Sohu.com Limited Shareholders' Equity | 17. SOHU.COM LIMITED SHAREHOLDERS’ EQUITY Summary of the Company’s outstanding shares (in thousands): Number of Outstanding Shares 2016 2017 2018 Balance, beginning of year 38,653 38,742 38,898 Issuance: 89 156 331 Balance, end of year 38,742 38,898 39,229 Share Incentive Plans Sohu (excluding Sohu Video), Sogou, Changyou, and Sohu Video have incentive plans for the granting of share-based awards, including options and restricted share units, to their directors, management and other key employees. 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 ten years from the grant date. 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, 2018, 649,405 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 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. 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 ASC 718-10-55 re-measured As of December 31, 2018, 578,500 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 $22.8 million. A summary of option activity under the Sohu 2010 Stock Incentive Plan and the Sohu 2018 Share Incentive Plan, as applicable, as of and for the year ended December 31, 2018 is presented below: Options Number Weighted Weighted Aggregate Outstanding as of January 1, 2018 223 $ 0.001 $ Granted 147 0.001 Exercised (328 ) 0.001 Forfeited or expired 0 Outstanding as of December 31, 2018 42 0.001 6.56 736 Vested as of December 31, 2018 42 0.001 6.56 736 Exercisable as of December 31, 2018 42 0.001 6.56 736 Note (1): The aggregated intrinsic value in the preceding table represents the difference between Sohu’s closing ADS price of $17.42 on December 31, 2018 and the nominal exercise price of the options. For the years ended December 31, 2018, 2017 and 2016, total share-based compensation expense recognized for these options was negative $5.1 million, $2.4 million and $1.4 million, respectively. The negative amounts in the tables above resulted from re-measured ii) Summary of restricted stock unit activity A summary of restricted stock/share unit activity under the Sohu 2010 Stock Incentive Plan and the Sohu 2018 Share Incentive Plan, as applicable, as of and for the year ended December 31, 2018 is presented below: Restricted Stock Units Number of Weighted-Average Unvested as of January 1, 2018 1 $ 72.92 Granted 0 Vested (1 ) 72.92 Forfeited 0 Unvested as of December 31, 2018 0 Expected to vest after December 31, 2018 0 For the years ended December 31, 2018, 2017 and 2016, total share-based compensation expense recognized for restricted stock/share units was nil, negative $1.7 million and $1.3 million, respectively. As of December 31, 2018, there was nil of unrecognized compensation expense related to unvested restricted stock/share units. The total fair value on their respective vesting dates of restricted stock/share units vested during the years ended December 31, 2018, 2017 and 2016 was nil, $0.3 million and $0.9 million, respectively. 2) Sogou Inc. Share-based Awards Sogou 2010 Share Incentive Plan Sogou adopted a share incentive plan on October 20, 2010 amended the plan 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 may be granted under the Sogou 2010 Share Incentive Plan to management and other key employees of Sogou and of any present or future parents or subsidiaries or VIEs of Sogou. The maximum term of any share incentive award granted under the Sogou 2010 Share Incentive Plan is ten years from the grant date. The Sogou 2010 Share Incentive Plan will expire on October 19, 2020. The options contractually granted under the Sogou 2010 Share Incentive Plan may be placed in one of the following three categories: (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 Sogou’s achievement of performance targets for the corresponding period. For purposes of recognition of share-based compensation expense, each installment is considered to be granted as of the date that the performance 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 A summary of each of the above three categories of Sogou’s share options as of December 31, 2018 is presented below: Contractually Granted Vested and Exercised Performance-based options 29,687 27,199 27,060 26,592 Service-based options 1,674 1,674 486 156 IPO-based 7,250 7,250 2,930 2,930 Total 38,611 36,123 30,476 29,678 A summary of Sogou share option activity under the Sogou 2010 Share Incentive Plan as of and for the year ended December 31, 2018 is presented below: Options Number Weighted Weighted Aggregate Outstanding as of January 1, 2018 9,753 $ 0.462 5.56 $ Granted 1,704 0.001 Exercised (4,515 ) 0.399 Forfeited or expired (497 ) 0.001 Outstanding as of December 31, 2018 6,445 0.419 5.29 31,137 Vested as of December 31, 2018 and expected to vest thereafter 6,059 0.446 5.10 29,109 Exercisable as of December 31, 2018 798 0.001 7.15 4,188 Note (1): The aggregate intrinsic values in the preceding table represent the difference between Sogou’s closing price of $5.25 per Class A Ordinary Share on December 31, 2018 and the exercise prices of the share options. For the years ended December 31, 2018, 2017 and 2016, total share-based compensation expense recognized for Sogou share options under the Sogou 2010 Share Incentive Plan was $12.5 million, $23.0 million and $7.6 million, respectively. As of December 31, 2018, there was $6.4 million of unrecognized compensation expense related to unvested Sogou share options. The expense is expected to be recognized over a weighted average period of 1.46 years. For the years ended December 31, 2018, 2017 and 2016, the total intrinsic value of options exercised was $33.2 million, $11.1 million, and $15.2 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 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 2016 2017 2018 Average risk-free interest rate 1.90%~2.77% 2.14%~3.00% 3.36% ~ 3.51% Exercise multiple 2~3 2~3 2 Expected forfeiture rate (post-vesting) 0%~12% 0%~12% 12% Weighted average expected option life 7 7 9 Volatility rate 43%~50% 39%~47% 40% ~ 46% Dividend yield 0% 0% 0% Weighted average fair value of share options 3.26 10.35 12.26 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 three was applied for management and a multiple of two was applied for other key employees. Sogou estimated the forfeiture rate to be 0% or 1% for the Sogou share options granted to Sogou management and 12% for the Sogou share options granted to Sogou’s other key employees. As Sogou’s ordinary shares had been publicly traded for only one year as of December 31, 2018, 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 Sogou Group’s achievement of performance targets for the corresponding period. For purposes of recognition of share-based compensation expense, each installment is considered to be granted as of the date that the performance targets have been set; or (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, 2018 is presented below: Contractually Granted Vested and Exercised Performance-based options 70 0 0 0 Service-based options 730 730 0 0 Total 800 730 0 0 A summary of Sogou share option activity under the Sogou 2017 Share Incentive Plan as of and for the year ended December 31, 2018 is presented below: Options Number Weighted Weighted Aggregate Outstanding as of January 1, 2018 0 $ $ Granted 767 0.001 Exercised 0 Forfeited or expired (37 ) 0.001 Outstanding as of December 31, 2018 730 0.001 9.57 3,829 Vested as of December 31, 2018 and expected to vest thereafter 544 0.001 9.57 2,857 Exercisable as of December 31, 2018 0 Note (1): The aggregate intrinsic value in the preceding table represents the difference between the Sogou’s closing price of $5.25 per Class A Ordinary Shares on December 31, 2018 and the exercise prices of the share options. For the years ended December 31, 2018, total share-based compensation expense recognized for Sogou share options under the Sogou 2017 Share Incentive Plan was $1.6 million. As of December 31, 2018 there was $4.0 million of unrecognized compensation expense related to unvested Sogou share options. The expense is expected to be recognized over a weighted average period of 2.12 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 Average risk-free interest rate 3.41%~3.95% Exercise multiple 2 Expected forfeiture rate (post-vesting) 12% Weighted average expected option life 10 Volatility rate 40%~46% Dividend yield 0% Weighted average fair value of share options 10.09 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, 2018, 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. 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, 2018 is presented below: Contractually Granted Vested and 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, 2018 is presented below: Number Weighted Weighted Aggregate Outstanding as of January 1, 2018 9 $ 0.001 7.38 $ Granted 0 Exercised 0 Forfeited or expired 0 Outstanding as of December 31, 2018 9 0.001 6.38 47 Vested as of December 31, 2018 9 0.001 6.38 47 Exercisable as of December 31, 2018 9 0.001 6.38 47 Note (1): The aggregate intrinsic values in the preceding table represent the difference between Sogou’s closing price of $5.25 per Class A ordinary share on December 31, 2018 and the exercise prices of the options. For the years ended December 31, 2018, 2017 and 2016, total share-based compensation expense recognized for Sogou share options under the Sohu Management Sogou Share Option Arrangement was nil, nil and $0.4 million, respectively. As of December 31, 2018, there was no unrecognized compensation expense related to unvested Sogou share options. For the years ended December 31, 2018, 2017 and 2016, the total fair values of the Sogou share options under the Sohu Management Sogou Share Option Arrangement vested on their respective vesting dates were nil, nil, and $0.5 million, respectively. For the years ended December 31, 2018, 2017 and 2016, total intrinsic value of options exercised was nil, $0.2 million, and $4.5 million, respectively. The method used to determine the fair value of Sogou share options granted under the Sohu Management Sogou Share Option Arrangement was the same as the method used for the Sogou 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. There was no share-based compensation expense recognized under the Sohu Management Sogou Share Option Arrangement for the year ended December 31, 2017 and 2018. Assumptions Adopted 2016 Average risk-free interest rate 2.01%~2.15% Exercise multiple 2~3 Expected forfeiture rate (post-vesting) 0% Weighted average expected option life 6 Volatility rate 43%~47% Dividend yield 0% Weighted average fair value of share options 3.02 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, no incremental fair value related to these Sogou ordinary shares resulted from the modification, and the remaining share-based compensation expense for these Sogou ordinary shares continued to be recognized over the original remaining vesting period. As of December 31, 2018, 6,405,000 Sogou Class A Ordinary Shares that were purchased upon the early exercise of options granted under the Sogou 2010 Share Incentive Plan remained unvested in accordance with the vesting requirements under the original option agreements. All Sogou 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, no incremental fair value related to these Sogou ordinary shares was recognized in connection with the modification, and the remaining share-based compensation expense for these Sogou ordinary shares continued to be recognized over the remaining vesting period. Sogou Share Repurchase Transaction In January 2017, Sogou repurchased 720,000 of its Pre-IPO Pre-IPO Tencent Share-based Awards Granted to Employees Who Transferred to Sogou with the Soso Search and Search-related Businesses Certain persons who became Sogou employees when Tencent’s Soso search and search-related businesses were transferred to Sogou on September 16, 2013 had been granted restricted share units under Tencent’s share award arrangements prior to the transfer of the businesses. Following the transfer of the businesses, these Tencent restricted share units will continue to vest under the original Tencent share award arrangements provided the transferred employees continue to be employed by Sogou during the requisite service period. After the transfer of the Soso search and search-related businesses to Sogou, Sogou applied the guidance in ASC 505-50 For the years ended December 31, 2018, 2017 and 2016, share-based compensation expense of $0.1 million, $0.7 million and $0.8 million, respectively, related to these Tencent restricted share units was recognized in the Group’s consolidated statements of comprehensive income. As of December 31, 2018, there were no unvested Tencent restricted share units held by employees of Sogou and there was no unrecognized compensation expense related to these unvested restricted share units. 3) Changyou.com Limited Share-based Awards Changyou 2008 Share Incentive Plan Changyou’s 2008 Share Incentive Plan (the “Changyou 2008 Share Incentive Plan”) originally provided for the issuance of up to 2,000,000 Changyou ordinary shares, including Changyou ordinary shares issued pursuant to the exercise of share options and upon vesting and settlement of restricted share units. The 2,000,000 reserved Changyou ordinary shares became 20,000,000 Changyou ordinary shares in March 2009 when Changyou effected a ten-for-one All of the restricted Changyou ordinary shares and restricted share units granted under the Changyou 2008 Share Incentive Plan were vested as of December 31, 2017, as the requisite service period for all these awards had been completed. There has been no share-based compensation expense recognized under the Changyou 2008 Share Incentive Plan since then. 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 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 ten years from the grant date. The Changyou 2014 Share Incentive Plan will expire in June 2024. As of December 31, 2018, 3,023,000 shares were available for grant under the Changyou 2014 Share Incentive Plan. i) Summary of Share Option Activity On November 2, 2014, Changyou approved the contractual grant of an aggregate of 2,416,000 Class A restricted share units to certain members of its management and certain other employees. On February 16, 2015, Changyou’s 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 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 Board of Directors approved the contractual grant of options for the purchase of an aggregate of 100,000 Class A ordinary shares to certain member of its management at an exercise price of $0.01. These Changyou share options vest in four equal installments over a period of four years, with each installment vesting upon satisfaction of a service period requirement and the achievement of certain subjective performance targets. These Changyou share options are substantially similar to restricted share units except for the nominal exercise price, which would be zero for restricted share units. Under ASC 718-10-25 ASC 718-10-55 re-measured As of December 31, 2018, 2,718,000 of these Changyou share options had been granted and had become vested on their respective vesting dates, as a mutual understanding of the subjective performance targets had been reached between Changyou and the recipients, the targets had been satisfied, and the service period requirements had been fulfilled. The cumulative share-based compensation expense of $35.4 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. A summary of share option activity under the Changyou 2014 Share Incentive Plan as of and for the year ended December 31, 2018 is presented below: Number Weighted Weighted Aggregate Outstanding as of January 1, 2018 947 $ 0.01 7.01 $ 17,240 Granted 719 0.01 Exercised (1,065 ) 0.01 Forfeited or expired 0 Outstanding as of December 31, 2018 601 0.01 5.98 5,487 Vested as of December 31, 2018 601 0.01 5,487 Exercisable as of December 31, 2018 601 0.01 Note (1): The aggregate intrinsic value in the preceding table represents the difference between Changyou’s closing price of $18.28 per ADS, or $9.14 per Class A ordinary share, on December 31, 2018 and the nominal exercise price of the share option. For the years ended December 31, 2018, 2017 and 2016, total share-based compensation expense recognized for these share options under the Changyou 2014 Share Incentive Plan was negative $6.5 million, $17.4 million and $8.3 million, respectively. For the years ended December 31, 2018, 2017 and 2016, the total fair values of these Changyou share options vested on their respective vesting dates were $5.7 million, $14.8 million and $9.1 million, respectively. For the years ended December 31, 2018, 2017 and 2016, the total intrinsic value of share options exercised was $14.9 million, $10.3 million and $4.3 million, respectively. 4) Sohu Video Share-based Awards On January 4, 2012, Sohu Video adopted the Video 2011 Share Incentive Plan, under which 25,000,000 ordinary shares of Sohu Video are reserved for the purpose of making share incentive awards to management and key employees of Sohu Video and to Sohu management. The maximum term of any share incentive award granted under the Video 2011 Share Incentive Plan is ten years from the grant date. The Video 2011 Share Incentive Plan will expire on January 3, 2022. As of December 31, 2018, 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. For purposes of ASC 718-10-25 For the years ended December 31, 2018, 2017 and 2016, total share-based compensation expense recognized for vested Sohu Video options under the Video 2011 Share Incentive Plan was negative $0.5 million, negative $0.3 million and $0.8 million, respectively. The fair value as of December 31, 2018 and 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 2018 Average risk-free interest rate 3.19 % Exercise multiple 2.8 Expected forfeiture rate (post-vesting) 14 % Weighted average expected option life 3.0 Volatility rate 45.1 % Dividend yield 0 Fair value 0.53 |