PRC laws and regulations prohibit or restrict foreign ownership of companies that operate value-added telecommunication services, Internet publishing, online news information services, online audiovisual transmission, online games, and certain other business 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 VIEs. The Sohu Group consolidates in its consolidated financial statements all of the VIEs of which the Group is the primary 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 operations and the economic benefit flow of contractual arrangements with the VIEs. In connection with such evaluations, management also took into account the fact that, as a result of contractual arrangements with the VIEs that the Sohu Group consolidates, it controls the shareholders’ voting interests in those VIEs. As a result of such evaluations, the management concluded that the Sohu Group is the primary beneficiary of the VIEs that the Group consolidates.

All of the consolidated VIEs are incorporated and operated in the PRC, and the 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.

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, 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, 2021, the registered capital and PRC statutory reserves of the consolidated VIEs totaled $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:

Basic Information for Principal VIEs and Subsidiaries of Principal VIEs

For Sohu

•

High Century

High Century was incorporated in 2001. As of December 31, 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, 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, 2021, High Century held a 100% interest in this entity.

•

Donglin

Donglin was incorporated in 2010. As of December 31, 2021, Sohu Internet held a 100% interest in this entity.

•

Tianjin Jinhu

Tianjin Jinhu was incorporated in 2011. As of December 31, 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, 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, 2021, High Century held a 100% interest in this entity.

•

Shanghai ICE

Shanghai ICE was acquired by Changyou in 2010. As of December 31, 2021, Gamease held a 100% interest in this entity.

•

Guanyou Gamespace

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

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,
	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


	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	)


	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

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 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.

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.

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.

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

and is renewable at the request of Sohu Media.

Technology support and utilization agreements

between AmazGame and Gamease, between Gamespace and Guanyou Gamespace, and between Changyou Chuangxiang and Gamease. Pursuant to these agreements, AmazGame, Gamespace and Changyou 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 Changyou Chuangxiang at any time, of Gamease’s and Guanyou Gamespace’s respective revenues. Each agreement terminates only when AmazGame, Gamespace or Changyou Chuangxiang is dissolved.

Services and maintenance agreements

between AmazGame and Gamease, between Gamespace and Guanyou Gamespace, and between Changyou Chuangxiang and Gamease. Pursuant to these agreements, AmazGame, Gamespace and 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 Changyou Chuangxiang, as the case may be, is dissolved.

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.

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.

In addition, it is possible that the contracts among the Sohu Group, the Sohu Group’s consolidated VIEs and the shareholders of such 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 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

benefit from

assets held by these VIEs.