decrease in share-based compensation expense and a $1.6 million decrease in professional fees.
The
year-on-year
increase for 2020 was $2.8 million, representing a
year-on-year
increase of 5%. The increase mainly consisted of a $4.8 million increase in share-based compensation expense and a $0.9 million increase in professional fees, offset by a $2.2 million decrease in salary and benefits expenses and a $1.2 million decrease in content and license costs.
The
year-on-year
decrease for 2019 was $15.5 million, representing a
year-on-year
decrease of 22%. The decrease mainly consisted of a $14.7 million decrease in professional fees, a $3.9 million decrease in salary and benefits expenses, a $1.1 million decrease in bad debt expenses, a $0.9 million decrease in fixed asset disposal expenses, and a $0.8 million decrease in facilities expenses, offset by a $7.4 million increase in share-based compensation expense.
Goodwill Impairment and Impairment of Intangible Assets Acquired as Part of Business Acquisitions
In 2021 and 2020, there was no goodwill impairment or impairment of intangible assets acquired as part of business acquisitions.
In 2019, we recognized a $7.2 million impairment loss for a domain name relating to the 56.com Website, mainly due to enhance restrictions that Chinese regulatory authorities imposed on the broadcasting industry, which had an adverse effect on the operation of the 56.com Website.
In 2018, we recognized a $16.4 goodwill impairment loss associated with the 17173.com Website, which is operated by Changyou. The $16.4 million of goodwill impairment was primarily due to (i) the launch of new initiatives for the 17173.com Website having fallen behind schedule in the fourth quarter of 2018, and the profit outlook of the business remained uncertain, and (ii) the relevant Chinese authority’s suspension between April and December of 2018 of its review of, and issuance of publishing and authorization codes for, online games, which resulted in declines in the number of new games launched and the related demand from game developers and operators for online advertising services on the 17173.com Website. Changyou management determined that, as a result, there was a material adverse impact on our ability to generate revenues from the 17173.com Website.
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Share-based Compensation Expense
Share-based compensation expense was recognized in costs and expenses for the years ended December 31, 2018, 2019, 2020 and 2020,2021, respectively, as follows (in thousands):
 
  
Year Ended December 31,
   
Year Ended December 31,
 
Share-based compensation expense
  
2018
   
2019
   
2020
   
2019
   
2020
   
2021
 
Cost of revenues
  $(739)   $142   $720   $142   $720   $277 
Product development expenses
   (4,182)    1,364    7,325    1,364    7,325    3,904 
Sales and marketing expenses
   (920)    (326)    460    (326)    460    166 
General and administrative expenses
   (6,267)    1,170    5,975    1,170    5,975    4,231 
  
 
   
 
   
 
   
 
   
 
   
 
 
  $(12,108)   $2,350   $14,480   $2,350   $14,480   $8,578 
  
 
   
 
   
 
   
 
   
 
   
 
 
Share-based compensation expense was recognized for share-based awards of Sohu (excluding Sohu Video), Changyou, and Sohu Video as follows (in thousands):
 
  
Year Ended December 31,
   
Year Ended December 31,
 
Share-based compensation expense
  
2018
   
2019
   
2020
   
2019
   
2020
   
2021
 
For Sohu (excluding Sohu Video) share-based awards
  $(5,100)   $1,940   $2,633   $1,940   $2,633   $1,849 
For Changyou share-based awards
   (6,461)    1,305    12,544    1,305    12,544    7,773 
For Sohu Video share-based awards
   (547)    (895)    (697)    (895)    (697)    (1,044) 
  
 
   
 
   
 
   
 
   
 
   
 
 
  $(12,108)   $2,350   $14,480   $2,350   $14,480   $8,578 
  
 
   
 
   
 
   
 
   
 
   
 
 
The negative amounts in the tables above resulted from
re-measured
compensation expense based on the then-current fair value of the awards on the reporting date.
There was no capitalized share-based compensation expense for the years ended December 31, 2018, 2019, 2020 and 2020.2021.
Operating Profit/(Loss)
We had operating income of $97.5 million for 2021, compared to an operating income of $73.4 million for 2020 compared toand an operating loss of $71.2 million for 2019 and an operating loss of $168.4 million for 2018.2019.
Other Income/(Expense)
Other income was $26.0$29.4 million for 2020,2021, compared to other income of $8.0$26.0 million and other income of $30.7$8.0 million, respectively, for 20192020 and 2018. The year-over-year increase in 2020 was mainly attributable to a $22.8 million decrease in impairment loss on an equity investment, and a $5.3 million increase from an individual tax refund and an additional deduction of PRC value-added tax, offset by a $6.8 million decrease from a change in the fair value of financial instruments and a $3.0 million decrease in investment income.2019.
Interest Income
Interest income was $15.6 million for 2021, compared to $7.4 million for 2020, compared toand $6.1 million and $16.0 million, respectively, for 20192020 and 2018.2019.
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Interest Expense
Interest expense was $7.5 million for 2021, compared to $6.2 million for 2020, compared toand $14.4 million and $17.5 million, respectively, for 20192020 and 2018. The decrease in 2020 was primarily due to the repayment of bank loans under loan agreements that Sohu entered into with ICBC in late 2017 and with CMB in 2018, which resulted in a decrease of approximately $6.8 million in interest expense in 2020.2019.
Income Tax Expense/(Benefit)
Income tax expense was $133.2$62.3 million for 2020,2021, compared to income tax expense of $28.4$133.2 million and income tax benefitexpense of $14.6$28.4 million, respectively, for 20192020 and 2018.2019.
The difference in income tax expense for 2021 compared to the income tax expense for 2020 resulted primarily from accrued regular income tax expense of $48.4 million.
The difference in income tax expense for 2020 compared to the income tax expense for 2019 resulted primarily from accrued regular income tax expense of $40.7 million and additional income withholding tax of $88 million recognized by Changyou due to a revised policy with respect to Changyou’s PRC subsidiaries regarding their distribution of cash dividends, offset by a reversal of PRC income tax expense of $6.9 million recognized by Changyou due to preferential tax rates that Changyou’s subsidiaries were entitled to as KNSE and Software Enterprises; and $6 million for U.S. corporate income tax, resulting primarily from accrued interest on an unrecognized tax benefit.
The difference in income tax expense for 2019 compared to the income tax benefit for 2018 resulted primarily from accrued regular income tax expense
112
Table of $32.6 million, offset by a reversal of PRC income tax expense of $19.5 million by Changyou due to preferential tax rates that Changyou’s subsidiaries were entitled to as KNSE and Software Enterprises; and $8 million for U.S. corporate income tax, resulting primarily from accrued interest on an unrecognized tax benefit.Contents
Net Income/(Loss)
As a result of the foregoing, we had a net lossincome from continuing operations of $36.5$69.3 million for 2020,2021, compared to a net loss of $98.5$36.5 million and a net loss of $121.3$98.5 million, respectively, for 20192020 and 2018.2019.
We had a net lossincome from discontinued operations of $91.8$864.9 million for 2020,2021, compared to a net incomeloss of $55.1$91.8 million, and net income of 53.955.1 million, respectively, for 20192020 and 2018.2019.
Net Income/(loss) Attributable to Noncontrolling Interest
Our net incomeloss from continuing operations attributable to noncontrolling interest was $3,000 for 2021, compared to net income attributable to noncontrolling interest of $18.4 million for 2020, compared toand net income attributable to noncontrolling interest of $58.2 million for 2019, and net income attributable to noncontrolling interest of $41.7 million for 2018.2019.
Our net lossincome from discontinued operations attributable to noncontrolling interest was $6.5 million for 2021, compared to net loss attributable to noncontrolling interest of $60.7 million for 2020, compared toand net income attributable to noncontrolling interest of $47.7 million for 2019, and net income attributable to noncontrolling interest of $51.0 million for 2018.2019.
Net income/(Loss) attributable to Sohu.com Limited
As a result of the foregoing, we had net income from continuing operations of $69.3 million attributable to Sohu.com Limited for 2021, compared to a net loss from continuing operations of $55.0 million attributable to Sohu.com Limited for 2020, compared toand a net loss of $156.7 million attributable to Sohu.com Limited for 2020 and 2019, respectively.
We had net lossincome from discontinued operations of $163.0$858.5 million attributable to Sohu.com Limited for 2019 and 2018, respectively.
We had2021, compared to a net loss from discontinued operations of $31.1 million attributable to Sohu.com Limited for 2020, compared toand net income of $7.4 million attributable to Sohu.com Limited for 2020 and net income of $3.0 million attributable to Sohu.com Limited. for 2019, and 2018, respectively.
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LIQUIDITY AND CAPITAL RESOURCES
Resources Analysis
Liquidity Sources and Balances
Our principal sources of liquidity are cash and cash equivalents, short-term investments, long-term time deposits, 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 investmentmainly consist of investments in financial instruments issued by commercial banks in China, with a variable interest rate indexedand time deposits with maturities of three months to performanceone year. Long-term time deposits consist of underlying assets and maturity dates withintime deposits with maturities over one year.
As of December 31, 2020,2021, we had cash and cash equivalents of approximately $217.1$998.9 million, restricted cash of $330.8$2.0 million, and short-term investments of $100.7$399.3 million, and long-term time deposits of $189.0 million. Of our cash and cash equivalents, $182.8$381.7 million was held in financial institutions inside Mainland China and $34.3$617.3 million was held in financial institutions outside of Mainland China. Of the cash and cash equivalents held in financial institutions inside Mainland China, $47.0$32.5 million was held by our VIEs and $135.8$349.2 million was held by our
PRC-based
subsidiaries.
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 overfor at least 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.
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See “Item 3. Key Information-Risk Factors-RisksInformation - Risk Factors - Risks Related to China’s Regulatory Environment—Restrictions on currency exchange may limit our ability to use our revenues effectively,” “- Our Offshore entities may need to rely on dividends and other distributions on equity paid by our Mainland China-based subsidiaries, including the Mainland China-based subsidiaries of our subsidiariessubsidiary Changyou, and Sogou, to fund any cash requirements those Offshore entities may have. Our Offshore entities may not be able to obtain cash from distributions because our subsidiaries and VIEs in Mainland China are subject to restrictions imposed by PRC law on paying such dividends and making other payments,” and “- Dividends we receive from our operating subsidiaries located in the PRC are subject to PRC profit appropriation and PRC withholding tax,” and “Risks Related to Our Corporate Structure—Although the Sohu Group holds substantial amounts of cash and cash equivalents, a significant portion of such cash and cash equivalents is held by Sogou, and it can be difficult for Sohu to have access to the portion held by Sogou” See also “Restrictions and Limitations on Cash Available to Sohu.com Limited.” below and Item 11 “Quantitative and Qualitative Disclosure About Market Risk-ForeignRisk—Foreign Currency Exchange Rate Risk.”
Cash Generating Ability
Our cash flows were summarized below (in thousands):
 
  
Year Ended December 31,
   
Year Ended December 31,
 
  
2018
   
2019
   
2020
   
2019
   
2020
   
2021
 
Net cash provided by/(used in) continuing operating activities
  $(52,143)   $(18,267)   $163,394   $(18,267)   $163,394   $113,610 
Net cash provided by/(used in) discontinued operating activities
   136,168    228,857    (68,187)    228,857    (68,187)    (175,888) 
Net cash provided by operating activities
   84,025    210,590    95,207 
Net cash provided by/(used in) operating activities
   210,590    95,207    (62,278) 
Net cash provided by/(used in) continuing investing activities
   180,146    (214,814)    184,393    (214,814)    184,393    (537,419) 
Net cash provided by/(used in) discontinued investing activities
   (639,390)    (228,406)    235,374    (228,406)    235,374    1,054,148 
Net cash provided by/(used in) investing activities
   (459,244)    (443,220)    419,767    (443,220)    419,767    516,729 
Net cash provided by/(used in) continuing financing activities
   96,333    (479,748)    101,795    (479,748)    101,795    (424,968) 
Net cash provided by/(used in) discontinued financing activities
   1    (33,415)    (8,209) 
Net cash used in discontinued financing activities
   (33,415)    (8,209)    (9,132) 
Net cash provided by/(used in) financing activities
   96,334    (513,163)    93,586    (513,163)    93,586    (434,100) 
Effect of exchange rate change on cash, cash equivalents, restricted cash and restricted time deposits
   (19,544)    (10,047)    36,984    (10,047)    36,984    20,997 
  
 
   
 
   
 
   
 
   
 
   
 
 
Net increase/(decrease) in cash, cash equivalents, restricted cash and restricted time deposits
   (298,429)    (755,840)    645,544    (755,840)    645,544    41,348 
Cash, cash equivalents, restricted cash and restricted time deposits at beginning of period
   1,368,295    1,069,866    314,026    1,069,866    314,026    959,570 
  
 
   
 
   
 
   
 
   
 
   
 
 
Cash, cash equivalents, restricted cash and restricted time deposits at end of period
  $1,069,866   $314,026   $959,570   $314,026   $959,570   $1,000,918 
  
 
   
 
   
 
   
 
   
 
   
 
 
Less: Cash, cash equivalents, restricted cash and restricted time deposits of discontinued operations, end of year
   187,867    147,834    310,203    147,834    310,203    0 
  
 
   
 
   
 
   
 
   
 
   
 
 
Cash, cash equivalents, restricted cash and restricted time deposits of continuing operations, end of year
   881,999    166,192    649,367    166,192    649,367    1,000,918 
  
 
   
 
   
 
   
 
   
 
   
 
 
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Net Cash Provided by/(Used in) Operating Activities
For 2021, $113.6 million net cash provided by continuing operation activities was primarily attributable to our net income of $69.3 million, adjusted by (i) the add back of
non-cash
items consisting of $36.0 million of depreciation and amortization expenses, $8.6 million of share-based compensation expense, $8.0 million of allowance for credit losses, $1.8 million of impairment of other intangible assets and other assets, and $0.2 million of impairment of long-term investments, (ii) offset by $6.3 million of investment income from equity investments, $2.5 million of change in fair value of financial instruments, and $0.9 million from disposal of fixed assets. The decrease in cash from $0.4 million in working capital items is also included in operating cash flow.
For 2020, $163.4 million net cash provided by continuing operation activities was primarily attributable to our net loss of $36.5 million, adjusted by (i) the add back of
non-cash
items consisting of $39.9 million of depreciation and amortization expenses, $14.5 million of share-based compensation expense, $4.9 million of allowance for credit losses, $4.2 million of impairment of intangible assets, $1.8 million of change in fair value of financial instruments, $0.5 million of investment income from equity investments, and $0.2 million cash provided by other continuing operating activities, (ii) offset by $0.4 million from disposal of fixed assets. The increase in cash from $134.3 million in working capital items is also included in operating cash flow.
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For 2019, $18.3 million net cash used by continuing operation activities was primarily attributable to our net loss of $98.5 million, adjusted by (i) the add back of
non-cash
items consisting of $67.1 million of depreciation and amortization expenses, $23.2 million of impairment of long-term investments, $7.2 million of goodwill impairment and impairment of intangible assets acquired as part of business acquisitions, $5.9 million of impairment of other intangible assets and other assets, $4.7 million of allowance for credit losses, and $2.4 million of share-based compensation expense, (ii) offset by $3.0 million of investment loss from equity investments, $1.2 million of change in fair value of financial instruments, and $0.8 million from disposal of fixed assets. The decrease in cash from $25.3 million in working capital items is also included in operating cash flow.
For 2018, $52.1 million net cash used by continuing operating activities was primarily attributable to our net loss of $121.3 million, adjusted by (i) the add back of
non-cash
items consisting of $90.2 million in depreciation and amortization expenses, $16.4 million in goodwill impairment and impairment of intangible assets acquired as part of business acquisitions, $11.2 million of change in fair value of financial instruments, $10.8 million in impairment of other intangible assets and other assets, $5.4 million in allowance for credit losses, and $4.0 million of investment income from equity investments, (ii) offset by $12.1 million of share-based compensation expense and $0.7 million used in other continuing operating activities. The decrease in cash from $56.0 million in working capital items is also included in operating cash flow.
Net Cash Provided by/(Used in) Investing Activities
For 2021, $537.4 million net cash used in continuing investing activities was primarily attributable to (i) $1.22 billion used in purchase of financial instruments, $42.2 million used in purchase of fixed assets and intangible assets, and $15.9 million used in the purchase of long-term investments, offset by (ii) $740.7 million in proceeds from bank investments and $2.5 million cash received from other investing activities.
For 2020, $184.4 million net cash provided by continuing investing activities was primarily attributable to (i) $1.42 billion in proceeds from financial instruments, and $1.2 million cash received from other investing activities, (ii) offset by $1.21 billion used in purchase of financial instruments, and $33.8 million used in purchase of fixed assets and intangible assets.
For 2019, $214.8 million net cash used in continuing investing activities was primarily attributable to (i) $1.02 billion used in purchase of financial instruments, $65.7 million used in purchase of fixed assets and intangible assets, and $12.3 million used in the purchase of long-term investments, (ii) offset by $884.0 million from collection of financing receivables and $1.2 million cash received from other investing activities.
For 2018, $180.1 million net cash provided by continuing investing activities was primarily attributable to (i) $1.78 billion in proceeds from financial instruments, $12.1 million from sale of an equity investment, and $5.3 million from loan repayment by a third party to Changyou, (ii) offset by $1.50 billion used in purchase of financial instruments, $121.5 million used in purchase of fixed assets and intangible assets and $0.8 million used in the purchase of long-term investments.
Net Cash Provided by/(Used in) Financing Activities
For 2021, $425.0 million net cash used in continuing financing activities was primarily attributable to (i) $560.6 million used in repayment of loans from banks and $17.4 million used in repurchase of shares, (ii) offset by $153.0 million in proceeds received from bank loans.
For 2020, $101.8 million net cash provided by continuing financing activities was primarily attributable to (i) $407.6 million in proceeds received from bank loans, (ii) offset by $191.8 million used in the Changyou Merger, and $114.0 million used in repayment of loans from banks.
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For 2019, $479.7 million net cash used in continuing financing activities was primarily attributable to (i) $371.9 million used in repayment of loans from banks and $165.8 million for the portion of a Changyou dividend distributed to holders of the
non-controlling
noncontrolling interests in Changyou, (ii) offset by $58.0 million in proceeds received from bank loans.
For 2018, $96.3 million net cash provided by continuing financing activities was primarily attributable to (i) $325.8 million in proceeds received from bank loans, (ii) offset by $162.5 million for the portion of a Changyou dividend distributed to holders of the
non-controlling
interests in Changyou, and $67.0 million used in repayment of loans from banks.
Restrictions and Limitations on Cash Available to Sohu.com Limited.Limited
To fund any cash requirements it may have, Sohu.com Limited may need to rely on dividends and other distributions on equity paid by our direct subsidiaries, which are all located outside PRC. Since substantially all of our operations are conducted through our indirect Mainland China-based subsidiaries and VIEs, all of Sohu.com Limited’s direct subsidiaries may need to rely on dividends, loans or advances made by our PRC subsidiaries and VIEs in order to make dividends and other distributions to us.
The ability of Sohu.com Limited’s direct subsidiaries 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 Limited, are subject to certain restrictions and limitations related to PRC law and our subsidiary and VIE structure. We do not expect any of such restrictions or taxes to have a material impact on our ability to meet our cash obligations. However, such restrictions and taxes limit our ability to use 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. See “Risk Factors—Risks Related to Our Corporate Structure—Although the Sohu Group holds substantial amountsChangyou.
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Table of cash and cash equivalents, a significant portion of such cash and cash equivalents is held by Sogou, and it can be difficult for Sohu to have access to the portion held by Sogou.”Contents
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 Changyou.com Limited, or Sogou’s parent company Sohu.com (Search)Changyou.com Limited and, accordingly, would not be available for distribution to Sohu.com Limited.
The CIT Law imposes a 10% withholding income tax for dividends distributed by foreign-invested enterprisesFIEs 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” 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 enterpriseFIE 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 December 31, 2020,2021, we had accrued deferred tax liabilities in the amount of $206.6$237.1 million for withholding taxes associated with dividends paid by Changyou’s Mainland China-based WFOEs to Changyou’s Hong Kong subsidiary.
Under regulations of the 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.
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PRC Restrictions Related to Our VIE Structure
A significant portion of our operations isare conducted through our VIEs, which generate a significant amount of our revenues. Significant cash balances remained in certain of our VIEs asAs of December 31, 2020.2021, there were significant cash balances held by certain of the VIEs that we consolidate in our financial statements. As ourthe VIEs are not owned by our PRC subsidiaries or any of our subsidiaries outside of the VIEsPRC, they are not able to make dividend payments to thethose subsidiaries. Therefore, in order for Sohu.com Limited or our subsidiaries outside of Mainland China to receive any dividends, loans, or advances from our PRC subsidiaries, in some cases we may need to rely on payments made by ourthe VIEs to our PRC subsidiaries pursuant to service contracts between them. Depending on the nature of services provided by our PRC subsidiaries to their corresponding VIEs, certain of these payments will be 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.
Capital Expenditure
Our capital expenditures include the purchase of fixed assets, intangible assets and other assets. Our capital expenditures were $121.5 million, $65.7 million, $33.8 million, and $33.8$42.2 million, respectively, for the years ended December 31, 2018, 2019, 2020 and 2020.2021.
CONTRACTUAL OBLIGATIONS
The following table sets forth our contractual obligations as of December 31, 20202021 (in thousands):
 
  
2021
   
2022
   
2023
   
2024
   
2025
   
Thereafter
   
Total
   
2022
   
2023
   
2024
   
2025
   
2026
   
Thereafter
   
Total
 
Repayment of principal of bank loans related to Changyou Merger
  $0    7,500    7,500    77,000    0    0    92,000 
Royalties and expenditures for licensed content of games
   28,423    7,870    0    0    0    0    36,293   $15,976    13,512    2,746    0    0    0    32,234 
Purchase of bandwidth
   14,418    1,029    455    0    0    0    15,902 
Operating lease obligations
   6,101    5,432    2,586    264    132    0    14,515    6,208    2,900    380    135    0    0    9,623 
Purchase of bandwidth
   14,084    150    102    0    0    0    14,336 
Interest payment commitment
   6,623    1,458    1,334    628    0    0    10,043 
Purchase of content and services - others
   6,715    236    19    0    0    0    6,970    7,530    389    43    0    0    0    7,962 
Purchase of content and services - video
   5,398    1,006    0    0    0    0    6,404    6,387    0    0    0    0    0    6,387 
Others
   518    24    0    0    0    0    542    3,796    0    0    0    0    0    3,796 
  
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
Total Payments Required
  $67,862    23,676    11,541    77,892    132    0    181,103   $54,315    17,830    3,624    135    0    0    75,904 
  
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
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OTHER LONG-TERM LIABILITIES
We recorded long-term tax liabilities of $188.8$193.9 million, consisting primarily of a $6.2$4.8 million in interest on the unrecognized tax benefit related to the Toll Charge, and $182.6$189.1 million related to certain business transactions that took place in previous years and management determined may result in additional tax obligations under relevant tax rules.
At this time, we are unable to make a reasonably reliable estimate of the timing of payments of long-term liabilities in individual years beyond 12 months due to uncertainties in the timing of the tax impact of the transactions. As a result, this amount is not included in the table above.
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 shareholder’s 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 PRONOUNCEMENTS
Financial Instruments-Credit Losses (Topic 326).
In June 2016, the FASB issued ASU
No. 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. We adopted ASU
2016-13
at the beginning of the first quarter of 2020, using the modified retrospective approach. We recorded an increase of approximately $3.4 million to allowance for credit losses on accounts receivable and $3.3 million to allowance for credit losses on assets held for sale on our adoption date of ASU
2016-13’s
of January 1, 2020. See “Summary of Significant Accounting Policies” above and Note 2.
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Simplifying the Test for Goodwill Impairment (Topic 350).
In January 2017 the FASB issued ASU
No. 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 unit’s 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. We adopted this guidance on January 1, 2020 and applied the revised impairment model for all goodwill impairment tests within that fiscal year. The adoption of ASU
2017-04
did not have a material impact on our consolidated financial statements.
Cloud computing
. In 2018, the FASB issued new guidance on a customer’s accounting for implementation,
set-up,
and other upfront costs incurred in a cloud computing arrangement that is hosted by the vendor (i.e., a service contract). Under the new guidance, customers will apply the same criteria for capitalizing implementation costs as they would for an arrangement that has a software license. The guidance is effective for annual reporting periods beginning after December 15, 2019, including interim reporting periods within those fiscal years. The adoption of this standard did not have a material impact on our consolidated financial statements.
Other accounting standards adopted beginning January 1, 2020 do not have a significant impact on our consolidated financial statements.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
Simplifying the accounting for income taxes (Topic 740).
In December 2019, the FASB issued ASU
No. 2019-12,
I
ncomeIncome Taxes (Topic 740)-Simplifying the Accounting for Income Taxes
. ASU
No. 2019-12
removes certain exceptions to the general principles in Topic 740 and provides for consistent application of and simplifies generally accepted accounting principles for other areas of Topic 740 by clarifying and amending existing guidance. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The methodadoption of adoption varies depending on the component of the new rule that is being adopted. Early application is permitted. We dothis standard did not expect to adopt ASU
2019-12
early and we are currently evaluating thehave a material impact of adopting this standard on our consolidated financial statements.
Investments-Equity securities (Topic 321), Investments-Equity method and joint ventures (Topic 323), and Derivatives and hedging (Topic 815)-Clarifying the interactions between Topic 321, Topic 323, and Topic 815.
In January 2020, the FASB issued ASU
No. 2020-01,
Investments-Equity securities (Topic 321), Investments-Equity method and joint ventures (Topic 323), and Derivatives and hedging (Topic 815)-Clarifying the interactions between Topic 321, Topic 323, and Topic 815
. The amendments clarify the interaction of the accounting for equity investments under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. We doThe adoption of this standard did not expect to adopt ASU
2020-01
early and we are currently evaluating thehave a material impact of adopting this standard on our consolidated financial statements.
Other accounting standards that we adopted beginning January 1, 2021 did not have a significant impact on our consolidated financial statements.
 
ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Directors and Senior Management
The following table sets forth information regarding our directors and executive officers as of the date of this annual report. The business address of each of our directors and executive officers is Sohu.com Media Plaza, Block 3, No. 2 Kexueyuan South Road, Haidian District, Beijing 100190, People’s Republic of China.
 
Directors and Executive Officers
Age
Position
Charles Zhang56Chairman of the Board and Chief Executive Officer
Dewen Chen45Chief Executive Officer of Changyou
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Directors and Executive Officers
  
Age
 
Position
Xiaochuan Wang
Charles Zhang
  4257Chairman of the Board and Chief Executive Officer
Dewen Chen
46  Chief Executive Officer of SogouChangyou
Joanna Lv
  5051  Chief Financial Officer
Charles Huang
  5152  Director
Zhonghan Deng
(1) (2) (3)
  5354  Independent Director
Dave De Yang
(1)
  5556  Independent Director
Dave Qi
(1) (2) (3)
  5758  Independent Director
Shi Wang
(3)
  7071  Independent Director
 
(1)
Member of the audit committee of our Board of Directors.
(2)
Member of the compensation committee of our Board of Directors.
(3)
Member of the nominating committee of our Board of Directors.
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Dr.
 Charles Zhang
is our founder and has been Chairman of our Board and Chief Executive Officer since August 1996. Dr. Charles Zhang also served as our President from August 1996 to July 2004. Prior to founding Sohu, Dr. Charles Zhang worked for Internet Securities Inc. and helped to establish its China operations. Prior to that, Dr. Charles Zhang worked as the liaison officer with China for the Massachusetts Institute of Technology (“MIT”). Dr. Charles Zhang is also the Chairman of the Board of Sogou and was the Chairman of the Board of Changyou prior to the completion of the Changyou Merger. Dr. Charles Zhang has a Ph.D. in experimental physics from MIT and a Bachelor of Science degree from Tsinghua University.
Dewen Chen
is the Chief Executive Officer of Changyou and was one of the principal founders of Changyou’s online game business. Mr. Chen was named as one of our executive officers effective November 1, 2016. Mr. Chen joined us in 2005 as a business manager, responsible for building a sales team for game products. Beginning in May 2006, Mr. Chen was in charge of the overall marketing, promotion, sales and channel distribution of our game products. Prior to Changyou’s
carve-out
from us in 2007, Mr. Chen was the Director of Marketing & Operations of our online game business. From April 2000 until he joined us in 2005, Mr. Chen worked at Shanghai Hua Teng Software System Co. Ltd. as a
pre-sale
technology consultant and sales manager. Prior to that, Mr. Chen worked with Fujian Shi Da Computer Group as a software engineer and project manager, and later as the Director of the Technology Department of the Shanghai branch office. Mr. Dewen Chen received a bachelor’s degree in Computer Engineering from Xi’an Jiaotong University.
Xiaochuan Wang
has been the Chief Executive Officer of Sogou since 2010, and was named as one of our executive officers effective November 1, 2016. Under his leadership, Sogou has developed many strategic products, including the Sogou Search Engine, the Sogou Pinyin Input Method, and the Sogou Browser. Mr. Wang has played an integral role in establishing a technology-driven culture at Sogou through a focus on team building and product innovation. Mr. Wang served as our senior vice president from 2008 to 2009 and as our Chief Technology Officer from 2009 to 2013. Mr. Wang received a Gold Medal in the 8th International Olympiad in Informatics. Mr. Wang received a bachelor’s degree and a master’s degree in Computer Science from Tsinghua University.
Joanna Lv
has been our Chief Financial Officer since January 27, 2018. Ms. Lv joined us in August 2000. From July 31, 2016 to January 26, 2018, Ms. Lv was our Acting Chief Financial Officer. Prior to July 31, 2016, Ms. Lv was our Senior Finance Director, in charge of
day-to-day
finance operations, including financial reporting, budget planning and treasury. Ms. Lv brings extensive experience in financial management and has been involved in multiple strategic financial projects for us. Ms. Lv received a bachelor’s degree in economics from the Capital University of Economics and Business in Beijing and an EMBA degree from Tsinghua University.
Mr.
 Charles Huang
is the Founder, Chief Executive Officer and Chairman of Netbig Education Holdings Ltd. (“Netbig”), a leading education enterprise in China. Prior to founding Netbig in 1999, Mr. Huang served as Executive Director and Head of the Asia Securitization Group of Deutsche Bank, New York and Hong Kong, as well as a Senior Vice President of Prudential Securities Inc., New York. Mr. Huang is also a Chartered Financial Analyst, and serves as director of ZTO Express (Cayman) Inc. (New York Stock Exchange). Mr. Huang holds a Master of Science degree in Computer Science from MIT and a Bachelor of Science degree from the University of Science and Technology of China.
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Dr.
 Zhonghan Deng
is the Chief Scientist and Chairman of the Board of Directors of Vimicro International Corporation (“Vimicro”), which he
co-founded
in 1999. Dr. Zhonghan Deng also worked as a research scientist for International Business Machines Corporation at the T.J. Watson Research Center in Yorktown Heights, New York. Dr. Deng received a Ph.D. in electrical engineering and computer sciences, a Master of Science degree in economics and a Master of Science degree in physics from the University of California, Berkeley.
Dave De Yang
has served as the Chief Financial Officer and a Partner of Dalton International, an investment firm based in Chicago, since 2017. From 2012 through 2016, Mr. Yang served as Chief Financial Officer for the North Asia region, including Mainland China, Hong Kong, Taiwan, Japan, and Korea, of Reckitt Benckiser, a London-based company that is listed on the London Stock Exchange and is included in the FTSE 100 Index. Prior to joining Reckitt Benckiser, Mr. Yang worked for McDonald’s Corporation as a senior financial director, including an international assignment as the Corporate Controller of McDonald’s China for three and half years. Prior to that role, he served as acting controller of McDonald’s India and Indonesia divisions and as a senior director of McDonald’s Corporation in the Asia Pacific, Middle East and Africa division, where he oversaw the development and supervision of financial strategy and policy. Prior to joining McDonald’s Corporation, Mr. Yang worked in the U.S. business unit of Ernst & Young LLP for seven years in various positions, including as a group manager. During Mr. Yang’s tenure at Ernst & Young LLP, he focused on business risk management consultation, corporate M&A, restructuring of corporate internal management processes, internal audits, risk assessment, control system designs, and auditing of corporate financial statements, primarily for Fortune 500 companies. Mr. Yang has also served aswas a member of the Board of Directors and of the Audit Committee of Changyou since 2009.prior to the completion of the Changyou Merger. Mr. Yang has a master of business administration degree from the City University of New York, a master’s degree in Management and Engineering from the Graduate School of the Chinese Academy of Sciences in Beijing, and a bachelor’s degree in physics from the University of Science and Technology of China. Mr. Yang is a member of the U.S. Institute of Certified Internal Auditors, the Institute of Certified Public Accountants and the Institute of Certified Management Accountants.
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Dr.
 Dave Qi
is a Professor of Accounting and the former Associate Dean of the Cheung Kong Graduate School of Business. He began teaching at the Cheung Kong Graduate School of Business in 2002 and was the founding Director of the Executive MBA program. Before joining the Cheung Kong Graduate School of Business, Dr. Dave Qi was an Associate Professor at the School of Accounting of the Chinese University of Hong Kong. Dr. Dave Qi has published many articles and research essays on accounting, financial reporting, capital market and other related topics. Dr. Dave Qi also serves as director of the following public companies: Bison Finance Group Limited (HK Stock Exchange), CTV Golden Bridge International Media Co., LTD. (Hong Kong Stock Exchange), Momo Inc. (NASDAQ), Jutal Offshore Oil Services Limited (Hong Kong Stock Exchange), Yunfeng Financial Group Limited (formerly Reorient Group Limited) (Hong Kong Stock Exchange) and Haidilao International Holding Ltd. (HK Stock Exchange). In addition, Dr. Dave Qi serves as Chairman of the Audit Committee of each of Bison Finance Group Limited, CTV Golden Bridge International Media Co., LTD., and Haidilao International Holding Ltd., and as a member of the Audit Committee of each of Momo Inc., Jutal Offshore Oil Services Limited and Yunfeng Financial Group Limited. Dr. Qi has a Ph.D. in accounting from the Eli Broad Graduate School of management of Michigan State University, a Master of Business Administration from the University of Hawaii at Manoa and a Bachelor of Science and a Bachelor of Arts degree from Fudan University. Dr. Dave Qi is currently a member of the American Accounting Association.
Mr.
 Shi Wang
is the Honorary Chairman of the Board of Directors of Vanke, of which he also served as General Manager from 1991 to 1999. In 1984 Mr. Shi Wang founded the Shenzhen Exhibition Center of Modern Science and Education Equipment, which is the predecessor of Vanke. Mr. Shi Wang is the Executive Manager of the China Real Estate Association and is Deputy Director of the City Housing Development Council of the China Real Estate Association.
Board of Directors
Our Board of Directors currently consists of six directors and is divided into two classes consisting of three directors each, with one class of directors being elected by the holders of our ordinary shares at each annual general meeting of shareholders and holding office for staggered
two-year
terms, with the term of one of the classes expiring at each annual general meeting. Our directors currently consist of Dr. Charles Zhang, Zhonghan Deng, and Dave De Yang, whose terms will expire at our 2022 annual general meeting of shareholders, and Charles Huang, Dave Qi, and Shi Wang, whose terms will expire at our 20212023 annual meeting of shareholders. A director is not required to hold any shares in our company by way of qualification. A director may vote with respect to any contract, proposed contract, or arrangement in which he is materially interested, provided the nature of such interest is disclosed prior to any vote thereon.
Board Diversity Disclosure
149
The following table provides the diversity statistics of our Board of Directors required by Rule 5606 of the NADSAQ Listing Rules:
Board Diversity Matrix (As of March 11, 2022)
Country of Principal Executive Offices:
  People’s Republic of China
Foreign Private Issuer
  Yes
Disclosure Prohibited Under Home Country Law
  No
Total Number of Directors
  6
    Female  Male  Non-Binary  Did Not Disclose
Gender
Part I: Gender Identity
Directors
  0  6  0  0
Part II: Demographic Background
            
Underrepresented Individual in Home Country Jurisdiction                        
  0
LGBTQ+
  0
Did Not Disclose Demographic Background
  0
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Committees of the Board of Directors
Audit Committee
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The members of our audit committee currently are Dr. Dave Qi, Dr. Zhonghan Deng and Mr. Dave De Yang, who are each independent as that term is defined in Rule
10A-3
under the Exchange Act and Rule 5605(a)(2) of the NASDAQ Listing Rules. Our Board has determined that Dr. Dave Qi is an audit committee financial expert as set forth under the applicable SEC rules and Rule 5605(c)(2) of the NASDAQ Listing Rules. The full responsibilities of our audit committee are set forth in its charter, which will be reviewed and updated annually and approved by our board, and will be posted on our Website at
http://investors.sohu.com/committee-details/audit-committee.
The audit committee is responsible for, among other things:
 
selecting the independent auditors and
pre-approving
all auditing and
non-auditing
services permitted to be performed by the independent auditors;
 
overseeing our accounting and financial reporting processes and audits of the financial statements of our company;
 
reviewing with the independent auditors any audit problems or difficulties and management’s response;
 
reviewing and approving all proposed related party transactions, as defined in the NASDAQ Listing Rules;
 
discussing the annual audited financial statements with management and the independent auditors;
 
reviewing major issues as to the adequacy of our internal controls over financial reporting and any special audit steps adopted in the light of any significant deficiencies or materially weakness in our internal controls; and
 
meeting separately and periodically with management and the independent auditors.
Compensation Committee
The members of our compensation committee currently are Dr. Dave Qi and Dr. Zhonghan Deng, who are each independent as that term is defined in Rule 5605(a)(2) of the NASDAQ Listing Rules. Our compensation committee makes recommendations concerning salaries and incentive compensation, administers and approves share-based awards under our equity incentive plans, and otherwise determines compensation levels and performs such other functions regarding compensation as our Board of Directors may delegate to our compensation committee. The full responsibilities of our compensation committee are set forth in its charter, which is posted on our Web site at
http://investors.sohu.com/committee-details/compensation-committee
Nominating Committee
The members of our nominating committee currently are Dr. Dave Qi, Mr. Shi Wang and Dr. Zhonghan Deng, who are each independent as that term is defined in Rule 5605(a)(2) of the NASDAQ Listing Rules. The purpose of our nominating committee is to assist our Board of Directors in identifying individuals qualified to become directors under criteria approved by our Board of Directors, periodically review director compensation and benefits, recommend to our Board of Directors any proposed revisions to our corporate governance guidelines and assist our Board of Directors in assessing directors’ independence, board effectiveness, continuing education, new director orientation and committee membership. The full responsibilities of our nominating committee are set forth in its charter, which is posted on our Web site at
http://investors.sohu.com/committee-details/nominating-committee
It is a policy of our nominating committee that candidates for director (i) be determined to have unquestionable integrity and honesty, (ii) have the ability to exercise sound, mature and independent business judgment which is in the best interests of the shareholders as a whole, (iii) have a background and experience in fields which will complement the talents of the other Board members, (iv) have the willingness and capability to take the time to actively participate in Board and committee meetings and related activities, (v) have the ability to work professionally and effectively with other Board members and our management, (vi) have the ability to remain on our Board long enough to make a meaningful contribution and (vii) have no material relationships with competitors or other third parties that could create a reasonable likelihood of a conflict of interest or other legal issues.
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Neither our nominating committee nor our Board of Directors has a policy with regard to the consideration of diversity when identifying and evaluating proposed director candidates, although both may consider diversity when identifying and evaluating proposed director candidates, and one of the enumerated factors under our nominating committee’s charter that the committee may consider when identifying potential nominees is the interplay of the candidate’s experience with the experience of the other board members. In compiling a list of possible candidates and considering their qualifications, our nominating committee makes its own inquiries, solicits input from other directors on our Board and may consult or engage other sources, such as a professional search firm, if it deems appropriate.
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Duties of Directors
Under Cayman Islands law, our directors have a common law duty owed to our company to act honestly in good faith with a view to the best interests of our company and for a proper purpose. A director must exercise the skill and care of a reasonably diligent person having both—both - (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company (an objective test), and (b) if greater, the general knowledge, skill and experience that that director actually possesses (a subjective test). In fulfilling their duty of care to our company, our directors must ensure compliance with our memorandum and articles of association and the Companies Act. There are also duties to avoid conflicts of interest. A shareholder may have the right to seek various remedies, including damages on behalf of our company, if a duty owed by our directors is breached.
Terms of Directors and Officers
A director may be removed by ordinary resolution passed by a majority of our shareholders before the expiration of such director’s term. For more information about the classification of our Board of Directors, see “- Board of Directors.” Officers are elected by and serve at the discretion of the Board of Directors.
Compensation of Executive Officers and Directors
During the year ended December 31, 2020,2021, we paid an aggregate of approximately $6.7$5.8 million in cash compensation to our executive officers. We paid an aggregate of approximately $0.6$0.7 million in cash compensation to our directors other than Dr. Charles Zhang. In 2020,2021, the total compensation expense for our
non-executive
directors and executive officers recorded in our consolidated statements of comprehensive income was $7.8$18.1 million. None of our directors, other than Dr. Charles Zhang, have service contracts that provide for benefits upon termination of employment.
Employment Agreements with Executive Officers
Employment Agreements with Dr.
 Charles Zhang, Ms.
 Joanna Lv and Mr.
 Dewen Chen
.
We have entered into a three-year employment agreement with our Chief Executive Officer, Dr. Charles Zhang, and a three-year employment agreement with our Chief Financial Officer, Ms. Joanna Lv, and Changyou has entered into an employment agreement with Mr. Dewen Chen, Changyou’s Chief Executive Officers. Under these agreements we or Changyou may terminate Dr. Zhang’s, Ms. Lv’s or Mr. Chen’s employment for cause, at any time, for certain acts of such officer such as willful misconduct or gross negligence, repeated failure to perform substantially his or her duties, indictment or conviction for or confession of a felony, or any crime involving moral turpitude. In any such case, such officer will not be entitled to receive payment of any severance benefits or other amounts by reason of termination other than accrued salary and vacation through the date of termination and such officer’s right to all other benefits will terminate, except as required by applicable law.
We or Changyou may also terminate our employment agreements with Dr. Zhang, Ms. Lv or Mr. Chen without cause upon thirty days’ advance written notice. In such case of termination by us and also in a case where Dr. Zhang, Ms. Lv or Mr. Chen voluntarily terminates his or her employment with us upon thirty-days’ advance written notice for “good reason,” we are required to provide him or her with severance benefits equal to an amount up to six (6) months of his or her monthly base salary, provided that he or she complies during the severance period with the
non-competition,
non-solicitation,
confidential information and work product provisions discussed below, which are incorporated into the employment agreement, and executes a release agreement in a form requested by us. “Good reason” includes (i) any significant change in the executive officer’s duties and responsibilities inconsistent in any material and adverse respect with his or her title and position, and (ii) any material breach of the employment agreement by us, including any reduction in the executive officer’s base salary or our failure to pay to him or her any portion of his or her compensation.
 
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Each of Dr. Zhang, Ms. Lv and Mr. Chen has entered into an employee
non-competition,
non-solicitation,
confidential information, and work product agreement with us or Changyou, respectively. Under these agreements, Dr. Zhang, Ms. Lv or Mr. Chen has agreed to be bound by
(i) non-competition
restrictions during his or her employment and for one year after the termination of his or her employment or for such longer period during which we pay him or her any severance benefits, and
(ii) non-solicitation
restrictions during the
non-competition
period. Each of Dr. Zhang, Ms. Lv and Mr. Chen has agreed to hold in confidence, both during and after the termination or expiry of his or her employment agreement, in strict confidence and not to use, except as required in the performance of his or her duties in connection with the employment, all of our confidential information or trade secrets, all confidential information or trade secrets of our clients or customers, and all confidential or proprietary information of any third party held by us. Each of Dr. Zhang, Ms. Lv and Mr. Chen has also agreed to disclose to us or Changyou all inventions which he or she conceives and develops during the employment and to assign all right, title and interest in them to us or Changyou and has agreed not to assert any such rights against us or Changyou.
Employment Agreement with Mr. Xiaochuan Wang
Our subsidiary Beijing Sogou Technology Development Co., Ltd. entered into an open-ended employment agreement with Mr. Xiaochuan Wang. Under his employment agreement, Mr. Wang is entitled to (i) base salaries and (ii) a performance-based cash bonus. His employment agreement also provides for certain additional benefits to the extent applicable, including vacation time; life, unemployment, medical, work-related injury and other insurance; and allowances for housing. Mr. Wang also agreed in his employment agreement to be bound by obligations regarding (i) assignment of intellectual property and (ii) confidential treatment of proprietary information. His employment agreement is governed by PRC law.
Share Incentive Plans
Sohu Share Incentive Plans
We adopted a share incentive plan in April 2018, or the Sohu 2018 Share Incentive Plan, which will expire in April 2028. The maximum number of our ordinary shares issuable under the Sohu 2018 Share Incentive Plan is 1,132,315, which is equal to the remaining number of 1,148,565 of shares of common stock issuable under the Sohu.com Inc. 2010 Share Incentive Plan as of the adoption of the Sohu 2018 Share Incentive Plan, reduced by 16,250 shares that were issued upon exercise or settlement between the time of the adoption of Sohu 2018 Share Incentive Plan and the dissolution and liquidation of Sohu.com Inc. on May 31, 2018. Our Board of Directors may amend, suspend, or terminate the Sohu 2018 Share Incentive Plan at any time; provided, however, that our Board of Directors must first seek the approval of the participants in the Sohu 2018 Share Incentive Plan if such amendment, suspension or termination would adversely affect the rights of participants with respect to any of their existing awards. Share incentive awards may be granted under the Sohu 2018 Share Incentive Plan to our management and employees. Share incentive awards that were granted, or may be granted, under the Sohu 2018 Share Incentive Plan include, among other forms, options, restricted share units and restricted shares, and the maximum term of any share incentive award granted is ten years from the grant date.
Our compensation committee, or our Board of Directors in the absence of such a committee, administers the Sohu 2018 Share Incentive Plan, and determines the terms and conditions of awards under the Sohu 2018 Share Incentive Plans. Awards granted under the Sohu 2018 Share Incentive Plan are evidenced by an award document that sets forth the terms and conditions applicable to each of the awards, as determined by our Board of Directors or compensation committee in its sole discretion.
Upon the dissolution of Sohu.com Inc. on May 31, 2018, we assumed all then existing obligations of Sohu.com Inc. with respect to equity incentive awards that had been granted under Sohu 2010 Stock Incentive Plan and then remained outstanding, and such awards were converted into the right to receive upon exercise or settlement our ordinary shares under the Sohu 2018 Share Incentive Plan rather than shares of the common stock of Sohu.com Inc., subject to the other terms of such outstanding awards.
Changyou Share Incentive Plan
Changyou adopted a share incentive plan in June 2014 (the “Changyou 2014 Share Incentive Plan”) that will terminate in June 2024, and adopted a share incentive plan in August 2019 (the “Changyou 2019 Share Incentive Plan”) that will terminate in August 2029 (the Changyou 2019 Share Incentive Plan and the Changyou 2014 Share Incentive Plan together, the “Changyou Share Incentive Plans”). The maximum number of Changyou Class A ordinary shares issuable under the Changyou 2014 Share Incentive Plan is 6,000,000 and the maximum number of Changyou’s Class A ordinary shares issuable under the Changyou 2019 Share Incentive Plan is 3,000,000. After the completion of the Changyou Merger, our Board of Directors may amend, suspend, or terminate the Changyou 2014 Share Incentive Plan and/or the Changyou 2019 Share Incentive Plan at any time; provided, however, that we must first seek the approval of the participants in the Changyou 2014 Share Incentive Plan or in the Changyou 2019 Share Incentive Plan, as the case may be, if such amendment, suspension or termination would adversely affect the rights of participants with respect to any of their existing awards. Share incentive awards may be granted under the Changyou Share Incentive Plans to Changyou management and employees and to management and employees of any of the Sohu Group companies. Share incentive awards that were granted, or may be granted, under the Changyou Share Incentive Plans include, among other forms, options, restricted share units and restricted shares, and the maximum term of any share incentive award granted is ten years from the grant date.
 
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Our Board of Directors administers the Changyou Share Incentive Plans following the completion of the Changyou Merger, and determines the terms and conditions of awards under the Changyou Share Incentive Plans. Awards granted under the Changyou Share Incentive Plans are evidenced by an award document that sets forth the terms and conditions applicable to each of the awards, as determined by our Board of Directors or compensation committee in its sole discretion.
SogouSohu Video Share Incentive PlansPlan
SogouOn January 4, 2012, Sohu Video, the holding entity of Sohu’s video division, adopted a share incentive plan in October 2010 (as amended from time to time, with the last amendment taking effect on August 22, 2014, the “Sogou 2010Sohu Video Share Incentive Plan”)Plan, which provided for the issuance of up to provide incentives to Sogou’s management and employees and25,000,000 ordinary shares of Sohu Video to management and key employees of the video division and to Sohu management. The maximum term of any ofshare-based award granted under the Sohu Group companies. The maximum number of Sogou Class A Ordinary Shares issuable under the Sogou 2010Video Share Incentive Plan is 41,500,000.ten years from the grant date. The Sogou 2010Sohu Video Share Incentive Plan expired on October 19, 2020,January 4, 2022, and is no longer available for granting new share-based awards.
As of February 26,December 31, 2021, there weregrants of options outstanding under the Sogou 2010 Share Incentive Plan exercisable for the purchase of an aggregate16,368,200 ordinary shares of 3,462,691 Sogou Class A Ordinary Shares. The maximum term of any share incentive award granted under the Sogou 2010 Share Incentive Plan is ten years from the grant date.
Sogou also adopted a share incentive plan in October 2017 (the “Sogou 2017 Share Incentive Plan,”Sohu Video had been contractually made and together with the Sogou 2010 Share Incentive Plan, the “Sogou Share Incentive Plans”). The maximum number of Sogou Class A Ordinary Shares issuable under the Sogou 2017 Share Incentive Plan is 28,000,000. Share incentive awards may be granted under the Sogou 2017 Share Incentive Plan to Sogou management and employees and to management and employees of any of the Sohu Group companies that is not a VIE of Sohu. Share incentive awards that may be granted under the Sogou 2017 Share Incentive Plan include, among other forms, options, restricted share units and restricted shares, and the maximum term of any share incentive award granted is ten years from the grant date. The Sogou 2017 Share Incentive Plan will terminate in October 2027.
Sogou’s compensation committee, or Sogou’s Board of Directors in the absence of such a committee, administers the Sogou Share Incentive Plans, and determines the terms and conditions of awards under the Sogou Share Incentive Plans. Awards granted under the Sogou Share Incentive Plans are evidenced by an award document that sets forth the terms and conditions applicable to each of the awards, as determined by Sogou’s Board of Directors or compensation committee in its sole discretion. Prior to Sogou’s IPO, the award documents for options previously granted under the Sogou 2010 Share Incentive Plan gave Sogou a right to repurchase from a grantee, within a certain time period, up to 50% of a grantee’s Class A Ordinary Shareswere subject to vested options,vesting in four equal installments, with each installment vesting upon such grantee’s death, disability, or voluntary, or involuntary terminationa service period requirement being met, as well as Sohu Video’s achievement of employment with Sogou (other than for “Cause,” as defined in the Sogou 2010 Share Incentive Plan); the repurchase price for such a purchase was equal to the fair market value of Sogou’s ordinary shares, as determined in an appraisal by an independent professional appraisal firm chosen by Sogou. Sogou’s such repurchase rights under the award documents terminated upon the completion of Sogou’s IPO.
Sogou’s Board of Directors may amend, suspend, or terminate the Share Incentive Plans at any time; provided, however, that Sogou’s Board of Directors must first seek the approval of the participants in the Share Incentive Plans if such amendment, suspension or termination would adversely affect the rights of participants with respect to any of their existing awards.
Awards for Sogou Class A Ordinary Shares held by Sohu
We also grant to our management and employees options to purchase from us Sogou Class A ordinary shares that we holdperformance targets for the purposecorresponding period. As of making such grants. VestingDecember 31, 2021, options for the purchase of options that we grant generally occurs in equal annual installments over a four-year period, but vesting for each year is also subject to the achievement of annual performance milestones related to Sogou that our Board of Directors establishes in its discretion.
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Sohu Video Share Incentive Plan
Our subsidiary Sohu Video adopted the Sohu Video Share Incentive Plan, which will expire in January 2022. The maximum number of4,972,800 Sohu Video ordinary shares issuable under the Sohu Video Share Incentive Plan is 25,000,000. Share incentive awards may be granted under the Sohu Video Share Incentive Plan to Sohu Video management and employees, and to management and employees of any of the Sohu Group companies. Share incentive awards that may be granted under the Sohu Video Share Incentive Plans include, among other forms, options, restricted share units and restricted shares, and the maximum term of any share incentive award granted is ten years from the grant date.
Sohu Video’s compensation committee, or Board of Directors in the absence of such a committee, administers the Sohu Video Share Incentive Plan, and determines the terms and conditions of awards under the Sohu Video Share Incentive Plan. Awards granted under the Sohu Video Share Incentive Plan are evidenced by an award document that sets forth the terms and conditions applicable to each of the awards, as determined by Sohu Video’s Board of Directors or compensation committee in its sole discretion. The award documents for options granted under the Sohu Video Share Incentive Plan give Sohu Video a right to repurchase from a grantee, within a certain time period, up to 50% of a grantee’s Sohu Video ordinary shares subject to vested options, upon such grantee’s death, disability, or voluntary, or involuntary termination of employment with us (other than for “Cause,” as defined in the Sohu Video Share Incentive Plan). The repurchase price for such a purchase was equal to the fair market value of Sohu Video’s ordinary shares, as determined in an appraisal by an independent professional appraisal firm chosen by Sohu Video. Sohu Video repurchase rights under the award documents will terminate upon the completion of Sohu Video’s IPO.
Sohu Video’s Board of Directors may amend, suspend, or terminate the Share Incentive Plans at any time; provided, however, that Sohu Video’s Board of Directors must first seek the approval of the participants in the Sohu Video Share Incentive Plan if such amendment, suspension or termination would adversely affect the rights of participants with respect to any of their existing awards.
were vested.
Grants of Shares and Options to Directors and Executive Officers
The following tables set forth summaries of all outstanding equity awards granted by us to, and held by each of our directors and executive officers as of February 26, 2021.March 11, 2022.
Awards Granted under Sohu 2018 Share Incentive Plan
 
Directors and Executive
Officers
  
Ordinary
Shares underlying
outstanding options
 
Exercise
price
   
Date of
grant
   
Expiration
date
   
Ordinary

Shares underlying

outstanding options
 
Exercise

price
   
Date of

grant
   
Expiration

date
 
Charles Zhang
   75,000(1)  $0.001    2/16/2015    2/15/2025    75,000(1)  $0.001    2/16/2015    2/15/2025 
Charles Zhang
   70,000(2)  $0.001    7/1/2019    6/30/2029    70,000(2)  $0.001    7/1/2019    6/30/2029 
Joanna Lv
   7,500(3)  $0.001    2/16/2015    2/15/2025    7,500(3)  $0.001    2/16/2015    2/15/2025 
Joanna Lv
   40,000(4)  $0.001    7/1/2019    6/30/2029    40,000(4)  $0.001    7/1/2019    6/30/2029 
Joanna Lv
   10,000(5)  $0.001    9/1/2020    8/31/2030    10,000(5)  $0.001    9/1/2020    8/31/2030 
 
(1)
Consists of options to purchase our ordinary shares at a nominal exercise price, of which 75,000 options are vested and exercisable as of February 26, 2021.March 11, 2022.
(2)
Consists of options to purchase our ordinary shares at a nominal exercise price, of which 17,500 options for the purchase of 35,000 ordinary shares are vested and exercisable as of February 26, 2021.March 11, 2022.
(3)
Consists of options to purchase our ordinary shares at a nominal exercise price, of which 7,500 options are vested and exercisable as of February 26, 2021.March 11, 2022.
(4)
Consists of options to purchase our ordinary shares at a nominal exercise price, of which 10,000 options for the purchase of 20,000 ordinary shares are vested and exercisable as of February 26, 2021.March 11, 2022.
(5)
Consists of options exercisableto purchase our ordinary shares at a nominal exercise price, of which options for the purchase of our2,500 ordinary shares that are subject to vesting in equal annual installments over a four-year period.vested and exercisable as of March 11, 2022.
 
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Awards Granted under Changyou 2019 Share Incentive Plan
 
Directors and Executive
Officers
  
Ordinary
Shares underlying
outstanding options
 
Exercise
price
   
Date of
grant
   
Expiration
date
   
Ordinary

Shares underlying

outstanding options
 
Exercise

price
   
Date of

grant
   
Expiration

date
 
Dewen Chen
   1,288,000(1)  $0.01    8/26/2019    9/30/2029    1,288,000(1)  $0.01    8/26/2019    9/30/2029 
 
(1)
Consists of options, granted on August 26, 2019 and effective as of October 1, 2019, that are subject to vesting in equal annual installments over a four-year period commencing on October 1, 2019.
Awards Granted under Sogou 2010 Share Incentive Plan
Directors and Executive
Officers
  
Restricted Sogou Class A
Ordinary
Shares
  
Exercise
price
   
Date of
grant
   
Expiration
date
 
Xiaochuan Wang
   1,440,000(1)  $0.625    1/31/2013    N/A 
(1)
Consists of Sogou Class A Ordinary Shares beneficially held by Mr. Wang that were issued in 2013 upon Mr. Wang’s early exercise of share options granted under the Sogou 2010 Share Incentive Plan and are still subject to vesting. Such Sogou Class A Ordinary Shares are subject to vesting upon the fourth anniversary of the completion of Sogou’s IPO, which took place on November 13, 2017.
Awards Granted under Sohu Video Share Incentive Plan
 
Directors and Executive
Officers
  
Ordinary
Shares underlying
outstanding options
 
Exercise
price
   
Date of
grant
   
Expiration
date
   
Ordinary

Shares underlying

outstanding options
 
Exercise

price
   
Date of

grant
   
Expiration

date
 
Joanna Lv
   110,000(1)  $0.01    1/4/2012    1/3/2022    110,000(1)  $0.01    1/4/2012    1/3/2022 
Xiaochuan Wang
   50,000(2)  $0.01    1/4/2012    1/3/2022 
 
(1)
Consists of options to purchase Sohu Video’sVideo ordinary shares at a nominal exercise price, vesting in equal annual installments over a four-year period, but vesting for each year will also be subject to the achievement of annual performance milestones related to Sohu Video that our Board of Directors establishes in its discretion. As of February 26, 2021,March 11, 2022, options for the purchase of 27,500 optionsSohu Video ordinary shares are fully vested and exercisable.
(2)
Consists of options to purchase Sohu Video’s ordinary shares at a nominal exercise price, vesting in equal annual installments over a four-year period, but vesting for each year will also be subject to the achievement of annual performance milestones related to Sohu Video that our Board of Directors establishes in its discretion. As of February 26, 2021, 12,500 options are fully vested and exercisable.vested.
Employees
As of December 31, 2020,2021, we had approximately 7,6004,900 employees, including 3,000 employees for Sohu, and 1,900 employees for Changyou, and 2,700 employees for Sogou.Changyou. None of our personnel are represented under collective bargaining agreements.
We have entered into standard employment agreements with our employees through our subsidiaries and VIEs. Sohu’s and Sogou’s employees have entered into confidentiality,
non-competition
and
non-solicitation
agreements with Sohu or Sogou, respectively.Sohu. Changyou’s employees have entered into confidentiality agreements with Changyou. However, the degree of protection afforded to an employer pursuant to confidentiality and
non-competition
agreements governed by PRC law may be more limited when compared to the degree of protection afforded under the laws of other jurisdictions. A number of our employees hold share-based awards granted by Sohu, Sogou, Changyou, and Sohu Video, which provide additional financial incentives to them. Most of these awards vest over a period of four years.
Share Ownership
Refer to “
Item 7. Major Shareholders and Related Party Transactions
” below for a description of the share ownership of our directors and senior executive officers.
 
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ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
Major Shareholders
The following table sets forth certain information regarding the beneficial ownership of our ordinary share as of February 26, 2021March 11, 2022 by (i) each person (including any “group” as that term is used in Section 13(d)(3) of the Exchange Act known by us to be the beneficial owner of more than 5% of our ordinary share (assuming conversion of all outstanding exercisable options and warrants held by that person), (ii) each current director, (iii) each named executive officer and (iv) all of our current directors and named executive officers as a group. Except as otherwise provided in the footnotes to this table, we believe that the persons named in this table have voting and investment power with respect to all the shares of common stock indicated.
 
Name and Address of Beneficial Owner
  
Amount and Nature of
Beneficial Ownership (1)
  
Percent of Class
 (1)
 
Charles Zhang
   10,282,029(2)   26.09% 
Charles Huang
(3)
   76,265   * 
Shi Wang
(4)
   34,132   * 
Dave Qi
(5)
   28,940   * 
Zhonghan Deng
(6)
   14,514   * 
Dave De Yang
(7)
   —     —   
Joanna Lv
   20,500(8)   * 
Xiaochuan Wang
(9)
   69,258   * 
Dewen Chen
(10)
   —     —   
All directors, nominees and executive officers as a group (9 persons)
   10,525,638(11)   26.70% 
Photon Group Limited
(12)
   9,920,829   25.23% 
Macquarie Investment Management Business Trust
(13)
   3,618,481   9.21% 
Renaissance Technologies LLC.
(14)
   2,699,355   7.30% 
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Name and Address of Beneficial Owner
  
Amount and Nature of
Beneficial Ownership
(1)
  
Percent of Class
(1)
 
Charles Zhang
   11,095,133(2)   30.29% 
Charles Huang
(3)
   76,265   * 
Shi Wang
(4)
   34,132   * 
Dave Qi
(5)
   28,940   * 
Zhonghan Deng
(6)
   5,878   * 
Dave De Yang
(7)
   —     —   
Joanna Lv
   33,000(8)   * 
Dewen Chen
(9)
   —     —   
All directors, nominees and executive officers as a group (8 persons)
   11,273,348(10)   30.75% 
Photon Group Limited
(11)
   10,716,433   29.35% 
Macquarie Investment Management Business Trust
(12)
   3,523,045   8.96% 
 
*
Less than 1%.
(1)
Includes the number of shares and percentage ownership represented by such shares determined to be beneficially owned by a person in accordance with the rules of the SEC. The number of shares beneficially owned by a person includes the number of ordinary shares subject to options or restricted stock units held by that person that are currently exercisable or settleable or that are exercisable or settleable within 60 days of February 26, 2021.March 11, 2022. Such shares are deemed outstanding for the purpose of computing the percentage of outstanding shares owned by that person. Such shares are not deemed outstanding, however, for the purpose of computing the percentage ownership of each other person.
(2)
Includes (i) 92,500110,000 ordinary shares subject to options exercisable within 60 days of February 26, 2021March 11, 2022 and (ii) 9,920,82910,716,433 ordinary shares beneficially owned by Photon Group Limited. Dr. Charles Zhang is a Director of Photon Group Limited, and may be deemed to be a beneficial owner of shares owned by it. Dr. Charles Zhang disclaims beneficial ownership of such shares except to the extent of his pecuniary interest in such shares. Dr. Charles Zhang’s address is c/o Sohu.com Limited., Level 18, Sohu.com Media Plaza, Block 3, No. 2 Kexueyuan South Road, Haidian District, Beijing 100190, People’s Republic of China.
(3)
Mr. Charles Huang’s address is Suite 5206, Central Plaza, Wanchai, Hong Kong.
(4)
Mr. Shi Wang’s address is Vanke Architecture Research Center, No. 68 Meilin Road, Futian District, Shenzhen 518049, People’s Republic of China.
(5)
Dr. Dave Qi’s address is 3/F, Tower E3, Oriental Plaza, 1 East Chang An Avenue, Beijing 100005, People’s Republic of China.
(6)
Dr. Zhonghan Deng’s address is 16/F, Shining Tower, No. 35, Xueyuan Road, Haidian District, Beijing 100191, People’s Republic of China.
(7)
Mr. Dave De Yang’s address is 24W435 Arrow Ct. Naperville,427 Ashbury Drive, Hinsdale, IL 60540,60521, the United States.
(8)
Includes 17,50030,000 ordinary shares subject to options exercisable within 60 days of February 26, 2021.March 11, 2022. Ms. Joanna Lv’s address is c/o Sohu.com Limited., Level 18, Sohu.com Media Plaza, Block 3, No. 2 Kexueyuan South Road, Haidian District, Beijing 100190, People’s Republic of China.
(9)
Mr. Xiaochuan Wang’s address is c/o Sogou Inc., Level 15, Sohu.com Internet Plaza, No. 1 Unit, Zhongguancun East Road, Haidian District, Beijing 100084, People’s Republic of China.
(10)
Mr. Dewen Chen’s address is c/o Changyou.comChangyou com Limited, Changyou Tower,Creative Industrial Park, No. 65 East Bajiao Road, Shijingshan District, Beijing 100043, People’s Republic of China.
(11)(10)
Includes 110,000140,000 ordinary shares that such persons have the right to acquire pursuant to currently exercisable options or options that may be exercised within 60 days of February 26, 2021.March 11, 2022.
(12)(11)
Photon Group Limited’s address is c/o Sohu.com Limited.,Limited, Sohu.com Media Plaza, Block 3, No. 2 Kexueyuan South Road, Haidian District, Beijing 100190, People’s Republic of China.
 
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(13)(12)
Data based on a Schedule 13G/A filed with the SEC on February 12, 2021.14, 2022. The principal business address of Macquarie Investment Management Business Trust is 2005 Market Street, Philadelphia, PA 19103.
(14)
Data based on a Schedule 13G/A filed with the SEC on February 11, 2021. The principal business address of Renaissance Technologies LLC is 800 Third Avenue, New York, New York 10022.
Related Party Transactions
Changyou’s Loan Arrangements with Fox Financial Technology Group Limited (“Fox Financial,” formerly known as “SoEasy Internet Finance Group Limited”)
Commencing in April 2015, certain subsidiaries of Changyou and certain subsidiaries of Fox Financial entered into a series of loan agreements pursuant to which the subsidiaries of Changyou were entitled to draw down HK dollar-denominated or U.S. dollar-denominated loans from the Fox Financial subsidiaries and the Fox Financial subsidiaries were entitled to draw down equivalent
RMB-denominated
loans from the Changyou subsidiaries, of Changyou, to facilitate each other’s business operations. All of the loans carry a fixed rate of interest which approximates toapproximated the current market interest rate.rate at the inception of the loans.
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In December 2018 and 2019, Changyou entered into supplemental agreements with Fox Financial pursuant to which all accrued and unpaid interest on the loans as of December 31, 2018 and December 31, 2019 was added to the principal of the corresponding loans. Due to the depreciation of the RMB against the U.S. dollar in 2018, the principal amounts of the Changyou’s outstanding
RMB-denominated
loans to Fox Financial as of December 31, 2018 were adjusted upward to amounts equal to the product of the principal amounts of Fox Financials’ outstanding U.S. dollar denominated loans to Changyou as of December 31, 2018, multiplied by the monthly average RMB to U.S. dollar exchange rate published by the Bank of China for the month of December 2018. As a result of such adjustment, Changyou advanced additional
RMB-denominated
loans in the principal amount of RMB8.2 million (approximately $1.2 million) to Fox Financial in January 2019.
In December 2019, Changyou entered into a supplemental agreement with Fox Financial pursuant to which states that Fox Financial undertakes and agreesprovided security for its repayment obligations to provide to Changyou a guaranty of the repayment obligation of Fox Financial and to deposit an amount equal to the US dollar-denominated loan principal and corresponding interest owed by Changyou to Fox Financial as a security deposit. IfChangyou. Under this supplemental agreement, if Fox Financial fails to repay the
RMB-denominated
loan principal and corresponding interest owed to Changyou, thenChangyou will have the right to apply the amount of a security deposit, will be applied to repaymentconsisting of the outstanding U.S. dollar-denominated loan principal and corresponding interest owed by Changyou to Fox Financial, to repay the
RMB-denominated
loan principal and interest owed by Fox Financial to Changyou. The security deposit will be required to be replenished by Fox Financial if itthe amount of the security deposit is insufficient to repay the loan principal and corresponding interest of the
RMB-denominated
loan owed to Changyou, and any remaining security deposit will be returned to Fox Financial if there is a surplus after the repayment of the
RMB-denominated
loan principal and interest will be returned to Fox Financial.interest. The parties entered into an additional supplemental agreement inpursuant to which Changyou undertakesprovided security for its repayment obligations to Fox Financial. Under this supplemental agreement, if Changyou fails to repay the U.S. dollar-denominated loan principal and agrees to providecorresponding interest owed to Fox Financial, Fox Financial will have the right to apply the amount of a guarantysecurity deposit, consisting of Changyou’s repayment obligation and to deposit an amount equal to the outstanding
RMB-denominated
loan principal and corresponding interest owed by Fox Financial to Changyou, as a security deposit. If Changyou fails to repay the U.S. dollar-denominated loan principal and corresponding interest, then the security deposit will be applied to repayment of the loan principal and corresponding interest owed by Changyou to Fox Financial. The security deposit will be required to be replenished by Changyou if itthe amount of the security deposit is insufficient to repay the U.S. dollar-denominated loan principal and corresponding interest owed by Changyou to Fox Financial, and theany remaining security deposit (if any) will be returned to Changyou if there is anya surplus after the repayment of the US dollar denominatedU.S. dollar-denominated loan principal and interest.
As ofThe loan arrangements expired on December 31, 2020 the loan arrangements had expired and no new supplemental agreements were signed. Under supplemental agreements of guaranty betweenIn May 2021, Changyou andnotified Fox Financial entered into in December 2019, if Fox Financial failedof Changyou’s intention to repayexercise its rights under the RMB-denominated loan principle and corresponding interest, Changyou could apply the amount ofsupplemental agreement by applying the security deposit consisting ofto repay the US dollar-denominated
RMB-denominated
loan principal and corresponding interest owed by Changyou to Fox Financial to repay the RMB-denominated loan principle and corresponding interest owed to Changyou. As of the date of this annual report, Changyou has not received any response from Fox Financial and accordingly, with an abundance of caution, has not so applied any of the loan arrangements have not been settled, and a settlement plan is under discussion.security deposit. Changyou performed an assessment as of December 31, 2020 ofits expected credit losses for the
RMB-denominated
loans receivable from Fox Financial. As of December 31, 2021, we had accrued a cumulative allowance for credit losses of approximately $3.3 million based on Changyou’s estimate of the net of the outstanding amount of such loans receivable from Fox Financial and accrued an expected credit loss of $2.4 million based on its estimate ofover the remaining exposure in excessamount of the security deposit and on the lack of solvency of Fox Financial.
As of December 31, 20192021, net loan receivables and 2020, Changyou had U.S. dollar-denominated loans payable to Fox Financialunder such loan arrangements, each in a totalthe amount of approximately $33.5 million and $34.1 million, respectively,were recorded as prepaid and
RMB-denominated
loans receivable from Fox Financial in a total amount of approximately $33.3 million other current assets and $34.1 million, respectively. For the year ended December 31, 2019 and 2020, Changyou incurred interest expense of $0.8 million and $0.6 million,other short-term liabilities, respectively, in connection with the loans payable and earned interest income of $1.0 million and $0.8 million, respectively, in connection with the loans receivable.our consolidated balance sheets.
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Transactions with Vanke Co., Ltd.
In the 2018, 2019, 2020 and 20202021 fiscal years, Vanke Co., Ltd. purchased $220,755, $174,259, $226,528 and $226,528,$173,276, respectively, in advertising services from us. Mr. Shi Wang, one of our directors, is the Honorary Chairman of the Board of Vanke Co., Ltd.
Contractual Arrangements with our VIEs and their Shareholders
PRC law currently restricts foreign ownership of value-added telecommunication services, Internet publishing, online news information and content, internet access, value-added telecommunications,services, online game,audiovisual transmission, online games, and certain other businesses.business activities in the PRC. To comply with PRC law, we conduct a significant part of our value-added telecommunications, online game, search and search-related and other businessesbusiness activities through contractual arrangements between our principal PRC subsidiaries and their corresponding VIEs and their respective shareholders. See “Information on the Company-Organizational Structure” in Item 4 of this annual report for a description of the ownership information of the principal VIEs through which we conduct a significant portion of our current principal VIEs.operations. For a discussion of risks related to these contractual arrangements, please see Item 3. Key Information—Risk Factors—Risks Related to Our Corporate Structure. “- We depend upon contractual arrangements with the VIEs and/or their shareholders for the success of our business, these arrangements may not be as effective in providing operational control as would ownership of these businesses, and the contracts may be difficult to enforce” and “- A failure by the VIEs or their shareholders to perform their obligations under our contractual arrangements with them could have an adverse effect on our business and financial condition.”
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The following is a summary of the agreements currently in effect between these principal PRC subsidiaries and our principal VIEs:
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 Group’s legal department and may be completed and effected at Sohu Media’s 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 Group’s legal department and may be completed and effected at Focus HK’s election.
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 Jinhu’s 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.
Exclusive 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 ten years, renewable at the request of Video Tianjin.
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Powers of Attorney
executed by the shareholders of Tianjin Jinhu in favor of Video Tianjin with a term of ten 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 Gamease’s and Guanyou Gamespace’s obligations to AmazGame and Gamespace under the various
VIE-related
agreements. If the shareholders breach their obligations under any
VIE-related
agreements (Gamease’s or Guanyou Gamespace’s breach of any of its obligations under the various applicable
VIE-related
agreements will be treated as its shareholder’s 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.
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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 ten years. These powers of attorney give the respective boards of directors of AmazGame and Gamespace the 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 ten years.
Loan and share pledge agreements
between Sogou Technology and the shareholders of Sogou Information. The loan agreement provides for a loan to Xiaochuan Wang, the individual shareholder of Sogou Information, to be used by him to make contributions to the registered capital of Sogou Information in exchange for his equity interest in Sogou Information. The loan is interest
free-and
is repayable on demand, but the shareholder may repay the loan only by transferring to Sogou Technology his equity interest in Sogou Information. Under the pledge agreement, all of the shareholders of Sogou Information pledge their equity interests to Sogou Technology to secure the performance of their obligations under the various
VIE-related
agreements. If any shareholder of Sogou Information breaches any of his or its obligations under any
VIE-related
agreements, Sogou Technology is entitled to exercise its right as the beneficiary under the share pledge agreement. The share pledge agreement terminates only after all of the obligations of the shareholders under the various
VIE-related
agreements are no longer in effect.
Exclusive equity interest purchase right agreements
between Sogou Technology, Sogou Information and the shareholders of Sogou Information. Pursuant to these agreements, Sogou Technology and any third party designated by it have the right, exercisable at any time when it becomes legal to do so under PRC law, to purchase from the shareholders of Sogou Information all or any part of their equity interests at the lowest purchase price permissible under PRC law.
Business operation agreement
among Sogou Technology, Sogou Information and the shareholders of Sogou Information. The agreement sets forth the right of Sogou Technology to control the actions of the shareholders of Sogou Information. The agreement has a term of ten years, renewable at the request of Sogou Technology.
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Powers of Attorney
executed by the shareholders of Sogou Information in favor of Sogou Technology with a term of ten years, extendable at the request of Sogou Technology. These powers of attorney give Sogou Technology the right to appoint nominees to act on behalf of each of the three Sogou Information shareholders in connection with all actions to be taken by Sogou Information.
Business Arrangements between Subsidiaries and Consolidated VIEs
A significant portion of our operations are conducted through the VIEs that we consolidate, which generate a significant amount of our revenues. In order for us to be able to receive such revenues, and, if applicable, other assets, from the VIEs, we rely on payments made by the VIEs to our PRC subsidiaries pursuant to a series of service contracts between them in order for the VIEs to transfer such revenues or other assets to us. For a discussion of such transfers and their limitations, please see “Item 5. Operating and Financial Review and Prospects - Liquidity and Capital Resources - Restrictions and Limitations on Cash Available to Sohu.com Limited - PRC Restrictions Related to Our VIE Structure.” The following is a summary of the material service contracts currently in effect between our PRC subsidiaries and certain of the VIEs that we consolidate:
Exclusive technology consulting and service agreement
between Sohu Era and Sohu Internet. Pursuant to this agreement Sohu Era has the 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.
Exclusive technology consulting and service agreement
between Video Tianjin and Tianjin Jinhu. Pursuant to this agreement Video Tianjin has the right to provide technical consultation and other related services to Tianjin Jinhu in exchange for a fee. The agreement has a term of ten years and is renewable at the request of Video Tianjin.
Technology service agreement
between Donglin and Sohu Media. Pursuant to this agreement Sohu Media has the right to provide technology services and other related services to Donglin in exchange for a percentage of the gross revenue of Donglin. The agreement has a term of three years and is renewable at the request of Sohu Media.
Technology support and utilization agreements
between AmazGame and Gamease, and between Gamespace and Guanyou Gamespace.Gamespace, and between Changyou Chuangxiang and Gamease. Pursuant to these agreements, AmazGame, Gamespace and GamespaceChangyou Chuangxiang have the 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, Gamespace or GamespaceChangyou Chuangxiang at any time, of Gamease’s and Guanyou Gamespace’s respective revenues. Each agreement terminates only when AmazGame, Gamespace or GamespaceChangyou Chuangxiang is dissolved.
Services and maintenance agreements
between AmazGame and Gamease, and between Gamespace and Guanyou Gamespace.Gamespace, and between Changyou Chuangxiang and Gamease. Pursuant to these agreements, AmazGame, Gamespace and Gamespace,Changyou Chuangxiang, 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, Gamespace or Gamespace,Changyou Chuangxiang, as the case may be, is dissolved.
Exclusive technology consulting and service agreement
between Sogou Technology and Sogou Information. Pursuant to this agreement Sogou Technology has the right to provide technical consultation and other related services to Sogou Information in exchange for a fee. The agreement has a term of ten years and is renewable at the request of Sogou Technology.
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.
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Other Transactions with Certain Directors, Shareholders and Affiliates
See “Directors, Senior Management and Employees - Compensation of DirectorsExecutive Officers and Executive Officers.Directors.”
Employment Agreements
See “Directors, Senior Management and Employees - Employment Agreements with Executive Officers.”
Share Incentive Plans
See “Directors, Senior Management and Employees - EquityShare Incentive Plans.”
Interests of Experts and Counsel
Not applicable.
 
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ITEM 8.
FINANCIAL INFORMATION
Consolidated Financial Statements
Please see Item 18 “Financial Statements” for our audited consolidated financial statements filed as a part of this annual report.
Legal Proceedings
From time to time we become subject to legal proceedings and claims in the ordinary course of our business. Such legal proceedings or claims, even if not meritorious, could result in the expenditure of significant financial and management resources.
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 Limited’s common stockordinary shares for the foreseeable future. Future cash dividends distributed by Sohu.com Limited., if any, will be declared at the discretion of Sohu.com Limited’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.
 
ITEM 9.
THE OFFER AND LISTING
Our ADSs commenced trading on June 1, 2018 on the NASDAQ Global Select Market under the symbol “SOHU.” Prior to June 1, 2018, the common stock of our predecessor Sohu.com Inc. was listed and traded on the NASDAQ Global Select Market under the same “SOHU” symbol.
 
ITEM 10.
ADDITIONAL INFORMATION
Memorandum and Articles of Association
We incorporate by reference into this annual report the description of our amended and restated memorandum of association and our amended and restated articles of association contained in our Registration Statement on Form
F-4
(File
No. 333-224069)
filed with the SEC on April 19, 2018 and in Sohu.com Inc.’s and our joint proxy statement/prospectus filed with the SEC on April 23, 2018. Our shareholders adopted our Memorandum and Articles of Association by a special resolution on April 2, 2018, which became effective on April 2, 2018.
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Differences in Corporate Law - Mergers and Similar Arrangements
The Companies Act is modeled after similar laws in the United Kingdom but does not follow all statutory enactments or legislative changes in the United Kingdom. In addition, the Companies Act differs from laws applicable to United States corporations and their shareholders. Set forth below is a summary of the significant differences between the provisions of the Companies Act applicable to us and the laws applicable to companies incorporated in the State of Delaware.
Mergers and Similar Arrangements
A merger or consolidation of two or more constituent companies under Cayman Islands law requires a plan of merger or consolidation to be approved by the directors of each constituent company and authorization by (a) a special resolution of the members of each constituent company and (b) such other authorization, if any, as may be specified in such constituent company’s articles of association.
A merger or consolidation between a Cayman parent company and its Cayman subsidiary or subsidiaries does not require authorization by a resolution of shareholders. For this purpose, a subsidiary is a company of which shares carrying at least ninety percent (90%) of the votes exercisable in a general meeting are held by or registered in the name of the parent company.
The consent of each holder of a fixed or floating security interest over the assets of a constituent company is required unless this requirement is waived by a court in the Cayman Islands.
Save in certain circumstances, a dissenting shareholder of a Cayman constituent company is entitled to payment of the fair value of his shares, as assessed byapply to the Grand Court of the Cayman Islands to have the fair value of his shares assessed by the Grand Court, upon dissenting to a merger or consolidation.consolidation by following the procedure required by the Companies Act and the rules of the Grand Court. The exercise of such appraisal rights will preclude the exercise of any other rights save for the right to seek relief on the grounds that the merger or consolidation is void or unlawful.
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In addition, there are statutory provisions applicable to a scheme of arrangement that facilitate the takeover of companies or the reconstruction and amalgamation of companies provided that theby way of a scheme of arrangement. The scheme of arrangement ismust currently be approved by a majority in number of each class of shareholders or creditors with whom the arrangement is to be made, and who must in addition represent
three-fourths
in value of each such class of shareholders or creditors, as the case may be, that are present and voting either in person or by proxy at a meeting, or meetings, convened for that purpose. The conveningpurpose by the direction of the meetings and subsequentlyGrand Court of the Cayman Islands. The requirement for a majority in number of shareholders to approve the scheme of arrangement will be abolished when the Companies (Amendment) Act, 2021 comes into force (expected to be in March 2022). The scheme of arrangement must be sanctioned by the Grand Court and the court order delivered to the Registrar of Companies of the Cayman Islands.Islands for registration for the scheme of arrangement to become effective. While a dissenting shareholder has the right to express to the court the view that the transactionscheme of arrangement ought not to be approved,sanctioned, the court can be expected to approve the scheme of arrangement if it determines that:
 
the statutory provisions as to the required majority vote have been met;
 
the shareholders have been fairly represented at the meeting in question and the statutory majority are acting bona fide without coercion of the minority shareholders or creditors to promote interests adverse to those of the class;
 
the arrangement is such that may be reasonably approved by an intelligent and honest man of that class acting in respect of his interest; and
 
the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Act.
When a takeover offer is made to all shareholders (or class of shareholders) and accepted by holders of 90% of the shares that are subject to the offer within four months of the offer being made, the offeror may, within a
two-month
period commencing on the expiration of such
four-month
period, require the holders of the remaining shares to transfer such shares to the offeror on the same terms as the offer. An objection can be made to the Grand Court of the Cayman Islands within one month of the compulsory acquisition notice but this is unlikely to succeed in the case of an offer which has been so approved unless there is evidence of a lack of compliance with the statutory procedures, of fraud, bad faith, or collusion.
If a scheme of arrangement or takeover offer is thus approved, the dissenting shareholder would have no rights comparable to appraisal rights, which would otherwise ordinarily be available (subject to certain exceptions) to dissenting shareholders in a merger or consolidation or to dissenting shareholders of Delaware corporations, providing rights to receive payment in cash for the judicially determined value of the shares.
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Shareholders’ Suits
In principle, our company will normally be the proper plaintiff, and, as a general rule, a derivative action may not be brought by a minority shareholder and requires leave or permission from the court in the Cayman Islands for such an action to be continued. However, based on English authorities, which would in all likelihood be of persuasive authority in the Cayman Islands, subject to leave being given, a derivative action may be available when:
 
a company acts or proposes to act illegally or ultra vires;
 
the act complained of, although not ultra vires, could only be effected duly if authorized by more than a simple majority vote of our shareholders and this has not been obtained; and
 
those who control the company are perpetrating a “fraud on the minority.”
Indemnification of Directors and Executive Officers and Limitation of Liability
Cayman Islands law does not limit the extent to which a company’s articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Our Amended and Restated Memorandum of Association and Amended and Restated Articles of Association permit indemnification of officers and directors for losses, damages, costs and expenses incurred in their capacities as such unless such losses or damages arise from fraud or dishonesty of such directors or officers. This standard of conduct is generally the same as permitted under the Delaware General Corporation Law for a Delaware corporation. In addition, we have entered into indemnification agreements with our directors and senior executive officers that provide such persons with additional indemnification beyond that provided in our Amended and Restated Memorandum of Association and Amended and Restated Articles of Association.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling us under the foregoing provisions, we have been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable as a matter of United States law.
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Anti-Takeover
Provisions in the Memorandum of Association and Articles of Association
Some provisions of our Amended and Restated Memorandum of Association and Amended and Restated Articles of Association may discourage, delay, or prevent a change in control of our company or management that shareholders may consider favorable, including provisions that authorize our Board of Directors to issue preferred shares in one or more series and to designate the price, rights, preferences, privileges and restrictions of such preferred shares without any further vote or action by our shareholders.
However, under Cayman Islands law, our directors may only exercise the rights and powers granted to them under our Amended and Restated Memorandum of Association and Amended and Restated Articles of Association, as amended and restated from time to time, for what they believe in good faith to be in the best interests of our company and for a proper purpose.
In January 2019, we entered into a Shareholders’ Rights Agreement with The Bank of New York Mellon, as Rights Agent (the “Shareholders’ Rights Agreement”). The Shareholders’ Rights Agreement is designed to deter coercive takeover tactics, including the accumulation of shares in the open market or through private transactions, and to prevent an acquirer from gaining control of the Sohu Group without offering a fair and adequate price and terms to all of our shareholders. Under the terms of the Shareholders’ Right Agreement if a person or group acquired more than 15% or more of our outstanding ordinary shares (including ordinary shares represented by ADSs), except as specifically permitted under the Shareholders’ Right Agreement, all other shareholders and holders of our ADSs would have the right to purchase securities from us at a substantial discount to those securities’ fair market value, thus causing substantial dilution to the holdings of the person or group that acquires more than 15%. The rights granted under the Shareholders’ Rights Agreement will expire on January 13, 2029, unless redeemed or cancelled earlier. Also see “Certain provisions of our Memorandum and Articles of Association, Cayman Islands law regarding mergers and similar arrangements, and our Shareholders’ Rights Agreement could delay or deter a change in control” in Item 3 of this report.
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Directors’ Fiduciary Duties
Under Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the corporation and its shareholders. This duty has two components: the duty of care and the duty of loyalty. The duty of care requires that a director act in good faith, with the care that an ordinarily prudent person would exercise under similar circumstances. Under this duty, a director must inform himself of, and disclose to shareholders, all material information reasonably available regarding a significant transaction. The duty of loyalty requires that a director act in a manner he reasonably believes to be in the best interests of the corporation. He must not use his corporate position for personal gain or advantage. This duty prohibits
self-dealing
by a director and mandates that the best interest of the corporation and its shareholders take precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the shareholders generally. In general, actions of a director are presumed to have been made on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the corporation. However, this presumption may be rebutted by evidence of a breach of one of the fiduciary duties. Should such evidence be presented concerning a transaction by a director, a director must prove the procedural fairness of the transaction, and that the transaction was of fair value to the corporation.
As a matter of Cayman Islands law, a director of a Cayman Islands company owes the following duties to the company—a duty to act bona fide in the best interests of the company and for a proper purpose, a duty not to make a personal profit based on his position as director (unless the company permits him to do so) and a duty not to put himself in a position where the interests of the company conflict with his personal interest or his duty to a third party. A director must exercise the skill and care of a reasonably diligent person having both—both - (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company (an objective test), and (b) if greater, the general knowledge, skill and experience that that director actually possesses (a subjective test).
Transactions with Interested Shareholders
The Delaware General Corporation Law contains a business combination statute applicable to Delaware public corporations whereby, unless the corporation has specifically elected not to be governed by such statute by amendment to its certificate of incorporation, it is prohibited from engaging in certain business combinations with an “interested shareholder” for three years following the date that such person becomes an interested shareholder. An interested shareholder generally is a person or a group who or which owns or owned 15% or more of the target’s outstanding voting stock within the past three years. This has the effect of limiting the ability of a potential acquirer to make a
two-tiered
bid for the target in which all shareholders would not be treated equally. The statute does not apply if, among other things, prior to the date on which such shareholder becomes an interested shareholder, the Board of Directors approves either the business combination or the transaction which resulted in the person becoming an interested shareholder. This encourages any potential acquirer of a Delaware public corporation to negotiate the terms of any acquisition transaction with the target’s Board of Directors.
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Cayman Islands law has no comparable statute. As a result, we cannot avail ourselves of the types of protections afforded by the Delaware business combination statute. However, although Cayman Islands law does not regulate transactions between a company and its significant shareholders, it does provide that such transactions must be entered into bona fide in the best interests of the company and for a proper corporate purpose and not with the effect of constituting a fraud on the minority shareholders.shareholders or which would merit an application for ancillary relief under section 92(e) of the Companies Act.
Dissolution:
Winding-up
Under the Delaware General Corporation Law, unless the Board of Directors approves the proposal to dissolve, dissolution must be approved by shareholders holding 100% of the total voting power of the corporation. Only if the dissolution is initiated by the Board of Directors may it be approved by a simple majority of the corporation’s outstanding shares. Delaware law allows a Delaware corporation to include in its certificate of incorporation a supermajority voting requirement in connection with dissolutions initiated by the board. Under the Companies Act of the Cayman Islands and our Amended and Restated Articles of association, our company may be dissolved, liquidated or wound up voluntarily by a special resolution (the vote of the holders of
two-thirds
of our shares voting at a meeting or the unanimous written resolution of all shareholders) or, if our company is unable to pay its debts as they fall due, by an ordinary resolution of our shareholders. Under Cayman Islands law, a company may be wound up compulsorily by an order of the courts of the Cayman Islands if the company has passed a special resolution of its shareholders to be wound up by the court or, if the company is unable to pay its debts as they fall due. The court also has authority to order a winding up in a number of other specified circumstances including where it is, in the opinion of the court, just and equitable to do so.
Material Contracts
We have not entered into any material contracts within the past two fiscal years other than in the ordinary course of business, other than those listed in Item 19 “Exhibits,” as described elsewhere in this annual report, or as described below.
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Facility Agreement and Equity Share Mortgages with ICBC Tokyo
On April 3, 2020, our indirect wholly-owned subsidiary Sohu Game, as borrower, and Sohu.com Limited, as guarantor, entered into a facility agreement (the “Facility Agreement”) with ICBC Tokyo pursuant to which ICBC Tokyo agreed to provide a term loan facility of up to $250 million (the “
Term Facility
”), subject to customary conditions, to be used to finance the consummation of the Changyou Merger and the related transactions and to pay related fees and expenses associated with the Changyou Merger. The Term Facility will consistconsisted of (i) a
one-year
term facility for term loans of up to $100 million (the “
One-Year
Facility
”) and (ii) a four-year term facility for term loans of up to $150 million (the “
Four-Year Facility
”). The outstanding principal amount of the loans under the
One-Year
Facility will bewas due in full on the
one-year
anniversary of the date of the first utilization of the
One-Year
Facility. The outstanding principal amount of the loans under the Four-Year Facility will bewas due in installments, with $7.5 million due and payable at the end of each of the second and third calendar years during the term of the Four-Year Facility and the remaining outstanding principal amount due and payable on the fourth anniversary of the date of the first utilization of the
One-Year
Facility. The Term Facility will bewas available for drawdown from the date of the Facility Agreement until six months after the date of the Facility Agreement, and the Term Facility maycould be drawn in up to three installments by Sohu Game at its election.
The Term Facility bearsbore interest at a rate of Three Month LIBOR plus a margin of 1.75%, with LIBOR to be determined by ICBC on the basis of the London InterBank Offered Rate published two business days before the first day of each three calendar month interest period. Accrued interest willwas to be paid every three calendar months on the first day after the end of each such three-month interest period.
The obligations of Sohu Game as borrower under the Term Facility arewere initially fully guaranteed by Sohu.com Limited, and arewere initially secured by first priority share pledges or mortgages over 97.9% of the outstanding equity interests in Changyou. In addition, Sohu Game iswas required to cause Changyou, within one (1) month after the initial funding under the Term Facility, to pledge a deposit certificate evidencing an RMB deposit equivalent to not less $125 million at an exchange rate of RMB7.20 to $1.00 and, within three months after the initial funding under the Term Facility, to pledge RMB deposit certificates evidencing amounts at least equivalent to the Facility Agreement amount (including the initial $125 million-equivalent deposit certificate). Upon the effectiveness of such additional pledge, Sohu’s guarantee and all share pledges or mortgages over the outstanding equity interests in Changyou willwould be released and discharged.
In April 2020, we caused Changyou to pledge a series of RMB deposit certificates required by the Facility Agreement and, as a result of those pledges, Sohu’s guarantee and all share pledges or mortgages over the outstanding equity interests in Changyou were released and discharged. In September 2021, we repaid all of the outstanding balance under the Facility Agreement with ICBC Tokyo, and as a result all of Changyou’s RMB deposit certificates pledges were released and the Facility Agreement was terminated.
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Changyou’s Credit Arrangement with CMB
On December 4, 2020, Changyou, through its wholly-owned subsidiary Changyou.com (HK) Limited (“
Changyou
 HK
”), entered into a credit agreement (together with related agreements and documentation, the “
CMB Credit Agreement
”) with China Merchants Bank Co., Ltd. (together with the bank’s Beijing Branch, “
CMB
”), pursuant to which Changyou iswas entitled to borrow from CMB up to an aggregate of RMB2.4 billion (or approximately $370.0 million) (the “
CMB Loan
”). The proceeds of the CMB Loan were used by Changyou HK to repay an existing loan of RMB2.4 billion (or approximately $367.8 million) from Changyou’s
PRC-based
wholly-owned subsidiary AmazGame, which repayment iswas required pursuant to foreign exchange controls under PRC law and regulations.
The CMB Loan hashad a
one-year
term. Interest accruesaccrued on the principal amount of the CMB Loan outstanding from time to time at an annual rate equal to (i) LIBOR for loans with terms of up to one month (the “
One-Month
LIBOR
”), adjusted monthly, plus (ii) a margin of 0.95%, and management fees at a combined annual rate of 0.90% of the principal amount of the CMB Loan outstanding from time to time willwas also be payable to CMB. Accordingly, the effective annual cost of the CMB Loan will bewas the
One-Month
LIBOR plus 1.85%.
The CMB Loan iswas secured by (i) a mortgage on a building owned by two
PRC-based
wholly-owned subsidiaries of Sohu that serves as Sohu’s corporate headquarters in Beijing, and (ii) pledgespledged by AmazGame of deposit certificates evidencing RMB deposits with CMB at least equivalent to the principal amount of the CMB Loan outstanding from time to time. AmazGame’s RMB deposits with CMB will earnearned interest on market terms. The CMB Credit Agreement includesincluded customary events of default.
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In connection with the CMB Credit Agreement, Sohu issued to CMB a commitment letter pursuant to which we agreed that, at all times when the CMB Loan iswas outstanding, we willwould not pledge to any third party other than CMB, or create any other encumbrances on, any of the equity interests in Changyou and Changyou HK without the prior written consent of CMB.
In September 2021, Changyou repaid all of the outstanding balance of the CMB Loans and, as a result, all of Changyou’s pledged deposit certificates and the mortgage over our building were released and the CMB Credit Agreement was terminated.
Exchange Controls
China’s government imposes control over the convertibility of RMB into foreign currencies. The conversion of RMB into foreign currencies, including U.S. dollars, has been based on rates announced by the People’s Bank of China. On July 21, 2005, the PRC government changed its
decade-old
policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in significant appreciation of the RMB against the U.S. dollar by the end of 2014. While the international reaction to the RMB revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the RMB against the U.S. dollar.
Pursuant to the Foreign Exchange Administration Regulations issued by the State Council on January 29, 1996, and effective as of April 1, 1996 (and amended on January 14, 1997 and August 5, 2008) and the Regulations on the Administration of Settlement, Sale and Payment of Foreign Exchange issued by the People’s Bank of China on June 20, 1996 and effective on July 1, 1996, or the FX Regulations, regarding the administration and control of foreign exchange, conversion of RMB into foreign exchange by foreign investment enterprisesFIEs for current account items, including the distribution of dividends and profits to foreign investors in joint ventures, is permissible. Foreign investment enterprisesFIEs are permitted to remit foreign exchange from their foreign exchange bank accounts in China on the basis of, inter alia, the terms of the relevant joint venture contracts and the board resolutions declaring the distribution of the dividend and payment of profits. Each conversion of RMB into a foreign currency and each remittance of a foreign currency for capital account items, including direct investment, loans and security investment, is subject to the approval of the SAFE.
Under the Foreign Exchange Administration Regulations, foreign investment enterprisesFIEs are required to open and maintain separate foreign exchange accounts for capital account items (but not for other items). In addition, foreign investment enterprisesFIEs may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business upon the production of valid commercial documents and, in the case of capital account item transactions, approval of the documents by the SAFE.
Currently, foreign investment enterprisesFIEs are required to apply to the SAFE for “foreign exchange registration certificates for foreign investmentforeign-invested enterprises” (which are granted to foreign investment enterprises,FIEs, upon fulfilling specified conditions and which are subject to review and renewal by the SAFE on an annual basis). With such foreign exchange registration certificates and required underlying transaction documents, or with approval documents from the SAFE if the transactions are under capital account (which are obtained on a
transaction-by-transaction
basis), foreign-invested enterprisesFIEs may enter into foreign exchange transactions at banks authorized to engage in the foreign exchange business to obtain foreign exchange for their needs.
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Taxation
The following summary of the material Cayman Islands, PRC and United States federal income tax consequences of an investment in our ADSs or ordinary shares is based upon laws and relevant interpretations thereof in effect as of the date of this annual report, all of which are subject to change. This summary does not discuss all possible tax consequences relating to an investment in our ADSs or ordinary shares, such as the tax consequences under United States state, local and other tax laws.
Cayman Islands Taxation
The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty or withholding tax applicable to us or to any holder of our ADSs and ordinary shares. We will not be subject to Cayman Islands taxation on payments of dividends or upon the repurchase by us of your ADSs or Ordinary Shares, nor will gains derived from the disposal of ADSs or Ordinary Shares be subject to Cayman Islands income or corporation tax. There are no other taxes likely to be material to us or holders of our ADSs or ordinary shares levied by the Government of Cayman Islands except for stamp duties, which may be applicable on instruments executed in, or after execution brought within the jurisdiction of the Cayman Islands. No stamp duty is payable in the Cayman Islands on transfers of shares of Cayman Islands exempted companies, except those which hold interests in land in the Cayman Islands. The Cayman Islands is not party to any double tax treaties. There are no exchange control regulations or currency restrictions in the Cayman Islands.
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PRC Taxation
Under the CIT Law and its implementation rules, an enterprise established outside of the PRC with a “de facto management body” within the PRC is considered a resident enterprise and will be subject to the enterprise income tax on its global income at the rate of 25%. The implementation rules define the term “de facto management body” as the body that exercises full and substantial control and overall management over the business, productions, personnel, accounts and properties of an enterprise. On April 22, 2009, the SAT issued a circular, known as Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a
PRC-controlled
enterprise that is incorporated Offshore is located in China, which will be subject to PRC enterprise income tax on its global income only if all of the following conditions are met: (i) the primary location of the
day-to-day
operational management is in the PRC; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the PRC. Circular 82 applies only to Offshore enterprises controlled by PRC enterprises or PRC enterprise groups, rather than those controlled by PRC individuals or foreigners, like us, but the criteria set forth in the circular may reflect the SAT’s general position on how the “de facto management body” text should be applied in determining the tax resident status of all Offshore enterprises. Although we believe we are not a PRC tax resident enterprise, it is not clear whether Sohu.com Limited and our subsidiaries established outside of the PRC will be deemed to be PRC tax residents under the CIT Law. If we are considered to be a PRC tax resident under the CIT law by the PRC tax authorities, our global income will be subject to corporate income tax at a rate of 25%.
The implementation rules of the CIT Law provide that, (i) if an enterprise that distributes dividends is domiciled in the PRC, or (ii) if gains are realized from transferring equity interests of enterprises domiciled in the PRC, then such dividends or capital gains are treated as
PRC-sourced
income. It is not clear how “domicile” may be interpreted under the CIT Law, and it may be interpreted as the jurisdiction where the enterprise is a tax resident. Therefore, if we, or our subsidiaries located in Hong Kong, are considered to be a PRC tax resident enterprise for tax purposes, any dividends we pay to our
non-PRC
resident shareholders or ADS holders as well as gains realized by such shareholders or ADS holders from the transfer of our shares or ADSs may be regarded as
PRC-sourced
income and as a result become subject to PRC tax at the rate up to 10% in the case of enterprises or 20% in the case of individuals. In the case of dividends, we would be required to withhold any PRC tax at source. See “Risk Factors - Risk Related to China’s Regulatory Environment - Dividends payable by us to our foreign investors and profits on the sale of our shares may be subject to tax under PRC tax laws.”
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United States Federal Income Taxation
The following is a general summary of the material United States federal income tax considerations related to the purchase, ownership and disposition of our ADSs or ordinary shares by U.S. holders (as defined below). This summary applies only to U.S. holders that hold the ADSs or ordinary shares as capital assets and that have the U.S. dollar as their functional currency. This discussion does not address any aspect of United States federal gift, estate tax or Medicare tax, or state, local or foreign tax consequences of an investment in our ADSs or ordinary shares. This discussion is based on the tax laws of the United States as in effect on the date of this annual report and on United States Treasury regulations in effect or, in some cases, proposed, as of the date of this annual report, as well as judicial and administrative interpretations of such tax laws and regulations available on or before such date. All of the foregoing authorities are subject to change, which change could apply retroactively and could affect the tax consequences described below.
The following discussion does not describe the tax consequences that may be relevant to any particular investor or to persons in special tax situations such as:
 
banks or certain financial institutions;
 
insurance companies;
 
broker dealers;
 
traders that elect to mark to market;
 
tax-exempt
entities;
 
persons liable for alternative minimum tax;
 
persons holding ADSs or ordinary shares as part of a straddle, hedging, conversion transaction or other integrated investment;
 
regulated investments companies;
 
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persons who acquired ADSs or ordinary shares pursuant to the exercise of any employee share option or otherwise as compensation;
 
persons who actually or constructively own 10% or more of the total combined voting power of all classes of our shares entitled to vote or 10% or more of the total value of all classes of our shares; or
 
partnerships or other pass-through entities for United States federal income tax purposes or persons holding ADSs or ordinary shares through partnerships or other pass-through entities.
U.S. holders are urged to consult their own tax advisors about the application of the United States federal tax rules to their particular circumstances as well as the state, local and foreign tax consequences to them of the purchase, ownership and disposition of our ADSs or ordinary shares.
The discussion below of the United States federal income tax consequences to “U.S. holders” will apply to a beneficial owner of ADSs or ordinary shares as capital assets for purposes of United States federal income tax laws and who is, for United States federal income tax purposes:
 
a citizen or individual resident of the United States;
 
a corporation (or other entity taxable as a corporation for United States federal income tax purposes) organized under the laws of the United States, any state thereof or the District of Columbia;
 
an estate whose income is subject to United States federal income taxation regardless of its source; or
 
a trust (1) whose administration is subject to the primary supervision of a court within the United States and one or more United States persons have the authority to control all substantial decisions of the trust, or (2) that has a valid election in effect under applicable United States Treasury regulations to be treated as a United States person.
For United States federal income tax purposes, the tax treatment of a partner in a partnership or other entity taxable as a partnership that holds ADSs or ordinary shares depends on the partner’s status and the activities of the partnership. U.S. holders who hold their ADSs or ordinary shares through a partnership, limited liability company, or other entity taxable as a partnership should consult their tax advisers regarding their tax treatment.
The discussion below assumes that the representations contained in the Deposit Agreement are true and that the obligations in the Deposit Agreement and any related agreement have been and will be complied with in accordance with their terms. Holders of ADSs will be treated as the holders of the underlying ordinary shares represented by those ADSs for United States federal income tax purposes. Accordingly, deposits of ordinary shares in return for ADSs representing those shares, and surrender of ADSs in return for the underlying ordinary shares, will not be subject to United States federal income tax.
The United States Treasury has expressed concerns that parties to whom ADSs are released before the underlying shares are delivered to the depositary
(“pre-release”),
or intermediaries in the chain of ownership between holders of ADSs and the issuer of the security underlying the ADSs, may be taking actions that are inconsistent with the claiming of foreign tax credits by holders of ADSs. These actions would also be inconsistent with the claiming of the reduced rate of tax, described below, applicable to dividends received by certain
non-corporate
holders. Accordingly, the creditability of PRC taxes, and the availability of the reduced tax rate for dividends received by certain
non-corporate
U.S. holders, each described below, could be affected by actions taken by such parties or intermediaries.
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Passive Foreign Investment Company
We believe that we may have been classified as a PFIC for United States federal income tax purposes for our taxable year ended November 30, 2020.2021. Our expectation is based on our operations and the composition of our earnings and assets for the 20202021 taxable year, including the valuation of our assets (including goodwill) based on the expected price of our ADSs in the market. We currently hold, and expect to continue to hold, a substantial amount of cash and cash equivalents, and because the value of our other assets may be based in part on the market price of our ADSs, which has fluctuated and is likely to continue to fluctuate (and may fluctuate considerably given that market prices of internet and online game companies historically have been especially volatile), our PFIC status in the current and future taxable years may depend in large part on the market price of our ADSs. A drop in the market price of our ADSs and associated decrease in the value of our goodwill would cause a reduction in the value of our
non-passive
assets for purposes of the asset test described below. In addition, the composition of our income and assets will be affected by how, and how quickly, we spend our cash. Furthermore, it is not entirely clear how the contractual arrangements between us and our consolidated VIEs will be treated for purposes of the PFIC rules. If these contractual arrangements were found by PRC authorities with appropriate jurisdiction to be unenforceable, such a finding alone could cause more than 75% of our gross income or more than 50% of our assets to be passive in the year that this finding was made or in subsequent years, which, in a given taxable year for which we might not otherwise expect to be classified as a PFIC, could cause us to be classified as a PFIC. See “Risk Factors - Risks Related to Our Corporate Structure - We depend upon contractual arrangements with ourthe VIEs and/or their shareholders for the success of our business, and these arrangements may not be as effective in providing operational control as directwould ownership of these businesses, and the contracts may be difficult to enforce.” Also, our actual PFIC status for any taxable year will depend upon the character of our income and assets and the value of our assets for such year, which will not be determinable until after the close of the taxable year. Accordingly, there is no guarantee regarding our PFIC status for any taxable year.
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A
non-U.S.
corporation is considered a PFIC for any taxable year if either:
 
at least 75% of its gross income is passive income (such as certain dividends, interest or royalties) (the “income test”), or
 
at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income (the “asset test”).
For the purposes of this determination, we will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other corporation in which we own, directly or indirectly, at least 25% (by value) of the shares.
We must make a separate determination each year as to whether we are a PFIC. As a result, our PFIC status may change from one year to the next.
If we are a PFIC for any taxable year during which a U.S. holder holds our ADSs or ordinary shares, such U.S. holder will be subject to special tax rules with respect to any “excess distribution” that such U.S. holder receives and any gain that such U.S. holder realizes from a sale or other disposition (including a pledge) of the ADSs or ordinary shares, unless the holder makes a
“mark-to-market”
election as discussed below. For purposes of these special rules, if we are a PFIC for any year during which a U.S. holder holds ADSs or ordinary shares, we will continue to be treated as a PFIC with respect to such U.S. holder for all succeeding years during which such U.S. holder holds ADSs or ordinary shares, even if we are no longer classified as a PFIC in subsequent years. Under certain attribution rules, if we are a PFIC, a U.S. holder will be deemed to own such U.S. holder’s proportionate share of any subsidiaries or other entities that are PFICs in which we hold (directly or indirectly through other PFICs) an equity interest (“subsidiary PFICs”), and will generally be treated for purposes of the PFIC rules as if such U.S. holder directly held the shares of such subsidiary PFICs.
Under these rules, distributions that a U.S. holder receives in a taxable year that are greater than 125% of the average annual distributions that such U.S. holder received during the shorter of the three preceding taxable years or such U.S. holder’s holding period for the ADSs or ordinary shares will be treated as an excess distribution. Under special tax rules:
 
the excess distribution or gain will be allocated ratably over the U.S. holder’s holding period for the ADSs or ordinary shares;
 
the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we became a PFIC, will be treated as ordinary income; and
 
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the amount allocated to each other taxable year will be subject to the highest tax rate in effect for that taxable year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such taxable year.
The tax liability for amounts allocated to years prior to the year of disposition or “excess distribution” cannot be offset by any net operating losses for such years, and gains (but not losses) realized on the sale of ADSs or ordinary shares cannot be treated as capital, even if the U.S. holder holds the ADSs or ordinary shares as capital assets. A U.S. holder will be subject to the same United States federal income tax rules as described above on indirect or constructive distributions that the U.S. holder is deemed to receive on shares of a subsidiary PFIC and on indirect or constructive dispositions of shares of subsidiary PFICs.
Alternatively, a U.S. holder of “marketable stock” (as defined below) in a PFIC may make a
mark-to-market
election for such stock of a PFIC to elect out of the tax treatment discussed in the two preceding paragraphs. A
mark-to-market
election will not be available, however, with respect to any subsidiary PFICs. If a U.S. holder makes a
mark-to-market
election for the ADSs or ordinary shares, such U.S. holder will generally include in income each year an amount equal to the excess, if any, of the fair market value of the ADSs or ordinary shares as of the close of such U.S. holder’s taxable year over such U.S. holder’s adjusted tax basis in such ADSs or ordinary shares. The U.S. holder will be allowed a deduction for the excess, if any, of the adjusted basis of the ADSs or ordinary shares over their fair market value as of the close of the taxable year. However, deductions are allowable only to the extent of any net
mark-to-market
gains on the ADSs or ordinary shares included in the U.S. holder’s income for prior taxable years. Amounts included in a U.S. holder’s income under a
mark-to-market
election, as well as gain on the actual sale or other disposition of the ADSs or ordinary shares, will generally be taxed at ordinary income rates. Ordinary loss treatment will also apply to the deductible portion of any
mark-to-market
loss on the ADSs or ordinary shares, as well as to any loss realized on the actual sale or disposition of the ADSs or ordinary shares, to the extent that the amount of such loss does not exceed the net
mark-to-market
gains previously included for such ADSs or ordinary shares. A U.S. holder’s basis in the ADSs or ordinary shares will be adjusted to reflect any such income or loss amounts. A
mark-to-market
election will not apply to ADSs or ordinary shares held by a U.S. holder for any taxable year during which we are not a PFIC, but will remain in effect with respect to any subsequent taxable year in which we become a PFIC.
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The
mark-to-market
election will only be available for “marketable stock” which is stock that is traded in more than de minimis quantities on at least 15 days during each calendar quarter on a qualified exchange or other market, as defined in applicable United States Treasury regulations. We expect that the ADSs will continue to be listed and regularly traded on the NASDAQ Global Select Market, which is a qualified exchange for these purposes, and, consequently, that the
mark-to-market
election would be available to U.S. holders of our ADSs if and when we are a PFIC. U.S. holders should consult their own tax advisors regarding the availability and tax consequences of a
mark-to-market
election with respect to our ADSs and ordinary shares.
Another alternative taxation regime that may be available to some United States investors in PFICs, known as qualified electing fund, or QEF, treatment, will not be available to U.S. holders of our ADSs or ordinary shares. This is because QEF treatment requires the PFIC to supply annually certain information to its U.S. holders of ADSs or ordinary shares, and we do not intend to supply such information.
A U.S. holder of ADSs or ordinary shares in any year in which we are a PFIC will be required to file Internal Revenue Service Form 8621 regarding distributions received on the ADSs or ordinary shares and any gain realized on the disposition of the ADSs or ordinary shares. In addition, if we are a PFIC for a taxable year in which we pay a dividend, or for the prior taxable year, the lower rate on “qualified dividend income” discussed below with respect to dividends paid to certain
non-corporate
U.S. holders would not apply.
U.S. holders and prospective holders of our ADSs and ordinary shares are urged to consult their own tax advisors regarding the application of the PFIC rules to an investment in our ADSs or ordinary shares.
Taxation of Dividends and Other Distributions on ADSs or Ordinary Shares
Subject to the PFIC rules discussed above, the gross amount of our distributions to a U.S. holder with respect to ADSs or ordinary shares (including any amount withheld in respect of PRC taxes) generally will be included in a U.S. holder’s gross income as foreign source dividend income on the date of receipt by the depositary, in the case of ADSs, or by the U.S. holder, in the case of ordinary shares, but only to the extent that the distribution is paid out of our current or accumulated earnings and profits (as determined under United States federal income tax principles). To the extent, if any, that the amount of any such distribution exceeds our current and accumulated earnings and profits, it will be treated first as a
tax-free
return of the U.S. holder’s tax basis in the ADSs or the ordinary shares (thereby increasing the amount of any gain or decreasing the amount of any loss realized on the subsequent sale or disposition of such ADSs or ordinary shares) and thereafter as capital gain. Further, any distributions treated as dividends generally will not be
eligible for the dividends-received deduction allowed to corporations in respect of dividends received from other United States corporations.
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With respect to certainCertain
non-corporate
U.S. holders, including individual U.S. holders, may be taxed on dividend payments at a special rate (the applicable capital gains rate) that is applicable to “qualified dividend income” provided that (1) theour ADSs or ordinary shares are readily tradable on an established securities market in the United States, (2) we are not treated as a PFIC with respect to the U.S. holder (as discussed above) for our taxable year in which the dividend was paid and we were not a PFIC in the preceding taxable year, and (3) certain holding period requirements are met. Under Internal Revenue Service authority, our ordinary shares, or ADSs representing such shares, will be considered for the purpose of clause (1) above to be readily tradable on an established securities market in the United States if they are listed (as our ADSs are currently) on the NASDAQ Global Select Market. U.S. holders should consult their own tax advisors regarding the availability of the lower rate for dividends paid with respect to our ADSs or ordinary shares. Dividends will constitute foreign source income for foreign tax credit limitation purposes. If the dividends are taxed as qualified dividend income (as discussed above), the amount of the dividend taken into account for purposes of calculating the foreign tax credit limitation will be limited to the gross amount of the dividend, multiplied by the reduced tax rate applicable to qualified dividend income and divided by the highest tax rate normally applicable to dividends. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For foreign tax credit purposes, dividends paid on our ordinary shares will generally constitute “passive category income” but could, in the case of certain U.S. holders, constitute “general category income.”
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If PRC withholding taxes apply to dividends paid to a U.S. holder with respect to our ADSs or ordinary shares, subject to certain conditions and limitations, such PRC withholding taxes will be treated as foreign taxes eligible for credit against the U.S. holder’s United States federal income tax liability. The rules governing foreign tax credits are complex, and U.S. holders should consult their tax advisors regarding the availability of a foreign tax credit in such U.S. holders’ particular circumstances.
Taxation of Disposition of Shares
Subject to the PFIC rules discussed above, a U.S. holder will recognize taxable gain or loss on any sale, exchange or other taxable disposition of an ADSour ADSs or ordinary shareshares equal to the difference between the amount realized by the U.S. Holder for the ADSour ADSs or ordinary shareshares and the U.S. holder’s adjusted tax basis in the ADSour ADSs or ordinary share.shares. Such gain or loss will be capital gain or loss. A
non-corporate
U.S. holder, including an individual U.S. holder, who has held the ADSour ADSs or ordinary shareshares for more than one year will be eligible for reduced capital gains tax rates. The deductibility of capital losses is subject to limitations. Any such gain or loss that a U.S. holder recognizes will be treated as United States source income (or loss, in the case of losses, subject to certain limitations) for foreign tax credit limitation purposes.
As described above under “Taxation -PRC- PRC Taxation,” any gain from the disposition of our ADSs or ordinary shares may be subject to PRC tax. In such event, a U.S. holder that is eligible for the benefits of the income tax treaty between the United States and the PRC may elect to treat the gain as PRC source income for foreign tax credit purposes.
U.S. holders should consult their tax advisors regarding their eligibility for benefits under the income tax treaty between the United States and the PRC and their ability to credit any PRC tax withheld in respect of a sale of our ADSs or ordinary shares against their United States federal income tax liability.
Information Reporting and Backup Withholding
Dividend payments with respect to our ADSs or ordinary shares and proceeds from the sale, exchange or redemption of our ADSs or ordinary shares may be subject to information reporting to the Internal Revenue Service and possible United States backup withholding at a rate of 24% for taxable years beginning after December 31, 2017, and before January 1, 2026. Backup withholding will not apply, however, to a U.S. holder who furnishes a correct taxpayer identification number and makes any other required certifications or who is otherwise exempt from backup withholding and demonstrates such exemption if required.
U.S. holders who are required to establish their exempt status must provide such certification on Internal Revenue Service Form
W-9.
U.S. holders should consult their tax advisors regarding the application of the United States information reporting and backup withholding rules.
Individual U.S. holders, and certain entities that are U.S. holders, that own “specified foreign financial assets” with an aggregate value in excess of $50,000 are generally required to file an information statement along with their tax returns, currently on Form 8938, with respect to such assets. “Specified foreign financial assets” include any financial accounts held at a
non-U.S.
financial institution, as well as securities issued by a
non-U.S.
issuer (which would include our ADSs and ordinary shares) that are not held in accounts maintained by financial institutions. Higher reporting thresholds apply to certain individuals living abroad and to certain married individuals. Regulations extend this reporting requirement to certain entities that are treated as formed or availed of to hold direct or indirect interests in specified foreign financial assets based on certain objective criteria. U.S. holders who fail to report the required information could be subject to substantial penalties. Prospective investors should consult their own tax advisors concerning the application of these rules to their investment in our ADSs and ordinary shares, including the application of the rules to their particular circumstances.
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Prospective purchasers of our ADSs or ordinary shares should consult their own tax advisor regarding the application of the United States federal income tax laws to their particular situations as well as any tax consequences resulting from purchasing, holding or disposing of our ADSs and Ordinary Shares,ordinary shares, including the applicability and effect of the tax laws of any state, local or foreign jurisdiction and including estate, gift and inheritance laws.
Available Additional Information
We are subject to the periodic reporting and other informational requirements of the Exchange Act. Under the Exchange Act, we are required to file reports and other information with the SEC.
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Copies of reports and other information, when so filed, may be inspected without charge and may be obtained at prescribed rates at the public reference facilities maintained by the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain information regarding the Washington, D.C. Public Reference Room by calling the SEC at
1-800-SEC-0330.
The SEC also maintains a Website at www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system. As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.
As permitted under NASDAQ Listing Rule 5250(d)(1)(C), we will post our annual reports filed with the SEC on our Web site at http://investors.sohu.com. We will not furnish hard copies of such reports to holders of our ADSs unless we are requested to do so in writing by a holder. Upon receipt of such a request, we will provide a hard copy of such reports to such requesting holder free of charge.
 
ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY EXCHANGE RATE RISK
While our reporting currency is the U.S. dollar, to date the majority of our revenues and costs are denominated in RMB and a significant portion of our assets and liabilities are denominated in RMB. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between the U.S. dollar and the RMB. If the RMB depreciates against the U.S. dollar, the value of our RMB revenues and assets as expressed in our U.S. dollar financial statements will decline. For example, our revenues for 20202021 were $0.75$0.84 billion and our total assets as of December 31, 20202021 were $2.82$2.24 billion, representing revenue of RMB4.89RMB5.36 billion and total assets of RMB18.40RMB14.28 billion at the central parity rate of RMB6.5249RMB6.3757 to $1.00 on December 31, 2020.2021. If the value of the RMB were to depreciate by approximately 10% to RMB7.1774RMB7.0133 to $1.00, the value of the same amount of
RMB-denominated
revenue and total assets in U.S. dollars would be $0.68$5.89 billion and $2.56$15.71 billion, respectively.
The RMB is currently freely convertible under the “current account,” which includes dividends, trade and service-related foreign exchange transactions, but not under the “capital account,” which includes foreign direct investment. In addition, commencing on July 21, 2005, China reformed its exchange rate regime by changing to a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies. Under the managed floating exchange rate regime, the RMB is no longer pegged to the U.S. dollar, and the People’s Bank of China will announce the closing prices of foreign currencies such as the U.S. dollar traded against the RMB in the inter-bank foreign exchange market after the closing of the market on each business day, and will make such prices the central parity for trading against the RMB on the following business day. On June 19, 2010, the People’s Bank of China announced that it had decided to proceed further with the reform of the RMB exchange rate regime to enhance the flexibility of the RMB exchange rate and that emphasis would be placed on reflecting market supply and demand with reference to a basket of currencies. While so indicating its intention to make the RMB’s exchange rate more flexible, the People’s Bank of China ruled out any sharp fluctuations in the currency or a
one-off
adjustment. On March 17, 2014, the People’s Bank of China announced a policy to expand the maximum daily floating range of RMB trading prices against the U.S. dollar in the inter-bank spot foreign exchange market to 2%. In the long term, the RMB may appreciate or depreciate more significantly in value against the U.S. dollar or other foreign currencies, depending on the market supply and demand with reference to a basket of currencies.
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To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the effectiveness of these hedges may be limited and we may not be able to successfully hedge our exposure. Accordingly, we may incur economic losses in the future due to foreign exchange rate fluctuations, which could have a negative impact on our financial condition and results of operations.
INFLATION RATE RISK
According to the National Bureau of Statistics of China, the consumer price index grew 2.5%0.9% in 2020,2021, compared to an increase of 2.9%2.5% in 2019. There2020. While the increase for 2021 represented a decline in the rate of inflation compared to 2020, there may be a furtheran increase in the rate of inflation in the future, which could have an adverse effect on our business.
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INTEREST RATE RISK
The basic objectives of our investment program are to protect the invested funds from excessive risk and to provide for liquidity that is sufficient to meet operating and investment cash requirements. Under the investment policy, our excess cash is invested in high-quality securities which are limited as to length of time to maturity and the amount of credit exposure.
Our exposure to interest rate risk primarily relates to the interest income generated from excess cash invested in demand deposits, and interest expense generated from loans to Changyou from Offshore banks. We have not used derivative financial instruments in our investment portfolio in order to reduce this risk. We have not been exposed nor do we anticipate being exposed to material risks due to changes in interest rates.
 
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
The following table summarizes the fees and charges that a holder of our ADSs may have to pay, directly or indirectly, pursuant to the Deposit Agreement and the types of services and the amount of the fees or charges paid therefore:
 
Persons depositing or withdrawing shares or ADS holders
must pay:
  
For:
$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)  
•   Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property
  
•   Cancellation of ADSs for the purpose of withdrawal, including if the Deposit Agreement terminates
$0.05 (or less) per ADS  
•   Any cash distribution to ADS holders
A fee equivalent to the fee that would be payable if securities
distributed to you had been shares and the shares had been
deposited for issuance of ADSs
  
•   Distribution of securities distributed to holders of deposited securities which are distributed by the depositary to ADS holders
$0.05 (or less) per ADSs per calendar year  
•   Depositary services
Registration or transfer fees  
•   Transfer and registration of shares on our share register to or from the name of the depositary or its agent when you deposit or withdraw shares
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Persons depositing or withdrawing shares or ADS holders
must pay:
For:
Expenses of the depositary  
•   Cable, telex and facsimile transmissions (when expressly provided in the Deposit Agreement)
  
•   converting foreign currency to U.S. dollars
Taxes and other governmental charges the depositary or the
custodian have to pay on any ADS or share underlying an ADS,
for example, stock transfer taxes, stamp duty or withholding
taxes
  
•   As necessary
Any charges incurred by the depositary or its agents for servicing
the deposited securities
  
•   As necessary
Pursuant to an agreement dated April 23, 2018, between us and the Bank of New York Mellon, the depositary for our ADSs, the depositary reimbursed us in cash for our expenses, including investor relations expenses, legal fees, accounting fees, NASDAQ listing application and listing fees, and related expenses, of $nil, which figures are net of U.S. withholding tax, related to the establishment of an American depositary receipt facility.
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PART II
 
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not Applicable.
 
ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
On May 31, 2018, effective at 4:30 PM Eastern Time (such date and time, the “Effective Time”), pursuant to a proposal (the “Liquidation Proposal”) for the dissolution of our predecessor Sohu.com Inc., a Delaware corporation, and adoption of a plan of complete liquidation and dissolution of Sohu.com Inc. that was approved by the stockholders of Sohu.com Inc. at a special meeting of stockholders held on May 29, 2018, Sohu.com Inc. was dissolved; all outstanding shares of the common stock of Sohu.com Inc. were cancelled; ADSs representing all our outstanding ordinary shares were distributed by Sohu.com Inc. on a
share-for-share
basis to the stockholders of Sohu.com Inc. as of immediately prior to the Effective Time.
The rights of a former stockholder of Sohu.com Inc. were governed by the Delaware General Corporation Law and the certificate of incorporation and bylaws of Sohu.com Inc. After the Effective Time, those stockholders became the holders of ADSs representing our ordinary shares, and the rights of our shareholders will be governed by the Companies Act of the Cayman Islands, our Memorandum and Articles of Association, and the Deposit Agreement. Many of the principal attributes of shares of Sohu.com Inc.’s common stock and our ordinary shares, including economic and voting rights, are similar. However, there are differences between rights under the Delaware General Corporation Law and under the Companies Act. In addition, there are differences between the certificate of incorporation and bylaws of Sohu.com Inc. and our Memorandum and Articles of Association. For a summary of certain material differences in the rights of a holder of shares of Sohu.com Inc. common stock and a holder of our ordinary shares, you may refer to the section titled “Comparison of Rights of Sohu Delaware Stockholders and Sohu Cayman Shareholders” in our Registration Statement on Form
F-4
(File
No. 333-224069)
filed with the SEC on April 19, 2018 and in Sohu.com Inc.’s and our joint proxy statement/prospectus filed with the SEC on April 23, 2018, which section is incorporated herein by reference.
USE OF PROCEEDS
On July 17, 2000, our predecessor Sohu.com Inc. completed an underwritten IPO of shares of its common stock pursuant to a Registration Statement on Form
S-1
(SEC file
No. 333-96137)
that became effective on July 10, 2000. There has been no change in the information regarding use of proceeds from the IPO that was included in our Annual Report on Form
20-F
for the year ended December 31, 2019 that we filed with the SEC on April 21, 2020.
 
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ITEM 15.
CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our “disclosure controls and procedures” (as defined in Rules
13a-15(e)
and
15d-15(e)
under the Securities Exchange Act) as of the end of the period covered by this report (the “Evaluation Date”), have concluded that as of the Evaluation Date our disclosure controls and procedures were effective and designed to ensure that all material information relating to Sohu.com Limited required to be included in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and to ensure that information required to be disclosed is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules
13a-15(f)
and
15d-15(f)
under the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2020.2021.
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Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The effectiveness of our internal control over financial reporting as of December 31, 20202021 has been audited by PricewaterhouseCoopers Zhong Tian LLP, an independent registered public accounting firm, as stated in their report which is included in this report on pages
F-2.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have not been any changes in our internal control over financial reporting, as such term is defined in Rules
13a-15(f)
and
15d-15(f)
under the Exchange Act during the Company’s fiscal year ended December 31, 20202021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
ITEM 16A.
AUDIT COMMITTEE FINANCIAL EXPERT
Our Board of Directors has determined that Dr. Dave Qi is an “audit committee financial expert” as defined under the applicable SEC rules and Rule 5605(c)(2) of the NASDAQ Listing Rules. Our Board of Directors has determined that all three members of our audit committee are “independent” under Rule
10A-3
under the Securities Exchange Act of 1934 and Rule 5605 of the NASDAQ Listing Rules.
 
ITEM 16B.
CODE OF ETHICS
Our Board of Directors adopted a code of ethics and conduct that is applicable to all of our directors, officers and employees. A copy of our code of ethics and conduct is filed as an exhibit to this annual report, and is also posted on our Website at
http://investors.sohu.com
.
 
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ITEM 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by PricewaterhouseCoopers Zhong Tian LLP, our principal external auditor, and its affiliates for the periods indicated below.
 
   
For the year ended
December 31,
 
   
2019
   
2020
 
   
(in thousands)
 
Audit fees
(1)
  $2,654   $2,304 
Tax fees
(2)
   567    487 
Audit related fees
(3)
   142    67 
All other fees
   2    2 
  
 
 
   
 
 
 
Total
  $3,365   $2,860 
   
For the year ended

December 31,
 
   
2020
   
2021
 
   
(in thousands)
 
Audit fees
(1)
  $2,304   $1,991 
Tax fees
(2)
   487    243 
Audit related fees
(3)
   67    36 
All other fees
   2    2 
  
 
 
   
 
 
 
Total
  $2,860   $2,272 
(1)
“Audit fees” means the aggregate fees incurred in each of the fiscal years listed for professional services rendered by our principal auditors for the audit of our annual financial statements and our internal controls over financial reporting.
(2)
“Tax fees” means the aggregate fees incurred in each of the fiscal years listed for professional services rendered by our principal auditors for tax compliance and tax advice.
(3)
“Audit-related fees” means the aggregate fees incurred in each of the fiscal years listed for professional services rendered by our principal auditors related to the audit of our financial statements and our internal controls over financial reporting that are not reported under “Audit Fees” and consultation on accounting standards or transactions.
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Audit Committee
Pre-Approval
Policies and Procedures
Our audit committee has adopted procedures which set forth the manner in which the committee will review and approve all audit and
non-audit
services to be provided by PricewaterhouseCoopers Zhong Tian LLP before that firm is retained for such services. The
pre-approval
procedures are as follows:
 
Any audit or
non-audit
service to be provided to us by the independent accountant must be submitted to the audit committee for review and approval, with a description of the services to be performed and the fees to be charged.
 
The audit committee in its sole discretion then approves or disapproves the proposed services and documents such approval, if given, through written resolutions or in the minutes of meetings, as the case may be.
ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not Applicable.
 
ITEM 16E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Not Applicable.On November 13, 2021, our Board of Directors authorized a share repurchase program of up to $100 million of outstanding Sohu ADSs over a twelve-month period from November 13, 2021 to November 12, 2022, and authorized our management to purchase ADSs under the ADS repurchase program from time to time at their discretion at prevailing market prices in accordance with Rule
10b-18
and Rule
10b5-1
under the Exchange Act and to determine the timing and amount of any purchases of Sohu ADSs based on their evaluation of market conditions, the trading price of Sohu ADSs and other factors. The table below provides information on our repurchases of Sohu ADSs pursuant to the ADS repurchase program during the year ended December 31, 2021.
   
Total

Number

of ADSs

Purchased
Under the
Program
   
Average

Price

Paid Per

ADS*
   
Approximate

Dollar Value of

ADSs that May

Yet Be Purchased

Under the Program

(in million)
 
2021 Month
      
December (from December 1 to December 31)
   1,129,228    16.57    81.3 
*
Cost and average price data exclude trading commissions. There may be some variation in figures due to rounding.
ITEM 16F.
CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
Not Applicable.
 
ITEM 16G.
CORPORATE GOVERNANCE
Not Applicable.
 
ITEM 16H.
MINE SAFETY DISCLOSURE
Not Applicable.
ITEM 16I.
DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not Applicable.
PART III
 
ITEM 17.
FINANCIAL STATEMENTS
We have elected to provide financial statements pursuant to Item 18.
 
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ITEM 18.
FINANCIAL STATEMENTS
The consolidated financial statements of Sohu and its subsidiaries and VIEs are included at the end of this annual report.
 
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ITEM 19.
EXHIBITS
Exhibit No.
 
Description
1.1(1) 
Amended and Restated Memorandum and Articles of Association of the Registrant.
2.1(22)2.1(18) 
Registrant’s Specimen American Depositary Receipt (included in Exhibit 2.2).
2.2(22)2.2(18) 
Amended and Restated Deposit Agreement, dated January 14, 2019, among the Registrant, the depositary and all registered holders and beneficial owners of the American Depositary Shares.
2.3(22)2.3(18) 
Shareholders’ Rights Agreement, dated as of January 14, 2019, between the Registrant and The Bank of New York Mellon.
4.1(2) 
Loan and Share Pledge Agreement dated November 19, 2001 among Sohu.com Inc., Dr. Charles Zhang, and Li Wei.
4.2(3) 
Real Property Purchase Agreement between Sohu Era and Vision Hua Qing.
4.3(4) 
Master Transaction Agreement, dated January 1, 2009, by and between Sohu.com Inc. and Changyou.com Limited.
4.4(4) 
Project Cooperation Agreement, dated November 20, 2009, by and between Beijing Raycom Real Estate Development Co., Ltd. and Beijing Sohu Media.
4.5(5) 
Amended and Restated Marketing Services Agreement, dated January 1, 2010, by and between Sohu.com Inc. and Changyou.com Limited.
4.6(6) 
Changyou Project Cooperation Agreement dated August 23, 2010.
4.7(6) 
Amended and Restated 2010 Stock Incentive Plan.
4.8(6) 
Cooperation Agreement, dated September 30, 2010. (Portions of this exhibit have been omitted pursuant to rules of the SEC permitting a registrant to omit confidential information that is not material, the release of which could cause competitive harm to the registrant).
4.9(7) 
Master Transaction Agreement, dated as of November 29, 2011, between Sohu.com Inc., Sohu Internet, Sohu Era, and Sohu Media, on the one hand, and Changyou.com Limited, Changyou.com HK, Gamespace, and Guanyou Gamespace, on the other hand.
4.10(7) 
Amended and Restated Non-Competition Agreement, dated as of November 29, 2011, between Changyou.com Limited and Sohu.com Inc.
4.11(7) 
Services Agreement, dated as of November 29, 2011, between Changyou Gamespace and Sohu Media.
4.12(8) 
Sohu Video 2011 Share Incentive Plan.
4.13(8) 
English Translation of Services and Maintenance Agreement, dated November 30, 2007, between AmazGame and Gamease.
4.14(8) 
English Translation of Technology Support and Utilization Agreement, dated August 20, 2008, between AmazGame and Gamease.
4.15(8)4.15(9) 
English Translation2014 Share Incentive Plan of Exclusive Technology Consulting and Services Agreement, dated September 26, 2010, between Sogou Technology and Sogou Information.Changyou.com Limited.
177
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4.16(9) English Translation of Loan Agreement, dated December 2, 2013, between Sogou Technology and Xiaochuan Wang.
4.17(9)English Translation of Share Pledge Agreement, dated December 2, 2013, among Sogou Technology, Sogou Information, and the shareholders of Sogou Information.
4.18(9)English Translation of Exclusive Equity Interest Purchase Rights Agreement, dated December 2, 2013, among Sogou Technology, Sogou Information, and the shareholders of Sogou Information.
4.19(9)English Translation of Business Operation Agreement, dated December 2, 2013, among Sogou Technology, Sogou Information, and the shareholders of Sogou Information.
4.20(9)English Translation of Power of Attorney, dated December 2, 2013, by the shareholders of Sogou Information in favor of Sogou Technology.
4.21(9)English Translation of Exclusive Technology Consulting and Services Agreement August 2, 2012, between Sohu Internet and Sohu Era.
4.22(10)2010 Share Incentive Plan of Sogou Inc. (as amended and restated)
4.23(10)2014 Share Incentive Plan of Changyou.com Limited.
4.24(10)English Translation of Loan Agreement, dated November 15, 2011, between Video Tianjin and Ye Deng, the shareholder of Tianjin Jinhu.
4.25(10)
English Translation of Loan Agreement, dated December 4, 2013, between Video Tianjin and Xuemei Zhang, the shareholder of Tianjin Jinhu.
4.26(10)4.17(9) English Translation of Equity Pledge Agreement, dated November 15, 2011, between Video Tianjin and Ye Deng, the shareholder of Tianjin Jinhu.
4.27(10)
English Translation of Equity Pledge Agreement, dated December 4, 2013, between Video Tianjin and Xuemei Zhang, the shareholder of Tianjin Jinhu.
4.28(10)4.18(9) English Translation of Exclusive Equity Interest Purchase Right Agreement, dated December 4, 2013, between Video Tianjin, Tianjin Jinhu and the shareholders of Tianjin Jinhu.
4.29(10)English Translation of Business Operation Agreement, dated December 4, 2013, among Video Tianjin, Tianjin Jinhu and the shareholders of Tianjin Jinhu.
4.30(10)English Translation of Powers of Attorney, dated December 4, 2013, by the shareholders of Tianjin Jinhu in favor of Video Tianjin.
4.31(10)
English Translation of Exclusive Technology Consulting and Services Agreement, dated December 4, 2013, between Video Tianjin and Tianjin Jinhu.
4.32(10)4.19(9) 
Loan and Share Pledge Agreement, effective as of April 28, 2014, by and among Sohu.com Limited, Charles Zhang, and Wei Li. (Portions of this exhibit have been omitted pursuant to rules of the SEC permitting a registrant to omit confidential information that is not material, the release of which could cause competitive harm to the registrant.)
4.33(11)4.20(10) 
English Translation of Loan Agreement, dated April 15, 2015, between AmazGame and High Century.
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4.34(11)4.21(10) 
English Translation of Equity Interest Pledge Agreement, dated April 15, 2015 among AmazGame, Gamease and High Century.
4.35(11)4.22(10) 
English Translation of Equity Interest Purchase Right Agreement, dated April 15, 2015, between AmazGame, Gamease and High Century.
4.36(11)4.23(10) 
English Translation of Power of Attorney, dated April 15, 2015, by High Century in favor of AmazGame.
4.37(11)4.24(10) 
English Translation of Business Operation Agreement, dated April 15, 2015, among AmazGame, Gamease and High Century.
4.38(12)4.25(11) 
Loan and Share Pledge Agreement, dated July 1, 2015, among Sohu Media, Charles Zhang and Wei Li.
4.39(12)4.26(11) 
Loan and Share Pledge Agreement, dated July 1, 2015, among Focus HK, Charles Zhang and Wei Li.
4.40(13)4.27(12) 
English translation of Loan Agreement, dated July 6, 2015, between Gamespace and Changyou Star.
4.41(13)4.28(12) 
English translation of Equity Interest Purchase Right Agreement, dated July 6, 2015, among Gamespace, Guanyou Gamespace and Changyou Star.
4.42(13)4.29(12) 
English translation of Equity Pledge Agreements, dated July 6, 2015, among Gamespace, Guanyou Gamespace and Changyou Star.
4.43(13)4.30(12) 
English translation of Business Operation Agreement, dated July 6, 2015, among Gamespace, Guanyou Gamespace and Changyou Star.
4.44(13)4.31(12) 
English translation of Power of Attorney, dated July 6, 2015, executed by Changyou Star in favor of Gamespace.
4.45(13)4.32(12) 
English translation of Share Purchase Agreement, dated April 16, 2015, between Gamease and Shanghai Yong Chong.Chong Investment Center LP.
4.46(14)4.33(13) English Translation of Loan Agreement, dated as of October 24, 2016, between AmazGame and Sohu Media.
4.47(15)
English translation of Employment Agreement effective as of April 1, 2012, between Sohu Era and Joanna Lv.
4.48(15)4.34(13) 
English translation of Agreement Changing One Party to Employment Agreement effective as of April 1, 2013, among Sohu Era, Joanna Lv and Sohu Media.
4.49(15)4.35(14) English translation of Employment Agreement effective as of November 30, 2012, between Sogou Technology and Xiaochuan Wang.
4.50(16)
English translation of Credit Agreement, dated May 19, 2017, between Ping An Bank and Beijing Sohu New Media Information Technology Co., Ltd.
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4.51(16)4.36(14) 
English translation of Credit Agreement, dated May 19, 2017, between Ping An Bank and Fox Information Technology (Tianjin) Limited.
4.52(16)4.37(14) 
English translation of Credit Agreement, dated May 19, 2017, between Ping An Bank and Tianjin Jinhu Culture Development Co., Ltd.
4.53(16)4.38(14) 
English translation of Form of Loan AgreementAgreement..
4.54(16)4.39(14) 
English translation of Asset Pledge Agreement, dated May 19, 2017, between Ping An Bank and Beijing Sohu New Momentum Information Technology Co., Ltd.
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4.55(16)4.40(14) 
English translation of Asset Pledge Agreement, dated May 19, 2017, between Ping An Bank and Beijing Sohu New Media Information Technology Co., Ltd.
4.56(16)4.41(14) 
English translation of Asset Pledge Agreement, dated May19,May 19, 2017, between Ping An Bank and Beijing Sohu New Era Information Technology Co., Ltd.
4.57(16)4.42(14) 
English translation of Guaranty Agreement, dated May 19, 2017, between Ping An Bank and Sohu.com (Game) Limited.
4.58(16)4.43(14) 
English translation of Commitment Letter, dated May 19, 2017, between Ping An Bank and Sohu.com Inc.
4.59(16)4.44(14) 
English translation of Strategic Cooperation Agreement, dated May 19, 2017, between Ping An Bank and Sohu.com Inc.
4.60(17)4.45(15) 
English translation of Amendment to the Original PAB Credit Agreements, dated September 1, 2017.
4.61(17)4.46(15) 
English translation of Credit Agreement, dated September 7, 2017, between ICBC and Beijing Sohu New Media Information Technology Co., Ltd., Fox Information Technology (Tianjin) Limited, and Beijing Sohu New Momentum Information Technology Co., Ltd.
4.62(17)4.47(15) 
English translation of Asset Pledge Agreement, dated September 7, 2017, between ICBC and Beijing Sohu New Momentum Information Technology Co., Ltd.
4.63(17)4.48(15) 
English translation of Asset Pledge Agreement, dated September 7, 2017, between ICBC and Beijing Sohu New Media Information Technology Co., Ltd.
4.64(17)4.49(15) 
English translation of Commitment Letter, dated September 7, 2017, between ICBC and Sohu.com Inc.
4.65(18)4.50(16) 
VotingEnglish translation of Credit Facility Agreement, dated September 16, 2013 among Sogou Inc.April 11, 2018, between CMB and Beijing Sohu New Media Information Technology Co., Sohu.com (Search) Limited, Photon, Xiaochuan Wang, and other members of Sogou Management, as amended as of August 11, 2017Ltd..
4.66(18)4.51(16) 
VotingEnglish translation of Asset Pledge Agreement, dated as of AugustApril 11, 2017 among Sogou Inc.2018, between CMB and Beijing Sohu New Era Information Technology Co., Sohu.com (Search) Limited, and THL A21 LimitedLtd..
4.67(18)4.52(16) 
Registration RightsEnglish translation of Asset Pledge Agreement, dated as of AugustApril 11, 2017 among Sogou Inc.2018, between CMB and Beijing Sohu New Media Information Technology Co., Sohu.com (Search) Limited, Photon and THL A21 LimitedLtd..
4.68(18)4.53(16) 
English Translationtranslation of Second Amended and Restated Mobile Browser Cooperation Agreement,Commitment Letter, dated September 25, 2017, between Shenzhen Tencent Computer Systems Co., Ltd. and Sogou Inc., Sogou Technology, Sogou Network, Sogou Information and Shenzhen Shi Ji Guang Su Information Technology Co., Ltd. (Portions of this exhibit have been omitted pursuant to rules ofApril 11, 2018, issued by the SEC permitting a registrant to omit confidential information that is not material, the release of which could cause competitive harm to the registrant.)CMB.
4.69(23)4.54(17) 
English Translation of Cooperation Agreement between Weixin Official Platform and Sogou Search dated March 1, 2019, between Shenzhen Tencent Computer Systems Co., Ltd. and Sogou Information.Sohu.com Limited 2018 Share Incentive Plan.
4.70(18)4.55(19) 
English Translation of Amended and Restated Business Development and Resource Sharing Agreement, dated September 25, 2017, between Shenzhen Tencent Computer Systems Co., Ltd. and Sogou Inc., Sogou Technology, Sogou Network, Sogou Information, Shenzhen Shi Ji Guang Su Information Technology Co., Ltd. and Sohu.comChangyou.com Limited 2019 Share Incentive Plan..
4.70A(23)English Translation of Supplemental Agreement to Amended and Restated Business Development and Resource Sharing Agreement, dated September 20, 2018, between Shenzhen Tencent Computer Systems Co., Ltd. and Sogou Inc., Sogou Technology, Sogou Network, Sogou Information, Shenzhen Shi Ji Guang Su Information Technology Co., Ltd. and Sohu.com Limited.
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4.70B(23)4.56(19) English Translation of Second Supplemental Agreement to Amended and Restated Business Development and Resource Sharing Agreement, dated October 24, 2019, between Shenzhen Tencent Computer Systems Co., Ltd. and Sogou Inc., Sogou Technology, Sogou Network, Sogou Information, Shenzhen Shi Ji Guang Su Information Technology Co., Ltd. and Sohu.com Limited.
4.70C(26)English Translation of Third Supplemental Agreement to Amended and Restated Business Development and Resource Sharing Agreement, dated February 14, 2021, between Shenzhen Tencent Computer Systems Co., Ltd. and Sogou Inc., Sogou Technology, Sogou Network, Sogou Information, Shenzhen Shi Ji Guang Su Information Technology Co., Ltd. and Sohu.com Limited.
4.71(23)
English Translation of SOHU.COM Internet Plaza Office Building Lease, dated December 25, 2019, between Beijing Sohu New Era Information Technology Co., Ltd. and Beijing Sogou Network Technology Co., Ltd.
4.72(23)4.57(19) 
English Translation of SOHU.COM Internet Plaza Office Building Lease, dated December 25, 2019, between Beijing Sohu New Media Information Technology Co., Ltd. and Beijing Sogou Information Services Co., Ltd.
4.73(23)4.58(19) 
English Translation of SOHU.COM Internet Plaza Office Building Lease, dated December 25, 2019, between Beijing Sohu New Media Information Technology Co., Ltd. and Beijing Sogou Technology Development Co., LtdLtd..
4.74(19)4.59(20) 
Seventh AmendedEmployment Agreement effective as of January 1, 2021 between Changyou.com Limited and Restated Memorandum of Association and Third Amended and Restated Articles of Association of Sogou Inc.Dewen Chen.
4.75(19)4.60(20) 
Sogou Inc. 2017 Share Incentive Plan,Employment Agreement effective as amendedof January 1, 2021 between Sohu.com Limited and restatedCharles Zhang..
4.76(22)4.61(21) 
English Translation of Technology Support and Utilization Agreement, dated September 1, 2010, between Guanyou Gamespace and Gamespace.
4.62(21)
English Translation of Technology Support and Utilization Agreement, dated November 1, 2011, between Guanyou Gamespace and Gamespace.
4.63(21)
English Translation of Loan Agreement, dated October 20, 2016, between Video Tianjin and Xiufeng Deng, the shareholder of Tianjin Jinhu.
4.64(21)
English Translation of Equity Pledge Agreement, dated October 20, 2016, between Video Tianjin and Xiufeng Deng, the shareholder of Tianjin Jinhu.
4.65(21)
English Translation of Exclusive Equity Interest Purchase Right Agreement, dated October 20, 2016, between Video Tianjin, Tianjin Jinhu and Xiufeng Deng, the shareholder of Tianjin Jinhu.
4.66(21)
English Translation of Business Operation Agreement, dated October 20, 2016, among Video Tianjin, Tianjin Jinhu and Xiufeng Deng, the shareholder of Tianjin Jinhu.
4.67(21)
English Translation of Power of Attorney, dated October 20, 2016, by Xiufeng Deng, the shareholder of Tianjin Jinhu, in favor of Video Tianjin.
4.68(21)
English Translation of Exclusive Equity Interest Purchase Right Agreement, dated October 20, 2016, between Video Tianjin, Tianjin Jinhu and Xuemei Zhang, the shareholder of Tianjin Jinhu.
4.69(21)
English Translation of Business Operation Agreement, dated October 20, 2016, among Video Tianjin, Tianjin Jinhu and Xuemei Zhang, the shareholder of Tianjin Jinhu.
4.70(21)
English Translation of Power of Attorney, dated October 20, 2016, by Xuemei Zhang, the shareholder of Tianjin Jinhu, in favor of Video Tianjin.
4.71(21)
English Translation of Exclusive Technology Consulting and Services Agreement August 2, 2020, between Sohu Era and Sohu Internet.
4.72(21)
English Translation of Services and Maintenance Agreement, dated January 1, 2021, between Gamease and Changyou Chuangxiang.
4.73(21)
English Translation of Technology Support and Utilization Agreement, dated January 1, 2021, between Gamease and Changyou Chuangxiang.
4.74(21)
Employment Agreement effective as of May 1, 20182021 between Sohu.com Limited and Joanna Lv.
4.77(20)English translation of Credit Facility Agreement, dated April 11, 2018, between CMB and Beijing Sohu New Media Information Technology Co., Ltd.
4.78(20)English translation of Asset Pledge Agreement, dated April 11, 2018, between CMB and Beijing Sohu New Era Information Technology Co., Ltd.
4.79(20)English translation of Asset Pledge Agreement, dated April 11, 2018, between CMB and Beijing Sohu New Media Information Technology Co., Ltd.
4.80(20)English translation of Commitment Letter, dated April 11, 2018, issued by the registrant to CMB.
4.81(21)Sohu.com Limited 2018 Share Incentive Plan.
4.82(23)Changyou.com Limited 2019 Share Incentive Plan.
4.83(23)Facility Agreement, dated April 3, 2020, among Sohu.com Limited, Sohu Game, and ICBC Tokyo.
4.84(23)Equitable Share Mortgage relating to shares in Sohu Game, dated April 3, 2020, between All Honest International Limitedand ICBC Tokyo.
4.85(23)Equitable Share Mortgage relating to shares in Changyou, dated April 3, 2020, between Sohu Game and ICBC Tokyo.
4.86(24)Share Purchase Agreement, dated as of September 29, 2020, by and among Sohu.com Limited, Sohu.com (Search) Limited, and TitanSupernova Limited.
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4.86A(25)4.75(21) 
Amendment No.English translation of Technology service agreement, dated January 1, to Share Purchase Agreement, dated as of December 1, 2020, by2022 between Donglin and among Sohu.com Limited, Sohu.com (Search) Limited, and TitanSupernova LimitedSohu Media..
4.87(24)8.1(21) Agreement and Plan of Merger, dated as of September 29, 2020, by and among Sogou Inc., THL A21 Limited, TitanSupernova Limited, and Tencent Mobility Limited.
4.87A(25)Amendment No. 1 to Agreement and Plan of Merger, dated as of December 1, 2020, by and among Sogou Inc., THL A21 Limited, TitanSupernova Limited, and Tencent Mobility Limited.
4.88(26)English Translation of Offshore Credit Agreement, dated December 4, 2020, between Changyou.com HK Limited and China Merchants Bank Co., Ltd.
4.89(26)English Translation of Pledge Agreement, dated December 28, 2020, among Beijing AmazGame Age Internet Technology Co., Ltd. and Beijing Branch of China Merchants Bank Co., Ltd.
4.90(26)English Translation of Pledge Agreement, dated January 15, 2021, among Beijing AmazGame Age Internet Technology Co., Ltd. and Beijing Branch of China Merchants Bank Co., Ltd.
4.91(26)English Translation of Maximum Mortgage Agreement, December 10, 2020, among Beijing Sohu New Momentum Information Technology Co., Ltd. and Beijing Branch of China Merchants Bank Co., Ltd.
4.92(26)English Translation of Maximum Mortgage Agreement, December 10, 2020, among Beijing Sohu New Media Information Technology Co., Ltd. and Beijing Branch of China Merchants Bank Co., Ltd.
4.93(26)English Translation of Letter of Comfort, dated December 9, 2020, issued by Changyou.com Limited to Beijing Branch of China Merchants Bank Co., Ltd.
4.94(26)English Translation of Statement of Undertaking, dated December 10, 2020, issued by Sohu.com Ltd to Beijing Branch of China Merchants Bank Co., Ltd.
4.95(26)Employment Agreement effective as of January 1, 2021 between Changyou.com Limited and Dewen Chen.
4.96(26)Employment Agreement effective as of January 1, 2021 between Sohu.com Limited and Charles Zhang.
8.1(26)
Principal Subsidiaries and VIEs of the Registrant.
11.1(22)11.1(18) 
Code of Ethics and Conduct for Directors, Officers and Employees.
12.1(26)12.1(21) 
Rule 13a-14(a)/15d-14(a) Certification of Dr. Charles Zhang.
12.2(26)12.2(21) 
Rule 13a-14(a)/15d-14(a) Certification of Joanna Lv.
13.1(26)13.1(21) 
Section 1350 Certification of Dr. Charles Zhang.
13.2(26)13.2(21) 
Section 1350 Certification of Joanna Lv.
15.1(26)15.1(21) 
Consent of Independent Registered Public Accounting Firm.
15.2(26)15.2(21) 
Consent of Haiwen & Partners, PRC Counsel.
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(1)
Incorporated herein by reference to Sohu.com Limited’s Registration Statement on Form
F-4
(File
No. 333-224069)
filed with the SEC on April 19, 2018.
 
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(2)
Incorporated herein by reference to Sohu.com Inc.’s Annual Report on Form 10-K filed on March 15, 2002.
(3)
Incorporated herein by reference to Sohu.com Inc.’s Quarterly Report on Form 10-Q filed on May 8, 2007.
(4)
Incorporated herein by reference to Sohu.com Inc.’s Annual Report on Form 10-K filed on February 26, 2010.
(5)
Incorporated herein by reference to Sohu.com Inc.’s Quarterly Report on Form 10-Q filed on May 7, 2010.
(6)
Incorporated herein by reference to Sohu.com Inc.’s Quarterly Report on Form 10-Q filed on November 8, 2010.
(7)
Incorporated herein by reference to Sohu.com Inc.’s Current Report on Form
8-K
filed on December 1, 2011.
(8)
Incorporated herein by reference to Sohu.com Inc.’s Annual Report on Form 10-K filed on February 28, 2013.
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Table of Contents
(9)
Incorporated herein by reference to Sohu.com Inc.’s Annual Report on Form 10-K filed on February 28, 2014.
(10)
Incorporated herein by reference to Sohu.com Inc.’s Annual Report on Form 10-K filed on March 2, 2015.
(11)(10)
Incorporated herein by reference to Sohu.com Inc.’s Quarterly Report on Form
10-Q
filed on August 7, 2015.
(12)(11)
Incorporated herein by reference to Sohu.com Inc.’s Quarterly Report on Form
10-Q
filed on November 6, 2015.
(13)(12)
Incorporated herein by reference to Sohu.com Inc.’s Annual Report on Form 10-K filed on February 26, 2016.
(14)
Incorporated herein by reference to Sohu.com Inc.’s Current Report on Form
8-K
filed on October 24, 2016.
(15)(13)
Incorporated herein by reference to Sohu.com Inc.’s Annual Report on Form 10-K filed on February 27, 2017.
(16)(14)
Incorporated herein by reference to Sohu.com Inc.’s Current Report on Form
8-K
filed on May 19, 2017.
(17)(15)
Incorporated herein by reference to Sohu.com Inc.’s Current Report on Form
8-K
filed on September 7, 2017.
(18)
Incorporated herein by reference to Sohu.com Inc.’s Quarterly Report on Form
10-Q
filed on November 3, 2017.
(19)
Incorporated herein by reference to Sohu.com Inc.’s Annual Report on Form
10-K
filed on February 28, 2018.
(20)(16)
Incorporated herein by reference to Sohu.com Inc.’s Current Report on Form
8-K
filed on April 16, 2018.
(21)(17)
Incorporated herein by reference to Sohu.com Limited’s Registration Statement on Form S-8 POS filed on June 1, 2018.
(22)(18)
Incorporated herein by reference to Sohu.com Limited’s Annual Report on Form
20-F
filed on March 28, 2019.
(23)(19)
Incorporated herein by reference to Sohu.com Limited’s Annual Report on Form
20-F
filed on April 21, 2020.
(24)(20)
Incorporated herein by reference to Sohu.com Limited’s Annual Report of Foreign Private Issuer on Form
6-K20-F
furnished to the SECfiled on September 29, 2020.
(25)
Incorporated herein by reference to Amendment No. 1 to Schedule
13E-3
filed by Sogou Inc., Tencent Holdings Limited, THL A21 Limited, TitanSupernova Limited, Tencent Mobility Limited, Sohu.com Limited and Sohu.com (Search) Limited on December 1, 2020.
(26)
Filed herewith.March 18, 2021.
(21)
Filed herewith.
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SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing its annual report on Form
20-F
and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
 
SOHU.COM LIMITED
By 
/s/ Charles Zhang
Name: 
Charles Zhang
Title: 
Chief Executive Officer
By 
/s/ Joanna Lv
Name: 
Joanna Lv
Title: 
Chief Financial Officer
Date: March 18, 2021
31
, 2022
 
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SOHU.COM LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
SOHU.COM LIMITED
Page
 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS:
  
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID: 1424)
   F-2 
Consolidated Balance Sheets as of December 31, 20192020 and 20202021
   F-5 
Consolidated Statements of Comprehensive Income/(Loss) for the Years Ended December 31, 2018, 2019, 2020 and 20202021
   F-7F-6 
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2019, 2020 and 20202021
   F-9F-7 
Consolidated Statements of Changes in Equity for the Years Ended December 31, 2018, 2019, 2020 and 20202021
   F-11F-8 
Notes to Consolidated Financial Statements
   F-14F-11 
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Sohu.com Limited
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Sohu.com Limited and its subsidiaries
(the “Company”) as of December 31, 20202021 and 2019,2020,
and the related consolidated statements of comprehensive income/(loss), of cash flows and of changes in equity for each of the three years in the period ended December 31, 2020,2021, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2020,2021, based on criteria established in
Internal Control - Control—Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20202021 and 2019,2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20202021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020,2021, based on criteria established in
Internal Control - Control—Integrated Framework
(2013) issued by the COSO.
ChangesChange in Accounting PrinciplesPrinciple
As discussed in NotesNote 2 11 and 10 to the consolidated financial statements, the Company changed the manner in which it accounts for credit losses on certain financial instruments in 2020; the manner in which it accounts for leases in 2019; and the manner in which it accounts for financial instruments in 2018, respectively.2020.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 15. Our responsibility is to express opinions on the Company’s consolidated
financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit mattersmatter communicated below are mattersis a matter arising from the current period audit of the consolidated financial statements that werewas communicated or required to be communicated to the audit committee and that (i) relaterelates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit mattersmatter below, providing a separate opinionsopinion on the critical audit mattersmatter or on the accounts or disclosures to which they relate.it relates.
Goodwill Impairment Assessment –- Brand Advertising Reporting Unit
As described in Notes 2 and 13 to the consolidated financial statements, the Company’s consolidated goodwill balance was $48.4$48.8 million as of December 31, 2020,2021, and the goodwill balance associated with the brand advertising reporting unit was $38.2$38.6 million. Management conducts an impairment test as of October 1 of each year, or more frequently if events or circumstances indicate an impairment may exist. The impairment test for goodwill determines the fair value of the reporting unit and compares it to the reporting unit’s carrying value. Fair value is estimated by management using the income approach and the market approach. Under the income approach, the fair value of the brand advertising reporting unit was based on the present value of the estimated future cash flows that the reporting unit is expected to generate over its remaining life. Cash flow projections were based on management’s estimates of revenue growth rates, profitability, and the discount rate. The market approach considered earnings multipliers based on market data of other comparable companies engaged in similar business. Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. Based on the operating results of the impairment assessment for the brand advertising business as of October 1, 2020,2021, management determined that the estimated fair value of the reporting unit exceeded its carrying value and therefore, no impairment was recorded.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the brand advertising reporting unit is a critical audit matter are (i) the significant judgment by management when developing the fair value measurement of the reporting unit; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to revenue growth rates, profitability, the discount rate, and comparable companies’ earnings multipliers; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the development of the significant assumptions related to the valuation of the Company’s reporting units. These procedures also included, among others, (i) testing management’s process for developing the fair value estimate of the brand advertising reporting unit; (ii) evaluating the appropriateness of management’s income and market approaches; (iii) testing the completeness, accuracy and relevance of underlying data used in the models; and (iv) evaluating the reasonableness of significant assumptions used by management related to the revenue growth rates, profitability, the discount rate, and comparable companies’ earnings multipliers. Evaluating management’s assumptions related to the revenue growth rates, profitability, the discount rate and comparable companies’ earnings multipliers involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting unit; (ii) the consistency with external market and industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of management’s models and certain significant assumptions, including the discount rate and comparable companies’ earnings multipliers.
Allowance for Credit Losses of the Financing Receivables Classified as Assets Held for Sale
As described in Note 2 to the consolidated financial statements, in 2020, Sohu entered into a Share Purchase Agreement with TitanSupernova Limited (“Buyer”) under which Sohu agreed to sell all of its shares and voting rights in Sogou Inc. (“Sogou”) to the Buyer. Management has reflected the results of Sogou segment as discontinued operations and classified the assets and liabilities of Sogou segment as assets and liabilities held for sale in the consolidated financial statements for all periods presented. As of December 31, 2020, the assets held for sale included the financing receivables of $41.9 million, which are subject to credit losses. The Company adopted the new accounting standard on credit losses on January 1, 2020 using the modified retrospective approach and recorded a $2.5 million increase to the allowance for credit losses of the Financing Receivables based on the current portfolios of such receivables and forecasts of future macroeconomic conditions. As of December 31, 2020, allowance for credit losses related to financing receivables classified as assets held for sale was $6.4 million. The allowance for credit losses represents management’s estimate of the lifetime expected credit losses inherent in the finance receivables as of the balance sheet date. For financing receivables that share similar risk characteristics, mainly based on delinquency levels, the estimate of the lifetime expected credit losses is made on a collective assessment basis using measurement models and management judgment. The significant assumptions used in the process of estimating the allowance for credit losses include portfolio composition, loan delinquencies, loss severity and recoveries, and application of macroeconomic forecasts.
 
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The principal considerations for our determination that performing procedures relating to the allowance for credit losses of the financing receivables classified as assets held for sale is a critical audit matter are (i) the significant judgments by management in the determination of the expected loss rates for the financing receivables classified as assets held for sale; (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to management’s determination of allowance for credit losses of financing receivables classified as assets held for sale, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s determination of allowance for credit losses of the financing receivables classified as assets held for sale. These procedures also included, among others, (i) testing management’s process for estimating the allowance for credit losses; (ii) evaluating the appropriateness of the models and methodology used; (iii) testing the completeness, accuracy and relevance of underlying data used in the models, including historical data and current data in estimating the expected loss rates at the date of the consolidated financial statements, and (iv) evaluating the reasonableness of significant assumptions used by management related to portfolio composition, loan delinquencies, loss severity and recoveries, and application of macroeconomic forecasts. Evaluating management’s assumptions related to the expected loss rates involved evaluating whether the significant assumptions used by management were reasonable considering (i) the historical default rates with the appropriateness of historical period selection, historical credit loss experience and current status of the loans, lifetime recovery information and other relevant data; and (ii) application of macroeconomic forecasts with the consideration of changes in future economics and market environment. Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of management’s methodology and significant assumptions related to the expected credit loss rates.
/s/ PricewaterhouseCoopers Zhong Tian LLP
Beijing, the People’s Republic of China
March 18, 202131, 2022
We have served as the Company’s auditor since 1999.
 
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SOHU.COM LIMITED
CONSOLIDATED BALANCE SHEETS
(In thousands)
 
   
As of December 31,
 
   
2019
   
2020
 
ASSETS
          
Current assets:
          
Cash and cash equivalents
  $162,662   $217,057 
Restricted cash
   3,290    330,791 
Short-term investments
   321,483    100,745 
Accounts receivable, net (including $2,006 and $2,096, respectively, due from a related party as of December 31, 2019 and 2020)
   126,081    87,521 
Prepaid and other current assets (including $33,329 and $34,123, respectively, due from a related party as of December 31, 2019 and 2020)
   97,531    106,590 
Assets held for sale (current)
   1,304,621    1,412,168 
           
Total current assets
   2,015,668    2,254,872 
           
Fixed assets, net
   337,682    337,674 
Goodwill
   47,390    48,434 
Long-term investments, net
   30,987    31,634 
Intangible assets, net
   9,922    4,842 
Restricted time deposits
   240    101,519 
Prepaid
non-current
assets
   1,882    1,006 
Other assets
   30,413    42,140 
Assets held for sale
(non-current)
   217,680    0 
           
Total assets
  $2,691,864   $2,822,121 
           
LIABILITIES
          
Current liabilities:
          
Accounts payable (including accounts payable of consolidated variable interest entities (“VIEs”) without recourse to the Company of $8,595 and $11,145, respectively, as of December 31, 2019 and 2020)
  $121,318   $107,611 
Accrued liabilities (including accrued liabilities of consolidated VIEs without recourse to the Company of $50,913 and $46,888, respectively, as of December 31, 2019 and 2020)
   157,861    157,513 
Receipts in advance and deferred revenue (including receipts in advance and deferred revenue of consolidated VIEs without recourse to the Company of $38,754 and $43,076, respectively, as of December 31, 2019 and 2020)
   50,321    52,055 
Accrued salary and benefits (including accrued salary and benefits of consolidated VIEs without recourse to the Company of $6,420 and $7,698, respectively, as of December 31, 2019 and 2020)
   86,666    100,826 
Tax payables (including tax payables of consolidated VIEs without recourse to the Company of $3,666 and $4,422, respectively, as of December 31, 2019 and 2020)
   25,997    28,006 
Short-term bank loans (including short-term bank loans of consolidated VIEs without recourse to the Company of NaN as of both December 31, 2019 and 2020)    
   114,528    315,550 
   
As of December 31,
 
   
2020
  
2021
 
ASSETS
         
Current assets:
         
Cash and cash equivalents
  $217,057  $998,949 
Restricted cash
   330,791   1,969 
Short-term investments
   100,745   399,345 
Accounts receivable, net (including $2,096 and $2,456, respectively, due from a related party as of December 31, 2020 and 2021)
   87,521   82,550 
Prepaid and other current assets (including $34,123 and $34,123, respectively, due from a related party as of December 31, 2020 and 2021)
   106,590   107,311 
Assets held for sale (current)
   1,412,168   0 
   
 
 
  
 
 
 
Total current assets
   2,254,872   1,590,124 
   
 
 
  
 
 
 
Fixed assets, net
   337,674   329,997 
Goodwill
   48,434   48,811 
Long-term investments, net
   31,634   53,121 
Intangible assets, net
   4,842   9,136 
Long-term time deposits  
0
   
189,007
 
Restricted time deposits
   101,519   0 
Prepaid
non-current
assets
   1,006   0 
Other assets
   42,140   25,589 
   
 
 
  
 
 
 
Total assets
  $2,822,121  $2,245,785 
   
 
 
  
 
 
 
LIABILITIES
         
Current liabilities:
         
Accounts payable (including accounts payable of consolidated variable interest entities (“VIEs”) without recourse to the Company of $11,145 and $12,325, respectively, as of December 31, 2020 and 2021)
  $107,611  $87,447 
Accrued liabilities (including accrued liabilities of consolidated VIEs without recourse to the Company of $46,888 and $43,695, respectively, as of December 31, 2020 and 2021)
   157,513   138,196 
Receipts in advance and deferred revenue (including receipts in advance and deferred revenue of consolidated VIEs without recourse to the Company of $43,076 and $45,844, respectively, as of December 31, 2020 and 2021)
   52,055   57,041 
Accrued salary and benefits (including accrued salary and benefits of consolidated VIEs without recourse to the Company of $7,698 and $8,393, respectively, as of December 31, 2020 and 2021)
   100,826   91,485 
Tax payables (including tax payables of consolidated VIEs without recourse to the Company of $4,422 and $1,539, respectively, as of December 31, 2020 and 2021)
   28,006   16,714 
Short-term bank loans (including short-term bank loans of consolidated VIEs without recourse to the Company of NaN as of both December 31, 2020 and 2021)
   315,550   0 
Other short-term liabilities (including other short-term liabilities of consolidated VIEs without recourse to the Company of $25,028 and $14,095, respectively, as of December 31, 2020 and 2021, and due to a related party of $34,123 and $34,123, respectively, as of December 31, 2020 and 2021.)
   106,171   112,568 
Liabilities held for sale (current) (including liabilities held for sale (current) of consolidated VIEs without recourse to the Company of $187,712 and NaN, respectively, as of December 31, 2020 and 2021)
   416,998   0 
   
 
 
  
 
 
 
Total current liabilities
   1,284,730   503,451 
   
 
 
  
 
 
 
Long-term
other payable
s
 (including long-term
other p
a
yables
of consolidated VIEs without recourse to the Company of NaN as of both December 31, 2020 and 2021)
   3,202   3,922 
Long-term bank loans (including long-term bank loans of consolidated VIEs without recourse to the Company of NaN as of both December 31, 2020 and 2021)
   92,000   0 
Long-term tax liabilities (including long-term tax liabilities of consolidated VIEs without recourse to the Company of $14,134 and $14,465, respectively, as of December 31, 2020 and 2021)
   188,760   193,918 
Deferred tax liabilities (including deferred tax liabilities of consolidated VIEs without recourse to the Company of $2,014 and $3,323, respectively, as of December 31, 2020 and 2021)
   217,593   249,165 
Other long-term liabilities (including other long-term liabilities of consolidated VIEs without recourse to the Company of $286 and $182, respectively, as of December 31, 2020 and 2021)
   3,855   3,142 
   
 
 
  
 
 
 
Total long-term liabilities
   505,410   450,147 
   
 
 
  
 
 
 
Total liabilities
  $1,790,140  $953,598 
   
 
 
  
 
 
 
Commitments and contingencies
  0   0 
SHAREHOLDERS’ EQUITY
         
Sohu.com Limited shareholders’ equity:
         
Ordinary Shares: $0.001 par value per share (75,400 shares authorized; 39,306 shares and 38,221 shares, respectively, issued and outstanding as of December 31, 2020 and 2021)
  $39  $39 
Additional
paid-in
capital
   952,733   965,328 
Treasury Stock: $0.001 par value per share (NaN and 1,129 shares,
 
respectively
,
as of December 31,
 
2020 and 2021)
   0   (18,776
)
Accumulated other comprehensive income
   29,189   51,145 
Accumulated earnings/(deficit)   (634,592)
 
  293,133 
   
 
 
  
 
 
 
Total Sohu.com Limited shareholders’ equity
   347,369   1,290,869 
Noncontrolling interest
   684,612   1,318 
   
 
 
  
 
 
 
Total shareholders’ equity
   1,031,981   1,292,187 
   
 
 
  
 
 
 
Total liabilities and shareholders’ equity  $2,822,121  $2,245,785 
   
 
 
  
 
 
 
The accompanying
notes
are an integral part of these consolidated financial statements.
 
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Other short-term liabilities (including other short-term liabilities of consolidated VIEs without recourse to the Company of $21,598 and $25,028, respectively, as of December 31, 2019 and 2020, and due to a related party of $33,536 and $34,123, respectively, as of December 31, 2019 and 2020.)
   91,065   106,171 
Liabilities held for sale (current) (including liabilities held for sale (current) of consolidated VIEs without recourse to the Company of $138,303 and $187,712, respectively, as of December 31, 2019 and 2020)
   453,111   416,998 
          
Total current liabilities
   1,100,867   1,284,730 
          
Long-term accounts payable (including long-term accounts payable of consolidated VIEs without recourse to the Company of NaN as of both December 31, 2019 and 2020)
   767   3,202 
Long-term bank loans (including long-term bank loans of consolidated VIEs without recourse to the Company of NaN as of both December 31, 2019 and 2020)
   0   92,000 
Long-term tax liabilities (including long-term tax liabilities of consolidated VIEs without recourse to the Company of $13,220 and $14,134, respectively, as of December 31, 2019 and 2020)
   181,640   188,760 
Deferred tax liabilities (including deferred tax liabilities of consolidated VIEs without recourse to the Company of $1,998 and $2,014, respectively, as of December 31, 2019 and 2020)
   95,904   217,593 
Other long-term liabilities (including other long-term liabilities of consolidated VIEs without recourse to the Company of NaN and $286, respectively, as of December 31, 2019 and 2020)
   83   3,855 
Liabilities held for sale
(non-current)
(including liabilities held for sale
(non-current)
of consolidated VIEs without recourse to the Company of $1,130 and NaN, respectively, as of December 31, 2019 and 2020)
   5,686   0 
          
Total long-term liabilities
   284,080   505,410 
          
Total liabilities
  $1,384,947  $1,790,140 
          
Commitments and contingencies
   0    0  
SHAREHOLDERS’ EQUITY
         
Sohu.com Limited shareholders’ equity:
         
Ordinary Shares: $0.001 par value per share (75,400 shares authorized; 39,269 shares and 39,306 shares, respectively, issued and outstanding as of December 31, 2019 and 2020)
  $39  $39 
Additional
paid-in
capital
   948,201   952,733 
Accumulated other comprehensive income
   24,351   29,189 
Accumulated deficit
   (544,137)   (634,592) 
          
Total Sohu.com Limited shareholders’ equity
   428,454   347,369 
Noncontrolling interest
   878,463   684,612 
          
Total shareholders’ equity
   1,306,917   1,031,981 
          
Total liabilities and shareholders’ equity
  $2,691,864  $2,822,121 
          
SOHU.COM LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(In thousands, except per share data) 
   
Year Ended December 31,
 
   
2019
  
2020
  
2021
 
Revenues:
    
Brand advertising (including revenues generated from a related party of $174, $227 and $173, respectively, for 2019, 2020 and 2021)
  $175,056  $146,526  $134,967 
Online games
   440,902   536,684   638,225 
Others (including revenues generated from a related party of $3,796, $3,752 and $4,155, respectively, for 2019, 2020 and 2021)
   57,845   66,680   62,384 
   
 
 
  
 
 
  
 
 
 
Total revenues
   673,803   749,890   835,576 
   
 
 
  
 
 
  
 
 
 
Cost of revenues:
             
Brand advertising
   126,406   105,604   99,522 
Online games
   88,992   91,526   87,616 
Others (including cost generated from a related party of $57, NaN and NaN
,
respectively, for 2019, 2020 and 2021)
   28,249   20,307   17,533 
   
 
 
  
 
 
  
 
 
 
Total cost of revenues
   243,647   217,437   204,671 
   
 
 
  
 
 
  
 
 
 
Gross profit
   430,156   532,453   630,905 
   
 
 
  
 
 
  
 
 
 
Operating expenses:
             
Product development
   234,852   241,941   268,863 
Sales and marketing
   204,665   159,787   182,690 
General and administrative (including expenses generated from a related party of NaN, $55 and $35, respectively, for 2019, 2020 and 2021)

   54,591   57,354   81,880 
Goodwill impairment and impairment of intangible assets acquired as part of business acquisitions
   7,245   0   0 
   
 
 
  
 
 
  
 
 
 
Total operating expenses
   501,353   459,082   533,433 
   
 
 
  
 
 
  
 
 
 
Operating profit/(loss)
   (71,197)   73,371   97,472 
   
 
 
  
 
 
  
 
 
 
Other income, net
   7,963   25,993   29,416 
Interest income (including interest income generated from a related party of $1,015, $810 and NaN, respectively, for 2019, 2020 and 2021)
   6,103   7,369   15,641 
Interest expense (including interest expense generated from a related party of $818, $588, and NaN, respectively, for 2019, 2020 and 2021)
   (14,370)   (6,234)   (7,500)
 
Exchange difference
   1,430   (3,800)   (3,462)
   
 
 
  
 
 
  
 
 
 
Income/(loss) before income tax expense
   (70,071)   96,699   131,567 
Income tax expense 
   28,428   133,226   62,296 
Net income/(loss) from continuing operations

   (98,499)   (36,527)   69,271 
Net income/(loss) from discontinued operations, net of tax
   55,108   (91,793)   864,902 
   
 
 
  
 
 
  
 
 
 
Net income/(loss)

   (43,391)   (128,320)   934,173 
Less: Net income/(loss) from continuing operations attributable to the noncontrolling interest shareholders

   58,223   18,448   (3)
Less: Net income/(loss) from discontinued operations attributable to the noncontrolling interest shareholders

   47,722   (60,656)   6,451 
Net income/(loss) from continuing operations attributable to Sohu.com Limited

   (156,722)   (54,975)   69,274 
Net income/(loss) from discontinued operations attributable to Sohu.com Limited

   7,386   (31,137)   858,451 
   
 
 
  
 
 
  
 
 
 
Net income/(loss) attributable to Sohu.com Limited

  $(149,336)  $(86,112)  $927,725 
   
 
 
  
 
 
  
 
 
 
Net income/(loss)

  $(43,391)  $(128,320)  $934,173 
Foreign currency translation adjustments
   (13,069)   11,972   23,474 
   
 
 
  
 
 
  
 
 
 
Other comprehensive income/(loss)
   (13,069)   11,972   23,474 
   
 
 
  
 
 
  
 
 
 
Comprehensive income/(loss)

   (56,460)   (116,348)   957,647 
Less: Comprehensive income/(loss) attributable to noncontrolling interest shareholders
   93,244   (35,074)   7,966 
   
 
 
  
 
 
  
 
 
 
Comprehensive income/(loss) attributable to Sohu.com Limited   (149,704)   (81,274)   949,681 
   
 
 
  
 
 
  
 
 
 
Basic net income/(loss) per share attributable to Sohu.com Limited

             
Continuing operations
  $(3.99)  $(1.39)  $1.75 
Discontinued operations
   0.19   (0.79)   21.74 
   
 
 
  
 
 
  
 
 
 
Net income/(loss) per share

   (3.80)   (2.18)   23.49 
   
 
 
  
 
 
  
 
 
 
Shares used in computing basic net income per share attributable to Sohu.com Limited

   39,249   39,452   39,501 
   
 
 
  
 
 
  
 
 
 
Diluted net income/(loss) per share attributable to Sohu.com Limited             
Continuing operations
  $(4.01)  $(1.40)  $1.75 
Discontinued operations
   0.18   (0.79)   21.74 
   
 
 
  
 
 
  
 
 
 
Net loss per share
   (3.83)   (2.19)   23.49 
   
 
 
  
 
 
  
 
 
 
Shares used in computing diluted net income per share attributable to Sohu.com Limited

   39,249   39,452   39,501 
   
 
 
  
 
 
  
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
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SOHU.COM LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(In thousands, except per share data)
   
Year Ended December 31,
 
   
2018
  
2019
  
2020
 
Revenues:
             
Brand advertising (including revenues generated from a related party of $224, $174 and $227, respectively, for 2018, 2019 and 2020)
  $232,339  $175,056  $146,526 
Online games
   389,788   440,902   536,684 
Others (including revenues generated from a related party of $2,187, $3,796 and $3,752, respectively, for 2018, 2019 and 2020)
   68,048   57,845   66,680 
              
Total revenues
   690,175   673,803   749,890 
              
Cost of revenues:
             
Brand advertising
   184,473   126,406   105,604 
Online games
   60,981   88,992   91,526 
Others (including cost generated from a related party of $237, $57 and NaN respectively, for 2018, 2019 and 2020)
   43,562   28,249   20,307 
              
Total cost of revenues
   289,016   243,647   217,437 
              
Gross profit
   401,159   430,156   532,453 
              
Operating expenses:
             
Product development
   246,155   234,852   241,941 
Sales and marketing
   236,898   204,665   159,787 
General and administrative
   70,129   54,591   57,354 
Goodwill impairment and impairment of intangible assets acquired as part of business acquisitions
   16,369   7,245   0 
              
Total operating expenses
   569,551   501,353   459,082 
              
Operating profit/(loss)
   (168,392)   (71,197)   73,371 
              
Other income, net
   30,701   7,963   25,993 
Interest income (including interest income generated from a related party of $1,051, $1,015 and $810, respectively, for 2018, 2019 and 2020)
   16,036   6,103   7,369 
Interest expense (including interest expense generated from a related party of $519, $818, and $588, respectively, for 2018, 2019 and 2020)
   (17,538)   (14,370)   (6,234) 
Exchange difference
   3,301   1,430   (3,800) 
              
Income/(loss) before income tax expense /(benefit)
   (135,892)   (70,071)   96,699 
Income tax expense /(benefit)
   (14,586)   28,428   133,226 
Net loss from continuing operations
   (121,306)   (98,499)   (36,527) 
Net income/(loss) from discontinued operations, net of tax
   53,947   55,108   (91,793) 
              
Net loss
   (67,359)   (43,391)   (128,320) 
Less: Net income from continuing operations attributable to the noncontrolling interest shareholders
   41,732   58,223   18,448 
Less: Net income/(loss) from discontinued operations attributable to the noncontrolling interest shareholders
   50,991   47,722   (60,656) 
Net loss from continuing operations attributable to Sohu.com Limited
   (163,038)   (156,722)   (54,975) 
Net income/(loss) from discontinued operations attributable to Sohu.com Limited
   2,956   7,386   (31,137) 
              
Net loss attributable to Sohu.com Limited    
  $(160,082)  $(149,336)  $(86,112) 
              
F-7
Table of Contents
Net loss
  $(67,359)  $(43,391)  $(128,320) 
Foreign currency translation adjustments
   (37,339)   (13,069)   11,972 
              
Other comprehensive income/(loss)
   (37,339)   (13,069)   11,972 
              
Comprehensive loss
   (104,698)   (56,460)   (116,348) 
Less: Comprehensive income/(loss) attributable to noncontrolling interest shareholders
   61,376   93,244   (35,074) 
              
Comprehensive loss attributable to Sohu.com Limited
   (166,074)   (149,704)   (81,274) 
              
Basic net (loss)/income per share attributable to Sohu.com Limited
             
Continuing operations
  $(4.18)  $(3.99)  $(1.39) 
Discontinued operations
   0.07   0.19   (0.79) 
              
Net loss per share
   (4.11)   (3.80)   (2.18) 
              
Shares used in computing basic net (loss)/income per share attributable to Sohu.com Limited
   38,959   39,249   39,452 
              
Diluted net (loss)/income per share attributable to Sohu.com Limited
             
Continuing operations
  $(4.20)  $(4.01)  $(1.40) 
Discontinued operations
   0.07   0.18   (0.79) 
              
Net loss per share
   (4.13)   (3.83)   (2.19) 
              
Shares used in computing diluted net (loss)/income per share attributable to Sohu.com Limited
   38,959   39,249   39,452 
              
The accompanying notes are an integral part of these consolidated financial statements.
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Table of Contents
SOHU.COM LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
   
Year Ended December 31,
 
   
2018
  
2019
  
2020
 
Cash flows from operating activities:
             
Net loss
  $(67,359)  $(43,391)  $(128,320) 
Net income/(loss) from discontinued operations, net of tax
   53,947   55,108   (91,793) 
Adjustments to reconcile net loss to net cash provided by operating activities:
             
Amortization of intangible assets and purchased video content in prepaid expense
   58,064   38,842   14,386 
Depreciation
   32,109   28,225   25,466 
Goodwill impairment and impairment of intangible assets acquired as part of business acquisitions
   16,369   7,245   0 
Share-based compensation expense
   (12,108)   2,350   14,480 
Impairment of long-term investment
   0   23,154   384 
Impairment of other intangible assets and other assets
   10,797   5,903   4,156 
Research and development expense allocation
   (671)   0   0 
Investment loss/(gain) from equity investments
   3,968   (2,960)   465 
Allowance for credit losses
   5,449   4,725   4,884 
Gain from sale of equity investments
   (134)   0   0 
Change in fair value of financial instruments
   11,201   (1,185)   1,784 
Others
   152   (786)   (390) 
Changes in assets and liabilities:
             
Accounts receivable
   10,998   (13,152)   39,979 
Prepaid and other assets
   5,758   5,574   (10,276) 
Accounts payable
   (1,628)   (160)   (3,358) 
Receipts in advance and deferred revenue
   (524)   (3,689)   (96) 
Tax liabilities
   (79,238)   (2,253)   8,683 
Deferred tax
   43,194   11,202   102,626 
Accrued liabilities and other short-term liabilities
   (34,593)   (22,803)   (3,252) 
              
Net cash provided by/(used in) continuing operating activities
   (52,143)   (18,267)   163,394 
              
Net cash provided by/(used in) discontinued operating activities
   136,168   228,857   (68,187) 
              
Net cash provided by operating activities
   84,025   210,590   95,207 
Cash flows from investing activities:
             
Purchase of fixed assets
   (25,217)   (15,081)   (6,339) 
Purchase of intangible and other assets
   (96,317)   (50,583)   (27,441) 
Purchase of long-term investments
   (727)   (12,290)   (114) 
Return of funds from a third party
   5,264   0   0 
Proceeds from financial instruments
   1,783,772   883,991   1,423,600 
Purchase of financial instruments
   (1,499,491)   (1,022,049)   (1,206,777) 
Proceeds received from sale of equity investment
   12,073   0   0 
Other cash proceeds related to investing activities
   789   1,198   1,464 
              
Net cash provided by/(used in) continuing investing activities
   180,146   (214,814)   184,393 
              
Net cash provided by/(used in) discontinued investing activities    
   (639,390)   (228,406)   235,374 
              
   
Year Ended December 31,
 
   
2019
  
2020
  
2021
 
Cash flows from operating activities:
    
Net income/(loss)

  $(43,391)  $(128,320)  $934,173 
Net income/(loss) from discontinued operations, net of tax
   55,108   (91,793)   864,902 
Adjustments to reconcile net loss to net cash provided by operating activities:
             
Amortization of intangible assets and purchased video content in prepaid expense
   38,842   14,386   12,461 
Depreciation
   28,225   25,466   23,495 
Goodwill impairment and impairment of intangible assets acquired as part of business acquisitions
   7,245   0   0 
Share-based compensation expense
   2,350   14,480   8,578 
Impairment of long-term investment
   23,154   384   215 
Impairment of other intangible assets and other assets
   5,903   4,156   1,758 
Investment loss/(gain) from equity investments
   (2,960)   465   (6,345)
Allowance for credit losses
   4,725   4,884   7,970 
Change in fair value of financial instruments
   (1,185)   1,784   (2,470)
 
Others
   (786)   (390)   (909)
Changes in assets and liabilities:
             
Accounts receivable
   (13,152)   39,979   444 
Prepaid and other assets
   5,574   (10,276)   (2,770)
Accounts payable
   (160)   (3,358)   (904)
Receipts in advance and deferred revenue
   (3,689)   (96)   3,776 
Tax liabilities
   (2,253)   8,683   (4,968)
Deferred tax
   11,202   102,626   26,239 
Accrued liabilities and other short-term liabilities
   (22,803)  (3,252)  
 
(22,231
 
 
)
   
 
 
  
 
 
  
 
 
 
Net cash provided by/(used in) continuing operating activities
   (18,267)  163,394   
 
113,610
 
 
 
   
 
 
  
 
 
  
 
 
 
Net cash provided by/(used in) discontinued operating activities
   228,857   (68,187)  
 
(175,888
 
 
)
   
 
 
  
 
 
  
 
 
 
Net cash provided by/(used in) operating activities   210,590   95,207   (62,278)
Cash flows from investing activities:
             
Purchase of fixed assets
   (15,081)   (6,339)   (6,718)
Purchase of intangible and other assets   (50,583)   (27,441)   (35,489)
Purchase of long-term investments
   (12,290)   (114)   (15,891)
Purchase of time deposits

   0   0   (188,215)
Proceeds from financial instruments
   883,991   1,423,600   740,730 
Purchase of financial instruments
   (1,022,049)   (1,206,777)   (1,034,337)
Other cash proceeds related to investing activities
   1,198   1,464   
 
2,501
 
 
 
   
 
 
  
 
 
  
 
 
 
Net cash provided by/(used in) continuing investing activities
   (214,814)  184,393   
 
(537,419
 
 
)
   
 
 
  
 
 
  
 
 
 
Net cash provided by/(used in) discontinued investing activities
   (228,406)  235,374   
 
1,054,148
 
 
 
   
 
 
  
 
 
  
 
 
 
Net cash provided by/(used in) investing activities
   (443,220)   419,767   516,729 
Cash flows from financing activities:
             
Proceeds from long-term bank loans
   0   92,000   0 
Proceeds from short-term bank loans
   58,035   315,550   153,000 
Exercise of share-based awards in subsidiaries
   7   0   0 
Repurchase of Sohu Ordinary Shares, represented by ADSs

   0   0   (17,418)
Repayments of loans from banks
   (371,973)   (113,952)   (560,550)
Acquisition of noncontrolling interests in Changyou Merger
   0   (191,803)   0 
Distribution of Changyou dividend to noncontrolling interest shareholders
   (165,817)   0   0 
   
 
 
  
 
 
  
 
 
 
Net cash provided by/(used in) continuing financing activities
   (479,748)   101,795   (424,968)
   
 
 
  
 
 
  
 
 
 
Net cash used in discontinued financing activities

   (33,415)   (8,209)   (9,132)
   
 
 
  
 
 
  
 
 
 
Net cash provided by/(used in) financing activities
   (513,163)   93,586   (434,100)
Effect of exchange rate changes on cash, cash equivalents, restricted cash and restricted time deposits
   (10,047)   36,984   20,997 
   
 
 
  
 
 
  
 
 
 
Net increase/(decrease) in cash, cash equivalents, restricted cash, and restricted time deposits
   (755,840)   645,544   41,348 
   
 
 
  
 
 
  
 
 
 
Cash, cash equivalents, restricted cash and restricted time deposits at beginning of year

  
1,069,866

   
314,026

   
959,570

 
Cash, cash equivalents, restricted cash and restricted time deposits at end of year
  $314,026  $959,570  $  1,000,918 
   
 
 
  
 
 
  
 
 
 
Less: Cash, cash equivalents, restricted cash and restricted time deposits of discontinued operations, end of year
   147,834   310,203   0 
   
 
 
  
 
 
  
 
 
 
Cash, cash equivalents, restricted cash and restricted time deposits of continuing operations, end of year
   166,192   649,367   1,000,918 
   
 
 
  
 
 
  
 
 
 
Supplemental cash flow disclosures from continuing operations:
             
Cash paid for income taxes
   (27,781)   (35,705)   (46,145)
Cash paid for interest expense
   (12,947)   (3,778)   (7,633)
Barter transactions
   4,357   4,039   5,086 
Supplemental schedule of
non-cash
investing activity from continuing operations:
             
Changes in payables and other liabilities related to fixed assets and intangible assets additions
   (24,568)   (20,964)   (19,391)
F-9
Table of Contents
Net cash provided by/(used in) investing activities
   (459,244)   (443,220)   419,767 
Cash flows from financing activities:
             
Proceeds from long-term bank loans
   251,738   0   92,000 
Proceeds from short-term bank loans
   74,056   58,035   315,550 
Exercise of share-based awards in subsidiaries
   11   7   0 
Repayments of loans from banks
   (67,011)   (371,973)   (113,952) 
Acquisition of noncontrolling interests in Changyou Merger
   0   0   (191,803) 
Distribution of Changyou dividend to noncontrolling interest shareholders
   (162,461)   (165,817)   0 
              
Net cash provided by/(used in) continuing financing activities
   96,333   (479,748)   101,795 
              
Net cash provided by/(used in) discontinued financing activities
   1   (33,415)   (8,209) 
              
Net cash provided by/(used in) financing activities
   96,334   (513,163)   93,586 
Effect of exchange rate changes on cash, cash equivalents, restricted cash and restricted time deposits
   (19,544)   (10,047)   36,984 
              
Net increase/(decrease) in cash, cash equivalents, restricted cash, and restricted time deposits
   (298,429)   (755,840)   645,544 
Cash, cash equivalents, restricted cash and restricted time deposits at beginning of year
   1,368,295   1,069,866   314,026 
              
Cash, cash equivalents, restricted cash and restricted time deposits at end of year
  $1,069,866  $314,026  $959,570 
              
Less: Cash, cash equivalents, restricted cash and restricted time deposits of discontinued operations, end of year
   187,867   147,834   310,203 
              
Cash, cash equivalents, restricted cash and restricted time deposits of continuing operations, end of year
   881,999   166,192   649,367 
              
Supplemental cash flow disclosures from continuing operations:
             
Cash paid for income taxes
   (38,737)   (27,781)   (35,705) 
Cash paid for interest expense
   (12,563)   (12,947)   (3,778) 
Barter transactions
   6,587   4,357   4,039 
Supplemental schedule of
non-cash
investing activity from continuing operations:
             
Changes in payables and other liabilities related to fixed assets and intangible assets additions
   (31,406)   (24,568)   (20,964) 
The accompanying notes are an integral part of these consolidated financial statements.
 
F-10
F-7
Table of Contents
SOHU.COM LIMITED
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Year Ended December 31, 20182019
(In thousands)
      
Sohu.com Limited Shareholders’ Equity
    
   
Total
  
Ordinary
Shares
  
Additional

Paid-in

Capital
  
Treasury
Stock
  
Accumulated

Other

Comprehensive

Income
  
Accumulated
Deficit
  
Noncontrolling

Interest
 
Beginning balance
  $1,817,237   45   1,098,455   (143,858)   38,212   (242,220)   1,066,603 
Impact of adoption of new accounting standards*
   0   0   0   0   (7,501)   7,501   0 
Share-based compensation expense
   2,095   0   (5,559)   0   0   0   7,654 
Settlement/Adjustment of share-based awards in subsidiary
   1,811   0   9,839   0   0   0   (8,028) 
Distribution of Changyou dividend to noncontrolling interest shareholders
   (162,461)   0   0   0   0   0   (162,461) 
Disposal of a majority-owned subsidiary
   (2,113)   0   0   0   0   0   (2,113) 
Liquidation of Sohu.com Inc.
   0   (6)   (143,852)   143,858   0   0   0 
Net income/(loss) attributable to Sohu.com Limited and noncontrolling interest shareholders
   (67,359)   0   0   0   0   (160,082)   92,723 
Accumulated other comprehensive loss
   (37,339)   0   0   0   (5,992)   0   (31,347) 
Others
   1,080   0   0   0   0   0   1,080 
                              
Ending balance
  $1,552,951   39   958,883   0   24,719   (394,801)   964,111 
                              

*
For details see Note 10 - Fair Value Measurements - Financial Instruments Measured at Fair Value - Equity Investments.
      
Sohu.com Limited Shareholders’ Equity
    
   
Total
  
Ordinary
Shares
   
Additional

Paid-in

Capital
  
Treasury
Stock
   
Accumulated

Other

Comprehensive

Income
  
Accumulated
Deficit
  
Noncontrolling

Interest
 
Beginning balance
  $1,552,951   39    958,883   0    24,719   (394,801)   964,111 
Share-based compensation expense
   18,251   0    1,045   0    0   0   17,206 
Settlement/adjustment of share-based awards in subsidiary   698   0    2,555   0    0   0   (1,857) 
Distribution
 
of
 
Changyou
 
dividend
 
to
 
noncontrolling
 
interest
shareholders
   (166,507)   0    0   0    0   0   (166,507) 
Net income/(loss) attributable to Sohu.com Limited
 
and
noncontrolling interest shareholders
   (43,391)   0    0   0    0   (149,336)   105,945 
Repurchase of Sogou Class A Ordinary Shares from noncontrolling shareholders
   (42,016)   0    (14,282)   0    0   0   (27,734) 
Accumulated other comprehensive loss
   (13,069)   0    0   0    (368)   0   (12,701) 
   
 
 
  
 
 
   
 
 
  
 
 
   
 
 
  
 
 
  
 
 
 
Ending balance
  $1,306,917   39    948,201   0    24,351   (544,137)   878,463 
   
 
 
  
 
 
   
 
 
  
 
 
   
 
 
  
 
 
  
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
F-11F-8
Table of Contents
SOHU.COM LIMITED
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Year Ended December 31, 20192020
(In thousands)
 
      
Sohu.com Limited Shareholders’ Equity
    
   
Total
  
Ordinary
Shares
   
Additional

Paid-in

Capital
  
Treasury
Stock
   
Accumulated

Other

Comprehensive

Income
  
Accumulated
Deficit
  
Noncontrolling

Interest
 
Beginning balance
  $1,552,951   39    958,883   0    24,719   (394,801)   964,111 
Share-based compensation expense
   18,251   0    1,045   0    0   0   17,206 
Settlement/Adjustment of share-based awards in subsidiary
   698   0    2,555   0    0   0   (1,857) 
Distribution of Changyou dividend to noncontrolling interest shareholders
   (166,507)   0    0   0    0   0   (166,507) 
Net income/(loss) attributable to Sohu.com Limited and noncontrolling interest shareholders
   (43,391)   0    0   0    0   (149,336)   105,945 
Repurchase of Sogou Class A Ordinary Shares from noncontrolling shareholders
   (42,016)   0    (14,282)   0    0   0   (27,734) 
Accumulated other comprehensive loss
   (13,069)   0    0   0    (368)   0   (12,701) 
                                
Ending balance
  $1,306,917   39    948,201   0    24,351   (544,137)   878,463 
                                
      
Sohu.com Limited Shareholders’ Equity
    
   
Total
  
Ordinary
Shares
   
Additional

Paid-in

Capital
  
Treasury
Stock
   
Accumulated

Other

Comprehensive

Income
  
Accumulated
Deficit
  
Noncontrolling

Interest
 
Beginning balance
  $1,306,917   39    948,201   0    24,351   (544,137)   878,463 
Share-based compensation expense
   18,115   0    1,935   0    0   0   16,180 
Settlement/adjustment of share-based awards in subsidiary   1,862   0    2,476   0    0   0   (614) 
Modification
 
of
 
share
-
based
 
awards
 
in
 
Changyou
   (10,506)   0    0   0    0   0   (10,506) 
Net loss attributable to Sohu.com Limited and
noncontrolling interest shareholders
   (128,320)   0    0   0    0   (86,112)   (42,208) 
Repurchase
 
of
 
Sogou
 
Class
 
A
 
Ordinary
 
Shares
 
from
noncontrolling shareholders
   (8,301)   0    (2,847)   0    0   0   (5,454) 
Acquisition of a partially-held subsidiary
   642   0    31   0    0   0   611 
Impact of adoption of new accounting standards*
   (6,656)   0    0   0    0   (4,343)   (2,313) 
Acquisition
 
of
 
noncontrolling
 
interests
 
in
 
Changyou
Merger
   (191,803)   0    2,937   0    (38,059)   0   (156,681) 
Accumulated other comprehensive loss
   50,031   0    0   0    42,897   0   7,134 
   
 
 
  
 
 
   
 
 
  
 
 
   
 
 
  
 
 
  
 
 
 
Ending balance
  $1,031,981   39    952,733   0    29,189   (634,592)   684,612 
   
 
 
  
 
 
   
 
 
  
 
 
   
 
 
  
 
 
  
 
 
 
*
For details see Note 2
 -
 Summary of Significant Accounting Policies
-
Accounts Receivable, Net
-
Allowance of credit losses.
The accompanying notes are an integral part of these consolidated financial statements.
 
F-12F-9
Table of Contents
SOHU.COM LIMITED
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Year Ended December 31, 20202021
(In thousands)
 
      
Sohu.com Limited Shareholders’ Equity
    
   
Total
  
Ordinary
Shares
   
Additional

Paid-in

Capital
  
Treasury
Stock
   
Accumulated

Other

Comprehensive

Income
  
Accumulated
Deficit
  
Noncontrolling

Interest
 
Beginning balance
  $1,306,917   39    948,201   0    24,351   (544,137)   878,463 
Share-based compensation expense
   18,115   0    1,935   0    0   0   16,180 
Settlement/Adjustment of share-based awards in subsidiary
   1,862   0    2,476   0    0   0   (614) 
Modification of share-based awards in Changyou
   (10,506)   0    0   0    0   0   (10,506) 
Net loss attributable to Sohu.com Limited and noncontrolling interest shareholders
   (128,320)   0    0   0    0   (86,112)   (42,208) 
Repurchase of Sogou Class A Ordinary Shares from noncontrolling shareholders
   (8,301)   0    (2,847)   0    0   0   (5,454) 
Acquisition of a partially-held subsidiary
   642   0    31   0    0   0   611 
Impact of adoption of new accounting standards*
   (6,656)   0    0   0    0   (4,343)   (2,313) 
Acquisition of noncontrolling interests in Changyou Merger
   (191,803)   0    2,937   0    (38,059)   0   (156,681) 
Accumulated other comprehensive loss
   50,031   0    0   0    42,897   0   7,134 
                                
Ending balance
  $1,031,981   39    952,733   0    29,189   (634,592)   684,612 
                                
      
Sohu.com Limited Shareholders’ Equity
    
   
Total
  
Ordinary
Shares
   
Additional

Paid-in

Capital
   
Treasury
Stock
  
Accumulated

Other

Comprehensive

Income
   
Accumulated
Earnings/(Deficit)
  
Noncontrolling

Interest
 
Beginning balance
  $1,031,981    39    952,733    0    29,189    (634,592)
 
   684,612 
Share-based compensation expense
   4,427    0    805    0    0    0    3,622 
Settlement/adjustment of share-based awards in
subsidiary		   0    0    7,579    0    0    0    (7,579)
Net income attributable to Sohu.com Limited
and
 
noncontrolling interest shareholders

   934,173    0    0    0    0    927,725    6,448 
Repurchase of Sohu Ordinary Shares,
represented by ADSs

   (18,776)   0    0    (18,776)
 
   0    0    0 
Disposal of noncontrolling interests in
Tencent/Sohu Sogou Share Purchase

   (687,303)
 
   0    0    0    0    0    (687,303)
 
Write-down of transaction costs related to
business acquisitions		  
4,211

   0   
4,211
   0   
0

   
0
   
0

 
Accumulated other comprehensive 
income
   23,474    0    0    0    21,956    0    1,518 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Ending balance
  $1,292,187    39    965,328    (18,776)   51,145    293,133    1,318 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
*
For details see Note 2 – Summary of Significant Accounting Policies – Accounts Receivable, Net – Allowance of credit losses.
The accompanying notes are an integral part of these consolidated financial statements.
 
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SOHU.COM LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
1. THE COMPANY AND NATURE OF OPERATIONS
Nature of Operations and Organization
Sohu.com Limited was incorporated in the Cayman Islands on May 30, 2003 as a direct wholly-owned subsidiary of Sohu.com Inc., which was incorporated in Delaware in August 1996 and was the ultimate parent company of the Sohu Group (as defined below) until its dissolution on May 31, 2018. On July 17, 2000, Sohu.com Inc. completed an initial public offering (“IPO”) of shares of its common stock on NASDAQ trading under the symbol “SOHU.” On May 31, 2018, pursuant to a proposal for the dissolution of Sohu.com Inc. and adoption of a plan of complete liquidation and dissolution of Sohu.com Inc. that was approved by the stockholders of Sohu.com Inc. at a special meeting of stockholders held on May 29, 2018, Sohu.com Inc. was dissolved, all outstanding shares of the common stock of Sohu.com Inc. were delisted and cancelled, and American Depositary Shares (“ADSs”) representing all outstanding ordinary shares of Sohu.com Limited (the “Ordinary Shares”) were distributed on a
share-for-share
basis to the stockholders of Sohu.com Inc. On June 1, 2018 Sohu.com Limited’s ADSs began trading on the NASDAQ Global Select Market under the same “SOHU” symbol in place of the common stock of Sohu.com Inc. As a result, Sohu.com Limited replaced Sohu.com Inc. as the
top-tier,
publicly-traded holding company of the Sohu Group (as defined below). Sohu.com Limited (or its predecessor Sohu.com Inc., as applicable), together with its subsidiaries and consolidated VIEs, are collectively referred to herein as the “Sohu Group,” the “Group” or the “Company.” As described elsewhere in this report, the Company does not own its consolidated VIEs, and the results of such VIEs’ operations only accrue to the Company through contractual arrangements between such VIEs, and such VIEs’ nominee shareholders, and certain of the Company’s subsidiaries. Accordingly, in appropriate contexts activities of the VIEs that the Company consolidates will be described separately from those of the Company’s direct and indirect owned subsidiaries and the use of the terms “Sohu Group,” “Group,” and “Company” may not include in those contexts the VIEs that the Company consolidates.
The Sohu Group is a leading Chinese online media, video, and game and search servicebusiness group providing comprehensive online products and services on PCs and mobile devices in China. The Sohu Group which consists of “Sohu,”Sohu, which when referred to in this report, unless the context requires otherwise, excludesconsists of the businesses of Sohu.com Limited and corresponding subsidiaries and VIEs excluding the businesses and the corresponding subsidiaries and VIEs of Changyou.com Limited (“Changyou”), and Sogou Inc. (“Sogou”),Changyou. Changyou and Sogou. Changyou and Sogou are theis an indirect controlled subsidiarieswholly-owned subsidiary of the Company. Sohu is a leading Chinese language online media content and services provider; and Changyou is a leading online game developer and operator in China that engages primarily in the development, operation and licensing of online games for PCs and mobile devices; and Sogou is an innovator in search and a leader in China’s Internet industry.devices. Most of the Sohu Group’s operations are conducted through the Group’s China-based subsidiaries and VIEs.
Changyou completed its IPO on NASDAQ in April 2009, trading under the symbol “CYOU.” On April 17, 2020, Sohu acquired all outstanding shares of Changyou that it did not already beneficially own pursuant to the merger (the “Changyou Merger”) of an indirect newly-formed wholly-owned subsidiary (“Changyou Merger Co.”) with and into Changyou, with Changyou being the company surviving the Changyou Merger, and resulting in Changyou being delisted from NASDAQ and continuing as a privately-held company that is an indirect wholly-owned directly and indirectly by Sohu.subsidiary of Sohu.com Limited.
Because prior to the completion of Changyou Merger, Sohu.com Limited, or its predecessor Sohu.com Inc., was the controlling shareholder of Changyou, Sohu.com Limited consolidated Changyou in its consolidated financial statements, and recognized noncontrolling interests reflecting economic interests in Changyou held by Changyou’s former shareholders or beneficial owners other than Sohu.com Limited. As a result of the completion of Sohu’s acquisition of the noncontrolling interests in Changyou on April 17, 2020, Sohu.com Limited
beneficially
holds
 and controls
100% of the combined total of Changyou’s outstanding ordinary shares and 100% of the total voting power in Changyou and consolidates Changyou in its consolidated financial statements with no noncontrolling interests being recognized except for noncontrolling interests reflecting economic interests in Changyou’s subsidiaries.

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Prior to the completion of the Tencent/Sohu Sogou Share Purchase (as defined below) on September 23, 2021, Sogou Inc. (“Sogou”) was an indirect controlled subsidiary of the Company. Sogou completed its IPO on the New York Stock Exchange (the “NYSE”) in November 2017 trading under the symbol “SOGO.” On September 23, 2021, Sohu completed the transactions contemplated by a Share Purchase Agreement, dated September 29, 2020 Sogou entered into a definitive agreement and plan of merger (as amended on December 1, 2020 and further amended on July 19, 2021, by and among the “Sogou Merger Agreement”) with THL A21Company, the Company’s indirect wholly-owned subsidiary Sohu.com (Search) Limited (“THL”Sohu Search”), and TitanSupernova Limited (“Tencent Merger Sub”), and Tencent Mobility Limited (“TML”), each of which is a direct oran indirect wholly-owned subsidiary of Tencent Holdings Limited (“Tencent”), which contemplates that Tencent Merger Sub will be merged with and into Sogou in an
all-cash
going-private transaction (the “Sogou Merger”). Also on September 29, 2020, Sohu and its indirect wholly-owned subsidiary Sohu.com (Search) Limited (“Sohu Search”) entered into a share purchase agreement with Tencent Merger Sub (as so amended, on December 1, 2020, the “Tencent/Sohu Sogou Share Purchase Agreement”), pursuant toin which Sohu agreed to sellSearch sold all of the Sogou Class A Ordinary Sharesordinary shares of Sogou and Sogou Class B Ordinary Sharesordinary shares of Sogou owned by Sohu Search to Tencent shortly before the effectivenessMerger Sub at a purchase price of the Sogou Merger
$9.00
per share (the “Tencent/Sohu Sogou Share Purchase”). IfThe Sohu Group received gross consideration of approximately
$1.18
 billion in cash from the Tencent/Sohu Sogou Share Purchase
.
Also on September 23, 2021, shortly after the completion of the Tencent/Sohu Sogou Share Purchase, Tencent Merger Sub was merged with and into Sogou (the “Sogou Merger”) pursuant to a definitive Agreement and Plan of Merger, dated September 29, 2020 and amended on December 1, 2020 and further amended on July 19, 2021 (as so amended, the “Sogou Merger Agreement”), by and among Sogou, Tencent Merger Sub, and two other wholly-owned subsidiaries of Tencent. As a result of the completion of the Tencent/Sohu Sogou Share Purchase and the Sogou Merger, are completed, Sohu will no longer havehas any beneficial ownership interest in Sogou, and Sogou will become an indirect wholly-owned subsidiary of Tencent and will no longer be listed on the NYSE.Sogou. 
As Sohu.com Limited, or its predecessor Sohu.com Inc., iswas the controlling shareholder of Sogou before the effectiveness of the Tencent/Sohu Sogou Share Purchase, Sohu.com Limited consolidatesconsolidated Sogou in its consolidated financial statements as discontinued operations, and recognizesrecognized noncontrolling interests reflecting economic interests in Sogou held by shareholders or beneficial owners other than Sohu.com Limited (the “Sogou noncontrolling shareholders”).
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The consolidated financial statements of Sohu.com Limited represent the continuation of the financial statements of Sohu.com Inc., reflecting the assets and liabilities, accumulated deficit and other equity balances of Sohu.com Inc. immediately before Sohu.com Inc.’s dissolution on May 31, 2018.
Through the operation of Sohu and Changyou, the Sohu Group generates brand advertising revenues, online game revenues, and other revenues. Brand advertising and online games are the Sohu Group’s core businesses. ThePrior to the completion of the Tencent/Sohu Sogou Share Purchase, the Sohu Group also generatesgenerated search and search-related advertising revenues through the discontinued operations of Sogou.
The principal subsidiaries and VIEs through which the Group conductsconducted its business operations as of December 31, 20202021 are described below:
 

Name of Entity
  
Date of
Incorporation/Acquisition
  
Place of
Incorporation/
Acquisition
  
Effective
Interest
held

Interest held through
equity
ownership/contractual
arrangements
 
Subsidiaries:
           
For Sohu:
           
Sohu.com (Hong Kong) Limited (“Sohu HK”)  Incorporated on April 19, 2000  Hong Kong  100% 
Beijing Sohu New Era Information Technology Co., Ltd. (“Sohu Era”)
  Incorporated on July 25, 2003  People’s Republic of China  100% 
Sohu.com (Search) Limited (“Sohu Search”)
  Incorporated on October 28, 2005  Cayman Islands  100% 
Beijing Sohu New Media Information Technology Co., Ltd. (“Sohu Media”)
  Incorporated on June 19, 2006  People’s Republic of China  100% 
Sohu.com (Game) Limited (“Sohu Game”)
  Incorporated on February 11, 2008  Cayman Islands  100% 
Beijing Sohu New Momentum Information Technology Co., Ltd. (“Sohu New Momentum”)
  Incorporated on May 31, 2010  People’s Republic of China  100% 
Fox Video Limited (“Sohu Video”)
  Incorporated on July 26, 2011  Cayman Islands  100% 
Fox Information Technology (Tianjin) Limited (“Video Tianjin”)
  Incorporated on November 17, 2011  People’s Republic of China  100% 
Sohu Focus Limited (“Sohu Focus”)
  Incorporated on July 11, 2013  Cayman Islands  100% 
Sohu Focus (HK) Limited (“Focus HK”)
Incorporated on July 26, 2013Hong Kong100% 
For Changyou:
          
Changyou.com Limited (“Changyou”)
  Incorporated on August 6, 2007  Cayman Islands  100% 
Changyou.com (HK) Limited (“Changyou HK”)
  Incorporated on August 13, 2007  Hong Kong  100% 
Beijing AmazGame Age Internet Technology Co., Ltd. (“AmazGame”)
  Incorporated on September 26, 2007  People’s Republic of China  100% 
Beijing Changyou Gamespace Software Technology Co., Ltd. (“Gamespace”)
  Incorporated on October 29, 2009  People’s Republic of China  100% 
Changyou.com Korea LLC (“Changyou Korea”)
  Incorporated on January 7, 2010  Korea  100% 
Beijing Changyou Chuangxiang Software Technology Co., Ltd. (“Changyou Chuangxiang”)
  Incorporated on November 8, 2016  People’s Republic of China  100% 
For Sogou:
Sogou Inc. (“Sogou”)
Incorporated on December 23, 2005Cayman Islands34% 
Sogou (BVI) Limited (“Sogou BVI”)
Incorporated on December 23, 2005British Virgin Islands34% 
Beijing Sogou Technology Development Co., Ltd. (“Sogou Technology”)
Incorporated on February 8, 2006People’s Republic of China34% 
Sogou Hong Kong Limited (“Sogou HK”)
Incorporated on December 12, 2007Hong Kong34% 
Vast Creation Advertising Media Services Limited (“Vast Creation”)
Acquired on November 30, 2011Hong Kong34% 
Beijing Sogou Network Technology Co., Ltd (“Sogou Network”)
Incorporated on March 29, 2012People’s Republic of China34% 

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2
Table of Contents
Sogou (Shantou) Internet Microcredit Co., Ltd. (“Sogou Microcredit”)
Table of Contents
Incorporated on November 22, 2017People’s Republic of China34% 
Sogou (Hangzhou) Intelligent Technology Co., Ltd. (“Sogou Hangzhou”)
Incorporated on April 28, 2018People’s Republic of China34% 
Shantou Ying Zhong Bai Fu Financing Guarantee Co., Ltd. (“Sogou Financing Guarantee”)
Incorporated on July 24, 2019People’s Republic of China34% 
VIEs:
           
For Sohu:
           
Beijing Century High-Tech Investment Co., Ltd. (“High Century”)
  Incorporated on December 28, 2001  People’s Republic of China   100
%

Beijing
Heng
Da
Yi
Tong
Information
Technology
Co.,
Ltd. (“
(“Heng
Da
Yi
Tong”)
  Incorporated on February 7, 2002  People’s Republic of China   100
%
Beijing Sohu Internet Information Service Co., Ltd. (“Sohu Internet”)
  Incorporated on July 31, 2003  People’s Republic of China   100
%
Beijing Sohu Donglin Advertising Co., Ltd. (“Donglin”)
  Incorporated on May 17, 2010  People’s Republic of China   100
%

Tianjin Jinhu Culture Development Co., Ltd (“Tianjin Jinhu”)
  Incorporated on November 24, 2011  People’s Republic of China   100
%

Beijing Focus Interactive Information Service Co., Ltd. (“Focus Interactive”)
  Incorporated on July 15, 2014  People’s Republic of China   100
%
Guangzhou Qianjun Network Technology Co., Ltd. (“Guangzhou Qianjun”)Acquired on November 25, 2014People’s Republic of China100
%

For Changyou:
           
Beijing Gamease Age Digital Technology Co., Ltd. (“Gamease”)
  Incorporated on August 23, 2007  People’s Republic of China   100
%
Shanghai ICE Information Technology Co., Ltd. (“Shanghai ICE”)
  Acquired on May 28, 2010  People’s Republic of China   100
%

Beijing Guanyou Gamespace Digital Technology Co., Ltd. (“Guanyou Gamespace”)
  Incorporated on August 5, 2010  People’s Republic of China   100% 
For Sogou:%

Beijing Sogou Information Service Co., Ltd.(“Sogou Information”)
Incorporated on December 28, 2005People’s Republic of China34% 
Chengdu Easypay Technology Co., Ltd. (“Chengdu Easypay”)
Incorporated on January 19, 2015People’s Republic of China34% 

Sohu’s Business
Brand Advertising Busines
s
Business
Sohu’s main business is the brand advertising business, which offers to users, over Sohu’s matrices of Chinese language online media, various content, products and services across multiple Internet-enabled devices such as mobile phones, tablets and PCs. The majority of Sohu’s products and services are provided in China through Sohu Media Portal, Sohu Video and Focus.
 
Sohu Media Portal.
Sohu Media Portal is a leading online news, information and information
content
services provider in China. It provides users with access to comprehensive content through the mobile phone application Sohu News APP, the mobile portal m.sohu.com and www.sohu.com for PCs;
 
Sohu Video.
Sohu Video is an online video content and serviceservices provider in China through the mobile phone application Sohu Video APP, tv.sohu.com and the PC video application ifox for PCs; and
 
Focus.
Focus (www.focus.cn) is an 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 Group’s consolidated statements of comprehensive income.
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Other Sohu Business
Sohu also engages in the other business, which consists primarily of paid subscription services, interactive
interactiv
e
 broadcasting services, and
sub-licensing
of purchased video content to third parties. revenue sharing from other platforms. Revenues generated by Sohu from the other business are classified as other revenues in the Sohu Group’s consolidated statements of comprehensive income.
Changyou’s Business
Changyou’s business lines consist of the online game business and the platform channel business, which consists primarily of online advertising and mobile game distribution services. Before ceasing its operations in August 2019, Changyou also operated a cinema advertising business, which consisted primarily of the acquisition from operators of movie theaters, and the sale to advertisers, of
pre-film
advertising slots.
Online Game Business
Changyou’s online game business offers PC games and mobile games to game players. All of Changyou’s games are operated under the item-based revenue model, meaning that game players can play the games for free, but may choose to pay for virtual items, which are
non-physical
items that game players can purchase and use within a game, such as characters, weapons, gems, pets, skills, fashion items magic medicine, riding animals, hierograms, skill books and fireworks.other
in-game
consumables, features and functionalities. Revenues derived from the operation of online games are classified as online game revenues in the Sohu Group’s consolidated statements of comprehensive income.

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PC Games
PC games 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. Changyou’s dominant game is Tian Long Ba Bu (“TLBB”TLBB
PC
”), a PC based
client-end
game. For the year ended December 31, 2020,2021, revenues from
TLBB PC
were $309.7$421.7 million, accounting for approximately 58%
66% of Changyou’s online game revenues, approximately 56%65% of Changyou’s total revenues
,
and approximately 41%50% of the Sohu Group’s total revenues.
Mobile Games
Mobile games are played on mobile devices and require an Internet connection. In the second quarter of 2017, Changyou launched a mobile game, Legacy TLBB (“Legacy TLBB Mobile”), which is operated by Tencent under license from Changyou. For the year ended December 31, 2020,2021, revenues from Legacy TLBB Mobile were $88.3$79.5 million, accounting for approximately 16%12% of Changyou’s online game revenues, approximately 16%12% of Changyou’s total revenues, and approximately 12%10% of the Sohu Group’s total revenues.
Platform Channel Business
Changyou’s platform channel business consists primarily of the operation of the 17173.com Website. Prior to RaidCall’s ceasing operations in March 2019, and the sale of MoboTap Inc. (“MoboTap”) in March 2018, Changyou’s platform channel business also included RaidCall and MoboTap.RaidCall.
17173.com Website
The 17173.com Website provides news, electronic forums, online videos, and other online game information services to game players, as well as mobile game distribution services. Changyou generates online advertising revenues from providing advertising services to third-party advertisers on the 17173.com Website and online game revenues from mobile game distribution services.
RaidCall
Prior to ceasing operations in March 2019, RaidCall provided online music and entertainment services, primarily in Taiwan. IVAS revenues that were generated by RaidCall are classified as other revenues in the Sohu Group’s consolidated statements of comprehensive income.
Cinema Advertising Business (Discontinued)
Prior to ceasing its operations in August 2019, Changyou also operated a cinema advertising business, which consisted primarily of the acquisition from operators of movie theaters, and the sale to advertisers, of
pre-film
advertising slots. Revenues that were generated by Changyou’s cinema advertising business are reflected as discontinued operations in the Sohu Group’s consolidated statements of comprehensive income.
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Changyou’s Share Structure
As a result of the completion of the Changyou Merger on April 17, 2020, Sohuthe Company beneficially held and controlled, and continues to beneficially hold and control,
 100% of the combined total of Changyou’s outstanding ordinary shares and 100% of the total voting power in Changyou. Sohu consolidates Changyou in its consolidated financial statements and, prior to the completion of the Changyou Merger on April 17, 2020, also provided for noncontrolling interests reflecting ordinary shares in Changyou held by shareholders other than the Company (“Changyou noncontrolling shareholders”).
Sogou’s Business (Discontinued)
On September 29, 2020, Sohu, Sohu Search, and Tencent Merger Sub entered
Between the Company’s entry into the Tencent/Sohu Sogou Share Purchase Agreement. UponAgreement on September 29, 2020 and the signingcompletion of the Tencent/Sohu Sogou Share Purchase Agreement,on September 23, 2021, Sogou met the criteria for discontinued operations. Accordingly, the results of Sogou’s operations for Sogou’s search and search-related business and other business have beenwere excluded from Sohu’s results from continuing operations. Revenuesoperations and revenues that were generated by Sogou’s search and search-related business and other businessSogou are reflected as discontinued operations in the Sohu Group’s consolidated statements of comprehensive income. The Company ceased consolidating Sogou in the Company’s consolidated financial statements after September 23, 2021. Retrospective adjustments to the historical statements have been made in order to provide a consistent basis of comparison.
Search and Search-related Business
The
Prior to the completion of the Tencent/Sohu Sogou Share Purchase on September 23, 2021, the Group’s search and search-related business consistsconsisted primarily of search and search-related advertising services offered by Sogou. Search and search-related advertising services enableenabled advertisers’ promotional links to be displayed on Sogou’s search results pages and other Internet properties and third parties’ Internet properties where the links arewere relevant to the subject and content of searches and such properties. Sogou’s advertising services expandexpanded 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 Sogou’s collaboration with Tencent Holdings Limited (together with its subsidiaries, “Tencent”), which provides Sogou access to traffic and content generated from products and services provided by Tencent.
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Other Sogou Business
Sogou also offersoffered IVAS, primarily with respect to the operation of Web games and mobile games developed by third parties, and offersoffered other products and services, including smart hardware products and online lending and microcredit services.
Initial Public Offering of Sogou
On November 13, 2017, Sogou completed its IPO on the NYSE, trading under the symbol “SOGO.” Proceeds to Sogou from the IPO were approximately $622.1 million, after deducting underwriting discounts and commissions and offering expenses. Following the completion of Sogou’s IPO, pursuant to the Voting Agreement among Sohu, Tencent, and Sogou (the “Voting Agreement”) that took effect upon the completion of Sogou’s IPO, Sohu has the right to appoint a majority of Sogou’s Board of Directors, and Sohu continues to consolidate Sogou in Sohu’s financial statements and provide for noncontrolling interests reflecting ordinary shares in Sogou held by shareholders other than Sohu. In the fourth quarter of 2017, Sohu recognized a
one-time
credit to additional
paid-in
capital of $278.4 million in shareholders’ equity in Sohu’s consolidated balance sheets to reflect the increase in the value of Sohu’s equity in Sogou that resulted from the completion of Sogou’s IPO.
Sogou’s Share Structure
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Sogou’s Ordinary Shares are divided into Sogou Class A Ordinary Shares and Sogou Class B Ordinary Shares. Holders of Sogou Class A Ordinary Shares and holders of Sogou Class B Ordinary Shares have identical rights with the exception of voting and conversion rights. Each Sogou Class A Ordinary Share is entitled to one vote per share and is not convertible. Each Sogou Class B Ordinary Share is entitled to ten votes per share and is convertible into 1 Sogou Class A Ordinary Share at any time.
As of December 31, 2020, Sogou had a combined total of 387,590,916 Sogou Class A Ordinary Shares and Sogou Class B Ordinary Shares issued and outstanding, consisting of:
(i)
Sohu: 127,200,000 Sogou Class B Ordinary Shares held by Sohu for its own account, and 3,717,250 Sogou Class A Ordinary Shares held by Sohu for the purpose of issuance upon the exercise of outstanding share-based awards and future share-based awards;
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(ii)
Tencent: 151,557,875 Sogou Class B Ordinary Shares; 
(iii)
Photon: 24,686,863 Sogou Class A Ordinary Shares; and
(iv)
Shareholders other than Sohu, Tencent, and Photon: 80,428,928 Sogou Class A Ordinary Shares, including Sogou Class A Ordinary Shares represented by Sogou ADSs.
The total number of Sogou outstanding shares listed above include 1,899,000 Sogou Class A Ordinary Shares that are outstanding for legal purposes, but have been determined to be Sogou treasury stock for accounting purposes.
Voting Agreement between Sohu, Tencent and Sogou
Pursuant to the Voting Agreement, Sohu and Tencent agreed that, subject to certain exceptions, (1) within three years following the completion of Sogou’s IPO, Sohu will vote all Sogou Class B Ordinary Shares and any Sogou Class A Ordinary Shares held by it and Tencent will vote 45,578,896 of its Sogou Class B Ordinary Shares to elect a Board of Directors consisting of 7 directors, 4 of whom will be appointed by Sohu, two of whom will be appointed by Tencent, and the seventh of whom will be Sogou’s then chief executive officer,
and (2)
after three years following the completion of Sogou’s IPO, Sohu will be entitled to choose to change the size and composition of Sogou’s Board of Directors, subject to Tencent’s right to appoint at least one director
. The effect of these provisions is to give Sohu the power to appoint a majority of Sogou’s Board of Directors, and to give Tencent the power to appoint
2
directors within three years following the completion of Sogou’s IPO and at least
1
director after three years after the completion of Sogou’s IPO. The Voting Agreement also provides that, subject to certain conditions, for so long as Sohu and Tencent together hold more than
50
% of the total voting power of the Sogou Class A Ordinary Shares and the Sogou Class B Ordinary Shares, Sohu or Tencent may remove and replace any director appointed by it. These provisions of the Voting Agreement are also reflected in Sogou’s Third Amended and Restated Memorandum of Association (“Sogou’s Amended and Restated Memorandum of Association”) and Seventh Amended and Restated Articles of Association (“Sogou’s Amended and Restated Articles of Association”).
Due to the additional voting power of the Sogou Class B Ordinary Shares held by Sohu and Tencent, as of the date of this report Sohu holds approximately 34% of the total of Sogou’s outstanding Class A and Class B Ordinary Shares and controls approximately 44% of the total voting power of the combined total of Sogou’s outstanding Class A and Class B Ordinary Shares; Tencent has an indirect shareholding of approximately 39% of the total of Sogou’s outstanding Class A and Class B Ordinary Shares and controls approximately 52% of the total voting power of the combined total of Sogou’s outstanding Class A and Class B Ordinary Shares; and Sohu and Tencent together have the power to decide all matters that may be brought to a vote of Sogou’s shareholders.
The Voting Agreement and Sogou’s Amended and Restated Articles of Association also specify that for so long as Sohu or Tencent holds not less than 15% of Sogou’s issued shares (calculated on a fully diluted basis), consent from the holder of 15% or more (either or both of Sohu or Tencent, as the case may be) will be required (1) to amend Sogou’s Amended and Restated Memorandum of Association or Amended and Restated Articles of Association, (2) to make material changes in Sogou’s principal lines of business, (3) to issue any additional Sogou Class B Ordinary Shares, (4) to create any new class or series of shares that is pari passu with or senior to the Sogou Class A Ordinary Shares, (5) for Sogou to approve a liquidation, dissolution or winding up of Sogou, or a merger or consolidation resulting in a change in control, or any disposition of all or substantially all of Sogou’s assets, or (6) for Sogou to enter into any transactions with affiliates of Sohu, other than in the ordinary course of business. Of these corporate actions that are subject to consent of Sohu or Tencent (as applicable), shareholder approval is required under the Companies Law of the Cayman Islands for any amendment of Sogou’s Amended and Restated Memorandum of Association or Amended and Restated Articles of Association, any
winding-up
of Sogou Inc., or any merger or consolidation with a third-party entity. The Voting Agreement and Sogou’s Amended and Restated Articles of Association further provide that if Sogou’s shareholders have voted in favor of any of these actions requiring the approval of Sogou’s shareholders but consent from Sohu or Tencent (as applicable) has not been obtained, then the holders of all classes of Sogou’s shares who have voted against such action will be deemed to have such number of votes as are equal to the aggregate number of votes cast in favor of such actions plus one additional vote. Under these provisions of the Voting Agreement and Sogou’s Amended and Restated Articles of Association, if an action is proposed for which the consent of either Tencent or Sohu is required, the failure to obtain the consent of Tencent or Sohu will have the effect of the proposed action’s not being approved, even if Sogou’s other shareholders approve it.
The Voting Agreement and Sogou’s Amended and Restated Articles of Association also specify that if at any time Sohu alone holds more than 50% of the total voting power of the Sogou Class A Ordinary Shares and the Sogou Class B Ordinary Shares, the voting arrangements with respect to the size and composition of Sogou’s Board of Directors will be automatically suspended until such time within five years after the completion of Sogou’s IPO as Sohu’s voting power again drops to 50% or less, in which case the original voting arrangements will be reinstated, provided that Tencent will only be required to vote the lower of 45,578,896 Sogou Class B Ordinary Shares held by it or such number as would give Sohu combined voting power of 50.1%. If such a suspension continues after the fifth anniversary of the completion of Sogou’s IPO, the voting arrangements with respect to the size and composition of Sogou’s Board of Directors will terminate.
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All of the Sogou Class B Ordinary Shares held by Sohu will be converted into Sogou Class A Ordinary Shares if there is a transaction resulting in change of control of Sohu that was not approved by Sohu’s board of directors, if specified competitors of Tencent control Sohu, or if a majority of Sohu’s board of directors consist of nominees of specified competitors of Tencent. The provisions with respect to the size and composition of Sogou’s Board of Directors set out in the Voting Agreement and Sogou’s Amended and Restated Articles of Association will terminate upon occurrence of any such event. Such arrangements will also terminate (1) if Dr. Charles Zhang, the chairman of the board of directors of Sohu and the chief executive officer, both ceases being the chairman of the board of directors of Sohu and ceases being the single largest beneficial owner of Sohu’s outstanding shares; (2) if Sohu transfers 30% or more of the Sogou Class B Ordinary Shares that Sohu held upon the completion of Sogou’s IPO; (3) if Sogou fails to provide irrevocable instructions to the person maintaining Sogou’s register of members to accept instructions from Tencent, under certain circumstances, with respect to the conversion of Sogou Class B Ordinary Shares held by Sohu; (4) or Sogou changes, without Tencent’s consent, the person that maintains Sogou’s register of members; (5) or if Tencent ceases to own any Sogou Class B Ordinary Shares.
Under the Voting Agreement, Sohu and Tencent are subject to certain restrictions on transfer of their Sogou Class A and Class B Ordinary Shares. In particular, a transfer of Sogou Class B Ordinary Shares by either Sohu or Tencent, respectively, to any person or entity that is not a direct or indirect wholly-owned subsidiary of Sohu or Tencent, respectively, will cause such Sogou Class B Ordinary Shares to be converted into Sogou Class A Ordinary Shares.
Voting Agreement between Sohu, Photon and Sogou Management
Sohu may be deemed to have beneficial ownership attributable to shared voting power of Sogou Class A Ordinary Shares beneficially owned by Photon Group Limited (“Photon”), an investment vehicle of the Company’s Chairman and Chief Executive Officer Charles Zhang, Sogou’s chief executive officer Xiaochuan Wang, and certain other members of the Sogou management, as a result of a voting agreement by and among Sohu, Photon, Mr. Wang and the other members of Sogou management, pursuant to which Photon, Mr. Wang, and the other members of Sogou Management have agreed to vote their Sogou Class A Ordinary Shares (not including shares acquired by Mr. Wang in the public market following Sogou’s IPO) to elect Sohu’s designees to Sogou’s Board of Directors.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Discontinued operations
A component of a reporting entity or a group of components of a reporting entity that are disposed of or meet the criteria to be classified as held for sale should be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. Discontinued operations are reported when a component of an entity comprising operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity is classified as held for disposal or has been disposed of, if the component either (1) represents a strategic shift or (2) has a major impact on an entity’s financial results and operations. In the statement of financial position, the assets and liabilities of the discontinued operation are presented separately in the asset and liability sections, respectively, of the statement of financial position and prior periods are presented on a comparative basis. In the consolidated statements of comprehensive income, results from discontinued operations are reported separately from the income and expenses from continuing operations and prior periods are presented on a comparative basis. Cash flows for discontinued operations are presented separately in the consolidated statements of cash flows. In order to present the financial effects of the continuing operations and discontinued operations, revenues and expenses arising from intra-group transactions are eliminated except for those revenues and expenses that are considered to continue after the disposal of the discontinued operations.
Accounting Standards
The consolidated financial statements have been prepared in accordance with United States of America generally accepted accounting principles (“U.S. GAAP”) to reflect the financial position and results of operations of the Sohu Group.
Use of Estimates
The preparation of these financial statements requires the Sohu Group 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, the Group evaluates its 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 the Group’s most significant estimates and judgments, and those that the Group believes are the most critical to fully understanding and evaluating its consolidated financial statements.
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Basis of Consolidation and Recognition of Noncontrolling Interest
The Sohu Group’s consolidated financial statements include the accounts of the Company and its subsidiaries and consolidated VIEs. All intra-Group transactions are eliminated except for revenues and expenses arising from intra-group transactions that are considered to continue after the disposal of the discontinued operations. In the consolidated statements of comprehensive income, results from discontinued operations are reported separately from income and expenses from continuing operations and prior periods are presented on a comparative basis.
Discontinued operations
A component of a reporting entity or a group of components of a reporting entity that are disposed of or meet the criteria to be classified as held for sale should be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. Discontinued operations are reported when a component of an entity comprising operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity is classified as held for disposal or has been disposed of, if the component either (1) represents a strategic shift or (2) has a major impact on an entity’s financial results and operations. In the statement of financial position, the assets and liabilities of the discontinued operation are presented separately in the asset and liability sections, respectively, of the statement of financial position and prior periods are presented on a comparative basis. In the consolidated statements of comprehensive income, results from discontinued operations are reported separately from the income and expenses from continuing operations and prior periods are presented on a comparative basis. Cash flows for discontinued operations are presented separately in the consolidated statements of cash flows. In order to present the financial effects of the continuing operations and discontinued operations, revenues and expenses arising from intra-group transactions are eliminated except for those revenues and expenses that are considered to continue after the disposal of the discontinued operations.
VIE Consolidation
The VIEs through which the Sohu Group’s VIEsGroup conducts a substantial portion of its business operations are wholly or partially owned by certain employees of the Sohu Group as nominee shareholders. For consolidatedthe VIEs that the Sohu Group consolidates, 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 Sohu Group controls the shareholders’ voting interests in these VIEs. As a result of such evaluation, management concluded that for accounting purposes the Sohu Group is the primary beneficiary of its consolidated VIEs.the VIEs that it consolidates.
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. Currently,Prior to the completion of the Changyou Merger on April 17, 2020, the noncontrolling interests in the Sohu Group’s consolidated financial statements primarily consistconsisted of noncontrolling interests for Changyou and Sogou and, following the completion of the Changyou Merger and prior to the completion of the Tencent/Sohu Sogou Share Purchase, consisted of noncontrolling interests for Sogou.

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Noncontrolling Interest for Changyou
Prior to the completion of the Changyou Merger on April 17, 2020, Sohuthe Company consolidated Changyou in its consolidated financial statements, and also recognized noncontrolling interest reflecting the economic interest in Changyou held by Changyou noncontrolling shareholders. Changyou’s net income/(loss) attributable to the Changyou noncontrolling shareholders is recorded as noncontrolling interest in the Sohu Group’s consolidated statements of comprehensive income, based on the noncontrolling shareholders’ share of the economic interest in Changyou. Changyou’s 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 the Company’s ownership in Changyou, are recorded as noncontrolling interest in the Sohu Group’s consolidated balance sheets. As a result of the completion of Sohu’s acquisition of the noncontrolling interests in Changyou on April 17, 2020, Sohuthe Company beneficially holds and
control
s 100% of the combined total of Changyou’s outstanding ordinary shares and 100%
of the total voting power in Changyou. SohuThe Company consolidates Changyou in its consolidated financial statements, and no noncontrolling interests are recognized except for noncontrolling interests reflecting economic interests in Changyou’s subsidiaries held by shareholders other than Changyou.
Noncontrolling Interest for Sogou
Prior to the completion of Sogou’s IPO in November 2017, the Company controlled the election of a majority of the Board of Directors ofTencent/Sohu Sogou pursuant to a shareholders’ agreement that expired upon the completion of the IPO. Following the completion of Sogou’s IPO, pursuant to the Voting Agreement and Sogou’s Amended and Restated Articles of Association, the Company still has the right to appoint a majority of Sogou’s Board of Directors.
AsShare Purchase on September 23, 2021, as Sogou’s controlling shareholder, the Company consolidatesconsolidated Sogou in its consolidated financial statements as discontinued operations, and recognizesrecognized noncontrolling interest reflecting economic interests in Sogou held by Sogou noncontrolling shareholders. Sogou’s net income/(loss) attributable to the Sogou noncontrolling interest shareholders is recorded as net income/(loss) from discontinued operations attributable to the noncontrolling interest shareholders in the Company’s consolidated statements of comprehensive income.
Sogou’s cumulative results of operations attributable to the Sogou noncontrolling shareholders, based on their share of the economic interest in Sogou, along with changes in shareholders’ equity and adjustment for share-based compensation expense in relation to share-based awards that arewere unvested and vested but not yet settled and adjustment for changes in the Sohu Group’sCompany’s ownership percentage in Sogou, arewere recorded as noncontrolling interest in the Sohu Group’s consolidated balance sheets.
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Segment Reporting
The Sohu Group’s 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 Group’s CODM is the Company’s Chief Executive Officer.
Revenue Recognition
Impact of Adoption of ASC 606
On January 1, 2018, the Sohu Group adopted ASC 606, applying the modified retrospective method to contracts that were not completed as of January 1, 2018. The adoption of ASC 606 did not have a material impact on the Company’s accumulated deficit as of January 1, 2018. Results for reporting periods beginning on or after January 1, 2018 are presented under ASC 606, while prior-period amounts are not adjusted and continue to be reported in accordance with the Group’s historic accounting under ASC 605.
Under ASC 605,
advertising-for-advertising
barter transactions for which the fair value of the advertising services was not determinable were recorded at the carrying amount of the advertising surrendered, since the Group did not settle such barter transactions with the counterparties in cash. As ASC 605 has been superseded by ASC 606 on this subject,
advertising-for-advertising
barter transactions are to be recorded at the fair value of the advertising received by reference to the fair value of advertising services provided to other customers.
Under ASC 606, revenues are recognized when control of the promised goods or services is transferred to the Group’s customers, in an amount that reflects the consideration the Group expects to be entitled to in exchange for those goods or services. The recognition of revenues involves certain management judgments, including estimated lives of virtual items purchased by game players, the estimation of the fair value of an
advertising-for-advertising
barter transaction, allocation of upfront license fees for
licensed-out
games between license and post-sale services, and volumevolume-based sales rebates. The Group does not believe that significant management judgementsjudgments are involved in revenue recognition, but the amount and timing of the Group’s revenues could be different for any period if management made different judgments or utilized different estimates.
The following table presents the Group’s revenues disaggregated by products and services:
   
Year Ended

December 31, 2018

(in thousands)
 
   
Sohu
   
Changyou
   
Total
 
Brand advertising:
               
Sohu Media Portal
  $127,612    0    127,612 
Sohu Video
   53,886    0    53,886 
Focus
   31,144    0    31,144 
17173.com Website
   0    19,697    19,697 
Online games:
               
PC games
   0    236,743    236,743 
Mobile games
   0    151,737    151,737 
Other games
   0    1,308    1,308 
Others
   61,974    6,074    68,048 
                
Total
  $274,616    415,559    690,175 
                
 
   
Year Ended

December 31, 2019

(in thousands)
 
   
Sohu
   
Changyou
   
Total
 
Brand advertising:
               
Sohu Media Portal
  $94,692    0    94,692 
Sohu Video
   34,529    0    34,529 
Focus
   32,120    0    32,120 
17173.com Website
   0    13,715    13,715 
Online games:
               
PC games
   0    267,752    267,752 
Mobile games
   0    172,718    172,718 
Other games
   0    432    432 
Others
   57,082    763    57,845 
   
 
 
   
 
 
   
 
 
 
Total
  $218,423    455,380    673,803 
   
 
 
   
 
 
   
 
 
 
 
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Year Ended

December 31, 2020

(in thousands)
 
   
Sohu
   
Changyou
   
Total
 
Brand advertising:
               
Sohu Media Portal
  $86,293    0    86,293 
Sohu Video
   25,312    0    25,312 
Focus
   23,281    0    23,281 
17173.com Website
   0    11,640    11,640 
Online games:
               
PC games
   0    353,737    353,737 
Mobile games
   0    182,947    182,947 
Other games
   0    0    0 
Others
   66,658    22    66,680 
Total
  $201,544    548,346    749,890 
   
Year Ended

December 31, 2020

(in thousands)
 
   
Sohu
   
Changyou
   
Total
 
Brand advertising:
               
Sohu Media Portal
  $86,293    0    86,293 
Sohu Video
   25,312    0    25,312 
Focus
   23,281    0    23,281 
17173.com Website
   0    11,640    11,640 
Online games:
               
PC games
   0    353,737    353,737 
Mobile games
   0    182,947    182,947 
Others
   66,658    22    66,680 
   
 
 
   
 
 
   
 
 
 
Total
  $201,544    548,346    749,890 
   
 
 
   
 
 
   
 
 
 
   
Year Ended
December 31, 2021
(in thousands)
 
   
Sohu
   
Changyou
   
Total
 
Brand advertising:
               
Sohu Media Portal
  $75,408    0    75,408 
Sohu Video
   26,803    0    26,803 
Focus
   22,013    0    22,013 
17173.com Website
   0    10,743    10,743 
Online games:
               
PC games
   0    469,332    469,332 
Mobile games
   0    168,893    168,893 
Others
   62,382    2    62,384 
   
 
 
   
 
 
   
 
 
 
Total
  $186,606    648,970    835,576 
   
 
 
   
 
 
   
 
 
 
Brand Advertising Revenues
Brand advertising revenues are generated from brand advertising services. Certain customers may receive sales rebates, which are accounted for as variable consideration. The Group estimates the annual expected revenue volume from each agent with reference to its historical results. Sales rebates will reduce revenues recognized. The Group recognizes revenue for the amount of fees it receives from its advertisers, after deducting sales rebates and net of value-added tax (“VAT”). There have not been any significant changes, and the Group believes that there will not be significant changes, to its estimates of variable consideration.

Brand Advertising Revenues
Revenue Recognition of Multiple Performance Obligations
The Group’s contracts with customers may include multiple performance obligations. For such arrangements, the Group allocates revenues to each performance obligation based on its relative standalone selling price. The Group generally determines the standalone selling price of each distinct performance obligation based on the prices charged to customers when sold on a standalone basis. Where a standalone selling price is not directly observable, the Group generally estimates the selling price based on the prices at which performance obligations of a similar nature and geography are charged to customers. Most of such contracts have all performance obligations completed within the same quarter.

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Pricing Model
Through mobile devices and PCs, the Group provides advertisement placements to its 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,
in-feed
video infomercial ads and other formats.
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Currently the Group has three main types of pricing models, consisting of the Fixed Price model, the Cost Per Impression (“CPM”) model and the Cost Per Click (“CPC”) model.
(i) Fixed Price model
(i)
Fixed Price model
Under the Fixed Price model, a contract is signed to establish a fixed price for the advertising services to be provided. Given that the advertisers benefit from displayed advertisements evenly over the period the advertisements are displayed, the Group recognizes revenue on a straight-line basis over the period of display, provided all revenue recognition criteria have been met.
(ii) CPM model
(ii)
CPM model
Under the CPM model, the unit price for each qualifying display is fixed and 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. Given that the fees are priced consistently throughout the contract and the unit prices are fixed in accordance with the Group’s pricing practices for similar advertisers, the Group recognizes revenue based on the fixed unit prices and the number of qualifying displays upon their occurrence, provided all revenue recognition criteria have been met.
(iii) CPC model
(iii)
CPC model
Under the CPC model, there is no fixed price for advertising services stated in the contract with the advertiser and the unit price for each click is auction-based. The Group charges advertisers on a
per-click
basis, when the users click on the advertisements. Given that the fees are priced consistently throughout the contract and the unit prices are fixed in accordance with the Group’s pricing practices for similar advertisers, the Group recognizes revenue based on qualifying clicks and unit price upon the occurrence of the clicks, provided all revenue recognition criteria have been met.
Online Game Revenues
Changyou’s online game revenues are generated primarily from its self-operated and
licensed-out
PC games and mobile games. Prior to the sale of the MoboTap business in 2018, Changyou also generated a small amount of revenues from online card and board games. All of Changyou’s 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.
Changyou is the principal 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 net of VAT and discounts to game card distributors where applicable. Changyou obtains revenues from the sale of
in-game
virtual items. Revenues are recognized over time for virtual items with estimated lives and upon use for items that are consumed immediately. 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.
PC Games
Proceeds from Changyou’s self-operated PC games are collected from players and third-party game card distributors through sales of Changyou’s game points on its online payment platform and prepaid game cards.
Changyou’s 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 Changyou’s cost of revenues.
Mobile Games
Self-operated 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.
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Changyou’s 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 included in Changyou’s cost of revenues.
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Licensed Out Mobile Games
Changyou also authorizes third parties to operate its mobile games. Licensed out games include mobile games developed in house, such as Changyou’s mobile game Legacy TLBB Mobile, and mobile games jointly developed with third-party developers. Changyou receives monthly revenue-based royalty payments from 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 Changyou’s games in specified geographic areas. Since Changyou is obligated to provide post-sale services (“PCS”), the initial license fees are allocated between the license and PCS based on relative standalone selling prices. The amount allocated to the license is recognized as revenue upon the commencement of the license period, given that Changyou’s intellectual property rights subject to the license are considered to be functional and the licensee has the right to use such intellectual property rights as they exist at the point when the license is granted, and the amount allocated to PCS is recognized as revenue ratably over the license period. Monthly revenue-based royalty payments are recognized when the relevant services are delivered, provided that collectability is reasonably assured. Changyou views the third-party licensee operators as Changyou’s 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 and keeps the balance pursuant to revenue-sharing agreements. Such revenue-sharing amounts paid to third-party developers are included in Changyou’s cost of revenues or product development expenses.
Other Revenues
Sohu
Other revenues attributable to Sohu consist primarily of revenues from paid subscription services, interactive broadcasting services, and
sub-licensing revenue sharing from other platforms.
of purchased video content to third parties.
Changyou
Other revenues attributable to Changyou are primarily from IVAS.
Revenues generated from Changyou’s IVAS were derived primarily from software applications for PCs and mobile devices offered by RaidCall, which ceased operations in March 2019. Prior to March 2018, IVAS revenues also included revenues generated from the Dolphin Browser operated by MoboTap. Revenues from IVAS are recognized during the period the services are rendered or items are consumed under the gross method, as Changyou is the principal obligor for provision of the services.

As of August 12, 2019, the Sohu Group ceased consolidating Changyou’s cinema advertising business in its consolidated financial statements and, accordingly, the financial results of the cinema advertising business are excluded from the Sohu Group’s results from continuing operations and are presented in separate line items as discontinued operations in the consolidated financial statements, and retrospective adjustments to the Sohu Group’s historical audited consolidated financial statements have been made in order to provide a consistent basis of comparison.
Contract Balances
Timing of revenue recognition may differ from the timing of invoicing to customers. Accounts receivable represent amounts invoiced and revenue recognized prior to invoicing, when the Group has satisfied its performance obligations and has the unconditional right to payment. The allowance for credit losses is estimated based upon the Group’s assessment of various factors, including past collection experience and consideration of current and future economic conditions and other factors that may affect the Group’s customers’ ability to pay. Contract assets as of December 31, 20202021 were 0t not
material. The allowance for credit losses was $7.0
$12.4 million and $4.0$7.0 million, respectively, as of December 31, 20202021 and December 31, 2019.2020.
Receipts in advance and deferred revenue relate to unsatisfied performance obligations at the end of the period and primarily consist of fees received from game players in the online game business and from advertisers in the brand advertising business. Due to the generally short-term duration of the contracts, the majority of the performance obligations are satisfied in the following reporting period. The amount of revenue recognized that was included in the receipts in advance and deferred revenue balance at the beginning of the period was $42.6$46.4 million for the year ended December 31, 2020.2021.
There was no significant change in the contract assets and contract liability balances during 2020.
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Revenue recognized in 20202021 from performance obligations related to prior years was not material.

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Practical Expedients
The Group has used the following practical expedients as allowed under ASC 606:
(i) The transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied has not been disclosed, as substantially all of the Group’s contracts have a duration of one year or less.
(ii) Payment terms and conditions vary by contract type, although terms generally include a requirement of prepayment or payment within one year or less. In instances where the timing of revenue recognition differs from the timing of invoicing, the Group has determined that its contracts generally do not include a significant financing component.
(iii) The Group applied the portfolio approach in determining the commencement date of consumption and the estimated lives of virtual items for the recognition of games revenue, given that the effect of applying a portfolio approach to a group game players’ behaviors would not differ materially from considering each one of them individually.
(iv) The Group generally expenses sales commissions when incurred because the amortization period would be one year or less. These costs are recorded within sales and marketing expenses.
Cost of Revenue
sRevenues
Cost of Brand Advertising Revenues
Cost of brand advertising revenues mainly consists of salary and benefits expenses, content and license costs, salary and benefits expenses and bandwidth service costs.incurred for related events. For self-developed video content, production costs incurred in excess of the amount of revenue contracted for are expensed as incurred.
Cost of Online Game Revenues
Cost of online game revenues mainly consists of revenue-sharing payments, bandwidth service costs, salary and benefits expenses, bandwidth servicecontent and license costs, tax surcharges, depreciation and amortization expenses, content and license costs, and other direct costs.
Cost of Other Revenues
Cost of other revenues mainly consists of revenue-sharing payments related to interactive broadcasting services, revenue-sharing payments related to paid subscription services, and content and license costs related to paid subscription services, revenue-sharing payments related to paid subscription services.
Product Development Expenses
Product development expenses mainly consist of salary and benefits expenses, content and license costs, professional fees, depreciation and amortization expenses, professional fees,facilities expenses, travel and entertainment expenses, and share-based compensation and facilities expenses.expense. These expenses are incurred for the enhancement and maintenance of the Sohu Group’s Internet platforms as well as for its products and services. The development costs of online games are expensed as incurred, including the development costs of online games prior to the establishment of technological feasibility and maintenance costs after the online games are available for marketing.
Sales and Marketing Expenses
Sales and marketing expenses mainly consist of advertising and promotional expenses, salary and benefits expenses, travel and entertainment expenses, and facilities expenses. Advertising and promotional expenses generally represent the expenses of promotions to create or stimulate a positive image of the Sohu Group or a desire to subscribe for the Group’s products and services. Advertising and promotional expenses are expensed as incurred.
General and Administrative Expenses
General and administrative expenses mainly consist of salary and benefits expenses, bad debts, professional fees, share-based compensation bad debts,expense, travel and entertainment expenses, and facilities expenses.

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Share-based Compensation Expense
Sohu (excluding Sohu Video), Changyou, Sogou, and Sohu Video have incentive plans for the granting of share-based awards, including 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 management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. If factors change or different assumptions are used, the Group’s 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.
After the completion of the Changyou Merger, the board of directors of Sohu (the
the
C
ompany
(the “Sohu Board”) approved a modification plan for the granted but unvested share options under the Changyou 2014 Share Incentive Plan and the Changyou 2019 Share Incentive Plan (the “Changyou Plans’ Modification”). After the Changyou Plans’ Modification, liability will be accrued over the service period based on a fixed price of $5.39 per Changyou Class A ordinary share, which equals the Changyou Merger consideration of $5.40 per Changyou Class A ordinary share minus the
per-share
exercise price of $0.01 of such options.
No subsequent fair value
re-measurement
will be made given the award is an obligationawards are obligations based on a fixed amount underlying such vested share options.of $5.39 per Changyou Class A ordinary share.
Sohu (excluding Sohu Video), and Changyou and Sogou Share-based Awards
Sohu (excluding Sohu Video) Share-based Awards
In determining the fair value of share options granted by Sohu (excluding Sohu Video) as share-based awards, the public market price of the underlying shares at each reporting date was used, and a binomial 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.
Upon the dissolution of Sohu.com Inc. on May 31, 2018, Sohu.com Limited assumed all then existing obligations of Sohu.com Inc. with respect to equity incentive awards that had been granted under Sohu.com Inc.’s Amended and Restated 2010 Stock Incentive Plan (the “Sohu 2010 Stock Incentive Plan”) and remained outstanding, and such awards were converted into the right to receive upon exercise or settlement Sohu.com Limited’s ordinary shares under the Sohu.com Limited 2018 Share Incentive Plan (the “Sohu 2018 Share Incentive Plan”) rather than shares of the common stock of Sohu.com Inc., subject to the other terms of such outstanding awards. Options for the purchase of Sohu.com Limited’s ordinary shares, including options converted from those 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.
Changyou Share-based Awards
Options for the purchase of Changyou Class A ordinary shares contractually granted under the Changyou 2014 Share Incentive Plan and the Changyou 2019 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 estimates 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.

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After the Changyou Plans’ Modification, a portion of the share options previously granted under the Changyou 2014 Share Incentive Plan that became vested after the completion of the Changyou Merger were settled by Changyou at a fixed price of $5.39$
5.39
 per Changyou Class A ordinary share, which equals the Changyou Merger consideration of $5.40 $
5.40
per Changyou Class A ordinary share minus the
per-share
exercise price of $0.01 $
0.01
of such options. None of the remaining share options granted under the Changyou 2014 Share Incentive Plan that became vested after the completion of the Changyou Merger or that become vested in the future, and none of the share options granted under the Changyou 2019 Share Incentive Plan, will be exercisable, but can only be repurchased by Changyou at a fixed price of $5.39 $
5.39
per Changyou Class A ordinary share underlying such vested share options upon termination of the option holders’ employment or upon approval of the Chairman of the Sohu Board. As a result of the Changyou Plans’ Modification, share-based compensation expense will be accrued over the service period based on the fixed price of $5.39 $
5.39
per Changyou Class A ordinary share. No subsequent fair value
re-measurement
will be made, given that the award is an obligation based on a fixed amount of $5.39 $
5.39
per Changyou Class A ordinary share.
As of December 31, 2020, 4,210,0002021, 5,443,000 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. Cumulative share-based compensation expense of $15.7$23.5 million was accrued based on the fixed price of $5.39 per Changyou Class A ordinary share.
Sogou Share-based Award
s
In determining the fair value of share options granted by Sogou as share-based awards, a binomial valuation 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, expected share price volatility rates, and expected dividends. The fair values of the ordinary shares were determined based on the trading price of Sogou ADSs in the public market.
Before Sogou’s adoption of ASU
2018-07
“Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting,” effective for fiscal years beginning after December 15, 2018, share-based compensation expense for share options granted to
non-employees
was measured at fair value at the earlier of the performance commitment date or the date service was completed and recognized over the period during which the service was provided. Sogou applied the guidance in ASC
505-50
to measure share options granted to
non-employees
based on the then-current fair value at each reporting date until the service was provided and the performance targets were met. After Sogou’s adoption of ASU
2018-07,
share-based compensation expense for share options granted to
non-employees
is recognized in accordance with the requirements of ASC 718 for employee share-based compensation awards.
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 upon the requisite service period and certain subjective performance targets being met. 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, or, after the performance target of Sogou’s completion of an IPO was met upon the completion of Sogou’s IPO on November 13, 2017, on an accelerated basis over the requisite service period, or, for options with only service period requirement, on an accelerated basis over the requisite service period. 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. Compensation expense recognized by Sogou is reflected as discontinued operations in the Sohu Group’s consolidated statements of comprehensive income. 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.
Sohu Video Share-based Awards
On January 4, 2012, Sohu Video, the holding entity of Sohu’s video division, adopted a 2011 Share Incentive Plan (the “Sohu Video Share Incentive
Plan”),
which providesprovided 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. The maximum term of any
share
-
based
award granted under the Sohu Video Share Incentive Plan is 10 years from the grant date. The Sohu Video Share Incentive Plan expired on
January 4, 2022, and is no longer available for granting new share-based awards.
As of December 31, 2020,2021, 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 Video’s achievement of whichperformance targets for the corresponding period.
As of December 31, 2021, options for the purchase ofo
f
 4,972,800
Sohu Video ordinary shares were vested.
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For purposes of ASC
718-10-25,
as of December 31, 2020,2021, 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 Group’s 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 thesethose 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, which the Group will continue to do until the grant date is established.
Taxation
PRC Corporate Income Tax
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 the Group’s 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, the Group considers 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 the Group to realize more of its 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 the Group to realize less of its 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.

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The Group’s deferred tax assets are related to net operating losses and temporary differences between accountingbook versus tax basis and tax basisdifferences for its China-based Subsidiaries and VIEs, which are subject to corporate income tax in the PRC under the PRC Corporate Income Tax Law (the “CIT Law”).​​​​​​​
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,” 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 PRC business tax to the imposition of VAT was expanded to all industries in China, and all of the Sohu Group’s 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 rates(
at
a rate of 6% or 17% for the period from January 1, 2018 to April 30, 2018, at rates of 6% or 16% for the period from May 1, 2018 to March 31, 2019, and at rates of 6% or 13% after April 1, 2019)) and the available input VAT amount (at the rate applicable to the supplier).
Taxation on distributions from VIEs to the Subsidiaries
Pursuant to the contractual agreements with the VIEs and their respective shareholders, the Sohu Group’s PRC subsidiaries charge the VIEs service fees. For income tax purposes, the Sohu Group’s PRC subsidiaries and the VIEs file income tax returns on a separate basis. The service fees paid by the VIEs are deductible by the VIEs for PRC income tax purposes and are recognized as income by the Sohu Group’s PRC subsidiaries. The effect on the Sohu Group is tax neutral when the VIEs and the PRC subsidiaries have the same income tax rate.
U.S. Corporate Income Tax
Sohu.com Inc., which was formerly the
top-tier
publicly-traded parent company of the Sohu Group, was dissolved and liquidated on May 31, 2018. Sohu.com Inc. was a Delaware corporation that was subject to U.S. federal corporate income tax on its taxable income at a rate of 21% for taxable years beginning after December 31, 2017 and of up to 35% for prior tax years. U.S. federal tax legislation signed into law on December 22, 2017, commonly referred to as the Tax Cuts and Jobs Act (the “U.S. TCJA”), significantly modified the U.S. Internal Revenue Code by, among other things, reducing the maximum statutory U.S. federal corporate income tax rate from 35% to 21% for taxable years beginning after December 31, 2017; limiting and/or eliminating many business deductions; migrating the U.S. to a partial territorial tax system with a
one-time
transition tax (the “Toll Charge”) on a mandatory deemed repatriation of previously deferred foreign earnings of certain foreign subsidiaries; subject to certain limitations, generally eliminating U.S. corporate income tax on dividends from foreign subsidiaries; and providing for new taxes on certain foreign earnings.
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Certain activities conducted in the PRC resulted in U.S. corporate income taxes being imposed on Sohu.com Inc. when its subsidiaries that were controlled foreign corporations (“CFCs”) generated income that was 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 the company’s investments, iswas among the types of income that were subject to taxation under Subpart F. Any income taxable under Subpart F was taxable in the U.S. at the applicable federal corporate income tax rate. Subpart F income also included certain income from intra-Group transactions between Sohu.com Inc.’s
non-U.S.
subsidiaries and VIEs and Changyou’s
non-U.S.
subsidiaries and VIEs or Sogou’s
non-U.S.
subsidiaries and VIEs, or where Sohu.com Inc.’s
non-U.S.
subsidiaries or VIEs made an “investment in U.S. property,” such as holding 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. did not have to treat dividends received by its CFC subsidiaries as Subpart F income includible in Sohu.com Inc.’s taxable income in the U.SU.S.
.
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To the extent that portions of Sohu.com Inc.’s U.S. taxable income, such as Subpart F income or global intangible
low-taxed
income (“GILTI”), as applicable, had been determined to be from sources outside of the U.S., subject to certain limitations, Sohu.com Inc. may have been entitled to claim foreign tax credits to offset its U.S. income tax liabilities. Following the enactment of the U.S. TCJA, if dividends that Sohu.com Inc. received from its subsidiaries after January 1, 2018 were determined to be from sources outside of the U.S., subject to certain limitations, Sohu.com Inc. would generally not have been required to pay U.S. corporate income tax on those dividends. Liabilities for U.S. corporate income tax were accrued in the Company’s consolidated statements of comprehensive income and estimated tax payments were made when required by U.S. law.
Treatment of Toll Charge Related to the U.S. TCJA
Beginning in the fourth quarter of 2017, the Sohu Group had recognized a provisional amount of income tax expense for the Toll Charge of $219 million, which represented management’s estimate of the amount of the Toll Charge that would have been payable by Sohu.com Inc. based on the deemed repatriation to the United States of its share of previously deferred earnings of certain of its
non-U.S.
subsidiaries, offset by a reduction of $4 million in liability for deferred U.S. income tax, as a result of the U.S. TCJA. The Sohu Group included the provisional amount of the Toll Charge of $219 million in its interim financial statements through the quarter ended September 30, 2018, in reliance on Staff Accounting Bulletin No. 118 (“SAB 118”).
For the fourth quarter of 2018, the Sohu Group’s management
re-evaluated
the impact on the Sohu Group of the Toll Charge under the U.S. TCJA. Management determined that it was more likely than not, based on the technical merits, that the tax position that the Sohu Group had no Toll Charge liability would be sustained. The Group recognized a tax benefit in the amount of $77 million, which was the largest amount that management determined to be greater than 50% likely to be realized upon settlement with the U.S. IRS. As a result, as of December 31, 2018, the Sohu Group had an unrecognized tax benefit in the amount of $142 million, which represented the difference between the tax benefit recognized in the fourth quarter of 2018 and management’s previous estimate of the Toll Charge. The estimate remained unchanged as of December 31, 2019 and December 31, 2020.2021. In addition, the Sohu Group accrued $8$6 million and $6$5 million, respectively, in interest on the unrecognized tax benefit for the years of 20192020 and 2020.2021.
The tax benefit recognized and the unrecognized tax benefit in relation to the Toll Charge may be subject to further adjustment in subsequent periods based on facts and circumstances that arose after December 31, 2020,2021, such as any IRS assessments upon audit and management’s further judgment and estimates.
Uncertain Tax Positions
The Sohu Group is subject to various taxes in different jurisdictions, but primarily the PRC. Management reviews regularly the adequacy of the provisions for taxes as they relate to the Group’s 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.
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Net Income/(Loss) per Share
Basic net income/(loss) per share is computed using the weighted average number of ordinary shares outstanding during the period. Diluted net income/(loss) per share is computed using the weighted average number of ordinary shares and, if dilutive, potential ordinary shares outstanding during the period. Potential ordinary shares 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 calculated as discussed below. The adjustment will not be made if there is an anti-dilutive effect.
Changyou’s net income/(loss) attributable to Sohu
Prior to the completion of the Changyou Merger on April 17, 2020, Changyou’s net income/(loss) attributable to Sohu was determined using the percentage that the weighted average number of Changyou shares held by Sohu represented 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 of the total economic interest in Changyou, which was used for the calculation of basic net income per share. After the completion of the Changyou Merger, Sohu holds 100% of the combined total of Changyou’s outstanding ordinary shares, so Changyou’s net income/(loss)
is
wholly attributable to Sohu.
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As a result of the Changyou Plans’ Modification, a portion of the share options previously granted under the Changyou 2014 Share Incentive Plan that became vested after the completion of the Changyou Merger were settled by Changyou at a fixed price of $5.39 per Changyou Class A ordinary share, which equals the Changyou Merger consideration of $5.40 per Changyou Class A ordinary share minus the
per-share
exercise price of $0.01 of such options. None of the remaining share options granted under the Changyou 2014 Share Incentive Plan that became vested after the completion of the Changyou Merger or that become vested in the future, and none of the share options granted under the Changyou 2019 Share Incentive Plan, will be exercisable, but can only be repurchased by Changyou at a fixed price of $5.39 per Changyou Class A ordinary share underlying such vested share options upon termination of the option holders’ employment or upon approval of the Chairman of the Sohu Board. As a result of the Changyou Plans’ Modification, share-based compensation expense will be accrued over the service period based on the fixed price of $5.39 per Changyou Class A ordinary share. No subsequent fair value
re-measurement
will be made, given that the award is an obligation based on a fixed amount of $5.39 per Changyou Class A ordinary share.

In the calculation of Sohu’s diluted net income/(loss) per share, before the Sohu Board’s approval of the Changyou Plans’ Modification, a dilutive effect should be assumed. All of Changyou’s existing unvested restricted share units and share options, and vested restricted share units and share options that have not yet been settled or exercised, 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 in Changyou to decrease. As a result, Changyou’s net income/(loss) attributable to Sohu 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’s diluted net income/(loss) per share. As a result, Changyou’s net income/(loss) attributable to Sohu on a diluted basis equals the number used for the calculation of Sohu’s basic net income/(loss) per share.
As a result ofAfter the Changyou Plans’ Modification, all of Changyou’s previously granted share-based awards have beenwere reclassified as obligation-based awards. Accordingly, all of those Changyou awards are excluded from the calculation of Sohu’s diluted net income/(loss) per share. Changyou’s net income/(loss) attributable to Sohu on a diluted basis equals the number used for the calculation of Sohu’s basis net income/(loss) per share. There have been no diluteddilutive effects resulting from Changyou’s existing unvested share options.
Sogou’s net income/(loss) attributable to Sohu (Discontinued)
Prior to the completion of the Tencent/Sohu Sogou Share Purchase on September 23, 2021, Sogou’s net income/(loss) attributable to Sohu iswas determined using the percentage that the weighted average number of Sogou shares held by Sohu representsrepresented of the weighted average number of Sogou 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 of the total economic interest in Sogou, which is used for the calculation of basic net income per share. Sogou’s net income/(loss) attributable to Sohu is reflected as discontinued operations in the Sohu Group’s consolidated statements of comprehensive income.
In the calculation of Sohu’s diluted net income/(loss) per share, assuming a dilutive effect, the percentage of Sohu’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 withwhere the performance targets had been 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’s diluted income/(loss) per share. As a result, Sogou’s net income/(loss) attributable to Sohu on a diluted basis equals the number used for the calculation of Sohu’s basic net income/(loss) per share.
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As a result of the completion of the Tencent/Sohu Sogou Share Purchase, Sohu no longer has any ownership interest in Sogou and Sogou is not included in Sohu’s consolidated financial statements.
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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
.activity.
The Sohu Group’s financial instruments consist primarily of cash equivalents, restricted cash, short-term investments, accounts receivable, prepaid and other current assets, long-term investments, long-term time deposits, restricted time deposits, accounts payable, accrued liabilities, receipts in advance and deferred revenue, short-term bank loans, other short-term liabilities, long-term bank loans, and long-term accounts payable.other payables.

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Cash Equivalents
The Sohu Group’s 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.
Restricted Cash and Restricted Time Deposits
Restricted cash and restricted time deposits are valued based on the prevailing interest rates in the market using the discounted cash flow method. See Note 10 - Fair Value Measurements.
Short-term Investments
The Sohu Group’s short-term investments mainly consist of investments in financial instruments with a variable interest rate and time deposits with maturities of three months to one year. For investments in financial instruments with a variable interest rate indexed to the performance of underlying assets and time deposits, the Sohu Group 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 for credit losses that reflects the Sohu Group’s best estimate of the amounts that will not be collected. The Group makes estimations of the collectability of accounts receivable. Many factors are considered in estimating the general allowance, including reviewing delinquent accounts receivable, performing a customer credit analysis, and analyzing historical bad debt records and current and future economic trends.
Accounts receivable are measured at amortized cost and reported on the consolidated balance sheets at the outstanding principals adjusted for any write-offs and anyrepresent historical balances recorded less related cash applications, less allowance for credit losses.losses and any write-offs of any receivables not previously provided for.
Allowance for credit losses
Effective on January 1, 2020, the Sohu Group adopted Accounting Standards Update (ASU)
2016-13,
“Financial Instruments - Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU
2016-13”)
under a modified retrospective transition. This guidance replaces the existing “incurred loss” methodology, and introduces an expected loss approach using macroeconomic forecasts, referred to as a current expected credit losses (“CECL”) methodology. Under the incurred loss methodology, credit losses are only recognized when the losses are probable of having been incurred. The CECL methodology requires that the full amount of expected credit losses for the lifetime of the financial instrument be recorded at the time it is originated or acquired, considering relevant historical experience, current conditions and reasonable and supportable macroeconomic forecasts that affect the collectability of financial assets, and adjusted for changes in expected lifetime credit losses subsequently, which may require earlier recognition of credit losses.
The Sohu Group adopted ASU
2016-13
using the modified retrospective transition approach and recognized a cumulative-effect adjustment of approximately $6.7 million to the opening balance of accumulated deficit in the consolidated financial statements.statements, including an increase of approximately $3.4 million in the allowance for credit losses of accounts receivable, and an increase of approximately $3.3 million in the allowance for credit losses of accounts receivable and financing receivables classified as assets held for sale. Results for reporting periods beginning after January 1, 2020 are presented using the CECL methodology while comparative information continues to be reported in accordance with the incurred loss methodology in effect for prior periods.
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The following table shows the overall adjustments recognized for each individual line item (in thousands).
   
December 31,

2019
   
ASU 2016-13

adjustment
   
January 1,

2020
 
Allowance for credit losses
               
Accounts receivable, net
  $126,081   $(3,383)   $122,698 
Accounts receivable and financing receivables, net classified as assets held for sale (1)
   134,635    (3,273)    131,362 
                
Total assets
   2,691,864    (6,656)    2,685,208 
Shareholders’ equity
               
Accumulated deficit
   (544,137)    (6,656)    (550,793) 
Note (1): Of the total adjustment of $3.3 million, $2.5 million was related to financing receivables.
Accounts receivable, net
The allowance for credit losses reflects the Sohu Group’s estimated expected losses. The Sohu Group estimates the allowance for credit losses, mainly based on past collection experience as well as consideration of current and future economic conditions and changes in the Sohu Group’s collection trends. The Sohu Group estimates the expected credit losses for accounts receivable with similar risk characteristics on a pool basis. For each pool, the Sohu Group first estimates its recovery period based on relevant historical accounts receivable collection information. Then the Sohu Group estimates the credit allowances based on the recovery period, the historical distribution of each aging bucket, and the impact of macroeconomic factors.
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Accounts receivable are written off when there is no reasonable expectation of recovery. Allowance for credit losses is presented as net impairment losses within operating profit. Subsequent recoveries of amounts previously written off are credited against the same line item.
Accounts receivable, net, as of December 31, 20192020 and 20202021 consisted of the following (in thousands):
 
   
As of December 31,
 
   
2019
   
2020
 
Accounts receivable, net
          
Accounts receivable
  $130,037   $94,528 
Less: Allowance for credit losses
   (3,956)    (7,007) 
           
   $126,081   $87,521 
   
As of December 31,
 
   
2020
   
2021
 
Accounts receivable, net
          
Accounts receivable
  $94,528   $94,908 
Less: Allowance for credit losses
   (7,007)    (12,358) 
   
 
 
   
 
 
 
   $87,521   $82,550 
The following table presents the aging analysis of accounts receivable as of December 31, 20192020 and 2020 (in2021
(in thousands):
 
   
As of December 31,
 
   
2019
   
2020
 
Less than 179 days
  $113,173   $78,805 
180-359
days
   6,516    7,569 
360 days and greater   10,348    8,154 
           
Total
   130,037    94,528 
F-33
   
As of December 31,
 
   
2020
   
2021
 
Less than 179 days
  $78,805   $79,155 
180-359
days
   7,569    7,437 
360 days and greater
   8,154    8,316 
   
 
 
      
Total
   94,528    94,908 
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The movement of allowance for credit losses for the years ended December 31, 2018, 2019, 2020 and 20202021 was as follows (in thousands):
 
   
For the year ended December 31,
 
   
2018
   
2019
   
2020
 
Balance at the beginning of year
  $4,487   $7,574   $3,956 
Changes on initial application of ASU
2016-13
(1)
   0    0    3,383 
Additional allowance for credit losses, net of recoveries
   5,449    4,724    2,419 
Write-offs
   (1,940)    (8,237)    (3,231) 
Exchange difference
   (422)    (105)    480 
                
Balance at the end of year
   7,574    3,956    7,007 
   
For the year ended December 31,
 
   
2019
   
2020
   
2021
 
Balance at the beginning of year
  $7,574   $3,956   $7,007 
Changes on initial application of ASU
2016-13
(1)
   0    3,383    0 
Additional allowance for credit losses, net of recoveries
   4,724    2,419    6,292 
Write-offs
   (8,237)    (3,231)    (1,155) 
Exchange difference
   (105)    480    214 
   
 
 
   
 
 
   
 
 
 
Balance at the end of year
   3,956    7,007    12,358 
Note (1): The Company adopted ASU
2016-13
using the modified retrospective transition approach. The adjustments arising from the new CECL model are recognized in the opening Consolidated Balance Sheet on January 1, 2020.
Accounts Receivable and Financing Receivables, Net classified as assets held for sale
Financing receivables, net, classified as assets held for sale consist primarily of small consumer loans that Sogou makes to individual borrowers. Sogou funds such loans either through its own capital or through a trust which was jointly established by Sogou and a third-party investor, and is administered by a third-party trust company. As the trust only invests in loans facilitated by Sogou, Sogou has power to direct the activities of the trust. Sogou also has the obligation to absorb losses and the right to receive benefits from the trust that could potentially be significant to the trust. As a result, Sogou is considered the primary beneficiary of the trust and the trust is considered a consolidated VIE (the “Consolidated Trust”) under ASC 810.
The financing receivables, net, classified as assets held for sale are recorded at the principal amount and interest accrued, net of allowance for credit losses that reflects Sogou’s best estimate of the amounts that will not be collected. Interest on loans is accrued based on the contractual interest rates of the loans when earned. The loan periods granted by Sogou to the borrowers related to the small consumer loans are generally within one year.
Sogou estimates its credit losses of the financing receivables collectively, using a pool basis within applicable credit risk classification levels of the underlying customers, mainly based on delinquency levels. The significant assumptions used in the process of estimating the allowance for credit losses include portfolio composition, loan delinquencies, loss severity and recoveries, and application of macroeconomic forecasts. The lifetime CECL allowance is measured as the product of the ending balance and two key parameters, the lifetime Probability of Default (“PD”) and Loss Given Default (“LGD”). PD represents the expected probability of payment and time to default of small consumer loans made by Sogou. LGD represents the percentage of the expected balance due at default that is not recoverable. The calibration of PD and LGD starts with the Sogou’s historical information, with PD considering vintage, recent performance, and macroeconomic factors and LGD being assessed based on portfolio delinquencies, loss severity, and future recoveries default. The estimated credit losses are further adjusted to incorporate the impact of macroeconomic conditions. To incorporate the impact based on Sogou’s macroeconomic forecasts, quantitative adjustments are applied to key parameters such as PD and LGD on a collective basis. Macroeconomic factors used in models include variables such as consumer price index and total retail sales of consumer goods. 
Financing receivables are written off when there is no reasonable expectation of recovery. Allowance for credit losses is presented as net impairment losses within operating profit. Subsequent recoveries of amounts previously written off are credited against the same line item.
The accounts receivable and financing receivables, net, classified as assets held for sale as of December 31, 2019 and 2020 consisted of the following (in thousands):
   
As of December 31,
 
   
2019
   
2020
 
Accounts receivable
  $77,210   $35,975 
Financing receivables
   66,858    41,911 
Less: Allowance for credit losses (1)
   (12,255)    (6,700) 
           
   $131,813   $71,186 
Note (1): The allowance for credit losses related to financing receivables was $6.4 million as of December 31, 2020.
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The following table summarizes the
past-due
status of the principle of financing receivables classified as assets held for sale as of December 31, 2019 and 2020 (in thousands):
   
1 - 
30
 Days

Past Due
   
31
 
-
 
60 
 Days
Past
 
Due
   
6
1 -
 
9
0
 Days
Past Due
   
Greater
 
than
 
90 Days
Past
 
Due
   
Total

Past Due
   
Current
   
Total
 
December 31, 2019
                                   
Financing receivables by origination year
                                   
2018
  $0   $0   $0   $0   $0   $1,744   $1,744 
2019
   10,606    1,635    1,176    1,709    15,126    49,988    65,114 
                                    
Total
   10,606    1,635    1,176    1,709    15,126    51,732    66,858 
December 31, 2020
                                   
Financing receivables by origination year
                                   
2018
  $0   $0   $0   $0   $0   $1,081   $1,081 
2019
   1    1    2    0    4    182    186 
2020
   7,037    576    548    501    8,662    31,982    40,644 
                                    
Total
  $7,038   $577   $550   $501   $8,666   $33,245   $41,911 
The movement of allowance for credit losses for the years ended December 31, 2018, 2019 and 2020 was as follows (in thousands):
   
For the year ended December 31,
 
   
2018
   
2019
   
2020
 
Beginning balance
  $384   $7,511   $12,255 
Change on initial application of ASU
2016-13
(1)
   0    0    3,273 
Additional allowance for credit losses, net of recoveries
   9,119    15,620    3,049 
Write-offs
   (1,908)    (11,741)    (12,517) 
Exchange difference
   (84)    865    640 
                
Balance at the end of year
  $7,511   $12,255   $6,700 
Note (1): The Group adopted ASU
2016-13
using the modified retrospective transition approach. The adjustments arising from the new CECL model are recognized in the opening consolidated balance sheet on January 1, 2020.
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.
Restricted Cash and Restricted Time Deposits
Restricted cash and restricted time deposits are valued based on the prevailing interest rates in the market using the discounted cash flow method.
Equity Investments
Investments in entities are recorded as equity investments under long-term investments. For investments in common stock or
in-substance
common stock of entities over which the Group can exercise significant influence but does not own a majority equity interest or control, the equity method is applied, and the Group adjusts the carrying amount of an investment and recognizes investment income or loss for the Group’s share of the earnings or loss of the investee after the date of investment. For those equity investments accounted for other than under the equity method, or those that result in consolidation, the fair value method is applied. However, for equity investments that do not have readily determinable fair values, the Group chooses to account for them at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. If this measurement alternative is elected, changes in the carrying value of the equity investments will be required to be made whenever there are observable price changes in transactions for identical or similar investments of the same issuer. The implementation guidance notes that an entity should make a “reasonable effort” to identify price changes that are known or that can reasonably be known.
 
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The Group assesses investments for impairment by considering factors including, but not limited to, current economic and market conditions, operating performance of the companies, including current earnings trends and undiscounted cash flows, and other company-specific information, such as recent financing rounds. The fair value determination, particularly for investments in privately-held companies whose revenue model is still unclear, requires significant judgment to determine appropriate estimates and assumptions. Changes in these estimates and assumptions could affect the calculation of the fair value of the investments. If the assessment indicates that an impairment exists, the Group estimates the fair value of the investment and writes down the asset to its fair value, taking the corresponding charge to the
consolidated
statements of comprehensive income/(loss).​​​​​​​​​​​​​​
Long-term Time Deposits
The Sohu Group elected the fair value method at the date of initial recognition of time deposits with maturities over one year and carried these investments subsequently at fair value. Changes in fair values are reflected in the consolidated statements of comprehensive income.
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 0 residual value. Depreciation is computed using the straight-line method over the estimated useful lives of the assets.
 
Fixed Assets
  
Estimated Useful Lives (years)
Office buildings
  
36-47
Leasehold improvements
  Lesser of term of the lease or the estimated useful lives of the assets
Vehicles
  
4-104
Office furniture
  5
Computer equipment and hardware
  2-54-5
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 sale proceeds and the carrying value of the relevant assets and is recognized in operating expenses in the consolidated statements of comprehensive income.
Intangible Assets
Intangible assets mainly comprise purchased video content, operating rights for licensed games, domain names and trademarks, computer software, and developed technologies. Intangible assets are recorded at cost less accumulated amortization with 0 residual value. Amortization of intangible assets other than purchased video content is computed using the straight-line method over their estimated useful lives. Amortization of purchased video content is computed based on the trend in viewership accumulation over the shorter of the applicable license period or two years.
The estimated useful lives of the Group’s intangible assets are listed below:
 
Intangible Assets
  
Estimated Useful Lives (years)
Purchased video content
  1 month to 2 years
Computer software
  
1-5
Developed technologies
  
3-10
Domain names and trademarks
  
4-30
Operating rights for licensed games
  over the contract terms
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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. The Sohu Group records 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.
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Table of Contents
Impairment of
Long-lived Assets Other Than Purchased Video Content
In accordance with ASC
360-10-35,
the Sohu Group reviews 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. The evaluation is performed at the lowest level of identifiable cash flows independent of other assets. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If such review indicates that the carrying amount of the long-lived assets is not recoverable, the carrying amount of such assets is reduced to fair value. The estimation of future cash flows requires significant management judgment based on the Group’s historical results and anticipated results and is subject to many factors. The discount rate that is commensurate with the risk inherent in the Group’s business model is determined by its management.
Impairment of Purchased Video Content
Purchased video content is stated at the lower of cost less accumulated amortization, or fair value.
In accordance with ASC
920-350-35,
if management’s expectations of the programming usefulness of a program, series, package, or program segment are revised downward, it may be necessary to write off to the income statement the amount by which the unamortized capitalized costs exceed fair value. A write-off from unamortized cost to fair value establishes a new cost basis. Accordingly, the Group measures the video content’s impairment loss by comparing the content’s carrying value to its fair value. An impairment loss will be recorded if the carrying value of video content is higher than its fair value. The impairment to be recognized is measured by the amount by which the carrying value of video content exceeds its fair value.
Lease
The Sohu Group adopted ASU
No. 2016-02,
Leases (Topic 842), at the beginning of the first quarter of 2019 using the modified retrospective method, and did not restate comparable periods. Results and disclosure requirements for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts have not been adjusted and continue to be reported in accordance with the Sohu Group’s historical accounting under Topic 840.
The Sohu Group elected the package of practical expedients permitted under the transition guidance, which allowed the Sohu Group to carry forward the historical lease classification, the assessment on whether an existing or expired contract contains a lease, and the treatment of initial direct costs. The Sohu Group also elected to keep leases with an initial term of 12 months or less off the balance sheet.

Under the new lease guidance, the Sohu Group determines if an arrangement is or contains a lease at inception.
Right-of-use
assets and lease liabilities are recognized at the lease commencement date based on the present value of remaining lease payments over the lease terms. Certain lease agreements may contain an option to renew a lease for a term agreed to by the Sohu Group and the lessor, or an option to terminate a lease earlier than the expiration date. The Sohu Group considers these options in determining the lease term on a lease-by-lease basis.
The Sohu Group only considers payments that are fixed and determinable at the time of lease commencement. The adoption of the new lease guidance resulted in recognition of $7.4 million of
right-of-use
assets, $6.7 million$
6.7
m
illion of lease liabilities, $17.9$
17.9
 million of
right-of-use
assets on assets held
for
sale, and $16.2$
16.2
 million of lease liabilities on liabilities held for sale as of
January 
1, 2019.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the identifiable assets and liabilities acquired as a result of the Sohu Group’s acquisitions of interests in its 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, the Group reports in its financial statements provisional amounts for the items for which the accounting is incomplete. If a measurement period adjustment is identified, the Group recognizes the adjustment as part of the acquisition accounting. The Sohu Group increases or decreases the provisional amounts of identifiable assets or liabilities by means of increases or decreases in goodwill for measurement period adjustments.
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Table of Contents
In accordance with ASC 350, the Group does not amortize goodwill, but tests it for impairment. The Group tests 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. The Group adopted ASU
No. 2017-04,
Intangibles —- Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, and in accordance with the FASB, pursuant to which the Group has the option to choose whether it 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, the Group starts 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 the reporting unit with its carrying value, including goodwill. If the carrying value of each reporting unit, including goodwill, exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, but limited to the total amount of goodwill allocated to that reporting unit. For the Sohu segment, management determined that a quantitative assessment was most appropriate. For the Changyou segment, management performed a qualitative assessment to determine whether it was more likely than not that the fair value of the reporting unit was less than its carrying amount.
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Table of Contents
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. The Group estimates fair value using the income approach and the market approach. The fair value determined using the income approach is compared with comparable market data and reconciled, as necessary. The judgment in estimating the fair value of reporting units includes revenue growth rates and profitability in estimating future cash flows; determining appropriate discount rates and earnings multipliers based on market data of comparable companies engaged in a similar business under the market approach; and making other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit.​​​​​​​
Treasury Stock
Treasury stock consists of the Company’s ordinary shares, including ordinary shares represented by ADSs, repurchased by the Company or that it is obligated to repurchase as of the reporting date. Ordinary shares included in treasury stock are no longer deemed to be outstanding. Treasury stock is accounted for under the cost method.
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 the Sohu Group’s consolidated balance sheets, consists of the Sohu Group’s cumulative foreign currency translation adjustment.
Functional Currency and Foreign Currency Translation
An entity’s functional currency is the currency of the primary economic environment in which it operates, normally that is the currency of the environment in which the entity primarily generates and expends cash. Management’s judgment is essential to determine the functional currency by assessing various indicators, such as cash flows, sales price and market, expenses, financing and intra-Group transactions and arrangements. The functional currency of Sohu.com Limited, and its predecessor Sohu.com Inc., is the U.S. dollar. The functional currency of the Sohu Group’s subsidiaries in the U.S., the Cayman Islands, the British Virgin Islands and Hong Kong is the U.S. dollar. The functional currencies of the Sohu Group’s 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 period’s 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.
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Table of Contents
Impact of Recently Issued Accounting Pronouncements
Financial Instruments-Credit Losses (Topic 326).
In June 2016, the FASB issued ASU No.
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. The Sohu Group adopted ASU
2016-13
at the beginning of the first quarter of 2020, using the modified retrospective approach. The Sohu Group recorded an increase of approximately $3.4 million to allowance for credit losses on accounts receivable and $3.3 million to allowance for credit losses on assets held for sale on ASU
2016-13’s
adoption date of January 1, 2020. Please see “Summary of Significant Accounting Policies” above.
Simplifying the Test for Goodwill Impairment (Topic 350).
In January 2017, the FASB issued ASU
No. 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 unit’s 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. The Sohu Group adopted this guidance on January 1, 2020 and applied the revised impairment model for all goodwill impairment tests within that fiscal year. The adoption of ASU
2017-04
did not have a material impact on the Sohu Group’s consolidated financial statements.
Cloud computing
. In 2018, the FASB issued new guidance on a customer’s accounting for implementation,
set-up,
and other upfront costs incurred in a cloud computing arrangement that is hosted by the vendor (i.e., a service contract). Under the new guidance, customers will apply the same criteria for capitalizing implementation costs as they would for an arrangement that has a software license. The guidance is effective for annual reporting periods beginning after December 15, 2019, including interim reporting periods within those fiscal years. The adoption of this standard did not have a material impact on the Sohu Group’s consolidated financial statements.
Other accounting standards adopted beginning January 1, 2020 do not have a significant impact on the Sohu Group’s consolidated financial statements.
Impact of Recently Issued Accounting Pronouncements not Yet Adopted
Simplifying the accounting for income taxes (Topic 740).
In December 2019, the FASB issued ASU
No. 2019-12,
I
Incomencome Taxes (Topic 740) - Simplifying-Simplifying the Accounting for Income Taxes
. ASU
No. 2019-12
removes certain exceptions to the general principles in Topic 740 and provides for consistent application of and simplifies generally accepted accounting principles for other areas of Topic 740 by clarifying and amending existing guidance. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The method of adoption varies depending on the component of the new rule that is being adopted. Early application is permitted. The Sohu Group does not expect to adopt ASU
2019-12
early and is currently evaluating the impactadoption of adopting this standard did not have a material impact on itsthe Sohu Group’s consolidated financial statements.
Investments—Equity
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Table of Contents

Investments-Equity securities (Topic 321), Investments—EquityInvestments-Equity method and joint ventures (Topic 323), and Derivatives and hedging (Topic 815)—Clarifying-Clarifying the interactions between Topic 321, Topic 323, and Topic 815.
In January 2020, the FASB issued ASU
No. 2020-01,
Investments—Equity
Investments-Equity securities (Topic 321), Investments—EquityInvestments-Equity method and joint ventures (Topic 323), and Derivatives and hedging (Topic 815)—Clarifying-Clarifying the interactions between Topic 321, Topic 323, and Topic 815
. The amendments clarify the interaction of the accounting for equity investments under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Sohu Group does not expect to adopt ASU
2020-01
early and is currently evaluating the impactadoption of adopting this standard did not have a material impact on itsthe Sohu Group’s consolidated financial statements.
3.Other accounting standards that the Sohu Group adopted beginning January 1, 2021 did not have a significant impact on the Sohu Group’s consolidated financial statements.
3
. DISCONTINUED OPERATIONS
Discontinued Operation of Sogou
Upon the signing of
Between Sohu’s entry into the Tencent/Sohu Sogou Share Purchase Agreement on September 29, 2020 and the completion of the Tencent/Sohu Sogou Share Purchase on September 23, 2021, Sogou met the criteria for discontinued operations. Accordingly, the results of operations for Sogou’s business have beenprior to the completion of the Tencent/Sohu Sogou Share Purchase are excluded from Sohu’s results from continuing operations in the Sogou Group’s consolidated statements of comprehensive income and are presented in separate line items as discontinued operations. Retrospective adjustments to the historical statements have been made in order to provide a consistent basis of comparison. Additionally, as of December 31, 2019 and December 31, 2020, the related assets and liabilities associated with the discontinued operations with respect to Sogou were classified as assets held for sale and liabilities held for sale associated with discontinued operations in the consolidated balance sheets to provide comparable financial information. Long-lived assets have not been depreciated or amortized after they were classified as held for sale. As a result, for the year ended December 31, 2020 and the period ended September 23, 2021, depreciation and amortization expenses of $17.0 million and $46.7 million were not recognized for long-lived assets accordingly. On September 23, 2021, the Tencent/Sohu Sogou Share Purchase and the Sogou Merger were completed, and Sohu recognized gain of approximately
 
$855 
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million, net of transaction and other costs, which is included in income from discontinued operations. After September 23, 2021, Sohu no longer had any ownership interest in Sogou.
Table of Contents
The following tables set forth the assets, liabilities, results of operations and cash flows of discontinued operations with respect to Sogou, that were included in the Sohu Group’s consolidated financial statements (in
(in thousands):
 
   
As of December 31,
2019
   
As of December 31,
2020
 
ASSETS
          
Cash and cash equivalents
  $142,464   $287,185 
Restricted cash
   5,370    23,018 
Short-term investments
   995,350    774,618 
Account and financing receivables, net
   134,635    73,656 
Prepaid and other current assets
   26,802    28,946 
Long-term investments, ne
t
   63,345    74,004 
Fixed assets, net
   110,006    89,089 
Goodwill
   5,534    6,527 
Intangible assets, net
   1,514    1,446 
Other assets
   37,281    53,679 
           
Total assets associated with discontinued operations
  
$
1,522,301
 
  
$
1,412,168
 
           
LIABILITIES
          
Accounts payable
  $132,085   $122,695 
Accrued liabilities
   91,949    68,582 
Receipts in advance
   67,902    64,414 
Accrued salary and benefits
   24,167    25,350 
Taxes payable
   76,688    64,082 
Other short-term liabilities
   60,320    61,154 
Long-term liabilities
   5,686    10,721 
           
Total liabilities associated with discontinued operations
  
$
458,797
 
  
$
416,998
 
           
   
As of December 31,
2020
 
ASSETS
     
Cash and cash equivalents
  $287,185 
Restricted cash
   23,018 
Short-term investments
   774,618 
Account and financing receivables, net
   73,656 
Prepaid and other current assets
   28,946 
Long-term investments, net
   74,004 
Fixed assets, net
   89,089 
Goodwill
   6,527 
Intangible assets, net
   1,446 
Other assets
   53,679 
   
 
 
 
Total assets associated with discontinued operations
  
$
1,412,168
 
   
 
 
 
LIABILITIES
     
Accounts payable
  $122,695 
Accrued liabilities
   68,582 
Receipts in advance
   64,414 
Accrued salary and benefits
   25,350 
Taxes payable
   64,082 
Other short-term liabilities
   61,154 
Long-term liabilities
   10,721 
   
 
 
 
Total liabilities associated with discontinued operations
  
$
416,998
 
   
 
 
 
   
Year Ended December 31,
 
   
2018
   
2019
   
2020
 
Revenues
  $1,124,158   $1,172,252   $924,664 
Cost of revenues
   693,470    738,454    722,614 
Gross profit
   430,688    433,798    202,050 
Operating expenses:
               
Research and development (1)
   201,739    190,402    193,376 
Sales and marketing (1)
   146,194    138,291    102,523 
General and administrative (1)
   38,072    40,670    29,271 
Total operating expenses
   386,005    369,363    325,170 
Operating profit/(loss)
   44,683    64,435    (123,120) 
Interest income
   8,037    4,443    2,807 
Foreign currency exchange gain/(loss)
   5,725    1,849    (7,767) 
Other income, net (1)
   41,490    21,127    38,633 
Income/(loss) before income tax expense
   99,935    91,854    (89,447) 
Income tax expense
   1,153    2,748    2,346 
                
Net income/(loss) from discontinued operations, net of tax
  
 
98,782
 
  
 
89,106
 
  
 
(91,793
) 
                
(1)
Expenses generated from marketing services among the Sohu and Sogou, and leasing expenses generated from a building that Sohu leases to Sogou are not eliminated because those expenses are considered to continue after the disposal of the discontinued operations.
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Year Ended December 31,
 
   
2018
   
2019
   
2020
 
Net cash provided by/(used in) discontinued operating activities
  $132,746   $219,516   $(68,187)
Net cash provided by/(used in) discontinued investing activities
   (638,672)   (217,598)   235,374 
Net cash provided by/(used in) discontinued financing activities
   1    (33,415)   (8,209)

Table of Contents
   
Year Ended December 31,
 
   
2019
   
2020
   
2021
(1)
 
Revenues
  $1,172,252   $924,664   $407,607 
Cost of revenues
   738,454    722,614    274,408 
Gross profit
   433,798    202,050    133,199 
Operating expenses:
               
Research and development (2)   190,402    193,376    141,506 
Sales and marketing (2)   138,291    102,523    53,481 
General and administrative (2)   40,670    29,271    11,854 
Total operating expenses
   369,363    325,170    206,841 
Operating profit/(loss)   64,435    (123,120)    (73,642) 
Interest income
   4,443    2,807    2,377 
Interest expense   0    0    (761) 
Foreign currency exchange gain/(loss)
   1,849    (7,767)    (848) 
Other income, net   21,127    38,633    81,655 
Income/(loss) from discontinued operations before income tax expense   91,854    (89,447)    8,781 
Income tax expense/(benefit)   2,748    2,346    (1,112)
Results of operations from discontinued operations, net of tax
  
 
89,106
 
  
 
(91,793
) 
  
 
9,893
 
Gain on disposal of discontinued operations
   0    0    855,009 
   
 
 
   
 
 
   
 
 
 
Net income/(loss) from discontinued operations, net of tax
  
 
89,106
 
  
 
(91,793
) 
  
 
864,902
 
   
 
 
   
 
 
   
 
 
 
Effective Tax Rate
   
Year Ended December 31,
 
   
2019
  
2020
  
2021
(1)(3)
 
Statutory Rate:
   25%   25%   25% 
Effect of tax holidays applicable to subsidiaries and consolidated VIEs
   (2%)   (18%)   127% 
Tax differential from statutory rate applicable to subsidiaries and consolidated VIEs
   3%   (3%)   (90%) 
Changes in valuation allowance for deferred tax assets
   7%   (43%)   349% 
Research and development super-deduction and other permanent book-tax differences
   (25%)   35%   (249%) 
Capital gains from equity investments
   (5%)   1%   (175%) 
   
 
 
  
 
 
  
 
 
 
    3%   (3%)   (13%) 
   
 
 
  
 
 
  
 
 
 
   
Year Ended December 31,
 
   
2019
   
2020
   
2021
(1)
 
Net cash provided by/(used in) discontinued operating activities
  $219,516   $(68,187)   $(175,888)
 
Net cash provided by/(used in) discontinued investing activities
   (217,598)    235,374    1,054,148 
Net cash used in discontinued financing activities
   (33,415)    (8,209)    (9,132)
Note
(1): Includes the financial results of the discontinued operations from January 1, 2021 to September 23, 2021.
Note (2): Expenses generated from marketing services between the Sohu Group and Sogou Group, and leasing expenses generated from a building that Sohu leases to Sogou are not eliminated because those expenses are considered to continue after the disposal of the discontinued operations.
Note (3): The changes in the effective tax rate for the period ended September 23, 2021 resulted from the lower income from discontinued operations before income tax expense.
Discontinued Operation of Shanghai Jingmao
In May 2010, Changyou acquired 50% of the equity interests in Shanghai Jingmao Culture Communication Co., Ltd. (“Shanghai Jingmao”) and an affiliate of Shanghai Jingmao, which were primarily engaged in the cinema advertising business. In January 2011, Changyou acquired the remaining 50% of the equity interests in Shanghai Jingmao and its affiliate for total consideration of approximately $3.0 million. In the fourth quarter of 2011, a full impairment loss of $5.2 million on goodwill was recognized for the cinema advertising business.
During
In
 the second quarter of 2019, after assessing the collectability of the assets of the cinema advertising business, including receivables and prepayments, Changyou recognized a $17.0 million asset impairment charge for the cinema advertising
business.
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Changyou ceased
operating the cinema advertising business and wound down the business in
August 2019
as a result of a Chinese court in Shanghai having granted a petition by Shanghai Jingmao for bankruptcy relief on August 
12 2019.
,
2019
. Accordingly, the results of operations for Changyou’s cinema advertising business have been excluded from Changyou’s results from continuing operations in the consolidated statements of comprehensive income and are presented in separate line items as discontinued operations. Retrospective adjustments to the historical statements have been made in order to provide a consistent basis of comparison. Additionally, as of December 31, 2018, the related assets and liabilities associated with the discontinued operations were classified as assets/liabilities associated with discontinued operations in the consolidated balance sheets to provide comparable financial information. Changyou recognized
NaN
disposal gain/loss for the years ended December 
31
,
2019
and 2020.
2020
. However, Changyou may recognize disposal gain/loss in the future, depending on developments in the bankruptcy proceedings in the Chinese court.court
.
See Note 8 - Balance Sheet Components.
The following tables set forth the results of operations and cash flows of discontinued operations with respect to Changyou’s cinema advertising business, that were included in the Group’s consolidated financial statements (in thousands):
   
Year Ended December 31,
 
   
2018
   
2019
(1)
 
Revenues
  $70,202   $37,323 
Cost of revenues
   89,233    43,857 
Gross loss
   (19,031)    (6,534) 
Operating expenses:
          
Sales and marketing
   20,288    8,807 
General and administrative
   4,965    18,583 
Total operating expenses
   25,253    27,390 
Operating loss
   (44,284)    (33,924) 
Interest income
   6    7 
Other income/(expense), net
   (557)    61 
Loss before income tax expense
   (44,835)    (33,856) 
Income tax expense
   0    142 
           
Net loss from discontinued operations, net of tax
  
 
(44,835
) 
  
 
(33,998
) 
           
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Year Ended
December 31,
 
   
2019
(1)
 
Revenues
  $37,323 
Cost of revenues
   43,857 
Gross loss
   (6,534) 
Operating expenses:
     
Sales and marketing
   8,807 
General and administrative
   18,583 
Total operating expenses
   27,390 
Operating loss
   (33,924) 
Interest income
   7 
Other income/(expense), net
   61 
Loss from discontinued operations before income tax expense   (33,856) 
Income tax expense
   142 
   
 
 
 
Net loss from discontinued operations, net of tax
  
 
(33,998
) 
   
 
 
 
   
Year Ended December 31,
 
   
2018
   
2019
(1)
 
Net cash provided by discontinued operating activities
  $3,422   $9,341 
Net cash used in discontinued investing activities
   (718)    (10,808) 
Net cash provided by/(used in) discontinued financing activities
   0    0 


   
Year Ended
December 31,
 
   
2019
(1)
 
Net cash provided by discontinued operating activities
  $9,341 
Net cash used in discontinued investing activities
   (10,808) 
Net cash provided by discontinued financing activities   0 
Note (1): Includes the financial results of the discontinued operations from January 1, 2019 to August 12, 2019.​​​​​​​
4. SEGMENT INFORMATION
The Sohu Group’s segments are business units that offer different services and are reviewed separately by the CODM or the decision making group, in deciding how to allocate resources and in assessing performance. The Group’s CODM is the Company’s Chief Executive Officer. There are two segments in the Sohu Group, consisting of Sohu and Changyou. Before Sohu’s entry into the Tencent/Sohu Sogou Share Purchase Agreement on September 29, 2020, there were three segments in the Sohu segment,Group, consisting of Sohu, Changyou, and Sogou. Between September 29, 2020 and the completion of the Tencent/Sohu Sogou Share Purchase on September 23, 2021, Sogou met the criteria to be classified as discontinued operations. Accordingly, Sogou’s historical financial results are reflected in Sohu’s consolidated financial statements as discontinued operations. The Sohu Group segments consisted of Sohu and Changyou segmentthereafter. As most of the Sohu Group’s long-lived assets are located in, and substantially all of the revenues of the Sohu Group’s reportable segments are derived from China, where the Sohu Group’s services and products are provided to customers, no geographical information is presented.
.
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The following tables present summary information by segment (in thousands):

 
   
Year Ended December 31, 2018
 
   
Sohu
   
Changyou
   
Eliminations
   
Consolidated
 
Revenues
  $274,670   $415,561   $(56)   $690,175 
Segment cost of revenues
   (218,184)    (71,626)    56    (289,754) 
                     
Segment gross profit
   56,486    343,935    0    400,421 
SBC (1) in cost of revenues
   707    31    0    738 
                     
Gross profit
   57,193    343,966    0    401,159 
                     
Operating expenses:
                    
Product development
   (123,743)    (126,593)    (1)    (250,337) 
Sales and marketing
   (203,307)    (34,512)    (1)    (237,820) 
General and administrative
   (47,738)    (28,657)    0    (76,395) 
Goodwill impairment and impairment of intangible assets acquired as part of business acquisitions
   0    (16,369)    0    (16,369) 
SBC (1) in operating expenses
   4,940    6,430    0    11,370 
                     
Total operating expenses
   (369,848)    (199,701)    (2)    (569,551) 
                     
Operating profit/(loss)
   (312,655)    144,265    (2)    (168,392) 
                     
Other income
                  30,701 
Interest income
                  16,036 
Interest expense
                  (17,538) 
Exchange difference
                  3,301 
                     
Loss before income tax expense
                  (135,892) 
Income tax benefit
                  14,586 
                     
Net loss from continuing operations
                  (121,306) 
Net income from discontinued operations
                  53,947 
                     
Net loss
                 $(67,359) 
                     
   
Year Ended December 31, 2019
 
   
Sohu
   
Changyou
   
Eliminations
   
Consolidated
 
Revenues
  $218,442   $455,380   $(19)   $673,803 
Segment cost of revenues (1)   (148,258)   (95,268)    21    (243,505) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Segment gross profit
   70,184    360,112    2    430,298 
SBC in cost of revenues (2)   (23)   (120)    1    (142) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Gross profit
   70,161    359,992    3    430,156 
   
 
 
   
 
 
   
 
 
   
 
 
 
Operating expenses:
                    
Product development (1)   (113,761)   (119,726)    0    (233,487) 
Sales and marketing (1)   (155,226)   (49,768)    2    (204,992) 
General and administrative (1)   (31,330)   (22,074)    (17)    (53,421) 
Goodwill impairment and impairment of intangible assets acquired as part of business acquisitions   (7,245)   0    0    (7,245) 
SBC in operating expenses (2)   (1,023)   (1,185)    0    (2,208) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total operating expenses   (308,585)   (192,753)    (15)    (501,353) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Operating profit/(loss)
   (238,424)   167,239    (12)    (71,197) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Other income
                  7,963 
Interest income
                  6,103 
Interest expense
                  (14,370) 
Exchange difference
                  1,430 
                  
 
 
 
Loss before income tax expense
                  (70,071) 
Income tax benefit
                  (28,428) 
                  
 
 
 
Net loss from continuing operations
                  (98,499) 
Net income from discontinued operations
                  55,108 
                  
 
 
 
Net loss
                 $(43,391) 
                  
 
 
 
Note (1): Total depreciation and amortization expenses of Sohu and Changyou were $50.7 million and $16.4 million, respectively, for the year ended December 31, 2019.
Note (2): “SBC” stands for share-based compensation expense.
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Year Ended December 31, 2019
 
   
Sohu
   
Changyou
   
Eliminations
   
Consolidated
 
Revenues
  $218,442   $455,380   $(19)   $673,803 
Segment cost of revenues
   (148,258)    (95,268)    21    (243,505) 
Segment gross profit
   70,184    360,112    2    430,298 
SBC (1) in cost of revenues
   (23)    (120)    1    (142) 
Gross profit
   70,161    359,992    3    430,156 
Operating expenses:
                    
Product development
   (113,761)    (119,726)    0    (233,487) 
Sales and marketing
   (155,226)    (49,768)    2    (204,992) 
General and administrative
   (31,330)    (22,074)    (17)    (53,421) 
Goodwill impairment and impairment of intangible assets acquired as part of business acquisitions
   (7,245)    0    0    (7,245) 
SBC (1) in operating expenses
   (1,023)    (1,185)    0    (2,208) 
Total operating expenses
   (308,585)    (192,753)    (15)    (501,353) 
Operating profit/(loss)
   (238,424)    167,239    (12)    (71,197) 
Other income
                  7,963 
Interest income
                  6,103 
Interest expense
                  (14,370) 
Exchange difference
                  1,430 
Loss before income tax expense
                  (70,071) 
Income tax expense
                  (28,428) 
Net loss from continuing operations
                  (98,499) 
Net income from discontinued operations
                  55,108 
Net loss
                 $(43,391) 
                     
   
Year Ended December 31, 2020
 
   
Sohu
   
Changyou
   
Eliminations
   
Consolidated
 
Revenues
  $201,544   $548,346   $0   $749,890 
Segment cost of revenues (1)   (122,362)    (94,362)    7    (216,717) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Segment gross profit
   79,182    453,984    7    533,173 
SBC in cost of revenues (2)   (177)    (543)    0    (720) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Gross profit
   79,005    453,441    7    532,453 
   
 
 
   
 
 
   
 
 
   
 
 
 
Operating expenses:
                    
Product development (1)   (97,681)    (136,934)    0    (234,615) 
Sales and marketing (1)   (106,057)    (53,272)    0    (159,329) 
General and administrative (1)   (25,861)    (25,517)    0    (51,378) 
SBC in operating expenses (2)   (1,759)    (12,001)    0    (13,760) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total operating expenses
   (231,358)    (227,724)    0    (459,082) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Operating profit/(loss)
   (152,353)    225,717    7    73,371 
   
 
 
   
 
 
   
 
 
   
 
 
 
Other income
                  25,993 
Interest income
                  7,369 
Interest expense
                  (6,234) 
Exchange difference
                  (3,800) 
                  
 
 
 
Loss before income tax expense
                  96,699 
Income tax expense
                  (133,226) 
                  
 
 
 
Net loss from continuing operations
                  (36,527) 
Net income from discontinued operations
                  (91,793) 
                  
 
 
 
Net loss
                 $(128,320) 
                  
 
 
 
Note (1): Total depreciation and amortization expenses of Sohu and Changyou were $26.4 million and $13.5 million, respectively, for the year ended December 31, 2020.
Note (2): “SBC” stands for share-based compensation expense.
 
   
Year Ended December 31, 2020
 
   
Sohu
   
Changyou
   
Eliminations
   
Consolidated
 
Revenues
  $201,544   $548,346   $0   $749,890 
Segment cost of revenues
   (122,362)    (94,362)    7    (216,717) 
                     
Segment gross profit
   79,182    453,984    7    533,173 
SBC (1) in cost of revenues
   (177)    (543)    0    (720) 
                     
Gross profit
   79,005    453,441    7    532,453 
                     
Operating expenses:
                    
Product development
   (97,681)    (136,934)    0    (234,615) 
Sales and marketing
   (106,057)    (53,272)    0    (159,329) 
General and administrative
   (25,861)    (25,517)    0    (51,378) 
SBC (1) in operating expenses
   (1,759)    (12,001)    0    (13,760) 
                     
Total operating expenses
   (231,358)    (227,724)    0    (459,082) 
                     
Operating profit/(loss)
   (152,353)    225,717    7    73,371 
                     
Other income
                  25,993 
Interest income
                  7,369 
Interest expense
                  (6,234) 
Exchange difference
                  (3,800) 
                     
Income before income tax expense
                  96,699 
Income tax expense
                  (133,226) 
                     
Net loss from continuing operations
                  (36,527) 
Net loss from discontinued operations
                  (91,793) 
                     
Net loss
                 $(128,320) 
                     
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Year Ended December 31, 2021
 
   
Sohu
   
Changyou
   
Eliminations
   
Consolidated
 
Revenues
  $186,606   $648,970   $0   $835,576 
Segment cost of revenues (1)   (113,881)   (90,517)   4    (204,394)
   
 
 
   
 
 
   
 
 
   
 
 
 
Segment gross profit
   72,725    558,453    4    631,182 
SBC in cost of revenues (2)   (1)   (276)   0    (277)
   
 
 
   
 
 
   
 
 
   
 
 
 
Gross profit
   72,724    558,177    4    630,905 
   
 
 
   
 
 
   
 
 
   
 
 
 
Operating expenses:
                    
Product development (1)   (113,186)   (151,773)   0    (264,959)
Sales and marketing (1)   (126,126)   (56,396)   0    (182,522)
General and administrative (1)   (36,949)   (40,702)   0    (77,651)
SBC in operating expenses (2)   (804)   (7,497)   0    (8,301)
   
 
 
   
 
 
   
 
 
   
 
 
 
Total operating expenses
   (277,065)   (256,368)   0    (533,433)
   
 
 
   
 
 
   
 
 
   
 
 
 
Operating profit/(loss)
   (204,341)   301,809    4    97,472 
   
 
 
   
 
 
   
 
 
   
 
 
 
Other income
                29,416 
Interest income
                15,641 
Interest expense
                (7,500)
Exchange difference
                (3,462)
                
 
 
 
Income before income tax expense
                131,567 
Income tax expense
                (62,296)
                
 
 
 
Net loss from continuing operations
                69,271 
Net loss from discontinued operations
                864,902 
                
 
 
 
Net loss
               $934,173 
                  
 
 
 
Note (1): Total
depreciation and amortization expenses of Sohu and Changyou were $23.4 million and $12.6 million, respectively, for the year ended December 31, 2021.
Note (2): “SBC” stands for share-based compensation expense.
 
   
As of December 31, 2020
 
   
Sohu
   
Changyou
   
Eliminations
   
Consolidated
 
Cash and cash equivalents
  $56,977   $160,080   $0   $217,057 
Accounts receivable, net
   60,886    26,635    0    87,521 
Fixed assets, net
   174,700    162,976    (2)    337,674 
Total assets (1)
  $1,632,736   $2,478,705   $(2,701,488)   $1,409,953 
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As of December 31, 2019
 
   
Sohu
   
Changyou
   
Eliminations
   
Consolidated
 
Cash and cash equivalents
  $68,229   $94,433   $0   $162,662 
Accounts receivable, net
   70,252    55,829    0    126,081 
Fixed assets, net
   177,978    159,713    (9)    337,682 
Total assets (1)
  $1,721,801   $1,871,685   $(2,423,923)   $1,169,563 
Note (1): The elimination for segment assets mainly consists of elimination of intra-Group loans between Sohu and Changyou, and elimination of long-term investments in subsidiaries and consolidated VIEs.
 
  
As of December 31, 2020
   
As of December 31, 202
1
 
  
Sohu
   
Changyou
   
Eliminations
   
Consolidated
   
Sohu
   
Changyou
   
Eliminations
   
Consolidated
 
Cash and cash equivalents
  $56,977   $160,080   $0   $217,057   $929,851   $69,098   $0   $998,949 
Accounts receivable, net
   60,886    26,635    0    87,521    48,108    34,442    0    82,550 
Fixed assets, net
   174,700    162,976    (2)    337,674    170,213    159,784    0    329,997 
Total assets (1)
  $1,632,736   $2,478,705   $(2,701,488)   $1,409,953   $2,294,537   $2,610,964   $(2,659,716)    $2,245,785 
Note (1): The elimination for segment assets mainly consists of elimination of intra-Group loans between Sohu and Changyou, and elimination of long-term investments in subsidiaries and consolidated VIEs.
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5. SHARE-BASED COMPENSATION EXPENSE
Sohu (excluding Sohu Video), Changyou, and Sohu Video have incentive plans for the granting of share-based awards, including share options and restricted share units, to members of the boards of directors, management and other key employees.
Share-based compensation expense was recognized in costs and expenses for the years ended December 31, 2018, 2019, 2020 and 20202021 as follows (in thousands):
 
   
Year Ended December 31,
 
Share-based compensation expense
  
2018
   
2019
   
2020
 
Cost of revenues
  $(739)   $142   $720 
Product development expenses
   (4,182)    1,364    7,325 
Sales and marketing expenses
   (920)    (326)    460 
General and administrative expenses
   (6,267)    1,170    5,975 
                
   $(12,108)   $2,350   $14,480 
                
   
Year Ended December 31,
 
Share-based compensation expense
  
2019
   
2020
   
2021
 
Cost of revenues
  $142   $720   $277 
Product development expenses
   1,364    7,325    3,904 
Sales and marketing expenses
   (326)    460    166 
General and administrative expenses
   1,170    5,975    4,231 
   
 
 
   
 
 
   
 
 
 
   $2,350   $14,480   $8,578 
   
 
 
   
 
 
   
 
 
 
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Share-based compensation expense was recognized for share awards of Sohu (excluding Sohu Video), Changyou and Sohu Video as follows (in thousands):
 
                                                                      
   
Year Ended December 31,
 
Share-based compensation expense
  
2018
   
2019
   
2020
 
For Sohu (excluding Sohu Video) share-based awards
  $(5,100)   $1,940   $2,633 
For Changyou share-based awards
   (6,461)    1,305    12,545 
For Sohu Video share-based awards
   (547)    (895)    (698) 
                
   $(12,108)   $2,350   $14,480 
                
   
Year Ended December 31,
 
Share-based compensation expense
  
2019
   
2020
   
2021
 
For Sohu (excluding Sohu Video) share-based awards
  $1,940   $2,633   $1,849 
For Changyou share-based awards
   1,305    12,545    7,773 
For Sohu Video share-based awards
   (895)    (698)    (1,044) 
   
 
 
   
 
 
   
 
 
 
   $2,350   $14,480   $8,578 
   
 
 
   
 
 
   
 
 
 
The negative amounts in the tables above resulted from
re-measured
compensation expense based on the then-current fair value of the awards on the reporting date.
There was 0
 c
apitalized capitalized share-based compensation expense for the years ended December 31, 2021, 2020 2019 and 2018.2019.
6. ADVERTISING AND PROMOTIONAL EXPENSES, INCLUDED IN SALES AND MARKETING EXPENSES
Advertising and promotional expenses are included in sales and marketing expenses, and generally represent the expenses of promotions to create or stimulate a positive image of the Sohu Group or a desire to subscribe for the Group’s products and services. Advertising expenses are expensed as incurred. For the years ended December 31, 2021, 2020 2019 and 2018,2019, advertising and promotional expenses recognized in the consolidated statements of comprehensive income were $98.5 million, $84.7 million $124.6 million and $137.6$124.6 million, respectively.
7. OTHER INCOME, NET
The following table summarizes the Sohu Group’s other income/(expense) (in thousands):

 
                                                                      
   
Year Ended December 31,
 
   
2018
   
2019
   
2020
 
Rental income from Sogou (1)
   8,392    8,029    9,793 
Individual tax refund and additional deduction of PRC value-added tax (2)
   0    907    6,169 
Government grant
   5,342    5,763    5,928 
Gain from the changes in fair value of financial instruments (3)
   17,999    11,113    4,303 
Write-off of unpaid long-term accounts payable
   0    0    47 
Investment income/(expense)
   (3,448)    3,004    3 
Impairment loss on equity investments (4)
   0    (23,154)    (384) 
Donations
   0    (283)    (1,460) 
Others
   2,416    2,584    1,594 
                
   $30,701   $7,963   $25,993 
                
   
Year Ended December 31,
 
   
2019
   
2020
   
2021
 
Rental income from Sogou (1)
   8,029    9,793    10,427 
Investment income   3,004    3    6,352 
Income from investments in financial instruments (2)   11,113    4,303    5,260 
Individual tax refund and additional deduction of PRC value-added tax

   907    6,169    4,827 
Write-down of unpaid long-term accounts payable   0    47    1,276 
Gover
nment grant

   5,763    5,928    418 
Impairment loss on equity investments (
3
)
   (23,154)    (384)    (215) 
Donations
   (283)    (1,460)    (1,565) 
Others
   2,584    1,594    2,636 
  
$
7,963
  
$
25,993
  
$
29,416
 
   
 
 
   
 
 
   
 
 
 
Note (1): Sogou currently leases from Sohu, on an arms-length basis, office space at Sohu.com Internet Plaza under a lease that expires on December 31, 2022 and may be renewed subject to terms to be agreed to by Sohu and Sogou. Rental income consisted solely of the income from this lease.
The cash receipts from this lease within operating activities for 2021, 2020 and 2019 and 2018 were $12.3 million, $12.1 million $8.4 million and $8.0$8.4 million, respectively.
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Note (2): The increase for 20202021 compared to 2019 mainly consisted of an individual tax refund of $2.6 million2020 and an additional deduction of PRC value-added tax of $2.1 million.
Note (3): Thethe decrease for 2020 compared to 2019 and the decrease for 2019 compared to 2018 were mainly due to a decrease in income earned from investments in financial instruments.
Note (4)(
3
): In the fourth quarter of 2019, the Sohu Group recognized impairment losses of $23.2 million for equity investments.
 
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8. BALANCE SHEET COMPONENTS (IN THOUSANDS)

  
As of December 31,
   
As of December 31,
 
  
2019
   
2020
   
2020
   
2021
 
Accounts receivable, net
            
Accounts receivable
  $130,037    94,528   $94,528    94,908 
Allowance for credit losses
   (3,956)    (7,007)    (7,007)    (12,358)
          
 
   
 
 
  $126,081    87,521   $87,521    82,550 
          
 
   
 
 
The following table presents the movement of allowances for credit losses for the years of 2018, 2019, 2020 and 2020:2021:
 
  
Balance at the
beginning of
year
   
Changes on initial
application of ASU
2016-13
   
Additional
allowance for credit
losses, net of
recoveries
   
Write-offs
 
Exchange
difference
 
Balance at the
end of year
   
Balance at the
beginning of
year
 
Changes on initial
application of ASU
2016-13
   
Additional
allowance for credit
losses, net of
recoveries
   
Write-offs
 
Exchange
difference
 
Balance at the
end of year
 
2018
   4,487    0    5,449    (1,940)   (422)   7,574 
2019
   7,574    0    4,724    (8,237)   (105)   3,956    7,574   0    4,724    (8,237)   (105)   3,956 
2020
   3,956    3,383    2,419    (3,231)   480   7,007    3,956   3,383    2,419    (3,231)   480   7,007 
2021
   7,007   0    6,292    (1,155)  214   12,358 
 
  
As of December 31,
   
As of December 31,
 
  
2019
   
2020
   
2020
   
2021
 
Prepaid and other current assets
            
Matching loan due from a related party (See Note 9)
  $33,329   $34,123   $34,123   $34,123 
Prepaid taxes
   26,274    25,043    25,043    28,719 
Prepaid content and license
   12,964    11,029 
Prepaid cost of revenue
   7,175    10,120 
Prepaid revenue-sharing cost  
10,120
   
12,428

 
Prepaid content and license costs   11,029    8,694 
Prepaid advertising and promotion fee   244    4,685 
Interest receivable from bank deposits with original maturities of three months or
less
   3,875    3,059 
Receivables from third party payment platforms
   3,435    5,488   
5,488
   
 
2,670
 
Interest receivable from bank deposits with original maturities of three months or less
   1,012    3,875 
Prepaid professional fees
   610    2,365    2,365    2,432 
Prepaid rental deposit
   2,891    2,310 
Prepaid rental deposit
s
   2,310    1,928 
Emplo
yee advances

  
 
587
   
 
569
 
Prepaid office rent and facilities expenses
   601    696    696    338 
Employee advances
   1,249    587 
Others
   7,991    10,954    10,710    7,666 
          
 
   
 
 
  $97,531   $106,590    $106,590   $107,311 
          
 
   
 
 
Prepaid
non-current
assets
            
Prepaid PRC income tax for the sale of assets associated with 17173.com by Sohu to Changyou
  $1,882   $1,006   $1,006   $0 
          
 
   
 
 
  $1,882   $1,006   $1,006   $0 
          
 
   
 
 
Other short-term liabilities
            
Matching loans due to a related party (See Note 9)
   33,536    34,123    34,123    34,123 
Contingent liability related to Shanghai Jingmao liquidation (1)
   23,900    23,900    23,900    23,900 
Deposits related to Focus
   19,101    21,936    21,936    10,387 
Share-based awards in Changyou
   0    13,292    13,292    20,693 
Other payables related to Shanghai Jingmao liquidation (2)   0    9,380 
Contract deposits from advertisers
   3,060    3,036    3,036    2,679 
Lease liabilities
   2,510    1,107    1,107    1,999 
Consideration payable for equity investment
   740    751    751    769 
Others
   8,218    8,026    8,026    8,638 
          
 
   
 
 
  $91,065   $106,171   $106,171   $112,568 
          
 
   
 
 
Note (1): The contingent liability represents the aggregate of estimated potential payments to third parties in connection with the liquidation of Shanghai Jingmao. The stated amount of the contingent liability reflects Changyou’s best estimate as of December 31, 20192020 and 20202021 pursuant to ASC
450-20.
Changyou may revise this estimate in the future based on developments in PRC bankruptcy court proceedings regarding Shanghai Jingmao.regarding.
 
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7
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Receipts in advance and deferred revenue
Note (2): Shanghai Jingmao. In 2021, Changyou received $9.4 million from the bankruptcy proceedings, as a creditor of Shanghai Jingmao, during the process of the liquidation of Shanghai Jingmao. No disposal gain was recognized due to the uncertainty with the proceedings that were still ongoing.
Receipts in advance and deferred revenue
  
 
 
 
  
 
 
 
Receipts in advance relating to:
  
 
 
 
  
 
 
 
brand advertising business
  
$
5,214
 
  
$
4,297 
online game business
  
 
7,869
 
  
 
9,310 
other business
  
 
6,029
 
  
 
5,286 
   
 
 
   
 
 
 
Total receipts in advance
  
 
19,112
 
  
 
18,893 
Deferred revenue
  
 
32,943
 
  
 
38,148 
   
 
 
   
 
 
 
  $52,055
 
 $57,041 
   
 
 
   
 
 
 
Receipts in advance relating to:
          
brand advertising business
  $7,097   $5,214 
online game business
   5,524    7,869 
other business
   6,490    6,029 
           
Total receipts in advance
   19,111    19,112 
Deferred revenue
   31,210    32,943 
           
   $50,321   $52,055 
           
9. RELATED PARTY TRANSACTIONS
Under an agreement between Sohu and Fox Financial Technology Group Limited (“Fox Financial,” formerly known as “SoEasy Internet Finance Group Limited”) entered into in August 2014, Sohu invested $4.8$
4.8
 million and $16.1$
16.1
 million, respectively,
in
Fox Financial in August 2014 and April 2015. In February 2016, Sohu invested an additional $10.5$
10.5
 million in Fox
Financial.
Changyou’s Loan Arrangements with Fox Financial
Commencing in April 2015, certain subsidiaries of Changyou and certain subsidiaries of Fox Financial entered into a series of loan agreements pursuant to which the subsidiaries of Changyou were entitled to draw down HK dollar-denominated or U.S. dollar-denominated loans from the Fox Financial subsidiaries and the Fox Financial subsidiaries were entitled to draw down equivalent RMB-denominated loans from the Changyou subsidiaries, of Changyou, to facilitate each other’s business operations. All of the loans carry a fixed rate of interest which approximatesapproximated the current market interest rate. rate at the inception of the loans.
In December 2018 and 2019, Changyou entered into supplemental agreements with Fox Financial pursuant to which all accrued and unpaid interest on the loans as of December 31, 2018 and December 31, 2019 was added to the principal of the corresponding loans. Due to the depreciation of the RMB against the U.S. dollar in 2018, the principal amounts of Changyou’s outstanding RMB-denominated loans to Fox Financial as of December 31, 2018 were adjusted upward to amounts equal to the principal amounts of Fox Financials’ outstanding U.S. dollar denominated loans to Changyou as of December 31, 2018, multiplied by the monthly average RMB to U.S. dollar exchange rate published by the Bank of China for the month of December 2018. As a result of such adjustment, Changyou advanced additional RMB-denominated loans in the principal amount of RMB8.2 million (approximately $1.2 million) to Fox Financial in January 2019.
In December 2019, Changyou entered into a supplemental agreement with Fox Financial pursuant to which states that Fox Financial undertakes and agreesprovided security for its repayment obligations to provide to Changyou a guaranty of the repayment obligation of Fox Financial and to deposit an amount equal to the US dollar denominated loan principal and corresponding interest owed by Changyou to Fox Financial as a security deposit. IfChangyou. Under this supplemental agreement, if Fox Financial fails to repay the RMB-denominated loan principal and corresponding interest based on RMB owed to Changyou, thenChangyou will have the right to apply the amount of a security deposit, will be applied to repaymentconsisting of the outstanding U.S. dollar-denominated loan principal and corresponding interest owed by Changyou to Fox Financial, to repay the RMB-denominated loan principal and interest owed by Fox Financial to Changyou. The security deposit will be required to be replenished by Fox Financial if itthe amount of the security deposit is insufficient to repay the loan principal and corresponding interest of the RMB-denominated loan owed to Changyou, and any remaining security deposit will be returned to Fox Financial if there is a surplus after the repayment of the RMB-denominated loan principal and interest will be returned to Fox Financial.interest. The parties entered into an additional supplemental agreement inpursuant to which Changyou undertakesprovided security for its repayment obligations to Fox Financial. Under this supplemental agreement, if Changyou fails to repay the U.S. dollar-denominated loan principal and agrees to providecorresponding interest owed to Fox Financial, Fox Financial will have the right to apply the amount of a guarantysecurity deposit, consisting of Changyou’s repayment obligation and to deposit an amount equal to the outstanding RMB-denominated loan principal and corresponding interest owed by Fox Financial to Changyou, as a security deposit. If Changyou fails to repay the U.S. dollar-denominated loan principal and corresponding interest, then the security deposit will be applied to repayment of the loan principal and corresponding interest owed by Changyou to Fox Financial. The security deposit will be required to be replenished by Changyou if itthe amount of the security deposit is insufficient to repay the U.S. dollar-denominated loan principal and corresponding interest owed by Changyou to Fox Financial, and theany remaining security deposit (if any) will be returned to Changyou if there is anya surplus after the repayment of the US dollar denominatedU.S. dollar-denominated loan principal and interest.
As
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The loan arrangements expired on December 31, 2020 the loan arrangements had expired and no new supplemental agreements were signed. Under supplemental agreements of guaranty betweenIn May 2021, Changyou andnotified Fox Financial entered into in December 2019, if Fox Financial failedof Changyou’s intention to exercise its rights under the supplemental agreement by applying the security deposit to repay the RMB
-
denominated loan principle and corresponding interest, Changyou could apply the amount of the security deposit, consisting of the US dollar-denominatedRMB-denominated loan principal and corresponding interest owed by Changyou to Fox Financial to repay the
RMB-denominated
loan principle and corresponding interest owed to Changyou.
As of the date of this report, Changyou has not received any response from Fox Financial and accordingly, with an abundance of caution, has not so applied any of the loan arrangements have not been settled, and a settlement plan is under discussion. 
security deposit. Changyou performed an assessment as of December 31, 2020 ofits expected credit losses for the RMB-denominated loans receivable from Fox Financial. As of December 31, 2021, the Sohu Group had accrued a cumulative allowance for credit losses of approximately
RMB-denominated$3.3 
million based on Changyou’s estimate of the net of the outstanding amount of such loans receivable from Fox Financial and accrued an expected credit loss of $2.4 million based on its estimate ofover the remaining exposure in excessamount of the security deposit and on the lack of solvency of Fox Financial.
As of December 31, 20192021, net loan receivables and December 31, 2020, Changyou had U.S. dollar-denominated loans payable to Fox Financialunder such loan arrangements, each in a total
the amount of approximately $33.5
$34.1 million, were recorded as prepaid and $34.1 million, respectively,other current assets and
RMB-denominated
loans receivable from Fox Financial in a total amount of approximately $33.3 million and $34.1 million, respectively. For the year ended December 31, 2019 and 2020, Changyou incurred interest expense of $0.8 million and $0.6 million, other short-term liabilities, respectively, in connection with the loans payable and earned interest income of $1.0 million and $0.8 million, respectively, in connection with the loans receivable.
Sohu Group’s consolidated balance sheets.
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10. FAIR VALUE MEASUREMENTS
10.
FAIR VALUE MEASUREMENTS 
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.
The Sohu Group’s financial instruments consist primarily of cash equivalents, restricted cash, short-term investments, accounts receivable, financing receivables, prepaid and other current assets, long-term investments, long-term time deposits, restricted time deposits, accounts payable, accrued liabilities, receipts in advance and deferred revenue, short-term bank loans, other short-term liabilities, long-term bank loans, and long-term accounts payable.other payables.
Financial Instruments Measured at Fair ValueRestricted Cash and Restricted Time Deposits
Restricted cash and restricted time deposits are valued based on the prevailing interest rates in the market using the discounted cash flow method. See Note 10 - Fair Value Measurements.
Short-term Investments
The following table sets forth theSohu Group’s short-term investments mainly consist of investments in financial instruments measured at fair value by level withinwith a variable interest rate and time deposits with maturities of three months to one year. For investments in financial instruments with a variable interest rate indexed to the performance of underlying assets and time deposits, the Sohu Group elected the fair value hierarchy,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 for credit losses that reflects the Sohu Group’s best estimate of the amounts that will not be collected. The Group makes estimations of the collectability of accounts receivable. Many factors are considered in estimating the general allowance, including reviewing delinquent accounts receivable, performing a customer credit analysis, and analyzing historical bad debt records and current and future economic trends.
Accounts receivable represent historical balances recorded less related cash applications, less allowance for credit losses and any write-offs of any receivables not previously provided for.
Allowance for credit losses
Effective on January 1, 2020, the Sohu Group adopted Accounting Standards Update (ASU)
2016-13,
“Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU
2016-13”)
under a modified retrospective transition. This guidance replaces the existing “incurred loss” methodology, and introduces an expected loss approach using macroeconomic forecasts, referred to as a current expected credit losses (“CECL”) methodology. Under the incurred loss methodology, credit losses are only recognized when the losses are probable of December 31, 2019 (in thousands):having been incurred. The CECL methodology requires that the full amount of expected credit losses for the lifetime of the financial instrument be recorded at the time it is originated or acquired, considering relevant historical experience, current conditions and reasonable and supportable macroeconomic forecasts that affect the collectability of financial assets, and adjusted for changes in expected lifetime credit losses subsequently, which may require earlier recognition of credit losses.
The Sohu Group adopted ASU
2016-13
using the modified retrospective transition approach and recognized a cumulative-effect adjustment of approximately $6.7 million to the opening balance of accumulated deficit in the consolidated financial statements, including an increase of approximately $3.4 million in the allowance for credit losses of accounts receivable, and an increase of approximately $3.3 million in the allowance for credit losses of accounts receivable and financing receivables classified as assets held for sale. Results for reporting periods beginning after January 1, 2020 are presented using the CECL methodology while comparative information continues to be reported in accordance with the incurred loss methodology in effect for prior periods.
The allowance for credit losses reflects the Sohu Group’s estimated expected losses. The Sohu Group estimates the allowance for credit losses, mainly based on past collection experience as well as consideration of current and future economic conditions and changes in the Sohu Group’s collection trends. The Sohu Group estimates the expected credit losses for accounts receivable with similar risk characteristics on a pool basis. For each pool, the Sohu Group first estimates its recovery period based on relevant historical accounts receivable collection information. Then the Sohu Group estimates the credit allowances based on the recovery period, the historical distribution of each aging bucket, and the impact of macroeconomic factors.
 
       
Fair value measurements at reporting date using
 
Items
  
As of
December 31,
2019
   
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
   
Significant
Other
Observable Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
Cash equivalents
  $112,349   $0   $112,349   $0 
Restricted cash
   3,290    0    3,290    0 
Restricted time deposits
   240    0    240    0 
Short-term investments
   321,483    0    321,483    0 
Equity investments with readily determinable fair values
   9,320    9,320    0    0 
The following table sets forth
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Accounts receivable are written off when there is no reasonable expectation of recovery. Subsequent recoveries of amounts previously written off are credited against the financial instruments, measured at fair value by level within the fair value hierarchy,same line item.
Accounts receivable, net, as of December 31, 2020 and 2021 consisted of the following (in thousands):
 
       
Fair value measurements at reporting date using
 
Items
  
As of
December 31,
2020
   
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
   
Significant
Other
Observable Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
Cash equivalents
  $173,655   $0   $173,655   $0 
Restricted cash
   330,791    0    330,791    0 
Restricted time deposits
   101,519    0    101,519    0 
Short-term investments
   100,745    0    100,745    0 
Equity investments with readily determinable fair values
   9,457    9,457    0    0 
   
As of December 31,
 
   
2020
   
2021
 
Accounts receivable, net
          
Accounts receivable
  $94,528   $94,908 
Less: Allowance for credit losses
   (7,007)    (12,358) 
   
 
 
   
 
 
 
   $87,521   $82,550 
The following table presents the aging analysis of accounts receivable as of December 31, 2020 and 2021
(in thousands):
   
As of December 31,
 
   
2020
   
2021
 
Less than 179 days
  $78,805   $79,155 
180-359
days
   7,569    7,437 
360 days and greater
   8,154    8,316 
   
 
 
      
Total
   94,528    94,908 
The movement of allowance for credit losses for the years ended December 31, 2019, 2020 and 2021 was as follows (in thousands):
Cash Equivalents
   
For the year ended December 31,
 
   
2019
   
2020
   
2021
 
Balance at the beginning of year
  $7,574   $3,956   $7,007 
Changes on initial application of ASU
2016-13
(1)
   0    3,383    0 
Additional allowance for credit losses, net of recoveries
   4,724    2,419    6,292 
Write-offs
   (8,237)    (3,231)    (1,155) 
Exchange difference
   (105)    480    214 
   
 
 
   
 
 
   
 
 
 
Balance at the end of year
   3,956    7,007    12,358 
Note (1): The Company adopted ASU
2016-13
using the modified retrospective transition approach. The adjustments arising from the new CECL model are recognized in the opening Consolidated Balance Sheet on January 1, 2020.
Equity Investments
Investments in entities are recorded as equity investments under long-term investments. For investments in common stock or
in-substance
common stock of entities over which the Group can exercise significant influence but does not own a majority equity interest or control, the equity method is applied, and the Group adjusts the carrying amount of an investment and recognizes investment income or loss for the Group’s share of the earnings or loss of the investee after the date of investment. For those equity investments accounted for other than under the equity method, the fair value method is applied. However, for equity investments that do not have readily determinable fair values, the Group chooses to account for them at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. If this measurement alternative is elected, changes in the carrying value of the equity investments will be required to be made whenever there are observable price changes in transactions for identical or similar investments of the same issuer. The implementation guidance notes that an entity should make a “reasonable effort” to identify price changes that are known or that can reasonably be known.
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The Group assesses investments for impairment by considering factors including, but not limited to, current economic and market conditions, operating performance of the companies, including current earnings trends and undiscounted cash flows, and other company-specific information, such as recent financing rounds. The fair value determination, particularly for investments in privately-held companies whose revenue model is still unclear, requires significant judgment to determine appropriate estimates and assumptions. Changes in these estimates and assumptions could affect the calculation of the fair value of the investments. If the assessment indicates that an impairment exists, the Group estimates the fair value of the investment and writes down the asset to its fair value, taking the corresponding charge to the consolidated statements of comprehensive income/(loss).​​​​​​​​​​​​​​
Long-term Time Deposits
The Sohu Group’s cash equivalents mainly consistGroup elected the fair value method at the date of initial recognition of time deposits with original maturities over one year and carried these investments subsequently at fair value. Changes in fair values are reflected in the consolidated statements of three monthscomprehensive income.
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 0 residual value. Depreciation is computed using the straight-line method over the estimated useful lives of the assets.
Fixed Assets
Estimated Useful Lives (years)
Office buildings
36-47
Leasehold improvementsLesser of term of the lease or the estimated useful lives of the assets
Vehicles
4
Office furniture5
Computer equipment and hardware4-5
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 sale proceeds and the carrying value of the relevant assets and is recognized in operating expenses in the consolidated statements of comprehensive income.
Intangible Assets
Intangible assets mainly comprise purchased video content, operating rights for licensed games, domain names and trademarks, computer software, and developed technologies. Intangible assets are recorded at cost less notice deposits,accumulated amortization with 0 residual value. Amortization of intangible assets other than purchased video content is computed using the straight-line method over their estimated useful lives. Amortization of purchased video content is computed based on the trend in viewership accumulation over the shorter of the applicable license period or two years.
The estimated useful lives of the Group’s intangible assets are listed below:
Intangible Assets
Estimated Useful Lives (years)
Purchased video content1 month to 2 years
Computer software1-5
Developed technologies3-10
Domain names and trademarks4-30
Operating rights for licensed gamesover the contract terms
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 highly liquid investments that are readily convertiblea gain or loss should be recognized on the exchange. The fair value of the asset received should be used to known amountsmeasure the cost if the fair value of cash.the asset received is more reliable than the fair value of the asset surrendered. The Sohu Group records these nonmonetary exchanges at 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 marketsonline broadcasting rights for identical cash equivalents at the reporting date. In order to determine the fair value, the Group must use the discounted cash flow methodpurchased video content and observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identicalrecognize any net gain 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.loss from such exchange
transactions.
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Impairment of
Long-lived Assets Other Than Purchased Video Content
In accordance with ASC
360-10-35,
the Sohu Group reviews 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. The evaluation is performed at the lowest level of identifiable cash flows independent of other assets. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If such review indicates that the carrying amount of the long-lived assets is not recoverable, the carrying amount of such assets is reduced to fair value. The estimation of future cash flows requires significant management judgment based on the Group’s historical results and anticipated results and is subject to many factors. The discount rate that is commensurate with the risk inherent in the Group’s business model is determined by its management.
Impairment of Purchased Video Content
Purchased video content is stated at the lower of cost less accumulated amortization, or fair value.
In accordance with ASC
920-350-35,
if management’s expectations of the programming usefulness of a program, series, package, or program segment are revised downward, it may be necessary to write off to the income statement the amount by which the unamortized capitalized costs exceed fair value. A write-off from unamortized cost to fair value establishes a new cost basis. Accordingly, the Group measures the video content’s impairment loss by comparing the content’s carrying value to its fair value. An impairment loss will be recorded if the carrying value of video content is higher than its fair value. The impairment to be recognized is measured by the amount by which the carrying value of video content exceeds its fair value.
Lease
The Sohu Group adopted ASU
No. 2016-02,
Leases (Topic 842), at the beginning of the first quarter of 2019 using the modified retrospective method, and did not restate comparable periods.
The Sohu Group elected the package of practical expedients permitted under the transition guidance, which allowed the Sohu Group to carry forward the historical lease classification, the assessment on whether an existing or expired contract contains a lease, and the treatment of initial direct costs. The Sohu Group also elected to keep leases with an initial term of 12 months or less off the balance sheet.

Under the new lease guidance, the Sohu Group determines if an arrangement is or contains a lease at inception.
Right-of-use
assets and lease liabilities are recognized at the lease commencement date based on the present value of remaining lease payments over the lease terms. Certain lease agreements may contain an option to renew a lease for a term agreed to by the Sohu Group and the lessor, or an option to terminate a lease earlier than the expiration date. The Sohu Group considers these options in determining the lease term on a lease-by-lease basis.
The Sohu Group only considers payments that are fixed and determinable at the time of lease commencement. The adoption of the new lease guidance resulted in recognition of $7.4 million of
right-of-use
assets, $
6.7
m
illion of lease liabilities, $
17.9
 million of
right-of-use
assets on assets held
for
sale, and $
16.2
 million of lease liabilities on liabilities held for sale as of
January 
1, 2019.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the identifiable assets and liabilities acquired as a result of the Sohu Group’s acquisitions of interests in its 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, the Group reports in its financial statements provisional amounts for the items for which the accounting is incomplete. If a measurement period adjustment is identified, the Group recognizes the adjustment as part of the acquisition accounting. The Sohu Group increases or decreases the provisional amounts of identifiable assets or liabilities by means of increases or decreases in goodwill for measurement period adjustments.
In accordance with ASC 350, the Group does not amortize goodwill, but tests it for impairment. The Group tests 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. The Group adopted ASU
No. 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, and in accordance with the FASB, pursuant to which the Group has the option to choose whether it 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, the Group starts 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 the reporting unit with its carrying value, including goodwill. If the carrying value of each reporting unit, including goodwill, exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, but limited to the total amount of goodwill allocated to that reporting unit. For the Sohu segment, management determined that a quantitative assessment was most appropriate. For the Changyou segment, management performed a qualitative assessment to determine whether it was more likely than not that the fair value of the reporting unit was less than its carrying amount.
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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. The Group estimates fair value using the income approach and the market approach. The fair value determined using the income approach is compared with comparable market data and reconciled, as necessary. The judgment in estimating the fair value of reporting units includes revenue growth rates and profitability in estimating future cash flows; determining appropriate discount rates and earnings multipliers based on market data of comparable companies engaged in a similar business under the market approach; and making other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit.​​​​​​​
Treasury Stock
Treasury stock consists of the Company’s ordinary shares, including ordinary shares represented by ADSs, repurchased by the Company or that it is obligated to repurchase as of the reporting date. Ordinary shares included in treasury stock are no longer deemed to be outstanding. Treasury stock is accounted for under the cost method.
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 the Sohu Group’s consolidated balance sheets, consists of the Sohu Group’s cumulative foreign currency translation adjustment.
Functional Currency and Foreign Currency Translation
An entity’s functional currency is the currency of the primary economic environment in which it operates, normally that is the currency of the environment in which the entity primarily generates and expends cash. Management’s judgment is essential to determine the functional currency by assessing various indicators, such as cash flows, sales price and market, expenses, financing and intra-Group transactions and arrangements. The functional currency of Sohu.com Limited, and its predecessor Sohu.com Inc., is the U.S. dollar. The functional currency of the Sohu Group’s subsidiaries in the U.S., the Cayman Islands, the British Virgin Islands and Hong Kong is the U.S. dollar. The functional currencies of the Sohu Group’s 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 period’s 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.
Impact of Recently Issued Accounting Pronouncements
Simplifying the accounting for income taxes (Topic 740).
In December 2019, the FASB issued ASU
No. 2019-12,
I
ncome Taxes (Topic 740)-Simplifying the Accounting for Income Taxes
. ASU
No. 2019-12
removes certain exceptions to the general principles in Topic 740 and provides for consistent application of and simplifies generally accepted accounting principles for other areas of Topic 740 by clarifying and amending existing guidance. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The method of adoption varies depending on the component of the new rule that is being adopted. Early application is permitted. The adoption of this standard did not have a material impact on the Sohu Group’s consolidated financial statements.
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Investments-Equity securities (Topic 321), Investments-Equity method and joint ventures (Topic 323), and Derivatives and hedging (Topic 815)-Clarifying the interactions between Topic 321, Topic 323, and Topic 815.
In January 2020, the FASB issued ASU
No. 2020-01,
Investments-Equity securities (Topic 321), Investments-Equity method and joint ventures (Topic 323), and Derivatives and hedging (Topic 815)-Clarifying the interactions between Topic 321, Topic 323, and Topic 815
. The amendments clarify the interaction of the accounting for equity investments under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The adoption of this standard did not have a material impact on the Sohu Group’s consolidated financial statements.
Other accounting standards that the Sohu Group adopted beginning January 1, 2021 did not have a significant impact on the Sohu Group’s consolidated financial statements.
3
. DISCONTINUED OPERATIONS
Discontinued Operation of Sogou
Between Sohu’s entry into the Tencent/Sohu Sogou Share Purchase Agreement on September 29, 2020 and the completion of the Tencent/Sohu Sogou Share Purchase on September 23, 2021, Sogou met the criteria for discontinued operations. Accordingly, the results of operations for Sogou’s business prior to the completion of the Tencent/Sohu Sogou Share Purchase are excluded from Sohu’s results from continuing operations in the Sogou Group’s consolidated statements of comprehensive income and are presented in separate line items as discontinued operations. Retrospective adjustments to the historical statements have been made in order to provide a consistent basis of comparison. Additionally, as of December 31, 2020, the related assets and liabilities associated with the discontinued operations with respect to Sogou were classified as assets held for sale and liabilities held for sale associated with discontinued operations in the consolidated balance sheets to provide comparable financial information. Long-lived assets have not been depreciated or amortized after they were classified as held for sale. As a result, for the year ended December 31, 2020 and the period ended September 23, 2021, depreciation and amortization expenses of $17.0 million and $46.7 million were not recognized for long-lived assets accordingly. On September 23, 2021, the Tencent/Sohu Sogou Share Purchase and the Sogou Merger were completed, and Sohu recognized gain of approximately
 
$855 
million, net of transaction and other costs, which is included in income from discontinued operations. After September 23, 2021, Sohu no longer had any ownership interest in Sogou.
The following tables set forth the assets, liabilities, results of operations and cash flows of discontinued operations with respect to Sogou, that were included in the Sohu Group’s consolidated financial statements
(in thousands):
   
As of December 31,
2020
 
ASSETS
     
Cash and cash equivalents
  $287,185 
Restricted cash
   23,018 
Short-term investments
   774,618 
Account and financing receivables, net
   73,656 
Prepaid and other current assets
   28,946 
Long-term investments, net
   74,004 
Fixed assets, net
   89,089 
Goodwill
   6,527 
Intangible assets, net
   1,446 
Other assets
   53,679 
   
 
 
 
Total assets associated with discontinued operations
  
$
1,412,168
 
   
 
 
 
LIABILITIES
     
Accounts payable
  $122,695 
Accrued liabilities
   68,582 
Receipts in advance
   64,414 
Accrued salary and benefits
   25,350 
Taxes payable
   64,082 
Other short-term liabilities
   61,154 
Long-term liabilities
   10,721 
   
 
 
 
Total liabilities associated with discontinued operations
  
$
416,998
 
   
 
 
 
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Table of Contents
   
Year Ended December 31,
 
   
2019
   
2020
   
2021
(1)
 
Revenues
  $1,172,252   $924,664   $407,607 
Cost of revenues
   738,454    722,614    274,408 
Gross profit
   433,798    202,050    133,199 
Operating expenses:
               
Research and development (2)   190,402    193,376    141,506 
Sales and marketing (2)   138,291    102,523    53,481 
General and administrative (2)   40,670    29,271    11,854 
Total operating expenses
   369,363    325,170    206,841 
Operating profit/(loss)   64,435    (123,120)    (73,642) 
Interest income
   4,443    2,807    2,377 
Interest expense   0    0    (761) 
Foreign currency exchange gain/(loss)
   1,849    (7,767)    (848) 
Other income, net   21,127    38,633    81,655 
Income/(loss) from discontinued operations before income tax expense   91,854    (89,447)    8,781 
Income tax expense/(benefit)   2,748    2,346    (1,112)
Results of operations from discontinued operations, net of tax
  
 
89,106
 
  
 
(91,793
) 
  
 
9,893
 
Gain on disposal of discontinued operations
   0    0    855,009 
   
 
 
   
 
 
   
 
 
 
Net income/(loss) from discontinued operations, net of tax
  
 
89,106
 
  
 
(91,793
) 
  
 
864,902
 
   
 
 
   
 
 
   
 
 
 
Effective Tax Rate
   
Year Ended December 31,
 
   
2019
  
2020
  
2021
(1)(3)
 
Statutory Rate:
   25%   25%   25% 
Effect of tax holidays applicable to subsidiaries and consolidated VIEs
   (2%)   (18%)   127% 
Tax differential from statutory rate applicable to subsidiaries and consolidated VIEs
   3%   (3%)   (90%) 
Changes in valuation allowance for deferred tax assets
   7%   (43%)   349% 
Research and development super-deduction and other permanent book-tax differences
   (25%)   35%   (249%) 
Capital gains from equity investments
   (5%)   1%   (175%) 
   
 
 
  
 
 
  
 
 
 
    3%   (3%)   (13%) 
   
 
 
  
 
 
  
 
 
 
   
Year Ended December 31,
 
   
2019
   
2020
   
2021
(1)
 
Net cash provided by/(used in) discontinued operating activities
  $219,516   $(68,187)   $(175,888)
 
Net cash provided by/(used in) discontinued investing activities
   (217,598)    235,374    1,054,148 
Net cash used in discontinued financing activities
   (33,415)    (8,209)    (9,132)
Note
(1): Includes the financial results of the discontinued operations from January 1, 2021 to September 23, 2021.
Note (2): Expenses generated from marketing services between the Sohu Group and Sogou Group, and leasing expenses generated from a building that Sohu leases to Sogou are not eliminated because those expenses are considered to continue after the disposal of the discontinued operations.
Note (3): The changes in the effective tax rate for the period ended September 23, 2021 resulted from the lower income from discontinued operations before income tax expense.
Discontinued Operation of Shanghai Jingmao
In May 2010, Changyou acquired 50% of the equity interests in Shanghai Jingmao Culture Communication Co., Ltd. (“Shanghai Jingmao”) and an affiliate of Shanghai Jingmao, which were primarily engaged in the cinema advertising business. In January 2011, Changyou acquired the remaining 50% of the equity interests in Shanghai Jingmao and its affiliate for total consideration of approximately $3.0 million. In the fourth quarter of 2011, a full impairment loss of $5.2 million on goodwill was recognized for the cinema advertising business.
In
 the second quarter of 2019, after assessing the collectability of the assets of the cinema advertising business, including receivables and prepayments, Changyou recognized a $17.0 million asset impairment charge for the cinema advertising
business.
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Changyou ceased
operating the cinema advertising business and wound down the business in
August 2019
as a result of a Chinese court in Shanghai having granted a petition by Shanghai Jingmao for bankruptcy relief on August 
12
,
2019
. Accordingly, the results of operations for Changyou’s cinema advertising business have been excluded from Changyou’s results from continuing operations in the consolidated statements of comprehensive income and are presented in separate line items as discontinued operations. Retrospective adjustments to the historical statements have been made in order to provide a consistent basis of comparison. Changyou recognized
NaN
disposal gain/loss for the years ended December 
31
,
2019
and
2020
. However, Changyou may recognize disposal gain/loss in the future, depending on developments in the bankruptcy proceedings in the Chinese court
.
See Note 8 - Balance Sheet Components.
The following tables set forth the results of operations and cash flows of discontinued operations with respect to Changyou’s cinema advertising business, that were included in the Group’s consolidated financial statements (in thousands):
   
Year Ended
December 31,
 
   
2019
(1)
 
Revenues
  $37,323 
Cost of revenues
   43,857 
Gross loss
   (6,534) 
Operating expenses:
     
Sales and marketing
   8,807 
General and administrative
   18,583 
Total operating expenses
   27,390 
Operating loss
   (33,924) 
Interest income
   7 
Other income/(expense), net
   61 
Loss from discontinued operations before income tax expense   (33,856) 
Income tax expense
   142 
   
 
 
 
Net loss from discontinued operations, net of tax
  
 
(33,998
) 
   
 
 
 


   
Year Ended
December 31,
 
   
2019
(1)
 
Net cash provided by discontinued operating activities
  $9,341 
Net cash used in discontinued investing activities
   (10,808) 
Net cash provided by discontinued financing activities   0 
Note (1): Includes the financial results of the discontinued operations from January 1, 2019 to August 12, 2019.​​​​​​​
4. SEGMENT INFORMATION
The Sohu Group’s segments are business units that offer different services and are reviewed separately by the CODM in deciding how to allocate resources and in assessing performance. The Group’s CODM is the Company’s Chief Executive Officer. There are two segments in the Sohu Group, consisting of Sohu and Changyou. Before Sohu’s entry into the Tencent/Sohu Sogou Share Purchase Agreement on September 29, 2020, there were three segments in the Sohu Group, consisting of Sohu, Changyou, and Sogou. Between September 29, 2020 and the completion of the Tencent/Sohu Sogou Share Purchase on September 23, 2021, Sogou met the criteria to be classified as discontinued operations. Accordingly, Sogou’s historical financial results are reflected in Sohu’s consolidated financial statements as discontinued operations. The Sohu Group segments consisted of Sohu and Changyou thereafter. As most of the Sohu Group’s long-lived assets are located in, and substantially all of the revenues of the Sohu Group’s reportable segments are derived from China, where the Sohu Group’s services and products are provided to customers, no geographical information is presented.
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Table of Contents
The following tables present summary information by segment (in thousands):

   
Year Ended December 31, 2019
 
   
Sohu
   
Changyou
   
Eliminations
   
Consolidated
 
Revenues
  $218,442   $455,380   $(19)   $673,803 
Segment cost of revenues (1)   (148,258)   (95,268)    21    (243,505) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Segment gross profit
   70,184    360,112    2    430,298 
SBC in cost of revenues (2)   (23)   (120)    1    (142) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Gross profit
   70,161    359,992    3    430,156 
   
 
 
   
 
 
   
 
 
   
 
 
 
Operating expenses:
                    
Product development (1)   (113,761)   (119,726)    0    (233,487) 
Sales and marketing (1)   (155,226)   (49,768)    2    (204,992) 
General and administrative (1)   (31,330)   (22,074)    (17)    (53,421) 
Goodwill impairment and impairment of intangible assets acquired as part of business acquisitions   (7,245)   0    0    (7,245) 
SBC in operating expenses (2)   (1,023)   (1,185)    0    (2,208) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total operating expenses   (308,585)   (192,753)    (15)    (501,353) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Operating profit/(loss)
   (238,424)   167,239    (12)    (71,197) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Other income
                  7,963 
Interest income
                  6,103 
Interest expense
                  (14,370) 
Exchange difference
                  1,430 
                  
 
 
 
Loss before income tax expense
                  (70,071) 
Income tax benefit
                  (28,428) 
                  
 
 
 
Net loss from continuing operations
                  (98,499) 
Net income from discontinued operations
                  55,108 
                  
 
 
 
Net loss
                 $(43,391) 
                  
 
 
 
Note (1): Total depreciation and amortization expenses of Sohu and Changyou were $50.7 million and $16.4 million, respectively, for the year ended December 31, 2019.
Note (2): “SBC” stands for share-based compensation expense.
   
Year Ended December 31, 2020
 
   
Sohu
   
Changyou
   
Eliminations
   
Consolidated
 
Revenues
  $201,544   $548,346   $0   $749,890 
Segment cost of revenues (1)   (122,362)    (94,362)    7    (216,717) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Segment gross profit
   79,182    453,984    7    533,173 
SBC in cost of revenues (2)   (177)    (543)    0    (720) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Gross profit
   79,005    453,441    7    532,453 
   
 
 
   
 
 
   
 
 
   
 
 
 
Operating expenses:
                    
Product development (1)   (97,681)    (136,934)    0    (234,615) 
Sales and marketing (1)   (106,057)    (53,272)    0    (159,329) 
General and administrative (1)   (25,861)    (25,517)    0    (51,378) 
SBC in operating expenses (2)   (1,759)    (12,001)    0    (13,760) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total operating expenses
   (231,358)    (227,724)    0    (459,082) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Operating profit/(loss)
   (152,353)    225,717    7    73,371 
   
 
 
   
 
 
   
 
 
   
 
 
 
Other income
                  25,993 
Interest income
                  7,369 
Interest expense
                  (6,234) 
Exchange difference
                  (3,800) 
                  
 
 
 
Loss before income tax expense
                  96,699 
Income tax expense
                  (133,226) 
                  
 
 
 
Net loss from continuing operations
                  (36,527) 
Net income from discontinued operations
                  (91,793) 
                  
 
 
 
Net loss
                 $(128,320) 
                  
 
 
 
Note (1): Total depreciation and amortization expenses of Sohu and Changyou were $26.4 million and $13.5 million, respectively, for the year ended December 31, 2020.
Note (2): “SBC” stands for share-based compensation expense.
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Table of Contents
   
Year Ended December 31, 2021
 
   
Sohu
   
Changyou
   
Eliminations
   
Consolidated
 
Revenues
  $186,606   $648,970   $0   $835,576 
Segment cost of revenues (1)   (113,881)   (90,517)   4    (204,394)
   
 
 
   
 
 
   
 
 
   
 
 
 
Segment gross profit
   72,725    558,453    4    631,182 
SBC in cost of revenues (2)   (1)   (276)   0    (277)
   
 
 
   
 
 
   
 
 
   
 
 
 
Gross profit
   72,724    558,177    4    630,905 
   
 
 
   
 
 
   
 
 
   
 
 
 
Operating expenses:
                    
Product development (1)   (113,186)   (151,773)   0    (264,959)
Sales and marketing (1)   (126,126)   (56,396)   0    (182,522)
General and administrative (1)   (36,949)   (40,702)   0    (77,651)
SBC in operating expenses (2)   (804)   (7,497)   0    (8,301)
   
 
 
   
 
 
   
 
 
   
 
 
 
Total operating expenses
   (277,065)   (256,368)   0    (533,433)
   
 
 
   
 
 
   
 
 
   
 
 
 
Operating profit/(loss)
   (204,341)   301,809    4    97,472 
   
 
 
   
 
 
   
 
 
   
 
 
 
Other income
                29,416 
Interest income
                15,641 
Interest expense
                (7,500)
Exchange difference
                (3,462)
                
 
 
 
Income before income tax expense
                131,567 
Income tax expense
                (62,296)
                
 
 
 
Net loss from continuing operations
                69,271 
Net loss from discontinued operations
                864,902 
                
 
 
 
Net loss
               $934,173 
                  
 
 
 
Note (1): Total
depreciation and amortization expenses of Sohu and Changyou were $23.4 million and $12.6 million, respectively, for the year ended December 31, 2021.
Note (2): “SBC” stands for share-based compensation expense.
   
As of December 31, 2020
 
   
Sohu
   
Changyou
   
Eliminations
   
Consolidated
 
Cash and cash equivalents
  $56,977   $160,080   $0   $217,057 
Accounts receivable, net
   60,886    26,635    0    87,521 
Fixed assets, net
   174,700    162,976    (2)    337,674 
Total assets (1)
  $1,632,736   $2,478,705   $(2,701,488)   $1,409,953 
Note (1): The elimination for segment assets mainly consists of elimination of intra-Group loans between Sohu and Changyou, and elimination of long-term investments in subsidiaries and consolidated VIEs.
   
As of December 31, 202
1
 
   
Sohu
   
Changyou
   
Eliminations
   
Consolidated
 
Cash and cash equivalents
  $929,851   $69,098   $0   $998,949 
Accounts receivable, net
   48,108    34,442    0    82,550 
Fixed assets, net
   170,213    159,784    0    329,997 
Total assets (1)
  $2,294,537   $2,610,964   $(2,659,716)    $2,245,785 
Note (1): The elimination for segment assets mainly consists of elimination of intra-Group loans between Sohu and Changyou, and elimination of long-term investments in subsidiaries and consolidated VIEs.
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5. SHARE-BASED COMPENSATION EXPENSE
Sohu (excluding Sohu Video), Changyou, and Sohu Video have incentive plans for the granting of share-based awards, including share options and restricted share units, to members of the boards of directors, management and other key employees.
Share-based compensation expense was recognized in costs and expenses for the years ended December 31, 2019, 2020 and 2021 as follows (in thousands):
   
Year Ended December 31,
 
Share-based compensation expense
  
2019
   
2020
   
2021
 
Cost of revenues
  $142   $720   $277 
Product development expenses
   1,364    7,325    3,904 
Sales and marketing expenses
   (326)    460    166 
General and administrative expenses
   1,170    5,975    4,231 
   
 
 
   
 
 
   
 
 
 
   $2,350   $14,480   $8,578 
   
 
 
   
 
 
   
 
 
 
Share-based compensation expense was recognized for share awards of Sohu (excluding Sohu Video), Changyou and Sohu Video as follows (in thousands):
   
Year Ended December 31,
 
Share-based compensation expense
  
2019
   
2020
   
2021
 
For Sohu (excluding Sohu Video) share-based awards
  $1,940   $2,633   $1,849 
For Changyou share-based awards
   1,305    12,545    7,773 
For Sohu Video share-based awards
   (895)    (698)    (1,044) 
   
 
 
   
 
 
   
 
 
 
   $2,350   $14,480   $8,578 
   
 
 
   
 
 
   
 
 
 
The negative amounts in the tables above resulted from
re-measured
compensation expense based on the then-current fair value of the awards on the reporting date.
There was 0 capitalized share-based compensation expense for the years ended December 31, 2021, 2020 and 2019.
6. ADVERTISING AND PROMOTIONAL EXPENSES, INCLUDED IN SALES AND MARKETING EXPENSES
Advertising and promotional expenses are included in sales and marketing expenses, and generally represent the expenses of promotions to create or stimulate a positive image of the Sohu Group or a desire to subscribe for the Group’s products and services. Advertising expenses are expensed as incurred. For the years ended December 31, 2021, 2020 and 2019, advertising and promotional expenses recognized in the consolidated statements of comprehensive income were $98.5 million, $84.7 million and $124.6 million, respectively.
7. OTHER INCOME, NET
The following table summarizes the Sohu Group’s other income/(expense) (in thousands):

   
Year Ended December 31,
 
   
2019
   
2020
   
2021
 
Rental income from Sogou (1)
   8,029    9,793    10,427 
Investment income   3,004    3    6,352 
Income from investments in financial instruments (2)   11,113    4,303    5,260 
Individual tax refund and additional deduction of PRC value-added tax

   907    6,169    4,827 
Write-down of unpaid long-term accounts payable   0    47    1,276 
Gover
nment grant

   5,763    5,928    418 
Impairment loss on equity investments (
3
)
   (23,154)    (384)    (215) 
Donations
   (283)    (1,460)    (1,565) 
Others
   2,584    1,594    2,636 
  
$
7,963
  
$
25,993
  
$
29,416
 
   
 
 
   
 
 
   
 
 
 
Note (1): Sogou leases from Sohu, on an arms-length basis, office space at Sohu.com Internet Plaza under a lease that expires on December 31, 2022 and may be renewed subject to terms to be agreed to by Sohu and Sogou.
The cash receipts from this lease within operating activities for 2021, 2020 and 2019 were $12.3 million, $12.1 million and $8.4 million, respectively.
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Note (2): The increase for 2021 compared to 2020 and the decrease for 2020 compared to 2019 were mainly due to income earned from investments in financial instruments.
Note (
3
): In the fourth quarter of 2019, the Sohu Group recognized impairment losses of $23.2 million for equity investments.
8. BALANCE SHEET COMPONENTS (IN THOUSANDS)

   
As of December 31,
 
   
2020
   
2021
 
Accounts receivable, net
          
Accounts receivable
  $94,528    94,908 
Allowance for credit losses
   (7,007)    (12,358)
   
 
 
   
 
 
 
   $87,521    82,550 
   
 
 
   
 
 
 
The following table presents the movement of allowances for credit losses for the years of 2019, 2020 and 2021:
   
Balance at the
beginning of
year
  
Changes on initial
application of ASU
2016-13
   
Additional
allowance for credit
losses, net of
recoveries
   
Write-offs
  
Exchange
difference
  
Balance at the
end of year
 
2019
   7,574   0    4,724    (8,237)   (105)   3,956 
2020
   3,956   3,383    2,419    (3,231)   480   7,007 
2021
   7,007   0    6,292    (1,155)  214   12,358 
   
As of December 31,
 
   
2020
   
2021
 
Prepaid and other current assets
          
Matching loan due from a related party (See Note 9)
  $34,123   $34,123 
Prepaid taxes
   25,043    28,719 
Prepaid revenue-sharing cost  
10,120
   
12,428

 
Prepaid content and license costs   11,029    8,694 
Prepaid advertising and promotion fee   244    4,685 
Interest receivable from bank deposits with original maturities of three months or
less
   3,875    3,059 
Receivables from third party payment platforms

  
5,488
   
 
2,670
 
Prepaid professional fees
   2,365    2,432 
Prepaid rental deposit
s
   2,310    1,928 
Emplo
yee advances

  
 
587
   
 
569
 
Prepaid office rent and facilities expenses
   696    338 
Others
   10,710    7,666 
   
 
 
   
 
 
 
    $106,590   $107,311 
   
 
 
   
 
 
 
Prepaid
non-current
assets
          
Prepaid PRC income tax for the sale of assets associated with 17173.com by Sohu to Changyou  $1,006   $0 
   
 
 
   
 
 
 
   $1,006   $0 
   
 
 
   
 
 
 
Other short-term liabilities
          
Matching loans due to a related party (See Note 9)
   34,123    34,123 
Contingent liability related to Shanghai Jingmao liquidation (1)
   23,900    23,900 
Deposits related to Focus
   21,936    10,387 
Share-based awards in Changyou
   13,292    20,693 
Other payables related to Shanghai Jingmao liquidation (2)   0    9,380 
Contract deposits from advertisers
   3,036    2,679 
Lease liabilities
   1,107    1,999 
Consideration payable for equity investment
   751    769 
Others
   8,026    8,638 
   
 
 
   
 
 
 
   $106,171   $112,568 
   
 
 
   
 
 
 
Note (1): The contingent liability represents the aggregate of estimated potential payments to third parties in connection with the liquidation of Shanghai Jingmao. The stated amount of the contingent liability reflects Changyou’s best estimate as of December 31, 2020 and 2021 pursuant to ASC
450-20.
Changyou may revise this estimate in the future based on developments in PRC bankruptcy court proceedings regarding.
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Note (2): Shanghai Jingmao. In 2021, Changyou received $9.4 million from the bankruptcy proceedings, as a creditor of Shanghai Jingmao, during the process of the liquidation of Shanghai Jingmao. No disposal gain was recognized due to the uncertainty with the proceedings that were still ongoing.
Receipts in advance and deferred revenue
  
 
 
 
  
 
 
 
Receipts in advance relating to:
  
 
 
 
  
 
 
 
brand advertising business
  
$
5,214
 
  
$
4,297 
online game business
  
 
7,869
 
  
 
9,310 
other business
  
 
6,029
 
  
 
5,286 
   
 
 
   
 
 
 
Total receipts in advance
  
 
19,112
 
  
 
18,893 
Deferred revenue
  
 
32,943
 
  
 
38,148 
   
 
 
   
 
 
 
  $52,055
 
 $57,041 
   
 
 
   
 
 
 
9. RELATED PARTY TRANSACTIONS
Under an agreement between Sohu and Fox Financial Technology Group Limited (“Fox Financial,” formerly known as “SoEasy Internet Finance Group Limited”) 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.
Changyou’s Loan Arrangements with Fox Financial
Commencing in April 2015, certain subsidiaries of Changyou and certain subsidiaries of Fox Financial entered into a series of loan agreements pursuant to which the subsidiaries of Changyou were entitled to draw down HK dollar-denominated or U.S. dollar-denominated loans from the Fox Financial subsidiaries and the Fox Financial subsidiaries were entitled to draw down equivalent RMB-denominated loans from the Changyou subsidiaries, to facilitate each other’s business operations. All of the loans carry a fixed rate of interest which approximated the market interest rate at the inception of the loans.
In December 2018 and 2019, Changyou entered into supplemental agreements with Fox Financial pursuant to which all accrued and unpaid interest on the loans as of December 31, 2018 and December 31, 2019 was added to the principal of the corresponding loans. Due to the depreciation of the RMB against the U.S. dollar in 2018, the principal amounts of Changyou’s outstanding RMB-denominated loans to Fox Financial as of December 31, 2018 were adjusted upward to amounts equal to the principal amounts of Fox Financials’ outstanding U.S. dollar denominated loans to Changyou as of December 31, 2018, multiplied by the monthly average RMB to U.S. dollar exchange rate published by the Bank of China for the month of December 2018. As a result of such adjustment, Changyou advanced additional RMB-denominated loans in the principal amount of RMB8.2 million (approximately $1.2 million) to Fox Financial in January 2019.
In December 2019, Changyou entered into a supplemental agreement with Fox Financial pursuant to which Fox Financial provided security for its repayment obligations to Changyou. Under this supplemental agreement, if Fox Financial fails to repay the RMB-denominated loan principal and corresponding interest owed to Changyou, Changyou will have the right to apply the amount of a security deposit, consisting of the outstanding U.S. dollar-denominated loan principal and corresponding interest owed by Changyou to Fox Financial, to repay the RMB-denominated loan principal and interest owed by Fox Financial to Changyou. The security deposit will be required to be replenished by Fox Financial if the amount of the security deposit is insufficient to repay the loan principal and interest of the RMB-denominated loan owed to Changyou, and any remaining security deposit will be returned to Fox Financial if there is a surplus after the repayment of the RMB-denominated loan principal and interest. The parties entered into an additional supplemental agreement pursuant to which Changyou provided security for its repayment obligations to Fox Financial. Under this supplemental agreement, if Changyou fails to repay the U.S. dollar-denominated loan principal and corresponding interest owed to Fox Financial, Fox Financial will have the right to apply the amount of a security deposit, consisting of the outstanding RMB-denominated loan principal and corresponding interest owed by Fox Financial to Changyou, to repay the U.S. dollar-denominated loan principal and interest owed by Changyou to Fox Financial. The security deposit will be required to be replenished by Changyou if the amount of the security deposit is insufficient to repay the U.S. dollar-denominated loan principal and interest owed by Changyou to Fox Financial, and any remaining security deposit will be returned to Changyou if there is a surplus after the repayment of the U.S. dollar-denominated loan principal and interest.
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The loan arrangements expired on December 31, 2020 and no new supplemental agreements were signed. In May 2021, Changyou notified Fox Financial of Changyou’s intention to exercise its rights under the supplemental agreement by applying the security deposit to repay the RMB-denominated loan principal and corresponding interest owed by Fox Financial to Changyou. As of the date of this report, Changyou has not received any response from Fox Financial and accordingly, with an abundance of caution, has not so applied any of the security deposit. Changyou performed an assessment of its expected credit losses for the RMB-denominated loans receivable from Fox Financial. As of December 31, 2021, the Sohu Group had accrued a cumulative allowance for credit losses of approximately
$3.3 
million based on Changyou’s estimate of the net of the outstanding amount of such loans receivable from Fox Financial over the amount of the security deposit and on the lack of solvency of Fox Financial. As of December 31, 2021, net loan receivables and loans payable under such loan arrangements, each in the amount of
$34.1 million, were recorded as prepaid and other current assets and other short-term liabilities, respectively, in the Sohu Group’s consolidated balance sheets.
10. FAIR VALUE MEASUREMENTS
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.
The Sohu Group’s financial instruments consist primarily of cash equivalents, restricted cash, short-term investments, accounts receivable, other current assets, long-term investments, long-term time deposits, restricted time deposits, accounts payable, accrued liabilities, short-term bank loans, other short-term liabilities, long-term bank loans, and long-term other payables.
Restricted Cash and Restricted Time Deposits
Restricted cash and restricted time deposits are valued based on the prevailing interest rates in the market using the discounted cash flow method. See Note 10 - Fair Value Measurements.
Short-term Investments
The Sohu Group’s short-term investments mainly consist of investments in financial instruments with a variable interest rate and time deposits with maturities of three months to one year. For investments in financial instruments with a variable interest rate indexed to the performance of underlying assets and time deposits, the Sohu Group 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 for credit losses that reflects the Sohu Group’s best estimate of the amounts that will not be collected. The Group makes estimations of the collectability of accounts receivable. Many factors are considered in estimating the general allowance, including reviewing delinquent accounts receivable, performing a customer credit analysis, and analyzing historical bad debt records and current and future economic trends.
Accounts receivable represent historical balances recorded less related cash applications, less allowance for credit losses and any write-offs of any receivables not previously provided for.
Allowance for credit losses
Effective on January 1, 2020, the Sohu Group adopted Accounting Standards Update (ASU)
2016-13,
“Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU
2016-13”)
under a modified retrospective transition. This guidance replaces the existing “incurred loss” methodology, and introduces an expected loss approach using macroeconomic forecasts, referred to as a current expected credit losses (“CECL”) methodology. Under the incurred loss methodology, credit losses are only recognized when the losses are probable of having been incurred. The CECL methodology requires that the full amount of expected credit losses for the lifetime of the financial instrument be recorded at the time it is originated or acquired, considering relevant historical experience, current conditions and reasonable and supportable macroeconomic forecasts that affect the collectability of financial assets, and adjusted for changes in expected lifetime credit losses subsequently, which may require earlier recognition of credit losses.
The Sohu Group adopted ASU
2016-13
using the modified retrospective transition approach and recognized a cumulative-effect adjustment of approximately $6.7 million to the opening balance of accumulated deficit in the consolidated financial statements, including an increase of approximately $3.4 million in the allowance for credit losses of accounts receivable, and an increase of approximately $3.3 million in the allowance for credit losses of accounts receivable and financing receivables classified as assets held for sale. Results for reporting periods beginning after January 1, 2020 are presented using the CECL methodology while comparative information continues to be reported in accordance with the incurred loss methodology in effect for prior periods.
The allowance for credit losses reflects the Sohu Group’s estimated expected losses. The Sohu Group estimates the allowance for credit losses, mainly based on past collection experience as well as consideration of current and future economic conditions and changes in the Sohu Group’s collection trends. The Sohu Group estimates the expected credit losses for accounts receivable with similar risk characteristics on a pool basis. For each pool, the Sohu Group first estimates its recovery period based on relevant historical accounts receivable collection information. Then the Sohu Group estimates the credit allowances based on the recovery period, the historical distribution of each aging bucket, and the impact of macroeconomic factors.
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Accounts receivable are written off when there is no reasonable expectation of recovery. Subsequent recoveries of amounts previously written off are credited against the same line item.
Accounts receivable, net, as of December 31, 2020 and 2021 consisted of the following (in thousands):
   
As of December 31,
 
   
2020
   
2021
 
Accounts receivable, net
          
Accounts receivable
  $94,528   $94,908 
Less: Allowance for credit losses
   (7,007)    (12,358) 
   
 
 
   
 
 
 
   $87,521   $82,550 
The following table presents the aging analysis of accounts receivable as of December 31, 2020 and 2021
(in thousands):
   
As of December 31,
 
   
2020
   
2021
 
Less than 179 days
  $78,805   $79,155 
180-359
days
   7,569    7,437 
360 days and greater
   8,154    8,316 
   
 
 
      
Total
   94,528    94,908 
The movement of allowance for credit losses for the years ended December 31, 2019, 2020 and 2021 was as follows (in thousands):
   
For the year ended December 31,
 
   
2019
   
2020
   
2021
 
Balance at the beginning of year
  $7,574   $3,956   $7,007 
Changes on initial application of ASU
2016-13
(1)
   0    3,383    0 
Additional allowance for credit losses, net of recoveries
   4,724    2,419    6,292 
Write-offs
   (8,237)    (3,231)    (1,155) 
Exchange difference
   (105)    480    214 
   
 
 
   
 
 
   
 
 
 
Balance at the end of year
   3,956    7,007    12,358 
Note (1): The Company adopted ASU
2016-13
using the modified retrospective transition approach. The adjustments arising from the new CECL model are recognized in the opening Consolidated Balance Sheet on January 1, 2020.
Equity Investments
Investments in entities are recorded as equity investments under long-term investments. For investments in common stock or
in-substance
common stock of entities over which the Group can exercise significant influence but does not own a majority equity interest or control, the equity method is applied, and the Group adjusts the carrying amount of an investment and recognizes investment income or loss for the Group’s share of the earnings or loss of the investee after the date of investment. For those equity investments accounted for other than under the equity method, the fair value method is applied. However, for equity investments that do not have readily determinable fair values, the Group chooses to account for them at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. If this measurement alternative is elected, changes in the carrying value of the equity investments will be required to be made whenever there are observable price changes in transactions for identical or similar investments of the same issuer. The implementation guidance notes that an entity should make a “reasonable effort” to identify price changes that are known or that can reasonably be known.
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The Group assesses investments for impairment by considering factors including, but not limited to, current economic and market conditions, operating performance of the companies, including current earnings trends and undiscounted cash flows, and other company-specific information, such as recent financing rounds. The fair value determination, particularly for investments in privately-held companies whose revenue model is still unclear, requires significant judgment to determine appropriate estimates and assumptions. Changes in these estimates and assumptions could affect the calculation of the fair value of the investments. If the assessment indicates that an impairment exists, the Group estimates the fair value of the investment and writes down the asset to its fair value, taking the corresponding charge to the consolidated statements of comprehensive income/(loss).​​​​​​​​​​​​​​
Long-term Time Deposits
The Sohu Group elected the fair value method at the date of initial recognition of time deposits with maturities over one year and carried these investments subsequently at fair value. Changes in fair values are reflected in the consolidated statements of comprehensive income.
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 0 residual value. Depreciation is computed using the straight-line method over the estimated useful lives of the assets.
Fixed Assets
Estimated Useful Lives (years)
Office buildings
36-47
Leasehold improvementsLesser of term of the lease or the estimated useful lives of the assets
Vehicles
4
Office furniture5
Computer equipment and hardware4-5
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 sale proceeds and the carrying value of the relevant assets and is recognized in operating expenses in the consolidated statements of comprehensive income.
Intangible Assets
Intangible assets mainly comprise purchased video content, operating rights for licensed games, domain names and trademarks, computer software, and developed technologies. Intangible assets are recorded at cost less accumulated amortization with 0 residual value. Amortization of intangible assets other than purchased video content is computed using the straight-line method over their estimated useful lives. Amortization of purchased video content is computed based on the trend in viewership accumulation over the shorter of the applicable license period or two years.
The estimated useful lives of the Group’s intangible assets are listed below:
Intangible Assets
Estimated Useful Lives (years)
Purchased video content1 month to 2 years
Computer software1-5
Developed technologies3-10
Domain names and trademarks4-30
Operating rights for licensed gamesover the contract terms
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. The Sohu Group records 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.
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Impairment of
Long-lived Assets Other Than Purchased Video Content
In accordance with ASC
360-10-35,
the Sohu Group reviews 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. The evaluation is performed at the lowest level of identifiable cash flows independent of other assets. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If such review indicates that the carrying amount of the long-lived assets is not recoverable, the carrying amount of such assets is reduced to fair value. The estimation of future cash flows requires significant management judgment based on the Group’s historical results and anticipated results and is subject to many factors. The discount rate that is commensurate with the risk inherent in the Group’s business model is determined by its management.
Impairment of Purchased Video Content
Purchased video content is stated at the lower of cost less accumulated amortization, or fair value.
In accordance with ASC
920-350-35,
if management’s expectations of the programming usefulness of a program, series, package, or program segment are revised downward, it may be necessary to write off to the income statement the amount by which the unamortized capitalized costs exceed fair value. A write-off from unamortized cost to fair value establishes a new cost basis. Accordingly, the Group measures the video content’s impairment loss by comparing the content’s carrying value to its fair value. An impairment loss will be recorded if the carrying value of video content is higher than its fair value. The impairment to be recognized is measured by the amount by which the carrying value of video content exceeds its fair value.
Lease
The Sohu Group adopted ASU
No. 2016-02,
Leases (Topic 842), at the beginning of the first quarter of 2019 using the modified retrospective method, and did not restate comparable periods.
The Sohu Group elected the package of practical expedients permitted under the transition guidance, which allowed the Sohu Group to carry forward the historical lease classification, the assessment on whether an existing or expired contract contains a lease, and the treatment of initial direct costs. The Sohu Group also elected to keep leases with an initial term of 12 months or less off the balance sheet.

Under the new lease guidance, the Sohu Group determines if an arrangement is or contains a lease at inception.
Right-of-use
assets and lease liabilities are recognized at the lease commencement date based on the present value of remaining lease payments over the lease terms. Certain lease agreements may contain an option to renew a lease for a term agreed to by the Sohu Group and the lessor, or an option to terminate a lease earlier than the expiration date. The Sohu Group considers these options in determining the lease term on a lease-by-lease basis.
The Sohu Group only considers payments that are fixed and determinable at the time of lease commencement. The adoption of the new lease guidance resulted in recognition of $7.4 million of
right-of-use
assets, $
6.7
m
illion of lease liabilities, $
17.9
 million of
right-of-use
assets on assets held
for
sale, and $
16.2
 million of lease liabilities on liabilities held for sale as of
January 
1, 2019.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the identifiable assets and liabilities acquired as a result of the Sohu Group’s acquisitions of interests in its 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, the Group reports in its financial statements provisional amounts for the items for which the accounting is incomplete. If a measurement period adjustment is identified, the Group recognizes the adjustment as part of the acquisition accounting. The Sohu Group increases or decreases the provisional amounts of identifiable assets or liabilities by means of increases or decreases in goodwill for measurement period adjustments.
In accordance with ASC 350, the Group does not amortize goodwill, but tests it for impairment. The Group tests 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. The Group adopted ASU
No. 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, and in accordance with the FASB, pursuant to which the Group has the option to choose whether it 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, the Group starts 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 the reporting unit with its carrying value, including goodwill. If the carrying value of each reporting unit, including goodwill, exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, but limited to the total amount of goodwill allocated to that reporting unit. For the Sohu segment, management determined that a quantitative assessment was most appropriate. For the Changyou segment, management performed a qualitative assessment to determine whether it was more likely than not that the fair value of the reporting unit was less than its carrying amount.
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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. The Group estimates fair value using the income approach and the market approach. The fair value determined using the income approach is compared with comparable market data and reconciled, as necessary. The judgment in estimating the fair value of reporting units includes revenue growth rates and profitability in estimating future cash flows; determining appropriate discount rates and earnings multipliers based on market data of comparable companies engaged in a similar business under the market approach; and making other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit.​​​​​​​
Treasury Stock
Treasury stock consists of the Company’s ordinary shares, including ordinary shares represented by ADSs, repurchased by the Company or that it is obligated to repurchase as of the reporting date. Ordinary shares included in treasury stock are no longer deemed to be outstanding. Treasury stock is accounted for under the cost method.
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 the Sohu Group’s consolidated balance sheets, consists of the Sohu Group’s cumulative foreign currency translation adjustment.
Functional Currency and Foreign Currency Translation
An entity’s functional currency is the currency of the primary economic environment in which it operates, normally that is the currency of the environment in which the entity primarily generates and expends cash. Management’s judgment is essential to determine the functional currency by assessing various indicators, such as cash flows, sales price and market, expenses, financing and intra-Group transactions and arrangements. The functional currency of Sohu.com Limited, and its predecessor Sohu.com Inc., is the U.S. dollar. The functional currency of the Sohu Group’s subsidiaries in the U.S., the Cayman Islands, the British Virgin Islands and Hong Kong is the U.S. dollar. The functional currencies of the Sohu Group’s 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 period’s 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.
Impact of Recently Issued Accounting Pronouncements
Simplifying the accounting for income taxes (Topic 740).
In December 2019, the FASB issued ASU
No. 2019-12,
I
ncome Taxes (Topic 740)-Simplifying the Accounting for Income Taxes
. ASU
No. 2019-12
removes certain exceptions to the general principles in Topic 740 and provides for consistent application of and simplifies generally accepted accounting principles for other areas of Topic 740 by clarifying and amending existing guidance. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The method of adoption varies depending on the component of the new rule that is being adopted. Early application is permitted. The adoption of this standard did not have a material impact on the Sohu Group’s consolidated financial statements.
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Investments-Equity securities (Topic 321), Investments-Equity method and joint ventures (Topic 323), and Derivatives and hedging (Topic 815)-Clarifying the interactions between Topic 321, Topic 323, and Topic 815.
In January 2020, the FASB issued ASU
No. 2020-01,
Investments-Equity securities (Topic 321), Investments-Equity method and joint ventures (Topic 323), and Derivatives and hedging (Topic 815)-Clarifying the interactions between Topic 321, Topic 323, and Topic 815
. The amendments clarify the interaction of the accounting for equity investments under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The adoption of this standard did not have a material impact on the Sohu Group’s consolidated financial statements.
Other accounting standards that the Sohu Group adopted beginning January 1, 2021 did not have a significant impact on the Sohu Group’s consolidated financial statements.
3
. DISCONTINUED OPERATIONS
Discontinued Operation of Sogou
Between Sohu’s entry into the Tencent/Sohu Sogou Share Purchase Agreement on September 29, 2020 and the completion of the Tencent/Sohu Sogou Share Purchase on September 23, 2021, Sogou met the criteria for discontinued operations. Accordingly, the results of operations for Sogou’s business prior to the completion of the Tencent/Sohu Sogou Share Purchase are excluded from Sohu’s results from continuing operations in the Sogou Group’s consolidated statements of comprehensive income and are presented in separate line items as discontinued operations. Retrospective adjustments to the historical statements have been made in order to provide a consistent basis of comparison. Additionally, as of December 31, 2020, the related assets and liabilities associated with the discontinued operations with respect to Sogou were classified as assets held for sale and liabilities held for sale associated with discontinued operations in the consolidated balance sheets to provide comparable financial information. Long-lived assets have not been depreciated or amortized after they were classified as held for sale. As a result, for the year ended December 31, 2020 and the period ended September 23, 2021, depreciation and amortization expenses of $17.0 million and $46.7 million were not recognized for long-lived assets accordingly. On September 23, 2021, the Tencent/Sohu Sogou Share Purchase and the Sogou Merger were completed, and Sohu recognized gain of approximately
 
$855 
million, net of transaction and other costs, which is included in income from discontinued operations. After September 23, 2021, Sohu no longer had any ownership interest in Sogou.
The following tables set forth the assets, liabilities, results of operations and cash flows of discontinued operations with respect to Sogou, that were included in the Sohu Group’s consolidated financial statements
(in thousands):
   
As of December 31,
2020
 
ASSETS
     
Cash and cash equivalents
  $287,185 
Restricted cash
   23,018 
Short-term investments
   774,618 
Account and financing receivables, net
   73,656 
Prepaid and other current assets
   28,946 
Long-term investments, net
   74,004 
Fixed assets, net
   89,089 
Goodwill
   6,527 
Intangible assets, net
   1,446 
Other assets
   53,679 
   
 
 
 
Total assets associated with discontinued operations
  
$
1,412,168
 
   
 
 
 
LIABILITIES
     
Accounts payable
  $122,695 
Accrued liabilities
   68,582 
Receipts in advance
   64,414 
Accrued salary and benefits
   25,350 
Taxes payable
   64,082 
Other short-term liabilities
   61,154 
Long-term liabilities
   10,721 
   
 
 
 
Total liabilities associated with discontinued operations
  
$
416,998
 
   
 
 
 
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Year Ended December 31,
 
   
2019
   
2020
   
2021
(1)
 
Revenues
  $1,172,252   $924,664   $407,607 
Cost of revenues
   738,454    722,614    274,408 
Gross profit
   433,798    202,050    133,199 
Operating expenses:
               
Research and development (2)   190,402    193,376    141,506 
Sales and marketing (2)   138,291    102,523    53,481 
General and administrative (2)   40,670    29,271    11,854 
Total operating expenses
   369,363    325,170    206,841 
Operating profit/(loss)   64,435    (123,120)    (73,642) 
Interest income
   4,443    2,807    2,377 
Interest expense   0    0    (761) 
Foreign currency exchange gain/(loss)
   1,849    (7,767)    (848) 
Other income, net   21,127    38,633    81,655 
Income/(loss) from discontinued operations before income tax expense   91,854    (89,447)    8,781 
Income tax expense/(benefit)   2,748    2,346    (1,112)
Results of operations from discontinued operations, net of tax
  
 
89,106
 
  
 
(91,793
) 
  
 
9,893
 
Gain on disposal of discontinued operations
   0    0    855,009 
   
 
 
   
 
 
   
 
 
 
Net income/(loss) from discontinued operations, net of tax
  
 
89,106
 
  
 
(91,793
) 
  
 
864,902
 
   
 
 
   
 
 
   
 
 
 
Effective Tax Rate
   
Year Ended December 31,
 
   
2019
  
2020
  
2021
(1)(3)
 
Statutory Rate:
   25%   25%   25% 
Effect of tax holidays applicable to subsidiaries and consolidated VIEs
   (2%)   (18%)   127% 
Tax differential from statutory rate applicable to subsidiaries and consolidated VIEs
   3%   (3%)   (90%) 
Changes in valuation allowance for deferred tax assets
   7%   (43%)   349% 
Research and development super-deduction and other permanent book-tax differences
   (25%)   35%   (249%) 
Capital gains from equity investments
   (5%)   1%   (175%) 
   
 
 
  
 
 
  
 
 
 
    3%   (3%)   (13%) 
   
 
 
  
 
 
  
 
 
 
   
Year Ended December 31,
 
   
2019
   
2020
   
2021
(1)
 
Net cash provided by/(used in) discontinued operating activities
  $219,516   $(68,187)   $(175,888)
 
Net cash provided by/(used in) discontinued investing activities
   (217,598)    235,374    1,054,148 
Net cash used in discontinued financing activities
   (33,415)    (8,209)    (9,132)
Note
(1): Includes the financial results of the discontinued operations from January 1, 2021 to September 23, 2021.
Note (2): Expenses generated from marketing services between the Sohu Group and Sogou Group, and leasing expenses generated from a building that Sohu leases to Sogou are not eliminated because those expenses are considered to continue after the disposal of the discontinued operations.
Note (3): The changes in the effective tax rate for the period ended September 23, 2021 resulted from the lower income from discontinued operations before income tax expense.
Discontinued Operation of Shanghai Jingmao
In May 2010, Changyou acquired 50% of the equity interests in Shanghai Jingmao Culture Communication Co., Ltd. (“Shanghai Jingmao”) and an affiliate of Shanghai Jingmao, which were primarily engaged in the cinema advertising business. In January 2011, Changyou acquired the remaining 50% of the equity interests in Shanghai Jingmao and its affiliate for total consideration of approximately $3.0 million. In the fourth quarter of 2011, a full impairment loss of $5.2 million on goodwill was recognized for the cinema advertising business.
In
 the second quarter of 2019, after assessing the collectability of the assets of the cinema advertising business, including receivables and prepayments, Changyou recognized a $17.0 million asset impairment charge for the cinema advertising
business.
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Changyou ceased
operating the cinema advertising business and wound down the business in
August 2019
as a result of a Chinese court in Shanghai having granted a petition by Shanghai Jingmao for bankruptcy relief on August 
12
,
2019
. Accordingly, the results of operations for Changyou’s cinema advertising business have been excluded from Changyou’s results from continuing operations in the consolidated statements of comprehensive income and are presented in separate line items as discontinued operations. Retrospective adjustments to the historical statements have been made in order to provide a consistent basis of comparison. Changyou recognized
NaN
disposal gain/loss for the years ended December 
31
,
2019
and
2020
. However, Changyou may recognize disposal gain/loss in the future, depending on developments in the bankruptcy proceedings in the Chinese court
.
See Note 8 - Balance Sheet Components.
The following tables set forth the results of operations and cash flows of discontinued operations with respect to Changyou’s cinema advertising business, that were included in the Group’s consolidated financial statements (in thousands):
   
Year Ended
December 31,
 
   
2019
(1)
 
Revenues
  $37,323 
Cost of revenues
   43,857 
Gross loss
   (6,534) 
Operating expenses:
     
Sales and marketing
   8,807 
General and administrative
   18,583 
Total operating expenses
   27,390 
Operating loss
   (33,924) 
Interest income
   7 
Other income/(expense), net
   61 
Loss from discontinued operations before income tax expense   (33,856) 
Income tax expense
   142 
   
 
 
 
Net loss from discontinued operations, net of tax
  
 
(33,998
) 
   
 
 
 


   
Year Ended
December 31,
 
   
2019
(1)
 
Net cash provided by discontinued operating activities
  $9,341 
Net cash used in discontinued investing activities
   (10,808) 
Net cash provided by discontinued financing activities   0 
Note (1): Includes the financial results of the discontinued operations from January 1, 2019 to August 12, 2019.​​​​​​​
4. SEGMENT INFORMATION
The Sohu Group’s segments are business units that offer different services and are reviewed separately by the CODM in deciding how to allocate resources and in assessing performance. The Group’s CODM is the Company’s Chief Executive Officer. There are two segments in the Sohu Group, consisting of Sohu and Changyou. Before Sohu’s entry into the Tencent/Sohu Sogou Share Purchase Agreement on September 29, 2020, there were three segments in the Sohu Group, consisting of Sohu, Changyou, and Sogou. Between September 29, 2020 and the completion of the Tencent/Sohu Sogou Share Purchase on September 23, 2021, Sogou met the criteria to be classified as discontinued operations. Accordingly, Sogou’s historical financial results are reflected in Sohu’s consolidated financial statements as discontinued operations. The Sohu Group segments consisted of Sohu and Changyou thereafter. As most of the Sohu Group’s long-lived assets are located in, and substantially all of the revenues of the Sohu Group’s reportable segments are derived from China, where the Sohu Group’s services and products are provided to customers, no geographical information is presented.
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The following tables present summary information by segment (in thousands):

   
Year Ended December 31, 2019
 
   
Sohu
   
Changyou
   
Eliminations
   
Consolidated
 
Revenues
  $218,442   $455,380   $(19)   $673,803 
Segment cost of revenues (1)   (148,258)   (95,268)    21    (243,505) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Segment gross profit
   70,184    360,112    2    430,298 
SBC in cost of revenues (2)   (23)   (120)    1    (142) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Gross profit
   70,161    359,992    3    430,156 
   
 
 
   
 
 
   
 
 
   
 
 
 
Operating expenses:
                    
Product development (1)   (113,761)   (119,726)    0    (233,487) 
Sales and marketing (1)   (155,226)   (49,768)    2    (204,992) 
General and administrative (1)   (31,330)   (22,074)    (17)    (53,421) 
Goodwill impairment and impairment of intangible assets acquired as part of business acquisitions   (7,245)   0    0    (7,245) 
SBC in operating expenses (2)   (1,023)   (1,185)    0    (2,208) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total operating expenses   (308,585)   (192,753)    (15)    (501,353) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Operating profit/(loss)
   (238,424)   167,239    (12)    (71,197) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Other income
                  7,963 
Interest income
                  6,103 
Interest expense
                  (14,370) 
Exchange difference
                  1,430 
                  
 
 
 
Loss before income tax expense
                  (70,071) 
Income tax benefit
                  (28,428) 
                  
 
 
 
Net loss from continuing operations
                  (98,499) 
Net income from discontinued operations
                  55,108 
                  
 
 
 
Net loss
                 $(43,391) 
                  
 
 
 
Note (1): Total depreciation and amortization expenses of Sohu and Changyou were $50.7 million and $16.4 million, respectively, for the year ended December 31, 2019.
Note (2): “SBC” stands for share-based compensation expense.
   
Year Ended December 31, 2020
 
   
Sohu
   
Changyou
   
Eliminations
   
Consolidated
 
Revenues
  $201,544   $548,346   $0   $749,890 
Segment cost of revenues (1)   (122,362)    (94,362)    7    (216,717) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Segment gross profit
   79,182    453,984    7    533,173 
SBC in cost of revenues (2)   (177)    (543)    0    (720) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Gross profit
   79,005    453,441    7    532,453 
   
 
 
   
 
 
   
 
 
   
 
 
 
Operating expenses:
                    
Product development (1)   (97,681)    (136,934)    0    (234,615) 
Sales and marketing (1)   (106,057)    (53,272)    0    (159,329) 
General and administrative (1)   (25,861)    (25,517)    0    (51,378) 
SBC in operating expenses (2)   (1,759)    (12,001)    0    (13,760) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total operating expenses
   (231,358)    (227,724)    0    (459,082) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Operating profit/(loss)
   (152,353)    225,717    7    73,371 
   
 
 
   
 
 
   
 
 
   
 
 
 
Other income
                  25,993 
Interest income
                  7,369 
Interest expense
                  (6,234) 
Exchange difference
                  (3,800) 
                  
 
 
 
Loss before income tax expense
                  96,699 
Income tax expense
                  (133,226) 
                  
 
 
 
Net loss from continuing operations
                  (36,527) 
Net income from discontinued operations
                  (91,793) 
                  
 
 
 
Net loss
                 $(128,320) 
                  
 
 
 
Note (1): Total depreciation and amortization expenses of Sohu and Changyou were $26.4 million and $13.5 million, respectively, for the year ended December 31, 2020.
Note (2): “SBC” stands for share-based compensation expense.
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Year Ended December 31, 2021
 
   
Sohu
   
Changyou
   
Eliminations
   
Consolidated
 
Revenues
  $186,606   $648,970   $0   $835,576 
Segment cost of revenues (1)   (113,881)   (90,517)   4    (204,394)
   
 
 
   
 
 
   
 
 
   
 
 
 
Segment gross profit
   72,725    558,453    4    631,182 
SBC in cost of revenues (2)   (1)   (276)   0    (277)
   
 
 
   
 
 
   
 
 
   
 
 
 
Gross profit
   72,724    558,177    4    630,905 
   
 
 
   
 
 
   
 
 
   
 
 
 
Operating expenses:
                    
Product development (1)   (113,186)   (151,773)   0    (264,959)
Sales and marketing (1)   (126,126)   (56,396)   0    (182,522)
General and administrative (1)   (36,949)   (40,702)   0    (77,651)
SBC in operating expenses (2)   (804)   (7,497)   0    (8,301)
   
 
 
   
 
 
   
 
 
   
 
 
 
Total operating expenses
   (277,065)   (256,368)   0    (533,433)
   
 
 
   
 
 
   
 
 
   
 
 
 
Operating profit/(loss)
   (204,341)   301,809    4    97,472 
   
 
 
   
 
 
   
 
 
   
 
 
 
Other income
                29,416 
Interest income
                15,641 
Interest expense
                (7,500)
Exchange difference
                (3,462)
                
 
 
 
Income before income tax expense
                131,567 
Income tax expense
                (62,296)
                
 
 
 
Net loss from continuing operations
                69,271 
Net loss from discontinued operations
                864,902 
                
 
 
 
Net loss
               $934,173 
                  
 
 
 
Note (1): Total
depreciation and amortization expenses of Sohu and Changyou were $23.4 million and $12.6 million, respectively, for the year ended December 31, 2021.
Note (2): “SBC” stands for share-based compensation expense.
   
As of December 31, 2020
 
   
Sohu
   
Changyou
   
Eliminations
   
Consolidated
 
Cash and cash equivalents
  $56,977   $160,080   $0   $217,057 
Accounts receivable, net
   60,886    26,635    0    87,521 
Fixed assets, net
   174,700    162,976    (2)    337,674 
Total assets (1)
  $1,632,736   $2,478,705   $(2,701,488)   $1,409,953 
Note (1): The elimination for segment assets mainly consists of elimination of intra-Group loans between Sohu and Changyou, and elimination of long-term investments in subsidiaries and consolidated VIEs.
   
As of December 31, 202
1
 
   
Sohu
   
Changyou
   
Eliminations
   
Consolidated
 
Cash and cash equivalents
  $929,851   $69,098   $0   $998,949 
Accounts receivable, net
   48,108    34,442    0    82,550 
Fixed assets, net
   170,213    159,784    0    329,997 
Total assets (1)
  $2,294,537   $2,610,964   $(2,659,716)    $2,245,785 
Note (1): The elimination for segment assets mainly consists of elimination of intra-Group loans between Sohu and Changyou, and elimination of long-term investments in subsidiaries and consolidated VIEs.
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5. SHARE-BASED COMPENSATION EXPENSE
Sohu (excluding Sohu Video), Changyou, and Sohu Video have incentive plans for the granting of share-based awards, including share options and restricted share units, to members of the boards of directors, management and other key employees.
Share-based compensation expense was recognized in costs and expenses for the years ended December 31, 2019, 2020 and 2021 as follows (in thousands):
   
Year Ended December 31,
 
Share-based compensation expense
  
2019
   
2020
   
2021
 
Cost of revenues
  $142   $720   $277 
Product development expenses
   1,364    7,325    3,904 
Sales and marketing expenses
   (326)    460    166 
General and administrative expenses
   1,170    5,975    4,231 
   
 
 
   
 
 
   
 
 
 
   $2,350   $14,480   $8,578 
   
 
 
   
 
 
   
 
 
 
Share-based compensation expense was recognized for share awards of Sohu (excluding Sohu Video), Changyou and Sohu Video as follows (in thousands):
   
Year Ended December 31,
 
Share-based compensation expense
  
2019
   
2020
   
2021
 
For Sohu (excluding Sohu Video) share-based awards
  $1,940   $2,633   $1,849 
For Changyou share-based awards
   1,305    12,545    7,773 
For Sohu Video share-based awards
   (895)    (698)    (1,044) 
   
 
 
   
 
 
   
 
 
 
   $2,350   $14,480   $8,578 
   
 
 
   
 
 
   
 
 
 
The negative amounts in the tables above resulted from
re-measured
compensation expense based on the then-current fair value of the awards on the reporting date.
There was 0 capitalized share-based compensation expense for the years ended December 31, 2021, 2020 and 2019.
6. ADVERTISING AND PROMOTIONAL EXPENSES, INCLUDED IN SALES AND MARKETING EXPENSES
Advertising and promotional expenses are included in sales and marketing expenses, and generally represent the expenses of promotions to create or stimulate a positive image of the Sohu Group or a desire to subscribe for the Group’s products and services. Advertising expenses are expensed as incurred. For the years ended December 31, 2021, 2020 and 2019, advertising and promotional expenses recognized in the consolidated statements of comprehensive income were $98.5 million, $84.7 million and $124.6 million, respectively.
7. OTHER INCOME, NET
The following table summarizes the Sohu Group’s other income/(expense) (in thousands):

   
Year Ended December 31,
 
   
2019
   
2020
   
2021
 
Rental income from Sogou (1)
   8,029    9,793    10,427 
Investment income   3,004    3    6,352 
Income from investments in financial instruments (2)   11,113    4,303    5,260 
Individual tax refund and additional deduction of PRC value-added tax

   907    6,169    4,827 
Write-down of unpaid long-term accounts payable   0    47    1,276 
Gover
nment grant

   5,763    5,928    418 
Impairment loss on equity investments (
3
)
   (23,154)    (384)    (215) 
Donations
   (283)    (1,460)    (1,565) 
Others
   2,584    1,594    2,636 
  
$
7,963
  
$
25,993
  
$
29,416
 
   
 
 
   
 
 
   
 
 
 
Note (1): Sogou leases from Sohu, on an arms-length basis, office space at Sohu.com Internet Plaza under a lease that expires on December 31, 2022 and may be renewed subject to terms to be agreed to by Sohu and Sogou.
The cash receipts from this lease within operating activities for 2021, 2020 and 2019 were $12.3 million, $12.1 million and $8.4 million, respectively.
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Note (2): The increase for 2021 compared to 2020 and the decrease for 2020 compared to 2019 were mainly due to income earned from investments in financial instruments.
Note (
3
): In the fourth quarter of 2019, the Sohu Group recognized impairment losses of $23.2 million for equity investments.
8. BALANCE SHEET COMPONENTS (IN THOUSANDS)

   
As of December 31,
 
   
2020
   
2021
 
Accounts receivable, net
          
Accounts receivable
  $94,528    94,908 
Allowance for credit losses
   (7,007)    (12,358)
   
 
 
   
 
 
 
   $87,521    82,550 
   
 
 
   
 
 
 
The following table presents the movement of allowances for credit losses for the years of 2019, 2020 and 2021:
   
Balance at the
beginning of
year
  
Changes on initial
application of ASU
2016-13
   
Additional
allowance for credit
losses, net of
recoveries
   
Write-offs
  
Exchange
difference
  
Balance at the
end of year
 
2019
   7,574   0    4,724    (8,237)   (105)   3,956 
2020
   3,956   3,383    2,419    (3,231)   480   7,007 
2021
   7,007   0    6,292    (1,155)  214   12,358 
   
As of December 31,
 
   
2020
   
2021
 
Prepaid and other current assets
          
Matching loan due from a related party (See Note 9)
  $34,123   $34,123 
Prepaid taxes
   25,043    28,719 
Prepaid revenue-sharing cost  
10,120
   
12,428

 
Prepaid content and license costs   11,029    8,694 
Prepaid advertising and promotion fee   244    4,685 
Interest receivable from bank deposits with original maturities of three months or
less
   3,875    3,059 
Receivables from third party payment platforms

  
5,488
   
 
2,670
 
Prepaid professional fees
   2,365    2,432 
Prepaid rental deposit
s
   2,310    1,928 
Emplo
yee advances

  
 
587
   
 
569
 
Prepaid office rent and facilities expenses
   696    338 
Others
   10,710    7,666 
   
 
 
   
 
 
 
    $106,590   $107,311 
   
 
 
   
 
 
 
Prepaid
non-current
assets
          
Prepaid PRC income tax for the sale of assets associated with 17173.com by Sohu to Changyou  $1,006   $0 
   
 
 
   
 
 
 
   $1,006   $0 
   
 
 
   
 
 
 
Other short-term liabilities
          
Matching loans due to a related party (See Note 9)
   34,123    34,123 
Contingent liability related to Shanghai Jingmao liquidation (1)
   23,900    23,900 
Deposits related to Focus
   21,936    10,387 
Share-based awards in Changyou
   13,292    20,693 
Other payables related to Shanghai Jingmao liquidation (2)   0    9,380 
Contract deposits from advertisers
   3,036    2,679 
Lease liabilities
   1,107    1,999 
Consideration payable for equity investment
   751    769 
Others
   8,026    8,638 
   
 
 
   
 
 
 
   $106,171   $112,568 
   
 
 
   
 
 
 
Note (1): The contingent liability represents the aggregate of estimated potential payments to third parties in connection with the liquidation of Shanghai Jingmao. The stated amount of the contingent liability reflects Changyou’s best estimate as of December 31, 2020 and 2021 pursuant to ASC
450-20.
Changyou may revise this estimate in the future based on developments in PRC bankruptcy court proceedings regarding.
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7
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Note (2): Shanghai Jingmao. In 2021, Changyou received $9.4 million from the bankruptcy proceedings, as a creditor of Shanghai Jingmao, during the process of the liquidation of Shanghai Jingmao. No disposal gain was recognized due to the uncertainty with the proceedings that were still ongoing.
Receipts in advance and deferred revenue
  
 
 
 
  
 
 
 
Receipts in advance relating to:
  
 
 
 
  
 
 
 
brand advertising business
  
$
5,214
 
  
$
4,297 
online game business
  
 
7,869
 
  
 
9,310 
other business
  
 
6,029
 
  
 
5,286 
   
 
 
   
 
 
 
Total receipts in advance
  
 
19,112
 
  
 
18,893 
Deferred revenue
  
 
32,943
 
  
 
38,148 
   
 
 
   
 
 
 
  $52,055
 
 $57,041 
   
 
 
   
 
 
 
9. RELATED PARTY TRANSACTIONS
Under an agreement between Sohu and Fox Financial Technology Group Limited (“Fox Financial,” formerly known as “SoEasy Internet Finance Group Limited”) 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.
Changyou’s Loan Arrangements with Fox Financial
Commencing in April 2015, certain subsidiaries of Changyou and certain subsidiaries of Fox Financial entered into a series of loan agreements pursuant to which the subsidiaries of Changyou were entitled to draw down HK dollar-denominated or U.S. dollar-denominated loans from the Fox Financial subsidiaries and the Fox Financial subsidiaries were entitled to draw down equivalent RMB-denominated loans from the Changyou subsidiaries, to facilitate each other’s business operations. All of the loans carry a fixed rate of interest which approximated the market interest rate at the inception of the loans.
In December 2018 and 2019, Changyou entered into supplemental agreements with Fox Financial pursuant to which all accrued and unpaid interest on the loans as of December 31, 2018 and December 31, 2019 was added to the principal of the corresponding loans. Due to the depreciation of the RMB against the U.S. dollar in 2018, the principal amounts of Changyou’s outstanding RMB-denominated loans to Fox Financial as of December 31, 2018 were adjusted upward to amounts equal to the principal amounts of Fox Financials’ outstanding U.S. dollar denominated loans to Changyou as of December 31, 2018, multiplied by the monthly average RMB to U.S. dollar exchange rate published by the Bank of China for the month of December 2018. As a result of such adjustment, Changyou advanced additional RMB-denominated loans in the principal amount of RMB8.2 million (approximately $1.2 million) to Fox Financial in January 2019.
In December 2019, Changyou entered into a supplemental agreement with Fox Financial pursuant to which Fox Financial provided security for its repayment obligations to Changyou. Under this supplemental agreement, if Fox Financial fails to repay the RMB-denominated loan principal and corresponding interest owed to Changyou, Changyou will have the right to apply the amount of a security deposit, consisting of the outstanding U.S. dollar-denominated loan principal and corresponding interest owed by Changyou to Fox Financial, to repay the RMB-denominated loan principal and interest owed by Fox Financial to Changyou. The security deposit will be required to be replenished by Fox Financial if the amount of the security deposit is insufficient to repay the loan principal and interest of the RMB-denominated loan owed to Changyou, and any remaining security deposit will be returned to Fox Financial if there is a surplus after the repayment of the RMB-denominated loan principal and interest. The parties entered into an additional supplemental agreement pursuant to which Changyou provided security for its repayment obligations to Fox Financial. Under this supplemental agreement, if Changyou fails to repay the U.S. dollar-denominated loan principal and corresponding interest owed to Fox Financial, Fox Financial will have the right to apply the amount of a security deposit, consisting of the outstanding RMB-denominated loan principal and corresponding interest owed by Fox Financial to Changyou, to repay the U.S. dollar-denominated loan principal and interest owed by Changyou to Fox Financial. The security deposit will be required to be replenished by Changyou if the amount of the security deposit is insufficient to repay the U.S. dollar-denominated loan principal and interest owed by Changyou to Fox Financial, and any remaining security deposit will be returned to Changyou if there is a surplus after the repayment of the U.S. dollar-denominated loan principal and interest.
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The loan arrangements expired on December 31, 2020 and no new supplemental agreements were signed. In May 2021, Changyou notified Fox Financial of Changyou’s intention to exercise its rights under the supplemental agreement by applying the security deposit to repay the RMB-denominated loan principal and corresponding interest owed by Fox Financial to Changyou. As of the date of this report, Changyou has not received any response from Fox Financial and accordingly, with an abundance of caution, has not so applied any of the security deposit. Changyou performed an assessment of its expected credit losses for the RMB-denominated loans receivable from Fox Financial. As of December 31, 2021, the Sohu Group had accrued a cumulative allowance for credit losses of approximately
$3.3 
million based on Changyou’s estimate of the net of the outstanding amount of such loans receivable from Fox Financial over the amount of the security deposit and on the lack of solvency of Fox Financial. As of December 31, 2021, net loan receivables and loans payable under such loan arrangements, each in the amount of
$34.1 million, were recorded as prepaid and other current assets and other short-term liabilities, respectively, in the Sohu Group’s consolidated balance sheets.
10. FAIR VALUE MEASUREMENTS
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.
The Sohu Group’s financial instruments consist primarily of cash equivalents, restricted cash, short-term investments, accounts receivable, other current assets, long-term investments, long-term time deposits, restricted time deposits, accounts payable, accrued liabilities, short-term bank loans, other short-term liabilities, long-term bank loans, and long-term other payables.
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, 2020 (in thousands):
     
Fair value measurements at reporting date using
 
Items
 
As of

December 31,

2020
  
Quoted Prices

in Active
Markets

for Identical
Assets

(Level 1)
  
Significant

Other

Observable
Inputs

(Level 2)
  
Significant

Unobservable

Inputs

(Level 3)
 
Cash equivalents
 $173,655
 

 $0  $173,655  $0 
Restricted cash
  330,791   0   330,791   0 
Restricted time deposits
  101,519   0   101,519   0 
Short-term investments
  100,745   0   100,745   0 
Equity investments with readily determinable fair values
  9,457   9,457   0   0 
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The
following table sets forth the financial instruments, measured at fair value by level within the fair value hierarchy, as of December 31, 2021
(in thousands):
     
Fair value measurements at reporting date using
 
Items
 
As of

December 31,

2021
  
Quoted Prices

in Active
Markets

for Identical
Assets

(Level 1)
  
Significant

Other

Observable
Inputs

(Level 2)
  
Significant

Unobservable

Inputs

(Level 3)
 
Cash equivalents
 $949,884  $0  $949,884  $0 
Restricted cash
  1,969   0   1,969   0 
Short-term investments
  399,345   0   399,345   0 
Equity investments with readily determinable fair values
  14,642   14,642   0   0 
Long-term time deposits  189,007   0   189,007   0 
Cash Equivalents
The Sohu Group’s cash equivalents mainly consist of time deposits with original maturities of three months or less, notice deposits, 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.
Restricted Cash and Restricted Time Deposits
Restricted cash and restricted time deposits are valued based on the prevailing interest rates in the market using the discounted cash flow method. The Sohu Group classifies the valuation techniques that use these inputs as Level 2 of fair value measurements.
Changyou Loans from Offshore Banks, Secured by Time Deposits
In 2018, Changyou drew down loans from the Hong Kong branches of PRC banks, which were secured by an equivalent or greater amount of RMB deposits by Changyou in the PRC branches of the banks. The loans from the Hong Kong branches of the lending banks were repaid in April 2019 by Changyou and the RMB deposits in the PRC branches of the banks were released.
In the fourth quarter of 2020 and the first quarter of 2021, Changyou drew down from an offshore branch of a PRC bank a loanloans of $215.6 
$215.6 
million that wasand $153 million, respectively, secured by an equivalent amount of RMB deposits by Changyou in the PRC branch of the bank and a mortgage on a building owned by Sohu. The loan carries aloans carried floating raterates of interest based on the London Inter-Bank Offered Rate (“LIBOR”). The loan fromloans were repaid in full in September 2021 by Changyou and the offshore branch of the lending bank was classified as short-term bank loan based on its payment term. The RMB deposits in the PRC securingbranch of the offshore loan are treated as restricted cash on our consolidated balance sheets.bank were released.
For the years ended December 31, 20202021 and 2019,2020, interest income from the restricted time deposits securing the loans were $0.1$5.0 million and $0.5$0.1 million, respectively, and expense for interest on the loans was $0.1$5.3 million and $2.1$0.1 million, respectively.
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In the second quarter of
2020
, Changyou pledged deposit certificates in connection with the Sohu Group’s financing of the Changyou Merger.
As of December 31, 2020, Changyou had pledged deposit certificates in the amount of $
212$212 million in the aggregate, of which $110 million was recorded as restricted cash and $102 million was recorded as restricted time deposits. UponIn September 2021, the effectivenessCompany repaid all of such pledge, Sohu’s previous guarantee, and all the previous share pledges or mortgages over the outstanding equity interests in Changyou, to securebalance under the loans fromFacility Agreement with ICBC Tokyo, (as defined below)and as a result all of Changyou’s deposit certificate pledges were released and discharged.the Facility Agreement was terminated.
Short-term Investments
The Sohu Group’s short-term investments mainly consist of investments in financial instruments with a variable interest rate and time deposits with maturities of three months to one year. In
accordance with ASC 825, for investments
in financial instruments with a variable interest rate indexed to performance of underlying assets and time deposits, 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). and interest income. To estimate fair value, the Group refers to the quoted rate of return provided by banks at the end of each period using the discounted cash flow method. The Group classifies the valuation techniques that use these inputs as
Level 2 of fair value measurements.
As of December 31, 20202021 and December 31, 2019,2020, the Sohu Group’s investment in these financial instruments
was $100.7$399.3 million
and $321.5$100.7 million, respectively. The investment instruments
with variable interest rates
were issued by commercial banks in China, and have a variable interest rate
are
indexed to performance of underlying assets. Since these investments’ maturity dates are within one year, they are classified as short-term investments. For the years ended December 31, 20202021 and 2019,2020, the Sohu Group recorded gains from changes in the fair value of short-term investments in the amounts of $4.3$5.3 million and $11.1$4.3 million, respectively, in the consolidated statements of comprehensive income.
Equity
Long-term Investments
Long-term investments consist of equity investments in publicly traded companies, privately-held companies and limited partnerships.
ASU
2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities,
amends certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The main provisions require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value through earnings, unless they qualify for a measurement alternative. The new guidance required modified retrospective application to all outstanding instruments beginning January 1, 2018, with a cumulative effect adjustment recorded to opening accumulated deficit as of the beginning of the first period in which the guidance becomes effective. However, changes to the accounting for equity securities without a readily determinable fair value will be applied prospectively.
The Group measures equity investments under the equity method and equity investments without readily determinable fair values at fair value on a
non-recurring
basis when an impairment charge is to be recognized. As of December 31, 20192020 and 2020,2021, certain investments were measured using significant unobservable inputs (Level 3) and written down from their respective carrying values to their fair values, considering the stage of development, the business plan, the financial condition, the sufficiency of funding and the operating performance of the investee companies, with impairment charges incurred and recorded in other income for the years then ended. The Group recognized impairment losses of $23.2$0.4 million and $0.4$0.2 million, respectively, for investments without readily determinable fair values in 2020 and equity method investments in 2019 and 2020.2021.
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Equity Investments Accounted for Using the Equity Method
For investments in common stock or
in-substance
common stock of entities over which the Group can exercise significant influence but does not own a majority equity interest or control, the equity method is applied, and the Group adjusts the carrying amount of an investment and recognizes investment income or loss for the Group’s share of the earnings or loss of the investee after the date of investment. The Group measures equity investments under the equity method at fair value on a
non-recurring
basis only if an impairment charge is to be recognized. The Group classifies these
non-recurring
fair value measurements as Level 3 of fair value measurement.
Equity Investments with Readily Determinable Fair Values
Effective as of January 1, 2018, all equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) will generally be measured at fair value through earnings. There will no longer be an
available-for-sale
classification (changes in fair value previously reported in other comprehensive income) for equity securities with readily determinable fair values.
Equity investments with readily determinable fair values 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.
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Equity Investments without Readily Determinable Fair Values
Based on ASU
2016-01,
an entity will be able to elect to record equity investments without readily determinable fair values and not accounted for by the equity method at cost, less impairment, adjusted for subsequent observable price changes.changes in orderly transactions for the identical or similar investments of the same issuer. Entities that elect this measurement alternative will report changes in the carrying value of the equity investments in current earnings.
If this measurement alternative is elected, changes in the carrying value of the equity investment will be required to be made whenever there are observable price changes in transactions for identical or similar investments of the same issuer. The implementation guidance notes that an entity should make a “reasonable effort” to identify price changes that are known or that can reasonably be known. When observable price changes were identified, the Group used the back-solve method to
re-measure
the fair value of the investments and to determine the amount that should be recorded as upward or downward adjustments. The back-solve method requires considering the rights and preferences of each classes of equity and solving for the total equity value that is consistent with a recent transaction of the subject company’s securities. This method requires making assumptions on future outcomes available to the subject company, the probability of each scenario, expected time to liquidity events, volatility and risk-free rate. The Group classifies this
non-recurring
fair value measurement as Level 3 of fair value measurement.
Long-term Time Deposits
The Sohu Group elected the fair value method at the date of initial recognition of time deposits with maturities over
one
year and carried these investments subsequently at fair value. Changes in fair values are reflected in the consolidated statements of comprehensive income. The Sohu Group classifies the valuation techniques as Level 2 of fair value measurements.
Assets Measured at Fair Value on a Nonrecurring Basis
The following table sets forth assets measured at fair value on a nonrecurring basis by level within the fair value hierarchy as of December 31, 2020 and 2021 (in thousands)
       
Fair value measurements at reporting date using
 
Items
  
As of
December 31,
2020
   
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
   
Significant Other
Observable Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
Purchased video content recorded in prepaid and other assets
  $2,585   $0   $0   $2,585 
Intangible assets, net
   4,842    0    0    4,842 
Goodwill
   48,434    0    0    48,434 
       
Fair value measurements at reporting date using
 
Items
  
As of
December 31,
2021
   
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
   
Significant Other
Observable Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
Purchased video content recorded in prepaid and other assets
  $2,555   $0   $0   $2,555 
Intangible assets, net
   9,136    0    0    9,136 
Goodwill
   48,811    0    0    48,811 
Purchased Video Content Recorded in Prepaid and Other Assets
The impairment losses recognized in prepaid and other assets were mainly due to impairment losses for Sohu Video’s purchased video content. See Note 14 - Intangible Assets, Net.
Intangible Assets
Intangible assets mainly comprise purchased video content, operating rights for licensed games, domain names and trademarks, computer software, and developed technologies. The impairment losses recognized for intangible assets were mainly due to impairment losses for the domain name related to the 56.com Website and Sohu Video’s purchased video content. See Note 14 - Intangible Assets, Net.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the identifiable assets and liabilities acquired as a result of the Group’s acquisitions of interests in its subsidiaries and consolidated VIEs. See Note 13 - Goodwill.
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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”)
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In May 2017, Sohu entered into a 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 $26.2 million), which is the upper limit reviewed by HSBC at least annually. The loan is secured by up to RMB198.0 million (or $28.8 million) of Sohu’s accounts receivable and guaranteed by Sohu Media. Interest accrues on the principal amounts of the loans outstanding at an annual rate agreed to by HSBC and Sohu upon drawdown. In June 2019, Sohu terminated the factoring contract with recourse with HSBC, and the accounts receivable of Sohu was released from the pledge. As of both December 31, 2020 and December 31, 2019, the total outstanding balance of the loan was NaN.

Credit agreements with Industrial and Commercial Bank of China Limited (“ICBC”)
In September 2017, Sohu entered into credit agreements with ICBC pursuant to which Sohu was entitled to borrow from ICBC from time to time until March 31, 2018 up to a combined aggregate of RMB800 million (or $116.6 million). The loan is secured by the pledge of Sohu’s building which serves as Sohu’s corporate headquarters in Beijing (“Sohu’s headquarters”). Interest accrues 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%. 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.
In July 2020, Sohu repaid all of the outstanding balance under the loan arrangements with ICBC and Sohu’s headquarters were released from the pledge. As of both December 31, 20202021 and December 31, 2019,2020, the total outstanding balance of the loan was NaN and RMB400 million (or $57.3 million), respectively.NaN.

Credit agreements with the China Merchants Bank Co., Ltd. (“CMB”)
In April 2018, Sohu entered into credit agreements with CMB pursuant to which Sohu was entitled to borrow from CMB from time to time until March 22, 2021 up to an aggregate of RMB700 million (or approximately $102.0 million) (the “CMB Loan”).
In April 2018, Sohu made an initial drawdown under the CMB Loan with a term of 12 months in the amount of RMB400 million (or $58.3 million) (the “First Drawdown”). The proceeds of the First Drawdown were used to repay in full the outstanding balance and all accrued and unpaid interest under credit agreements between Sohu and Ping An Bank. The CMB Loan was secured by a pledge of Sohu’s building, which was released from the pledge after Ping An Bank received such repayment. Interest accrued on the outstanding principal balance at a rate of 6% per year. In April 2019, the outstanding principal amount of the First Drawdown was repaid in full.

In
June 2018
, Sohu made a drawdown under the CMB Loan with a term of
24
months in the amount of RMB300RMB
300
 million (or approximately $43.7 $
43.7
million) (the “Subsequent Drawdown”). Interest accrued on the outstanding principal balance at a rate of 6%
6
% per year. The outstanding principal amount of the Subsequent Drawdown was payable in
four
installments.
The first installment of RMB45 million (or $6.7 million) was paid in December 2018; the second and third installments of RMB90 million (or $13.1 million) in the aggregate were paid early in June 2019; and the fourth installment of RMB165 million (or $23.3million) was paid early in July 2019.
In April 2019 and May 2019, Sohu made drawdowns under the CMB Loan with a term of 12 months in the aggregate amount of RMB399 million ($59.3 million). Interest accrues on the outstanding principal balances at a rate of 5.1% per year. The outstanding principal amount of each drawdown will be due and payable 12 months after such drawdown.
In May 2020, Sohu repaid all of the outstanding balance under the loan arrangements with CMB and the pledge of Sohu’s building was released. As of both December 31, 20202021 and December 31, 2019,2020, the total outstanding balance of the CMB loan was NaN
and RMB399 million (or $57.2 million), respectively.NaN.
 
Credit agreement with Industrial and Commercial Bank of China Limited, Tokyo Branch (“ICBC Tokyo”)
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On April 3, 2020, the Company’s indirect wholly-owned subsidiary Sohu.com (Game) Limited (“Sohu Game”), as borrower, and Sohu.com Limited, as
guarantor, entered into a facility agreement (the “Facility Agreement”) with ICBC Tokyo pursuant to which ICBC Tokyo agreed to provide a term loan facility of up to $250 million (the “Term Facility”), subject to customary conditions, to be used to finance the consummation of the Changyou Merger and the related transactions and to pay related fees and expenses associated with the Changyou Merger. The Term Facility consisted of (i) a
one-year
term facility for term loans of up to $100 million (the
“One-Year
Facility”) and (ii) a four-year term facility for term loans of up to $150 million (the “Four-Year Facility”). The outstanding principal amount of the loans under the
One-Year
Facility is due in full on the
one-year
anniversary of the date of the first utilization of the
One-Year
Facility. The outstanding principal amount of the loans under the Four-Year Facility is
was
due in installments, with $7.5 million due and payable at the end of each of the second and third calendar years during the term of the Four-Year Facility and the remaining outstanding principal amount is
was
due and payable on the fourth anniversary of the date of the first utilization of the
One-Year
Facility. The Term Facility bears
bore
interest at a rate of Three Month LIBOR plus a margin of 1.75%, with LIBOR to be determined by ICBC on the basis of the London InterBank Offered Rate published two business days before the first day of each three calendar month interest period. Accrued interest is to be
w
as
 paid every three calendar months on the first day after the end of each such three-month interest period.
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The obligations of Sohu Game as borrower under the Term Facility were initially fully guaranteed by Sohu.com Limited, and were initially secured by first priority share pledges over 97.9% of the outstanding equity interests in Changyou. In the second quarter of 2020, Changyou pledged deposit certificates evidencing an RMB deposit in the amount of $192 million in the aggregate at an exchange rate of
RMB7.20 to $1.00
, equivalent to the Facility Agreement amount. Upon the effectiveness of such additional pledge, Sohu’s previous guarantee, and all the previous share pledges or mortgages over the outstanding equity interests in Changyou, to secure the loans from ICBC Tokyo were released and discharged.

In September 2021, the Company repaid all of the outstanding balance under the Facility Agreement with ICBC Tokyo, and as a result all of Changyou’s deposit certificates pledges were released and the Facility Agreement was terminated.
Long-term Payables
Long-term payables mainly consist of long-term accounts payable,other payables and long-term bank loans,loans.
long-term
Long-term
taxother payables are financial liabilities and deferred tax liabilities (see Note 15).with carrying values that approximate fair value.
After the Changyou Plans’ Modification, long term
other
payables also include liabilities accrued over the option holders’ service periods with a fixed price of $5.39 per Changyou Class A ordinary share.share
.
Long-term accounts payable are financial liabilities with carrying values that approximate fair value due to any changes in fair value, after considering the discount rate, being immaterial. For long-term accounts payable, the Group estimated fair values using the discounted cash flow method. The Sohu Group classifies the valuation technique as Level 2 of fair value measurements.
Assets Measured at Fair Value on a Nonrecurring Basis
The following table sets forth assets measured at fair value on a nonrecurring basis by level within the fair value hierarchy as of December 31, 2019 and 2020 (in thousands)
       
Fair value measurements at reporting date using
 
Items
  
As of
December 31,
2019
   
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
   
Significant Other
Observable Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
Purchased video content recorded in prepaid and other assets
  $3,115   $0   $0   $3,115 
Intangible assets, net
   9,922    0    0    9,922 
Goodwill
   47,390    0    0    47,390 
       
Fair value measurements at reporting date using
 
Items
  
As of
December 31,
2020
   
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
   
Significant Other
Observable Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
Purchased video content recorded in prepaid and other assets
  $2,585   $0   $0   $2,585 
Intangible assets, net
   4,842    0    0    4,842 
Goodwill
   48,434    0    0    48,434 
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Purchased Video Content Recorded in Prepaid and Other Assets11. LEASE
The impairment losses recognized in prepaid and other assets were mainly due to impairment losses for Sohu Video’s purchased video content. See Note 14 - Intangible Assets, Net.
Intangible Assets
Intangible assets mainly comprise purchased video content, operating rights for licensed games, domain names and trademarks, computer software, and developed technologies. The impairment losses recognized for intangible assets were mainly due to impairment losses for the domain name related to the 56.com Website and Sohu Video’s purchased video content. See Note 14 - Intangible Assets, Net.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the identifiable assets and liabilities acquired as a result of the Group’s acquisitions of interests in its subsidiaries and consolidated VIEs. See Note 13 - Goodwill.
11.
LEASE
The Group has entered into operating lease agreements, primarily for offices in China with lease periods expiring between 20202021 and 2025.2026. The determination of whether an arrangement is or contains a lease is made at the inception of the lease by evaluating whether the arrangement conveys the right to use an identified asset and whether the Group obtains substantially all of the economic benefits from and has the ability to direct the use of the asset. Operating lease assets and liabilities are included on the Group’s consolidated balance sheets beginning January 1, 2019. The
right-of-use
assets are included in other assets, while the current portion of the operating lease liabilities is included in other short-term liabilities and the long-term portion is included in other long-term liabilities. The Group has elected to not recognize lease assets and lease liabilities for leases with a term of twelve months or less on the consolidated balance sheets.
Operating lease assets and liabilities are recognized at the present value of the future lease payments at the lease commencement date. The Group uses its incremental borrowing rate in determining the present value of the future lease payments, because the interest rate implicit in most of the leases is not readily determinable. The Group estimates its incremental borrowing rate for each leased asset based on the interest rate the Group would incur to borrow an amount equal to the lease payments on a collateralized basis over a similar term in a similar economic environment.
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Certain
lease agreements contain an option for the Group to renew a lease for a term agreed to by the Group and the lessor or an option to terminate a lease earlier than the maturity date. The Group considers these options, which may be elected at the Group’s sole discretion, in determining the lease term on a
lease-by-lease
basis. The Group’s lease agreements generally do not contain any residual value guarantees or material restrictive covenants. Certain of the Group’s leases contain free or escalating rent payment terms. Operating lease expense is recognized on a straight-line basis over the lease term.
The Group’s lease agreements generally contain lease and
non-lease
components.
Non-lease
components consist primarily of payments for maintenance and utilities. The Group has identified separate lease and
non-lease
components, allocated the contractual considerations between components based on the terms specified in the lease agreements, and accounted for the lease components separately from the
non-lease
components. Payments under the lease arrangements are primarily fixed with no variable payments.

Components of operating lease expense are as follows (in thousands):
 
   
Year ended December 31,
 
   
2019
   
2020
 
Operating lease expense
  $4,858   $3,985 
Short-term lease expense
   244    297 
           
Total operating lease expense
  $5,102   $4,282 
           
   
Year ended December 31,
 
   
2020
   
2021
 
Operating lease expense
  $3,985   $2,952 
Short-term lease expense
   297    563 
   
 
 
   
 
 
 
Total operating lease expense
  $4,282   $3,515 
Supplemental cash flow information related to leases are as follows (in thousands):
 
   
Year ended December 31,
 
   
2019
   
2020
 
Cash paid for amounts included in the measurement of lease liabilities
          
Operating cash flows from operating leases
  $5,013   $3,206 
   
Year ended December 31,
 
   
2020
   
2021
 
Cash paid for amounts included in the measurement of lease liabilities
          
Operating cash flows from operating leases
  $3,206   $3,085 
 
F-53
   
Year ended December 31,
 
   
2020
   
2021
 
Right-of-use
assets obtained in exchange for lease liabilities:
          
Operating leases
  $5,351   $2,620 
Table of Contents
   
Year ended December 31,
 
   
2019
   
2020
 
Right-of-use
assets obtained in exchange for lease liabilities:
          
Operating leases
  $134   $5,351 
The following table presents supplemental balanc
e
balance sheet information related to the operating leases (in thousands):
 
   
Year ended December 31,
 
   
2019
   
2020
 
Assets:
          
Operating lease
right-of-use
assets
  $3,323   $4,998 
           
Liabilities:
          
Current lease liabilities
   2,510    1,107 
Non-current
lease liabilities
   83    3,855 
           
Total operating lease liabilities
  $2,593   $4,962 
           
   
Year ended December 31,
 
   
2020
   
2021
 
Assets:
          
Operating lease right-of-use assets
  $4,998   $5,207 
   
 
 
   
 
 
 
Liabilities:
          
Current lease liabilities
   1,107    1,999 
Non-current lease liabilities

   3,855    3,142 
   
 
 
   
 
 
 
Total operating lease liabilities
  $4,962   $5,141 
   
 
 
   
 
 
 
Maturities of lease liabilities under operating leases as of December 31, 20202021 are as follows (in thousands):
 
2021
  $1,957 
2022
   1,785 
2023
   1,421 
2024
   191 
2025
   95 
Thereafter
   0 
      
Total future lease payments
   5,449 
Less: imputed interest
   (487) 
      
Total present value of lease liabilities
  $4,962 
      
2022
  $2,853 
2023
   2,240 
2024
   277 
2025   98 
202
6
   0 
Thereafter
   0 
   
 
 
 
Total future lease payments
   5,468 
Less: imputed interest
   327 
   
 
 
 
Total present value of lease liabilities
  $5,141 
   
 
 
 
As of December 31, 2020,2021, operating leases
recognized
in lease liabilities had a weighted average remaining lease term of 3.02.1 years and a weighted average discount rate of 5.7%. As of December 31, 2020,2021, liabilities for leases that had been entered into, but the term of which had not yet commenced, amounted to $1.9$0.2 million.
12.
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12. FIXED ASSETS
The following table summarizes the Sohu Group’s fixed assets (in thousands):
 
  
As of December 31,
   
As of December 31,
 
  
2019
   
2020
   
2020
   
2021
 
Office buildings
  $366,686   $392,045   $392,045   $ 401,223 
Computer equipment and hardware
   133,451    132,021    132,021    123,079 
Leasehold and building improvements
   34,251    36,649    36,649    37,753 
Office furniture
   6,609    6,841    6,841    6,960 
Vehicles
   3,239    3,729    3,729    3,515 
          
 
   
 
 
Fixed assets, gross
   544,236    571,285    571,285    572,530 
Accumulated depreciation
   (206,554)    (233,611)    (233,611)
 
   (242,533)
 
          
 
   
 
 
Fixed assets, net
  $337,682   $337,674   $337,674   $329,997 
          
 
   
 
 
For the years ended December 31, 2021, 2020 2019 and 2018,2019, depreciation expenses for fixed assets were $23.5 million, $25.5 million and $28.2 million, and $32.1 million, respectively.

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13. GOODWILL
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13.
GOODWILL 
Changes in the carrying value of goodwill by segment are as follows (in thousands):
 
  
Sohu
   
Changyou
   
Total
 
Balance as of December 31, 2018
         
Goodwill
   69,627    180,543    250,170 
Accumulated impairment losses
   (32,246)    (170,286)    (202,532) 
            
  $37,381   $10,257   $47,638 
            
Transactions in 2019
         
Foreign currency translation adjustment
   (248)    0    (248) 
Impairment losses
   0    0    0 
            
Balance as of December 31, 2019
  $37,133   $10,257   $47,390 
              
Sohu
   
Changyou
   
Total
 
Balance as of December 31, 2019
                  
Goodwill
   69,379    180,543    249,922    69,379    180,543    249,922 
Accumulated impairment losses
   (32,246)    (170,286)    (202,532)    (32,246)    (170,286)    (202,532) 
              
 
   
 
   
 
 
  $37,133   $10,257   $47,390   $37,133   $10,257   $47,390 
              
 
   
 
   
 
 
Transactions in 2020
                  
Foreign currency translation adjustment
   1,044    0    1,044    1,044    0    1,044 
Impairment losses
   0    0    0 
              
 
   
 
   
 
 
Balance as of December 31, 2020
  $38,177   $10,257   $48,434   $38,177   $10,257   $48,434 
              
 
   
 
   
 
 
Balance as of December 31, 2020
                  
Goodwill
   70,423    180,543    250,966    70,423    180,543    250,966 
Accumulated impairment losses
   (32,246)    (170,286)    (202,532)    (32,246)    (170,286)    (202,532) 
              
 
   
 
   
 
 
  $38,177   $10,257   $48,434   $38,177   $10,257   $48,434 
              
 
   
 
   
 
 
Transactions in 2021
         
Foreign currency translation adjustment
   377    0    377 
  
 
   
 
   
 
 
Balance as of December 31, 2021
  $38,554   $10,257   $48,811 
  
 
   
 
   
 
 
Balance as of December 31, 2021
         
Goodwill
   70,800    180,543    251,343 
Accumulated impairment losses
   (32,246)   (170,286)   (202,532)
  
 
   
 
   
 
 
  $38,554   $10,257   $48,811 
  
 
   
 
   
 
 
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There was one reporting unit under the Sohu segment. After Changyou ceased operationsoperation of RaidCall and the cinema advertising business, the reporting units under the Changyou segment consisted of the Changyou online game business and the 17173.com Website. The Changyou online game business was the only reporting unit with goodwill under the Changyou segment.
In the fourth quarter of 2020,2021, the Sohu Group tested goodwill for impairment at the reporting unit level. The Group performed impairment tests using the qualitative and quantitative methods.
For the Sohu segments, impairmentsegment, management determined that a quantitative assessment was most appropriate. Impairment tests were conducted by quantitatively comparing the fair values of the reporting units to their carrying amounts. The Sohu segmentssegment estimated the fair values by weighting the results fromusing the income approach and market approach. The valuation approach considers a number of factors that include expected future cash flows, revenue growth rates, discount rates, and requires Sohu to make certain assumptions and estimates regarding future profitability of the business. The market approach considers earnings multipliers based on market data of comparable companies engaged in similar business. The fair value determined using the income approach is compared with comparable market data and reconciled, as necessary. For the Changyou segment, Changyou first qualitatively assessedmanagement performed a qualitative assessment to determine whether it was more likely than not that the fair valuesvalue of the reporting segments wereunit was less than theirits carrying amounts. For those reporting units where it was more likely than not that their fair values were less than their carrying amounts, Changyou performed the quantitative goodwill impairment test. Changyou estimated the fair values using the income approach considering factors that included expected future cash flows, growth rates and discount rates. amount.
As of December 31, 2021 and 2020, for the Sohu segment and Changyou segments,segment, management concluded that the fair values of the reporting units exceeded their carrying values, indicating that the goodwill of the reporting units was not impaired.
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In March 2019 and August 2019, respectively, Changyou ceased its RaidCall and cinema advertising business operations. Accordingly, there were no impairments for these two units, as the carrying values of both RaidCall and the cinema advertising business were nil before their cessation. As of December 31, 2019, for the Sohu segment and the businesses in the Changyou segment, management concluded that the fair values of the reporting units exceeded their carrying values, indicating that the goodwill of the reporting units was
not
impaired.14. INTANGIBLE ASSETS, NET
 
   
As of December 31, 2020
 
Items
  
Gross

Carrying

Amount
   
Accumulated

Amortization
   
Accumulated

Impairment
   
Net

Carrying

Amount
 
 
 
Purchased video content
  $212,999   $(161,160)   $(50,088)   $1,751 
Operating rights for licensed games
   51,856    (35,017)    (14,026)    2,813 
Domain names and trademarks
   27,536    (10,243)    (17,219)    74 
Computer software
   11,749    (11,545)    0    204 
Developed technologies
   8,699    (918)    (7,781)    0 
Others
   2,928    (966)    (1,962)    0 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $315,767   $(219,849)   $(91,076)   $4,842 
   
 
 
   
 
 
   
 
 
   
 
 
 
14.
INTANGIBLE ASSETS, NET
 
   
As of December 31, 2019
 
Items
  
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Impairment
   
Net
Carrying
Amount
 
Purchased video content
  $217,610   $(179,167)   $(35,940)   $2,503 
Operating rights for licensed games
   47,227    (27,992)    (12,365)    6,870 
Domain names and trademarks
   26,301    (9,896)    (16,176)    229 
Computer software
   13,273    (12,953)    0    320 
Developed technologies
   8,200    (868)    (7,332)    0 
Others
   2,738    (903)    (1,835)    0 
                     
Total
  $315,349   $(231,779)   $(73,648)   $9,922 
                     
   
As of December 31, 2021
 
Items
  
Gross

Carrying

Amount
   
Accumulated

Amortization
   
Accumulated

Impairment
   
Net

Carrying

Amount
 
 
 
Purchased video content
  $138,902   $(99,961)    $(37,343)    $1,598 
Operating rights for licensed games
   60,454    (39,431)     (13,895)     7,128 
Domain names and trademarks
   26,766    (10,240)     (16,506)     20 
Computer software
   12,474    (12,084)     0    390 
Developed technologies
   8,879    (936)     (7,943)     0 
Others
   2,996    (988)     (2,008)     0 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $250,471   $(163,640)    $(77,695)  $9,136 
   
 
 
   
 
 
   
 
 
   
 
 
 
   
As of December 31, 2020
 
Items
  
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Impairment
   
Net
Carrying
Amount
 
Purchased video content
  $212,999   $(161,160)   $(50,088)   $1,751 
Operating rights for licensed games
   51,856    (35,017)    (14,026)    2,813 
Domain names and trademarks
   27,536    (10,243)    (17,219)    74 
Computer software
   11,749    (11,545)    0    204 
Developed technologies
   8,699    (918)    (7,781)    0 
Others
   2,928    (966)    (1,962)    0 
                     
Total
  $315,767   $(219,849)   $(91,076)   $4,842 
                     
Impairment Losses
In 2020,2021, Sohu recognized a $1.5$14,000 impairment loss related to Sohu Video’s purchased video content pursuant to the Sohu Group’s policy on impairment of overseas content. Changyou recognized a $1.7 million impairment loss related to content and game licenses, of which $0.1 million was recognized as impairment of intangible assets and $1.6 million was recognized as impairment of prepaid and other current assets.
In 2020
,
 Sohu recognized a $
1.5
 million impairment loss related to Sohu Video’s purchased video content pursuant to the Sohu Group’s policy on impairment of overseas content. Changyou recognized a $2.7$
2.7
 million impairment loss related to content and game licenses, of which $0.8$
0.8
 million was recognized as impairment of intangible assets and $1.9$
1.9
 million was recognized as impairment of prepaid and other current assets.
In 2019, Sohu recognized a $7.2 million impairment loss for a domain name related to the 56.com Website, mainly due to enhanced restrictions that Chinese regulatory authorities imposed on the broadcasting industry, which had an adverse effect on the operation of the 56.com Website. Also in 2019, Sohu recognized a $4.0 million impairment loss related to Sohu Video’s purchased video content pursuant to the Sohu Group’s policy on impairment of overseas content.
In 2018, Sohu recognized $10.4 million in losses related to Sohu Video’s purchased video content, of which $9.8 million was recognized as impairment of intangible assets and $0.6 million was recognized as impairment of prepaid and other current assets, as Sohu Video’s revenues for 2018 did not meet management’s expectations.
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Amortization
In 2021, 2020 2019 and 2018,2019, amortization of intangible assets was $12.5 million, $14.4 million and $38.8 million, and $58.1 million, respectively.
As of December 31, 2020,2021, amortization expenses for future periods are estimated to be as follows:
 
For the year ended December 31,
  
(in thousands)
 
2021
   3,346 
2022
   1,177 
2023
   279 
2024
   40 
2025
   0 
      
Thereafter
   0 
      
Total expected amortization expense
  $4,842 
      
For the year ended December 31,
  
(in thousands)
 
2022
   4,357 
2023
   3,761 
2024
   1,018 
2025
   0 
2026   0 
Thereafter   0 
   
 
 
 
Total expected amortization expense
  $9,136 
   
 
 
 

15.
15. TAXATION
Income Tax
PRC Corporate 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 Group’s operations, and generate most of the Sohu Group’s income or losses. The CIT Law applies an income tax rate of 25% to all enterprises but grants preferential tax treatment to HNTEs, Software Enterprises, and KNSEs.
Principal Entities QualifiedQualifi
e
d as HNTEs
Under 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 December 31, 2020,2021, the following principal entities of the Sohu Group were qualified as HNTEs and were entitled to an income tax rate of 15%.
For Sohu
 
Video Tianjin and Sohu Internet. Video Tianjin and Sohu Internet
re-applied
for HNTE qualification and received approval in October 2021 and December 2021, respectively. Video Tianjin and Sohu Internet are entitled to continue to enjoy the beneficial tax rate qualified as HNTEs for the years 2021 through 2023, and will need to
re-apply
for HNTE qualification in 2024.
Sohu Media and Guangzhou Qianjun. Sohu Media and Guangzhou Qianjun qualified as HNTEs for the years 2020 through 2022, and will need to
re-apply
for HNTE qualification in 2023.
Sohu New Momentum. Sohu New Momentum qualified as an HNTE for the years 2019 through 2021, and will need to
re-apply
for HNTE qualification in 2022.
For Changyou
 
Sohu Internet
Gamease and Video Tianjin. Sohu InternetAmazGame. Gamease and Video TianjinAmazGame qualified as HNTEs for the years 2018 through 2020, and will need to
re-apply
for HNTE qualification in 2021.
Sohu Media. Sohu Media
re-applied
for HNTE qualification and received approval in December 2020. Sohu Media is entitled to continue to enjoy the beneficial tax rate as an HNTE for the years 2020 through 2022, and will need to
re-apply
for HNTE qualification in 2023.
For Changyou
Gamespace and Changyou Chuangxiang. Gamespace and Changyou Chuangxiang qualified as HNTEs for the years 2019 through 2021, and will need to
re-apply
for HNTE qualification in 2022.
Gamease and AmazGame. Gamease and AmazGame
re-applied
for HNTE qualification and received approval in October 2020. Gamease and AmazGame are entitled to continue to enjoy the beneficial tax rate as HNTEs for the years 2020 through 2022, and will need to
re-apply
for HNTE qualification in 2023.
For Sogou
F-48
Sogou Network. Sogou Network qualified as an HNTE for the years 2019 through 2021, and will need to
re-apply
for HNTE qualification in 2022.

Sogou Information. Sogou Information qualified as an HNTE for the years 2018 through 2020, and will need to
re-apply
for HNTE qualification in 2021.
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Sogou Technology. Sogou Technology
re-applied
for HNTE qualification and received approval in December 2020. Sogou Technology is entitled to continue to enjoy the beneficial tax rate as an HNTE for the years 2020 through 2022, and will need to
re-apply
for HNTE qualification in 2023.
Principal Entities Qualified as KNSEsSoftware Enterprises
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%
50
% reduction to a rate of 12.5%
12.5
% for the subsequent
three years. An entity that qualifies as a KNSE is entitled to a further reduced preferential income tax rate of 10%years
.
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 Ministry of Industry and Information Technology of the PRC and the relevant tax authorities before using the preferential CIT rates. These enterprises will be subject to the taxrelevant governmental authorities’ assessment each year as to whether they are entitled to use the relevant preferential CIT treatments. If at any time during the preferential tax treatment years an enterprise uses the preferential CIT rates but the relevant authorities determine that it fails to meet applicable criteria for qualification, the relevant authorities may revoke the enterprise’s Software Enterprise or KNSE status
.
status.
For Changyou
 
AmazGame.
Changyou Chuangxiang. In 2020, AmazGame2021, Changyou Chuangxiang completed a self-assessment and filed required supporting documents for KNSESoftware Enterprise status for 2019.2020. Also in 2020, AmazGame was2021, Changyou Chuangxiang qualified as a KNSESoftware Enterprise after the relevant government authorities’ assessment and became entitled to a preferential income tax rate of 10%12.5% for 2019. In 2021, AmazGame expects2020. Changyou Chuangxiang plans to follow the appropriate rules and procedures of the relevant government authorities in order to maintain its KNSESoftware Enterprise status for 2020.2021, the last year of a five-year period of qualification for Changyou Chuangxiang as a Software Enterprise.
Changyou Chuangxiang. In 2020, Changyou Chuangxiang completed a self-assessment and filed required supporting documents for KNSE status for 2019. In 2020, Changyou Chuangxiang was qualified as a KNSE after the relevant government authorities’ assessment and became entitled to a preferential income tax rate of 10% for 2019. In 2021, Changyou Chuangxiang expects to follow the appropriate rules and procedures of the relevant government authorities in order to maintain its KNSE status for 2020.
U.S. Corporate Income Tax
Sohu.com Inc., which was formerly the
top-tier
publicly-traded parent company of the Sohu Group, was dissolved and liquidated on May 31, 2018. Sohu.com Inc. was a Delaware corporation that was subject to U.S. federal corporate income tax on its taxable income at a rate of 21% for taxable years beginning after December 31, 2017 and of up to 35% for prior tax years. U.S. federal tax legislation signed into law on December 22, 2017, commonly referred to as the Tax Cuts and Jobs Act (the “U.S. TCJA”), significantly modified the U.S. Internal Revenue Code by, among other things, reducing the maximum statutory U.S. federal corporate income tax rate from 35% to 21% for taxable years beginning after December 31, 2017; limiting and/or eliminating many business deductions; migrating the U.S. to a partial territorial tax system with a
one-time
Toll Charge on a mandatory deemed repatriation of previously deferred foreign earnings of certain foreign subsidiaries; subject to certain limitations, generally eliminating U.S. corporate income tax on dividends from foreign subsidiaries; and providing for new taxes on certain foreign earnings.
Certain activities conducted in the PRC resulted in U.S. corporate income taxes being imposed on Sohu.com Inc. when its subsidiaries that were controlled foreign corporations (“CFCs”) generated income that was 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 the company’s investments, iswas among the types of income that were subject to taxation under Subpart F. Any income taxable under Subpart F was taxable in the U.S. at the applicable federal corporate income tax rate. Subpart F income also included certain income from intra-Group transactions between Sohu.com Inc.’s
non-U.S.
subsidiaries and VIEs and Changyou’s
non-U.S.
subsidiaries and VIEs or Sogou’s
non-U.S.
subsidiaries and VIEs, or where Sohu.com Inc.’s
non-U.S.
subsidiaries or VIEs made 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. did not have to treat dividends received by its CFC subsidiaries as Subpart F income includible in Sohu.com Inc.’s taxable income in the U.S.
To the extent that portions of Sohu.com Inc.’s U.S. taxable income, such as Subpart F income or GILTI, as applicable, had been determined to be from sources outside of the U.S., subject to certain limitations, Sohu.com Inc. may have been entitled to claim foreign tax credits to offset its U.S. income tax liabilities. Following the enactment of the U.S. TCJA, if dividends that Sohu.com Inc. received from its subsidiaries after January 1, 2018 were determined to be from sources outside of the U.S., subject to certain limitations, Sohu.com Inc. would generally not have been required to pay U.S. corporate income tax on those dividends. Liabilities for U.S. corporate income tax were accrued in the Company’s consolidated statements of comprehensive income and estimated tax payments were made when required by U.S. law.
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Treatment of Toll Charge Related to the U.S. TCJA
Beginning in the fourth quarter of 2017, the Sohu Group had recognized a provisional amount of income tax expense for the Toll Charge of $219 million, which represented management’s estimate of the amount of the Toll Charge that would have been payable by Sohu.com Inc. based on the deemed repatriation to the United States of its share of previously deferred earnings of certain of its
non-U.S.
subsidiaries, offset by a reduction of $4 million in liability for deferred U.S. income tax, as a result of the U.S. TCJA. The Sohu Group included the provisional amount of the Toll Charge of $219 million in its interim financial statements through the quarter ended September 30, 2018, in reliance on SAB 118.
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For the fourth quarter of 2018, the Sohu Group’s management
re-evaluated
the impact on the Sohu Group of the Toll Charge under the U.S. TCJA. Management determined that it was more likely than not, based on the technical merits, that the tax position that the Sohu Group had no Toll Charge liability would be sustained. The Group recognized a tax benefit in the amount of $77 million, which was the largest amount that management determined to be greater than 50% likely to be realized upon settlement with the U.S. IRS. As a result, as of December 31, 2018, the Sohu Group had an unrecognized tax benefit in the amount of $142 million, which represented the difference between the tax benefit recognized in the fourth quarter of 2018 and management’s previous estimate of the Toll Charge. The estimate remained unchanged as of December 31, 2020.2021. In addition, the Sohu Group accrued $8$6 million and $6$5 million, respectively, in interest on the unrecognized tax benefit for the years of 20192020 and 2020.2021.
The tax benefit recognized and the unrecognized tax benefit in relation to the Toll Charge may be subject to further adjustment in subsequent periods based on facts and circumstances that arose after December 31, 2020,2021, such as any IRS assessments upon audit and management’s further judgment and estimates.

Cayman Island Tax
Under the current tax laws of the Cayman Islands, the Group is not subject to tax on its income or capital gains. In addition, no

Cayman Islands withholding tax will be imposed upon the payment of dividends by the Group to its shareholders.
Hong Kong Tax
The Group’s subsidiaries incorporated in Hong Kong are subject to profits tax in Hong Kong at the rate of 16.5% for each of the years ended December 31, 2018, 2019, 2020 and 2020.2021
.
Composition of Income Tax Expense
Sohu.com Inc., which was the former
top-tier
entity of the Sohu Group, was a Delaware corporation that was subject to United States income tax. On May 31, 2018, Sohu.com Inc. was dissolved and liquidated and Sohu.com Limited became the
top-tier
entity of the Sohu Group. Sohu.com Limited is not subject to income or capital gains tax under the current laws of the Cayman Islands. There are no other taxes likely to be material to Sohu.com Limited levied by the government of the Cayman Islands.
The components of income before income
taxes are as follows (in thousands):
 
   
Year ended December 31,
 
   
2018
   
2019
   
2020
 
Income/(loss) before income tax expense
               
Income/(loss) from China operations
  $(76,585)   $(89,150)   $154,514 
Income/(loss) from
non-China
operations
   (59,307)    19,079    (57,815) 
                
Total income/(loss) before income tax expense from continuing operations
  $(135,892)   $(70,071)   $96,699 
                
Income tax expense applicable to China operations
               
Current tax
  $14,578   $9,026   $24,255 
Deferred tax
   48,907    11,191    102,652 
                
Subtotal income tax expense applicable to China operations
   63,485    20,217    126,907 
Non-China
income tax expense/(benefit)
   (78,540)    7,887    6,207 
Non-China
withholding tax expense
   469    324    112 
                
Total income tax expense/(benefit) from continuing operations
  $(14,586)   $28,428   $133,226 
                
   
Year ended December 31,
 
   
2019
   
2020
   
2021
 
             
Income/(loss) before income tax expense
               
Income/(loss) from China operations
  $(89,150)   $154,514   $153,708 
Income/(loss) from
non-China
operations
   19,079    (57,815)    (22,141)
   
 
 
   
 
 
   
 
 
 
Total income/(loss) before income tax expense from continuing operations
  $(70,071)   $96,699   $131,567 
   
 
 
   
 
 
   
 
 
 
Income tax expense applicable to China operations
               
Current tax
  $9,026   $24,255   $31,089 
Deferred tax
   11,191    102,652    26,207 
   
 
 
   
 
 
   
 
 
 
Subtotal income tax expense applicable to China operations
   20,217    126,907    57,296 
Non-China
income tax expense
   7,887    6,207    4,817 
Non-China
withholding tax expense
   324    112    183 
   
 
 
   
 
 
   
 
 
 
Total income tax expense from continuing operations

  $28,428   $133,226   $62,296 
   
 
 
   
 
 
   
 
 
 
F-59
In 2021, of the $62.3 million total income tax expense, $57.3 million was from PRC tax, resulting primarily from accrued regular income tax expense of $48.4 million, and $5 million was for U.S. corporate income tax, resulting primarily from accrued interest on an unrecognized tax benefit.
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In 2020, of the $133.2 million total income tax expense, $126.9 million was for PRC tax, resulting primarily from accrued regular income tax expense of $40.7 million and additional income withholding tax of $88 million recognized by Changyou due to a revised policy with respect to Changyou’s PRC subsidiaries regarding their distribution of cash dividends, offset by a reversal of PRC income tax expense of $6.9 million by Changyou due to preferential tax rates that Changyou’s subsidiaries were entitled to as KNSEs; and $6 million was for U.S. corporate income tax, resulting primarily from accrued interest on an unrecognized tax benefit.

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In
2019
, of the $28.4$
28.4
 million total income tax expense, $20.2$
20.2
 million was for PRC tax, resulting primarily from accrued regular income tax expense of $32.6$
32.6
 million, offset by a reversal of PRC income tax expense of $19.5$
19.5
 million by Changyou due to preferential tax rates that Changyou’s subsidiaries were entitled to as KNSE and Software enterprises, and $8$
8
 million was for U.S. corporate income tax, resulting primarily from accrued interest on an unrecognized tax benefit.
For the fourth quarter of 2018, the Sohu Group’s management
re-evaluated
the impact on the Sohu Group of the Toll Charge under the U.S. TCJA. Management determined that it was more likely than not, based on the technical merits, that the tax position that the Sohu Group had no Toll Charge liability would be sustained. The Group recognized a tax benefit in the amount of $77 million, which was the largest amount that management determined to be greater than 50% likely to be realized upon settlement with the U.S. IRS. As a result, as of December 31, 2018 the Sohu Group had an unrecognized tax benefit in the amount of $142 million, which represented the difference between the tax benefit recognized in the fourth quarter of 2018 and management’s previous estimate of the Toll Charge. In addition, the Sohu Group accrued $2 million in interest on the unrecognized tax benefit.
The combined effects of the income tax exemption and reduction
available to the Group are as follows (in thousands, except per share data):
 
   
Year Ended December 31,
 
   
2018
   
2019
   
2020
 
Tax holiday effect
  $23,271   $7,981   $16,174 
Basic net income per share effect
   0.60    0.20    0.41 
   
Year Ended December 31,
 
   
2019
   
2020
   
2021
 
             
Tax holiday effect
  $7,981   $16,174   $1,635 
Basic net income per share effect
   0.20    0.41    0.04 
Effective Tax Rate
The
CIT Law applies an income tax rate of 25% to all enterprises, but grants preferential tax treatment to HNTEs, Software Enterprises, and KNSEs.
The U.S. TCJA significantly modified the U.S. Internal Revenue Code by, among other things, reducing the statutory U.S. federal corporate income tax rate from 35% to 21% for taxable years beginning after December 31, 2017; limiting and/or eliminating many business deductions; migrating the U.S. to a territorial tax system with a
one-time
Toll Charge on a mandatory deemed repatriation of previously deferred foreign earnings of certain foreign subsidiaries; subject to certain limitations, generally eliminating U.S. corporate income tax on dividends from foreign subsidiaries; and providing for new taxes on certain foreign earnings.
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The following is reconciliation between the statutory rate and the Group’s effective tax rate. For 2018, 2019, 2020 and 2020,2021, the statutory rate represented the PRC statutory rate of 25%. The table does not reflect any accruals related to the Toll Charge. See “
U.S. Corporate Income Tax
” and “
Treatment of Toll Charge Related to the U.S. TCJA.
”
 
   
Year Ended December 31,
 
   
2018
  
2019
  
2020
 
Statutory Rate:
   25%   25%   25% 
Effect of tax holidays applicable to subsidiaries and consolidated VIEs (1)
   17%   11%   (17%) 
Tax differential from statutory rate applicable to subsidiaries and consolidated VIEs
   (1%)   7%   9% 
Effect of withholding taxes (2)
   (39%)   (12%)   109% 
Changes in valuation allowance for deferred tax assets
   (29%)   (71%)   27% 
Research and development super-deduction
   4%   12%   (9%) 
Others
   (24%)   (1%)   (13%) 
              
    (47%)   (29%)   131% 
              
   
Year Ended December 31,
 
   
2019
  
2020
  
2021
 
           
           
Statutory Rate:
   25%    25%    25%
Effect of tax holidays applicable to subsidiaries and consolidated VIEs (1)
   11%    (17%)    (1%)
Tax differential from statutory rate applicable to subsidiaries and consolidated VIEs
   7%    9%    3%
Effect of withholding taxes (2)
   (12%)    109%    19%
Changes in valuation allowance for deferred tax assets
   (71%)    27%    31%
Research and development super-deduction
   12%    (9%)    (19%)
Others
   (1%)    (13%)    (14%)
   
 
 
   
 
 
   
 
 
 
   (29%)   131%   44%
   
 
 
   
 
 
   
 
 
 
Note (1): The reversal of income tax for preferential income tax rates that Changyou’s subsidiaries and VIEs were entitled to as KNSEs or Software Enterprises for 2018, 2019, 2020 and 20202021 was included in the “Effect of tax holidays applicable to subsidiaries and consolidated VIEs” in the above table.
Note (2): The effective tax rate for 2018 was mainly due to additional income withholding tax of $47 million that was recognized in the first quarter of 2018 due to a revised policy for Changyou’s PRC subsidiaries with respect to their distribution of cash dividends. The
revised policy was adopted to facilitate the distribution of a special cash dividend in the aggregate amount of approximately $500.0 
million that was declared by Changyou’s Boardboard of Directorsdirectors (the “Changyou Board”) on April 5, 2018. The change for 2020 was mainly due to additional income withholding tax
of $88 million that was recognized in the second quarter of 2020 due to a revised policy with respect to Changyou’s PRC subsidiaries regarding their distribution of cash dividends.
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,” 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%.
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Before 2018, in order to fund the distribution of a dividend to shareholders of the Sohu Group’s majority-owned subsidiary Changyou, Changyou’s 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 HK, and adopted as a policy for such subsequent years for its PRC subsidiaries a limit on payment of dividends to their direct overseas parent companies of
one-half
of such PRC subsidiaries’ earnings. In 2018, in order to facilitate the distribution of a special cash dividend of
 $500.0 
million declared by Changyou’s board of directorsthe Changyou Board on April 5, 2018, Changyou revised its policy for its PRC subsidiaries with respect to their distribution of cash dividends. Under the revised policy, all of Changyou’s PRC subsidiaries (not including Changyou’s VIEs and their subsidiaries) will be able to distribute their cumulative available and undistributed earnings to their direct overseas parent companies in future periods. The change resulted in Changyou’s accrual of additional withholding income taxes of approximately
 $47 
million for the period before December 31, 2017, which was recognized in the Sohu Group’s consolidated financial statements for the quarter ended March 31, 2018. As of December 31, 2019, the Sohu Group had accrued deferred tax liabilities related to Changyou in the amount of
 $86.8 
million for PRC withholding tax. In 2020, after the completion of Changyou Merger, Changyou’s net income/(loss) is wholly attributable to Sohu. Changyou changed its policy for its PRC subsidiaries with respect to their distribution of cash dividends. The change resulted in Changyou’s accrual of additional withholding income taxes of approximately
 $88 
million, which was recognized in the Sohu Group’s consolidated financial statements for the quarter ended June 30, 2020. As of December 31, 2020,2021, the Sohu Group had accrued deferred tax liabilities related to Changyou in the amount of $206.6
 $237.1 million for PRC withholding tax.
With the exception of that dividend, the Sohu Group does not intend to have any of its PRC subsidiaries or VIEs distribute any undistributed profits of such subsidiaries or VIEs to their direct overseas parent companies, but rather intends that such profits will be permanently reinvested by such subsidiaries and VIEs for their PRC operations. As of December 31, 2020,2021, the total amount of undistributed profits from the PRC subsidiaries and VIEs for which no withholding tax had been accrued was $783.8$484.9 million, and the unrecognized tax liabilities were $78.4$48.5 million.
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PRC Value-AddedUncertain Tax Positions
On May 1, 2016,The Sohu Group is subject to various taxes in different jurisdictions, but primarily the transition fromPRC. Management reviews regularly the impositionadequacy of PRC business taxthe provisions for taxes as they relate to the imposition of VAT was expandedGroup’s income and transactions. In order to all industries in China, and as a result all of the Sohu Group’s revenues have been subject to VAT since that date. To record VAT payable,assess uncertain tax positions, the Group adoptedapplies a more likely than not threshold and a
two-step
approach for tax position measurement and financial statement recognition. For the net presentation method, which presents
two-step
approach, the difference betweenfirst step is to evaluate the output VAT (at ratestax position for recognition by determining if the weight of 6% or 17% for the period from January 1, 2018 to April 30, 2018, at rates of 6% or 16% for the period from May 1, 2018 to March 31, 2019, and at rates of 6% or 13% after April 1, 2019) and the available input VAT amount (at the rate applicable to the supplier).
Deferred Tax Assets and Liabilities
Significant components of the Group’s deferred tax assets and liabilities consist of the following (in thousands):
   
As of December 31,
 
   
2019
   
2020
 
Deferred tax assets:
          
Net operating loss from operations
  $277,478   $325,797 
Accrued bonus and commissions
   8,539    10,613 
Intangible assets transfer
   916    690 
Others
   10,947    8,692 
           
Total deferred tax assets
   297,880    345,792 
Less: Valuation allowance
   (283,711)    (326,755) 
           
Net deferred tax asset
s
  $14,169   $19,037 
           
Deferred tax liabilities
          
Withholding tax for dividend
  $(86,834)   $(206,594) 
Others
   (9,070)    (10,999) 
           
Total deferred tax liabilities
  $(95,904)   $(217,593) 
           
Net deferred tax assets are recorded under other assets in the consolidated balance sheets. As of December 31, 2020, the Group had net operating losses from PRC entities of approximately $1.56 billion available to offset against future net profit for income tax purposes. The Group anticipatesevidence indicates that it is more likely than not that thesethe 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 operating losses mayincome/(loss) per share is computed using the weighted average number of ordinary shares outstanding during the period. Diluted net income/(loss) per share is computed using the weighted average number of ordinary shares and, if dilutive, potential ordinary shares outstanding during the period. Potential ordinary shares 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 calculated as discussed below. The adjustment will not be utilized based on its estimatemade if there is an anti-dilutive effect.
Changyou’s net income/(loss) attributable to Sohu
Prior to the completion of the operation performanceChangyou Merger on April 17, 2020, Changyou’s net income/(loss) attributable to Sohu was determined using the percentage that the weighted average number of these PRC entities; therefore, $318.5 million in deferred tax assets generated from net operating losses were offsetChangyou shares held by a valuation allowance.
The following table sets forth the movementSohu represented of the valuation allowances for deferred tax assetsweighted 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 of the total economic interest in Changyou, which was used for the years presented (in thousands):
   
For the Year Ended
December 31,
 
   
2018
   
2019
   
2020
 
Beginning balance
  $233,910    250,524    283,711 
Provision for the year
   34,496    44,634    36,363 
Reversal for the year
   (6,891)    (7,311)    (12,637) 
Foreign currency translation adjustment
   (10,991)    (4,136)    19,318 
                
Ending balance
  $250,524    283,711    326,755 
                
In 2020, $13.8 millioncalculation of PRCbasic net operating losses generated from previous years expired. Pursuantincome per share. After the completion of the Changyou Merger, Sohu holds 100% of the combined total of Changyou’s outstanding ordinary shares, so Changyou’s net income/(loss) is wholly attributable to a public announcement issued by the PRC State Administration of Taxation in August 2018, net operating losses of entities not qualified as HNTEs will expire between 2021 and 2025 if not utilized and those of entities qualified as HNTEs will expire in 2030.Sohu.
 
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As a result of the Changyou Plans’ Modification, a portion of the share options previously granted under the Changyou 2014 Share Incentive Plan that became vested after the completion of the Changyou Merger were settled by Changyou at a fixed price of $5.39 per Changyou Class A ordinary share, which equals the Changyou Merger consideration of $5.40 per Changyou Class A ordinary share minus the
per-share
exercise price of $0.01 of such options. None of the remaining share options granted under the Changyou 2014 Share Incentive Plan that became vested after the completion of the Changyou Merger or that become vested in the future, and none of the share options granted under the Changyou 2019 Share Incentive Plan, will be exercisable, but can only be repurchased by Changyou at a fixed price of $5.39 per Changyou Class A ordinary share underlying such vested share options upon termination of the option holders’ employment or upon approval of the Chairman of the Sohu Board. As a result of the Changyou Plans’ Modification, share-based compensation expense will be accrued over the service period based on the fixed price of $5.39 per Changyou Class A ordinary share. No subsequent fair value
re-measurement
will be made, given that the award is an obligation based on a fixed amount of $5.39 per Changyou Class A ordinary share.

In the calculation of Sohu’s diluted net income/(loss) per share, before the Sohu Board’s approval of the Changyou Plans’ Modification, a dilutive effect should be assumed. All of Changyou’s existing unvested restricted share units and share options, and vested restricted share units and share options that have not yet been settled or exercised, 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 in Changyou to decrease. As a result, Changyou’s net income/(loss) attributable to Sohu 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’s diluted net income/(loss) per share. As a result, Changyou’s net income/(loss) attributable to Sohu on a diluted basis equals the number used for the calculation of Sohu’s basic net income/(loss) per share.
After the Changyou Plans’ Modification, all of Changyou’s previously granted share-based awards were reclassified as obligation-based awards. Accordingly, all of those Changyou awards are excluded from the calculation of Sohu’s diluted net income/(loss) per share. Changyou’s net income/(loss) attributable to Sohu on a diluted basis equals the number used for the calculation of Sohu’s basis net income/(loss) per share. There have been no dilutive effects resulting from Changyou’s existing unvested share options.
Sogou’s net income/(loss) attributable to Sohu (Discontinued)
Prior to the completion of the Tencent/Sohu Sogou Share Purchase on September 23, 2021, Sogou’s net income/(loss) attributable to Sohu was determined using the percentage that the weighted average number of Sogou shares held by Sohu represented of the weighted average number of Sogou 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 of the total economic interest in Sogou, which is used for the calculation of basic net income per share. Sogou’s net income/(loss) attributable to Sohu is reflected as discontinued operations in the Sohu Group’s consolidated statements of comprehensive income.
In the calculation of Sohu’s diluted net income/(loss) per share, assuming a dilutive effect, the percentage of Sohu’s shareholding in Sogou was calculated by treating unvested Sogou share options where the performance targets had been 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’s diluted income/(loss) per share. As a result, Sogou’s net income/(loss) attributable to Sohu on a diluted basis equals the number used for the calculation of Sohu’s basic net income/(loss) per share. As a result of the completion of the Tencent/Sohu Sogou Share Purchase, Sohu no longer has any ownership interest in Sogou and Sogou is not included in Sohu’s consolidated financial statements.
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.
The Sohu Group’s financial instruments consist primarily of cash equivalents, restricted cash, short-term investments, accounts receivable, other current assets, long-term investments, long-term time deposits, restricted time deposits, accounts payable, accrued liabilities, short-term bank loans, other short-term liabilities, long-term bank loans, and long-term other payables.

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Cash Equivalents
The Sohu Group’s 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.
Restricted Cash and Restricted Time Deposits
Restricted cash and restricted time deposits are valued based on the prevailing interest rates in the market using the discounted cash flow method. See Note 10 - Fair Value Measurements.
Short-term Investments
The Sohu Group’s short-term investments mainly consist of investments in financial instruments with a variable interest rate and time deposits with maturities of three months to one year. For investments in financial instruments with a variable interest rate indexed to the performance of underlying assets and time deposits, the Sohu Group 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 for credit losses that reflects the Sohu Group’s best estimate of the amounts that will not be collected. The Group makes estimations of the collectability of accounts receivable. Many factors are considered in estimating the general allowance, including reviewing delinquent accounts receivable, performing a customer credit analysis, and analyzing historical bad debt records and current and future economic trends.
Accounts receivable represent historical balances recorded less related cash applications, less allowance for credit losses and any write-offs of any receivables not previously provided for.
Allowance for credit losses
Effective on January 1, 2020, the Sohu Group adopted Accounting Standards Update (ASU)
2016-13,
“Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU
2016-13”)
under a modified retrospective transition. This guidance replaces the existing “incurred loss” methodology, and introduces an expected loss approach using macroeconomic forecasts, referred to as a current expected credit losses (“CECL”) methodology. Under the incurred loss methodology, credit losses are only recognized when the losses are probable of having been incurred. The CECL methodology requires that the full amount of expected credit losses for the lifetime of the financial instrument be recorded at the time it is originated or acquired, considering relevant historical experience, current conditions and reasonable and supportable macroeconomic forecasts that affect the collectability of financial assets, and adjusted for changes in expected lifetime credit losses subsequently, which may require earlier recognition of credit losses.
The Sohu Group adopted ASU
2016-13
using the modified retrospective transition approach and recognized a cumulative-effect adjustment of approximately $6.7 million to the opening balance of accumulated deficit in the consolidated financial statements, including an increase of approximately $3.4 million in the allowance for credit losses of accounts receivable, and an increase of approximately $3.3 million in the allowance for credit losses of accounts receivable and financing receivables classified as assets held for sale. Results for reporting periods beginning after January 1, 2020 are presented using the CECL methodology while comparative information continues to be reported in accordance with the incurred loss methodology in effect for prior periods.
The allowance for credit losses reflects the Sohu Group’s estimated expected losses. The Sohu Group estimates the allowance for credit losses, mainly based on past collection experience as well as consideration of current and future economic conditions and changes in the Sohu Group’s collection trends. The Sohu Group estimates the expected credit losses for accounts receivable with similar risk characteristics on a pool basis. For each pool, the Sohu Group first estimates its recovery period based on relevant historical accounts receivable collection information. Then the Sohu Group estimates the credit allowances based on the recovery period, the historical distribution of each aging bucket, and the impact of macroeconomic factors.
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Accounts receivable are written off when there is no reasonable expectation of recovery. Subsequent recoveries of amounts previously written off are credited against the same line item.
Accounts receivable, net, as of December 31, 2020 and 2021 consisted of the following (in thousands):
   
As of December 31,
 
   
2020
   
2021
 
Accounts receivable, net
          
Accounts receivable
  $94,528   $94,908 
Less: Allowance for credit losses
   (7,007)    (12,358) 
   
 
 
   
 
 
 
   $87,521   $82,550 
The following table presents the aging analysis of accounts receivable as of December 31, 2020 and 2021
(in thousands):
   
As of December 31,
 
   
2020
   
2021
 
Less than 179 days
  $78,805   $79,155 
180-359
days
   7,569    7,437 
360 days and greater
   8,154    8,316 
   
 
 
      
Total
   94,528    94,908 
The movement of allowance for credit losses for the years ended December 31, 2019, 2020 and 2021 was as follows (in thousands):
   
For the year ended December 31,
 
   
2019
   
2020
   
2021
 
Balance at the beginning of year
  $7,574   $3,956   $7,007 
Changes on initial application of ASU
2016-13
(1)
   0    3,383    0 
Additional allowance for credit losses, net of recoveries
   4,724    2,419    6,292 
Write-offs
   (8,237)    (3,231)    (1,155) 
Exchange difference
   (105)    480    214 
   
 
 
   
 
 
   
 
 
 
Balance at the end of year
   3,956    7,007    12,358 
Note (1): The Company adopted ASU
2016-13
using the modified retrospective transition approach. The adjustments arising from the new CECL model are recognized in the opening Consolidated Balance Sheet on January 1, 2020.
Equity Investments
Investments in entities are recorded as equity investments under long-term investments. For investments in common stock or
in-substance
common stock of entities over which the Group can exercise significant influence but does not own a majority equity interest or control, the equity method is applied, and the Group adjusts the carrying amount of an investment and recognizes investment income or loss for the Group’s share of the earnings or loss of the investee after the date of investment. For those equity investments accounted for other than under the equity method, the fair value method is applied. However, for equity investments that do not have readily determinable fair values, the Group chooses to account for them at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. If this measurement alternative is elected, changes in the carrying value of the equity investments will be required to be made whenever there are observable price changes in transactions for identical or similar investments of the same issuer. The implementation guidance notes that an entity should make a “reasonable effort” to identify price changes that are known or that can reasonably be known.
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The Group assesses investments for impairment by considering factors including, but not limited to, current economic and market conditions, operating performance of the companies, including current earnings trends and undiscounted cash flows, and other company-specific information, such as recent financing rounds. The fair value determination, particularly for investments in privately-held companies whose revenue model is still unclear, requires significant judgment to determine appropriate estimates and assumptions. Changes in these estimates and assumptions could affect the calculation of the fair value of the investments. If the assessment indicates that an impairment exists, the Group estimates the fair value of the investment and writes down the asset to its fair value, taking the corresponding charge to the consolidated statements of comprehensive income/(loss).​​​​​​​​​​​​​​
Long-term Time Deposits
The Sohu Group elected the fair value method at the date of initial recognition of time deposits with maturities over one year and carried these investments subsequently at fair value. Changes in fair values are reflected in the consolidated statements of comprehensive income.
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 0 residual value. Depreciation is computed using the straight-line method over the estimated useful lives of the assets.
Fixed Assets
Estimated Useful Lives (years)
Office buildings
36-47
Leasehold improvementsLesser of term of the lease or the estimated useful lives of the assets
Vehicles
4
Office furniture5
Computer equipment and hardware4-5
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 sale proceeds and the carrying value of the relevant assets and is recognized in operating expenses in the consolidated statements of comprehensive income.
Intangible Assets
Intangible assets mainly comprise purchased video content, operating rights for licensed games, domain names and trademarks, computer software, and developed technologies. Intangible assets are recorded at cost less accumulated amortization with 0 residual value. Amortization of intangible assets other than purchased video content is computed using the straight-line method over their estimated useful lives. Amortization of purchased video content is computed based on the trend in viewership accumulation over the shorter of the applicable license period or two years.
The estimated useful lives of the Group’s intangible assets are listed below:
Intangible Assets
Estimated Useful Lives (years)
Purchased video content1 month to 2 years
Computer software1-5
Developed technologies3-10
Domain names and trademarks4-30
Operating rights for licensed gamesover the contract terms
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. The Sohu Group records 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.
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Impairment of
Long-lived Assets Other Than Purchased Video Content
In accordance with ASC
360-10-35,
the Sohu Group reviews 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. The evaluation is performed at the lowest level of identifiable cash flows independent of other assets. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If such review indicates that the carrying amount of the long-lived assets is not recoverable, the carrying amount of such assets is reduced to fair value. The estimation of future cash flows requires significant management judgment based on the Group’s historical results and anticipated results and is subject to many factors. The discount rate that is commensurate with the risk inherent in the Group’s business model is determined by its management.
Impairment of Purchased Video Content
Purchased video content is stated at the lower of cost less accumulated amortization, or fair value.
In accordance with ASC
920-350-35,
if management’s expectations of the programming usefulness of a program, series, package, or program segment are revised downward, it may be necessary to write off to the income statement the amount by which the unamortized capitalized costs exceed fair value. A write-off from unamortized cost to fair value establishes a new cost basis. Accordingly, the Group measures the video content’s impairment loss by comparing the content’s carrying value to its fair value. An impairment loss will be recorded if the carrying value of video content is higher than its fair value. The impairment to be recognized is measured by the amount by which the carrying value of video content exceeds its fair value.
Lease
The Sohu Group adopted ASU
No. 2016-02,
Leases (Topic 842), at the beginning of the first quarter of 2019 using the modified retrospective method, and did not restate comparable periods.
The Sohu Group elected the package of practical expedients permitted under the transition guidance, which allowed the Sohu Group to carry forward the historical lease classification, the assessment on whether an existing or expired contract contains a lease, and the treatment of initial direct costs. The Sohu Group also elected to keep leases with an initial term of 12 months or less off the balance sheet.

Under the new lease guidance, the Sohu Group determines if an arrangement is or contains a lease at inception.
Right-of-use
assets and lease liabilities are recognized at the lease commencement date based on the present value of remaining lease payments over the lease terms. Certain lease agreements may contain an option to renew a lease for a term agreed to by the Sohu Group and the lessor, or an option to terminate a lease earlier than the expiration date. The Sohu Group considers these options in determining the lease term on a lease-by-lease basis.
The Sohu Group only considers payments that are fixed and determinable at the time of lease commencement. The adoption of the new lease guidance resulted in recognition of $7.4 million of
right-of-use
assets, $
6.7
m
illion of lease liabilities, $
17.9
 million of
right-of-use
assets on assets held
for
sale, and $
16.2
 million of lease liabilities on liabilities held for sale as of
January 
1, 2019.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the identifiable assets and liabilities acquired as a result of the Sohu Group’s acquisitions of interests in its 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, the Group reports in its financial statements provisional amounts for the items for which the accounting is incomplete. If a measurement period adjustment is identified, the Group recognizes the adjustment as part of the acquisition accounting. The Sohu Group increases or decreases the provisional amounts of identifiable assets or liabilities by means of increases or decreases in goodwill for measurement period adjustments.
In accordance with ASC 350, the Group does not amortize goodwill, but tests it for impairment. The Group tests 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. The Group adopted ASU
No. 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, and in accordance with the FASB, pursuant to which the Group has the option to choose whether it 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, the Group starts 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 the reporting unit with its carrying value, including goodwill. If the carrying value of each reporting unit, including goodwill, exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, but limited to the total amount of goodwill allocated to that reporting unit. For the Sohu segment, management determined that a quantitative assessment was most appropriate. For the Changyou segment, management performed a qualitative assessment to determine whether it was more likely than not that the fair value of the reporting unit was less than its carrying amount.
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Table of Contents
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. The Group estimates fair value using the income approach and the market approach. The fair value determined using the income approach is compared with comparable market data and reconciled, as necessary. The judgment in estimating the fair value of reporting units includes revenue growth rates and profitability in estimating future cash flows; determining appropriate discount rates and earnings multipliers based on market data of comparable companies engaged in a similar business under the market approach; and making other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit.​​​​​​​
Treasury Stock
Treasury stock consists of the Company’s ordinary shares, including ordinary shares represented by ADSs, repurchased by the Company or that it is obligated to repurchase as of the reporting date. Ordinary shares included in treasury stock are no longer deemed to be outstanding. Treasury stock is accounted for under the cost method.
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 the Sohu Group’s consolidated balance sheets, consists of the Sohu Group’s cumulative foreign currency translation adjustment.
Functional Currency and Foreign Currency Translation
An entity’s functional currency is the currency of the primary economic environment in which it operates, normally that is the currency of the environment in which the entity primarily generates and expends cash. Management’s judgment is essential to determine the functional currency by assessing various indicators, such as cash flows, sales price and market, expenses, financing and intra-Group transactions and arrangements. The functional currency of Sohu.com Limited, and its predecessor Sohu.com Inc., is the U.S. dollar. The functional currency of the Sohu Group’s subsidiaries in the U.S., the Cayman Islands, the British Virgin Islands and Hong Kong is the U.S. dollar. The functional currencies of the Sohu Group’s 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 period’s 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.
Impact of Recently Issued Accounting Pronouncements
Simplifying the accounting for income taxes (Topic 740).
In December 2019, the FASB issued ASU
No. 2019-12,
I
ncome Taxes (Topic 740)-Simplifying the Accounting for Income Taxes
. ASU
No. 2019-12
removes certain exceptions to the general principles in Topic 740 and provides for consistent application of and simplifies generally accepted accounting principles for other areas of Topic 740 by clarifying and amending existing guidance. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The method of adoption varies depending on the component of the new rule that is being adopted. Early application is permitted. The adoption of this standard did not have a material impact on the Sohu Group’s consolidated financial statements.
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Investments-Equity securities (Topic 321), Investments-Equity method and joint ventures (Topic 323), and Derivatives and hedging (Topic 815)-Clarifying the interactions between Topic 321, Topic 323, and Topic 815.
In January 2020, the FASB issued ASU
No. 2020-01,
Investments-Equity securities (Topic 321), Investments-Equity method and joint ventures (Topic 323), and Derivatives and hedging (Topic 815)-Clarifying the interactions between Topic 321, Topic 323, and Topic 815
. The amendments clarify the interaction of the accounting for equity investments under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The adoption of this standard did not have a material impact on the Sohu Group’s consolidated financial statements.
Other accounting standards that the Sohu Group adopted beginning January 1, 2021 did not have a significant impact on the Sohu Group’s consolidated financial statements.
3
. DISCONTINUED OPERATIONS
Discontinued Operation of Sogou
Between Sohu’s entry into the Tencent/Sohu Sogou Share Purchase Agreement on September 29, 2020 and the completion of the Tencent/Sohu Sogou Share Purchase on September 23, 2021, Sogou met the criteria for discontinued operations. Accordingly, the results of operations for Sogou’s business prior to the completion of the Tencent/Sohu Sogou Share Purchase are excluded from Sohu’s results from continuing operations in the Sogou Group’s consolidated statements of comprehensive income and are presented in separate line items as discontinued operations. Retrospective adjustments to the historical statements have been made in order to provide a consistent basis of comparison. Additionally, as of December 31, 2020, the related assets and liabilities associated with the discontinued operations with respect to Sogou were classified as assets held for sale and liabilities held for sale associated with discontinued operations in the consolidated balance sheets to provide comparable financial information. Long-lived assets have not been depreciated or amortized after they were classified as held for sale. As a result, for the year ended December 31, 2020 and the period ended September 23, 2021, depreciation and amortization expenses of $17.0 million and $46.7 million were not recognized for long-lived assets accordingly. On September 23, 2021, the Tencent/Sohu Sogou Share Purchase and the Sogou Merger were completed, and Sohu recognized gain of approximately
 
$855 
million, net of transaction and other costs, which is included in income from discontinued operations. After September 23, 2021, Sohu no longer had any ownership interest in Sogou.
The following tables set forth the assets, liabilities, results of operations and cash flows of discontinued operations with respect to Sogou, that were included in the Sohu Group’s consolidated financial statements
(in thousands):
   
As of December 31,
2020
 
ASSETS
     
Cash and cash equivalents
  $287,185 
Restricted cash
   23,018 
Short-term investments
   774,618 
Account and financing receivables, net
   73,656 
Prepaid and other current assets
   28,946 
Long-term investments, net
   74,004 
Fixed assets, net
   89,089 
Goodwill
   6,527 
Intangible assets, net
   1,446 
Other assets
   53,679 
   
 
 
 
Total assets associated with discontinued operations
  
$
1,412,168
 
   
 
 
 
LIABILITIES
     
Accounts payable
  $122,695 
Accrued liabilities
   68,582 
Receipts in advance
   64,414 
Accrued salary and benefits
   25,350 
Taxes payable
   64,082 
Other short-term liabilities
   61,154 
Long-term liabilities
   10,721 
   
 
 
 
Total liabilities associated with discontinued operations
  
$
416,998
 
   
 
 
 
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Table of Contents
   
Year Ended December 31,
 
   
2019
   
2020
   
2021
(1)
 
Revenues
  $1,172,252   $924,664   $407,607 
Cost of revenues
   738,454    722,614    274,408 
Gross profit
   433,798    202,050    133,199 
Operating expenses:
               
Research and development (2)   190,402    193,376    141,506 
Sales and marketing (2)   138,291    102,523    53,481 
General and administrative (2)   40,670    29,271    11,854 
Total operating expenses
   369,363    325,170    206,841 
Operating profit/(loss)   64,435    (123,120)    (73,642) 
Interest income
   4,443    2,807    2,377 
Interest expense   0    0    (761) 
Foreign currency exchange gain/(loss)
   1,849    (7,767)    (848) 
Other income, net   21,127    38,633    81,655 
Income/(loss) from discontinued operations before income tax expense   91,854    (89,447)    8,781 
Income tax expense/(benefit)   2,748    2,346    (1,112)
Results of operations from discontinued operations, net of tax
  
 
89,106
 
  
 
(91,793
) 
  
 
9,893
 
Gain on disposal of discontinued operations
   0    0    855,009 
   
 
 
   
 
 
   
 
 
 
Net income/(loss) from discontinued operations, net of tax
  
 
89,106
 
  
 
(91,793
) 
  
 
864,902
 
   
 
 
   
 
 
   
 
 
 
Effective Tax Rate
   
Year Ended December 31,
 
   
2019
  
2020
  
2021
(1)(3)
 
Statutory Rate:
   25%   25%   25% 
Effect of tax holidays applicable to subsidiaries and consolidated VIEs
   (2%)   (18%)   127% 
Tax differential from statutory rate applicable to subsidiaries and consolidated VIEs
   3%   (3%)   (90%) 
Changes in valuation allowance for deferred tax assets
   7%   (43%)   349% 
Research and development super-deduction and other permanent book-tax differences
   (25%)   35%   (249%) 
Capital gains from equity investments
   (5%)   1%   (175%) 
   
 
 
  
 
 
  
 
 
 
    3%   (3%)   (13%) 
   
 
 
  
 
 
  
 
 
 
   
Year Ended December 31,
 
   
2019
   
2020
   
2021
(1)
 
Net cash provided by/(used in) discontinued operating activities
  $219,516   $(68,187)   $(175,888)
 
Net cash provided by/(used in) discontinued investing activities
   (217,598)    235,374    1,054,148 
Net cash used in discontinued financing activities
   (33,415)    (8,209)    (9,132)
Note
(1): Includes the financial results of the discontinued operations from January 1, 2021 to September 23, 2021.
Note (2): Expenses generated from marketing services between the Sohu Group and Sogou Group, and leasing expenses generated from a building that Sohu leases to Sogou are not eliminated because those expenses are considered to continue after the disposal of the discontinued operations.
Note (3): The changes in the effective tax rate for the period ended September 23, 2021 resulted from the lower income from discontinued operations before income tax expense.
Discontinued Operation of Shanghai Jingmao
In May 2010, Changyou acquired 50% of the equity interests in Shanghai Jingmao Culture Communication Co., Ltd. (“Shanghai Jingmao”) and an affiliate of Shanghai Jingmao, which were primarily engaged in the cinema advertising business. In January 2011, Changyou acquired the remaining 50% of the equity interests in Shanghai Jingmao and its affiliate for total consideration of approximately $3.0 million. In the fourth quarter of 2011, a full impairment loss of $5.2 million on goodwill was recognized for the cinema advertising business.
In
 the second quarter of 2019, after assessing the collectability of the assets of the cinema advertising business, including receivables and prepayments, Changyou recognized a $17.0 million asset impairment charge for the cinema advertising
business.
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Changyou ceased
operating the cinema advertising business and wound down the business in
August 2019
as a result of a Chinese court in Shanghai having granted a petition by Shanghai Jingmao for bankruptcy relief on August 
12
,
2019
. Accordingly, the results of operations for Changyou’s cinema advertising business have been excluded from Changyou’s results from continuing operations in the consolidated statements of comprehensive income and are presented in separate line items as discontinued operations. Retrospective adjustments to the historical statements have been made in order to provide a consistent basis of comparison. Changyou recognized
NaN
disposal gain/loss for the years ended December 
31
,
2019
and
2020
. However, Changyou may recognize disposal gain/loss in the future, depending on developments in the bankruptcy proceedings in the Chinese court
.
See Note 8 - Balance Sheet Components.
The following tables set forth the results of operations and cash flows of discontinued operations with respect to Changyou’s cinema advertising business, that were included in the Group’s consolidated financial statements (in thousands):
   
Year Ended
December 31,
 
   
2019
(1)
 
Revenues
  $37,323 
Cost of revenues
   43,857 
Gross loss
   (6,534) 
Operating expenses:
     
Sales and marketing
   8,807 
General and administrative
   18,583 
Total operating expenses
   27,390 
Operating loss
   (33,924) 
Interest income
   7 
Other income/(expense), net
   61 
Loss from discontinued operations before income tax expense   (33,856) 
Income tax expense
   142 
   
 
 
 
Net loss from discontinued operations, net of tax
  
 
(33,998
) 
   
 
 
 


   
Year Ended
December 31,
 
   
2019
(1)
 
Net cash provided by discontinued operating activities
  $9,341 
Net cash used in discontinued investing activities
   (10,808) 
Net cash provided by discontinued financing activities   0 
Note (1): Includes the financial results of the discontinued operations from January 1, 2019 to August 12, 2019.​​​​​​​
4. SEGMENT INFORMATION
The Sohu Group’s segments are business units that offer different services and are reviewed separately by the CODM in deciding how to allocate resources and in assessing performance. The Group’s CODM is the Company’s Chief Executive Officer. There are two segments in the Sohu Group, consisting of Sohu and Changyou. Before Sohu’s entry into the Tencent/Sohu Sogou Share Purchase Agreement on September 29, 2020, there were three segments in the Sohu Group, consisting of Sohu, Changyou, and Sogou. Between September 29, 2020 and the completion of the Tencent/Sohu Sogou Share Purchase on September 23, 2021, Sogou met the criteria to be classified as discontinued operations. Accordingly, Sogou’s historical financial results are reflected in Sohu’s consolidated financial statements as discontinued operations. The Sohu Group segments consisted of Sohu and Changyou thereafter. As most of the Sohu Group’s long-lived assets are located in, and substantially all of the revenues of the Sohu Group’s reportable segments are derived from China, where the Sohu Group’s services and products are provided to customers, no geographical information is presented.
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Table of Contents
The following tables present summary information by segment (in thousands):

   
Year Ended December 31, 2019
 
   
Sohu
   
Changyou
   
Eliminations
   
Consolidated
 
Revenues
  $218,442   $455,380   $(19)   $673,803 
Segment cost of revenues (1)   (148,258)   (95,268)    21    (243,505) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Segment gross profit
   70,184    360,112    2    430,298 
SBC in cost of revenues (2)   (23)   (120)    1    (142) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Gross profit
   70,161    359,992    3    430,156 
   
 
 
   
 
 
   
 
 
   
 
 
 
Operating expenses:
                    
Product development (1)   (113,761)   (119,726)    0    (233,487) 
Sales and marketing (1)   (155,226)   (49,768)    2    (204,992) 
General and administrative (1)   (31,330)   (22,074)    (17)    (53,421) 
Goodwill impairment and impairment of intangible assets acquired as part of business acquisitions   (7,245)   0    0    (7,245) 
SBC in operating expenses (2)   (1,023)   (1,185)    0    (2,208) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total operating expenses   (308,585)   (192,753)    (15)    (501,353) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Operating profit/(loss)
   (238,424)   167,239    (12)    (71,197) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Other income
                  7,963 
Interest income
                  6,103 
Interest expense
                  (14,370) 
Exchange difference
                  1,430 
                  
 
 
 
Loss before income tax expense
                  (70,071) 
Income tax benefit
                  (28,428) 
                  
 
 
 
Net loss from continuing operations
                  (98,499) 
Net income from discontinued operations
                  55,108 
                  
 
 
 
Net loss
                 $(43,391) 
                  
 
 
 
Note (1): Total depreciation and amortization expenses of Sohu and Changyou were $50.7 million and $16.4 million, respectively, for the year ended December 31, 2019.
Note (2): “SBC” stands for share-based compensation expense.
   
Year Ended December 31, 2020
 
   
Sohu
   
Changyou
   
Eliminations
   
Consolidated
 
Revenues
  $201,544   $548,346   $0   $749,890 
Segment cost of revenues (1)   (122,362)    (94,362)    7    (216,717) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Segment gross profit
   79,182    453,984    7    533,173 
SBC in cost of revenues (2)   (177)    (543)    0    (720) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Gross profit
   79,005    453,441    7    532,453 
   
 
 
   
 
 
   
 
 
   
 
 
 
Operating expenses:
                    
Product development (1)   (97,681)    (136,934)    0    (234,615) 
Sales and marketing (1)   (106,057)    (53,272)    0    (159,329) 
General and administrative (1)   (25,861)    (25,517)    0    (51,378) 
SBC in operating expenses (2)   (1,759)    (12,001)    0    (13,760) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total operating expenses
   (231,358)    (227,724)    0    (459,082) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Operating profit/(loss)
   (152,353)    225,717    7    73,371 
   
 
 
   
 
 
   
 
 
   
 
 
 
Other income
                  25,993 
Interest income
                  7,369 
Interest expense
                  (6,234) 
Exchange difference
                  (3,800) 
                  
 
 
 
Loss before income tax expense
                  96,699 
Income tax expense
                  (133,226) 
                  
 
 
 
Net loss from continuing operations
                  (36,527) 
Net income from discontinued operations
                  (91,793) 
                  
 
 
 
Net loss
                 $(128,320) 
                  
 
 
 
Note (1): Total depreciation and amortization expenses of Sohu and Changyou were $26.4 million and $13.5 million, respectively, for the year ended December 31, 2020.
Note (2): “SBC” stands for share-based compensation expense.
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Year Ended December 31, 2021
 
   
Sohu
   
Changyou
   
Eliminations
   
Consolidated
 
Revenues
  $186,606   $648,970   $0   $835,576 
Segment cost of revenues (1)   (113,881)   (90,517)   4    (204,394)
   
 
 
   
 
 
   
 
 
   
 
 
 
Segment gross profit
   72,725    558,453    4    631,182 
SBC in cost of revenues (2)   (1)   (276)   0    (277)
   
 
 
   
 
 
   
 
 
   
 
 
 
Gross profit
   72,724    558,177    4    630,905 
   
 
 
   
 
 
   
 
 
   
 
 
 
Operating expenses:
                    
Product development (1)   (113,186)   (151,773)   0    (264,959)
Sales and marketing (1)   (126,126)   (56,396)   0    (182,522)
General and administrative (1)   (36,949)   (40,702)   0    (77,651)
SBC in operating expenses (2)   (804)   (7,497)   0    (8,301)
   
 
 
   
 
 
   
 
 
   
 
 
 
Total operating expenses
   (277,065)   (256,368)   0    (533,433)
   
 
 
   
 
 
   
 
 
   
 
 
 
Operating profit/(loss)
   (204,341)   301,809    4    97,472 
   
 
 
   
 
 
   
 
 
   
 
 
 
Other income
                29,416 
Interest income
                15,641 
Interest expense
                (7,500)
Exchange difference
                (3,462)
                
 
 
 
Income before income tax expense
                131,567 
Income tax expense
                (62,296)
                
 
 
 
Net loss from continuing operations
                69,271 
Net loss from discontinued operations
                864,902 
                
 
 
 
Net loss
               $934,173 
                  
 
 
 
Note (1): Total
depreciation and amortization expenses of Sohu and Changyou were $23.4 million and $12.6 million, respectively, for the year ended December 31, 2021.
Note (2): “SBC” stands for share-based compensation expense.
   
As of December 31, 2020
 
   
Sohu
   
Changyou
   
Eliminations
   
Consolidated
 
Cash and cash equivalents
  $56,977   $160,080   $0   $217,057 
Accounts receivable, net
   60,886    26,635    0    87,521 
Fixed assets, net
   174,700    162,976    (2)    337,674 
Total assets (1)
  $1,632,736   $2,478,705   $(2,701,488)   $1,409,953 
Note (1): The elimination for segment assets mainly consists of elimination of intra-Group loans between Sohu and Changyou, and elimination of long-term investments in subsidiaries and consolidated VIEs.
   
As of December 31, 202
1
 
   
Sohu
   
Changyou
   
Eliminations
   
Consolidated
 
Cash and cash equivalents
  $929,851   $69,098   $0   $998,949 
Accounts receivable, net
   48,108    34,442    0    82,550 
Fixed assets, net
   170,213    159,784    0    329,997 
Total assets (1)
  $2,294,537   $2,610,964   $(2,659,716)    $2,245,785 
Note (1): The elimination for segment assets mainly consists of elimination of intra-Group loans between Sohu and Changyou, and elimination of long-term investments in subsidiaries and consolidated VIEs.
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5. SHARE-BASED COMPENSATION EXPENSE
Sohu (excluding Sohu Video), Changyou, and Sohu Video have incentive plans for the granting of share-based awards, including share options and restricted share units, to members of the boards of directors, management and other key employees.
Share-based compensation expense was recognized in costs and expenses for the years ended December 31, 2019, 2020 and 2021 as follows (in thousands):
   
Year Ended December 31,
 
Share-based compensation expense
  
2019
   
2020
   
2021
 
Cost of revenues
  $142   $720   $277 
Product development expenses
   1,364    7,325    3,904 
Sales and marketing expenses
   (326)    460    166 
General and administrative expenses
   1,170    5,975    4,231 
   
 
 
   
 
 
   
 
 
 
   $2,350   $14,480   $8,578 
   
 
 
   
 
 
   
 
 
 
Share-based compensation expense was recognized for share awards of Sohu (excluding Sohu Video), Changyou and Sohu Video as follows (in thousands):
   
Year Ended December 31,
 
Share-based compensation expense
  
2019
   
2020
   
2021
 
For Sohu (excluding Sohu Video) share-based awards
  $1,940   $2,633   $1,849 
For Changyou share-based awards
   1,305    12,545    7,773 
For Sohu Video share-based awards
   (895)    (698)    (1,044) 
   
 
 
   
 
 
   
 
 
 
   $2,350   $14,480   $8,578 
   
 
 
   
 
 
   
 
 
 
The negative amounts in the tables above resulted from
re-measured
compensation expense based on the then-current fair value of the awards on the reporting date.
There was 0 capitalized share-based compensation expense for the years ended December 31, 2021, 2020 and 2019.
6. ADVERTISING AND PROMOTIONAL EXPENSES, INCLUDED IN SALES AND MARKETING EXPENSES
Advertising and promotional expenses are included in sales and marketing expenses, and generally represent the expenses of promotions to create or stimulate a positive image of the Sohu Group or a desire to subscribe for the Group’s products and services. Advertising expenses are expensed as incurred. For the years ended December 31, 2021, 2020 and 2019, advertising and promotional expenses recognized in the consolidated statements of comprehensive income were $98.5 million, $84.7 million and $124.6 million, respectively.
7. OTHER INCOME, NET
The following table summarizes the Sohu Group’s other income/(expense) (in thousands):

   
Year Ended December 31,
 
   
2019
   
2020
   
2021
 
Rental income from Sogou (1)
   8,029    9,793    10,427 
Investment income   3,004    3    6,352 
Income from investments in financial instruments (2)   11,113    4,303    5,260 
Individual tax refund and additional deduction of PRC value-added tax

   907    6,169    4,827 
Write-down of unpaid long-term accounts payable   0    47    1,276 
Gover
nment grant

   5,763    5,928    418 
Impairment loss on equity investments (
3
)
   (23,154)    (384)    (215) 
Donations
   (283)    (1,460)    (1,565) 
Others
   2,584    1,594    2,636 
  
$
7,963
  
$
25,993
  
$
29,416
 
   
 
 
   
 
 
   
 
 
 
Note (1): Sogou leases from Sohu, on an arms-length basis, office space at Sohu.com Internet Plaza under a lease that expires on December 31, 2022 and may be renewed subject to terms to be agreed to by Sohu and Sogou.
The cash receipts from this lease within operating activities for 2021, 2020 and 2019 were $12.3 million, $12.1 million and $8.4 million, respectively.
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Note (2): The increase for 2021 compared to 2020 and the decrease for 2020 compared to 2019 were mainly due to income earned from investments in financial instruments.
Note (
3
): In the fourth quarter of 2019, the Sohu Group recognized impairment losses of $23.2 million for equity investments.
8. BALANCE SHEET COMPONENTS (IN THOUSANDS)

   
As of December 31,
 
   
2020
   
2021
 
Accounts receivable, net
          
Accounts receivable
  $94,528    94,908 
Allowance for credit losses
   (7,007)    (12,358)
   
 
 
   
 
 
 
   $87,521    82,550 
   
 
 
   
 
 
 
The following table presents the movement of allowances for credit losses for the years of 2019, 2020 and 2021:
   
Balance at the
beginning of
year
  
Changes on initial
application of ASU
2016-13
   
Additional
allowance for credit
losses, net of
recoveries
   
Write-offs
  
Exchange
difference
  
Balance at the
end of year
 
2019
   7,574   0    4,724    (8,237)   (105)   3,956 
2020
   3,956   3,383    2,419    (3,231)   480   7,007 
2021
   7,007   0    6,292    (1,155)  214   12,358 
   
As of December 31,
 
   
2020
   
2021
 
Prepaid and other current assets
          
Matching loan due from a related party (See Note 9)
  $34,123   $34,123 
Prepaid taxes
   25,043    28,719 
Prepaid revenue-sharing cost  
10,120
   
12,428

 
Prepaid content and license costs   11,029    8,694 
Prepaid advertising and promotion fee   244    4,685 
Interest receivable from bank deposits with original maturities of three months or
less
   3,875    3,059 
Receivables from third party payment platforms

  
5,488
   
 
2,670
 
Prepaid professional fees
   2,365    2,432 
Prepaid rental deposit
s
   2,310    1,928 
Emplo
yee advances

  
 
587
   
 
569
 
Prepaid office rent and facilities expenses
   696    338 
Others
   10,710    7,666 
   
 
 
   
 
 
 
    $106,590   $107,311 
   
 
 
   
 
 
 
Prepaid
non-current
assets
          
Prepaid PRC income tax for the sale of assets associated with 17173.com by Sohu to Changyou  $1,006   $0 
   
 
 
   
 
 
 
   $1,006   $0 
   
 
 
   
 
 
 
Other short-term liabilities
          
Matching loans due to a related party (See Note 9)
   34,123    34,123 
Contingent liability related to Shanghai Jingmao liquidation (1)
   23,900    23,900 
Deposits related to Focus
   21,936    10,387 
Share-based awards in Changyou
   13,292    20,693 
Other payables related to Shanghai Jingmao liquidation (2)   0    9,380 
Contract deposits from advertisers
   3,036    2,679 
Lease liabilities
   1,107    1,999 
Consideration payable for equity investment
   751    769 
Others
   8,026    8,638 
   
 
 
   
 
 
 
   $106,171   $112,568 
   
 
 
   
 
 
 
Note (1): The contingent liability represents the aggregate of estimated potential payments to third parties in connection with the liquidation of Shanghai Jingmao. The stated amount of the contingent liability reflects Changyou’s best estimate as of December 31, 2020 and 2021 pursuant to ASC
450-20.
Changyou may revise this estimate in the future based on developments in PRC bankruptcy court proceedings regarding.
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Note (2): Shanghai Jingmao. In 2021, Changyou received $9.4 million from the bankruptcy proceedings, as a creditor of Shanghai Jingmao, during the process of the liquidation of Shanghai Jingmao. No disposal gain was recognized due to the uncertainty with the proceedings that were still ongoing.
Receipts in advance and deferred revenue
  
 
 
 
  
 
 
 
Receipts in advance relating to:
  
 
 
 
  
 
 
 
brand advertising business
  
$
5,214
 
  
$
4,297 
online game business
  
 
7,869
 
  
 
9,310 
other business
  
 
6,029
 
  
 
5,286 
   
 
 
   
 
 
 
Total receipts in advance
  
 
19,112
 
  
 
18,893 
Deferred revenue
  
 
32,943
 
  
 
38,148 
   
 
 
   
 
 
 
  $52,055
 
 $57,041 
   
 
 
   
 
 
 
9. RELATED PARTY TRANSACTIONS
Under an agreement between Sohu and Fox Financial Technology Group Limited (“Fox Financial,” formerly known as “SoEasy Internet Finance Group Limited”) 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.
Changyou’s Loan Arrangements with Fox Financial
Commencing in April 2015, certain subsidiaries of Changyou and certain subsidiaries of Fox Financial entered into a series of loan agreements pursuant to which the subsidiaries of Changyou were entitled to draw down HK dollar-denominated or U.S. dollar-denominated loans from the Fox Financial subsidiaries and the Fox Financial subsidiaries were entitled to draw down equivalent RMB-denominated loans from the Changyou subsidiaries, to facilitate each other’s business operations. All of the loans carry a fixed rate of interest which approximated the market interest rate at the inception of the loans.
In December 2018 and 2019, Changyou entered into supplemental agreements with Fox Financial pursuant to which all accrued and unpaid interest on the loans as of December 31, 2018 and December 31, 2019 was added to the principal of the corresponding loans. Due to the depreciation of the RMB against the U.S. dollar in 2018, the principal amounts of Changyou’s outstanding RMB-denominated loans to Fox Financial as of December 31, 2018 were adjusted upward to amounts equal to the principal amounts of Fox Financials’ outstanding U.S. dollar denominated loans to Changyou as of December 31, 2018, multiplied by the monthly average RMB to U.S. dollar exchange rate published by the Bank of China for the month of December 2018. As a result of such adjustment, Changyou advanced additional RMB-denominated loans in the principal amount of RMB8.2 million (approximately $1.2 million) to Fox Financial in January 2019.
In December 2019, Changyou entered into a supplemental agreement with Fox Financial pursuant to which Fox Financial provided security for its repayment obligations to Changyou. Under this supplemental agreement, if Fox Financial fails to repay the RMB-denominated loan principal and corresponding interest owed to Changyou, Changyou will have the right to apply the amount of a security deposit, consisting of the outstanding U.S. dollar-denominated loan principal and corresponding interest owed by Changyou to Fox Financial, to repay the RMB-denominated loan principal and interest owed by Fox Financial to Changyou. The security deposit will be required to be replenished by Fox Financial if the amount of the security deposit is insufficient to repay the loan principal and interest of the RMB-denominated loan owed to Changyou, and any remaining security deposit will be returned to Fox Financial if there is a surplus after the repayment of the RMB-denominated loan principal and interest. The parties entered into an additional supplemental agreement pursuant to which Changyou provided security for its repayment obligations to Fox Financial. Under this supplemental agreement, if Changyou fails to repay the U.S. dollar-denominated loan principal and corresponding interest owed to Fox Financial, Fox Financial will have the right to apply the amount of a security deposit, consisting of the outstanding RMB-denominated loan principal and corresponding interest owed by Fox Financial to Changyou, to repay the U.S. dollar-denominated loan principal and interest owed by Changyou to Fox Financial. The security deposit will be required to be replenished by Changyou if the amount of the security deposit is insufficient to repay the U.S. dollar-denominated loan principal and interest owed by Changyou to Fox Financial, and any remaining security deposit will be returned to Changyou if there is a surplus after the repayment of the U.S. dollar-denominated loan principal and interest.
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The loan arrangements expired on December 31, 2020 and no new supplemental agreements were signed. In May 2021, Changyou notified Fox Financial of Changyou’s intention to exercise its rights under the supplemental agreement by applying the security deposit to repay the RMB-denominated loan principal and corresponding interest owed by Fox Financial to Changyou. As of the date of this report, Changyou has not received any response from Fox Financial and accordingly, with an abundance of caution, has not so applied any of the security deposit. Changyou performed an assessment of its expected credit losses for the RMB-denominated loans receivable from Fox Financial. As of December 31, 2021, the Sohu Group had accrued a cumulative allowance for credit losses of approximately
$3.3 
million based on Changyou’s estimate of the net of the outstanding amount of such loans receivable from Fox Financial over the amount of the security deposit and on the lack of solvency of Fox Financial. As of December 31, 2021, net loan receivables and loans payable under such loan arrangements, each in the amount of
$34.1 million, were recorded as prepaid and other current assets and other short-term liabilities, respectively, in the Sohu Group’s consolidated balance sheets.
10. FAIR VALUE MEASUREMENTS
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.
The Sohu Group’s financial instruments consist primarily of cash equivalents, restricted cash, short-term investments, accounts receivable, other current assets, long-term investments, long-term time deposits, restricted time deposits, accounts payable, accrued liabilities, short-term bank loans, other short-term liabilities, long-term bank loans, and long-term other payables.
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, 2020 (in thousands):
     
Fair value measurements at reporting date using
 
Items
 
As of

December 31,

2020
  
Quoted Prices

in Active
Markets

for Identical
Assets

(Level 1)
  
Significant

Other

Observable
Inputs

(Level 2)
  
Significant

Unobservable

Inputs

(Level 3)
 
Cash equivalents
 $173,655
 

 $0  $173,655  $0 
Restricted cash
  330,791   0   330,791   0 
Restricted time deposits
  101,519   0   101,519   0 
Short-term investments
  100,745   0   100,745   0 
Equity investments with readily determinable fair values
  9,457   9,457   0   0 
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The
following table sets forth the financial instruments, measured at fair value by level within the fair value hierarchy, as of December 31, 2021
(in thousands):
     
Fair value measurements at reporting date using
 
Items
 
As of

December 31,

2021
  
Quoted Prices

in Active
Markets

for Identical
Assets

(Level 1)
  
Significant

Other

Observable
Inputs

(Level 2)
  
Significant

Unobservable

Inputs

(Level 3)
 
Cash equivalents
 $949,884  $0  $949,884  $0 
Restricted cash
  1,969   0   1,969   0 
Short-term investments
  399,345   0   399,345   0 
Equity investments with readily determinable fair values
  14,642   14,642   0   0 
Long-term time deposits  189,007   0   189,007   0 
Cash Equivalents
The Sohu Group’s cash equivalents mainly consist of time deposits with original maturities of three months or less, notice deposits, 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.
Restricted Cash and Restricted Time Deposits
Restricted cash and restricted time deposits are valued based on the prevailing interest rates in the market using the discounted cash flow method. The Sohu Group classifies the valuation techniques that use these inputs as Level 2 of fair value measurements.
Changyou Loans from Offshore Banks, Secured by Time Deposits
In 2018, Changyou drew down loans from the Hong Kong branches of PRC banks, which were secured by an equivalent or greater amount of RMB deposits by Changyou in the PRC branches of the banks. The loans from the Hong Kong branches of the lending banks were repaid in April 2019 by Changyou and the RMB deposits in the PRC branches of the banks were released.
In the fourth quarter of 2020 and the first quarter of 2021, Changyou drew down from an offshore branch of a PRC bank loans of
$215.6 
million and $153 million, respectively, secured by an equivalent amount of RMB deposits by Changyou in the PRC branch of the bank and a mortgage on a building owned by Sohu. The loans carried floating rates of interest based on the London Inter-Bank Offered Rate (“LIBOR”). The loans were repaid in full in September 2021 by Changyou and the RMB deposits in the PRC branch of the bank were released.
For the years ended December 31, 2021 and 2020, interest income from the restricted time deposits securing the loans were $5.0 million and $0.1 million, respectively, and expense for interest on the loans was $5.3 million and $0.1 million, respectively.
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In the second quarter of
2020
, Changyou pledged deposit certificates in connection with the Sohu Group’s financing of the Changyou Merger.
As of December 31, 2020, Changyou had pledged deposit certificates in the amount of $212 million in the aggregate, of which $110 million was recorded as restricted cash and $102 million was recorded as restricted time deposits. In September 2021, the Company repaid all of the outstanding balance under the Facility Agreement with ICBC Tokyo, and as a result all of Changyou’s deposit certificate pledges were released and the Facility Agreement was terminated.
Short-term Investments
The Sohu Group’s short-term investments mainly consist of investments in financial instruments with a variable interest rate and time deposits with maturities of three months to one year. In
accordance with ASC 825, for investments
in financial instruments with a variable interest rate indexed to performance of underlying assets and time deposits, 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) and interest income. To estimate fair value, the Group refers to the quoted rate of return provided by banks at the end of each period using the discounted cash flow method. The Group classifies the valuation techniques that use these inputs as
Level 2 of fair value measurements.
As of December 31, 2021 and December 31, 2020, the Sohu Group’s investment in these financial instruments
was $399.3 million
and $100.7 million, respectively. The investment instruments
with variable interest rates
were issued by commercial banks in China, and
are
indexed to performance of underlying assets. Since these investments’ maturity dates are within one year, they are classified as short-term investments. For the years ended December 31, 2021 and 2020, the Sohu Group recorded gains from changes in the fair value of short-term investments in the amounts of $5.3 million and $4.3 million, respectively, in the consolidated statements of comprehensive income.
Long-term Investments
Long-term investments consist of equity investments in publicly traded companies, privately-held companies and limited partnerships.
ASU
2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities,
amends certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The main provisions require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value through earnings, unless they qualify for a measurement alternative. The new guidance required modified retrospective application to all outstanding instruments beginning January 1, 2018, with a cumulative effect adjustment recorded to opening accumulated deficit as of the beginning of the first period in which the guidance becomes effective. However, changes to the accounting for equity securities without a readily determinable fair value will be applied prospectively.
The Group measures equity investments under the equity method and equity investments without readily determinable fair values at fair value on a
non-recurring
basis when an impairment charge is to be recognized. As of December 31, 2020 and 2021, certain investments were measured using significant unobservable inputs (Level 3) and written down from their respective carrying values to their fair values, considering the stage of development, the business plan, the financial condition, the sufficiency of funding and the operating performance of the investee companies, with impairment charges incurred and recorded in other income for the years then ended. The Group recognized impairment losses of $0.4 million and $0.2 million, respectively, for investments without readily determinable fair values in 2020 and 2021.
Equity Investments Accounted for Using the Equity Method
For investments in common stock or
in-substance
common stock of entities over which the Group can exercise significant influence but does not own a majority equity interest or control, the equity method is applied, and the Group adjusts the carrying amount of an investment and recognizes investment income or loss for the Group’s share of the earnings or loss of the investee after the date of investment. The Group measures equity investments under the equity method at fair value on a
non-recurring
basis only if an impairment charge is to be recognized. The Group classifies these
non-recurring
fair value measurements as Level 3 of fair value measurement.
Equity Investments with Readily Determinable Fair Values
Effective as of January 1, 2018, all equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) will generally be measured at fair value through earnings. There will no longer be an
available-for-sale
classification (changes in fair value previously reported in other comprehensive income) for equity securities with readily determinable fair values.
Equity investments with readily determinable fair values 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.
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Equity Investments without Readily Determinable Fair Values
Based on ASU
2016-01,
an entity will be able to elect to record equity investments without readily determinable fair values and not accounted for by the equity method at cost, less impairment, adjusted for subsequent observable price changes in orderly transactions for the identical or similar investments of the same issuer. Entities that elect this measurement alternative will report changes in the carrying value of the equity investments in current earnings.
If this measurement alternative is elected, changes in the carrying value of the equity investment will be required to be made whenever there are observable price changes in transactions for identical or similar investments of the same issuer. The implementation guidance notes that an entity should make a “reasonable effort” to identify price changes that are known or that can reasonably be known. When observable price changes were identified, the Group used the back-solve method to
re-measure
the fair value of the investments and to determine the amount that should be recorded as upward or downward adjustments. The back-solve method requires considering the rights and preferences of each classes of equity and solving for the total equity value that is consistent with a recent transaction of the subject company’s securities. This method requires making assumptions on future outcomes available to the subject company, the probability of each scenario, expected time to liquidity events, volatility and risk-free rate. The Group classifies this
non-recurring
fair value measurement as Level 3 of fair value measurement.
Long-term Time Deposits
The Sohu Group elected the fair value method at the date of initial recognition of time deposits with maturities over
one
year and carried these investments subsequently at fair value. Changes in fair values are reflected in the consolidated statements of comprehensive income. The Sohu Group classifies the valuation techniques as Level 2 of fair value measurements.
Assets Measured at Fair Value on a Nonrecurring Basis
The following table sets forth assets measured at fair value on a nonrecurring basis by level within the fair value hierarchy as of December 31, 2020 and 2021 (in thousands)
       
Fair value measurements at reporting date using
 
Items
  
As of
December 31,
2020
   
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
   
Significant Other
Observable Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
Purchased video content recorded in prepaid and other assets
  $2,585   $0   $0   $2,585 
Intangible assets, net
   4,842    0    0    4,842 
Goodwill
   48,434    0    0    48,434 
       
Fair value measurements at reporting date using
 
Items
  
As of
December 31,
2021
   
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
   
Significant Other
Observable Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
Purchased video content recorded in prepaid and other assets
  $2,555   $0   $0   $2,555 
Intangible assets, net
   9,136    0    0    9,136 
Goodwill
   48,811    0    0    48,811 
Purchased Video Content Recorded in Prepaid and Other Assets
The impairment losses recognized in prepaid and other assets were mainly due to impairment losses for Sohu Video’s purchased video content. See Note 14 - Intangible Assets, Net.
Intangible Assets
Intangible assets mainly comprise purchased video content, operating rights for licensed games, domain names and trademarks, computer software, and developed technologies. The impairment losses recognized for intangible assets were mainly due to impairment losses for the domain name related to the 56.com Website and Sohu Video’s purchased video content. See Note 14 - Intangible Assets, Net.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the identifiable assets and liabilities acquired as a result of the Group’s acquisitions of interests in its subsidiaries and consolidated VIEs. See Note 13 - Goodwill.
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Short-term Receivables and Payables
Accounts receivable 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, 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.
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.

Credit agreements with Industrial and Commercial Bank of China Limited (“ICBC”)
In September 2017, Sohu entered into credit agreements with ICBC pursuant to which Sohu was entitled to borrow from ICBC from time to time until March 31, 2018 up to a combined aggregate of RMB800 million (or $116.6 million). The loan is secured by the pledge of Sohu’s building which serves as Sohu’s corporate headquarters in Beijing (“Sohu’s headquarters”). Interest accrues 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%. 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.
In July 2020, Sohu repaid all of the outstanding balance under the loan arrangements with ICBC and Sohu’s headquarters were released from the pledge. As of both December 31, 2021 and December 31, 2020, the total outstanding balance of the loan was NaN.

Credit agreements with the China Merchants Bank Co., Ltd. (“CMB”)
In April 2018, Sohu entered into credit agreements with CMB pursuant to which Sohu was entitled to borrow from CMB from time to time until March 22, 2021 up to an aggregate of RMB700 million (or approximately $102.0 million) (the “CMB Loan”).
In April 2018, Sohu made an initial drawdown under the CMB Loan with a term of 12 months in the amount of RMB400 million (or $58.3 million) (the “First Drawdown”). The proceeds of the First Drawdown were used to repay in full the outstanding balance and all accrued and unpaid interest under credit agreements between Sohu and Ping An Bank. The CMB Loan was secured by a pledge of Sohu’s building, which was released from the pledge after Ping An Bank received such repayment. Interest accrued on the outstanding principal balance at a rate of 6% per year. In April 2019, the outstanding principal amount of the First Drawdown was repaid in full.

In
June 2018
, Sohu made a drawdown under the CMB Loan with a term of
24
months in the amount of RMB
300
 million (or approximately $
43.7
million) (the “Subsequent Drawdown”). Interest accrued on the outstanding principal balance at a rate of
6
% per year. The outstanding principal amount of the Subsequent Drawdown was payable in
four
installments.
The first installment of RMB45 million (or $6.7 million) was paid in December 2018; the second and third installments of RMB90 million (or $13.1 million) in the aggregate were paid early in June 2019; and the fourth installment of RMB165 million (or $23.3million) was paid early in July 2019.
In April 2019 and May 2019, Sohu made drawdowns under the CMB Loan with a term of 12 months in the aggregate amount of RMB399 million ($59.3 million). Interest accrues on the outstanding principal balances at a rate of 5.1% per year. The outstanding principal amount of each drawdown will be due and payable 12 months after such drawdown.
In May 2020, Sohu repaid all of the outstanding balance under the loan arrangements with CMB and the pledge of Sohu’s building was released. As of both December 31, 2021 and December 31, 2020, the total outstanding balance of the CMB loan was NaN.
Credit agreement with Industrial and Commercial Bank of China Limited, Tokyo Branch (“ICBC Tokyo”)
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On April 3, 2020, the Company’s indirect wholly-owned subsidiary Sohu.com (Game) Limited (“Sohu Game”), as borrower, and Sohu.com Limited, as
guarantor, entered into a facility agreement (the “Facility Agreement”) with ICBC Tokyo pursuant to which ICBC Tokyo agreed to provide a term loan facility of up to $250 million (the “Term Facility”), subject to customary conditions, to be used to finance the consummation of the Changyou Merger and the related transactions and to pay related fees and expenses associated with the Changyou Merger. The Term Facility consisted of (i) a
one-year
term facility for term loans of up to $100 million (the
“One-Year
Facility”) and (ii) a four-year term facility for term loans of up to $150 million (the “Four-Year Facility”). The outstanding principal amount of the loans under the
One-Year
Facility is due in full on the
one-year
anniversary of the date of the first utilization of the
One-Year
Facility. The outstanding principal amount of the loans under the Four-Year Facility
was
due in installments, with $7.5 million due and payable at the end of each of the second and third calendar years during the term of the Four-Year Facility and the remaining outstanding principal amount
was
due and payable on the fourth anniversary of the date of the first utilization of the
One-Year
Facility. The Term Facility
bore
interest at a rate of Three Month LIBOR plus a margin of 1.75%, with LIBOR to be determined by ICBC on the basis of the London InterBank Offered Rate published two business days before the first day of each three calendar month interest period. Accrued interest
w
as
 paid every three calendar months on the first day after the end of each such three-month interest period.
The obligations of Sohu Game as borrower under the Term Facility were initially fully guaranteed by Sohu.com Limited, and were initially secured by first priority share pledges over 97.9% of the outstanding equity interests in Changyou. In the second quarter of 2020, Changyou pledged deposit certificates evidencing an RMB deposit in the amount of $192 million in the aggregate at an exchange rate of
RMB7.20 to $1.00
, equivalent to the Facility Agreement amount. Upon the effectiveness of such additional pledge, Sohu’s previous guarantee, and all the previous share pledges or mortgages over the outstanding equity interests in Changyou, to secure the loans from ICBC Tokyo were released and discharged.

In September 2021, the Company repaid all of the outstanding balance under the Facility Agreement with ICBC Tokyo, and as a result all of Changyou’s deposit certificates pledges were released and the Facility Agreement was terminated.
Long-term Payables
Long-term payables mainly consist of long-term other payables and long-term bank loans.
Long-term
other payables are financial liabilities with carrying values that approximate fair value.
After the Changyou Plans’ Modification, long term
other
payables also include liabilities accrued over the option holders’ service periods with a fixed price of $5.39 per Changyou Class A ordinary share
.
11. LEASE
The Group has entered into operating lease agreements, primarily for offices in China with lease periods expiring between 2021 and 2026. The determination of whether an arrangement is or contains a lease is made at the inception of the lease by evaluating whether the arrangement conveys the right to use an identified asset and whether the Group obtains substantially all of the economic benefits from and has the ability to direct the use of the asset. Operating lease assets and liabilities are included on the Group’s consolidated balance sheets beginning January 1, 2019. The
right-of-use
assets are included in other assets, while the current portion of the operating lease liabilities is included in other short-term liabilities and the long-term portion is included in other long-term liabilities. The Group has elected to not recognize lease assets and lease liabilities for leases with a term of twelve months or less on the consolidated balance sheets.
Operating lease assets and liabilities are recognized at the present value of the future lease payments at the lease commencement date. The Group uses its incremental borrowing rate in determining the present value of the future lease payments, because the interest rate implicit in most of the leases is not readily determinable. The Group estimates its incremental borrowing rate for each leased asset based on the interest rate the Group would incur to borrow an amount equal to the lease payments on a collateralized basis over a similar term in a similar economic environment.
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Certain
lease agreements contain an option for the Group to renew a lease for a term agreed to by the Group and the lessor or an option to terminate a lease earlier than the maturity date. The Group considers these options, which may be elected at the Group’s sole discretion, in determining the lease term on a
lease-by-lease
basis. The Group’s lease agreements generally do not contain any residual value guarantees or material restrictive covenants. Certain of the Group’s leases contain free or escalating rent payment terms. Operating lease expense is recognized on a straight-line basis over the lease term.
The Group’s lease agreements generally contain lease and
non-lease
components.
Non-lease
components consist primarily of payments for maintenance and utilities. The Group has identified separate lease and
non-lease
components, allocated the contractual considerations between components based on the terms specified in the lease agreements, and accounted for the lease components separately from the
non-lease
components. Payments under the lease arrangements are primarily fixed with no variable payments.

Components of operating lease expense are as follows (in thousands):
   
Year ended December 31,
 
   
2020
   
2021
 
Operating lease expense
  $3,985   $2,952 
Short-term lease expense
   297    563 
   
 
 
   
 
 
 
Total operating lease expense
  $4,282   $3,515 
Supplemental cash flow information related to leases are as follows (in thousands):
   
Year ended December 31,
 
   
2020
   
2021
 
Cash paid for amounts included in the measurement of lease liabilities
          
Operating cash flows from operating leases
  $3,206   $3,085 
   
Year ended December 31,
 
   
2020
   
2021
 
Right-of-use
assets obtained in exchange for lease liabilities:
          
Operating leases
  $5,351   $2,620 
The following table presents supplemental balance sheet information related to the operating leases (in thousands):
   
Year ended December 31,
 
   
2020
   
2021
 
Assets:
          
Operating lease right-of-use assets
  $4,998   $5,207 
   
 
 
   
 
 
 
Liabilities:
          
Current lease liabilities
   1,107    1,999 
Non-current lease liabilities

   3,855    3,142 
   
 
 
   
 
 
 
Total operating lease liabilities
  $4,962   $5,141 
   
 
 
   
 
 
 
Maturities of lease liabilities under operating leases as of December 31, 2021 are as follows (in thousands):
2022
  $2,853 
2023
   2,240 
2024
   277 
2025   98 
202
6
   0 
Thereafter
   0 
   
 
 
 
Total future lease payments
   5,468 
Less: imputed interest
   327 
   
 
 
 
Total present value of lease liabilities
  $5,141 
   
 
 
 
As of December 31, 2021, operating leases
recognized
in lease liabilities had a weighted average remaining lease term of 2.1 years and a weighted average discount rate of 5.7%. As of December 31, 2021, liabilities for leases that had been entered into, but the term of which had not yet commenced, amounted to $0.2 million.
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12. FIXED ASSETS
The following table summarizes the Sohu Group’s fixed assets (in thousands):
   
As of December 31,
 
   
2020
   
2021
 
Office buildings
  $392,045   $ 401,223 
Computer equipment and hardware
   132,021    123,079 
Leasehold and building improvements
   36,649    37,753 
Office furniture
   6,841    6,960 
Vehicles
   3,729    3,515 
   
 
 
   
 
 
 
Fixed assets, gross
   571,285    572,530 
Accumulated depreciation
   (233,611)
 
   (242,533)
 
   
 
 
   
 
 
 
Fixed assets, net
  $337,674   $329,997 
   
 
 
   
 
 
 
For the years ended December 31, 2021, 2020 and 2019, depreciation expenses for fixed assets were $23.5 million, $25.5 million and $28.2 million, respectively.

13. GOODWILL
Changes in the carrying value of goodwill by segment are as follows (in thousands):
   
Sohu
   
Changyou
   
Total
 
Balance as of December 31, 2019
               
Goodwill
   69,379    180,543    249,922 
Accumulated impairment losses
   (32,246)    (170,286)    (202,532) 
   
 
 
   
 
 
   
 
 
 
   $37,133   $10,257   $47,390 
   
 
 
   
 
 
   
 
 
 
Transactions in 2020
               
Foreign currency translation adjustment
   1,044    0    1,044 
   
 
 
   
 
 
   
 
 
 
Balance as of December 31, 2020
  $38,177   $10,257   $48,434 
   
 
 
   
 
 
   
 
 
 
Balance as of December 31, 2020
               
Goodwill
   70,423    180,543    250,966 
Accumulated impairment losses
   (32,246)    (170,286)    (202,532) 
   
 
 
   
 
 
   
 
 
 
   $38,177   $10,257   $48,434 
   
 
 
   
 
 
   
 
 
 
Transactions in 2021
               
Foreign currency translation adjustment
   377    0    377 
   
 
 
   
 
 
   
 
 
 
Balance as of December 31, 2021
  $38,554   $10,257   $48,811 
   
 
 
   
 
 
   
 
 
 
Balance as of December 31, 2021
               
Goodwill
   70,800    180,543    251,343 
Accumulated impairment losses
   (32,246)   (170,286)   (202,532)
   
 
 
   
 
 
   
 
 
 
   $38,554   $10,257   $48,811 
   
 
 
   
 
 
   
 
 
 
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There was one reporting unit under the Sohu segment. After Changyou ceased operation of RaidCall and the cinema advertising business, the reporting units under the Changyou segment consisted of the Changyou online game business and the 17173.com Website. The Changyou online game business was the only reporting unit with goodwill under the Changyou segment.
In the fourth quarter of 2021, the Sohu Group tested goodwill for impairment at the reporting unit level. The Group performed impairment tests using the qualitative and quantitative methods.
For the Sohu segment, management determined that a quantitative assessment was most appropriate. Impairment tests were conducted by quantitatively comparing the fair values of the reporting units to their carrying amounts. The Sohu segment estimated the fair values using the income approach and market approach. The valuation approach considers a number of factors that include expected future cash flows, revenue growth rates, discount rates, and requires Sohu to make certain assumptions and estimates regarding future profitability of the business. The market approach considers earnings multipliers based on market data of comparable companies engaged in similar business. The fair value determined using the income approach is compared with comparable market data and reconciled, as necessary. For the Changyou segment, management performed a qualitative assessment to determine whether it was more likely than not that the fair value of the reporting unit was less than its carrying amount.
As of December 31, 2021 and 2020, for the Sohu segment and Changyou segment, management concluded that the fair values of the reporting units exceeded their carrying values, indicating that the goodwill of the reporting units was not impaired.
14. INTANGIBLE ASSETS, NET
   
As of December 31, 2020
 
Items
  
Gross

Carrying

Amount
   
Accumulated

Amortization
   
Accumulated

Impairment
   
Net

Carrying

Amount
 
 
 
Purchased video content
  $212,999   $(161,160)   $(50,088)   $1,751 
Operating rights for licensed games
   51,856    (35,017)    (14,026)    2,813 
Domain names and trademarks
   27,536    (10,243)    (17,219)    74 
Computer software
   11,749    (11,545)    0    204 
Developed technologies
   8,699    (918)    (7,781)    0 
Others
   2,928    (966)    (1,962)    0 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $315,767   $(219,849)   $(91,076)   $4,842 
   
 
 
   
 
 
   
 
 
   
 
 
 
   
As of December 31, 2021
 
Items
  
Gross

Carrying

Amount
   
Accumulated

Amortization
   
Accumulated

Impairment
   
Net

Carrying

Amount
 
 
 
Purchased video content
  $138,902   $(99,961)    $(37,343)    $1,598 
Operating rights for licensed games
   60,454    (39,431)     (13,895)     7,128 
Domain names and trademarks
   26,766    (10,240)     (16,506)     20 
Computer software
   12,474    (12,084)     0    390 
Developed technologies
   8,879    (936)     (7,943)     0 
Others
   2,996    (988)     (2,008)     0 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $250,471   $(163,640)    $(77,695)  $9,136 
   
 
 
   
 
 
   
 
 
   
 
 
 
Impairment Losses
In 2021, Sohu recognized a $14,000 impairment loss related to Sohu Video’s purchased video content pursuant to the Sohu Group’s policy on impairment of overseas content. Changyou recognized a $1.7 million impairment loss related to content and game licenses, of which $0.1 million was recognized as impairment of intangible assets and $1.6 million was recognized as impairment of prepaid and other current assets.
In 2020
,
 Sohu recognized a $
1.5
 million impairment loss related to Sohu Video’s purchased video content pursuant to the Sohu Group’s policy on impairment of overseas content. Changyou recognized a $
2.7
 million impairment loss related to content and game licenses, of which $
0.8
 million was recognized as impairment of intangible assets and $
1.9
 million was recognized as impairment of prepaid and other current assets.
In 2019, Sohu recognized a $7.2 million impairment loss for a domain name related to the 56.com Website, mainly due to enhanced restrictions that Chinese regulatory authorities imposed on the broadcasting industry, which had an adverse effect on the operation of the 56.com Website. Also in 2019, Sohu recognized a $4.0 million impairment loss related to Sohu Video’s purchased video content pursuant to the Sohu Group’s policy on impairment of overseas content.
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Amortization
In 2021, 2020 and 2019, amortization of intangible assets was $12.5 million, $14.4 million and $38.8 million, respectively. As of December 31, 2021, amortization expenses for future periods are estimated to be as follows: 
For the year ended December 31,
  
(in thousands)
 
2022
   4,357 
2023
   3,761 
2024
   1,018 
2025
   0 
2026   0 
Thereafter   0 
   
 
 
 
Total expected amortization expense
  $9,136 
   
 
 
 

15. TAXATION
Income Tax
PRC Corporate 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 Group’s operations, and generate most of the Sohu Group’s income or losses. The CIT Law applies an income tax rate of 25% to all enterprises but grants preferential tax treatment to HNTEs, Software Enterprises, and KNSEs.
Principal Entities Qualifi
e
d as HNTEs
Under 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 December 31, 2021, the following principal entities of the Sohu Group were qualified as HNTEs and were entitled to an income tax rate of 15%.
For Sohu
Video Tianjin and Sohu Internet. Video Tianjin and Sohu Internet
re-applied
for HNTE qualification and received approval in October 2021 and December 2021, respectively. Video Tianjin and Sohu Internet are entitled to continue to enjoy the beneficial tax rate qualified as HNTEs for the years 2021 through 2023, and will need to
re-apply
for HNTE qualification in 2024.
Sohu Media and Guangzhou Qianjun. Sohu Media and Guangzhou Qianjun qualified as HNTEs for the years 2020 through 2022, and will need to
re-apply
for HNTE qualification in 2023.
Sohu New Momentum. Sohu New Momentum qualified as an HNTE for the years 2019 through 2021, and will need to
re-apply
for HNTE qualification in 2022.
For Changyou
Gamease and AmazGame. Gamease and AmazGame qualified as HNTEs for the years 2020 through 2022, and will need to
re-apply
for HNTE qualification in 2023.
Gamespace and Changyou Chuangxiang. Gamespace and Changyou Chuangxiang qualified as HNTEs for the years 2019 through 2021, and will need to
re-apply
for HNTE qualification in 2022.
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Principal Entities Qualified as Software Enterprises
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
. Enterprises wishing to enjoy the status of a Software Enterprise must perform a self-assessment each year to ensure they meet the criteria for qualification and file required supporting documents with
the Ministry of Industry and Information Technology of the PRC and the relevant tax authorities before using the preferential CIT rates. These enterprises will be subject to the relevant governmental authorities’ assessment each year as to whether they are entitled to use the relevant preferential CIT treatments. If at any time during the preferential tax treatment years an enterprise uses the preferential CIT rates but the relevant authorities determine that it fails to meet applicable criteria for qualification, the relevant authorities may revoke the enterprise’s Software Enterprise status.
For Changyou
Changyou Chuangxiang. In 2021, Changyou Chuangxiang completed a self-assessment and filed required supporting documents for Software Enterprise status for 2020. Also in 2021, Changyou Chuangxiang qualified as a Software Enterprise after the relevant government authorities’ assessment and became entitled to a preferential income tax rate of 12.5% for 2020. Changyou Chuangxiang plans to follow the appropriate rules and procedures of the relevant government authorities in order to maintain its Software Enterprise status for 2021, the last year of a five-year period of qualification for Changyou Chuangxiang as a Software Enterprise.
U.S. Corporate Income Tax
Sohu.com Inc., which was formerly the
top-tier
publicly-traded parent company of the Sohu Group, was dissolved and liquidated on May 31, 2018. Sohu.com Inc. was a Delaware corporation that was subject to U.S. federal corporate income tax on its taxable income at a rate of 21% for taxable years beginning after December 31, 2017 and of up to 35% for prior tax years. U.S. federal tax legislation signed into law on December 22, 2017, commonly referred to as the Tax Cuts and Jobs Act (the “U.S. TCJA”), significantly modified the U.S. Internal Revenue Code by, among other things, reducing the maximum statutory U.S. federal corporate income tax rate from 35% to 21% for taxable years beginning after December 31, 2017; limiting and/or eliminating many business deductions; migrating the U.S. to a partial territorial tax system with a
one-time
Toll Charge on a mandatory deemed repatriation of previously deferred foreign earnings of certain foreign subsidiaries; subject to certain limitations, generally eliminating U.S. corporate income tax on dividends from foreign subsidiaries; and providing for new taxes on certain foreign earnings.
Certain activities conducted in the PRC resulted in U.S. corporate income taxes being imposed on Sohu.com Inc. when its subsidiaries that were controlled foreign corporations (“CFCs”) generated income that was 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 the company’s investments, was among the types of income that were subject to taxation under Subpart F. Any income taxable under Subpart F was taxable in the U.S. at the applicable federal corporate income tax rate. Subpart F income also included certain income from intra-Group transactions between Sohu.com Inc.’s non-U.S. subsidiaries and VIEs and Changyou’s non-U.S. subsidiaries and VIEs or Sogou’s non-U.S. subsidiaries and VIEs, or where Sohu.com Inc.’s non-U.S. subsidiaries or VIEs made 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. did not have to treat dividends received by its CFC subsidiaries as Subpart F income includible in Sohu.com Inc.’s taxable income in the U.S. 
To the extent that portions of Sohu.com Inc.’s U.S. taxable income, such as Subpart F income or GILTI, as applicable, had been determined to be from sources outside of the U.S., subject to certain limitations, Sohu.com Inc. may have been entitled to claim foreign tax credits to offset its U.S. income tax liabilities. Following the enactment of the U.S. TCJA, if dividends that Sohu.com Inc. received from its subsidiaries after January 1, 2018 were determined to be from sources outside of the U.S., subject to certain limitations, Sohu.com Inc. would generally not have been required to pay U.S. corporate income tax on those dividends. Liabilities for U.S. corporate income tax were accrued in the Company’s consolidated statements of comprehensive income and estimated tax payments were made when required by U.S. law.
Treatment of Toll Charge Related to the U.S. TCJA
Beginning in the fourth quarter of 2017, the Sohu Group had recognized a provisional amount of income tax expense for the Toll Charge of $219 million, which represented management’s estimate of the amount of the Toll Charge that would have been payable by Sohu.com Inc. based on the deemed repatriation to the United States of its share of previously deferred earnings of certain of its
non-U.S.
subsidiaries, offset by a reduction of $4 million in liability for deferred U.S. income tax, as a result of the U.S. TCJA. The Sohu Group included the provisional amount of the Toll Charge of $219 million in its interim financial statements through the quarter ended September 30, 2018, in reliance on SAB 118.
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For the fourth quarter of 2018, the Sohu Group’s management
re-evaluated
the impact on the Sohu Group of the Toll Charge under the U.S. TCJA. Management determined that it was more likely than not, based on the technical merits, that the tax position that the Sohu Group had no Toll Charge liability would be sustained. The Group recognized a tax benefit in the amount of $77 million, which was the largest amount that management determined to be greater than 50% likely to be realized upon settlement with the U.S. IRS. As a result, as of December 31, 2018, the Sohu Group had an unrecognized tax benefit in the amount of $142 million, which represented the difference between the tax benefit recognized in the fourth quarter of 2018 and management’s previous estimate of the Toll Charge. The estimate remained unchanged as of December 31, 2021. In addition, the Sohu Group accrued $6 million and $5 million, respectively, in interest on the unrecognized tax benefit for the years of 2020 and 2021.
The tax benefit recognized and the unrecognized tax benefit in relation to the Toll Charge may be subject to further adjustment in subsequent periods based on facts and circumstances that arose after December 31, 2021, such as any IRS assessments upon audit and management’s further judgment and estimates.

Cayman Island Tax
Under the current tax laws of the Cayman Islands, the Group is not subject to tax on its income or capital gains. In addition, no

Cayman Islands withholding tax will be imposed upon the payment of dividends by the Group to its shareholders.
Hong Kong Tax
The Group’s subsidiaries incorporated in Hong Kong are subject to profits tax in Hong Kong at the rate of 16.5% for each of the years ended December 31, 2019, 2020 and 2021
.
Composition of Income Tax Expense
Sohu.com Inc., which was the former
top-tier
entity of the Sohu Group, was a Delaware corporation that was subject to United States income tax. On May 31, 2018, Sohu.com Inc. was dissolved and liquidated and Sohu.com Limited became the
top-tier
entity of the Sohu Group. Sohu.com Limited is not subject to income or capital gains tax under the current laws of the Cayman Islands. There are no other taxes likely to be material to Sohu.com Limited levied by the government of the Cayman Islands.
The components of income before income
taxes are as follows (in thousands):
   
Year ended December 31,
 
   
2019
   
2020
   
2021
 
             
Income/(loss) before income tax expense
               
Income/(loss) from China operations
  $(89,150)   $154,514   $153,708 
Income/(loss) from
non-China
operations
   19,079    (57,815)    (22,141)
   
 
 
   
 
 
   
 
 
 
Total income/(loss) before income tax expense from continuing operations
  $(70,071)   $96,699   $131,567 
   
 
 
   
 
 
   
 
 
 
Income tax expense applicable to China operations
               
Current tax
  $9,026   $24,255   $31,089 
Deferred tax
   11,191    102,652    26,207 
   
 
 
   
 
 
   
 
 
 
Subtotal income tax expense applicable to China operations
   20,217    126,907    57,296 
Non-China
income tax expense
   7,887    6,207    4,817 
Non-China
withholding tax expense
   324    112    183 
   
 
 
   
 
 
   
 
 
 
Total income tax expense from continuing operations

  $28,428   $133,226   $62,296 
   
 
 
   
 
 
   
 
 
 
In 2021, of the $62.3 million total income tax expense, $57.3 million was from PRC tax, resulting primarily from accrued regular income tax expense of $48.4 million, and $5 million was for U.S. corporate income tax, resulting primarily from accrued interest on an unrecognized tax benefit.
In 2020, of the $133.2 million total income tax expense, $126.9 million was for PRC tax, resulting primarily from accrued regular income tax expense of $40.7 million and additional income withholding tax of $88 million recognized by Changyou due to a revised policy with respect to Changyou’s PRC subsidiaries regarding their distribution of cash dividends, offset by a reversal of PRC income tax expense of $6.9 million by Changyou due to preferential tax rates that Changyou’s subsidiaries were entitled to as KNSEs; and $6 million was for U.S. corporate income tax, resulting primarily from accrued interest on an unrecognized tax benefit.

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In
2019
, of the $
28.4
 million total income tax expense, $
20.2
 million was for PRC tax, resulting primarily from accrued regular income tax expense of $
32.6
 million, offset by a reversal of PRC income tax expense of $
19.5
 million by Changyou due to preferential tax rates that Changyou’s subsidiaries were entitled to as KNSE and Software enterprises, and $
8
 million was for U.S. corporate income tax, resulting primarily from accrued interest on an unrecognized tax benefit.
The combined effects of the income tax exemption and reduction
available to the Group are as follows (in thousands, except per share data):
   
Year Ended December 31,
 
   
2019
   
2020
   
2021
 
             
Tax holiday effect
  $7,981   $16,174   $1,635 
Basic net income per share effect
   0.20    0.41    0.04 
Effective Tax Rate
The
CIT Law applies an income tax rate of 25% to all enterprises, but grants preferential tax treatment to HNTEs, Software Enterprises, and KNSEs.
The U.S. TCJA significantly modified the U.S. Internal Revenue Code by, among other things, reducing the statutory U.S. federal corporate income tax rate from 35% to 21% for taxable years beginning after December 31, 2017; limiting and/or eliminating many business deductions; migrating the U.S. to a territorial tax system with a
one-time
Toll Charge on a mandatory deemed repatriation of previously deferred foreign earnings of certain foreign subsidiaries; subject to certain limitations, generally eliminating U.S. corporate income tax on dividends from foreign subsidiaries; and providing for new taxes on certain foreign earnings.
The following is reconciliation between the statutory rate and the Group’s effective tax rate. For 2019, 2020 and 2021, the statutory rate represented the PRC statutory rate of 25%. The table does not reflect any accruals related to the Toll Charge. See “
U.S. Corporate Income Tax
” and “
Treatment of Toll Charge Related to the U.S. TCJA.
”
   
Year Ended December 31,
 
   
2019
  
2020
  
2021
 
           
           
Statutory Rate:
   25%    25%    25%
Effect of tax holidays applicable to subsidiaries and consolidated VIEs (1)
   11%    (17%)    (1%)
Tax differential from statutory rate applicable to subsidiaries and consolidated VIEs
   7%    9%    3%
Effect of withholding taxes (2)
   (12%)    109%    19%
Changes in valuation allowance for deferred tax assets
   (71%)    27%    31%
Research and development super-deduction
   12%    (9%)    (19%)
Others
   (1%)    (13%)    (14%)
   
 
 
   
 
 
   
 
 
 
   (29%)   131%   44%
   
 
 
   
 
 
   
 
 
 
Note (1): The reversal of income tax for preferential income tax rates that Changyou’s subsidiaries and VIEs were entitled to as KNSEs or Software Enterprises for 2019, 2020 and 2021 was included in the “Effect of tax holidays applicable to subsidiaries and consolidated VIEs” in the above table.
Note (2): The
revised policy was adopted to facilitate the distribution of a special cash dividend in the aggregate amount of approximately $500.0 
million that was declared by Changyou’s board of directors (the “Changyou Board”) on April 5, 2018. The change for 2020 was mainly due to additional income withholding tax
of $88 million that was recognized in the second quarter of 2020 due to a revised policy with respect to Changyou’s PRC subsidiaries regarding their distribution of cash dividends.
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,” 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%.
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Before 2018, in order to fund the distribution of a dividend to shareholders of the Sohu Group’s majority-owned subsidiary Changyou, Changyou’s 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 HK, and adopted as a policy for such subsequent years for its PRC subsidiaries a limit on payment of dividends to their direct overseas parent companies of one-half of such PRC subsidiaries’ earnings. In 2018, in order to facilitate the distribution of a special cash dividend of
 $500.0 
million declared by the Changyou Board on April 5, 2018, Changyou revised its policy for its PRC subsidiaries with respect to their distribution of cash dividends. Under the revised policy, all of Changyou’s PRC subsidiaries (not including Changyou’s VIEs and their subsidiaries) will be able to distribute their cumulative available and undistributed earnings to their direct overseas parent companies in future periods. The change resulted in Changyou’s accrual of additional withholding income taxes of approximately
 $47 
million for the period before December 31, 2017, which was recognized in the Sohu Group’s consolidated financial statements for the quarter ended March 31, 2018. As of December 31, 2019, the Sohu Group had accrued deferred tax liabilities related to Changyou in the amount of
 $86.8 
million for PRC withholding tax. In 2020, after the completion of Changyou Merger, Changyou’s net income/(loss) is wholly attributable to Sohu. Changyou changed its policy for its PRC subsidiaries with respect to their distribution of cash dividends. The change resulted in Changyou’s accrual of additional withholding income taxes of approximately
 $88 
million, which was recognized in the Sohu Group’s consolidated financial statements for the quarter ended June 30, 2020. As of December 31, 2021, the Sohu Group had accrued deferred tax liabilities related to Changyou in the amount of
 $237.1 million for PRC withholding tax.
With the exception of that dividend, the Sohu Group does not intend to have any of its PRC subsidiaries or VIEs distribute any undistributed profits of such subsidiaries or VIEs to their direct overseas parent companies, but rather intends that such profits will be permanently reinvested by such subsidiaries and VIEs for their PRC operations. As of December 31, 2021, the total amount of undistributed profits from the PRC subsidiaries and VIEs for which no withholding tax had been accrued was $484.9 million, and the unrecognized tax liabilities were $48.5 million.
Uncertain Tax Positions
The Sohu Group is subject to various taxes in different jurisdictions, but primarily the PRC. Management reviews regularly the adequacy of the provisions for taxes as they relate to the Group’s 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.
Net Income/(Loss) per Share
Basic net income/(loss) per share is computed using the weighted average number of ordinary shares outstanding during the period. Diluted net income/(loss) per share is computed using the weighted average number of ordinary shares and, if dilutive, potential ordinary shares outstanding during the period. Potential ordinary shares 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 calculated as discussed below. The adjustment will not be made if there is an anti-dilutive effect.
Changyou’s net income/(loss) attributable to Sohu
Prior to the completion of the Changyou Merger on April 17, 2020, Changyou’s net income/(loss) attributable to Sohu was determined using the percentage that the weighted average number of Changyou shares held by Sohu represented 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 of the total economic interest in Changyou, which was used for the calculation of basic net income per share. After the completion of the Changyou Merger, Sohu holds 100% of the combined total of Changyou’s outstanding ordinary shares, so Changyou’s net income/(loss) is wholly attributable to Sohu.
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As a result of the Changyou Plans’ Modification, a portion of the share options previously granted under the Changyou 2014 Share Incentive Plan that became vested after the completion of the Changyou Merger were settled by Changyou at a fixed price of $5.39 per Changyou Class A ordinary share, which equals the Changyou Merger consideration of $5.40 per Changyou Class A ordinary share minus the
per-share
exercise price of $0.01 of such options. None of the remaining share options granted under the Changyou 2014 Share Incentive Plan that became vested after the completion of the Changyou Merger or that become vested in the future, and none of the share options granted under the Changyou 2019 Share Incentive Plan, will be exercisable, but can only be repurchased by Changyou at a fixed price of $5.39 per Changyou Class A ordinary share underlying such vested share options upon termination of the option holders’ employment or upon approval of the Chairman of the Sohu Board. As a result of the Changyou Plans’ Modification, share-based compensation expense will be accrued over the service period based on the fixed price of $5.39 per Changyou Class A ordinary share. No subsequent fair value
re-measurement
will be made, given that the award is an obligation based on a fixed amount of $5.39 per Changyou Class A ordinary share.

In the calculation of Sohu’s diluted net income/(loss) per share, before the Sohu Board’s approval of the Changyou Plans’ Modification, a dilutive effect should be assumed. All of Changyou’s existing unvested restricted share units and share options, and vested restricted share units and share options that have not yet been settled or exercised, 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 in Changyou to decrease. As a result, Changyou’s net income/(loss) attributable to Sohu 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’s diluted net income/(loss) per share. As a result, Changyou’s net income/(loss) attributable to Sohu on a diluted basis equals the number used for the calculation of Sohu’s basic net income/(loss) per share.
After the Changyou Plans’ Modification, all of Changyou’s previously granted share-based awards were reclassified as obligation-based awards. Accordingly, all of those Changyou awards are excluded from the calculation of Sohu’s diluted net income/(loss) per share. Changyou’s net income/(loss) attributable to Sohu on a diluted basis equals the number used for the calculation of Sohu’s basis net income/(loss) per share. There have been no dilutive effects resulting from Changyou’s existing unvested share options.
Sogou’s net income/(loss) attributable to Sohu (Discontinued)
Prior to the completion of the Tencent/Sohu Sogou Share Purchase on September 23, 2021, Sogou’s net income/(loss) attributable to Sohu was determined using the percentage that the weighted average number of Sogou shares held by Sohu represented of the weighted average number of Sogou 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 of the total economic interest in Sogou, which is used for the calculation of basic net income per share. Sogou’s net income/(loss) attributable to Sohu is reflected as discontinued operations in the Sohu Group’s consolidated statements of comprehensive income.
In the calculation of Sohu’s diluted net income/(loss) per share, assuming a dilutive effect, the percentage of Sohu’s shareholding in Sogou was calculated by treating unvested Sogou share options where the performance targets had been 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’s diluted income/(loss) per share. As a result, Sogou’s net income/(loss) attributable to Sohu on a diluted basis equals the number used for the calculation of Sohu’s basic net income/(loss) per share. As a result of the completion of the Tencent/Sohu Sogou Share Purchase, Sohu no longer has any ownership interest in Sogou and Sogou is not included in Sohu’s consolidated financial statements.
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.
The Sohu Group’s financial instruments consist primarily of cash equivalents, restricted cash, short-term investments, accounts receivable, other current assets, long-term investments, long-term time deposits, restricted time deposits, accounts payable, accrued liabilities, short-term bank loans, other short-term liabilities, long-term bank loans, and long-term other payables.

F-25
Table of Contents
Cash Equivalents
The Sohu Group’s 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.
Restricted Cash and Restricted Time Deposits
Restricted cash and restricted time deposits are valued based on the prevailing interest rates in the market using the discounted cash flow method. See Note 10 - Fair Value Measurements.
Short-term Investments
The Sohu Group’s short-term investments mainly consist of investments in financial instruments with a variable interest rate and time deposits with maturities of three months to one year. For investments in financial instruments with a variable interest rate indexed to the performance of underlying assets and time deposits, the Sohu Group 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 for credit losses that reflects the Sohu Group’s best estimate of the amounts that will not be collected. The Group makes estimations of the collectability of accounts receivable. Many factors are considered in estimating the general allowance, including reviewing delinquent accounts receivable, performing a customer credit analysis, and analyzing historical bad debt records and current and future economic trends.
Accounts receivable represent historical balances recorded less related cash applications, less allowance for credit losses and any write-offs of any receivables not previously provided for.
Allowance for credit losses
Effective on January 1, 2020, the Sohu Group adopted Accounting Standards Update (ASU)
2016-13,
“Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU
2016-13”)
under a modified retrospective transition. This guidance replaces the existing “incurred loss” methodology, and introduces an expected loss approach using macroeconomic forecasts, referred to as a current expected credit losses (“CECL”) methodology. Under the incurred loss methodology, credit losses are only recognized when the losses are probable of having been incurred. The CECL methodology requires that the full amount of expected credit losses for the lifetime of the financial instrument be recorded at the time it is originated or acquired, considering relevant historical experience, current conditions and reasonable and supportable macroeconomic forecasts that affect the collectability of financial assets, and adjusted for changes in expected lifetime credit losses subsequently, which may require earlier recognition of credit losses.
The Sohu Group adopted ASU
2016-13
using the modified retrospective transition approach and recognized a cumulative-effect adjustment of approximately $6.7 million to the opening balance of accumulated deficit in the consolidated financial statements, including an increase of approximately $3.4 million in the allowance for credit losses of accounts receivable, and an increase of approximately $3.3 million in the allowance for credit losses of accounts receivable and financing receivables classified as assets held for sale. Results for reporting periods beginning after January 1, 2020 are presented using the CECL methodology while comparative information continues to be reported in accordance with the incurred loss methodology in effect for prior periods.
The allowance for credit losses reflects the Sohu Group’s estimated expected losses. The Sohu Group estimates the allowance for credit losses, mainly based on past collection experience as well as consideration of current and future economic conditions and changes in the Sohu Group’s collection trends. The Sohu Group estimates the expected credit losses for accounts receivable with similar risk characteristics on a pool basis. For each pool, the Sohu Group first estimates its recovery period based on relevant historical accounts receivable collection information. Then the Sohu Group estimates the credit allowances based on the recovery period, the historical distribution of each aging bucket, and the impact of macroeconomic factors.
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Table of Contents
Accounts receivable are written off when there is no reasonable expectation of recovery. Subsequent recoveries of amounts previously written off are credited against the same line item.
Accounts receivable, net, as of December 31, 2020 and 2021 consisted of the following (in thousands):
   
As of December 31,
 
   
2020
   
2021
 
Accounts receivable, net
          
Accounts receivable
  $94,528   $94,908 
Less: Allowance for credit losses
   (7,007)    (12,358) 
   
 
 
   
 
 
 
   $87,521   $82,550 
The following table presents the aging analysis of accounts receivable as of December 31, 2020 and 2021
(in thousands):
   
As of December 31,
 
   
2020
   
2021
 
Less than 179 days
  $78,805   $79,155 
180-359
days
   7,569    7,437 
360 days and greater
   8,154    8,316 
   
 
 
      
Total
   94,528    94,908 
The movement of allowance for credit losses for the years ended December 31, 2019, 2020 and 2021 was as follows (in thousands):
   
For the year ended December 31,
 
   
2019
   
2020
   
2021
 
Balance at the beginning of year
  $7,574   $3,956   $7,007 
Changes on initial application of ASU
2016-13
(1)
   0    3,383    0 
Additional allowance for credit losses, net of recoveries
   4,724    2,419    6,292 
Write-offs
   (8,237)    (3,231)    (1,155) 
Exchange difference
   (105)    480    214 
   
 
 
   
 
 
   
 
 
 
Balance at the end of year
   3,956    7,007    12,358 
Note (1): The Company adopted ASU
2016-13
using the modified retrospective transition approach. The adjustments arising from the new CECL model are recognized in the opening Consolidated Balance Sheet on January 1, 2020.
Equity Investments
Investments in entities are recorded as equity investments under long-term investments. For investments in common stock or
in-substance
common stock of entities over which the Group can exercise significant influence but does not own a majority equity interest or control, the equity method is applied, and the Group adjusts the carrying amount of an investment and recognizes investment income or loss for the Group’s share of the earnings or loss of the investee after the date of investment. For those equity investments accounted for other than under the equity method, the fair value method is applied. However, for equity investments that do not have readily determinable fair values, the Group chooses to account for them at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. If this measurement alternative is elected, changes in the carrying value of the equity investments will be required to be made whenever there are observable price changes in transactions for identical or similar investments of the same issuer. The implementation guidance notes that an entity should make a “reasonable effort” to identify price changes that are known or that can reasonably be known.
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Table of Contents
The Group assesses investments for impairment by considering factors including, but not limited to, current economic and market conditions, operating performance of the companies, including current earnings trends and undiscounted cash flows, and other company-specific information, such as recent financing rounds. The fair value determination, particularly for investments in privately-held companies whose revenue model is still unclear, requires significant judgment to determine appropriate estimates and assumptions. Changes in these estimates and assumptions could affect the calculation of the fair value of the investments. If the assessment indicates that an impairment exists, the Group estimates the fair value of the investment and writes down the asset to its fair value, taking the corresponding charge to the consolidated statements of comprehensive income/(loss).​​​​​​​​​​​​​​
Long-term Time Deposits
The Sohu Group elected the fair value method at the date of initial recognition of time deposits with maturities over one year and carried these investments subsequently at fair value. Changes in fair values are reflected in the consolidated statements of comprehensive income.
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 0 residual value. Depreciation is computed using the straight-line method over the estimated useful lives of the assets.
Fixed Assets
Estimated Useful Lives (years)
Office buildings
36-47
Leasehold improvementsLesser of term of the lease or the estimated useful lives of the assets
Vehicles
4
Office furniture5
Computer equipment and hardware4-5
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 sale proceeds and the carrying value of the relevant assets and is recognized in operating expenses in the consolidated statements of comprehensive income.
Intangible Assets
Intangible assets mainly comprise purchased video content, operating rights for licensed games, domain names and trademarks, computer software, and developed technologies. Intangible assets are recorded at cost less accumulated amortization with 0 residual value. Amortization of intangible assets other than purchased video content is computed using the straight-line method over their estimated useful lives. Amortization of purchased video content is computed based on the trend in viewership accumulation over the shorter of the applicable license period or two years.
The estimated useful lives of the Group’s intangible assets are listed below:
Intangible Assets
Estimated Useful Lives (years)
Purchased video content1 month to 2 years
Computer software1-5
Developed technologies3-10
Domain names and trademarks4-30
Operating rights for licensed gamesover the contract terms
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. The Sohu Group records 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.
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Table of Contents
Impairment of
Long-lived Assets Other Than Purchased Video Content
In accordance with ASC
360-10-35,
the Sohu Group reviews 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. The evaluation is performed at the lowest level of identifiable cash flows independent of other assets. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If such review indicates that the carrying amount of the long-lived assets is not recoverable, the carrying amount of such assets is reduced to fair value. The estimation of future cash flows requires significant management judgment based on the Group’s historical results and anticipated results and is subject to many factors. The discount rate that is commensurate with the risk inherent in the Group’s business model is determined by its management.
Impairment of Purchased Video Content
Purchased video content is stated at the lower of cost less accumulated amortization, or fair value.
In accordance with ASC
920-350-35,
if management’s expectations of the programming usefulness of a program, series, package, or program segment are revised downward, it may be necessary to write off to the income statement the amount by which the unamortized capitalized costs exceed fair value. A write-off from unamortized cost to fair value establishes a new cost basis. Accordingly, the Group measures the video content’s impairment loss by comparing the content’s carrying value to its fair value. An impairment loss will be recorded if the carrying value of video content is higher than its fair value. The impairment to be recognized is measured by the amount by which the carrying value of video content exceeds its fair value.
Lease
The Sohu Group adopted ASU
No. 2016-02,
Leases (Topic 842), at the beginning of the first quarter of 2019 using the modified retrospective method, and did not restate comparable periods.
The Sohu Group elected the package of practical expedients permitted under the transition guidance, which allowed the Sohu Group to carry forward the historical lease classification, the assessment on whether an existing or expired contract contains a lease, and the treatment of initial direct costs. The Sohu Group also elected to keep leases with an initial term of 12 months or less off the balance sheet.

Under the new lease guidance, the Sohu Group determines if an arrangement is or contains a lease at inception.
Right-of-use
assets and lease liabilities are recognized at the lease commencement date based on the present value of remaining lease payments over the lease terms. Certain lease agreements may contain an option to renew a lease for a term agreed to by the Sohu Group and the lessor, or an option to terminate a lease earlier than the expiration date. The Sohu Group considers these options in determining the lease term on a lease-by-lease basis.
The Sohu Group only considers payments that are fixed and determinable at the time of lease commencement. The adoption of the new lease guidance resulted in recognition of $7.4 million of
right-of-use
assets, $
6.7
m
illion of lease liabilities, $
17.9
 million of
right-of-use
assets on assets held
for
sale, and $
16.2
 million of lease liabilities on liabilities held for sale as of
January 
1, 2019.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the identifiable assets and liabilities acquired as a result of the Sohu Group’s acquisitions of interests in its 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, the Group reports in its financial statements provisional amounts for the items for which the accounting is incomplete. If a measurement period adjustment is identified, the Group recognizes the adjustment as part of the acquisition accounting. The Sohu Group increases or decreases the provisional amounts of identifiable assets or liabilities by means of increases or decreases in goodwill for measurement period adjustments.
In accordance with ASC 350, the Group does not amortize goodwill, but tests it for impairment. The Group tests 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. The Group adopted ASU
No. 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, and in accordance with the FASB, pursuant to which the Group has the option to choose whether it 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, the Group starts 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 the reporting unit with its carrying value, including goodwill. If the carrying value of each reporting unit, including goodwill, exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, but limited to the total amount of goodwill allocated to that reporting unit. For the Sohu segment, management determined that a quantitative assessment was most appropriate. For the Changyou segment, management performed a qualitative assessment to determine whether it was more likely than not that the fair value of the reporting unit was less than its carrying amount.
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Table of Contents
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. The Group estimates fair value using the income approach and the market approach. The fair value determined using the income approach is compared with comparable market data and reconciled, as necessary. The judgment in estimating the fair value of reporting units includes revenue growth rates and profitability in estimating future cash flows; determining appropriate discount rates and earnings multipliers based on market data of comparable companies engaged in a similar business under the market approach; and making other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit.​​​​​​​
Treasury Stock
Treasury stock consists of the Company’s ordinary shares, including ordinary shares represented by ADSs, repurchased by the Company or that it is obligated to repurchase as of the reporting date. Ordinary shares included in treasury stock are no longer deemed to be outstanding. Treasury stock is accounted for under the cost method.
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 the Sohu Group’s consolidated balance sheets, consists of the Sohu Group’s cumulative foreign currency translation adjustment.
Functional Currency and Foreign Currency Translation
An entity’s functional currency is the currency of the primary economic environment in which it operates, normally that is the currency of the environment in which the entity primarily generates and expends cash. Management’s judgment is essential to determine the functional currency by assessing various indicators, such as cash flows, sales price and market, expenses, financing and intra-Group transactions and arrangements. The functional currency of Sohu.com Limited, and its predecessor Sohu.com Inc., is the U.S. dollar. The functional currency of the Sohu Group’s subsidiaries in the U.S., the Cayman Islands, the British Virgin Islands and Hong Kong is the U.S. dollar. The functional currencies of the Sohu Group’s 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 period’s 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.
Impact of Recently Issued Accounting Pronouncements
Simplifying the accounting for income taxes (Topic 740).
In December 2019, the FASB issued ASU
No. 2019-12,
I
ncome Taxes (Topic 740)-Simplifying the Accounting for Income Taxes
. ASU
No. 2019-12
removes certain exceptions to the general principles in Topic 740 and provides for consistent application of and simplifies generally accepted accounting principles for other areas of Topic 740 by clarifying and amending existing guidance. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The method of adoption varies depending on the component of the new rule that is being adopted. Early application is permitted. The adoption of this standard did not have a material impact on the Sohu Group’s consolidated financial statements.
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Investments-Equity securities (Topic 321), Investments-Equity method and joint ventures (Topic 323), and Derivatives and hedging (Topic 815)-Clarifying the interactions between Topic 321, Topic 323, and Topic 815.
In January 2020, the FASB issued ASU
No. 2020-01,
Investments-Equity securities (Topic 321), Investments-Equity method and joint ventures (Topic 323), and Derivatives and hedging (Topic 815)-Clarifying the interactions between Topic 321, Topic 323, and Topic 815
. The amendments clarify the interaction of the accounting for equity investments under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The adoption of this standard did not have a material impact on the Sohu Group’s consolidated financial statements.
Other accounting standards that the Sohu Group adopted beginning January 1, 2021 did not have a significant impact on the Sohu Group’s consolidated financial statements.
3
. DISCONTINUED OPERATIONS
Discontinued Operation of Sogou
Between Sohu’s entry into the Tencent/Sohu Sogou Share Purchase Agreement on September 29, 2020 and the completion of the Tencent/Sohu Sogou Share Purchase on September 23, 2021, Sogou met the criteria for discontinued operations. Accordingly, the results of operations for Sogou’s business prior to the completion of the Tencent/Sohu Sogou Share Purchase are excluded from Sohu’s results from continuing operations in the Sogou Group’s consolidated statements of comprehensive income and are presented in separate line items as discontinued operations. Retrospective adjustments to the historical statements have been made in order to provide a consistent basis of comparison. Additionally, as of December 31, 2020, the related assets and liabilities associated with the discontinued operations with respect to Sogou were classified as assets held for sale and liabilities held for sale associated with discontinued operations in the consolidated balance sheets to provide comparable financial information. Long-lived assets have not been depreciated or amortized after they were classified as held for sale. As a result, for the year ended December 31, 2020 and the period ended September 23, 2021, depreciation and amortization expenses of $17.0 million and $46.7 million were not recognized for long-lived assets accordingly. On September 23, 2021, the Tencent/Sohu Sogou Share Purchase and the Sogou Merger were completed, and Sohu recognized gain of approximately
 
$855 
million, net of transaction and other costs, which is included in income from discontinued operations. After September 23, 2021, Sohu no longer had any ownership interest in Sogou.
The following tables set forth the assets, liabilities, results of operations and cash flows of discontinued operations with respect to Sogou, that were included in the Sohu Group’s consolidated financial statements
(in thousands):
   
As of December 31,
2020
 
ASSETS
     
Cash and cash equivalents
  $287,185 
Restricted cash
   23,018 
Short-term investments
   774,618 
Account and financing receivables, net
   73,656 
Prepaid and other current assets
   28,946 
Long-term investments, net
   74,004 
Fixed assets, net
   89,089 
Goodwill
   6,527 
Intangible assets, net
   1,446 
Other assets
   53,679 
   
 
 
 
Total assets associated with discontinued operations
  
$
1,412,168
 
   
 
 
 
LIABILITIES
     
Accounts payable
  $122,695 
Accrued liabilities
   68,582 
Receipts in advance
   64,414 
Accrued salary and benefits
   25,350 
Taxes payable
   64,082 
Other short-term liabilities
   61,154 
Long-term liabilities
   10,721 
   
 
 
 
Total liabilities associated with discontinued operations
  
$
416,998
 
   
 
 
 
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Year Ended December 31,
 
   
2019
   
2020
   
2021
(1)
 
Revenues
  $1,172,252   $924,664   $407,607 
Cost of revenues
   738,454    722,614    274,408 
Gross profit
   433,798    202,050    133,199 
Operating expenses:
               
Research and development (2)   190,402    193,376    141,506 
Sales and marketing (2)   138,291    102,523    53,481 
General and administrative (2)   40,670    29,271    11,854 
Total operating expenses
   369,363    325,170    206,841 
Operating profit/(loss)   64,435    (123,120)    (73,642) 
Interest income
   4,443    2,807    2,377 
Interest expense   0    0    (761) 
Foreign currency exchange gain/(loss)
   1,849    (7,767)    (848) 
Other income, net   21,127    38,633    81,655 
Income/(loss) from discontinued operations before income tax expense   91,854    (89,447)    8,781 
Income tax expense/(benefit)   2,748    2,346    (1,112)
Results of operations from discontinued operations, net of tax
  
 
89,106
 
  
 
(91,793
) 
  
 
9,893
 
Gain on disposal of discontinued operations
   0    0    855,009 
   
 
 
   
 
 
   
 
 
 
Net income/(loss) from discontinued operations, net of tax
  
 
89,106
 
  
 
(91,793
) 
  
 
864,902
 
   
 
 
   
 
 
   
 
 
 
Effective Tax Rate
   
Year Ended December 31,
 
   
2019
  
2020
  
2021
(1)(3)
 
Statutory Rate:
   25%   25%   25% 
Effect of tax holidays applicable to subsidiaries and consolidated VIEs
   (2%)   (18%)   127% 
Tax differential from statutory rate applicable to subsidiaries and consolidated VIEs
   3%   (3%)   (90%) 
Changes in valuation allowance for deferred tax assets
   7%   (43%)   349% 
Research and development super-deduction and other permanent book-tax differences
   (25%)   35%   (249%) 
Capital gains from equity investments
   (5%)   1%   (175%) 
   
 
 
  
 
 
  
 
 
 
    3%   (3%)   (13%) 
   
 
 
  
 
 
  
 
 
 
   
Year Ended December 31,
 
   
2019
   
2020
   
2021
(1)
 
Net cash provided by/(used in) discontinued operating activities
  $219,516   $(68,187)   $(175,888)
 
Net cash provided by/(used in) discontinued investing activities
   (217,598)    235,374    1,054,148 
Net cash used in discontinued financing activities
   (33,415)    (8,209)    (9,132)
Note
(1): Includes the financial results of the discontinued operations from January 1, 2021 to September 23, 2021.
Note (2): Expenses generated from marketing services between the Sohu Group and Sogou Group, and leasing expenses generated from a building that Sohu leases to Sogou are not eliminated because those expenses are considered to continue after the disposal of the discontinued operations.
Note (3): The changes in the effective tax rate for the period ended September 23, 2021 resulted from the lower income from discontinued operations before income tax expense.
Discontinued Operation of Shanghai Jingmao
In May 2010, Changyou acquired 50% of the equity interests in Shanghai Jingmao Culture Communication Co., Ltd. (“Shanghai Jingmao”) and an affiliate of Shanghai Jingmao, which were primarily engaged in the cinema advertising business. In January 2011, Changyou acquired the remaining 50% of the equity interests in Shanghai Jingmao and its affiliate for total consideration of approximately $3.0 million. In the fourth quarter of 2011, a full impairment loss of $5.2 million on goodwill was recognized for the cinema advertising business.
In
 the second quarter of 2019, after assessing the collectability of the assets of the cinema advertising business, including receivables and prepayments, Changyou recognized a $17.0 million asset impairment charge for the cinema advertising
business.
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Changyou ceased
operating the cinema advertising business and wound down the business in
August 2019
as a result of a Chinese court in Shanghai having granted a petition by Shanghai Jingmao for bankruptcy relief on August 
12
,
2019
. Accordingly, the results of operations for Changyou’s cinema advertising business have been excluded from Changyou’s results from continuing operations in the consolidated statements of comprehensive income and are presented in separate line items as discontinued operations. Retrospective adjustments to the historical statements have been made in order to provide a consistent basis of comparison. Changyou recognized
NaN
disposal gain/loss for the years ended December 
31
,
2019
and
2020
. However, Changyou may recognize disposal gain/loss in the future, depending on developments in the bankruptcy proceedings in the Chinese court
.
See Note 8 - Balance Sheet Components.
The following tables set forth the results of operations and cash flows of discontinued operations with respect to Changyou’s cinema advertising business, that were included in the Group’s consolidated financial statements (in thousands):
   
Year Ended
December 31,
 
   
2019
(1)
 
Revenues
  $37,323 
Cost of revenues
   43,857 
Gross loss
   (6,534) 
Operating expenses:
     
Sales and marketing
   8,807 
General and administrative
   18,583 
Total operating expenses
   27,390 
Operating loss
   (33,924) 
Interest income
   7 
Other income/(expense), net
   61 
Loss from discontinued operations before income tax expense   (33,856) 
Income tax expense
   142 
   
 
 
 
Net loss from discontinued operations, net of tax
  
 
(33,998
) 
   
 
 
 


   
Year Ended
December 31,
 
   
2019
(1)
 
Net cash provided by discontinued operating activities
  $9,341 
Net cash used in discontinued investing activities
   (10,808) 
Net cash provided by discontinued financing activities   0 
Note (1): Includes the financial results of the discontinued operations from January 1, 2019 to August 12, 2019.​​​​​​​
4. SEGMENT INFORMATION
The Sohu Group’s segments are business units that offer different services and are reviewed separately by the CODM in deciding how to allocate resources and in assessing performance. The Group’s CODM is the Company’s Chief Executive Officer. There are two segments in the Sohu Group, consisting of Sohu and Changyou. Before Sohu’s entry into the Tencent/Sohu Sogou Share Purchase Agreement on September 29, 2020, there were three segments in the Sohu Group, consisting of Sohu, Changyou, and Sogou. Between September 29, 2020 and the completion of the Tencent/Sohu Sogou Share Purchase on September 23, 2021, Sogou met the criteria to be classified as discontinued operations. Accordingly, Sogou’s historical financial results are reflected in Sohu’s consolidated financial statements as discontinued operations. The Sohu Group segments consisted of Sohu and Changyou thereafter. As most of the Sohu Group’s long-lived assets are located in, and substantially all of the revenues of the Sohu Group’s reportable segments are derived from China, where the Sohu Group’s services and products are provided to customers, no geographical information is presented.
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The following tables present summary information by segment (in thousands):

   
Year Ended December 31, 2019
 
   
Sohu
   
Changyou
   
Eliminations
   
Consolidated
 
Revenues
  $218,442   $455,380   $(19)   $673,803 
Segment cost of revenues (1)   (148,258)   (95,268)    21    (243,505) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Segment gross profit
   70,184    360,112    2    430,298 
SBC in cost of revenues (2)   (23)   (120)    1    (142) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Gross profit
   70,161    359,992    3    430,156 
   
 
 
   
 
 
   
 
 
   
 
 
 
Operating expenses:
                    
Product development (1)   (113,761)   (119,726)    0    (233,487) 
Sales and marketing (1)   (155,226)   (49,768)    2    (204,992) 
General and administrative (1)   (31,330)   (22,074)    (17)    (53,421) 
Goodwill impairment and impairment of intangible assets acquired as part of business acquisitions   (7,245)   0    0    (7,245) 
SBC in operating expenses (2)   (1,023)   (1,185)    0    (2,208) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total operating expenses   (308,585)   (192,753)    (15)    (501,353) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Operating profit/(loss)
   (238,424)   167,239    (12)    (71,197) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Other income
                  7,963 
Interest income
                  6,103 
Interest expense
                  (14,370) 
Exchange difference
                  1,430 
                  
 
 
 
Loss before income tax expense
                  (70,071) 
Income tax benefit
                  (28,428) 
                  
 
 
 
Net loss from continuing operations
                  (98,499) 
Net income from discontinued operations
                  55,108 
                  
 
 
 
Net loss
                 $(43,391) 
                  
 
 
 
Note (1): Total depreciation and amortization expenses of Sohu and Changyou were $50.7 million and $16.4 million, respectively, for the year ended December 31, 2019.
Note (2): “SBC” stands for share-based compensation expense.
   
Year Ended December 31, 2020
 
   
Sohu
   
Changyou
   
Eliminations
   
Consolidated
 
Revenues
  $201,544   $548,346   $0   $749,890 
Segment cost of revenues (1)   (122,362)    (94,362)    7    (216,717) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Segment gross profit
   79,182    453,984    7    533,173 
SBC in cost of revenues (2)   (177)    (543)    0    (720) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Gross profit
   79,005    453,441    7    532,453 
   
 
 
   
 
 
   
 
 
   
 
 
 
Operating expenses:
                    
Product development (1)   (97,681)    (136,934)    0    (234,615) 
Sales and marketing (1)   (106,057)    (53,272)    0    (159,329) 
General and administrative (1)   (25,861)    (25,517)    0    (51,378) 
SBC in operating expenses (2)   (1,759)    (12,001)    0    (13,760) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total operating expenses
   (231,358)    (227,724)    0    (459,082) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Operating profit/(loss)
   (152,353)    225,717    7    73,371 
   
 
 
   
 
 
   
 
 
   
 
 
 
Other income
                  25,993 
Interest income
                  7,369 
Interest expense
                  (6,234) 
Exchange difference
                  (3,800) 
                  
 
 
 
Loss before income tax expense
                  96,699 
Income tax expense
                  (133,226) 
                  
 
 
 
Net loss from continuing operations
                  (36,527) 
Net income from discontinued operations
                  (91,793) 
                  
 
 
 
Net loss
                 $(128,320) 
                  
 
 
 
Note (1): Total depreciation and amortization expenses of Sohu and Changyou were $26.4 million and $13.5 million, respectively, for the year ended December 31, 2020.
Note (2): “SBC” stands for share-based compensation expense.
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Year Ended December 31, 2021
 
   
Sohu
   
Changyou
   
Eliminations
   
Consolidated
 
Revenues
  $186,606   $648,970   $0   $835,576 
Segment cost of revenues (1)   (113,881)   (90,517)   4    (204,394)
   
 
 
   
 
 
   
 
 
   
 
 
 
Segment gross profit
   72,725    558,453    4    631,182 
SBC in cost of revenues (2)   (1)   (276)   0    (277)
   
 
 
   
 
 
   
 
 
   
 
 
 
Gross profit
   72,724    558,177    4    630,905 
   
 
 
   
 
 
   
 
 
   
 
 
 
Operating expenses:
                    
Product development (1)   (113,186)   (151,773)   0    (264,959)
Sales and marketing (1)   (126,126)   (56,396)   0    (182,522)
General and administrative (1)   (36,949)   (40,702)   0    (77,651)
SBC in operating expenses (2)   (804)   (7,497)   0    (8,301)
   
 
 
   
 
 
   
 
 
   
 
 
 
Total operating expenses
   (277,065)   (256,368)   0    (533,433)
   
 
 
   
 
 
   
 
 
   
 
 
 
Operating profit/(loss)
   (204,341)   301,809    4    97,472 
   
 
 
   
 
 
   
 
 
   
 
 
 
Other income
                29,416 
Interest income
                15,641 
Interest expense
                (7,500)
Exchange difference
                (3,462)
                
 
 
 
Income before income tax expense
                131,567 
Income tax expense
                (62,296)
                
 
 
 
Net loss from continuing operations
                69,271 
Net loss from discontinued operations
                864,902 
                
 
 
 
Net loss
               $934,173 
                  
 
 
 
Note (1): Total
depreciation and amortization expenses of Sohu and Changyou were $23.4 million and $12.6 million, respectively, for the year ended December 31, 2021.
Note (2): “SBC” stands for share-based compensation expense.
   
As of December 31, 2020
 
   
Sohu
   
Changyou
   
Eliminations
   
Consolidated
 
Cash and cash equivalents
  $56,977   $160,080   $0   $217,057 
Accounts receivable, net
   60,886    26,635    0    87,521 
Fixed assets, net
   174,700    162,976    (2)    337,674 
Total assets (1)
  $1,632,736   $2,478,705   $(2,701,488)   $1,409,953 
Note (1): The elimination for segment assets mainly consists of elimination of intra-Group loans between Sohu and Changyou, and elimination of long-term investments in subsidiaries and consolidated VIEs.
   
As of December 31, 202
1
 
   
Sohu
   
Changyou
   
Eliminations
   
Consolidated
 
Cash and cash equivalents
  $929,851   $69,098   $0   $998,949 
Accounts receivable, net
   48,108    34,442    0    82,550 
Fixed assets, net
   170,213    159,784    0    329,997 
Total assets (1)
  $2,294,537   $2,610,964   $(2,659,716)    $2,245,785 
Note (1): The elimination for segment assets mainly consists of elimination of intra-Group loans between Sohu and Changyou, and elimination of long-term investments in subsidiaries and consolidated VIEs.
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5. SHARE-BASED COMPENSATION EXPENSE
Sohu (excluding Sohu Video), Changyou, and Sohu Video have incentive plans for the granting of share-based awards, including share options and restricted share units, to members of the boards of directors, management and other key employees.
Share-based compensation expense was recognized in costs and expenses for the years ended December 31, 2019, 2020 and 2021 as follows (in thousands):
   
Year Ended December 31,
 
Share-based compensation expense
  
2019
   
2020
   
2021
 
Cost of revenues
  $142   $720   $277 
Product development expenses
   1,364    7,325    3,904 
Sales and marketing expenses
   (326)    460    166 
General and administrative expenses
   1,170    5,975    4,231 
   
 
 
   
 
 
   
 
 
 
   $2,350   $14,480   $8,578 
   
 
 
   
 
 
   
 
 
 
Share-based compensation expense was recognized for share awards of Sohu (excluding Sohu Video), Changyou and Sohu Video as follows (in thousands):
   
Year Ended December 31,
 
Share-based compensation expense
  
2019
   
2020
   
2021
 
For Sohu (excluding Sohu Video) share-based awards
  $1,940   $2,633   $1,849 
For Changyou share-based awards
   1,305    12,545    7,773 
For Sohu Video share-based awards
   (895)    (698)    (1,044) 
   
 
 
   
 
 
   
 
 
 
   $2,350   $14,480   $8,578 
   
 
 
   
 
 
   
 
 
 
The negative amounts in the tables above resulted from
re-measured
compensation expense based on the then-current fair value of the awards on the reporting date.
There was 0 capitalized share-based compensation expense for the years ended December 31, 2021, 2020 and 2019.
6. ADVERTISING AND PROMOTIONAL EXPENSES, INCLUDED IN SALES AND MARKETING EXPENSES
Advertising and promotional expenses are included in sales and marketing expenses, and generally represent the expenses of promotions to create or stimulate a positive image of the Sohu Group or a desire to subscribe for the Group’s products and services. Advertising expenses are expensed as incurred. For the years ended December 31, 2021, 2020 and 2019, advertising and promotional expenses recognized in the consolidated statements of comprehensive income were $98.5 million, $84.7 million and $124.6 million, respectively.
7. OTHER INCOME, NET
The following table summarizes the Sohu Group’s other income/(expense) (in thousands):

   
Year Ended December 31,
 
   
2019
   
2020
   
2021
 
Rental income from Sogou (1)
   8,029    9,793    10,427 
Investment income   3,004    3    6,352 
Income from investments in financial instruments (2)   11,113    4,303    5,260 
Individual tax refund and additional deduction of PRC value-added tax

   907    6,169    4,827 
Write-down of unpaid long-term accounts payable   0    47    1,276 
Gover
nment grant

   5,763    5,928    418 
Impairment loss on equity investments (
3
)
   (23,154)    (384)    (215) 
Donations
   (283)    (1,460)    (1,565) 
Others
   2,584    1,594    2,636 
  
$
7,963
  
$
25,993
  
$
29,416
 
   
 
 
   
 
 
   
 
 
 
Note (1): Sogou leases from Sohu, on an arms-length basis, office space at Sohu.com Internet Plaza under a lease that expires on December 31, 2022 and may be renewed subject to terms to be agreed to by Sohu and Sogou.
The cash receipts from this lease within operating activities for 2021, 2020 and 2019 were $12.3 million, $12.1 million and $8.4 million, respectively.
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Note (2): The increase for 2021 compared to 2020 and the decrease for 2020 compared to 2019 were mainly due to income earned from investments in financial instruments.
Note (
3
): In the fourth quarter of 2019, the Sohu Group recognized impairment losses of $23.2 million for equity investments.
8. BALANCE SHEET COMPONENTS (IN THOUSANDS)

   
As of December 31,
 
   
2020
   
2021
 
Accounts receivable, net
          
Accounts receivable
  $94,528    94,908 
Allowance for credit losses
   (7,007)    (12,358)
   
 
 
   
 
 
 
   $87,521    82,550 
   
 
 
   
 
 
 
The following table presents the movement of allowances for credit losses for the years of 2019, 2020 and 2021:
   
Balance at the
beginning of
year
  
Changes on initial
application of ASU
2016-13
   
Additional
allowance for credit
losses, net of
recoveries
   
Write-offs
  
Exchange
difference
  
Balance at the
end of year
 
2019
   7,574   0    4,724    (8,237)   (105)   3,956 
2020
   3,956   3,383    2,419    (3,231)   480   7,007 
2021
   7,007   0    6,292    (1,155)  214   12,358 
   
As of December 31,
 
   
2020
   
2021
 
Prepaid and other current assets
          
Matching loan due from a related party (See Note 9)
  $34,123   $34,123 
Prepaid taxes
   25,043    28,719 
Prepaid revenue-sharing cost  
10,120
   
12,428

 
Prepaid content and license costs   11,029    8,694 
Prepaid advertising and promotion fee   244    4,685 
Interest receivable from bank deposits with original maturities of three months or
less
   3,875    3,059 
Receivables from third party payment platforms

  
5,488
   
 
2,670
 
Prepaid professional fees
   2,365    2,432 
Prepaid rental deposit
s
   2,310    1,928 
Emplo
yee advances

  
 
587
   
 
569
 
Prepaid office rent and facilities expenses
   696    338 
Others
   10,710    7,666 
   
 
 
   
 
 
 
    $106,590   $107,311 
   
 
 
   
 
 
 
Prepaid
non-current
assets
          
Prepaid PRC income tax for the sale of assets associated with 17173.com by Sohu to Changyou  $1,006   $0 
   
 
 
   
 
 
 
   $1,006   $0 
   
 
 
   
 
 
 
Other short-term liabilities
          
Matching loans due to a related party (See Note 9)
   34,123    34,123 
Contingent liability related to Shanghai Jingmao liquidation (1)
   23,900    23,900 
Deposits related to Focus
   21,936    10,387 
Share-based awards in Changyou
   13,292    20,693 
Other payables related to Shanghai Jingmao liquidation (2)   0    9,380 
Contract deposits from advertisers
   3,036    2,679 
Lease liabilities
   1,107    1,999 
Consideration payable for equity investment
   751    769 
Others
   8,026    8,638 
   
 
 
   
 
 
 
   $106,171   $112,568 
   
 
 
   
 
 
 
Note (1): The contingent liability represents the aggregate of estimated potential payments to third parties in connection with the liquidation of Shanghai Jingmao. The stated amount of the contingent liability reflects Changyou’s best estimate as of December 31, 2020 and 2021 pursuant to ASC
450-20.
Changyou may revise this estimate in the future based on developments in PRC bankruptcy court proceedings regarding.
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7
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Note (2): Shanghai Jingmao. In 2021, Changyou received $9.4 million from the bankruptcy proceedings, as a creditor of Shanghai Jingmao, during the process of the liquidation of Shanghai Jingmao. No disposal gain was recognized due to the uncertainty with the proceedings that were still ongoing.
Receipts in advance and deferred revenue
  
 
 
 
  
 
 
 
Receipts in advance relating to:
  
 
 
 
  
 
 
 
brand advertising business
  
$
5,214
 
  
$
4,297 
online game business
  
 
7,869
 
  
 
9,310 
other business
  
 
6,029
 
  
 
5,286 
   
 
 
   
 
 
 
Total receipts in advance
  
 
19,112
 
  
 
18,893 
Deferred revenue
  
 
32,943
 
  
 
38,148 
   
 
 
   
 
 
 
  $52,055
 
 $57,041 
   
 
 
   
 
 
 
9. RELATED PARTY TRANSACTIONS
Under an agreement between Sohu and Fox Financial Technology Group Limited (“Fox Financial,” formerly known as “SoEasy Internet Finance Group Limited”) 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.
Changyou’s Loan Arrangements with Fox Financial
Commencing in April 2015, certain subsidiaries of Changyou and certain subsidiaries of Fox Financial entered into a series of loan agreements pursuant to which the subsidiaries of Changyou were entitled to draw down HK dollar-denominated or U.S. dollar-denominated loans from the Fox Financial subsidiaries and the Fox Financial subsidiaries were entitled to draw down equivalent RMB-denominated loans from the Changyou subsidiaries, to facilitate each other’s business operations. All of the loans carry a fixed rate of interest which approximated the market interest rate at the inception of the loans.
In December 2018 and 2019, Changyou entered into supplemental agreements with Fox Financial pursuant to which all accrued and unpaid interest on the loans as of December 31, 2018 and December 31, 2019 was added to the principal of the corresponding loans. Due to the depreciation of the RMB against the U.S. dollar in 2018, the principal amounts of Changyou’s outstanding RMB-denominated loans to Fox Financial as of December 31, 2018 were adjusted upward to amounts equal to the principal amounts of Fox Financials’ outstanding U.S. dollar denominated loans to Changyou as of December 31, 2018, multiplied by the monthly average RMB to U.S. dollar exchange rate published by the Bank of China for the month of December 2018. As a result of such adjustment, Changyou advanced additional RMB-denominated loans in the principal amount of RMB8.2 million (approximately $1.2 million) to Fox Financial in January 2019.
In December 2019, Changyou entered into a supplemental agreement with Fox Financial pursuant to which Fox Financial provided security for its repayment obligations to Changyou. Under this supplemental agreement, if Fox Financial fails to repay the RMB-denominated loan principal and corresponding interest owed to Changyou, Changyou will have the right to apply the amount of a security deposit, consisting of the outstanding U.S. dollar-denominated loan principal and corresponding interest owed by Changyou to Fox Financial, to repay the RMB-denominated loan principal and interest owed by Fox Financial to Changyou. The security deposit will be required to be replenished by Fox Financial if the amount of the security deposit is insufficient to repay the loan principal and interest of the RMB-denominated loan owed to Changyou, and any remaining security deposit will be returned to Fox Financial if there is a surplus after the repayment of the RMB-denominated loan principal and interest. The parties entered into an additional supplemental agreement pursuant to which Changyou provided security for its repayment obligations to Fox Financial. Under this supplemental agreement, if Changyou fails to repay the U.S. dollar-denominated loan principal and corresponding interest owed to Fox Financial, Fox Financial will have the right to apply the amount of a security deposit, consisting of the outstanding RMB-denominated loan principal and corresponding interest owed by Fox Financial to Changyou, to repay the U.S. dollar-denominated loan principal and interest owed by Changyou to Fox Financial. The security deposit will be required to be replenished by Changyou if the amount of the security deposit is insufficient to repay the U.S. dollar-denominated loan principal and interest owed by Changyou to Fox Financial, and any remaining security deposit will be returned to Changyou if there is a surplus after the repayment of the U.S. dollar-denominated loan principal and interest.
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The loan arrangements expired on December 31, 2020 and no new supplemental agreements were signed. In May 2021, Changyou notified Fox Financial of Changyou’s intention to exercise its rights under the supplemental agreement by applying the security deposit to repay the RMB-denominated loan principal and corresponding interest owed by Fox Financial to Changyou. As of the date of this report, Changyou has not received any response from Fox Financial and accordingly, with an abundance of caution, has not so applied any of the security deposit. Changyou performed an assessment of its expected credit losses for the RMB-denominated loans receivable from Fox Financial. As of December 31, 2021, the Sohu Group had accrued a cumulative allowance for credit losses of approximately
$3.3 
million based on Changyou’s estimate of the net of the outstanding amount of such loans receivable from Fox Financial over the amount of the security deposit and on the lack of solvency of Fox Financial. As of December 31, 2021, net loan receivables and loans payable under such loan arrangements, each in the amount of
$34.1 million, were recorded as prepaid and other current assets and other short-term liabilities, respectively, in the Sohu Group’s consolidated balance sheets.
10. FAIR VALUE MEASUREMENTS
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.
The Sohu Group’s financial instruments consist primarily of cash equivalents, restricted cash, short-term investments, accounts receivable, other current assets, long-term investments, long-term time deposits, restricted time deposits, accounts payable, accrued liabilities, short-term bank loans, other short-term liabilities, long-term bank loans, and long-term other payables.
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, 2020 (in thousands):
     
Fair value measurements at reporting date using
 
Items
 
As of

December 31,

2020
  
Quoted Prices

in Active
Markets

for Identical
Assets

(Level 1)
  
Significant

Other

Observable
Inputs

(Level 2)
  
Significant

Unobservable

Inputs

(Level 3)
 
Cash equivalents
 $173,655
 

 $0  $173,655  $0 
Restricted cash
  330,791   0   330,791   0 
Restricted time deposits
  101,519   0   101,519   0 
Short-term investments
  100,745   0   100,745   0 
Equity investments with readily determinable fair values
  9,457   9,457   0   0 
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The
following table sets forth the financial instruments, measured at fair value by level within the fair value hierarchy, as of December 31, 2021
(in thousands):
     
Fair value measurements at reporting date using
 
Items
 
As of

December 31,

2021
  
Quoted Prices

in Active
Markets

for Identical
Assets

(Level 1)
  
Significant

Other

Observable
Inputs

(Level 2)
  
Significant

Unobservable

Inputs

(Level 3)
 
Cash equivalents
 $949,884  $0  $949,884  $0 
Restricted cash
  1,969   0   1,969   0 
Short-term investments
  399,345   0   399,345   0 
Equity investments with readily determinable fair values
  14,642   14,642   0   0 
Long-term time deposits  189,007   0   189,007   0 
Cash Equivalents
The Sohu Group’s cash equivalents mainly consist of time deposits with original maturities of three months or less, notice deposits, 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.
Restricted Cash and Restricted Time Deposits
Restricted cash and restricted time deposits are valued based on the prevailing interest rates in the market using the discounted cash flow method. The Sohu Group classifies the valuation techniques that use these inputs as Level 2 of fair value measurements.
Changyou Loans from Offshore Banks, Secured by Time Deposits
In 2018, Changyou drew down loans from the Hong Kong branches of PRC banks, which were secured by an equivalent or greater amount of RMB deposits by Changyou in the PRC branches of the banks. The loans from the Hong Kong branches of the lending banks were repaid in April 2019 by Changyou and the RMB deposits in the PRC branches of the banks were released.
In the fourth quarter of 2020 and the first quarter of 2021, Changyou drew down from an offshore branch of a PRC bank loans of
$215.6 
million and $153 million, respectively, secured by an equivalent amount of RMB deposits by Changyou in the PRC branch of the bank and a mortgage on a building owned by Sohu. The loans carried floating rates of interest based on the London Inter-Bank Offered Rate (“LIBOR”). The loans were repaid in full in September 2021 by Changyou and the RMB deposits in the PRC branch of the bank were released.
For the years ended December 31, 2021 and 2020, interest income from the restricted time deposits securing the loans were $5.0 million and $0.1 million, respectively, and expense for interest on the loans was $5.3 million and $0.1 million, respectively.
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In the second quarter of
2020
, Changyou pledged deposit certificates in connection with the Sohu Group’s financing of the Changyou Merger.
As of December 31, 2020, Changyou had pledged deposit certificates in the amount of $212 million in the aggregate, of which $110 million was recorded as restricted cash and $102 million was recorded as restricted time deposits. In September 2021, the Company repaid all of the outstanding balance under the Facility Agreement with ICBC Tokyo, and as a result all of Changyou’s deposit certificate pledges were released and the Facility Agreement was terminated.
Short-term Investments
The Sohu Group’s short-term investments mainly consist of investments in financial instruments with a variable interest rate and time deposits with maturities of three months to one year. In
accordance with ASC 825, for investments
in financial instruments with a variable interest rate indexed to performance of underlying assets and time deposits, 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) and interest income. To estimate fair value, the Group refers to the quoted rate of return provided by banks at the end of each period using the discounted cash flow method. The Group classifies the valuation techniques that use these inputs as
Level 2 of fair value measurements.
As of December 31, 2021 and December 31, 2020, the Sohu Group’s investment in these financial instruments
was $399.3 million
and $100.7 million, respectively. The investment instruments
with variable interest rates
were issued by commercial banks in China, and
are
indexed to performance of underlying assets. Since these investments’ maturity dates are within one year, they are classified as short-term investments. For the years ended December 31, 2021 and 2020, the Sohu Group recorded gains from changes in the fair value of short-term investments in the amounts of $5.3 million and $4.3 million, respectively, in the consolidated statements of comprehensive income.
Long-term Investments
Long-term investments consist of equity investments in publicly traded companies, privately-held companies and limited partnerships.
ASU
2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities,
amends certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The main provisions require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value through earnings, unless they qualify for a measurement alternative. The new guidance required modified retrospective application to all outstanding instruments beginning January 1, 2018, with a cumulative effect adjustment recorded to opening accumulated deficit as of the beginning of the first period in which the guidance becomes effective. However, changes to the accounting for equity securities without a readily determinable fair value will be applied prospectively.
The Group measures equity investments under the equity method and equity investments without readily determinable fair values at fair value on a
non-recurring
basis when an impairment charge is to be recognized. As of December 31, 2020 and 2021, certain investments were measured using significant unobservable inputs (Level 3) and written down from their respective carrying values to their fair values, considering the stage of development, the business plan, the financial condition, the sufficiency of funding and the operating performance of the investee companies, with impairment charges incurred and recorded in other income for the years then ended. The Group recognized impairment losses of $0.4 million and $0.2 million, respectively, for investments without readily determinable fair values in 2020 and 2021.
Equity Investments Accounted for Using the Equity Method
For investments in common stock or
in-substance
common stock of entities over which the Group can exercise significant influence but does not own a majority equity interest or control, the equity method is applied, and the Group adjusts the carrying amount of an investment and recognizes investment income or loss for the Group’s share of the earnings or loss of the investee after the date of investment. The Group measures equity investments under the equity method at fair value on a
non-recurring
basis only if an impairment charge is to be recognized. The Group classifies these
non-recurring
fair value measurements as Level 3 of fair value measurement.
Equity Investments with Readily Determinable Fair Values
Effective as of January 1, 2018, all equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) will generally be measured at fair value through earnings. There will no longer be an
available-for-sale
classification (changes in fair value previously reported in other comprehensive income) for equity securities with readily determinable fair values.
Equity investments with readily determinable fair values 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.
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Equity Investments without Readily Determinable Fair Values
Based on ASU
2016-01,
an entity will be able to elect to record equity investments without readily determinable fair values and not accounted for by the equity method at cost, less impairment, adjusted for subsequent observable price changes in orderly transactions for the identical or similar investments of the same issuer. Entities that elect this measurement alternative will report changes in the carrying value of the equity investments in current earnings.
If this measurement alternative is elected, changes in the carrying value of the equity investment will be required to be made whenever there are observable price changes in transactions for identical or similar investments of the same issuer. The implementation guidance notes that an entity should make a “reasonable effort” to identify price changes that are known or that can reasonably be known. When observable price changes were identified, the Group used the back-solve method to
re-measure
the fair value of the investments and to determine the amount that should be recorded as upward or downward adjustments. The back-solve method requires considering the rights and preferences of each classes of equity and solving for the total equity value that is consistent with a recent transaction of the subject company’s securities. This method requires making assumptions on future outcomes available to the subject company, the probability of each scenario, expected time to liquidity events, volatility and risk-free rate. The Group classifies this
non-recurring
fair value measurement as Level 3 of fair value measurement.
Long-term Time Deposits
The Sohu Group elected the fair value method at the date of initial recognition of time deposits with maturities over
one
year and carried these investments subsequently at fair value. Changes in fair values are reflected in the consolidated statements of comprehensive income. The Sohu Group classifies the valuation techniques as Level 2 of fair value measurements.
Assets Measured at Fair Value on a Nonrecurring Basis
The following table sets forth assets measured at fair value on a nonrecurring basis by level within the fair value hierarchy as of December 31, 2020 and 2021 (in thousands)
       
Fair value measurements at reporting date using
 
Items
  
As of
December 31,
2020
   
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
   
Significant Other
Observable Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
Purchased video content recorded in prepaid and other assets
  $2,585   $0   $0   $2,585 
Intangible assets, net
   4,842    0    0    4,842 
Goodwill
   48,434    0    0    48,434 
       
Fair value measurements at reporting date using
 
Items
  
As of
December 31,
2021
   
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
   
Significant Other
Observable Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
Purchased video content recorded in prepaid and other assets
  $2,555   $0   $0   $2,555 
Intangible assets, net
   9,136    0    0    9,136 
Goodwill
   48,811    0    0    48,811 
Purchased Video Content Recorded in Prepaid and Other Assets
The impairment losses recognized in prepaid and other assets were mainly due to impairment losses for Sohu Video’s purchased video content. See Note 14 - Intangible Assets, Net.
Intangible Assets
Intangible assets mainly comprise purchased video content, operating rights for licensed games, domain names and trademarks, computer software, and developed technologies. The impairment losses recognized for intangible assets were mainly due to impairment losses for the domain name related to the 56.com Website and Sohu Video’s purchased video content. See Note 14 - Intangible Assets, Net.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the identifiable assets and liabilities acquired as a result of the Group’s acquisitions of interests in its subsidiaries and consolidated VIEs. See Note 13 - Goodwill.
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Short-term Receivables and Payables
Accounts receivable 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, 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.
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.

Credit agreements with Industrial and Commercial Bank of China Limited (“ICBC”)
In September 2017, Sohu entered into credit agreements with ICBC pursuant to which Sohu was entitled to borrow from ICBC from time to time until March 31, 2018 up to a combined aggregate of RMB800 million (or $116.6 million). The loan is secured by the pledge of Sohu’s building which serves as Sohu’s corporate headquarters in Beijing (“Sohu’s headquarters”). Interest accrues 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%. 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.
In July 2020, Sohu repaid all of the outstanding balance under the loan arrangements with ICBC and Sohu’s headquarters were released from the pledge. As of both December 31, 2021 and December 31, 2020, the total outstanding balance of the loan was NaN.

Credit agreements with the China Merchants Bank Co., Ltd. (“CMB”)
In April 2018, Sohu entered into credit agreements with CMB pursuant to which Sohu was entitled to borrow from CMB from time to time until March 22, 2021 up to an aggregate of RMB700 million (or approximately $102.0 million) (the “CMB Loan”).
In April 2018, Sohu made an initial drawdown under the CMB Loan with a term of 12 months in the amount of RMB400 million (or $58.3 million) (the “First Drawdown”). The proceeds of the First Drawdown were used to repay in full the outstanding balance and all accrued and unpaid interest under credit agreements between Sohu and Ping An Bank. The CMB Loan was secured by a pledge of Sohu’s building, which was released from the pledge after Ping An Bank received such repayment. Interest accrued on the outstanding principal balance at a rate of 6% per year. In April 2019, the outstanding principal amount of the First Drawdown was repaid in full.

In
June 2018
, Sohu made a drawdown under the CMB Loan with a term of
24
months in the amount of RMB
300
 million (or approximately $
43.7
million) (the “Subsequent Drawdown”). Interest accrued on the outstanding principal balance at a rate of
6
% per year. The outstanding principal amount of the Subsequent Drawdown was payable in
four
installments.
The first installment of RMB45 million (or $6.7 million) was paid in December 2018; the second and third installments of RMB90 million (or $13.1 million) in the aggregate were paid early in June 2019; and the fourth installment of RMB165 million (or $23.3million) was paid early in July 2019.
In April 2019 and May 2019, Sohu made drawdowns under the CMB Loan with a term of 12 months in the aggregate amount of RMB399 million ($59.3 million). Interest accrues on the outstanding principal balances at a rate of 5.1% per year. The outstanding principal amount of each drawdown will be due and payable 12 months after such drawdown.
In May 2020, Sohu repaid all of the outstanding balance under the loan arrangements with CMB and the pledge of Sohu’s building was released. As of both December 31, 2021 and December 31, 2020, the total outstanding balance of the CMB loan was NaN.
Credit agreement with Industrial and Commercial Bank of China Limited, Tokyo Branch (“ICBC Tokyo”)
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On April 3, 2020, the Company’s indirect wholly-owned subsidiary Sohu.com (Game) Limited (“Sohu Game”), as borrower, and Sohu.com Limited, as
guarantor, entered into a facility agreement (the “Facility Agreement”) with ICBC Tokyo pursuant to which ICBC Tokyo agreed to provide a term loan facility of up to $250 million (the “Term Facility”), subject to customary conditions, to be used to finance the consummation of the Changyou Merger and the related transactions and to pay related fees and expenses associated with the Changyou Merger. The Term Facility consisted of (i) a
one-year
term facility for term loans of up to $100 million (the
“One-Year
Facility”) and (ii) a four-year term facility for term loans of up to $150 million (the “Four-Year Facility”). The outstanding principal amount of the loans under the
One-Year
Facility is due in full on the
one-year
anniversary of the date of the first utilization of the
One-Year
Facility. The outstanding principal amount of the loans under the Four-Year Facility
was
due in installments, with $7.5 million due and payable at the end of each of the second and third calendar years during the term of the Four-Year Facility and the remaining outstanding principal amount
was
due and payable on the fourth anniversary of the date of the first utilization of the
One-Year
Facility. The Term Facility
bore
interest at a rate of Three Month LIBOR plus a margin of 1.75%, with LIBOR to be determined by ICBC on the basis of the London InterBank Offered Rate published two business days before the first day of each three calendar month interest period. Accrued interest
w
as
 paid every three calendar months on the first day after the end of each such three-month interest period.
The obligations of Sohu Game as borrower under the Term Facility were initially fully guaranteed by Sohu.com Limited, and were initially secured by first priority share pledges over 97.9% of the outstanding equity interests in Changyou. In the second quarter of 2020, Changyou pledged deposit certificates evidencing an RMB deposit in the amount of $192 million in the aggregate at an exchange rate of
RMB7.20 to $1.00
, equivalent to the Facility Agreement amount. Upon the effectiveness of such additional pledge, Sohu’s previous guarantee, and all the previous share pledges or mortgages over the outstanding equity interests in Changyou, to secure the loans from ICBC Tokyo were released and discharged.

In September 2021, the Company repaid all of the outstanding balance under the Facility Agreement with ICBC Tokyo, and as a result all of Changyou’s deposit certificates pledges were released and the Facility Agreement was terminated.
Long-term Payables
Long-term payables mainly consist of long-term other payables and long-term bank loans.
Long-term
other payables are financial liabilities with carrying values that approximate fair value.
After the Changyou Plans’ Modification, long term
other
payables also include liabilities accrued over the option holders’ service periods with a fixed price of $5.39 per Changyou Class A ordinary share
.
11. LEASE
The Group has entered into operating lease agreements, primarily for offices in China with lease periods expiring between 2021 and 2026. The determination of whether an arrangement is or contains a lease is made at the inception of the lease by evaluating whether the arrangement conveys the right to use an identified asset and whether the Group obtains substantially all of the economic benefits from and has the ability to direct the use of the asset. Operating lease assets and liabilities are included on the Group’s consolidated balance sheets beginning January 1, 2019. The
right-of-use
assets are included in other assets, while the current portion of the operating lease liabilities is included in other short-term liabilities and the long-term portion is included in other long-term liabilities. The Group has elected to not recognize lease assets and lease liabilities for leases with a term of twelve months or less on the consolidated balance sheets.
Operating lease assets and liabilities are recognized at the present value of the future lease payments at the lease commencement date. The Group uses its incremental borrowing rate in determining the present value of the future lease payments, because the interest rate implicit in most of the leases is not readily determinable. The Group estimates its incremental borrowing rate for each leased asset based on the interest rate the Group would incur to borrow an amount equal to the lease payments on a collateralized basis over a similar term in a similar economic environment.
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Certain
lease agreements contain an option for the Group to renew a lease for a term agreed to by the Group and the lessor or an option to terminate a lease earlier than the maturity date. The Group considers these options, which may be elected at the Group’s sole discretion, in determining the lease term on a
lease-by-lease
basis. The Group’s lease agreements generally do not contain any residual value guarantees or material restrictive covenants. Certain of the Group’s leases contain free or escalating rent payment terms. Operating lease expense is recognized on a straight-line basis over the lease term.
The Group’s lease agreements generally contain lease and
non-lease
components.
Non-lease
components consist primarily of payments for maintenance and utilities. The Group has identified separate lease and
non-lease
components, allocated the contractual considerations between components based on the terms specified in the lease agreements, and accounted for the lease components separately from the
non-lease
components. Payments under the lease arrangements are primarily fixed with no variable payments.

Components of operating lease expense are as follows (in thousands):
   
Year ended December 31,
 
   
2020
   
2021
 
Operating lease expense
  $3,985   $2,952 
Short-term lease expense
   297    563 
   
 
 
   
 
 
 
Total operating lease expense
  $4,282   $3,515 
Supplemental cash flow information related to leases are as follows (in thousands):
   
Year ended December 31,
 
   
2020
   
2021
 
Cash paid for amounts included in the measurement of lease liabilities
          
Operating cash flows from operating leases
  $3,206   $3,085 
   
Year ended December 31,
 
   
2020
   
2021
 
Right-of-use
assets obtained in exchange for lease liabilities:
          
Operating leases
  $5,351   $2,620 
The following table presents supplemental balance sheet information related to the operating leases (in thousands):
   
Year ended December 31,
 
   
2020
   
2021
 
Assets:
          
Operating lease right-of-use assets
  $4,998   $5,207 
   
 
 
   
 
 
 
Liabilities:
          
Current lease liabilities
   1,107    1,999 
Non-current lease liabilities

   3,855    3,142 
   
 
 
   
 
 
 
Total operating lease liabilities
  $4,962   $5,141 
   
 
 
   
 
 
 
Maturities of lease liabilities under operating leases as of December 31, 2021 are as follows (in thousands):
2022
  $2,853 
2023
   2,240 
2024
   277 
2025   98 
202
6
   0 
Thereafter
   0 
   
 
 
 
Total future lease payments
   5,468 
Less: imputed interest
   327 
   
 
 
 
Total present value of lease liabilities
  $5,141 
   
 
 
 
As of December 31, 2021, operating leases
recognized
in lease liabilities had a weighted average remaining lease term of 2.1 years and a weighted average discount rate of 5.7%. As of December 31, 2021, liabilities for leases that had been entered into, but the term of which had not yet commenced, amounted to $0.2 million.
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12. FIXED ASSETS
The following table summarizes the Sohu Group’s fixed assets (in thousands):
   
As of December 31,
 
   
2020
   
2021
 
Office buildings
  $392,045   $ 401,223 
Computer equipment and hardware
   132,021    123,079 
Leasehold and building improvements
   36,649    37,753 
Office furniture
   6,841    6,960 
Vehicles
   3,729    3,515 
   
 
 
   
 
 
 
Fixed assets, gross
   571,285    572,530 
Accumulated depreciation
   (233,611)
 
   (242,533)
 
   
 
 
   
 
 
 
Fixed assets, net
  $337,674   $329,997 
   
 
 
   
 
 
 
For the years ended December 31, 2021, 2020 and 2019, depreciation expenses for fixed assets were $23.5 million, $25.5 million and $28.2 million, respectively.

13. GOODWILL
Changes in the carrying value of goodwill by segment are as follows (in thousands):
   
Sohu
   
Changyou
   
Total
 
Balance as of December 31, 2019
               
Goodwill
   69,379    180,543    249,922 
Accumulated impairment losses
   (32,246)    (170,286)    (202,532) 
   
 
 
   
 
 
   
 
 
 
   $37,133   $10,257   $47,390 
   
 
 
   
 
 
   
 
 
 
Transactions in 2020
               
Foreign currency translation adjustment
   1,044    0    1,044 
   
 
 
   
 
 
   
 
 
 
Balance as of December 31, 2020
  $38,177   $10,257   $48,434 
   
 
 
   
 
 
   
 
 
 
Balance as of December 31, 2020
               
Goodwill
   70,423    180,543    250,966 
Accumulated impairment losses
   (32,246)    (170,286)    (202,532) 
   
 
 
   
 
 
   
 
 
 
   $38,177   $10,257   $48,434 
   
 
 
   
 
 
   
 
 
 
Transactions in 2021
               
Foreign currency translation adjustment
   377    0    377 
   
 
 
   
 
 
   
 
 
 
Balance as of December 31, 2021
  $38,554   $10,257   $48,811 
   
 
 
   
 
 
   
 
 
 
Balance as of December 31, 2021
               
Goodwill
   70,800    180,543    251,343 
Accumulated impairment losses
   (32,246)   (170,286)   (202,532)
   
 
 
   
 
 
   
 
 
 
   $38,554   $10,257   $48,811 
   
 
 
   
 
 
   
 
 
 
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There was one reporting unit under the Sohu segment. After Changyou ceased operation of RaidCall and the cinema advertising business, the reporting units under the Changyou segment consisted of the Changyou online game business and the 17173.com Website. The Changyou online game business was the only reporting unit with goodwill under the Changyou segment.
In the fourth quarter of 2021, the Sohu Group tested goodwill for impairment at the reporting unit level. The Group performed impairment tests using the qualitative and quantitative methods.
For the Sohu segment, management determined that a quantitative assessment was most appropriate. Impairment tests were conducted by quantitatively comparing the fair values of the reporting units to their carrying amounts. The Sohu segment estimated the fair values using the income approach and market approach. The valuation approach considers a number of factors that include expected future cash flows, revenue growth rates, discount rates, and requires Sohu to make certain assumptions and estimates regarding future profitability of the business. The market approach considers earnings multipliers based on market data of comparable companies engaged in similar business. The fair value determined using the income approach is compared with comparable market data and reconciled, as necessary. For the Changyou segment, management performed a qualitative assessment to determine whether it was more likely than not that the fair value of the reporting unit was less than its carrying amount.
As of December 31, 2021 and 2020, for the Sohu segment and Changyou segment, management concluded that the fair values of the reporting units exceeded their carrying values, indicating that the goodwill of the reporting units was not impaired.
14. INTANGIBLE ASSETS, NET
   
As of December 31, 2020
 
Items
  
Gross

Carrying

Amount
   
Accumulated

Amortization
   
Accumulated

Impairment
   
Net

Carrying

Amount
 
 
 
Purchased video content
  $212,999   $(161,160)   $(50,088)   $1,751 
Operating rights for licensed games
   51,856    (35,017)    (14,026)    2,813 
Domain names and trademarks
   27,536    (10,243)    (17,219)    74 
Computer software
   11,749    (11,545)    0    204 
Developed technologies
   8,699    (918)    (7,781)    0 
Others
   2,928    (966)    (1,962)    0 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $315,767   $(219,849)   $(91,076)   $4,842 
   
 
 
   
 
 
   
 
 
   
 
 
 
   
As of December 31, 2021
 
Items
  
Gross

Carrying

Amount
   
Accumulated

Amortization
   
Accumulated

Impairment
   
Net

Carrying

Amount
 
 
 
Purchased video content
  $138,902   $(99,961)    $(37,343)    $1,598 
Operating rights for licensed games
   60,454    (39,431)     (13,895)     7,128 
Domain names and trademarks
   26,766    (10,240)     (16,506)     20 
Computer software
   12,474    (12,084)     0    390 
Developed technologies
   8,879    (936)     (7,943)     0 
Others
   2,996    (988)     (2,008)     0 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $250,471   $(163,640)    $(77,695)  $9,136 
   
 
 
   
 
 
   
 
 
   
 
 
 
Impairment Losses
In 2021, Sohu recognized a $14,000 impairment loss related to Sohu Video’s purchased video content pursuant to the Sohu Group’s policy on impairment of overseas content. Changyou recognized a $1.7 million impairment loss related to content and game licenses, of which $0.1 million was recognized as impairment of intangible assets and $1.6 million was recognized as impairment of prepaid and other current assets.
In 2020
,
 Sohu recognized a $
1.5
 million impairment loss related to Sohu Video’s purchased video content pursuant to the Sohu Group’s policy on impairment of overseas content. Changyou recognized a $
2.7
 million impairment loss related to content and game licenses, of which $
0.8
 million was recognized as impairment of intangible assets and $
1.9
 million was recognized as impairment of prepaid and other current assets.
In 2019, Sohu recognized a $7.2 million impairment loss for a domain name related to the 56.com Website, mainly due to enhanced restrictions that Chinese regulatory authorities imposed on the broadcasting industry, which had an adverse effect on the operation of the 56.com Website. Also in 2019, Sohu recognized a $4.0 million impairment loss related to Sohu Video’s purchased video content pursuant to the Sohu Group’s policy on impairment of overseas content.
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Amortization
In 2021, 2020 and 2019, amortization of intangible assets was $12.5 million, $14.4 million and $38.8 million, respectively. As of December 31, 2021, amortization expenses for future periods are estimated to be as follows: 
For the year ended December 31,
  
(in thousands)
 
2022
   4,357 
2023
   3,761 
2024
   1,018 
2025
   0 
2026   0 
Thereafter   0 
   
 
 
 
Total expected amortization expense
  $9,136 
   
 
 
 

15. TAXATION
Income Tax
PRC Corporate 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 Group’s operations, and generate most of the Sohu Group’s income or losses. The CIT Law applies an income tax rate of 25% to all enterprises but grants preferential tax treatment to HNTEs, Software Enterprises, and KNSEs.
Principal Entities Qualifi
e
d as HNTEs
Under 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 December 31, 2021, the following principal entities of the Sohu Group were qualified as HNTEs and were entitled to an income tax rate of 15%.
For Sohu
Video Tianjin and Sohu Internet. Video Tianjin and Sohu Internet
re-applied
for HNTE qualification and received approval in October 2021 and December 2021, respectively. Video Tianjin and Sohu Internet are entitled to continue to enjoy the beneficial tax rate qualified as HNTEs for the years 2021 through 2023, and will need to
re-apply
for HNTE qualification in 2024.
Sohu Media and Guangzhou Qianjun. Sohu Media and Guangzhou Qianjun qualified as HNTEs for the years 2020 through 2022, and will need to
re-apply
for HNTE qualification in 2023.
Sohu New Momentum. Sohu New Momentum qualified as an HNTE for the years 2019 through 2021, and will need to
re-apply
for HNTE qualification in 2022.
For Changyou
Gamease and AmazGame. Gamease and AmazGame qualified as HNTEs for the years 2020 through 2022, and will need to
re-apply
for HNTE qualification in 2023.
Gamespace and Changyou Chuangxiang. Gamespace and Changyou Chuangxiang qualified as HNTEs for the years 2019 through 2021, and will need to
re-apply
for HNTE qualification in 2022.
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Principal Entities Qualified as Software Enterprises
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
. Enterprises wishing to enjoy the status of a Software Enterprise must perform a self-assessment each year to ensure they meet the criteria for qualification and file required supporting documents with
the Ministry of Industry and Information Technology of the PRC and the relevant tax authorities before using the preferential CIT rates. These enterprises will be subject to the relevant governmental authorities’ assessment each year as to whether they are entitled to use the relevant preferential CIT treatments. If at any time during the preferential tax treatment years an enterprise uses the preferential CIT rates but the relevant authorities determine that it fails to meet applicable criteria for qualification, the relevant authorities may revoke the enterprise’s Software Enterprise status.
For Changyou
Changyou Chuangxiang. In 2021, Changyou Chuangxiang completed a self-assessment and filed required supporting documents for Software Enterprise status for 2020. Also in 2021, Changyou Chuangxiang qualified as a Software Enterprise after the relevant government authorities’ assessment and became entitled to a preferential income tax rate of 12.5% for 2020. Changyou Chuangxiang plans to follow the appropriate rules and procedures of the relevant government authorities in order to maintain its Software Enterprise status for 2021, the last year of a five-year period of qualification for Changyou Chuangxiang as a Software Enterprise.
U.S. Corporate Income Tax
Sohu.com Inc., which was formerly the
top-tier
publicly-traded parent company of the Sohu Group, was dissolved and liquidated on May 31, 2018. Sohu.com Inc. was a Delaware corporation that was subject to U.S. federal corporate income tax on its taxable income at a rate of 21% for taxable years beginning after December 31, 2017 and of up to 35% for prior tax years. U.S. federal tax legislation signed into law on December 22, 2017, commonly referred to as the Tax Cuts and Jobs Act (the “U.S. TCJA”), significantly modified the U.S. Internal Revenue Code by, among other things, reducing the maximum statutory U.S. federal corporate income tax rate from 35% to 21% for taxable years beginning after December 31, 2017; limiting and/or eliminating many business deductions; migrating the U.S. to a partial territorial tax system with a
one-time
Toll Charge on a mandatory deemed repatriation of previously deferred foreign earnings of certain foreign subsidiaries; subject to certain limitations, generally eliminating U.S. corporate income tax on dividends from foreign subsidiaries; and providing for new taxes on certain foreign earnings.
Certain activities conducted in the PRC resulted in U.S. corporate income taxes being imposed on Sohu.com Inc. when its subsidiaries that were controlled foreign corporations (“CFCs”) generated income that was 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 the company’s investments, was among the types of income that were subject to taxation under Subpart F. Any income taxable under Subpart F was taxable in the U.S. at the applicable federal corporate income tax rate. Subpart F income also included certain income from intra-Group transactions between Sohu.com Inc.’s non-U.S. subsidiaries and VIEs and Changyou’s non-U.S. subsidiaries and VIEs or Sogou’s non-U.S. subsidiaries and VIEs, or where Sohu.com Inc.’s non-U.S. subsidiaries or VIEs made 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. did not have to treat dividends received by its CFC subsidiaries as Subpart F income includible in Sohu.com Inc.’s taxable income in the U.S. 
To the extent that portions of Sohu.com Inc.’s U.S. taxable income, such as Subpart F income or GILTI, as applicable, had been determined to be from sources outside of the U.S., subject to certain limitations, Sohu.com Inc. may have been entitled to claim foreign tax credits to offset its U.S. income tax liabilities. Following the enactment of the U.S. TCJA, if dividends that Sohu.com Inc. received from its subsidiaries after January 1, 2018 were determined to be from sources outside of the U.S., subject to certain limitations, Sohu.com Inc. would generally not have been required to pay U.S. corporate income tax on those dividends. Liabilities for U.S. corporate income tax were accrued in the Company’s consolidated statements of comprehensive income and estimated tax payments were made when required by U.S. law.
Treatment of Toll Charge Related to the U.S. TCJA
Beginning in the fourth quarter of 2017, the Sohu Group had recognized a provisional amount of income tax expense for the Toll Charge of $219 million, which represented management’s estimate of the amount of the Toll Charge that would have been payable by Sohu.com Inc. based on the deemed repatriation to the United States of its share of previously deferred earnings of certain of its
non-U.S.
subsidiaries, offset by a reduction of $4 million in liability for deferred U.S. income tax, as a result of the U.S. TCJA. The Sohu Group included the provisional amount of the Toll Charge of $219 million in its interim financial statements through the quarter ended September 30, 2018, in reliance on SAB 118.
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For the fourth quarter of 2018, the Sohu Group’s management
re-evaluated
the impact on the Sohu Group of the Toll Charge under the U.S. TCJA. Management determined that it was more likely than not, based on the technical merits, that the tax position that the Sohu Group had no Toll Charge liability would be sustained. The Group recognized a tax benefit in the amount of $77 million, which was the largest amount that management determined to be greater than 50% likely to be realized upon settlement with the U.S. IRS. As a result, as of December 31, 2018, the Sohu Group had an unrecognized tax benefit in the amount of $142 million, which represented the difference between the tax benefit recognized in the fourth quarter of 2018 and management’s previous estimate of the Toll Charge. The estimate remained unchanged as of December 31, 2021. In addition, the Sohu Group accrued $6 million and $5 million, respectively, in interest on the unrecognized tax benefit for the years of 2020 and 2021.
The tax benefit recognized and the unrecognized tax benefit in relation to the Toll Charge may be subject to further adjustment in subsequent periods based on facts and circumstances that arose after December 31, 2021, such as any IRS assessments upon audit and management’s further judgment and estimates.

Cayman Island Tax
Under the current tax laws of the Cayman Islands, the Group is not subject to tax on its income or capital gains. In addition, no

Cayman Islands withholding tax will be imposed upon the payment of dividends by the Group to its shareholders.
Hong Kong Tax
The Group’s subsidiaries incorporated in Hong Kong are subject to profits tax in Hong Kong at the rate of 16.5% for each of the years ended December 31, 2019, 2020 and 2021
.
Composition of Income Tax Expense
Sohu.com Inc., which was the former
top-tier
entity of the Sohu Group, was a Delaware corporation that was subject to United States income tax. On May 31, 2018, Sohu.com Inc. was dissolved and liquidated and Sohu.com Limited became the
top-tier
entity of the Sohu Group. Sohu.com Limited is not subject to income or capital gains tax under the current laws of the Cayman Islands. There are no other taxes likely to be material to Sohu.com Limited levied by the government of the Cayman Islands.
The components of income before income
taxes are as follows (in thousands):
   
Year ended December 31,
 
   
2019
   
2020
   
2021
 
             
Income/(loss) before income tax expense
               
Income/(loss) from China operations
  $(89,150)   $154,514   $153,708 
Income/(loss) from
non-China
operations
   19,079    (57,815)    (22,141)
   
 
 
   
 
 
   
 
 
 
Total income/(loss) before income tax expense from continuing operations
  $(70,071)   $96,699   $131,567 
   
 
 
   
 
 
   
 
 
 
Income tax expense applicable to China operations
               
Current tax
  $9,026   $24,255   $31,089 
Deferred tax
   11,191    102,652    26,207 
   
 
 
   
 
 
   
 
 
 
Subtotal income tax expense applicable to China operations
   20,217    126,907    57,296 
Non-China
income tax expense
   7,887    6,207    4,817 
Non-China
withholding tax expense
   324    112    183 
   
 
 
   
 
 
   
 
 
 
Total income tax expense from continuing operations

  $28,428   $133,226   $62,296 
   
 
 
   
 
 
   
 
 
 
In 2021, of the $62.3 million total income tax expense, $57.3 million was from PRC tax, resulting primarily from accrued regular income tax expense of $48.4 million, and $5 million was for U.S. corporate income tax, resulting primarily from accrued interest on an unrecognized tax benefit.
In 2020, of the $133.2 million total income tax expense, $126.9 million was for PRC tax, resulting primarily from accrued regular income tax expense of $40.7 million and additional income withholding tax of $88 million recognized by Changyou due to a revised policy with respect to Changyou’s PRC subsidiaries regarding their distribution of cash dividends, offset by a reversal of PRC income tax expense of $6.9 million by Changyou due to preferential tax rates that Changyou’s subsidiaries were entitled to as KNSEs; and $6 million was for U.S. corporate income tax, resulting primarily from accrued interest on an unrecognized tax benefit.

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In
2019
, of the $
28.4
 million total income tax expense, $
20.2
 million was for PRC tax, resulting primarily from accrued regular income tax expense of $
32.6
 million, offset by a reversal of PRC income tax expense of $
19.5
 million by Changyou due to preferential tax rates that Changyou’s subsidiaries were entitled to as KNSE and Software enterprises, and $
8
 million was for U.S. corporate income tax, resulting primarily from accrued interest on an unrecognized tax benefit.
The combined effects of the income tax exemption and reduction
available to the Group are as follows (in thousands, except per share data):
   
Year Ended December 31,
 
   
2019
   
2020
   
2021
 
             
Tax holiday effect
  $7,981   $16,174   $1,635 
Basic net income per share effect
   0.20    0.41    0.04 
Effective Tax Rate
The
CIT Law applies an income tax rate of 25% to all enterprises, but grants preferential tax treatment to HNTEs, Software Enterprises, and KNSEs.
The U.S. TCJA significantly modified the U.S. Internal Revenue Code by, among other things, reducing the statutory U.S. federal corporate income tax rate from 35% to 21% for taxable years beginning after December 31, 2017; limiting and/or eliminating many business deductions; migrating the U.S. to a territorial tax system with a
one-time
Toll Charge on a mandatory deemed repatriation of previously deferred foreign earnings of certain foreign subsidiaries; subject to certain limitations, generally eliminating U.S. corporate income tax on dividends from foreign subsidiaries; and providing for new taxes on certain foreign earnings.
The following is reconciliation between the statutory rate and the Group’s effective tax rate. For 2019, 2020 and 2021, the statutory rate represented the PRC statutory rate of 25%. The table does not reflect any accruals related to the Toll Charge. See “
U.S. Corporate Income Tax
” and “
Treatment of Toll Charge Related to the U.S. TCJA.
”
   
Year Ended December 31,
 
   
2019
  
2020
  
2021
 
           
           
Statutory Rate:
   25%    25%    25%
Effect of tax holidays applicable to subsidiaries and consolidated VIEs (1)
   11%    (17%)    (1%)
Tax differential from statutory rate applicable to subsidiaries and consolidated VIEs
   7%    9%    3%
Effect of withholding taxes (2)
   (12%)    109%    19%
Changes in valuation allowance for deferred tax assets
   (71%)    27%    31%
Research and development super-deduction
   12%    (9%)    (19%)
Others
   (1%)    (13%)    (14%)
   
 
 
   
 
 
   
 
 
 
   (29%)   131%   44%
   
 
 
   
 
 
   
 
 
 
Note (1): The reversal of income tax for preferential income tax rates that Changyou’s subsidiaries and VIEs were entitled to as KNSEs or Software Enterprises for 2019, 2020 and 2021 was included in the “Effect of tax holidays applicable to subsidiaries and consolidated VIEs” in the above table.
Note (2): The
revised policy was adopted to facilitate the distribution of a special cash dividend in the aggregate amount of approximately $500.0 
million that was declared by Changyou’s board of directors (the “Changyou Board”) on April 5, 2018. The change for 2020 was mainly due to additional income withholding tax
of $88 million that was recognized in the second quarter of 2020 due to a revised policy with respect to Changyou’s PRC subsidiaries regarding their distribution of cash dividends.
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,” 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%.
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Before 2018, in order to fund the distribution of a dividend to shareholders of the Sohu Group’s majority-owned subsidiary Changyou, Changyou’s 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 HK, and adopted as a policy for such subsequent years for its PRC subsidiaries a limit on payment of dividends to their direct overseas parent companies of one-half of such PRC subsidiaries’ earnings. In 2018, in order to facilitate the distribution of a special cash dividend of
 $500.0 
million declared by the Changyou Board on April 5, 2018, Changyou revised its policy for its PRC subsidiaries with respect to their distribution of cash dividends. Under the revised policy, all of Changyou’s PRC subsidiaries (not including Changyou’s VIEs and their subsidiaries) will be able to distribute their cumulative available and undistributed earnings to their direct overseas parent companies in future periods. The change resulted in Changyou’s accrual of additional withholding income taxes of approximately
 $47 
million for the period before December 31, 2017, which was recognized in the Sohu Group’s consolidated financial statements for the quarter ended March 31, 2018. As of December 31, 2019, the Sohu Group had accrued deferred tax liabilities related to Changyou in the amount of
 $86.8 
million for PRC withholding tax. In 2020, after the completion of Changyou Merger, Changyou’s net income/(loss) is wholly attributable to Sohu. Changyou changed its policy for its PRC subsidiaries with respect to their distribution of cash dividends. The change resulted in Changyou’s accrual of additional withholding income taxes of approximately
 $88 
million, which was recognized in the Sohu Group’s consolidated financial statements for the quarter ended June 30, 2020. As of December 31, 2021, the Sohu Group had accrued deferred tax liabilities related to Changyou in the amount of
 $237.1 million for PRC withholding tax.
With the exception of that dividend, the Sohu Group does not intend to have any of its PRC subsidiaries or VIEs distribute any undistributed profits of such subsidiaries or VIEs to their direct overseas parent companies, but rather intends that such profits will be permanently reinvested by such subsidiaries and VIEs for their PRC operations. As of December 31, 2021, the total amount of undistributed profits from the PRC subsidiaries and VIEs for which no withholding tax had been accrued was $484.9 million, and the unrecognized tax liabilities were $48.5 million.
PRC Value-Added Tax
On May 1, 2016, the transition from the imposition of PRC business tax to the imposition of VAT was expanded to all industries in China, and as a result all of the Sohu Group’s 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).
Deferred Tax Assets and Liabilities
Significant components of the Group’s deferred tax assets and liabilities consist of the following (in thousands):
   
As of December 31,
 
   
2020
   
2021
 
         
Deferred tax assets:
          
Net operating loss from operations
  $325,797   $291,380 
Accrued bonus and commissions
   10,613    9,101 
Intangible assets transfer
   690    485 
Others
   8,692    7,489 
   
 
 
   
 
 
 
Total deferred tax assets
   345,792    308,455 
Less: Valuation allowance
   (326,755)    (289,097)
   
 
 
   
 
 
 
Net deferred tax assets
  $19,037   $19,358 
   
 
 
   
 
 
 
Deferred tax liabilities
          
Withholding tax for dividend
  $(206,594)   $(237,116)
Others
   (10,999)    (12,049)
   
 
 
   
 
 
 
Total deferred tax liabilities
  $(217,593)   $(249,165)
   
 
 
   
 
 
 

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Net deferred tax assets are recorded under other assets in the consolidated balance sheets. As of December 31, 2021, the Group had net operating losses from PRC entities of approximately $1.85 billion available to offset against future net profit for income tax purposes. The Group anticipates that it is more likely than not that these net operating losses may not be utilized based on its estimate of the operation performance of these PRC entities; therefore, $285.8 million in deferred tax assets generated from net operating losses were offset by a valuation allowance.
The following table sets forth the movement of the valuation
allowances for deferred tax assets for the years presented (in thousands):
   
For the Year Ended

December 31,
 
   
2019
   
2020
   
2021
 
             
             
Beginning balance
  $250,524    283,711    326,755 
Provision for the year
   44,634    36,363    45,787 
Reversal for the year
   (7,311)    (12,637)    (91,019)
Foreign currency translation adjustment
   (4,136)    19,318    7,574 
   
 
 
   
 
 
   
 
 
 
Ending balance
  $283,711    326,755    289,097 
   
 
 
   
 
 
   
 
 
 
In 2021, $48.5
million of PRC net operating losses generated from previous years expired. Pursuant to a public announcement issued by the PRC State Administration of Taxation in August 2018, net operating losses of entities not qualified as HNTEs will expire between 2022 and 2026 if not utilized and those of entities qualified as HNTEs will expire in 2031.
The reversal of valuation allowance was also due to the impact of changes in income tax rates upon preferential tax rates
being
obtained.
Uncertain Tax Positions
The following table summarizes the Group’s unrecognized tax
benefit from January 1, 20182019 to December 31, 20202021 (in thousands):
 
   
As of December 31,
 
   
2018
   
2019
   
2020
 
Beginning balance
  $31,138   $174,363   $181,640 
Increases /(decreases) related to prior year tax positions
   (1,190)    7,277    7,120 
Increases related to current year tax positions
   144,415    0    0 
                
Ending balance
  $174,363   $181,640   $188,760 
                
   
As of December 31,
 
   
2019
   
2020
   
2021
 
             
Beginning balance
  $174,363   $181,640   $188,760 
Increases/(decreases) related to prior year tax positions
   7,277    7,120    5,158 
Increases related to current year tax positions
   0    0    0 
   
 
 
   
 
 
   
 
 
 
Ending balance
  $181,640   $188,760   $193,918 
   
 
 
   
 
 
   
 
 
 
The increaseincreases in 2021, 2020 wasand 2019 were mainly due to $6 million in interest recognized in connection with an unrecognized tax benefit for the year ended December 31, 2020.benefit.
The increase in 2019 was mainly due to $8 million interest recognized in connection with an unrecognized tax benefit for the year ended December 31, 2019.
The material jurisdictions in which the Group is subject to potential examination include China and the United States. In general, the PRC tax authorities have up to five years and in certain cases up to 10 years, and the U.S. IRS has up to three years and in certain cases up to six years, to conduct examinations of the tax filings of the Group. All of these related tax years are open for the Sohu Group.
16.
16. COMMITMENTS AND CONTINGENCIES
Commitments
The following table sets forth the Group’s
commitments as of December 31, 20202021 (in thousands):
 
   
2021
   
2022
   
2023
   
2024
   
2025
   
Thereafter
   
Total
Payments
Required
 
Royalties and expenditures for licensed content of games
  $28,423    7,870    0    0    0    0    36,293 
Purchase of bandwidth
   14,084    150    102    0    0    0    14,336 
Interest payment commitment
   6,623    1,458    1,334    628    0    0    10,043 
Operating lease obligations
   4,144    3,647    1,165    73    37    0    9,066 
Purchase of content and services — others
   6,715    236    19    0    0    0    6,970 
Purchase of content and services — video
   5,398    1,006    0    0    0    0    6,404 
Others
   518    24    0    0    0    0    542 
                                    
Total Payments Required
  $65,905    14,391    2,620    701    37    0    83,654 
                                    
   
2022
   
2023
   
2024
   
2025
   
2026
   
Thereafter
   
Total
Payments
Required
 
                             
Royalties and expenditures for licensed content of games
  $15,976    13,512    2,746    0    0    0    32,234 
Purchase of bandwidth
   14,418    1,029    455    0    0    0    15,902 
Purchase of content and services - others

   7,530    389    43    0    0    0    7,962 
Purchase of content and services - video

   6,387    0    0    0    0    0    6,387 
Operating lease obligations   3,355    660    103    37    0    0    4,155 
Others
   3,796    0    0    0    0    0    3,796 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total Payments Required
  $51,462    15,590    3,347    37    0    0    70,436 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
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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 Group’s business, results of operations, financial condition and cash flows. As of December 31, 2020,2021, Sohu and Changyou had no significant litigation contingencies.
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 Group’s 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 Group’s VIE structure are discussed in Note 17 - VIEs.
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Regulatory risks also encompass interpretation by PRC tax authorities of current tax law, including the applicability of certain preferential tax treatments.
The Sohu Group’s 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.
17.
17. VIEs
Background
PRC laws and regulations prohibit or restrict foreign ownership of companies that operate value-added telecommunication services, Internet publishing, online news information and content, Internet access,services, online audiovisual transmission, online games, mobile, value added telecommunications and certain other businessesbusiness activities in the PRC 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.beneficiary for accounting purposes.
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 the VIEs through which it conducts a significant portion of its VIEsoperations and the economic benefit flow of contractual arrangements with the VIEs. In connection with such evaluation,evaluations, management also took into account the fact that, as a result of contractual arrangements with its consolidatedthe VIEs that the Sohu Group consolidates, it controls the shareholders’ voting interests in those VIEs. As a result of such evaluation,evaluations, the management concluded that the Sohu Group is the primary beneficiary of the VIEs whichthat the Group consolidates.
All of the consolidated VIEs are incorporated and operated in the PRC, and the Group’s principal VIEs are directly or indirectly owned by Dr. Charles Zhang, the Sohu Group’s 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.
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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 December 31, 2020,2021, the aggregate amount of these loans was $7.6 million.
Under its contractual arrangements with the consolidated VIEs, the Sohu Group has the power to direct activities of the VIEs, and can have assets transferred freely out of the VIEs without any restrictions. Therefore, the Group considers that there is no asset of a consolidated VIE that can be used only to settle obligations of the VIEs, except for registered capital and PRC statutory reserves of the VIEs. As of December 31, 2020,2021, the registered capital and PRC statutory reserves of the consolidated VIEs totaled $103.9$45.1 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:
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Basic Information for Principal VIEs and Subsidiaries of Principal VIEs
For Sohu
 
High Century
High Century was incorporated in 2001. As of December 31, 2020,2021, Dr. Charles Zhang and Wei Li held 80% and 20% interests, respectively, in this entity.
 
Heng Da Yi Tong
Heng Da Yi Tong was incorporated in 2002. As of December 31, 2020,2021, Dr. Charles Zhang and Wei Li held 80% and 20% interests, respectively, in this entity.
 
Sohu Internet
Sohu Internet was incorporated in 2003. As of December 31, 2020,2021, High Century held a 100% interest in this entity.
 
Donglin
Donglin was incorporated in 2010. As of December 31, 2020,2021, Sohu Internet held a 100% interest in this entity.
 
Tianjin Jinhu
Tianjin Jinhu was incorporated in 2011. As of December 31, 2020,2021, Xiufeng Deng and Xuemei Zhang each held a 50% interest in this entity.
 
Focus Interactive
Focus Interactive was incorporated in July 2014. As of December 31, 2020,2021, Heng Da Yi Tong held 100% of the equity interests in this entity
.
Guangzhou Qianjun
Guangzhou Qianjun was acquired in November 2014. As of December 31, 2021, Tianjin Jinhu held a 100% interest in this entity.
For Changyou
 
Gamease
Gamease was incorporated in 2007. As of December 31, 2020,2021, High Century held a 100% interest in this entity.

 
Shanghai ICE
Shanghai ICE was acquired by Changyou in 2010. As of December 31, 2020,2021, Gamease held a 100% interest in this entity.
 
Guanyou Gamespace
Guanyou Gamespace was incorporated in 2010. As of December 31, 2020,2021, Beijing Changyou Star Digital Technology Co., Ltd (“Changyou Star”) held a 100% interest in this entity.

For Sogou
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Sogou Information
Sogou Information was incorporated in 2005. As of December 31, 2020, Xiaochuan Wang, Sogou’s Chief Executive Officer, High Century and Tencent held 10%, 45% and 45% interests, respectively, in this entity.
Chengdu Easypay
Chengdu Easypay was incorporated in 2015. As of December 31, 2020, Sogou Information held 100% of the equity interests in this entity.
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Financial Information
The following financial information of the Sohu Group’s consolidated VIEs (including subsidiaries of these VIEs) is included in the accompanying consolidated financial statements (in thousands):
 
   
As of December 31,
 
   
2019
   
2020
 
ASSETS:
          
Cash and cash equivalent
s
  $40,535   $47,028 
Restricted cash
   1,132    1,211 
Accounts receivable, net
   67,403    47,234 
Prepaid and other current assets
   13,586    15,385 
Short-term investments
   0    153 
Intra-Group receivables due from the Company’s subsidiaries
   400,338    506,659 
Assets held for sale (current)
   121,347    113,011 
           
Total current assets
   644,341    730,681 
           
Long-term investments, net
   17,488    17,307 
Fixed assets, net
   639    295 
Intangible assets, net
   6,832    3,173 
Goodwill
   32,782    33,670 
Other
non-current
assets
   14,754    15,134 
Assets held for sale
(non-current)
   32,244    0 
           
Total assets
  $749,080   $800,260 
           
LIABILITIES:
          
Accounts payable
  $8,595   $11,145 
Accrued liabilities
   50,913    46,888 
Receipts in advance and deferred revenue
   38,754    43,076 
Other current liabilities
   31,684    37,148 
Intra-Group payables due to the Company’s subsidiaries
   300,601    332,794 
Liabilities held for sale (current)
   138,303    187,712 
           
Total current liabilities
   568,850    658,763 
           
Long-term tax liabilities
   13,220    14,134 
Deferred tax liabilities
   1,998    2,014 
Intra-Group payables due to the Company’s subsidiaries
   18,599    19,338 
Other long-term liabilities
   0    286 
Liabilities held for sale
(non-current)
   1,130    0 
           
Total liabilities
  $603,797   $694,535 
           
   
As of December 31,
 
   
2020
   
2021
 
         
ASSETS:
          
Cash and cash equivalents
  $47,028   $32,513 
Restricted cash
   1,211    0 
Short-term investments
   153    0 
Accounts receivable, net
   47,234    36,027 
Prepaid and other current assets
   15,385    18,836 
Intra-Group receivables due from the Company’s subsidiaries
   506,659    647,330 
Assets held for sale (current)
   113,011    0 
   
 
 
   
 
 
 
Total current assets
   730,681    734,706 
   
 
 
   
 
 
 
Fixed assets, net
   295    427 
Other
non-current
assets
   69,284    86,744 
   
 
 
   
 
 
 
Total assets
  $800,260   $821,877 
   
 
 
   
 
 
 
LIABILITIES:
          
Accounts payable
  $11,145   $12,325 
Accrued liabilities
   46,888    43,695 
Receipts in advance and deferred revenue
   43,076    45,844 
Other current liabilities
   37,148    24,026 
Intra-Group payables due to the Company’s subsidiaries
   350,599    462,487 
Liabilities held for sale (current)
   187,712    0 
   
 
 
   
 
 
 
Total current liabilities
   676,568    588,377 
   
 
 
   
 
 
 
Long-term tax liabilities
   14,134    14,465 
Deferred tax liabilities
   2,014    3,323 
Other non-current liabilities
   1,819    1,750 
   
 
 
   
 
 
 
Total liabilities
  $694,535   $607,915 
   
 
 
   
 
 
 
 
   
As of December 31,
 
   
2018
   
2019
   
2020
 
Net revenue
  $499,861   $511,957   $583,187 
Net income from continuing operations
   1,098    19,607    41,756 
Net loss from discontinued operations
  $(19,534)   $(1,491)   $(82,329) 
                
   
Year Ended December 31,
 
   
2019
   
2020
   
2021
 
             
Revenues:
               
Third-party revenues
  $482,283   $552,980   $664,823 
Intra-Group revenues
   29,674    30,207    21,488 
   
 
 
   
 
 
   
 
 
 
Total revenues
   511,957    583,187    686,311 
Cost of revenues:
               
Third-party cost of revenues
   101,044    93,333    81,725 
Intra-Group cost of revenues
   139,765    141,717    136,221 
   
 
 
   
 
 
   
 
 
 
Total cost of revenues
   240,809    235,050    217,946 
Operating expenses:
               
Third-party operating expenses
   69,131    50,983    72,126 
Intra-Group operating expenses
   184,799    254,796    366,762 
   
 
 
   
 
 
   
 
 
 
Total operating expenses
   253,930    305,779    438,888 
Net income from continuing operations
   19,607    41,756    35,805 
Net loss from discontinued operations
   (1,491)    (82,329)    (47,924) 
 
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Year ended December 31,
 
   
2019
   
2020
   
2021
 
             
Cash flows from operating activities:
               
Net cash provided by transactions with external parties
  $334,903   $459,263   $541,172 
Net cash used in transactions with intra-Group entities
   (310,243)    (379,649)    (505,553) 
   
 
 
   
 
 
   
 
 
 
Net cash provided by continuing operating activities
   24,660    79,614    35,619 
Net cash used in discontinued operating activities
   (5,046)    (13,244)    (1,789) 
   
 
 
   
 
 
   
 
 
 
Net cash provided by operating activities
   19,614    66,370    33,830 
   
 
 
   
 
 
   
 
 
 
Cash flows from investing activities:
               
Net cash used in transactions with external parties
   (13,272)    (773)    (23,887) 
Net cash used in transactions with intra-Group entities
   (40,426)    (106,321)    (140,671) 
Net cash used in continuing investing activities
   (53,698)    (107,094)    (164,558) 
   
 
 
   
 
 
   
 
 
 
Net cash provided by/(used in) discontinued investing activities
   (18,040)    7,797    12,116 
   
 
 
   
 
 
   
 
 
 
Net cash used in investing activities
   (71,738)    (99,297)    (152,442) 
   
 
 
   
 
 
   
 
 
 
Cash flows from financing activities:
               
Net cash provided by transactions with intra-Group entities
   26,559    32,751    111,888 
   
 
 
   
 
 
   
 
 
 
Net cash provided by continuing financing activities
   26,559    32,751    111,888 
Net cash provided by/(used in) discontinued financing activities
   8,601    152    (9,131) 
   
 
 
   
 
 
   
 
 
 
Net cash provided by financing activities
   35,160    32,903    102,757 
   
 
 
   
 
 
   
 
 
 
   
Year ended December 31,
 
   
2018
   
2019
   
2020
 
Net cash provided by/(used in) continuing operating activities
  $18,268   $(2,038)   $5,224 
Net cash provided by/(used in) discontinued operating activities
   51,657    (5,046)    (13,244) 
Net cash provided by/(used in) operating activities
   69,925    (7,084)    (8,020) 
Net cash provided by/(used in) investing activities
   (1,110)    (441)    47 
Net cash provided by/(used in) discontinued investing activities
   (48,161)    (18,040)    7,797 
Net cash provided by/(used in) investing activities
   (49,271)    (18,481)    7,844 
Net cash provided by continuing financing activities
   650    0    0 
Net cash provided by discontinued financing activities
   0    8,601    152 
                
Net cash provided by financing activities
  $650   $8,601   $152 
                
Amounts previously reported for 2020 and 2019 have been revised, which revisions, in the opinion of management, are immaterial. The impact of the revisions was eliminated in consolidation. There is no impact on the previously reported consolidated financial position, results of operations or cash flows.
The intra-Group payables of the Sohu Group’s consolidated VIEs for the year ended December 31, 2020 have been revised to reflect an adjustment with an increase of $17.8 million in current payables and a decrease of $17.8 million in non-current payables.
The amounts of cash flow activities of the Sohu Group’s consolidated VIEs for the year ended December 31, 2020 have been revised to reflect an adjustment with an increase of $74.4 million in the cash provided by operating activities, an increase of $107.1 million in the cash used in investing activities, and an increase of $32.8 million in the cash provided by financing activities. The amounts of cash flow activities of the Sohu Group’s consolidated VIEs for the year ended December 31, 2019 have been revised to reflect an adjustment with an increase of $26.7 million in the cash provided by operating activities, an increase of $53.3 million in the cash used in investing activities, and an increase of $26.6 million in the cash provided by financing activities.

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 Group’s legal department and may be completed and effected at Sohu Media’s election.
Loan and share pledge agreement
between Sohu 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 Group’s legal department and may be completed and effected at Focus HK’s election.
Loan agreements and equity pledge agreements
between 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 Jinhu’s 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.
Exclusive 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.


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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 Gamease’s and Guanyou Gamespace’s obligations to AmazGame and Gamespace under the various
VIE-related
agreements. If the shareholders breach their obligations under any
VIE-related
agreements (Gamease’s or Guanyou Gamespace’s breach of any of its obligations under the various applicable
VIE-related
agreements will be treated as its shareholder’s 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.
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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 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.
Loan and share pledge agreements
between Sogou Technology and the shareholders of Sogou Information. The loan agreement provides for a loan to Xiaochuan Wang, the individual shareholder of Sogou Information, to be used by him to make contributions to the registered capital of Sogou Information in exchange for his equity interest in Sogou Information. The loan is interest
free-and
is repayable on demand, but the shareholder may repay the loan only by transferring to Sogou Technology his equity interest in Sogou Information. Under the pledge agreement, all of the shareholders of Sogou Information pledge their equity interests to Sogou Technology to secure the performance of their obligations under the various
VIE-related
agreements. If any shareholder of Sogou Information breaches any of his or its obligations under any
VIE-related
agreements, Sogou Technology is entitled to exercise its right as the beneficiary under the share pledge agreement. The share pledge agreement terminates only after all of the obligations of the shareholders under the various
VIE-related
agreements are no longer in effect.
Exclusive equity interest purchase right agreements
between Sogou Technology, Sogou Information and the shareholders of Sogou Information. Pursuant to these agreements, Sogou Technology and any third party designated by it have the right, exercisable at any time when it becomes legal to do so under PRC law, to purchase from the shareholders of Sogou Information all or any part of their equity interests at the lowest purchase price permissible under PRC law.
Business operation agreement
among Sogou Technology, Sogou Information and the shareholders of Sogou Information. The agreement sets forth the right of Sogou Technology to control the actions of the shareholders of Sogou Information. The agreement has a term of 10 years, renewable at the request of Sogou Technology.
Powers of Attorney
executed by the shareholders of Sogou Information in favor of Sogou Technology with a term of 10 years, extendable at the request of Sogou Technology. These powers of attorney give Sogou Technology the right to appoint nominees to act on behalf of each of the three Sogou Information shareholders in connection with all actions to be taken by Sogou Information.
Business Arrangements between Subsidiaries and Consolidated VIEs
A significant portion of the Sohu Group’s operations are conducted through the VIEs that the Sohu Group consolidates, which generate a significant amount of the Sohu Group’s revenues. In order for the Sohu Group to be able to receive such revenues, and, if applicable, other assets, from the VIEs, it relies on payments made by the VIEs to the Sohu Group’s PRC subsidiaries pursuant to a series of service contracts between them in order for the VIEs to transfer such revenues or other assets to the Sohu Group. The following is a summary of the material service contracts currently in effect between the Sohu Group’s PRC subsidiaries and certain of the VIEs that the Sohu Group consolidates:
Exclusive technology consulting and service agreement
between Sohu Era and Sohu Internet. Pursuant to this agreement Sohu Era has the 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.
Exclusive technology consulting and service agreement
between Video Tianjin and Tianjin Jinhu. Pursuant to this agreement Video Tianjin has the 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 service agreement
between Donglin and Sohu Media. Pursuant to this agreement Sohu Media has the right to provide technology services and other related services to Donglin in exchange for a percentage of the gross revenue of Donglin. The agreement has a term of three years
 
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and is renewable at the request of Sohu Media.
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Technology support and utilization agreements
between AmazGame and Gamease, and between Gamespace and Guanyou Gamespace.Gamespace, and between Changyou Chuangxiang and Gamease. Pursuant to these agreements, AmazGame, Gamespace and GamespaceChangyou Chuangxiang have the 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, Gamespace or GamespaceChangyou Chuangxiang at any time, of Gamease’s and Guanyou Gamespace’s respective revenues. Each agreement terminates only when AmazGame, Gamespace or GamespaceChangyou Chuangxiang is dissolved.
Services and maintenance agreements
between AmazGame and Gamease, and between Gamespace and Guanyou Gamespace.Gamespace, and between Changyou Chuangxiang and Gamease. Pursuant to these agreements, AmazGame, Gamespace and Gamespace,Changyou Chuangxiang, 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, Gamespace or Gamespace,Changyou Chuangxiang, as the case may be, is dissolved.
Exclusive technology consulting and service agreement
between Sogou Technology and Sogou Information. Pursuant to this agreement Sogou Technology has the 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.
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.

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VIE-Related
Risks
It is possible that the Sohu Group’s 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. If a finding were made by PRC authorities that the Sohu Group’s 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 Group’s 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 Group’s business operations, and have a severe adverse impact on the Sohu Group’s cash flows, financial position, and operating performance. The Sohu Group’s management considers the possibility of such a finding by PRC regulatory authorities to be remote.
In addition, it is possible that the contracts among the Sohu Group, the Sohu Group’s consolidated VIEs and the shareholders of itssuch 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. As of the date of this report, the validity and enforceability of the contracts among the Sogou Group, the Sohu Group’s consolidated VIEs and the shareholders of such VIEs, and, to the knowledge of the Company, of any similar contracts entered into by other
PRC-based
companies, have never been considered or determined by a PRC court. 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 Group’s consolidated financial statements. If such were the case, the Sohu Group’s cash flows, financial position and operating performance would be severely adversely affected. The Sohu Group’s contractual arrangements with respect to its consolidated VIEs are in place. The Sohu Group’s management believes that such contracts are enforceable, and considers the possibility remote that PRC regulatory authorities with jurisdiction over the Sohu Group’s operations and contractual relationships would find the contracts to be unenforceable.
The
Sohu Group’s operations and businesses rely on the operations and businesses of its VIEs, which hold certain recognized and unrecognized revenue-producing assets. The recognized revenue-producing assets include goodwill and intangible assets acquired through business acquisitions. Goodwill primarily represents the expected synergies from combining an acquired business with the 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 Group’s operations and businesses may be adversely impacted if the Sohu Group loses the ability to use and enjoy
benefit from
assets held by these VIEs.
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18. SOHU.COM LIMITED SHAREHOLDERS’ EQUITY
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18.
SOHU.COM LIMITED SHAREHOLDERS’ EQUITY
Summary of the Company’s outstanding shares (in thousands):
 
   
Number of Outstanding Shares
As of December 31,
 
   
2018
   
2019
   
2020
 
Balance, beginning of year
   38,898    39,229    39,269 
Issuance:
   331    40    37 
                
Balance, end of year
   39,229    39,269    39,306 
                
   
Number of Outstanding Shares
As of December 31,
 
   
2019
   
2020
   
2021
 
Balance, beginning of year
   39,229    39,269    39,306 
Issuances:   40    37    44 
Repurchases:   0    0    (1,129) 
   
 
 
   
 
 
   
 
 
 
Balance, end of year
   39,269    39,306    38,221 
 
 
 
 
 
 
 
 
 
 
 
 
 
Treasury Stock
Treasury stock consists of the Company’s ordinary shares, including ordinary shares represented by ADSs, repurchased by the Company or that it is obligated to repurchase as of the reporting date. Ordinary shares included in treasury stock are no longer deemed to be outstanding. Treasury stock is accounted for under the cost method.
On November 13, 2021, the Sohu Board authorized a share repurchase program of up to $100 million of outstanding Sohu ADSs over a twelve-month period from November 13, 2021 to November 12, 2022. As of December 31, 2021, Sohu had repurchased 1,129,228 ADSs under the share repurchase program at an aggregate cost of approximately $18.7 million.
Share Incentive Plans
Sohu (excluding Sohu Video), Changyou, Sogou, 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.
1) Sohu.com Limited Share-based Awards
Sohu’s 2018 Share Incentive Plan
On
July 2, 2010, Sohu.com Inc.’s
shareholders
adopted the 2010 Stock Incentive Plan, which provides for the issuance of up to
1,500,000
shares of Sohu.com Inc.’s 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 share-based award granted under the Sohu 2010 Stock Incentive Plan is
10 years
ten years from the grant date.
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On
April 2, 2018, Sohu.com Limited adopted the Sohu 2018 Share Incentive Plan, which provides for the issuance of up 1,148,565 ordinary shares of Sohu.com Limited. The Sohu 2018 Share Incentive Plan will expire in April 2028.
Upon the dissolution of Sohu.com Inc. on May 31, 2018, Sohu.com Limited assumed all then existing obligations of Sohu.com Inc. with respect to equity incentive awards that had been granted under the Sohu 2010 Stock Incentive Plan and then remained outstanding, and such awards were converted into the right to receive upon exercise or settlement Sohu.com Limited’s ordinary shares under the Sohu 2018 Share Incentive Plan rather than shares of the common stock of Sohu.com Inc., subject to the other terms of such outstanding awards.
As of December 31, 2020, 208,2802021, 214,405 shares were available for grant under the Sohu 2018 Share Incentive Plan.
i) Summary of Share Option Activity
In February 2015, May 2016, September 2017 and November 2017, Sohu.com Inc.’s
the Sohu Board of Directors approved
contractual grants to members of the Company’s management and key employees of options for the purchase of an aggregate of 1,068,000, 13,000, 32,000 and 6,000 shares of common stock of Sohu.com Inc., respectively, under the Sohu 2010 Stock Incentive Plan, with nominal exercise prices of $0.001, all of which were converted, on May 31, 2018, into the right to receive upon exercise Sohu.com Limited’s ordinary shares under the Sohu 2018 Share Incentive Plan.
 In February 2019, July 2019, September 2020 and September 2020, Sohu.com Limited’s2021
, the Sohu Board of Directors approved
contractual grants to members of the Company’s management and key employees of options for the purchase of an aggregate of
20,000
,
477,500
,
34,000
and 34,000 shares of 5,000
ordinary shares of Sohu.com Limited, respectively, under the Sohu 2018 Share Incentive Plan, with nominal exercise prices of $0.001.
$
0.001
. These share 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 share options are substantially similar to restricted share units except for the nominal exercise price, which would be zero for restricted share units.
Under
ASC
718-10-25
and
ASC
718-10-55
, no grant date can be established for these 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 options, the public market price of the underlying shares at each reporting date is used and a binomial valuation model is applied.
As of December 31, 2020, 815,4252021, 927,788 of these 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 options has been adjusted and fixed based on their aggregate fair values, at their respective grant dates, of $26.4$28.5 million.
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A summary of option activity under the Sohu 2018 Share Incentive Plan as of and for the year ended December 31, 20202021 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 as of January 1, 2020
   128   $0.001        $  
Granted
   112    0.001           
Exercised
   (43)    0.001           
Forfeited or expired
   0                
                     
Outstanding as of December 31, 2020
   197    0.001    6.09    3,147 
                     
Vested as of December 31, 2020
   197    0.001    6.09    3,147 
                     
Exercisable as of December 31, 2020
   197    0.001    6.09    3,147 
                     
           
Weighted
     
   
Number
   
Weighted
   
Average
   
Aggregate
 
   
Of
   
Average
   
Remaining
   
Intrinsic
 
   
Shares
   
Exercise
   
Contractual
   
Value (1)
 
Options
  
(in thousands)
   
Price
   
Life (Years)
   
(in thousands)
 
Outstanding as of January 1, 2021
   197   $0.001    
   $
 
Granted
   113    0.001    
    
 
Exercised
   (39)   0.001    
    
 
Forfeited or expired
   0   

    
    
 
   
 
 
                
Outstanding as of December 31, 2021
   271    0.001    5.87    4,412 
   
 
 
                
Vested as of December 31, 2021
   271    0.001    5.87    4,412 
   
 
 
                
Exercisable as of December 31, 2021
   271    0.001    5.87    4,412 
   
 
 
                
Note (1): The aggregated intrinsic value in the preceding table represents the difference between Sohu’s closing ADS price of $15.94$16.28 on December 31, 20202021 and the nominal exercise price of the options.
For the years ended December 31, 2021, 2020 2019 and 2018,2019, total share-based compensation expense recognized for these options was $2.6$1.8 million, $1.9$2.6 million and negative $5.1$1.9 million, respectively. The negative amounts resulted from
re-measured
compensation expense based on the then-current fair value of the awards on the reporting date. For the years ended December 31, 2021, 2020 2019 and 2018,2019, the total fair values of these Sohu options vested on their respective vesting dates were $2.1 million, $1.0 million $2.5 million and $5.0$2.5 million, respectively. For the years ended December 31, 2021, 2020 2019 and 2018,2019, the total intrinsic value of options exercised was $0.8 million, $0.7 million and $0.6 million, and $6.2 million, respectively.

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2) Changyou.com Limited Share-based Awards
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, Changyou’s
the Changyou
Board approved an increase in the number of Class A ordinary shares reserved under the Changyou 2014 Share Incentive Plan from 2,000,000 to 6,000,000. The maximum term of any share right granted under the Changyou 2014 Share Incentive Plan is ten10 years from the grant date. The Changyou 2014 Share Incentive Plan will terminate inJune 2024. As of December 31, 2020,202
1
, all shares available for grant under the Changyou 2014 Share Incentive Plan had been granted.
i) Summary of Share Option Activity
On November 2, 2014, the Changyou Board 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, Changyou’sthe Changyou 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, Changyou’s
the Changyou 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, Changyou’s
the Changyou 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. On August 26, 2019, Changyou’s
the Changyou Board of Directors approved
the grant, effective as of October 1, 2019, to a member of Changyou’s management and a Changyou employee of options for the purchase of an aggregate of 3,023,000 Class A ordinary shares at an exercise price of $0.01 per Class A ordinary share. 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. After the completion of the Changyou Merger, the Sohu Board approved the Changyou Plans’ Modification, pursuant to which, among other things, a portion of the share options previously granted under the Changyou 2014 Share Incentive Plan that became vested after the completion of the Changyou Merger were settled by Changyou at a fixed price of $5.39 per Changyou Class A ordinary share, which equals the Changyou Merger consideration of $5.40 per Changyou Class A ordinary share minus the
per-share
exercise price of $0.01 of such options. None of the remaining share options granted under the Changyou 2014 Share Incentive Plan that became vested after the completion of the Changyou Merger or that become vested in the future will be exercisable, but can only be repurchased by Changyou at a fixed price of $5.39 per Changyou Class A ordinary share underlying such vested share options upon termination of the option holders’ employment or upon approval of the Chairman of the Sohu Board. As a result of the Changyou Plans’ Modification, share-based compensation expense will be accrued over the service period based on the fixed price of $5.39 per Changyou Class A ordinary share. No subsequent fair value
re-measurement
will be made, given that the award is an obligation based on a fixed amount of $5.39 per Changyou Class A ordinary share.
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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.
Prior to the completion of Changyou Merger, 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 was used and a binomial valuation model was applied.
As of December 31, 2020, 3,732,7502021, 4,488,500 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 of $4.2$4.1 million for these granted share options was adjusted and fixed based on the aggregate amounts of the fair values of these granted share options at their respective grant dates for periods before the Changyou Plans’ Modification, and at a price of $5.39 $
5.39
per Changyou Class A ordinary share for periods after the Changyou Plans’ Modification.
For
the years ended December 31, 2021, 2020 2019 and 2018,2019, total share-based compensation expense recognized for share options under the Changyou 2014 Share Incentive Plan was $7.7$3.9 million, negative $1.9$7.7 million and negative $6.5$1.9 million, respectively. For the years ended December 31, 2021, 2020 2019 and 2018,2019, the total fair values of these Changyou share options vested on their respective vesting dates were $4.1 million, $4.2 million and $1.0 million and $5.7 
million, respectively. For the years ended December 31, 2021, 2020 2019 and 2018,2019, the total intrinsic value of share options exercised was NaN, $0.1 million $6.6
 and
$6.6 million, and $14.9 million,
respectively.
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Changyou 2019 Share Incentive Plan
On August 3, 2019, Changyou adopted and reserved for issuance 3,000,000 Class A ordinary shares
of Changyou
under a new share incentive plan (the “Changyou 2019 Share Incentive Plan”). On August 26, 2019, Changyou’s
the Changyou Board of Directors approved
the grant, effective as of October 1, 2019, to certain members of the Changyou’s management and certain other employees of options for the purchase of an aggregate of 1,909,000 Class A ordinary shares at an exercise price of $0.01.
On February 2, 2021,
the Changyou Board approved
the grant, effective 
for vesting commencement purposes
as of February 
2
, 2021, to certain members of
Changyou’s management and certain other
employees of options for the purchase of an aggregate of 600,000 Class A ordinary shares 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. After the completion of the Changyou Merger, the Sohu Board approved the Changyou Plans’ Modification, pursuant to which, among other things, none of the share options granted under the Changyou 2019 Share Incentive Plan will be exercisable, but can only be repurchased by Changyou following vesting at a fixed price of $5.39 per Changyou Class A ordinary share underlying such vested share options upon termination of the option holders’ employment or upon approval of the Chairman of the Sohu Board. As a result of the Changyou Plans’ Modification, share-based compensation expense will be accrued over the service period based on the
a
fixed price of $5.39 per Changyou Class A ordinary share. No subsequent fair value
re-measurement
will be made, given that the award is an obligation
awards are obligations
based on a fixed amount of $5.39 per Changyou Class A ordinary share.
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.
Prior to the completion of the Changyou Merger, to determine the fair value of Changyou share options, the public market price of the underlying Changyou Class A ordinary shares at each reporting date was used and a binomial valuation model was applied.
As of December 31, 2020, 477,2502021, 954,500 of the share options granted under the Changyou 2019 Share Incentive Plan had vested. The cumulative share-based compensation expense of $2.6 million for the granted share options was adjusted and fixed based on a price of $5.39 per Changyou Class A ordinary share after the Changyou Plans’ Modification. For the years ended December 31, 20202021 and 2019,2020, total share-based compensation expense recognized for these share options under the Changyou 2019 Share Incentive Plan was $4.8$3.9 million and $3.2$4.8 million, respectively. For the years ended December 31, 2021
 and 2020
, the total value of these Changyou share options vested on their respective vesting dates was $
2.6
million.
$2.6 million
 
and $2.6 million, respectively
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3) Sogou Inc. Share-based Awards
Sogou 2010 Share Incentive Plan
Sogou adopted a share incentive plan on October 20, 2010, which was amended effective August 22, 2014 to increase the aggregate number of Sogou Class A Ordinary Shares issuable under the plan to 41,500,000 (as amended to date, the “Sogou 2010 Share Incentive Plan”). Awards of share rights granted under the Sogou 2010 Share Incentive Plan were made to management and other key employees of Sogou and of any present or future parents or subsidiaries or VIEs of Sogou. The Sogou 2010 Share Incentive Plan expired on October 19, 2020 and is no longer available for making new grants. The maximum term of any share incentive award granted under the Sogou 2010 Share Incentive Plan is ten years from the grant date.
The options contractually granted under the Sogou 2010 Share Incentive Plan were placed in one of the following three categories:
(i)
Performance-based options, which vest and become exercisable either in
four equal installments or in two to four installments of specified share numbers over their specified vesting periods, with each installment vesting upon a service period requirement being met, as well as the employee grantee’s achievement, as determined by Sogou’s chief executive officer, of performance targets for the corresponding period specified by Sogou’s chief executive officer. For purposes of recognition of share-based compensation expense, each installment is considered to be granted as of the date that the performance targets have been set; or
(ii)
Service-based options, which vest and become exercisable either in four equal installments or in two to four installments of specified share numbers over their specified vesting periods, with each installment vesting only upon a service period requirement being met; or
(iii)
IPO-based
options, which were subject to completion of an IPO and vesting/ exercisability in five equal installments, with (i) the first installment vesting upon the expiration of all underwriters’ lockup periods applicable to Sogou’s IPO and (ii) each of the four subsequent installments vesting on the first, second, third, and fourth anniversary dates of the completion of Sogou’s IPO.
A summary of each of the above three categories of Sogou’s share options as of December 31, 2020 is presented below
(
in thousands
)
:
                                                                                             
   
Contractually
Granted
   
Granted

(For Purposes of Share-
based Compensation
Expense)
   
Vested and
Exercisable
   
Exercised
 
Performance-based options
   30,912    29,169    28,761    27,772 
Service-based options
   1,888    1,888    1,410    829 
IPO-based
options
   7,250    7,250    5,810    5,810 
                     
Total
   40,050    38,307    35,981    34,411 
                     
A summary of Sogou share option activity under the Sogou 2010 Share Incentive Plan as of and for the year ended December 31, 2020 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 as of January 1, 2020
   7,162   $0.377    4.45   $  
Granted
   1,099    0.001           
Exercised
   (4,233)    0.426           
Forfeited or expired
   (132)    0.001           
                     
Outstanding as of December 31, 2020
   3,896    0.232    4.38    30,850 
                     
Vested as of December 31, 2020 and expected to vest thereafter
   3,395    0.266    4.46    26,767 
                     
Exercisable as of December 31, 2020
   1,570    0.001    5.77    12,794 
                     
Note (1): The aggregate intrinsic values in the preceding table represent the difference between Sogou’s closing price of $8.15 per Sogou ADS (each representing one Sogou Class A Ordinary Share) on December 31, 2020 and the exercise prices of the share options.
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For the years ended December 31, 2020, 2019 and 2018, total share-based compensation expense recognized for Sogou share options under the Sogou 2010 Share Incentive Plan was $
7.4
 million, $
13.5
 million and $12.5 million, respectively. As of December 31, 2020, there was $0.8 million of unrecognized compensation expense related to unvested Sogou share options. The expense is expected to be recognized over a weighted average period of 1.37 years. For the years ended December 31, 2020, 2019 and 2018, the total intrinsic value of options exercised was $23.1 million, $1.6 million, and $33.2 million, respectively.
Prior to the completion of Sogou’s IPO, the fair values of Sogou Class A Ordinary Shares were assessed using the income approach/discounted cash flow method or based on the
mid-point
of the estimated Sogou IPO price range, in each case with a discount for lack of marketability, because the Sogou Class A Ordinary Shares underlying the award were not publicly traded at the time of grant. The assessment required complex and subjective judgments regarding Sogou’s projected financial and operating results, its unique business risks, the liquidity of its ordinary shares and its operating history and prospects at the time the grants were made. After the completion of Sogou’s IPO, the fair values of the ordinary shares of Sogou were determined based on the market price of Sogou’s ADSs
.
The fair value of the Sogou share options granted under the Sogou 2010 Incentive Plan was estimated on the date of grant with the assistance of a qualified professional appraiser, using the binomial valuation model with the following assumptions used:
Assumptions Adopted
  
2018
   
2019
   
2020
 
Average risk-free interest rate
   3.36%~3.51%    2.60%~2.86%    1.21%~1.66% 
Exercise multiple
   2    2~3    2~3 
Expected forfeiture rate (post-vesting)
   12%    0%~12%    0% 
Weighted average expected option life
   9    7    4 
Volatility rate
   40%~46%    36%~41%    38%~44% 
Dividend yield
   0%    0%    0% 
Weighted average fair value of share options
   12.26    4.05    4.48 
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 Class A Ordinary Shares over the exercise prices as of the time the options would be expected to be exercised, based on consideration of research studies regarding exercise patterns based on historical statistical data. In Sogou’s valuation analysis, a multiple of 3 was applied for management and a multiple of 2 was applied for other key employees. Sogou estimated the forfeiture rate to be 0% for the Sogou share options granted to Sogou management and 12% for the Sogou share options granted to Sogou’s other key employees. As Sogou’s ordinary shares had been publicly traded for slightly more than three years as of December 31, 2020, the expected volatility at the valuation date was estimated based on the historical volatility of specified comparable companies for the periods before the grant dates 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%.
Sogou 2017 Share Incentive Plan
In October 2017, Sogou adopted a share incentive plan (the “Sogou 2017 Share Incentive Plan”) which provides that the aggregate number of Sogou Class A Ordinary Shares issuable under the plan is 28,000,000. Share incentive awards may be granted under the Sogou 2017 Share Incentive Plan to Sogou’s management and employees and of any of its present or future parents or subsidiaries. The maximum term of any share incentive award granted under the Sogou 2017 Share Incentive Plan is ten years from the grant date.
The options contractually granted under the Sogou 2017 Share Incentive Plan may be placed in one of the following two categories:
(i)
Performance-based options, which vest and become exercisable in four equal installments, with each installment vesting upon a service period requirement being met, as well as the employee grantee’s achievement, as determined by Sogou’s chief executive officer, of performance targets for the corresponding period specified by Sogou’s chief executive officer. For purposes of recognition of share-based compensation expense, each installment is considered to be granted as of the date that the performance targets have been set; or
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(ii)
Service-based options, which vest and become exercisable in four equal installments, with each installment vesting only upon a service period requirement being met.
A summary of each of the above two categories of Sogou’s share options as of December 31, 2020 is presented below
(
in thousands
)
:
                                                                                                                                     
   
Contractually
Granted
   
Granted

(For Purposes of Share-
based Compensation
Expense)
   
Vested and
Exercisable
   
Exercised
 
Performance-based options
   192    55    44    17 
Service-based options
   994    994    324    173 
                     
Total
   1,186    1,049    368    190 
                     
A summary of Sogou share option activity under the Sogou 2017 Share Incentive Plan as of and for the year ended December 31, 2020 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 as of January 1, 2020
   798   $0.001    8.90   $  
Granted
   425    0.001           
Exercised
   (142)    0.001           
Forfeited or expired
   (222)    0.001           
                     
Outstanding as of December 31, 2020
   859    0.001    8.51    7,000 
                     
Vested as of December 31, 2020 and expected to vest thereafter
   680    0.001    8.46    5,541 
                     
Exercisable as of December 31, 2020
   178    0.001    7.95    1,451 
                     
Note (1): The aggregate intrinsic value in the preceding table represents the difference between the closing price of $8.15 per Sogou ADS (each representing one Class A Ordinary Share) on December 31, 2020 and the exercise prices of the share options.
For the years ended December 31, 2020, 2019 and 2018, total share-based compensation expense recognized for Sogou share options under the Sogou 2017 Share Incentive Plan was $1.6 million, $2.4 million and $1.6 million, respectively. As of December 31, 2020 there was $1.5 million of unrecognized compensation expense related to unvested Sogou share options. The expense is expected to be recognized over a weighted average period of 1.74 years.
The method used to determine the fair value of the Sogou share options granted under the Sogou 2017 Share Incentive Plan was the same as the method used for the share options granted under the Sogou 2010 Incentive Plan as described above, except for the assumptions used in the binomial valuation model as presented below:
Assumptions Adopted
  
2018
   
2019
   
2020
 
Average risk-free interest rate
   3.41%~3.95%    2.37%~3.45%    1.20%~2.47% 
Exercise multiple
   2    2~3    2~3 
Expected forfeiture rate (post-vesting)
   12%    0%~12%    0%~12% 
Weighted average expected option life
   10    10    9 
Volatility rate
   40%~46%    41%~42%    39%~42% 
Dividend yield
   0%    0%    0% 
Weighted average fair value of share options
   10.09    4.87    4.95 
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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 Sohu’s Board of Directors, management and other key employees of the Sohu, and certain members of management and other key employees of Sogou the opportunity to purchase from Sohu up to 12,000,000 Sogou Class A Ordinary Shares at a fixed exercise price of $0.625 or $0.001 per share. Of these 12,000,000 Sogou Class A Ordinary Shares, 8,800,000 are Sogou Class A Ordinary Shares previously held by Sohu and 3,200,000 are Sogou Class A Ordinary Shares that were newly-issued on April 14, 2011 by Sogou to Sohu at a price of $0.625 per share, or a total of $2.0 million. As of December 31, 2020, Sohu had contractually granted options for the purchase of 8,305,000 Sogou Class A Ordinary Shares under the Sohu Management Sogou Share Option Arrangement.
The options contractually granted under the Sohu Management Sogou Share Option Arrangement may be placed in one of the following two categories:
(i)
Performance-based options, which vest and become exercisable in four equal installments, with each installment vesting upon a service period requirement being met, as well as the Sogou Group’s achievement of performance targets for the corresponding period. All of these options vested and became exercisable before January 1, 2017. For purposes of recognition of share-based compensation expense, each installment is considered to be granted as of the date that the performance targets have been set; or
(ii)
Service-based options, which were granted to members of Sohu’s Board of Directors. All of these share options vested and became exercisable in 2015, as the service period requirement had been met.
A summary of the above two categories of Sogou’s share options as of December 31, 2020 is presented below
(
in thousands
)
:
                                                                                                                             
   
Contractually
Granted
   
Granted

(For Purposes of Share-
based Compensation
Expense)
   
Vested and
Exercisable
   
Exercised
 
Performance-based options
   8,290    8,290    8,290    8,290 
Service-based options
   15    15    15    6 
                     
Total
   8,305    8,305    8,305    8,296 
                     
A summary of Sogou share option activity under the Sohu Management Sogou Share Option Arrangement as of and for the year ended December 31, 2020 is presented below:
                                                                                                                             
   
Number

Of Shares
(in thousands)
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual Life
(Years)
   
Aggregate
Intrinsic
Value (1)
(in thousands)
 
Outstanding as of January 1, 2020
   9   $0.001    5.38   $  
Granted
   0                
Exercised
   0                
Forfeited or expired
   0                
                     
Outstanding as of December 31, 2020
   9    0.001    4.38    73 
                     
Vested as of December 31, 2020
   9    0.001    4.38    73 
                     
Exercisable as of December 31, 2020
   9    0.001    4.38    73 
                     
Note (1): The aggregate intrinsic values in the preceding table represent the difference between the closing price of $8.15 per Sogou ADS (each representing one Class A Ordinary Share) on December 31, 2020 and the exercise prices of the options.
As all Sogou share options granted under the Sohu Management Sogou Share Option Arrangement vested before January 1, 2017, 0 share-based compensation expense was recognized for the years ended December 31, 2020, 2019, and 2018.
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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 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, 0 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 December 31, 2020, 1,899,000 Sogou Class A Ordinary Shares issued upon the early exercise of options granted under the Sogou 2010 Share Incentive Plan remained unvested in accordance with the vesting requirements under the original option agreements. All Sogou Class A Ordinary Shares issued upon such early exercise that have become vested have been included in the disclosures under the headings “Sogou 2010 Share Incentive Plan” and “Sohu Management Sogou Share Option Arrangement” above.
In the first quarter of 2018, Sogou changed the vesting conditions of options for the purchase of 2,181,192 Sogou Class A Ordinary Shares contractually granted under the Sogou 2010 Share Incentive Plan by removing as a condition of vesting Sogou’s achievement of performance targets for the period corresponding to the vesting schedule. Of these options, options for the purchase of 1,601,427 Sogou Class A Ordinary Shares had not been deemed granted, because their performance targets for the current period had not been set, so the removal of the performance targets resulted in these options becoming subject to vesting only upon service-period requirements being met and being deemed granted immediately upon the effectiveness of the changes. For the remaining options for the purchase of 579,765 Sogou Class A Ordinary Shares, which had been deemed granted, the removal of the performance targets constituted a modification. The modification was not considered substantive, because their performance targets had been achieved before the modification. Based on valuation results, 0 incremental fair value related to these Sogou ordinary shares was recognized in connection with the modification, and the remaining share-based compensation expense for these Sogou ordinary shares continued to be recognized over the remaining vesting period.
4) Sohu Video Share-based Awards
On January 4, 2012, Sohu Video, the holding entity of Sohu’s video division, adopted the Sohu Video Share Incentive Plan under
,
which provided for the issuance of up to
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 Videothe video division and to Sohu management. The maximum term of any share incentive
-
based
award granted under the Sohu Video Share Incentive
Plan is ten10 years from
the grant date. The Sohu Video Share Incentive Plan will expireexpired on January 3, 2022. 4, 2022, and is no longer available for granting new share-based awards.

As of December 31, 2020,2021, 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 Video’s achievement of performance targets for the corresponding period.
As of
December 31, 2021,
options for the purchase of 4,972,800
Sohu Video
ordinary shares
 were vested.
For purposes of
ASC
718-10-25,
, as of December 31, 2020,2021, 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 December 31, 2019, options
In accordance with ASC
718-10-55,
the Group’s 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
those
vested Sohu Video ordinary shares were vested.share-based awards and
re-measured
 the compensation expense on each subsequent reporting date based on the then-current fair values of these vested awards
, which the Group will continue to do
until the grant date is established.
For the years ended December 31, 2021, 2020 2019 and 2018,2019, total share-based compensation expense recognized for vested Sohu Video options under the Sohu Video Share Incentive Plan was
negative
 $
1.0 million, negative $0.7 million and negative $0.9 million, and negative $0.5 million, respectively.
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Table of Contents
The fair value as of December 31, 20202021 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 binomial valuation model, with the following assumptions used:
 
Assumptions Adopted
  
2019
 
2020
   
2020
 
2021
 
Average risk-free interest rate
   2.44%   1.11%    1.11%   0.59% 
Exercise multiple
   2.8   2.8    2.8   2.8 
Expected forfeiture rate (post-vesting)
   14%   5%    5%   2%
Weighted average expected option life
   2.0   1.0    1.0   0 
Volatility rate
   53.9%   57.3%    57.3%   97.3%
Dividend yield
   0   0    0   0 
Fair value
   0.35   0.21    0.21   0 
F-7719. NONCONTROLLING INTEREST
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19.
NONCONTROLLING INTEREST
Prior to the completion of the Changyou Merger on April 17, 2020, the noncontrolling interests in the Sohu Group’s consolidated financial statements primarily consisted of noncontrolling interests for Changyou and Sogou and, following the completion of the Changyou Merger consistand prior to the completion of the Tencent/Sohu Sogou Share Purchase, consisted of noncontrolling interests for Sogou
.Sogou.
Noncontrolling Interest in the Consolidated Balance Sheets
As of December 31, 20202021 and 2019,2020, noncontrolling interest in the consolidated balance sheets was $0.68 billion
$
1.3
million
and $0.88 billion,$684.6 
million
, respectively.
 
  
As of December 31,
 
  
As of December 31,
   
2020
   
2021
 
  
2019
   
2020
 
Changyou
  $151,503   $1,321   $1,321   $1,318 
Sogou
   726,960    683,291    683,291    0 
          
 
   
 
 
Total
  $878,463   $684,612   $684,612   $1,318 
          
 
   
 
 
Noncontrolling
Interest of Changyou
As of December 31, 2020 and 2019, noncontrolling interest of Changyou of
$
1.3
 million and $
151.5
million, respectively, was recognized in the Sohu Group’s consolidated balance sheets, representing an economic interest of
NaN
and
33
%, respectively, in Changyou’s net assets held by shareholders other than Sohu and reflecting the reclassification of Changyou’s share-based compensation expense from shareholders’ additional
paid-in
capital to noncontrolling interest. As a result of the completion of Sohu’s acquisition of the noncontrolling interests in Changyou on April 17, 2020, Sohu hold
s
100
%
holds 100% of the combined total of Changyou’s outstanding ordinary shares, and the noncontrolling interests recognized in the Sohu Group’s consolidated balance sheets only reflected economic interests in Changyou’s subsidiaries held by shareholders other than Changyou.
Noncontrolling
interest of Changyou of $1.3 million was recognized in the Sohu Group’s consolidated balance sheets
as of both December 31, 2021 and 2020.
Noncontrolling Interest of Sogou
As of December 31, 20202021 and 2019,2020, noncontrolling interest of Sogou of $683.3 millionNaN and $727.0$683.3 million, respectively, was recognized in the Sohu Group’s consolidated balance sheets, representing an economic interest of 66% NaN
and 66%, respectively, in Sogou’s net assets held by shareholders other than Sohu and reflecting the reclassification of Sogou’s share-based compensation expense from shareholders’ additional
paid-in
capital to noncontrolling interest.
As a result of the completion of the Tencent/Sohu Sogou Share Purchase on September 23, 2021, the Company no longer has any ownership interest in Sogou and has ceased consolidating Sogou in the Company’s consolidated financial statements.
Noncontrolling Interest in the Consolidated Statements of Comprehensive Income/(Loss)
For the years ended December 31, 2021, 2020 2019 and 2018,2019, respectively, the Sohu Group had net income of negative $42.2$6.4 million, net income
of $105.9
negative
 $42.2 million and net income of $92.7$105.9 million, respectively, attributable to the noncontrolling interest in the consolidated statements of comprehensive income/(loss).
   
Year Ended December 31,
 
   
2018
   
2019
   
2020
 
Changyou
  $27,137   $46,990   $18,448 
Sogou
   65,586    58,955    (60,656) 
                
Total
  $92,723   $105,945   $(42,208) 
                
 
   
Year Ended December 31,
 
   
2018
   
2019
   
2020
 
Net income from continuing operations attributable to noncontrolling shareholders
  $41,732   $58,223   $18,448 
Net income/(loss) from discontinued operations attributable to noncontrolling shareholders
   50,991    47,722    (60,656) 
                
Net income/(loss) attributable to noncontrolling interest shareholders
  $92,723   $105,945   $(42,208) 
                
​​​​​​​
   
Year Ended December 31,
 
   
2019
   
2020
   
2021
 
Changyou
  $46,990   $18,448   $(3) 
Sogou
   58,955    (60,656)    6,451 
   
 
 
   
 
 
   
 
 
 
Total
  $105,945   $(42,208)   $6,448 
   
 
 
   
 
 
   
 
 
 
 
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Table of Contents
  
Year Ended December 31,
 
   
2019
   
2020
   
2021
 
Net income
/(loss)
from continuing operations attributable to noncontrolling shareholders
  $58,223   $18,448   $(3) 
Net income/(loss) from discontinued operations attributable to noncontrolling
shareholders
   47,722    (60,656)    6,451 
   
 
 
   
 
 
   
 
 
 
Net income/(loss) attributable to noncontrolling interest shareholders
  $105,945   $(42,208)   $6,448 
   
 
 
   
 
 
   
 
 
 
Noncontrolling Interest of Changyou
For the years ended December 31, 2021, 2020 and 2019, and 2018, respectively,
a $18.4 millionnet loss of
$3,000
,
 net income a $47.0
of
$18.4 million and
net income and a $27.1of
$47.0 million, net income, respectively, attributable to the noncontrolling interest of Changyou was recognized in the Sohu Group’s consolidated statements of comprehensive income/(loss), representing a NaN, 33% andNaNand 33%, respectively, of the economic interest in Changyou attributable to shareholders other than Sohu.
Noncontrolling Interest of Sogou (Discontinued)
For the years ended December 31, 2021, 2020 and 2019, and 2018, respectively, a negative $60.7 million
net income a $59.0 o
f
 $6.5 
million, a
net
loss of
$
60.7
 million
 and
net income and a $65.6
of
$
59.0
 million, net income, respectively, attributable to the noncontrolling interest of Sogou was recognized in the Sohu Group’s consolidated statements of comprehensive income/(loss), representing Sogou’s net income/(loss) attributable to shareholders other than Sohu.
20.
20. NET INCOME/(LOSS) PER SHARE
Basic net income/(loss) per share is computed using the weighted average number of ordinary shares outstanding during the period. Diluted net income/(loss) per share is computed using the weighted average number of ordinary shares and, if dilutive, potential ordinary shares outstanding during the period. Potential ordinary shares 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 calculated as discussed below. The adjustment will not be made if there is an anti-dilutive effect.
Changyou’s Net Income/(Loss) Attributable to Sohu
Prior to the completion of the Changyou Merger on April 17, 2020, Changyou’s net income/(loss) attributable to Sohu was determined using the percentage that the weighted average number of Changyou shares held by Sohu represented 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 of the total economic interest in Changyou, which was used for the calculation of basic net income per share. After the completion of the Changyou Merger, Sohu holds 100%
of the combined total of Changyou’s outstanding ordinary shares, so Changyou’s net income/(loss) is wholly attributable to Sohu.
After the completion of the Changyou Merger, the Sohu Board approved the Changyou Plans’ Modification, pursuant to which, among other things, a portion of the share options previously granted under the Changyou 2014 Share Incentive Plan that became vested after the completion of the Changyou Merger were settled by Changyou at a fixed price of $5.39 per Changyou Class A ordinary share, which equals the Changyou Merger consideration of $5.40 per Changyou Class A ordinary share minus the
per-share
exercise price of $0.01 of such options. None of the remaining share options granted under the Changyou 2014 Share Incentive Plan that became vested after the completion of the Changyou Merger or that become vested in the future, and none of the share options granted under the Changyou 2019 Share Incentive Plan, will be exercisable, but can only be repurchased by Changyou at a fixed price of $5.39 per Changyou Class A ordinary share underlying such vested share options upon termination of the option holders’ employment or upon approval of the Chairman of the Sohu Board. As a result of the Changyou Plans’ Modification, share-based compensation expense will be accrued over the service period based on the fixed price of $5.39 per Changyou Class A ordinary share. No subsequent fair value
re-measurement
will be made, given that the award is an obligation based on a fixed amount of $5.39 per Changyou Class A ordinary
share.
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In the calculation of Sohu’s diluted net income/(loss) per share, before the Sohu Board’s approval of the Changyou Plans’ Modification, a dilutive effect should be assumed. All of Changyou’s existing unvested restricted share units and share options, and vested restricted share units and share options that have not yet been settled or exercised, 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 in Changyou to decrease. As a result, Changyou’s net income/(loss) attributable to Sohu 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’s diluted net income/(loss) per share. As a result, Changyou’s net income/(loss) attributable to Sohu on a diluted basis equals the number used for the calculation of Sohu’s basic net income/(loss) per share.
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After the Changyou Plans’ Modification, all of Changyou’s previously granted share-based awards have beenwere reclassified as obligation-based awards. Accordingly, all of those Changyou awards are excluded from the calculation of Sohu’s diluted net income/(loss) per share. Changyou’s net income/(loss) attributable to Sohu on a diluted basis equals the number used for the calculation of Sohu’s basic net income/(loss) per share. There have been no diluteddilutive effects resulting from Changyou’s existing unvested share options.
Sogou’s Net Income/(Loss) Attributable to Sohu (Discontinued)
Prior to the completion of the Tencent/Sohu Sogou Share Purchase on September 23, 2021, Sogou’s net income/(loss) attributable to Sohu iswas determined using the percentage that the weighted average number of Sogou shares held by Sohu representsrepresented of the weighted average number of Sogou 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 of the total economic interest in Sogou, which is used for the calculation of basic net income per share. Sogou’s net income/(loss) attributable to Sohu is reflected as discontinued operations in the Sohu Group’s consolidated statements of comprehensive income.

In the calculation of Sohu’s diluted net income/(loss) per share, assuming a dilutive effect, the percentage of Sohu’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 withwhere the performance targets had been 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’s diluted income/(loss) per share. As a result, Sogou’s net income/(loss) attributable to Sohu on a diluted basis equals the number used for the calculation of Sohu’s basic net income/(loss) per share.
For the year ended December 31, 2020, all
As a result of the completion of the Tencent/Sohu Sogou share options had a dilutive effect,Share Purchase, the Sohu Group no longer has any ownership interest in Sogou, and therefore wereSogou is not included in the calculationSohu Group’s consolidated financial statements.
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Table of Sohu.com Limited’s diluted net income/(loss) per share. This impact is presented as “incremental dilution from Sogou” in the table below.Contents
The following table presents the calculation of the Sohu Group’s basic and diluted net loss per share (in thousands, except per share data).
 
   
Year Ended December 31,
 
   
2018
   
2019
   
2020
 
Numerator:
               
Net loss from continuing operations attributable to Sohu.com Limited, basic
  $(163,038)   $(156,722)   $(54,975) 
Net income/(loss) from discontinued operations attributable to Sohu.com Limited, basic
   2,956    7,386    (31,137) 
Net loss attributable to Sohu.com Limited, basic
   (160,082)   $(149,336)    (86,112) 
Effect of dilutive securities:
               
Incremental dilution from Changyou
   (381)    (507)    (392) 
Incremental dilution from Sogou
   (496)    (606)    0 
Net loss from continuing operations attributable to Sohu.com Limited, diluted
   (163,659)    (157,282)    (55,365) 
Net income/(loss) from discontinued operations attributable to Sohu.com Limited, diluted
   2,700    6,833    (31,139) 
                
Net loss attributable to Sohu.com Limited, diluted
  $(160,959)   $(150,449)    (86,504) 
                
Denominator:
               
Weighted average basic ordinary shares outstanding
   38,959    39,249    39,452 
Effect of dilutive securities:
               
Share options and restricted share units
   0    0    0 
                
Weighted average diluted ordinary shares outstanding
  $38,959   $39,249   $39,452 
                
Basic net loss per share attributable to Sohu.com Limited
               
Continuing operations
  $(4.18)   $(3.99)   $(1.39) 
Discontinued operations
   0.07    0.19    (0.79) 
                
Net loss per share
   (4.11)    (3.80)    (2.18) 
                
Diluted net loss per share attributable to Sohu.com Limited
               
Continuing operations
  $(4.20)   $(4.01)   $(1.40) 
Discontinued operations
   0.07    0.18    (0.79) 
                
Net loss per share
   (4.13)    (3.83)    (2.19) 
                
   
Year Ended December 31,
 
   
2019
   
2020
   
2021
 
Numerator:
               
Net income/(loss) from continuing operations attributable to Sohu.com Limited,
basic

  $(156,722)   $(54,975)   $69,274 
Net income/(loss) from discontinued operations attributable to Sohu.com Limited,
basic
   7,386    (31,137)    858,451 
Net income/(loss) attributable to Sohu.com Limited, basic

   (149,336)    (86,112)    927,725 
Effect of dilutive securities:
               
Incremental dilution from Changyou
   (507)    (392)    0 
Incremental dilution from Sogou
   (606)    0    (20) 
Net income/(loss) from continuing operations attributable to Sohu.com Limited,
diluted

   (157,282)    (55,365)    69,274 
Net income/(loss) from discontinued operations attributable to Sohu.com Limited,
diluted
   6,833    (31,139)    858,431 
   
 
 
   
 
 
   
 
 
 
Net income/(loss) attributable to Sohu.com Limited, diluted  $(150,449)   $(86,504)   $927,705 
   
 
 
   
 
 
   
 
 
 
Denominator:
               
Weighted average basic ordinary shares outstanding
   39,249    39,452    39,501 
Effect of dilutive securities:
               
Share options and restricted share units
   0    0    0 
   
 
 
   
 
 
   
 
 
 
Weighted average diluted ordinary shares outstanding
  $39,249   $39,452   $39,501 
   
 
 
   
 
 
   
 
 
 
Basic net income/(loss) per share attributable to Sohu.com Limited

               
Continuing operations
  $(3.99)   $(1.39)   $1.75 
Discontinued operations
   0.19    (0.79)    21.74 
   
 
 
   
 
 
   
 
 
 
Net income/(loss) per share

   (3.80)    (2.18)    23.49 
   
 
 
   
 
 
   
 
 
 
Diluted net income/(loss) per share attributable to Sohu.com Limited

               
Continuing operations
  $(4.01)   $(1.40)   $1.75 
Discontinued operations
   0.18    (0.79)    21.74 
   
 
 
   
 
 
   
 
 
 
Net income/(loss) per share

   (3.83)    (2.19)    23.49 
   
 
 
   
 
 
   
 
 
 
F-8021. CHINA CONTRIBUTION PLAN
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21.
CHINA CONTRIBUTION PLAN
The Sohu
Group’s subsidiaries and consolidated VIEs in China participate in a government-mandated multi-employer defined contribution plan pursuant to which certain retirement, medical and other welfare benefits are provided to employees. Chinese labor regulations require the Group’s subsidiaries and consolidated VIEs to pay to the local labor bureau a monthly contribution at a stated contribution rate based on the monthly compensation of qualified employees. The relevant local labor bureau is responsible for meeting all retirement benefit obligations; the Group’s China-based subsidiaries and consolidated VIEs have no further commitments beyond their monthly contributions. For the years ended December 31, 2021, 2020 2019 and 2018,2019, the Group’s China based subsidiaries and consolidated VIEs contributed a total of $83.1 million, $59.2 million $79.2 million and $89.9$79.2 million, respectively, to these funds.
22.
22. PROFIT APPROPRIATION
The Sohu Group’s China-based subsidiaries and VIEs are required to make appropriations to certain
non-distributable
reserve funds.
On March 15, 2019, the Standing Committee of the National People’s Congress of the PRC issued the
Law of the People’s Republic of China on Foreign Investment
(the “Foreign Investment Law”), which took effect on January 1, 2020 and replaced the
Law of the People’s Republic of China on Foreign Investment Enterprises
, promulgated on April 12, 1986 and most recently amended on September 3, 2016 (the “Replaced Foreign Investment Enterprises Law”), and certain other laws and regulations relating to foreign investment. On December 12, 2019, the State Council of the PRC also issued the
Implementing Regulations of the Foreign Investment Law.,
which became effective on January 1, 2020.
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Under
the China Foreign Investment Enterprises Laws and its supplemental regulations those of the Group’s China-based subsidiaries that are considered under PRC law to be WFOEs are required to make appropriations from their
after-tax
profit as determined under generally accepted accounting principles in the PRC (the
“after-tax-profit
under PRC GAAP”) to
non-distributable
reserve funds, including (i) a general reserve fund and (ii) a staff bonus and welfare fund. Each year, at least 10% of the
after-tax-profit
under PRC GAAP is required to be set aside as general reserve fund until such appropriations for the fund equal 50% of the registered capital of the applicable entity. The appropriation for the other reserve fund is at the Group’s discretion as determined by each entity. Alternatively, after January 1, 2020, those China-based subsidiaries of the Group that are wholly foreign-owned enterprises may choose to make appropriations from their
after-tax-profit
under PRC GAAP to
non-distributable
reserve funds, including a statutory surplus fund and a discretionary surplus fund, in compliance with the requirements of the Company Law of the PRC (the “Company Law”) that apply to PRC domestically-funded enterprises.
Pursuant to the Company Law, those of the Group’s China-based subsidiaries that are considered under PRC law to be domestically funded enterprises, as well as the Group’s VIEs, are required to make appropriations from their
after-tax-profit
under PRC GAAP to
non-distributable
reserve funds, including a statutory surplus fund and a discretionary surplus fund. Each year, at least 10% of the
after-tax-profit
under PRC GAAP is required to be set aside as statutory surplus fund until such appropriations for the fund equal 50% of the registered capital of the applicable entity. The appropriation for the discretionary surplus fund is at the Company’s discretion as determined by each entity.
Upon certain regulatory approvals and subject to certain limitations, the general reserve fund and the statutory surplus fund can be used to offset prior year losses, if any, and can be converted into paid-in capital of the applicable entity.
For the years ended December 31, 2020, 2019 and 2018, the total amount of profits contributed to these funds by the Group was $0.4 million, $10.4 million and $7.3 million, respectively. As of December 31,2021, 2020 and 2019, the total amount of profits contributed to these funds by the Group was $81.1$0.1 million, $0.4 million and $80.7$10.4 million, respectively. As of December 31, 2021 and 2020, the total amount of profits contributed to these funds by the Group was $57.2 million and $81.1 million, respectively.
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As a result of these and other restrictions under PRC laws and regulations, the Group’s China-based subsidiaries and VIEs are restricted in their ability to transfer a portion of their net assets in the form of
non-distributable
reserve funds to the Company in the form of dividends, loans or advances. Even though the Company currently does not require any such dividends, loans or advances from its China-based subsidiaries and VIEs for working capital and other funding purposes, the Company may in the future require additional cash resources from its China-based subsidiaries and VIEs due to changes in business conditions, to fund future acquisitions and development, or to declare and pay dividends to or make distributions to its shareholders.​​​​​​​​​​​​​​
23.
23. CONCENTRATION RISKS
Because its operations are substantially conducted in the PRC, the Sohu Group is subject to
PRC-related
political, economic and legal risks. Besides these risks, the Sohu Group may also have the following concentration risks.
Operation Risk
For the years ended December 31, 2021, 2020 2019 and 2018,2019, there were 0 revenues from customers that individually represent greater than 10% of the total online advertising revenues.
For the year ended December 31, 2020,2021, revenues from TLBB
 PC
were $309.7$421.7 million, accounting for approximately 58%66% of Changyou’s online game revenues, approximately 56%65% of Changyou’s total revenues and approximately 41%50% of the Sohu Group’s total revenues. For the year ended December 31, 2020,2021, revenues from Legacy TLBB Mobile were $88.3$79.5 million, accounting for approximately 16%12% of Changyou’s online game revenues, approximately 16%12% of Changyou’s total revenues, and approximately 12%10% of the Sohu Group’s total revenues.
Financial instruments that potentially subject the Sohu Group to concentration risks consist primarily of cash and cash equivalents, short-term investments and short-term investments.long-term time deposits. Cash and cash equivalents in Sohu Group are mainly denominated in RMB and in U.S. dollars. Short-term investments and long-term time deposits are denominated in RMB. The Group may experience economic losses and negative impacts on earnings and equity as a result of fluctuations in the exchange rate between the U.S. dollar and the RMB. Moreover, the Chinese government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of the PRC. The Group may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency.
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Credit Risk
As of December 31, 2021, approximately 61% of the Sohu Group’s cash and cash
equivalents,
short-term investments
,
and long-term
time deposits
were held in 16 financial institutions in Mainland China. The remaining cash and cash equivalents and short-term investments were held prima
rily in financial institutions in Hong Kong and Macao.
As of December 31, 2020, approximately 95% of the Sohu Group’s cash and cash equivalents and short-term investments were held in 22 financial institutions in Mainland China. The remaining cash and cash equivalents and short-term investments were held primarily in financial institutions in Hong Kong and Macao.
As of December 31, 2019, approximately 89% of the Sohu Group’s cash and cash equivalents and short-term investments were held in 23 financial institutions in Mainland China. The remaining cash and cash equivalents and short-term investments were held primarily in financial institutions in Hong Kong and Macao.
The Sohu Group holds its cash and bank deposits at Chinese financial institutions that are among the largest and most respected in the PRC and at international financial institutions with high ratings from internationally-recognized rating agencies. The management chooses these institutions because of their reputations and track records for stability, and their known large cash reserves, and management periodically reviews these institutions’ reputations, track records, and reported reserves.
Management expects that any additional institutions that the Sohu Group uses for its cash and bank deposits will be chosen with similar criteria for soundness. As a further means of managing its credit risk, the Sohu Group holds its cash and bank deposits in a number of different financial institutions. As of December 31, 20202021 and 2019,2020, the Sohu Group held its cash and bank deposits in different financial institutions and held no more than approximately 59%35% and 19%59%, respectively, of its total cash at any single institution.
Under PRC law, it is generally required that a commercial bank in the PRC that holds third party cash deposits protect the depositors’ rights over and interests in their deposited money; PRC banks are subject to a series of risk control regulatory standards; and PRC bank regulatory authorities are empowered to take over the operation and management of any PRC bank that faces a material credit crisis.
For the credit risk related to accounts receivable, the Sohu Group performs ongoing credit evaluations of its customers and, if necessary, maintains reserves for potential credit losses. Historically, such losses have been within management’s expectations.
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24.
24. RESTRICTED NET ASSETS
Relevant PRC law and regulations permit payment of dividends by
PRC-based
operating entities only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. In addition, a
PRC-based
operating entity is required to annually appropriate 10% of net
after-tax
income to the statutory surplus reserve fund (see Note 23) prior to payment of any dividends, unless such reserve funds have reached 50% of the entity’s registered capital. As a result of these and other restrictions under PRC law and regulations,
PRC-based
operating entities are restricted in their ability to transfer a portion of their net assets to the Company either in the form of dividends, loans or advances. The Company may in the future require additional cash resources from
PRC-based
operating entities due to changes in business conditions, to fund future acquisitions and development, or to declare and pay dividends to or distribution to its shareholders. As of December 31, 2020,2021, the Group had restricted net assets in the amount of $347.4 million. 
$1.29
 billion.
25.
ADDITIONAL INFORMATION — CONDENSED FINANCIAL STATEMENTS
The condensed financial statements of Sohu.com Limited have been prepared in accordance with Securities and Exchange Commission Regulation
S-X
Rule
5-04
and Rule
12-04.
The Company records its investments in subsidiaries and VIEs under the equity method of accounting. Such investments and long-term loans to subsidiaries and VIEs are presented on the balance sheet as “Interests in subsidiaries and VIEs” and the loss of the subsidiaries and VIEs is presented as “Share of loss of subsidiaries and VIEs” in the statement of comprehensive income.
The footnote disclosures contain supplemental information relating to the operations of the Company and, as such, these financial statements should be read in conjunction with the notes to the Consolidated Financial Statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.
As of December 31, 2019 and 2020, there were no material contingencies, significant provisions for long-term obligations, or guarantees of the Company, except for those, if any, which have been separately disclosed in the consolidated financial statements.
SOHU.COM LIMITED
CONDENSED BALANCE SHEETS
(In thousands)
   
As of December 31,
 
   
2019
  
2020
 
ASSETS
         
Current assets:
         
Cash and cash equivalents
  $3,756  $586 
Prepaid and other current assets
   744   1,609 
Due from subsidiaries and VIEs
   530,182   528,218 
          
Total current assets
   534,682   530,413 
Interests in subsidiaries and VIEs
   22,093   0 
Other assets, net
   27,736   27,496 
          
Total assets
  $584,511  $557,909 
          
LIABILITIES AND SHAREHOLDERS’ EQUITY
         
Current liabilities
   3,757   1,932 
Deficit of investment in subsidiaries and VIEs
   0   50,101 
Long-term liabilities
   152,300   158,507 
          
Total liabilities
   156,057   210,540 
          
Shareholders’ equity:
         
Ordinary Shares: $0.001 par value per share (75,400 shares authorized; 39,269 shares and 39,306 shares, respectively, issued and outstanding as of December 31, 2019 and 2020)
   39   39 
Additional
paid-in
capital
   948,201   952,733 
Accumulated other comprehensive income
   24,351   29,189 
Accumulated deficit
   (544,137)   (634,592) 
          
Total shareholders’ equity
   428,454   347,369 
          
Total liabilities and shareholders’ equity
  $584,511  $557,909 
          
 
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SOHU.COM LIMITED
CONDENSED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
   
Year Ended December 31,
 
   
2018
  
2019
  
2020
 
Revenues
  $0  $0  $0 
Cost of revenues
   0   0   0 
              
Gross profit
   0   0   0 
              
Operating expenses:
             
General and administrative
   12,206   2,320   1,613 
              
Operating loss
   (12,206)   (2,320)   (1,613) 
Share of loss of subsidiaries and VIEs
   (232,307)   (184,092)   (77,221) 
Other income/(expense)
   22   44,738   (1,083) 
Interest income
   5,865   225   12 
              
Loss before income tax expense/(benefit)
   (238,626)   (141,449)   (79,905) 
Income tax expense/(benefit)
   (78,544)   7,887   6,207 
              
Net loss
   (160,082)   (149,336)   (86,112) 
              
Other comprehensive income/(loss)
   (13,494)   24,351   29,189 
              
Comprehensive loss
  $(173,576)  $(124,985)  $(56,923) 
              
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SOHU.COM LIMITED
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
   
Year Ended December 31,
 
   
2018
  
2019
  
2020
 
Cash flows from operating activities:
             
Net loss
  $(160,082)  $(149,336)  $(86,112) 
Adjustments to reconcile net loss to net cash provided by operating activities:
             
Investment loss from subsidiaries and VIEs
   232,307   184,092   77,221 
Share-based compensation expense/(benefit)
   (1,916)   395   0 
Others
   (993)   0   0 
Changes in current assets and liabilities:
             
Due from subsidiaries and VIEs
   (2,963)   (59,533)   1,964 
Prepaid and other current assets
   (3,996)   425   (865) 
Tax liabilities
   (79,569)   7,886   6,207 
Accrued liabilities
   1,892   (3,715)   (1,825) 
              
Net cash used in operating activities
   (15,320)   (19,786)   (3,410) 
              
Cash flows from investing activities:
             
Dividend received
   0   7,050   0 
              
Net cash used in operating activities
   0   7,050   0 
              
Net decrease in cash, cash equivalents, restricted cash and restricted time deposits
   (15,320)   (12,736)   (3,410) 
Cash, cash equivalents, restricted cash and restricted time deposits at beginning of year
   2,845   16,732   3,996 
Cash and cash equivalents, restricted cash and restricted time deposits of Sohu.com Limited at the date of the liquidation of Sohu.com Inc.
   29,207   0   0 
              
Cash, cash equivalents, restricted cash and restricted time deposits at end of year
  $16,732  $3,996  $586 
              
Reconciliation of cash, cash equivalents, and restricted time deposits to the condensed balance sheets:
             
Cash and cash equivalents
  $16,492  $3,756  $586 
Restricted time deposits included in other assets
   240   240   0 
              
Total cash, cash equivalents, restricted cash and restricted time deposits at end of year
  $16,732  $3,996  $586 
              
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