More annual reports from PDD Holdings:
2023 ReportTable 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
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
For the fiscal year ended December 31, 2020.
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
OR
☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report
For the transition period from to
Commission file number: 001-38591
Pinduoduo Inc.
(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)
28/F, No. 533 Loushanguan Road, Changning District
Shanghai, 200051
People’s Republic of China
(Address of principal executive offices)
Jianchong Zhu
Tel: +86-21-52661300
Email: investor@pinduoduo.com
28/F, No. 533 Loushanguan Road, Changning District
Shanghai, 200051
People’s Republic of China
(Name, Telephone, E-mail 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
American Depositary Shares (one
American
depositary share representing four Class A
ordinary shares, par value US$0.000005
per share)
Class A ordinary shares, par value
US$0.000005 per share*
Ticker Symbol
PDD
Name of each exchange on which registered
The Nasdaq Stock Market LLC
(The Nasdaq Global Select Market)
The Nasdaq Stock Market LLC (The Nasdaq)
(The Nasdaq Global Select Market)
*
Not for trading, but only in connection with the listing on The Nasdaq Global Select Market of American depositary shares.
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
(Title of Class)
Table of Contents
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
(Title of Class)
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: 3,545,065,888
Class A ordinary shares, par value US$0.000005 per share and 1,409,744,080 Class B ordinary shares, par value US$0.000005 per share, were outstanding as of December 31,
2020.
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.
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
☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically, if any, 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 the definitions 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☐
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.
☐ Yes ☐ No
† 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
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.
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).
☐ Item 17 ☐ Item 18
☐ 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
FORWARD-LOOKING INFORMATION
PART I
Item 1.
Item 2.
Item 3.
Item 4.
Item 4A.
Item 5.
Item 6.
Item 7.
Item 8.
Item 9.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16A.
Item 16B.
Item 16C.
Item 16D.
Item 16E.
Item 16F.
Item 16G.
Item 16H.
PART II
Identity of Directors, Senior Management and Advisers
Offer Statistics and Expected Timetable
Key Information
Information on the Company
Unresolved Staff Comments
Operating and Financial Review and Prospects
Directors, Senior Management and Employees
Major Shareholders and Related Party Transactions
Financial Information
The Offer and Listing
Additional Information
Quantitative and Qualitative Disclosures about Market Risk
Description of Securities Other than Equity Securities
Defaults, Dividend Arrearages and Delinquencies
Material Modifications to the Rights of Security Holders and Use of Proceeds
Controls and Procedures
Audit Committee Financial Expert
Code of Ethics
Principal Accountant Fees and Services
Exemptions from the Listing Standards for Audit Committees
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Change in Registrant’s Certifying Accountant
Corporate Governance
Mine Safety Disclosure
PART III
Item 17.
Item 18.
Item 19.
Financial Statements
Financial Statements
Exhibits
i
1
2
3
3
3
3
58
83
83
100
115
117
119
119
130
131
132
132
132
133
134
134
134
134
134
134
135
135
135
135
135
135
Table of Contents
INTRODUCTION
Unless otherwise indicated or the context otherwise requires, references in this annual report to:
● “active buyers” in a given period are to user accounts that placed one or more orders (i) on our Pinduoduo mobile
app or (ii) through social networks or access points in that period, regardless of whether the products and services
are actually sold, delivered or returned;
● “active merchants” in a given period are to merchant accounts that had one or more orders shipped to a buyer on
our Pinduoduo mobile platform in that period, regardless of whether the buyer returns the merchandise or the
merchant refunds the purchase price;
● “ADRs” are to the American depositary receipts that evidence our ADSs;
● “ADSs” are to our American depositary shares, each of which represents four Class A ordinary shares, par value
US$0.000005 each;
● “annual spending per active buyer” in a given year are to the quotient of total GMV in that year divided by the
number of active buyers in the same year;
● “China” or the “PRC” are to the People’s Republic of China, excluding, for the purposes of this annual report
only, Hong Kong, Macau and Taiwan;
● “GMV” are to the total value of all orders for products and services placed on our Pinduoduo mobile platform,
regardless of whether the products and services are actually sold, delivered or returned. Buyers on our platform
are not charged for shipping fees in addition to the listed price of merchandise. Hence, merchants may embed the
shipping fees in the listed price. If embedded, then the shipping fees are included in our GMV. As a prudential
matter aimed at eliminating any influence on our GMV of irregular transactions, we exclude from our calculation
of GMV transactions in certain product categories over certain amounts and transactions by buyers in certain
product categories over a certain amount per day;
● “monthly active users” are to the number of user accounts that visited our Pinduoduo mobile app during a given
month, which does not include those that accessed our platform through social networks and access points;
● “our platform” or “Pinduoduo mobile platform” are to our Pinduoduo mobile app and a variety of related
features, functionalities, tools and services that we provide to buyers and merchants via Pinduoduo mobile app
and through social networks and access points;
● “Pinduoduo,” “we,” “us,” “our company” and “our” are to Pinduoduo Inc., its subsidiaries and its consolidated
affiliated entities;
● “RMB” and “Renminbi” are to the legal currency of China;
● “shares” or “ordinary shares” refers to our Class A and Class B ordinary shares, par value US$0.000005 per
share;
● “total orders” are to the total number of orders for products and services placed on our Pinduoduo mobile
platform, regardless of whether the products and services are actually sold, delivered or returned; and
● “US$,” “U.S. dollars,” “$,” and “dollars” are to the legal currency of the United States.
1
Table of Contents
Our reporting currency is Renminbi because our business is mainly conducted in China and all of our revenues are
denominated in Renminbi. This annual report contains translations of Renminbi amounts into U.S. dollars at specific rates
solely for the convenience of the readers. Unless otherwise noted, all translations from Renminbi to U.S. dollars and from
U.S. dollars to Renminbi in this annual report were made at a rate of RMB6.5250 to US$1.00, the exchange rate on
December 31, 2020 as set forth in the H.10 statistical release of the Board of Governors of the Federal Reserve System. We
make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars
or Renminbi, as the case may be, at any particular rate or at all.
FORWARD-LOOKING INFORMATION
This annual report contains forward-looking statements that reflect our current expectations and views of future
events. The forward-looking statements are contained principally in the sections entitled “Item 3. Key Information—D.
Risk Factors,” “Item 4. Information on the Company—B. Business Overview” and “Item 5. Operating and Financial
Review and Prospects.” These forward-looking statements are made under the “safe-harbor” provisions of the U.S. Private
Securities Litigation Reform Act of 1995. Known and unknown risks, uncertainties and other factors, including those listed
under “Item 3. Key Information—D. Risk Factors,” may cause our actual results, performance or achievements to be
materially different from those expressed or implied by the forward-looking statements.
You can identify some of these forward-looking statements by words or phrases such as “may,” “will,” “expect,”
“anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely to,” “potential,” “continue” or other similar
expressions. We have based these forward-looking statements largely on our current expectations and projections about
future events that we believe may affect our financial condition, results of operations, business strategy and financial needs.
These forward-looking statements include statements relating to:
● our growth strategies;
● our future business development, financial conditions and results of operations;
● the trends in the e-commerce industry in China;
● our expectations regarding demand for and market acceptance of our products and services;
● our expectations regarding our relationships with buyers and merchants;
● competition in our industry; and
● relevant government policies and regulations relating to our industry.
These forward-looking statements involve various risks and uncertainties. Although we believe that our expectations
expressed in these forward-looking statements are reasonable, our expectations may later be found to be incorrect. Our
actual results could be materially different from our expectations. Important risks and factors that could cause our actual
results to be materially different from our expectations are generally set forth in “Item 3. Key Information—D. Risk
Factors,” “Item 4. Information on the Company—B. Business Overview,” “Item 5. Operating and Financial Review and
Prospects,” and other sections in this annual report. You should read thoroughly this annual report and the documents that
we refer to with the understanding that our actual future results may be materially different from and worse than what we
expect. We qualify all of our forward-looking statements by these cautionary statements.
2
Table of Contents
This annual report contains certain data and information that we obtained from various government and private
publications. We have not independently verified the accuracy or completeness of the data contained in these industry
publications and reports. Statistical data in these publications also include projections based on a number of assumptions.
The e-commerce industry may not grow at the rate projected by market data, or at all. Failure of this market to grow at the
projected rate may have a material and adverse effect on our business and the market price of our ADSs. In addition, the
rapidly evolving nature of the e-commerce industry results in significant uncertainties for any projections or estimates
relating to the growth prospects or future condition of our market. Furthermore, if any one or more of the assumptions
underlying the market data are later found to be incorrect, actual results may differ from the projections based on these
assumptions. You should not place undue reliance on these forward-looking statements.
The forward-looking statements made in this annual report relate only to events or information as of the date on which
the statements are made in this annual report. Except as required by law, we undertake no obligation to update or revise
publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date
on which the statements are made or to reflect the occurrence of unanticipated events. You should read this annual report
and the documents that we refer to in this annual report and exhibits to this annual report completely and with the
understanding that our actual future results may be materially different from what we expect.
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
A. Selected Financial Data
The following table presents the selected consolidated financial information for our company. The selected
consolidated statements of comprehensive loss data for the years ended December 31, 2018, 2019 and 2020, selected
consolidated balance sheet data as of December 31, 2019 and 2020 and selected consolidated statements of cash flow data
for the years ended December 31, 2018, 2019 and 2020 have been derived from our audited consolidated financial
statements, which are included in this annual report beginning on page F-1. The selected consolidated statements of
comprehensive loss data for the year ended December 31, 2016 and 2017, and the selected consolidated balance sheet data
as of December 31, 2016, 2017 and 2018 have been derived from our audited consolidated financial statements not
included in this annual report. Our historical results are not necessarily indicative of results expected for future periods.
You should read this selected financial data together with our consolidated financial statements and the related notes and
information under “Item 5. Operating and Financial Review and Prospects” in this annual report. Our audited consolidated
financial statements are prepared and presented in accordance with U.S. GAAP.
The Jumpstart Our Business Startups Act (“JOBS Act”) provides that an emerging growth company (“EGC”) as
defined therein can take advantage of an extended transition period for complying with new or revised accounting
standards. This allows an EGC to delay adoption of certain accounting standards until those standards would otherwise
apply to private companies. The Company as an EGC elected to take advantage of the extended transition period. However,
the Company ceased to be an EGC on December 31, 2018 due to its rapid revenue growth in 2018.
3
Table of Contents
As a result, we adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers
(Topic 606), as amended, effective January 1, 2018 using the modified retrospective approach. There were no changes
made to our revenue recognition policy as a result of the adoption of Topic 606. We also changed the classification and
presentation of restricted cash on the consolidated statements of cash flows for each of the three years in the period ended
December 31, 2018 due to the adoption of ASU No. 2016-18, Statement of Cash Flows: Restricted Cash. For the years
ended December 31, 2016 and 2017, the changes in restricted cash of nil and RMB9,370.8 million, respectively were
previously reported within net cash used in operating activities in the statements of cash flows. We adopted ASU No. 2016-
02: Leases on January 1, 2019 using the modified retrospective transition method. Right-of-use assets (“ROU assets”) and
lease liabilities (including current and non-current) for operating leases are presented on the face of the consolidated
balance sheet as of December 31, 2019 and 2020, while the consolidated balance sheet data for the years ended December
31, 2016, 2017 and 2018 have been prepared in accordance with ASC Topic 840 (“ASC 840”), Accounting for Leases. We
adopted Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments-Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) on January 1, 2020, which requires the
measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces
the incurred loss methodology with a forward-looking current expected credit losses.
For the Year Ended December 31,
2016
RMB
2017
RMB
2019
RMB
(in thousands, except for number of shares and per share (or ADS) data)
2018
RMB
RMB
2020
US$
Selected Consolidated Statement of Comprehensive
Loss Data:
Revenues
Online marketing services and others
Transaction services
Merchandise sales
Total revenues
Costs of revenues(1)
Gross (loss)/profit
Operating expenses
Sales and marketing expenses(1)
General and administrative expenses(1)
Research and development expenses(1)
Impairment of a long-term investment
Total operating expenses
Operating loss
Other (expenses)/income
Interest and investment income, net
Interest expense
Foreign exchange gain/(loss)
Change in the fair value of warrant liability
Other (loss)/income, net
Loss before income tax and share of results of equity
investees
Income tax expenses
Share of results of equity investees
Net loss
Net loss attributable to ordinary shareholders
Loss per share
Basic
Diluted
Shares used in loss per share computation
Basic
Diluted
Loss per ADS (each ADS representing four Class A
ordinary shares)
Basic
Diluted
Weighted average number of shares
Basic
Diluted
—
48,276
456,588
504,864
(577,870)
(73,006)
(168,990)
(14,793)
(29,421)
—
(213,204)
(286,210)
4,460
—
475
(8,668)
(2,034)
(291,977)
—
—
(291,977)
(322,407)
1,209,275
531,416
3,385
1,744,076
(722,830)
1,021,246
11,515,575
1,604,415
—
13,119,990
(2,905,249)
10,214,741
(1,344,582)
(133,207)
(129,181)
(10,000)
(1,616,970)
(595,724)
(13,441,813)
(6,456,612)
(1,116,057)
—
(21,014,482)
(10,799,741)
80,783
—
(11,547)
—
1,373
584,940
—
10,037
—
(12,361)
(525,115)
—
—
(525,115)
(498,702)
(10,217,125)
—
—
(10,217,125)
(10,297,621)
26,813,641
3,328,245
—
30,141,886
(6,338,778)
23,803,108
(27,174,249)
(1,296,712)
(3,870,358)
—
(32,341,319)
(8,538,211)
1,541,825
(145,858)
63,179
—
82,786
(6,996,279)
—
28,676
(6,967,603)
(6,967,603)
47,953,779
5,787,415
5,750,671
59,491,865
(19,278,641)
40,213,224
(41,194,599)
(1,507,297)
(6,891,653)
—
(49,593,549)
(9,380,325)
2,455,366
(757,336)
225,197
—
193,702
(7,263,396)
—
83,654
(7,179,742)
(7,179,742)
7,349,238
886,960
881,329
9,117,527
(2,954,581)
6,162,946
(6,313,349)
(231,003)
(1,056,192)
—
(7,600,544)
(1,437,598)
376,301
(116,067)
34,513
—
29,686
(1,113,165)
—
12,821
(1,100,344)
(1,100,344)
(0.18)
(0.18)
(0.28)
(0.28)
(3.47)
(3.47)
(1.51)
(1.51)
(1.51)
(1.51)
(0.23)
(0.23)
1,815,200
1,815,200
1,764,799
1,764,799
2,968,320
2,968,320
4,627,278
4,627,278
4,768,343
4,768,343
4,768,343
4,768,343
(0.72)
(0.72)
(1.12)
(1.12)
(13.88)
(13.88)
(6.04)
(6.04)
(6.02)
(6.02)
(0.92)
(0.92)
1,815,200
1,815,200
1,764,799
1,764,799
2,968,320
2,968,320
4,627,278
4,627,278
4,768,343
4,768,343
4,768,343
4,768,343
(1) Share-based compensation expenses were allocated as follows:
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Costs of revenues
Sales and marketing expenses
General and administrative expenses
Research and development expenses
Total
2016
RMB
2017
RMB
276
563
1,477
1,748
4,064
796
1,675
108,141
5,893
116,505
For the Year Ended December 31,
2018
RMB
3,488
405,805
6,296,186
136,094
6,841,573
2019
RMB
23,835
860,862
786,641
886,368
2,557,706
2020
RMB
32,291
1,093,547
966,985
1,520,220
3,613,043
US$
4,949
167,593
148,197
232,984
553,723
The following table presents our selected consolidated balance sheet data as of the dates indicated:
2016
RMB
2017
RMB
2018
RMB
As of December 31,
2019
RMB
(in thousands)
2020
RMB
US$
Selected Consolidated Balance
Sheet Data:
Current assets:
Cash and cash equivalents
Restricted cash(1)
Receivables from online payment
platforms
Short-term investments
Prepayments and other current
assets
Non-current assets:
Other non-current assets
Property, equipment and
software, net
Total assets
Current liabilities:
Payable to merchants
Merchant deposits
Total current liabilities
Total mezzanine equity
Total shareholders’
(deficits)/equity
1,319,843
—
3,058,152
9,370,849
14,160,322
16,379,364
5,768,186
27,577,671
22,421,189
52,422,447
3,436,198
8,034,091
10,282
290,000
88,173
50,000
247,586
7,630,689
1,050,974
35,288,827
729,548
64,551,094
111,808
9,892,888
40,731
127,742
953,989
950,277
5,159,531
790,733
15,000
5,000
182,667
503,120
7,275,305
1,114,989
2,248
1,770,751
9,279
13,314,470
29,075
43,182,063
41,273
76,057,336
202,853
158,908,614
31,089
24,353,811
1,116,798
219,472
1,414,296
782,733
9,838,519
1,778,085
12,109,507
2,196,921
17,275,934
4,188,273
24,359,469
—
29,926,488
7,840,912
45,767,806
—
53,833,981
10,926,319
83,882,077
—
8,250,419
1,674,532
12,855,492
—
(426,278)
(991,958)
18,822,594
24,646,866
60,175,888
9,222,358
(1) Restricted cash mainly represents cash received from buyers and reserved in a bank supervised account for payments
to merchants
5
Table of Contents
The following table presents our selected consolidated cash flow data for the periods indicated:
For the Year Ended December 31,
2016
RMB
2017
RMB
2018
RMB
2019
RMB
(in thousands)
2020
RMB
US$
Selected Consolidated Cash
Flow Data:
Net cash generated from
operating activities
Net cash (used in)/generated
from investing activities
Net cash generated from
financing activities
Exchange rate effect on cash,
cash equivalents and restricted
cash
Net increase in cash, cash
879,777
9,686,328
7,767,927
14,820,976
28,196,627
4,321,323
(307,301)
71,651
(7,548,509)
(28,319,678)
(38,357,901)
(5,878,606)
486,538
1,398,860
17,344,357
15,854,731
51,798,996
7,938,543
20,397
(47,681)
546,910
450,142
(139,943)
(21,447)
equivalents and restricted cash
1,079,411
11,109,158
18,110,685
2,806,171
41,497,779
6,359,813
Cash, cash equivalents at and
restricted cash at beginning of
the year
Cash, cash equivalents and
restricted cash at end of the
year
240,432
1,319,843
12,429,001
30,539,686
33,345,857
5,110,476
1,319,843
12,429,001
30,539,686
33,345,857
74,843,636
11,470,289
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
Risks Related to Our Business and Industry
Our limited operating history makes it difficult to evaluate our business and prospects. We cannot guarantee that we will
be able to maintain the growth rate that we have experienced to date.
We commenced our commercial operations in 2015, and have a limited operating history. The number of our active
buyers have grown exponentially to reach approximately 788.4 million in 2020. Our revenues grew from RMB30,141.9
million in 2019 to RMB59,491.9 million (US$9,117.5 million) in 2020. However, our historical performance may not be
indicative of our future growth or financial results. We cannot assure you that we will be able to grow at the same rate as
we did in the past, or avoid any decline in the future. Our growth may slow down or become negative, and revenues may
decline for a number of possible reasons, some of which are beyond our control, including decreasing consumer spending,
increasing competition, declining growth of our overall market or industry, the emergence of alternative business models,
changes in rules, regulations, government policies or general economic conditions. In addition, our online marketing
services, from which we have generated almost all of our revenues since 2017, are a relatively new initiative and may not
grow as quickly as we have anticipated. It is difficult to evaluate our prospects, as we may not have sufficient experience in
addressing the risks to which companies operating in rapidly evolving markets may be exposed. If our growth rate declines,
investors’ perceptions of our business, operating results and prospects may be materially and adversely affected and the
market price of our ADSs could decline. You should consider our prospects in light of the risks and uncertainties that
companies with a limited operating history may encounter.
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If we fail to anticipate buyer needs and provide products and services to attract and retain buyers, or fail to adapt our
services or business model to changing buyer needs or emerging industry standards, our business may be materially and
adversely affected.
The e-commerce market in which we operate as well as buyer needs and preferences are constantly evolving. As a
result, we must continuously respond to changes in the market and buyer demand and preferences to remain competitive,
grow our business and maintain our market position. We intend to further diversify our product and service offerings to add
to our revenue sources in the future. New products and services, new types of buyers or new business models may involve
risks and challenges we do not currently face. Any new initiatives may require us to devote significant financial and
management resources and may not perform as well as expected. For example, the e-waybill system we launched in the
first quarter of 2019, the livestreaming initiative we launched in November 2019 and Duo Duo Grocery we started in
August 2020, each may require financial, personnel and other resources commitment over time and may not attract or
retain enough users or otherwise perform in accordance with our expectations.
Furthermore, we may have difficulty in anticipating buyer demand and preferences, and the products offered on our
platform may not be accepted by the market or be rendered obsolete or uneconomical. Therefore, any inability to adapt to
these changes may result in a failure to capture new buyers or retain existing buyers, the occurrence of which would
materially and adversely affect our business, financial condition and results of operations.
In addition, to remain competitive, we must continue to enhance and improve the responsiveness, functionality and
features of our platform. The internet and e-commerce markets are characterized by rapid technological evolution, changes
in buyer requirements and preferences, frequent introductions of new products, features and services embodying new
technologies and the emergence of new industry standards and practices, any of which could render our existing
technologies and systems obsolete. Our success will depend, in part, on our ability to identify, develop and adapt to new
technologies useful in our business, and respond to technological advances and emerging industry standards and practices,
in particular with respect to mobile internet, in a cost-effective and timely way. We cannot assure you that we will be
successful in these efforts.
Any harm to our brand or reputation may materially and adversely affect our business and results of operations.
We believe that the recognition and reputation of our Pinduoduo or “拼多多” brand among our buyers, merchants and
third-party service providers have contributed significantly to the growth and success of our business. Maintaining and
enhancing the recognition and reputation of our brand are critical to our business and competitiveness. Many factors, some
of which are beyond our control, are important to maintaining and enhancing our brand. These factors include our ability
to:
● provide a superior shopping experience to buyers;
● maintain the popularity, attractiveness, diversity, quality and authenticity of our product offerings;
● maintain the efficiency, reliability and quality of the fulfillment and delivery services to our buyers;
● maintain or improve buyers’ satisfaction with our after-sale services;
● increase brand awareness through marketing and brand promotion activities; and
● preserve our reputation and goodwill in the event of any negative publicity on our consumer experience or
merchant service, internet and data security, product quality, price or authenticity, performance measures, or other
issues affecting us or other e-commerce businesses in China.
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Public perception that counterfeit, unauthorized, illegal, or infringing products are sold on our platform or that we or
merchants on our platform do not provide satisfactory consumer services, even if factually incorrect or based on isolated
incidents, could damage our reputation, diminish the value of our brand, undermine the trust and credibility we have
established and have a negative impact on our ability to attract new buyers or retain our current buyers. In particular, we
have been and may continue to be subject to negative publicity based on claims and allegations related to intellectual
property. For example, the Office of the U.S. Trade Representative, or USTR, identified our platform as a “notorious
market” in the 2019 and 2020 Annual Special 301 Reports. The USTR may continue to identify our platform as a notorious
market in the future. The negative public perception resulted therefrom could damage our reputation, harm our business,
diminish the value of our brand name and negatively affect trading price of our ADSs.
If we are unable to maintain our reputation, enhance our brand recognition or increase positive awareness of our
platform, products and services, it may be difficult to maintain and grow our buyer base, and our business and growth
prospects may be materially and adversely affected.
Our merchants deliver their products to buyers through a variety of third-party logistics service providers, third-party
warehouse operators, third-party pick-up point operators and/or e-waybill systems. Service interruptions, failures, or
constraints of these third parties or any disruptions or malfunctions of the e-waybill systems could severely harm our
business and prospects.
Our merchants fulfil and deliver their orders through third-party logistics service providers, warehouse operators
and/or pick-up point operators. Interruptions to or failures in services provided by these third parties could affect timely
and successful delivery of the ordered products to our buyers. As we do not directly control or manage the operations of
these third parties, we may not be able to guarantee their performance. Any failure to provide satisfactory services to our
buyers, such as delays in delivery, product damage or product loss during transit, shutdown or termination of pick-up
points may damage our reputation and cause us to lose buyers, and may ultimately adversely affect our results of
operations. In addition, certain of these third parties may be influenced by our competitors when providing services to us.
For example, if third-party logistics service providers raise the shipping rates for delivering products of merchants on our
platform, our merchants may not be willing to bear the increased costs or be able to offer competitive prices for products
on our platform. As a result, our business and prospects, as well as our financial condition and results of operations could
be materially and adversely affected.
If these third parties fail to deliver products to our buyers on time or in good condition, our buyers may refuse to
accept merchandise purchased on our platform and have less confidence in our platform. In such event, we cannot assure
you that our merchants or we will be able to find alternative cost-efficient service providers or operators to offer
satisfactory services or pick-up points in a timely manner, or at all, which could cause our business and reputation to suffer
or cause merchants and buyers to move to other platforms and have negative impact on our financial conditions.
Most merchants use e-waybill systems to arrange and track shipment. While we launched our e-waybill system during
the first quarter of 2019, the merchants on our platform are allowed to choose different e-waybill systems. Any disruptions
or malfunctions of e-waybill systems used by our merchants could prevent the timely or proper delivery of products to
consumers, which would damage our reputation, harm our business, diminish the value of our brand name.
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We face intense competition, and if we fail to compete effectively, we may lose market share, buyers and merchants.
The e-commerce industry in China is intensely competitive. We compete to attract, engage and retain buyers,
merchants, and other participants on our platforms. Our current or potential competitors include (i) major e-commerce
companies in China, (ii) major traditional and brick-and-mortar retailers in China, (iii) retail companies in China focused
on specific product categories and (iv) major internet companies in China that do not operate e-commerce businesses now
but may enter the e-commerce business area or are in the process of initiating their e-commerce businesses. These current
or future competitors may have longer operating histories, greater brand recognition, better supplier or merchant
relationships, stronger infrastructure, larger buyer bases or greater financial, technical or marketing resources than we do.
Competitors may leverage their brand recognition, experience and resources to compete with us in a variety of ways,
including making investments and acquisitions for the expansion of their product and service offerings. Some of our
competitors may be able to secure more favorable terms from merchants, devote greater resources to marketing and
promotional campaigns, adopt more aggressive pricing or inventory policies and devote substantially more resources to
develop their IT systems and technology. Some of these competitors may also offer “team purchase” on their platforms or
offer innovative purchase models that may turn out to be highly popular among buyers, and buyers may prefer them over
our team purchase model. In addition, new and enhanced technologies may increase the competition in the market we
operate in. Increased competition may reduce our profitability, market share, user base and brand recognition. There can be
no assurance that we will be able to compete successfully against current or future competitors, and such competitive
pressures may have a material and adverse effect on our business, financial condition and results of operations.
If we fail to maintain and expand our relationships with merchants, our revenues and results of operations will be
harmed.
We rely on our merchants to offer merchandise that appeal to our existing and potential buyers at attractive prices. Our
ability to provide popular products on our platform at attractive prices depends on our ability to develop mutually
beneficial relationships with our merchants. For example, we rely on our merchants to make available sufficient inventory
and fulfill large volumes of orders in an efficient and timely manner to ensure our user experience. To date, our buyers and
merchants have been increasing in parallel as a result of the powerful network effects of our platform. However, we may
experience merchant attrition in the ordinary course of business resulting from several factors, such as losses to
competitors, perception that marketing on our platform is ineffective, reduction in merchants’ marketing budgets, and
closures or bankruptcies of merchants. In addition, we may have disputes with merchants with respect to their compliance
with our quality control policies and measures and the penalties imposed by us for violation of these policies or measures
from time to time, which may cause them to be dissatisfied with our platform. Their complaints may in turn result in
negative impact on our public image and reputation. If we experience significant merchant attrition, or if we are unable to
attract new merchants, our revenues and results of operations may be materially and adversely affected. In addition, our
agreements with merchants also typically do not restrict them from establishing or maintaining business relationships with
our competitors. We cannot assure you that merchants will continue to offer merchandise on our platform if they are
pressured to use only one platform to market their products.
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Any change, disruption, discontinuity in the features and functions of major social networks could severely limit our
ability to continue growing our buyer base, and our business may be materially and adversely affected.
Our success depends on our ability to attract and retain new buyers and expand our buyer base. Acquiring and
retaining buyers on our platform is important to the growth and profitability of our business. We leverage social networks
as a tool for buyer acquisition and engagement. Although buyers can access our platform and make team purchases directly
through our Pinduoduo mobile app, we leverage social networks, such as Weixin and QQ, to enable buyers to share product
information and their purchase experiences with their friends, family and other social contacts to generate effective and
organic traffic and active interactions among buyers. A portion of our buyer traffic comes from such user recommendation
or product introduction feature which buyers can share with friends or contacts through social networks. Due to the nature
of our business model, which resembles a dynamic and interactive shopping experience, it is impracticable for us to
accurately bifurcate and quantify the buyer traffic generated directly through our platform and through social networks.
Therefore, during our daily operations, we focus more on the GMV on our platform as a whole and the seamless user
experience across different access points, and believe that the final purchase destination cannot be used to reflect the
significance of social networks and our Pinduoduo mobile app to our business operations.
To the extent that we fail to leverage such social networks, our ability to attract or retain buyers may be severely
harmed. If any of these social networks makes changes to its functions or support, such as charging fees for functions or
support that is currently provided for free, or stops offering its functions or support to us, we may not be able to locate
alternative platforms of similar scale to provide similar functions or support on commercially reasonable terms in a timely
manner, or at all. Furthermore, we may fail to establish or maintain relationships with additional social network operators
to support the growth of our business on economically viable terms, or at all. Any interruption to or discontinuation of our
relationships with major social network operators may severely and negatively impact our ability to continue growing our
buyer base, and any occurrence of the circumstances mentioned above may have a material adverse effect on our business,
financial condition and results of operations.
We are dependent on app stores to disseminate our mobile apps.
We offer our services mainly through our Pinduoduo mobile platform. Our mobile apps are offered via smartphone and
tablet apps stores operated by third parties, such as Apple’s App Store, which could suspend or terminate users’ access to
our mobile apps, increase access costs or change the terms of access in a way that makes our apps less desirable or harder
to access. As a result, our ability to expand our user base may be hindered if potential users experience difficulties in or are
barred from accessing our mobile apps. In the past, our mobile apps were taken down from certain third-party app stores
for a short period of time. We cannot assure you that we will not experience such incident of similar nature in the future.
The occurrence of the similar incident may adversely affect our brand and reputation, business, financial condition and
results of operations.
Any disruption to our IT systems could materially affect our ability to maintain the satisfactory performance of our IT
systems and deliver consistent services to our buyers and merchants.
The proper functioning of our IT systems is essential to our business. The satisfactory performance, reliability and
availability of our IT systems are critical to our success, our ability to attract and retain buyers and our ability to maintain
and deliver consistent services to our buyers and merchants. However, our technology infrastructure may fail to keep pace
with increased sales on our platform, in particular with respect to our new product and service offerings, and therefore our
buyers may experience delays as we seek to source additional capacity, which would adversely affect our results of
operations as well as our reputation.
Additionally, we must continue to upgrade and improve our technology infrastructure to support our business growth.
However, we cannot assure you that we will be successful in executing these system upgrades, and the failure to do so may
impede our growth. We currently rely on cloud services and servers operated by external cloud service providers to store
our data, to allow us to analyze a large amount of data simultaneously and to update our buyer database and buyer profiles
quickly. Any interruption or delay in the functionality of these external cloud service and server providers may materially
and adversely affect the operations of our business.
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We may be unable to monitor and ensure high-quality maintenance and upgrade of our IT systems and infrastructure
on a real-time basis, and buyers may experience service outages and delays in accessing and using our platform to place
orders. In addition, we may experience surges in online traffic and orders associated with promotional activities and
generally as we scale, which can put additional demand on our platform at specific times. Our technology or infrastructure
may not function properly at all times. Any system interruptions caused by telecommunications failures, computer viruses,
hacking or other attempts to harm our systems that result in the unavailability or slowdown of our platform or reduced
order fulfillment performance could reduce the volume of products sold and the attractiveness of product offerings on our
platform. Our servers may also be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions,
which could lead to system interruptions, mobile app slowdown or unavailability, delays or errors in transaction
processing, loss of data or the inability to accept and fulfill buyer orders. Any of such occurrences could cause severe
disruption to our daily operations. As a result, our reputation may be materially and adversely affected, our market share
could decline and we could be subject to liability claims.
We have incurred net losses in the past, and we may continue to incur losses in the future.
We have incurred net losses since our inception. We incurred net loss of RMB7,179.7 million (US$1,100.3 million) in
2020, compared to net loss of RMB6,967.6 million in 2019. We cannot assure you that we will be able to generate net
profits in the future. In addition, we expect our operating costs and expenses to increase in absolute amounts in the future
due to: (i) the continued expansion of our business operations, buyer base and merchant network, (ii) the continued
investment in technology infrastructure and network, (iii) our promotion and marketing efforts as we continue to enhance
our brand recognition, retain and grow our buyer base, and increase our buyer activities, (iv) the launch of new services,
and (v) the investment in new initiatives, which may incur upfront costs, change our existing revenue and cost structures,
and affect our ability to achieve profitability.
Our ability to achieve profitability depends on our ability to, among other things, increase our number of active buyers,
grow and diversify our merchant base, and optimize our cost structure. We may not be able to achieve any of the above. In
particular, our sales and marketing expenses increased substantially from RMB27,174.2 million in 2019 to RMB41,194.6
million (US$6,313.3 million) in 2020, as we invested in cultivating greater user recognition and engagement through
online and offline advertising campaigns and promotions. If we continue to incur substantial sales and marketing expenses
without being able to achieve the anticipated growth in active buyers and merchants, our operating results may be
materially and adversely affected. As a result, we may fail to improve our operating margin, and may continue to incur net
losses in the future. In addition, our ability to use our net losses to offset future taxable income may be subject to certain
limitations, including limitations resulting from reorganization of our corporate structure and change of our primary
operating entities. As such, we may not be able to fully utilize our net losses or at all, even if we were to achieve
profitability.
We rely on certain key operating metrics to evaluate the performance of our business, and perceived inaccuracies in
such metrics may harm our reputation and negatively affect our business.
We rely on certain key operating metrics to evaluate the performance of our business. Our operating metrics may differ
from estimates published by third parties or from similarly titled metrics used by other companies due to differences in
methodology and assumptions. If these metrics are perceived to be inaccurate by investors or investors make investment
decisions based on operating metrics we disclosed but with their own methodology and assumptions or those published or
used by third parties or other companies, our reputation may be harmed, which could negatively affect our business, and
we may also face potential lawsuits or disputes.
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We face risks related to natural disasters, health epidemics and other outbreaks, most notably those related to the
outbreak of COVID-19, which could significantly disrupt our operations.
We and our merchants are vulnerable to natural disasters, health epidemics, and other calamities. Any of such
occurrences could cause severe disruption to the daily operations of us and our merchants and may even require a
temporary closure of facilities and logistics delivery networks, which may disrupt our business operations and adversely
affect our results of operations. In recent years, there have been outbreaks of epidemics in China and globally. For example,
in early 2020, to contain the spread of COVID-19, the Chinese government took a number of actions, which included
extending the Chinese New Year holiday, quarantining individuals suspected of having COVID-19, and asking residents in
China to stay at home and to avoid public gathering, among other things. COVID-19 has also resulted in temporary closure
of many corporate offices, retail stores, and manufacturing facilities and factories across China, and put significant strain
on merchandise shipping and delivery. Reduction in product offering on our e-commerce platform and delay in delivery
caused by the impairment of manufacturing and delivery capacity of our merchants and services providers may damage our
reputation and cause us to lose buyers, and adversely affect our results of operations. While the events related to the
outbreak of and response to the COVID-19 may be temporary and many of the COVID-19 quarantine measures within
China have since been significantly relaxed as of the date of this annual report, the impact of the outbreak of COVID-19 on
our financial performance for the period beyond 2020 cannot be reasonably estimated at this time. The extent to which the
outbreak of COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be
predicted, including new information which may emerge concerning the severity of this outbreak and the actions to contain
this outbreak or treat its impact, among others. In addition, our results of operations could be adversely affected to the
extent that any epidemics or other catastrophic events, such as COVID-19, harm the Chinese economy in general.
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Our success depends on the continuing efforts of our key employees. If we fail to hire, retain and motivate our key
employees, our business may suffer.
Our future success is significantly dependent upon the continued service of our key executives and other key
employees. If we lose the services of any member of our management or key personnel, we may not be able to locate
suitable or qualified replacements, and may incur additional expenses to recruit and train new staff, which could severely
disrupt our business and growth. Our management and key personnel are critical to our vision, strategic direction, culture
and overall business success. If there is any internal organizational structure change or change in responsibilities for our
management or key personnel, the operation of our business and our business prospects may be adversely affected. Our
employees, including members of our management, may choose to pursue other opportunities. If we are unable to motivate
or retain key employees, our business may be severely disrupted and our prospects could suffer.
The increasing scale of our business also requires us to hire and retain a wide range of capable and experienced
personnel and technology talents who can adapt to a dynamic, competitive and challenging business environment. For
example, we may need to hire additional personnel with special sets of skills and experience for Duo Duo Grocery.
Competition for talents is intense, and the availability of suitable and qualified candidates in China is limited. Competition
for talents could cause us to offer higher compensation and other benefits to attract and retain them. Even if we were to
offer higher compensation and other benefits, these individuals may choose not to join or continue to work for us. Any
failure to attract or retain management and key personnel could severely disrupt our business and growth.
If we are unable to manage our growth or execute our strategies effectively, our business and prospects may be
materially and adversely affected.
Our business has grown substantially since our inception, and we expect continued growth in our business, revenues
and number of employees. We have significantly expanded our headcount and office facilities, and we anticipate that
further expansion in certain areas and geographies will be required. Expansion in general increases the complexity of our
operations and places significant strains on our management, operational and financial resources, and may cause additional
risks and costs in relation to compliance, such as dealing with regulatory enforcement or labor disputes. We may continue
to hire, train and effectively manage new employees and contractors. If our new hires perform poorly or if we are
unsuccessful in hiring, training, managing and integrating new employees and contractors, our business, financial condition
and results of operations may be materially harmed.
In addition, we plan to further establish relationships with more merchants to increase the product offerings on our
platform. Such expansion may require us to introduce new products and work with a variety of additional merchants to
address the evolving needs of our buyers. We may have limited or no experience for certain new product offerings, and our
expansion into these new product offerings may not achieve broad buyer acceptance. These offerings may present new and
difficult technological or operational challenges, and we may be subject to claims if buyers are not satisfied with the
quality of the products or do not have satisfactory experiences in general.
To effectively execute our business strategies and manage the expected growth of our operations and personnel, we
will need to continue to improve our transaction processing, technological, operational and financial systems, policies,
procedures and controls. For example, the e-waybill system that we launched in the first quarter of 2019, the livestreaming
feature that we started in November 2019, and Duo Duo Grocery that we started in August 2020, each may require
financial, personnel and other resources commitment over time, including recruitment of employees and contractors,
development of new technologies, collaboration with new business partners, launch of additional promotional activities and
investments in logistics infrastructure. All of these endeavors involve risks and will require significant management,
financial and human resources. We cannot assure you that we will be able to effectively manage our growth or to
implement our strategies successfully. If we are not able to manage our growth or implement our strategies effectively, or at
all, our business and prospects may be materially and adversely affected.
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For example, we have developed an open, asset-light logistics technology platform. As the first pillar to such logistics
technology platform, we launched our e-waybill system during the first quarter of 2019. Building on top of our e-waybill
system, our aim is to build a platform that would provide technology solutions to our sizable and growing merchant base,
and fundamentally improve their efficiencies and services to users as we deepen our relationships with them through C2M
(Consumer-to-Manufacturer), cross-border e-commerce, and other initiatives. As a result of the development of this
platform, we may incur additional costs and expenses, devote more management’s attention to its operations and
compliance and allocate additional resources in dealing with potential disputes relating to its operations and intellectual
property rights. In August 2020, we started Duo Duo Grocery, a next-day grocery pick-up service that allows users to order
groceries and related products online and collect goods the next day at nearby designated pickup points. We cannot assure
you that we will be able to manage or operate this new business initiative successfully or effectively, such as providing the
requisite services to the merchants, attracting and retaining capable employees and partners and leasing suitable facilities
on commercially acceptable terms. Failure to manage and operate Duo Duo Grocery could materially and adversely affect
our business, financial condition and results of operations.
We may incur liability for counterfeit, unauthorized, illegal, or infringing products sold or misleading information
available on our platforms.
Under our current marketplace model, substantially all of products offered on our platform are supplied by merchants,
who are separately responsible for sourcing and coordinating delivery of the products that are sold on our platform. In
2020, we had 8.6 million active merchants on our platform, offering a broad range of product categories. We have been and
may continue to be subject to allegations and lawsuits claiming that products listed or sold through our platform by us or
third-party merchants are counterfeit, unauthorized, illegal, or otherwise infringe third-party copyrights, trademarks,
patents or other intellectual property rights, or that content posted on our user interface contains misleading information on
description of products and comparable prices. Although we have adopted strict measures to protect us against these
potential liabilities, including but not limited to, proactively verifying the authenticity and authorization of products sold on
our platform through working with brands and conducting offline investigations, blocking prior to product launch or
immediately taking down any counterfeit or illegal products or misleading information found on our platform, closing
higher-risk online stores, and freezing the accounts of merchants in violation of the platform policies, these measures may
not always be successful or timely. For example, in January 2018, we were required by the relevant government authorities
to strengthen supervision on the qualifications of the distributors of publications on our platform and to respond effectively
to claims of copyright infringement. We have taken a number of measures in accordance with such requirements including
the implementation of a comprehensive system in reviewing and tracking the qualification status of the relevant merchants.
In August 2018, we met with the officials from the relevant governmental authorities to discuss the alleged sale of
counterfeit and infringing products on our platform upon their request. Shortly after the meetings, we adopted a number of
remediation measures including more rigorous policies of closure of stores and removal of listings with infringing products
from our platform. We may implement further measures in an effort to eliminate infringing products on our platforms,
including taking legal actions against merchants of counterfeit or infringing products, which may cause us to spend
substantial additional resources or result in reduced revenues. In addition, these measures may not appeal to consumers,
merchants or other participants on our platforms. A merchant whose account is suspended or terminated by us, regardless
of our compliance with the applicable laws, rules and regulations, may have disputes with us and commence action against
us for damages, make public complaints or engage in publicity campaigns against us. We may incur significant costs to
defend against these activities, which could harm our business.
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In the event that counterfeit, illegal, unauthorized or infringing products are sold on our platform or infringing or
misleading content is posted on our user interface, we could face claims or be imposed penalties. Counterfeit products sold
on our platform may damage our reputation and cause buyers to refrain from making future purchases from us, which
would materially and adversely affect our business operations and financial results. We have in the past received claims
alleging the sales of defective, counterfeit or unauthorized items on our platform. For example, in July 2018, a complaint
was filed against us in U.S. federal court alleging contributory trademark infringement and unfair competition based on
certain allegedly counterfeit and unauthorized merchandise sold by merchants to U.S. consumers on our platform. In 2019,
the court dismissed all claims against us and awarded us attorney’s fees and costs due to the plaintiff’s frivolous and
problematic claims. Irrespective of the validity of such claims, we could incur significant costs and efforts in either
defending against or settling such claims. If there is a successful claim against us in the United States, we might be
required to pay substantial damages or be enjoined from permitting further sale of the relevant products or activities by
certain merchants. Potential liabilities under PRC law for negligence in participating or assisting in infringement activities
associated with counterfeit goods include injunctions to cease infringing activities, rectification, compensation,
administrative penalties and even criminal liability.
Moreover, the alleged sales of counterfeit products and third-party claims or administrative penalties related to them
could result in significant negative publicity and our reputation could be severely damaged. For example, the Office of the
U.S. Trade Representative, or USTR, identified our platform as a “notorious market” in the 2019 and 2020 Annual Special
301 Reports. The USTR may continue to identify our platform as a notorious market in the future. The negative public
perception resulted therefrom could damage our reputation, harm our business, diminish the value of our brand name and
negatively affect trading price of our ADSs.
Some of our merchants interact and exchange information with our users through our livestreaming feature. As such
communication is conducted in real time, we are unable to verify the information exchanged. Therefore, it is possible that
users may engage in conversations or activities with illegal, obscene or infringing content that may be deemed unlawful
under PRC laws and regulations on our platform. In addition, certain merchants may post and sell on our platform products
that may not be sold via e-commerce platform under relevant PRC regulation, such as prescription drugs and foreign
currencies. Failure to identify and remove such products and content from our platform may subject us to liability and
administrative penalties. Any of these events could have a material and adverse effect on our business, results of operations
or financial condition.
Under our standard form agreements, we require our merchants to indemnify us for any losses we suffer or any costs
that we incur due to any products sold by these merchants. However, we may not be able to successfully enforce our
contractual rights and may need to initiate costly and lengthy legal proceedings in China to protect our rights.
In addition to fraudulent transactions with legitimate buyers, merchants on our platform may engage in fictitious
transactions with themselves or collaborate with third parties in order to artificially inflate their sales records and search
results rankings. Such activity may frustrate other merchants by enabling the perpetrating merchants to be favored over
legitimate merchants, and may harm buyers by misleading them to believe that a merchant is more reliable or trustworthy
than the merchant actually is. We are also aware that certain merchants and users engage in fictitious transactions on e-
commerce platforms to facilitate illegal activities such as online gambling. Fictitious transactions may result in inflated
GMV, total orders and other key metrics. Although we have implemented strict measures to detect and penalize merchants
who engaged in fictitious transactions on our platform, there can be no assurance that such measures will be effective in
preventing all fraudulent transactions or deter illegal activities.
Moreover, illegal, fraudulent or collusive activities by our employees could also subject us to liability or negative
publicity. There were occasions where we found our employees accepting payments from merchants in exchange for
preferential treatment on our platform, and we reported such behavior to the relevant government authorities.
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Although we implement a zero-tolerance policy towards these activities and have not been charged with any
wrongdoing, there can be no assurance that our controls and policies will prevent all fictitious, fraudulent or illegal
activities by merchants, users or our employees or that similar incidents will not occur in the future. Any inquiries,
investigations and other governmental actions associated with and negative publicity and user sentiment resulting from
similar incidents could divert significant management time and attention, severely diminish consumer confidence in us and
the value of our brand, and would materially and adversely affect our business, financial condition and results of
operations.
We may be subject to claims under consumer protection laws, including health and safety claims and product liability
claims, if property or people are harmed by the products and services sold on our platform. Meanwhile, we are subject
to existing and new laws and regulations imposing various requirements on our business operations.
The products sold on our platform may be defectively designed or manufactured, and offerings of defective products
on our platform may expose us to liabilities associated with consumer protection laws. Third parties who purchased
defective products sold by us and sustained personal injury or property damage may bring claims or legal proceedings
against us as the retailer of the product. Although we would have legal recourse against the manufacturer of such products
under PRC law, attempting to enforce our rights against the manufacturer may be expensive, time-consuming and
ultimately futile. Also, operators of e-commerce platforms may be subject to certain provisions of consumer protection
laws even where the operator is not the manufacturer, provider or retailer of the products or services purchased by the
consumer. For example, if we failed to provide a consumer with the name, address and contact details of the merchant that
sold the defective product, we may be liable to compensate such consumer damages suffered by her. In addition, if we do
not take appropriate remedial action against merchants for their actions that we know, or should have known, would
infringe upon the rights and interests of consumers, we may be held jointly liable for infringement alongside the merchants.
Moreover, applicable consumer protection laws in China provide that a platform will be held liable for failing to meet any
undertaking that it made to consumers with regard to products listed on it. Furthermore, we are required to report violations
of applicable consumer protection laws, regulations or administrative rules by merchants to the State Administration for
Market Regulation, or SAMR, or its local branches, and take appropriate remedial measures, including ceasing to provide
services to the relevant merchants, as a platform. We may also be held jointly liable with merchants who do not possess the
proper licenses or authorizations to sell goods or sell goods that do not meet product standards.
We do not maintain product liability insurance for products transacted on our platform, and our rights of indemnity
from the merchants or suppliers on our platform may not adequately cover us for any liability we may incur. Claims against
us, even if they are eventually unsuccessful, could result in significant expenditure of funds and diversion of management
time and resources, which could materially and adversely affect our business, financial condition and prospects.
In addition, the PRC government authorities may continue to promulgate new laws, regulations and rules governing
the e-commerce industry, tighten enforcement of existing laws, rules and regulations, and impose additional requirements
and other obligations on our business including the operation of our e-commerce platform and our market promotion
activities. Compliance with these laws, regulations and rules may be costly, and any incompliance or associated inquiries,
investigations and other governmental actions may divert significant management time and attention and our financial
resources, bring negative publicity, or subject us to liabilities or administrative penalties:
● In August 2018, the Standing Committee of the National People’s Congress, or the NPC, promulgated the E-
Commerce Law, which took effect in January 2019. According to the E-Commerce Law, e-commerce platform
operators who fail to take necessary actions when they know or should have known that the merchants on their
platform infringe others’ intellectual property rights or the products or services provided by the merchants do not
meet the requirements for product safety, or otherwise infringe upon consumers’ legitimate rights, will be held
jointly liable with the merchants. Additionally, with respect to the products or services affecting consumers’ life
and health, the e-commerce platform operators will bear relevant responsibilities if they fail to review the
qualifications of merchants or fail to safeguard the interests of the consumers. We may be held responsible if
fresh produce or other products sold through Duo Duo Grocery caused harm to the interests and health of
consumers.
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● The E-Commerce Law requires e-commerce platform operators to take necessary actions if merchants on their
platforms fail to display prominently on their platform web pages the information contained in their business
licenses or administrative permits relating to their operating businesses. According to the E-Commerce Law, all e-
commerce operators, including individuals and entities carrying out their business online and e-commerce
platform operators and merchants on these platforms, should register with the relevant local branches of SAMR.
Individuals selling agricultural products or conducting certain transactions with minimum economic value and
low volume are not subject to these registration requirements. E-commerce platform operators should provide the
identity information of the merchants on their platforms to local branches of SAMR and procure the merchants
who fail to make such registrations to comply with the registration requirements. Measures for the Supervision
and Administration of Online Transactions promulgated by SAMR in 2021 also require e-commerce platforms to
timely remind individual merchants to register with local branches of SAMR if their total annual transaction
volume across different platforms exceeds RMB100,000. Our policy expressly requires all merchants on our
platform to complete these registrations. We may lose existing or potential merchants who do not or are unwilling
to comply with the registration and related requirements, and we may be found liable under the E-Commerce Law
and related regulations if we are deemed to have failed to implement the required procedures. The E-Commerce
Law and the related regulations are relatively new and subject to implementation rules by local regulatory
authorities. As such, we still face uncertainties in relation to their further interpretations and applications.
● In October 2020, the SAMR issued the Interim Provisions for Regulating Promotional Activities, which became
effective on December 1, 2020. Among other things, these interim provisions are designed to promote consumer
protection and prohibit false or misleading commercial information used in promotional activities. As a platform
operator, we are required by the interim provisions to design rules and procedures to foster fair and transparent
merchandise promotional activities, and assist the authorities in their investigation of violations by platform
merchants, which will add more compliance costs and enforcement uncertainties. In addition, according to the
PRC Anti-unfair Competition Law and relevant laws and regulations, business operators are prohibited from
inducing consumers into transactions via misleading pricing terms or engaging in other anti-competitive conducts
associated with product price. If we are found to have violated these laws and regulations, we may be subject to
fines and other administrative penalties. For example, in March 2021, SAMR fined five platforms a sum of
RMB6.5 million, including RMB1.5 million against us, for unfair pricing conduct with respect to their online
grocery businesses.
● In February 2021, the Anti-monopoly Committee of the State Council published the Anti-monopoly Guidelines
for the Platform Economy Sector, aiming at enhancing anti-monopoly administration of businesses that operate
under the platform model and the overall platform economy. According to these guidelines, business practices
such as deploying big data analytics to set discriminatory terms for merchandise price or other transaction terms,
coercive exclusivity arrangements with transaction counterparties, blocking of competitor interface through
technological means and unlawful collection of user data without consent, are prohibited. As the guidelines were
newly promulgated, it is still uncertain as to the specific impact on our business or results of operations and
prospects. If we are found to have any non-compliance issues by relevant authorities, we may be subject to fines
and other penalties.
● In April 2021, SAMR, together with the Office of the Central Cyberspace Affairs Commission and the State Tax
Bureau of China, held a meeting with more than 30 major platform operators, including us. All platform operators
that participated in the meeting were required to conduct a self-inspection within one month to identify and
correct possible violations of anti-monopoly, anti-unfair competition, tax and other related laws and regulations
and submit their compliance commitments for public supervision. It is still uncertain how the requirement will be
implemented and whether further legislation and administration activities will be entailed. As a result, we may
incur additional costs and expenses, devote more management’s attention and allocate additional resources in the
compliance with relevant laws and regulations. If we are required to take any rectifying or remedial measures or
are subject to any penalty, our reputation and business operations may be materially and adversely affected.
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Due to the uncertainties associated with the evolving legislative activities and varied local implementation practices of
consumer protection, anti-monopoly and competition laws and regulations in the PRC, compliance with these laws,
regulations, rules, guidelines and implementations may be costly, and any incompliance or associated inquiries,
investigations and other governmental actions may divert significant management time and attention and our financial
resources, bring negative publicity, subject us to liabilities or administrative penalties, and may materially and adversely
affect our financial conditions, operations and business prospects.
We may face challenges in expanding our product offerings.
The merchants on our platform carry a wide range of products, including apparel, shoes, bags, mother and childcare
products, food and beverage, fresh produce, electronic appliances, furniture and household goods, cosmetics and other
personal care items, sports and fitness items and auto accessories. Expansion of product offerings both in categories and
items involve new risks and challenges. Our lack of familiarity with these products and lack of relevant buyer data relating
to these products may make it more difficult for us to anticipate buyer demand and preferences and to inspect and control
quality and ensure proper handling, storage and delivery by our merchants. Our merchants may experience higher return
rates on new products, receive more buyer complaints about such products and face costly product liability claims as a
result of selling such products, which would harm our brand and reputation as well as our financial performance. We may
also be involved in disputes with the merchants in connection with these claims and complaints.
As we broaden our product offerings, we will need to work with a large number of new merchants efficiently and
establish and maintain mutually beneficial relationships with our existing and new merchants. To support our growth and
our expansion, we will need to devote management, operating, financial and human resources which may divert our
attention from existing businesses, incur upfront costs, and implement a variety of new and upgraded management,
operating, financial and human resource systems, procedures and controls. There is no assurance that we will be able to
implement all of these systems, procedures and control measures successfully or address the various challenges in
expanding our future businesses and operations effectively. In addition, our newly launched initiatives such as
livestreaming and Duo Duo Grocery may face risks and uncertainties and may not grow successfully.
Tencent provides services to us in connection with various aspects of our operations. If such services become limited,
restricted, curtailed or less effective or more expensive in any way or become unavailable to us for any reason, our
business may be materially and adversely affected.
We collaborate with Tencent, one of our principal shareholders and owner of Weixin and QQ, with respect to various
aspects of our business, including our mini-program within Weixin and the entry point to our mini-program in Weixin Pay,
which serves as one of our access points to our platform, as well as services such as payment processing, advertising and
cloud technology. We have entered into a strategic cooperation framework agreement with Tencent, pursuant to which we
and Tencent have agreed to cooperate in a number of areas including payment solutions, cloud services and user
engagement, and to explore and pursue additional opportunities for potential cooperation.
If services provided by Tencent to us become limited, compromised, restricted, curtailed or less effective or become
more expensive or unavailable to us for any reason, including the availability of our mini-program within Weixin and the
entry point to our mini-program in Weixin Pay, our business may be materially and adversely affected. We may also
encounter difficulties in implementing the Strategic Cooperation Framework Agreement, which may divert significant
management attention from existing business operations. Failure to maintain our relationship with Tencent could materially
and adversely affect our business and results of operations. See “Item 7. Major Shareholders and Related Party
Transactions—B. Related Party Transactions”.
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Impairment of long-lived assets could materially and adversely affect our results of operations and book value.
We have accumulated long-lived assets as a result of our operations. We review these assets, including intangible
assets with finite lives, for impairment annually and whenever events or changes in circumstances arise that will impact the
future use of these assets. In the event that the book value of long-lived assets is impaired, such impairment would be
charged to earnings in the period when such impairment is determined. Any future impairment of long-lived assets could
have a material and adverse effect on our profitability, results of operations and book value. For more information on our
impairment testing, see note 2 to the consolidated financial statements included elsewhere in this annual report.
We rely on proper operation and maintenance of our mobile platform and internet infrastructure and
telecommunications networks in China. Any malfunction, capacity constraint or operation interruption may have an
adverse impact on our business.
Currently, all of our sales of products are generated online through our Pinduoduo mobile platform. Therefore, the
satisfactory performance, reliability and availability of our mobile platform are critical to our success and our ability to
attract and retain buyers. Our business depends on the performance and reliability of the internet infrastructure in China.
The reliability and availability of our mobile platform depends on telecommunications carriers and other third-party
providers for communications and storage capacity, including bandwidth and server storage, among other things. If we are
unable to enter into and renew agreements with these providers on acceptable terms, or if any of our existing agreements
with such providers are terminated as a result of our breach or otherwise, our ability to provide our services to our buyers
could be adversely affected. Access to internet in China is maintained through state-owned telecommunications carriers
under administrative control, and we obtain access to end-user networks operated by such telecommunications carriers and
internet service providers to give buyers access to our mobile platform. The failure of telecommunications network
operators to provide us with the requisite bandwidth could also interfere with the speed and availability of our mobile
platform. Service interruptions prevent buyers from accessing our mobile platform and placing orders, and frequent
interruptions could frustrate buyers and discourage them from attempting to place orders, which could cause us to lose
buyers and harm our operating results. In addition, we have no control over the costs of the services provided by the
telecommunications operators. If the prices that we pay for telecommunications and internet services rise significantly, our
financial results could be adversely affected.
We may engage in acquisitions, investments or strategic alliances, which could require significant management
attention and materially and adversely affect our business and results of operations.
We may from time to time identify strategic partners to form strategic alliances, invest in or acquire additional assets,
technologies or businesses that are complementary to our existing business. These transactions may involve minority
investments in other companies, acquisitions of controlling stakes in other companies or acquisitions of selected assets.
Any strategic alliances, investments or acquisitions and the subsequent integration of the new assets and businesses
obtained or developed from such transactions into our own may divert management from their primary responsibilities and
subject us to additional liabilities. In addition, the costs of identifying and consummating investments and acquisitions may
be significant. We may also incur costs and experience uncertainties in completing necessary registrations and obtaining
necessary approvals from relevant government authorities in China and elsewhere in the world. The costs and duration of
integrating newly acquired assets and businesses could also materially exceed our expectations. Any such negative
developments could have a material adverse effect on our business, financial condition, results of operations and cash flow.
Our financial results could be adversely affected by our investments or acquisitions. The investments and acquired
assets or businesses may not generate anticipated synergies with our business or achieve anticipated financial growth as we
would expect. They could result in significant investments and goodwill impairment charges and amortization expenses for
other intangible assets, which would adversely affect our financial condition and operating results.
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Undetected programming errors or flaws or failure to maintain effective customer service could damage our reputation
or even cause direct loss to us which would materially and adversely affect our results of operations.
Our platform and internal systems rely on software that is highly technical and complex. In addition, our platform and
internal systems depend on the ability of such software to store, retrieve, process and manage an immense amount of data
and the ability of their operators to operate these complex systems properly. The software on which we rely may contain
undetected programming errors or design defects, some of which may only be discovered after the code has been released.
Improper operations or other human errors may also occur from time to time as a result of operating such software and
complex systems. Programming errors or design defects within the software or human errors in connection with the
operation of the software may result in negative experience to buyers using our platform, disruptions to the operations of
our merchants, delay in introductions of new features or enhancements, unintended disclosure of confidential information
of buyers, merchants and our platform or compromise in our ability to provide effective customer service and enjoyable
user engagement or exploitation of loopholes by dishonest buyers or merchants. They could cause damage to our
reputation, loss of buyers or merchants, or direct economic loss to us.
Our business generates and processes a large amount of data, and we are required to comply with PRC and other
applicable laws relating to privacy and cyber security. The improper use or disclosure of data could have a material and
adverse effect on our business and prospects.
Our business generates and processes a large quantity of data. We face risks inherent in handling and protecting large
volume of data. In particular, we face a number of challenges relating to data from transactions and other activities on our
platforms, including:
● protecting the data in and hosted on our system, including against attacks on our system by outside parties or
fraudulent behavior or improper use by our employees;
● addressing concerns related to privacy and sharing, safety, security and other factors; and
● complying with applicable laws, rules and regulations relating to the collection, use, storage, transfer, disclosure
and security of personal information, including any requests from regulatory and government authorities relating
to these data.
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The PRC regulatory and enforcement regime with regard to data security and data protection is evolving. We may be
required by Chinese governmental authorities to share personal information and data that we collect to comply with PRC
laws relating to cybersecurity. See “Item 4. Information on the Company—B. Business Overview—Regulation—
Regulations Relating to Internet Information Security and Privacy Protection”. The law imposes heightened regulation and
additional security and privacy protection obligations on operators of critical information infrastructure. The PRC National
Security Law covers various types of national security, including technology security and information security. All the
relevant laws and regulations may result in additional expenses to us and any non-compliance and misuse of or failure to
secure personal information could have a negative impact on our financial results and may subject us to negative publicity,
which could harm our reputation and negatively affect the trading price of our ADSs. There are also uncertainties with
respect to how these laws will be implemented in practice. PRC regulators, including the MIIT and the Cyberspace
Administration of China, or the Cyberspace Administration, have been increasingly focused on regulation in the areas of
data security and data protection. On November 28, 2019, the Secretary Bureau of the Cyberspace Administration of
China, the General Office of the MIIT, the General Office of the Ministry of Public Security and the General Office of the
State Administration for Market Regulation promulgated the Measures for the Determination of the Collection and Use of
Personal Information by Apps in Violation of Laws and Regulations, which provides guidance for regulatory authorities to
identify the illegal collection and use of personal information through mobile apps and for mobile app operators to conduct
self-examination and self-correction. In July 2020, the Standing Committee of the NPC published for public comment a
draft Data Security Law, which provided that at the national level, varying levels of data protective measures will be
applied based on the level of importance of the data and a centralized mechanism will be established for risk assessment,
risk monitoring, early potential data security risk warning and emergency response. The draft Data Security Law also set
forth the data security protection obligations for entities and individuals handling personal data, including that no entity or
individual may acquire such data by stealing or other illegal means, and the collection and use of such data should not
exceed the necessary limits. In addition, the Anti-monopoly Guidelines for the Platform Economy Sector published by the
Anti-monopoly Committee of the State Council, effective on February 7, 2021, also prohibits collection of user information
through coercive means by online platforms operators. Compliance with these laws, regulations and rules may be costly,
and any incompliance or associated inquiries, investigations and other governmental actions may divert significant
management time and attention and our financial resources, bring negative publicity, or subject us to liabilities or
administrative penalties and/or materially and adversely affect our financial conditions, operations and business prospects.
The European Union General Data Protection Regulation (“GDPR”), which came into effect on May 25, 2018,
includes operational requirements for companies that receive or process personal data of residents of the European
Economic Area. The GDPR establishes new requirements applicable to the processing of personal data, affords new data
protection rights to individuals and imposes penalties for serious data breaches. Individuals also have a right to
compensation under the GDPR for financial or non-financial losses. Although we do not conduct any business in the
European Economic Area, in the event that residents of the European Economic Area access our website or our mobile
platform and input protected information, we may become subject to provisions of the GDPR.
In addition, regulatory authorities around the world have recently adopted or are considering a number of legislative
and regulatory proposals concerning data protection. These legislative and regulatory proposals, if adopted, and the
uncertain interpretations and application thereof could, in addition to the possibility of fines, result in an order requiring
that we change our data practices and policies, which could have an adverse effect on our business and results of
operations.
Furthermore, we expect that data security and data protection compliance will receive greater attention and focus from
regulators, as well as attract continued or greater public scrutiny and attention going forward, which could increase our
compliance costs and subject us to heightened risks and challenges associated with data security and protection. If we are
unable to manage these risks, we could become subject to penalties, including fines, suspension of business and revocation
of required licenses, and our reputation and results of operations could be materially and adversely affected.
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Failure to protect confidential information of buyers, merchants and our network against security breaches could
damage our reputation and brand and substantially harm our business and results of operations.
A significant challenge to the e-commerce industry is the secure storage of confidential information and its secure
transmission over public networks. A majority of the orders and the payments for products offered on our platform are
made through our mobile app. In addition, all online payments for products sold on our platform are settled through third-
party online payment services. Maintaining complete security on our platform and systems for the storage and transmission
of confidential or private information, such as buyers’ personal information, payment-related information and transaction
information, is essential to maintain consumer confidence in our platform and systems.
We have adopted strict security policies and measures, including encryption technology, to protect our proprietary data
and buyer information. However, advances in technology, the expertise of hackers, new discoveries in the field of
cryptography or other events or developments could result in a compromise or breach of the technology that we use to
protect confidential information. We may not be able to prevent third parties, especially hackers or other individuals or
entities engaging in similar activities through viruses, Trojan horses, malicious software, break-ins, phishing attacks, third-
party manipulation or security breaches, from illegally obtaining such confidential or private information we hold with
respect to buyers and merchants on our platform. Such individuals or entities obtaining confidential or private information
may further engage in various other illegal activities using such information. The methods used by hackers and others
engaging in illegal online activities are increasingly more sophisticated and constantly evolving. Significant capital,
managerial and other resources, including costs incurred to deploy additional personnel and develop network protection
technologies, train employees, and engage third-party experts and consultants, may be required to ensure and enhance
information security or to address the issues caused by such security failure.
In addition, we have limited control or influence over the security policies or measures adopted by third-party
providers of online payment services through which some of our buyers may choose to make payment for purchases. Any
negative publicity on our platform’s safety or privacy protection mechanisms and policies, and any claims asserted against
us or fines imposed upon us as a result of actual or perceived failures, could have a material and adverse effect on our
public image, reputation, financial condition and results of operations. Any compromise of our information security or the
information security measures of our contracted third-party online payment service providers could have a material and
adverse effect on our reputation, business, prospects, financial condition and results of operations.
We currently rely on commercial banks and third-party online payment service providers for payment processing and
escrow services on our platform. If these payment services are restricted or curtailed in any way, are offered to us on
less favorable terms, or become unavailable to us or our buyers for any reason, our business may be materially and
adversely affected.
All online payments for products sold on our platform are settled through third-party online payment service providers.
Our business depends on the billing, payment and escrow systems of these payment service providers to maintain accurate
records of payments of sales proceeds by buyers and collect such payments. If the quality, utility, convenience or
attractiveness of these payment processing and escrow services declines, or we have to change the pattern of using these
payment services for any reason, the attractiveness of our platform could be materially and adversely affected.
Business involving online payment services is subject to a number of risks that could materially and adversely affect
third-party online payment service providers’ ability to provide payment processing and escrow services to us, including:
● dissatisfaction with these online payment services or decreased use of their services by buyers and merchants;
● increasing competition, including from other established Chinese internet companies, payment service providers
and companies engaged in other financial technology services;
● changes to rules or practices applicable to payment systems that link to third-party online payment service
providers;
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● breach of buyers’ personal information and concerns over the use and security of information collected from
buyers;
● service outages, system failures or failures to effectively scale the system to handle large and growing transaction
volumes;
● increasing costs to third-party online payment service providers, including fees charged by banks to process
transactions through online payment channels, which would also increase our costs of revenues; and
● failure to manage funds accurately or loss of funds, whether due to employee fraud, security breaches, technical
errors or otherwise.
Certain commercial banks in China impose limits on the amounts that may be transferred by automated payment from
buyers’ bank accounts to their linked accounts with third-party online payment services. We cannot predict whether these
and any additional restrictions that could be put in place would have a material adverse effect on our platform.
The commercial banks and third-party online payment service providers that we work with are subject to the
supervision of the People’s Bank of China, or the PBOC. The PBOC may publish rules, guidelines and interpretations from
time to time regulating the operation of financial institutions and payment service providers that may in turn affect the
pattern of services provided by such entities for us. For example, in November 2017, the PBOC published a notice, or the
PBOC Notice, on the investigation and administration of illegal offering of settlement services by financial institutions and
third-party payment service providers to unlicensed entities. The PBOC Notice intended to prevent unlicensed entities from
using licensed payment service providers as a conduit for conducting the unlicensed payment settlement services, so as to
safeguard the fund security and information security. We believe that our pattern of receiving settlement services from
third-party online payment service providers is not in violation of the PBOC Notice because the relevant commercial bank
opens an internal special account to receive payment from the buyers and we will submit to the bank materials verifying
the truthfulness of the relevant transactions and the bank will also verify other information if it deems necessary before it
distributes the payment to merchants and us. However, we cannot assure you that the PBOC or other governmental
authorities will hold the same view with ours. If required by the PBOC or new legislation, our cooperative payment service
providers will have to suspend their services or explore new models to offer their services to us, we may not be able to
claim our ownership and exclusive control of the payments from the buyers in the bank accounts opened with the relevant
commercial banks, and we may incur additional expenses or invest considerable resources in complying with the
requirements. If the PBOC or other governmental authorities deem our cooperation with payment service providers to be
violative of law, we may also have to suspend or terminate our cooperation with these payment service providers or explore
new models for using their services, and our income derived from the accrued interests in the relevant bank accounts may
be confiscated, and we may be subject to a fine of one to five times of such income.
We cannot assure you that we will be successful in entering and maintaining amicable relationships with these
commercial banks and online payment service providers. Identifying, negotiating and maintaining relationships with these
providers require significant time and resources. Our current agreements with these service providers also do not prohibit
them from working with our competitors. They could choose to terminate their relationships with us or propose terms that
we cannot accept. Moreover, we cannot guarantee that the terms we negotiated with these payment service providers,
including the payment processing fee rates, will remain as favorable. If the terms with these payment service providers
become less favorable to us, such as the increase of payment processing fee rate, we may have to raise the transaction
services fees for certain of our merchants, which may cause us to lose merchants, or absorb the additional costs by
ourselves, both of which may materially and adversely affect our business, financial condition and results of operations.
Furthermore, these service providers may not perform as expected under our agreements with them, and we may have
disagreements or disputes with such payment service providers, any of which could adversely affect our brand and
reputation as well as our business operations.
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We do not control Shanghai Fufeitong and the majority of its equity interests is indirectly controlled by our executive
officers. If any conflict arises between us and Shanghai Fufeitong and cannot be resolved in our favor, our business,
financial condition, results of operations and prospects may be materially and adversely affected.
In April 2020, Shanghai Xunmeng, a subsidiary of our VIE, entered into a business cooperation agreement with
Shanghai Fufeitong Information Service Co., Ltd., or Shanghai Fufeitong, pursuant to which both parties agreed to conduct
comprehensive business cooperation in payment services, technical resources and other related professional areas. As
Shanghai Fufeitong is a company which Messrs. Lei Chen and Zhenwei Zheng, our executive officers, indirectly hold
50.01% of the equity interests in, the transaction constitutes our related party transaction. See “Item 7. Major Shareholders
and Related Party Transactions—B. Related Party Transactions—Loan to Ningbo Hexin and Business Cooperation
Agreement with Shanghai Fufeitong” for more details of the transactions.
As Shanghai Fufeitong, which we do not have control over, also provides payment services to other parties from time
to time, we cannot assure you that Shanghai Fufeitong’s transactions with other parties or its pursuit of opportunities and
development would not conflict with our interests. There can be no assurance that Messrs. Lei Chen and Zhenwei Zheng,
in light of their control over Shanghai Fufeitong, would act in favor of our interests if any conflict arises between us and
Shanghai Fufeitong. If the conflict cannot be resolved in our favor, our business, financial condition, results of operations
and prospects may be materially and adversely affected.
Moreover, due to our cooperation with Shanghai Fufeitong, any event that negatively affects Shanghai Fufeitong may
also negatively affect the perception of our customers, merchants, regulators and other third parties on us and may further
adversely and materially affect our reputation, business, results of operations and prospects.
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Any lack of additional requisite approvals, licenses or permits or failure to comply with any requirements of PRC laws,
regulations and policies may materially and adversely affect our daily operations and hinder our growth.
Our business is subject to governmental supervision and regulation by the relevant PRC governmental authorities,
including the Ministry of Commerce, or MOFCOM, the Ministry of Industry and Information Technology, or the MIIT, the
National Radio and Television Administration, or the NRTA, and other governmental authorities in charge of the relevant
categories of products sold by us. Together, these government authorities promulgate and enforce regulations that cover
many aspects of the operation of online retailing and related business, including entry into this industry, the scope of
permissible business activities, licenses and permits for various business activities, and foreign investment. We are required
to hold a number of licenses and permits in connection with our business operation, including the ICP license and
approvals for the establishment of foreign-invested enterprises engaging in the sale of goods over the internet. We have in
the past held and currently hold all material licenses and permits described above and may apply for certain additional
licenses with the government authorities in the future to maintain compliance especially when we take on new business
activities. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Relating to
Foreign Investment” and “Item 4. Information on the Company—B. Business Overview—Regulation—Licenses, Permits
and Filings”.
As of the date of this annual report, we have not been subject to penalties or other disciplinary action from the relevant
governmental authorities regarding conducting our business without proper approvals, licenses and permits. However, we
cannot assure you that we will not receive such notice of warning or be subject to penalties or other disciplinary actions in
the future. As the online retail industry is still evolving in China, new laws and regulations may be adopted from time to
time to require additional licenses and permits other than those we currently have, and to address new issues that arise from
time to time. As a result, substantial uncertainties exist regarding the interpretation and implementation of current and any
future PRC laws and regulations applicable to online retail and related businesses. If the PRC government considers us
operating without proper approvals, licenses, filings, registrations or permits or promulgates new laws and regulations that
require additional approvals, filings, registrations or licenses or impose additional restrictions on the operation of any part
of our business, it has the power, among other things, to levy fines, confiscate our income, revoke our business licenses,
and require us to discontinue our relevant business or impose restrictions on the affected portion of our business. Any of
these and other regulatory actions by the PRC governmental authorities, including issuance of official notices, change of
policies, promulgation of regulations and imposition of sanctions, may adversely affect our business and have a material
and adverse effect on our results of operations. In addition, if we were to use new or additional domain names to conduct
our business, we would have to apply for the same set of government authorizations or amend the current ones. There is no
assurance that we will be able to complete such procedures timely.
PRC laws and regulations may also require e-commerce platform operators to take measures to protect consumer
rights. Failure to do so may subject the e-commerce platform operators to rectification requirements and penalties.
Although we endeavor to comply with the relevant laws and regulations, there is no assurance that we can timely react to
the evolving requirements. If the competent governmental authorities deem that we fail to meet such requirements, we may
receive warnings, be ordered to make rectifications, or subject to other administrative sanctions and/or penalties that may
have a material adverse effect on our reputation, business, financial condition and results of operations. For example, in
January 2019, we were ordered by the local regulatory authority to pay a fine of RMB30,000 for failure to comply with the
legal requirements with respect to the display and update of individual merchants’ identities and full disclosure of platform
policies.
On November 12, 2020, the NRTA issued the Circular on Strengthening the Administration of Live Streaming, or the
Notice 78, which requires, among other things, platforms that provide live streaming to register their information and
business operations. As the live streaming and e-commerce industries in China are still evolving rapidly, regulatory
authorities may promulgate new laws and regulations from time to time to address new issues and regulate emerging
activities. There also remains considerable uncertainties in the interpretation and implementation of existing laws and
regulations applicable to business activities in live streaming and e-commerce. We cannot assure you that we will not be
found in violation of any of the laws and regulations currently in effect due to the evolving interpretation and
implementation of these laws and regulations.
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We are required by PRC laws and regulations to comply with labor laws and regulations and pay overtime
compensation and various government statutory employee benefit plans, including medical insurance, maternity insurance,
workplace injury insurance, unemployment insurance and pension benefits through a PRC government-mandated multi-
employer defined contribution plan. The relevant government agencies may examine whether an employer has made
adequate payments of the requisite statutory employee benefits, and those employers who fail to make adequate payments
may be subject to late payment fees, fines and/or other penalties. If the relevant PRC authorities determine that we shall
make supplemental contributions, that we are not in compliance with labor laws and regulations, or that we are subject to
fines or other legal sanctions, such as order of timely rectification, our business, financial condition and results of
operations may be adversely affected.
Pursuant to the Individual Income Tax Law of the PRC, as amended on August 31, 2018, which became effective on
January 1, 2019, an individual’s taxable income shall be an amount equal to such individual’s total annual income less a
general deductible of RMB60,000 and various special deductibles permitted under relevant laws. Determination and
calculation of such special deductibles in accordance with relevant laws may result in an increase of our operating costs
and expenses. However, as these laws and implementing rules were only recently promulgated and their interpretations
have not been entirely settled yet, our determination and calculation of the special deductibles based on our understanding
may be different from how the tax authorities or our employees would do. These differences may result in inquiries or
reassessment by the tax authorities, as well as disputes with our employees.
We may increasingly become a target for public scrutiny, including complaints to regulatory agencies, negative media
coverage, and public dissemination of malicious reports or accusations about our business, all of which could severely
damage our reputation and materially and adversely affect our business and prospects.
We process an extremely large number of transactions on a daily basis on our platform, and the high volume of
transactions taking place on our platform as well as publicity about our business create the possibility of heightened
attention from the public, regulators and the media. Heightened regulatory and public concerns over consumer protection
and consumer safety issues may subject us to additional legal and social responsibilities and increased scrutiny and
negative publicity over these issues, due to the large number of transactions that take place on our platform and the
increasing scope of our overall business operations. In addition, changes in our services or policies have resulted and could
result in objections by members of the public, the traditional, new and social media, social network operators, merchants on
our platform or others. From time to time, these objections or allegations, regardless of their veracity, may result in
consumer dissatisfaction, public protests or negative publicity, which could result in government inquiry or substantial
harm to our brand, reputation and operations.
Moreover, as our business expands and grows, both organically and through acquisitions of and investments in other
businesses, domestically and internationally, we may be exposed to heightened public scrutiny in jurisdictions where we
already operate as well as in new jurisdictions where we may operate. There is no assurance that we would not become a
target for regulatory or public scrutiny in the future or that scrutiny and public exposure would not severely damage our
reputation as well as our business and prospects.
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Furthermore, our brand name and our business may be harmed by aggressive marketing and communication strategies
by third parties. We may be subject to government or regulatory investigation or third-party claims as a result and we may
be required to spend significant time and incur substantial costs to react to and address these consequences. There is no
assurance that we will be able to effectively refute each of the allegations within a reasonable period of time, or at all.
Additionally, public allegations, directly or indirectly, against us or the merchants on our platform, may be posted on
internet forums, blogs or websites by anyone on an anonymous basis. The availability of information on social media
platforms is virtually immediate, as is its impact. Social media platforms may not necessarily filter or check the accuracy of
information before publishing them and we are often afforded little or no time to respond. As a result, our reputation may
be materially and adversely affected and our ability to attract and retain customers and maintain our market share and
profitability may suffer.
We may be subject to inventory risk.
We operate an online direct sales business under which we acquire products from suppliers and sell them directly to
buyers. The online direct sales business requires us to maintain and manage inventory. As a result, we are exposed to
inventory risks that may adversely affect our operating results. We maintain and manage our inventory based on our
understanding of our buyers’ needs. We may not be able to maintain and manage our inventory effectively due to
seasonality, new product launches, changes in product cycles and pricing, product defects, changes in consumer demand
and spending patterns, spoilage and other factors. Demand for products can also change significantly between the time
inventory is ordered and the date of sale. In addition, when we begin selling a new product, it may be difficult to establish
supplier relationships, determine appropriate product selection, and accurately forecast demand. The acquisition of certain
types of inventory may require significant lead time and prepayment, and they may not be returnable.
If we fail to manage our inventory effectively, we may be subject to a heightened risk of inventory obsolescence, a
decline in inventory values, and significant inventory write-downs or write-offs. In addition, we may be required to lower
sale prices in order to reduce inventory level, which may lead to lower gross margins.
Our online marketing services constitute internet advertisement, which subjects us to laws, rules and regulations
applicable to advertising.
We derive a significant amount of our revenues from online marketing services and other related services. In
July 2016, SAIC promulgated the Interim Administrative Measures on Internet Advertising, or the Internet Advertising
Measures, effective September 2016, pursuant to which internet advertisements are defined as any commercial advertising
that directly or indirectly promotes goods or services through internet media in any form including paid-for search results.
See “Item 4. Information on the Company—B. Business Overview—Regulation— Regulations Relating to Internet
Advertising Business”. Under the Internet Advertising Measures, our online marketing services and other related services
constitute internet advertisement.
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PRC advertising laws, rules and regulations require advertisers, advertising operators and advertising distributors to
ensure that the content of the advertisements they prepare or distribute is fair and accurate and is in full compliance with
applicable law. We currently generate revenues primarily from online marketing services. Violation of these laws, rules or
regulations may result in penalties, including fines, confiscation of advertising fees and orders to cease dissemination of the
advertisements. In circumstances involving serious violations, the PRC government may suspend or revoke a violator’s
business license or license for operating advertising business. In addition, the Internet Advertising Measures require paid-
for search results to be distinguished from natural search results so that consumers will not be misled as to the nature of
these search results. As such, we are obligated to distinguish from others the merchants who purchase online marketing and
related services or the relevant listings by these merchants. Complying with these requirements and any penalties or fines
for any failure to comply may significantly reduce the attractiveness of our platform and increase our costs and could have
a material adverse effect on our business, financial condition and results of operations.
In addition, for advertising content related to specific types of products and services, advertisers, advertising operators
and advertising distributors must confirm that the advertisers have obtained requisite government approvals, including the
advertiser’s operating qualifications, proof of quality inspection of the advertised products, and, with respect to certain
industries, government approval of the content of the advertisement and filing with the local authorities. Pursuant to the
Internet Advertising Measures, we are required to take steps to monitor the content of advertisements displayed on our
platforms. This requires considerable resources and time, and could significantly affect the operation of our business, while
at the same time also exposing us to increased liability under the relevant laws, rules and regulations. The costs associated
with complying with these laws, rules and regulations, including any penalties or fines for our failure to so comply if
required, could have a material adverse effect on our business, financial condition and results of operations. Any further
change in the classification of our online marketing and other related services by the PRC government may also
significantly disrupt our operations and materially and adversely affect our business and prospects.
We may be subject to intellectual property infringement claims, which may be expensive to defend and may disrupt our
business and operations.
We cannot be certain that our operations or any aspects of our business do not or will not infringe upon or otherwise
violate patents, copyrights or other intellectual property rights held by third parties. We have been, and from time to time in
the future may be, subject to legal proceedings and claims relating to the intellectual property rights of others. In addition,
there may be other third-party intellectual property that is infringed by products offered by our merchants and our services
or other aspects of our business. There could also be existing patents of which we are not aware that our products may
inadvertently infringe. We cannot assure you that holders of patents purportedly relating to some aspect of our technology
platform or business, if any such holders exist, would not seek to enforce such patents against us in China, the United
States or any other jurisdictions. Further, the application and interpretation of China’s patent laws and the procedures and
standards for granting patents in China are still evolving and are uncertain, and we cannot assure you that PRC courts or
regulatory authorities would agree with our analysis. If we are found to have violated the intellectual property rights of
others, we may be subject to liability for our infringement activities or may be prohibited from using such intellectual
property, and we may incur licensing fees or be forced to develop alternatives of our own. In addition, we may incur
significant expenses, and may be forced to divert management’s time and other resources from our business and operations
to defend against these infringement claims, regardless of their merits. Successful infringement or licensing claims made
against us may result in significant monetary liabilities and may materially disrupt our business and operations by
restricting or prohibiting our use of the intellectual property in question. Finally, we use open source software in connection
with our products and services. Companies that incorporate open source software into their products and services have,
from time to time, faced claims challenging the ownership of open source software and compliance with open source
license terms. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source
software or noncompliance with open source licensing terms. Some open source software licenses require users who
distribute open source software as part of their software to publicly disclose all or part of the source code to such software
and make available any derivative works of the open source code on unfavorable terms or at no cost. Any requirement to
disclose our source code or pay damages for breach of contract could be harmful to our business, results of operations and
financial condition.
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We may not be able to prevent others from unauthorized use of our intellectual property, which could harm our business
and competitive position.
We regard our trademarks, copyrights, patents, domain names, know-how, proprietary technologies, and similar
intellectual property as critical to our success, and we rely on a combination of intellectual property laws and contractual
arrangements, including confidentiality, invention assignment and non-compete agreements with our employees and others,
to protect our proprietary rights. We are aware of certain copycat websites that attempt to cause confusion or diversion of
traffic from us at the moment, against which we are considering initiating lawsuits, and we may continue to become an
attractive target to such attacks in the future because of our brand recognition in the online retail industry in China. Despite
these measures, any of our intellectual property rights could be challenged, invalidated, circumvented or misappropriated,
or such intellectual property may not be sufficient to provide us with competitive advantages. In addition, there can be no
assurance that (i) our application for registration of trademarks, patents, and other intellectual property rights will be
approved, (ii) any intellectual property rights will be adequately protected, or (iii) such intellectual property rights will not
be challenged by third parties or found by a judicial authority to be invalid or unenforceable. Further, because of the rapid
pace of technological change in our industry, parts of our business rely on technologies developed or licensed by third
parties, and we may not be able to obtain or continue to obtain licenses and technologies from these third parties at all or on
reasonable terms.
Confidentiality, invention assignment and non-compete agreements may be breached by counterparties, and there may
not be adequate remedies available to us for any such breach. Accordingly, we may not be able to effectively protect our
intellectual property rights or to enforce our contractual rights. Policing any unauthorized use of our intellectual property is
difficult and costly and the steps we take may be inadequate to prevent the infringement or misappropriation of our
intellectual property. In the event that we resort to litigation to enforce our intellectual property rights, such litigation could
result in substantial costs and a diversion of our management and financial resources, and could put our intellectual
property at risk of being invalidated or narrowed in scope. We can provide no assurance that we will prevail in such
litigation, and even if we do prevail, we may not obtain a meaningful recovery. In addition, our trade secrets may be leaked
or otherwise become available to, or be independently discovered by, our competitors. Any failure in maintaining,
protecting or enforcing our intellectual property rights could have a material adverse effect on our business, financial
condition and results of operations.
Tightening of tax compliance efforts that affect merchants on our platform could materially and adversely affect our
business, financial condition and results of operations.
The e-commerce industry in China is still developing, and the PRC government may require e-commerce platform
operators, such as our company, to assist in the collection of taxes with respect to income generated by merchants from
transactions conducted on our platforms. Merchants operating businesses on our platform may be deficient in their tax
registration. PRC tax authorities may enforce registration requirements that target these merchants on our platforms and
may request our assistance in these efforts. As a result, these merchants may be subject to more stringent tax compliance
requirements and liabilities and their business on our platforms could suffer or they could decide to terminate their
relationship with us, which could in turn negatively affect us. According to the E-Commerce Law, the e-commerce
platform operators shall submit the identity information and the information related to tax payment of the merchants on the
platform to the tax authorities. We may also be requested by tax authorities to assist in the enforcement of tax regulations,
such as disclosure of transaction records and bank account information of the merchants, and withholding against our
merchants. If that occurs, we may lose existing merchants and potential merchants might not be willing to operate their
business on our platforms. We may be subject to liabilities if we fail to cooperate with the relevant PRC tax authorities to
assist in the enforcement as requested. Stricter tax enforcement by the PRC tax authorities may also reduce the activities by
merchants on our platforms. Any of these results could have a material adverse effect on our business, financial condition
and results of operations.
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Our business may be subject to seasonal sales fluctuations which could result in volatility or have an adverse effect on
the market price of our ADSs.
We experience seasonality in our business, reflecting a combination of seasonal fluctuations in internet usage and
traditional retail seasonality patterns. For example, we generally experience less user traffic and purchase orders during the
Chinese New Year holiday season in the first quarter of each year. Furthermore, online sales in China are significantly
higher in the fourth quarter of each calendar year than in the preceding three quarters. Due to the foregoing factors, our
financial condition and results of operations for future quarters may continue to fluctuate and our historical quarterly
results may not be comparable to future quarters. As a result, the trading price of our ADSs may fluctuate from time to time
due to seasonality.
We have granted and may continue to grant options and other types of awards under our share incentive plans, which
may result in increased share-based compensation expenses.
We adopted a global share incentive plan in 2015 (the “2015 Plan”) and a share incentive plan in 2018 (the “2018
Plan”) for the purpose of granting share-based compensation awards to employees, directors and consultants to incentivize
their performance and align their interests with ours. Under each of the share incentive plans, we are authorized to grant
options and other types of awards. The maximum aggregate number of ordinary shares which may be issued pursuant to all
awards under the 2015 Plan is 581,972,860 Class A ordinary shares, subject to adjustment and amendment, and the
maximum aggregate number of shares which may be issued pursuant to all awards under the 2018 Plan was initially
363,130,400 Class A ordinary shares, plus an annual increase on the first day of each fiscal year of our company during the
term of the 2018 Plan commencing with the fiscal year beginning January 1, 2019, by an amount equal to the lessor of
(i) 1.0% of the total number of shares issued and outstanding on the last day of the immediately preceding fiscal year, and
(ii) such number of shares as may be determined by our board of directors. In March 2021, our board of directors approved
an amendment to the 2018 Plan to increase the annual increase percentage from 1.0% to 3.0% effective from the fiscal year
beginning January 1, 2022. See “Item 4. Information on the Company-B. Compensation” for further details. We recognized
substantial share-based compensation expenses in our consolidated financial statements in connection with these grants,
and may continue to incur such expenses in the future.
We believe the granting of share-based compensation is of significant importance to our ability to attract and retain key
personnel and employees, and we will continue to grant share-based compensation to employees in the future. As a result,
our expenses associated with share-based compensation may increase, which may have an adverse effect on our results of
operations. We may re-evaluate the vesting schedules, lock-up period, exercise price or other key terms applicable to the
grants under our currently effective share incentive plans from time to time. If we choose to do so, our expenses associated
with share-based compensation may increase, which may have an adverse effect on our results of operations.
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If we fail to implement and maintain an effective system of internal control over financial reporting, our ability to
accurately and timely report our financial results or prevent fraud may be adversely affected, and investor confidence
and the market price of our ADSs may be adversely impacted.
We are subject to the reporting requirements of the Exchange Act of 1934, or Exchange Act, the Sarbanes-Oxley Act
of 2002, or Sarbanes-Oxley Act, and the rules and regulations of the Nasdaq Global Select Market. The Sarbanes-Oxley
Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over
financial reporting. Commencing with our fiscal year ending December 31, 2019, we must perform system and process
evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of
our internal control over financial reporting in our Form 20-F filing for that year, as required by Section 404 of the
Sarbanes-Oxley Act . In addition, as we have ceased to be an “emerging growth company” as such term is defined in the
JOBS Act, our independent registered public accounting firm must attest to and report on the effectiveness of our internal
control over financial reporting beginning with our annual report for the fiscal year ending December 31, 2020. Our
management has concluded that our internal control over financial reporting was effective as of December 31, 2020. See
“Item 15. Controls and Procedures”. If we fail to implement and maintain an effective system of internal control, we will
not be able to conclude and our independent registered public accounting firm will not be able to report that we have
effective internal control over financial reporting in accordance with the Sarbanes-Oxley Act in our future annual report on
Form 20-F covering the fiscal year in which this failure occurs. Effective internal control over financial reporting is
necessary for us to produce reliable financial reports. Any failure to maintain effective internal control over financial
reporting could prevent us from identifying fraud and result in the loss of investor confidence in the reliability of our
financial statements, which in turn could have a material and adverse effect on the trading price of our ADSs. Furthermore,
we may need to incur additional costs and use additional management and other resources as our business and operations
further expand or in an effort to remediate any significant control deficiencies that may be identified in the future.
If we cannot obtain sufficient cash when we need it, we may not be able to meet our payment obligations under our
convertible notes.
In September 2019, we issued US$1 billion in aggregate principal amount of convertible senior notes due 2024 (the
“2024 Notes”). The 2024 Notes do not bear regular interest, and will mature on October 1, 2024.
In November 2020, we issued US$2 billion in aggregate principal amount of convertible senior notes due 2025 (the
“2025 Notes”). The 2025 Notes do not bear regular interest, and will mature on December 1, 2025.
We may not have sufficient funds to fulfill our payment obligations under the 2024 Notes and the 2025 Notes,
including to repay the 2024 Notes and/or the 2025 Notes upon maturity, to settle conversions of the 2024 Notes and/or the
2025 Notes in cash, to repurchase the 2024 Notes and/or the 2025 Notes upon a tax redemption or an optional redemption
thereof or, at the holders’ election, upon a fundamental change (as defined in the terms of the 2024 Notes and the 2025
Notes, respectively) or on the specified dates set forth in the terms of the 2024 Notes and/or the 2025 Notes.
We derive most of our revenues from, and hold most of our assets through, our subsidiaries. As a result, we may rely
in part upon distributions and advances from our subsidiaries in order to help us meet our payment obligations under the
2024 Notes, the 2025 Notes and our other obligations. Our subsidiaries are distinct legal entities and do not have any
obligation, legal or otherwise, to provide us with distributions or advances. We may face tax or other adverse
consequences, or legal limitations, on our ability to obtain funds from these entities. In addition, our ability to obtain
external financing in the future is subject to a variety of uncertainties, including:
● our financial condition, results of operations and cash flows;
● general market conditions for financing activities by internet companies; and
● economic, political and other conditions in the PRC and elsewhere.
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If we are unable to obtain funding in a timely manner or on commercially acceptable terms, we may not be able to
meet our payment obligations under the 2024 Notes and/or the 2025 Notes, which in turn may constitute a default under
the existing and/or future agreements governing our indebtedness.
Changes in U.S. and international trade policies, particularly with regard to China, may adversely impact our business
and operating results.
The U.S. government has recently proposed, among other actions, imposing new or higher tariffs on specified products
imported from China to penalize China for what it characterizes as unfair trade practices and China has responded by
proposing new or higher tariffs on specified products imported from the United States. For example, in 2018, the United
States announced three finalized tariffs that applied exclusively to products imported from China, totaling approximately
US$250 billion, and in May 2019 the United States increased from 10% to 25% the rate of certain tariffs previously levied
on Chinese products. Trade tension between China and the United States may intensify, and the United States may adopt
even more drastic measures in the future. Although cross-border business may not be an area of our focus, if we plan to sell
our products internationally in the future, any unfavorable government policies on international trade, such as capital
controls or tariffs, may affect the demand for our products and services, impact the competitive position of our products or
prevent us from being able to sell products in certain countries. If any new tariffs, legislation and/or regulations are
implemented, or if existing trade agreements are renegotiated such changes could have an adverse effect on our business,
financial condition, results of operations. In addition, future actions or escalations by either the United States or China that
affect trade relations may cause global economic turmoil and potentially have a negative impact on our business.
In addition, recent economic and trade sanctions threatened and/or imposed by the U.S. government on a number of
China-based technology companies have raised concerns as to whether, in the future, there may be additional regulatory
challenges or enhanced restrictions involving other China-based technology companies in areas such as data security,
information technology or other business activities. Similar or more expansive restrictions that may be imposed by the U.S.
or other jurisdictions in the future, may materially and adversely affect our ability to acquire technologies, systems or
devices that may be important to our technology infrastructure, service offerings and business operations.
We do not have any business insurance coverage.
The insurance industry in China is still at an early stage of development, and insurance companies in China currently
offer limited business-related insurance products. We do not have any business liability or disruption insurance to cover our
operations. We have determined that the costs of insuring for these risks and the difficulties associated with acquiring such
insurance on commercially reasonable terms make it impractical for us to have such insurance. Any uninsured risks may
result in substantial costs and the diversion of resources, which could adversely affect our results of operations and
financial condition.
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A severe or prolonged downturn in the global economy could materially and adversely affect our business and financial
condition.
COVID-19 had a negative impact on the Chinese and the global economy in the first half of 2020. Whether this will
lead to a prolonged downturn in the economy is still unknown. Even before the outbreak of COVID-19, the global
macroeconomic environment was facing numerous challenges. There was considerable uncertainty over the long-term
effects of the expansionary monetary and fiscal policies which had been adopted by the central banks and financial
authorities of some of the world’s leading economies, including the United States and China, even before 2020. Unrest,
terrorist threats and the potential for war in the Middle East and elsewhere may increase market volatility across the globe.
There have also been concerns about the relationship between China and other countries, including the surrounding Asian
countries, which may potentially have economic effects. In particular, there is significant uncertainty about the future
relationship between the United States and China with respect to trade policies, treaties, government regulations and tariffs.
Any severe or prolonged slowdown in the global economy may materially and adversely affect our business, results of
operations and financial condition.
We and certain of our directors and officers have been named as defendants in several lawsuits, which could have a
material adverse impact on our business, financial condition, results of operation, cash flows and reputation.
Between August and December 2018, several putative shareholder class action lawsuits have been filed against us and
certain of our directors and officers. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial
Information—Legal Proceedings” for more details. We are currently unable to estimate the potential loss, if any, associated
with the resolution of the outstanding lawsuit, if it proceeds. We may continue to be a target for lawsuits in the future,
including putative class action lawsuits brought by shareholders and lawsuits arising from contractual disputes in the
ordinary course of our business. There can be no assurance that we will be able to prevail in our defense or reverse any
unfavorable judgment on appeal, and we may decide to settle lawsuits on unfavorable terms. Any adverse outcome of these
cases, including any plaintiffs’ appeal of the judgment in these cases, could result in payments of substantial monetary
damages or fines, or changes to our business practices, and thus have a material adverse effect on our business, financial
condition, results of operation, cash flows and reputation. In addition, all or part of the defense costs, or any liabilities that
may arise from these matters may not be covered by any insurance. The litigation process may utilize a significant portion
of our cash resources and divert management’s attention from the day-to-day operations of our company, all of which could
harm our business. We may also be subject to claims for indemnification related to these matters, and we cannot predict the
impact that indemnification claims may have on our business or financial results.
Risks Related to Our Corporate Structure
If the PRC government finds that the agreements that establish the structure for operating some of our operations in
China do not comply with PRC regulations relating to the relevant industries, or if these regulations or the
interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to
relinquish our interests in those operations.
Foreign ownership of certain parts of our businesses including value-added telecommunications services (“VATS”) is
subject to restrictions under current PRC laws and regulations. For example, foreign investors are not allowed to own more
than 50% of the equity interests in a value-added telecommunications service provider (excluding e-commerce) and any
such foreign investor must have experience in providing value-added telecommunications services overseas and maintain a
good track record.
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We are a Cayman Islands company and our PRC subsidiaries, namely our WFOEs, are considered foreign-invested
enterprises. Accordingly, our WFOEs are not eligible to provide value-added telecommunications services. As a result, we
currently conduct our e-commerce business activities through Shanghai Xunmeng, a subsidiary of our VIE, which holds a
VATS License for (i) online data processing and transaction processing business (operating e-commerce), (ii) internet
content-related services, (iii) domestic call center business, and (iv) information services. Shanghai Xunmeng is wholly
owned by our VIE, namely Hangzhou Aimi, which has obtained a VATS License covering online data processing and
transaction processing business (operating commerce, excluding internet finance and e-hailing services) and internet
content-related services (excluding information search and inquiry services and real-time interactive information services).
We entered into a series of contractual arrangements with Hangzhou Aimi and its shareholders, which enable us to (i)
exercise effective control over our VIE, (ii) receive substantially all of the economic benefits of our VIE, and (iii) have an
exclusive option to purchase all or part of the equity interests and assets in our VIE when and to the extent permitted by
PRC law. As a result of these contractual arrangements, we have control over and are the primary beneficiary of our VIE
and hence consolidate its financial results and its subsidiary into our consolidated financial statements under U.S. GAAP.
See “Item 4. Information on the Company—C. Organizational Structure” for further details.
In the opinion of our PRC legal counsel, (i) the ownership structures of our VIE in China and Hangzhou Weimi are not
in violation of applicable PRC laws and regulations currently in effect; and (ii) the contractual arrangements between
Hangzhou Weimi, our VIE and its shareholders governed by PRC law are legal, valid, binding and enforceable in
accordance with its terms and applicable PRC laws. However, our PRC legal counsel has also advised us that there are
substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules.
Accordingly, the PRC regulatory authorities may take a view that is contrary to the opinion of our PRC legal counsel. It is
uncertain whether any new PRC laws or regulations relating to variable interest entity structures will be adopted or if
adopted, what they would provide. If we or our VIE are found to be in violation of any existing or future PRC laws or
regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities
would have broad discretion to take action in dealing with such violations or failures, including:
● revoking the business license and/or operating license of such entities;
● discontinuing or placing restrictions or onerous conditions on our operations;
● imposing fines, confiscating the income from Hangzhou Weimi or our VIE, or imposing other requirements with
which we or our VIE may not be able to comply;
● requiring us to restructure our ownership structure or operations, including terminating the contractual
arrangements with our VIE and deregistering the equity pledges of our VIE, which in turn would affect our ability
to consolidate, derive economic interests from, or exert effective control over our VIE; or
● restricting or prohibiting our use of the proceeds of offshore financing to finance our business and operations in
China.
The imposition of any of these penalties would result in a material and adverse effect on our ability to conduct our
business. In addition, it is unclear what impact the PRC government actions would have on us and on our ability to
consolidate the financial results of our VIE in our consolidated financial statements, if the PRC government authorities
were to find our legal structure and contractual arrangements to be in violation of PRC laws and regulations. If the
imposition of any of these government actions causes us to lose our right to direct the activities of our VIE or our right to
receive substantially all the economic benefits and residual returns from our VIE and we are not able to restructure our
ownership structure and operations in a satisfactory manner, we would no longer be able to consolidate the financial results
of our VIE in our consolidated financial statements. Either of these results, or any other significant penalties that might be
imposed on us in this event, would have a material adverse effect on our financial condition and results of operations.
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We face uncertainties with respect to the implementation of the Foreign Investment Law and how it may impact the
viability of our current corporate structure, corporate governance and business operations.
On March 15, 2019, the NPC approved the Foreign Investment Law, which has taken effect on January 1, 2020 and
replaced the Sino-Foreign Equity Joint Venture Enterprise Law, the Sino-Foreign Cooperative Joint Venture Enterprise
Law and the Foreign Owned Enterprise Law, together with their implementation rules and ancillary regulations, to become
the legal foundation for foreign investment in the PRC. The Foreign Investment Law embodies the legislative efforts to
unify the corporate legal requirements for both foreign and domestic investments. Under the Foreign Investment Law,
“foreign investment” refers to the investment activities directly or indirectly conducted by foreign individuals, enterprises
or other foreign entities in China. The Foreign Investment Law stipulates three forms of foreign investment, and does not
explicitly stipulate contractual arrangements as a form of foreign investment. On December 26, 2019, the State Council
promulgated the Implementation Regulations on the Foreign Investment Law, which came into effect on January 1, 2020.
The Implementation Regulations on the Foreign Investment Law does not stipulate whether contractual arrangements
should be deemed as a form of foreign investment. Before clarification or confirmation by future laws, administrative
regulations or provisions promulgated by the State Council on nature of contractual arrangements, there is no assurance
that contractual arrangement would not be considered as foreign investment under the Foreign Investment Law. In addition,
the Foreign Investment Law stipulates that activities constituting “foreign investment” includes foreign investors investing
in China through “any other methods” under laws, administrative regulations, or provisions prescribed by the State
Council. The State Council may in the future enact laws or issue administrative regulations or provisions to classify
contractual arrangements as a form of foreign investment, at which time it would be uncertain as to regulation on such
contractual arrangements and whether such contractual arrangements would be deemed to be in violation of the foreign
investment restrictions. There is no guarantee that our contractual arrangements and our business will not be materially and
adversely affected in the future due to changes in PRC laws and regulations. If future laws, administrative regulations or
provisions prescribed by the State Council mandate further actions to be completed by companies with existing contractual
arrangements, we may face substantial uncertainties as to the timely completion of such actions. Failure to take timely and
appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely
affect our current corporate structure and business operations.
The rights and functions of the Pinduoduo Partnership, once effective, may impact your ability to appoint executive
directors and nominate the chief executive officer of the company, and the interests of the Pinduoduo Partnership may
conflict with your interests.
Under our currently effective articles of association, the Pinduoduo Partnership, upon and for so long as certain
conditions are satisfied, will be entitled to nominate two executive directors (if there are no more than 5 directors on the
board of directors) or three executive directors (if there are more than 5 but no more than 9 directors on the board of
directors) and nominate the chief executive officer candidate of our company. Such executive director candidate duly
nominated by the Pinduoduo Partnership shall be approved and appointed by our board of directors and serve as an
executive director of our company until expiry of his or her terms (if any), removal by the Pinduoduo Partnership, the
shareholders by an ordinary resolution or vacation of office if such executive director, among other things, resigns his
office by notice in writing to us or dies or is found to be or becomes of unsound mind. The chief executive officer
candidate nominated by the Pinduoduo Partnership shall stand for appointment by the nominating and corporate
governance committee of the board of directors. If the candidate is not appointed by the nominating and corporate
governance committee in accordance with the then effective articles of association of the company, the Pinduoduo
Partnership may nominate a replacement nominee until the nominating and corporate governance committee appoints such
nominee as chief executive officer, or if the nominating and corporate governance committee fails to appoint more than
three candidates nominated by the Pinduoduo Partnership consecutively, the board of directors may then nominate and
appoint any person to serve as our chief executive officer in accordance with the then effective articles of association of the
company. See “Item 6. Directors, Senior Management and Employees—A. Directors and Senior Management—
Pinduoduo Partnership”. This governance structure and contractual arrangements will limit your ability to influence
corporate matters, including the matters determined at the board level.
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In addition, the interests of the Pinduoduo Partnership may not coincide with your interests, including certain
managerial decisions such as partner compensation. For example, each year, once an aggregate bonus pool is approved by
the board of directors, the partnership committee of the Pinduoduo Partnership will make further determinations as to,
among other things, the allocation of the current bonus pool among all partners and these allocations may not be entirely
aligned with the interest of shareholders who are not partners. Because the partners may be largely comprised of members
of our management team, the Pinduoduo Partnership and its executive director nominees may focus on the operational and
financial results that may differ from the expectations and desires of shareholders. To the extent that the interests of the
Pinduoduo Partnership differ from your interests on certain matters, you may be disadvantaged.
We rely on contractual arrangements with our VIE and its shareholders for a large portion of our business operations,
which may not be as effective as direct ownership in providing operational control.
Our VIE contributed 77.3%, 58.5% and 65.1% of our consolidated total revenues in 2018, 2019 and 2020,
respectively. We have relied and expect to continue to rely on contractual arrangements with our VIE and its shareholders
to conduct our business. For a description of these contractual arrangements, see “Item 4. Information on the Company—
C. Organizational Structure”. These contractual arrangements may not be as effective as direct ownership in providing us
with control over our VIE. For example, our VIE and its shareholders could breach their contractual arrangements with us
by, among other things, failing to conduct their operations in an acceptable manner or taking other actions that are
detrimental to our interests.
If we had direct ownership of our VIE, we would be able to exercise our rights as a shareholder to effect changes in the
board of directors of our VIE, which in turn could implement changes, subject to any applicable fiduciary obligations, at
the management and operational level. However, under the current contractual arrangements, we rely on the performance
by our VIE and its shareholders of their obligations under the contracts to exercise control over our VIE. The shareholders
of our consolidated VIE may not act in the best interests of our company or may not perform their obligations under these
contracts. Such risks exist throughout the period in which we intend to operate certain portions of our business through the
contractual arrangements with our VIE. If any dispute relating to these contracts remains unresolved, we will have to
enforce our rights under these contracts through the operations of PRC law and arbitration, litigation and other legal
proceedings and therefore will be subject to uncertainties in the PRC legal system. See “Item 3. Key Information—D. Risk
Factors—Risks Related to Our Corporate Structure—Any failure by our VIE or its shareholders to perform their
obligations under our contractual arrangements with them would have a material and adverse effect on our business.”
Therefore, our contractual arrangements with our VIE may not be as effective in ensuring our control over the relevant
portion of our business operations as direct ownership would be.
Any failure by our VIE or its shareholders to perform their obligations under our contractual arrangements with them
would have a material and adverse effect on our business.
Although the shareholders of our VIE hold equity interests on record in our VIE, each such shareholder has
irrevocably authorized Hangzhou Weimi to exercise his rights as a shareholder of our VIE pursuant to the terms of the
relevant shareholders’ voting rights proxy agreement. However, if our VIE or its shareholders fail to perform their
respective obligations under the contractual arrangements, we may have to incur substantial costs and expend additional
resources to enforce such arrangements. We may also have to rely on legal remedies under PRC law, including seeking
specific performance or injunctive relief, and claiming damages, which may not be effective under PRC law. For example,
if the shareholders of our VIE refuse to transfer their equity interest in our VIE to us or our designee if we exercise the
purchase option pursuant to these contractual arrangements, or if they otherwise act in bad faith toward us, then we may
have to take legal actions to compel them to perform their contractual obligations.
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All of the agreements under our contractual arrangements are governed by PRC law and provide for the resolution of
disputes through arbitration in China. Accordingly, these contracts would be interpreted in accordance with PRC law and
any disputes would be resolved in accordance with PRC legal procedures. The legal system in the PRC is not as developed
as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our
ability to enforce these contractual arrangements. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing
Business in China—Uncertainties with respect to the PRC legal system and changes in laws and regulations in China could
adversely affect us.” Meanwhile, there are very few precedents and little formal guidance as to how contractual
arrangements in the context of a VIE should be interpreted or enforced under PRC law. There remain significant
uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary. In addition, under
PRC law, rulings by arbitrators are final, parties cannot appeal the arbitration results in courts, and if the losing parties fail
to carry out the arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration
awards in PRC courts through arbitration award recognition proceedings, which would require additional expenses and
delay. In the event we are unable to enforce these contractual arrangements, or if we suffer significant delays or other
obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over our
VIE, and our ability to conduct our business may be negatively affected.
The shareholders of our VIE may have potential conflicts of interest with us, which may materially and adversely affect
our business and financial condition.
Messrs. Lei Chen and Jianchong Zhu hold 86.6% and 13.4% equity interests in our VIE, respectively. They are
employees of our company and have entered into a series of contractual arrangements with Hangzhou Weimi, pursuant to
which we have control over and are the primary beneficiary of our VIE. These shareholders of our VIE may have potential
conflicts of interest with us. See “Item 4. Information on the Company—C. Organizational Structure”. These shareholders
may breach, or cause our VIE to breach, or refuse to renew, the existing contractual arrangements we have with them and
our VIE, which would have a material and adverse effect on our ability to effectively control our VIE and receive
economic benefits from it. For example, the shareholders may be able to cause our agreements with our VIE to be
performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual
arrangements to us on a timely basis. We cannot assure you that when conflicts of interest arise any or all of these
shareholders will act in the best interests of our company or such conflicts will be resolved in our favor.
Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and
our company, except that we could exercise our purchase option under the exclusive option agreements with these
shareholders to request them to transfer all of their equity interests in the VIE to a PRC entity or individual designated by
us, to the extent permitted by PRC law. We also rely on these shareholders to abide by the laws of the Cayman Islands,
which provide that directors and officers owe a fiduciary duty to the company that requires them to act in good faith and in
what they believe to be the best interests of the company and not to use their position for personal gains. The shareholders
of our VIE have executed shareholders’ voting rights proxy agreement to appoint Hangzhou Weimi or a person designated
by Hangzhou Weimi to vote on their behalf and exercise voting rights as shareholders of our VIE. If we cannot resolve any
conflict of interest or dispute between us and the shareholders of our variable interest entities, we would have to rely on
legal proceedings, which could result in disruption of our business and subject us to substantial uncertainty as to the
outcome of any such legal proceedings.
The shareholders of our VIE may be involved in personal disputes with third parties or other incidents that may have
an adverse effect on their respective equity interests in our VIE and the validity or enforceability of our contractual
arrangements with the relevant entity and its shareholders. For example, in the event that any of the shareholders of our
VIE divorces his spouse, the spouse may claim that the equity interest of our VIE held by such shareholder is part of their
community property and should be divided between such shareholder and his spouse. If such claim is supported by the
court, the relevant equity interest may be obtained by the shareholder’s spouse or another third party who is not subject to
obligations under our contractual arrangements, which could result in a loss of the effective control over our VIE by us.
Similarly, if any of the equity interests of our VIE is inherited by a third party with whom the current contractual
arrangements are not binding, we could lose our control over our VIE or have to maintain such control by incurring
unpredictable costs, which could cause significant disruption to our business and operations and harm our financial
condition and results of operations.
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Although under our current contractual arrangements, (i) to the extent applicable, the spouse of each of the
shareholders of our VIE has executed a spousal consent letter, under which the spouse agrees not to raise any claim against
the equity interest, and to take every action to ensure the performance of the contractual arrangements, and (ii) it is
expressly provided that the rights and obligations under the contractual agreements shall be equally effective and binding
on the heirs and successors of the parties thereto, or that our VIE shall not assign or delegate its rights and obligations
under the contractual agreements to third parties without our prior consent, we cannot assure you that these undertakings
and arrangements will be complied with or effectively enforced. In the case any of them is breached or becomes
unenforceable and leads to legal proceedings, it could disrupt our business, distract our management’s attention and subject
us to substantial uncertainties as to the outcome of any such legal proceedings.
Contractual arrangements in relation to our VIE may be subject to scrutiny by the PRC tax authorities and they may
determine that we or our VIE owes additional taxes, which could negatively affect our financial condition and the value
of your investment.
Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to
audit or challenge by the PRC tax authorities. We could face material and adverse tax consequences if the PRC tax
authorities determine that the VIE contractual arrangements were not entered into on an arm’s length basis in such a way as
to result in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, and adjust the income of
our VIE in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a
reduction of expense deductions recorded by our VIE for PRC tax purposes, which could in turn increase its tax liabilities
without reducing Hangzhou Weimi’s tax expenses. In addition, the PRC tax authorities may impose late payment fees and
other penalties on our VIE for the adjusted but unpaid taxes according to the applicable regulations. Our financial position
could be materially and adversely affected if our VIE’s tax liabilities increase or if it is required to pay late payment fees
and other penalties.
We may lose the ability to use and enjoy assets held by our VIE that are material to the operation of certain portion of
our business if the VIE goes bankrupt or become subject to a dissolution or liquidation proceeding.
As part of our contractual arrangements with our VIE, our VIE and its subsidiaries hold certain assets that are material
to the operation of certain portion of our business, including intellectual property and premise and VATS licenses. If our
VIE goes bankrupt and all or part of its assets become subject to liens or rights of third-party creditors, we may be unable
to continue some or all of our business activities, which could materially and adversely affect our business, financial
condition and results of operations. Under the contractual arrangements, our VIE may not, in any manner, sell, transfer,
mortgage or dispose of their assets or legal or beneficial interests in the business without our prior consent. If our VIE
undergoes a voluntary or involuntary liquidation proceeding, independent third-party creditors may claim rights to some or
all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our
business, financial condition and results of operations.
If the chops of our PRC subsidiaries and our VIE are not kept safely, are stolen or are used by unauthorized persons or
for unauthorized purposes, the corporate governance of these entities could be severely and adversely compromised.
In China, a company chop or seal serves as the legal representation of the company towards third parties even when
unaccompanied by a signature. Each legally registered company in China is required to maintain a company chop, which
must be registered with the local Public Security Bureau. In addition to this mandatory company chop, companies may
have several other chops which can be used for specific purposes. The chops of our PRC subsidiaries and VIE are
generally held securely by personnel designated or approved by us in accordance with our internal control procedures. To
the extent those chops are not kept safely, are stolen or are used by unauthorized persons or for unauthorized purposes, the
corporate governance of these entities could be severely and adversely compromised and those corporate entities may be
bound to abide by the terms of any documents so chopped, even if they were chopped by an individual who lacked the
requisite power and authority to do so. In addition, if the chops are misused by unauthorized persons, we could experience
disruption to our normal business operations. We may have to take corporate or legal action, which could involve
significant time and resources to resolve while distracting management from our operations.
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Risks Related to Doing Business in China
Changes in China’s economic, political or social conditions or government policies could have a material adverse effect
on our business and operations.
Substantially all of our assets and operations are located in China. Accordingly, our business, financial condition,
results of operations and prospects may be influenced to a significant degree by political, economic and social conditions in
China generally. The Chinese economy differs from the economies of most developed countries in many respects,
including the level of government involvement, level of development, growth rate, control of foreign exchange and
allocation of resources. Although the Chinese government has implemented measures emphasizing the utilization of
market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of
improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by
the government. In addition, the Chinese government continues to play a significant role in regulating industry
development by imposing industrial policies.
The Chinese government also exercises significant control over China’s economic growth through allocating
resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing
preferential treatment to particular industries or companies.
While the Chinese economy has experienced significant growth over the past decades, growth has been uneven, both
geographically and among various sectors of the economy, and the rate of growth has been slowing since 2012, and the
impact of COVID-19 on the Chinese economy in 2020 was severe. According to the National Bureau of Statistics of
China, China’s real GDP growth rate was 6.7%, 6.0% and 2.3% in 2018, 2019 and 2020, respectively. There have also been
concerns about the relationships among China and other Asian countries, the relationship between China and the United
States, as well as the relationship between the United States and certain Asian countries such as North Korea, which may
result in or intensify potential conflicts in relation to territorial, regional security and trade disputes. Any adverse changes
in economic conditions in China, in the policies of the Chinese government or in the laws and regulations in China could
have a material adverse effect on the overall economic growth of China. Such developments could adversely affect our
business and operating results, lead to reduction in demand for our services and adversely affect our competitive position.
Any disruptions or continuing or worsening slowdown could significantly reduce domestic commerce activities in China,
which could lead to significant reduction in merchants’ demand for and spending on the various services we offer. An
economic downturn, whether actual or perceived, a further decrease in economic growth rates or an otherwise uncertain
economic outlook in China could have a material adverse effect on business and consumer spending and, as a result,
adversely affect our business, financial condition and results of operations. The Chinese government has implemented
various measures to encourage economic growth and guide the allocation of resources. Some of these measures may
benefit the overall Chinese economy, but may have a negative effect on us. For example, our financial condition and results
of operations may be adversely affected by government control over capital investments or changes in tax regulations.
In addition, because we hold a significant amount of cash and cash equivalents and short-term investments, if financial
institutions and issuers of financial instruments that we hold become insolvent or if the market for these financial
instruments become illiquid as a result of a severe economic downturn, our business and financial condition could be
materially and adversely affected.
Uncertainties with respect to the PRC legal system and changes in laws and regulations in China could adversely affect
us.
We conduct our business primarily through our PRC subsidiaries and our VIE and one of its subsidiaries in China. Our
operations in China are governed by PRC laws and regulations. Our PRC subsidiaries are subject to laws and regulations
applicable to foreign investment in China. The PRC legal system is a civil law system based on written statutes. Unlike the
common law system, prior court decisions under the civil law system may be cited for reference but have limited
precedential value. In addition, any new or changes in PRC laws and regulations related to foreign investment in China
could affect the business environment and our ability to operate our business in China.
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From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. Any
administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources
and management attention. Since PRC administrative and court authorities have significant discretion in interpreting and
implementing statutory provisions and contractual terms, it may be more difficult to evaluate the outcome of administrative
and court proceedings and the level of legal protection we enjoy than in more developed legal systems. These uncertainties
may impede our ability to enforce the contracts we have entered into and could materially and adversely affect our business
and results of operations.
Furthermore, the PRC legal system is based in part on government policies and internal rules, some of which are not
published on a timely basis or at all and may have retroactive effect. As a result, we may not be aware of our violation of
any of these policies and rules until sometime after the violation. Such unpredictability towards our contractual, property
and procedural rights could adversely affect our business and impede our ability to continue our operations.
We may be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet-related
businesses and companies, and any lack of requisite approvals, licenses or permits applicable to our business may have
a material adverse effect on our business and results of operations.
The PRC government extensively regulates the internet industry, including foreign ownership of, and the licensing and
permit requirements pertaining to, companies in the internet industry. These internet-related laws and regulations are
relatively new and evolving, and their interpretation and enforcement involve significant uncertainties. As a result, in
certain circumstances it may be difficult to determine what actions or omissions may be deemed to be in violation of
applicable laws and regulations.
We only have contractual control over our Pinduoduo mobile app. We do not directly own the mobile app due to the
restrictions on foreign investment in businesses providing value-added telecommunications services in China, including e-
commerce services and internet content-related services. This may significantly disrupt our business, subject us to
sanctions, compromise enforceability of related contractual arrangements, or have other harmful effects on us.
The evolving PRC regulatory system for the internet industry may lead to the establishment of new regulatory
agencies. For example, in May 2011, the State Council announced the establishment of the State Internet Information
Office (with the involvement of the State Council Information Office, MIIT, and the Ministry of Public Security). The
primary role of the State Internet Information Office is to facilitate the policy-making and legislative development in this
field, to direct and coordinate with the relevant departments in connection with online content administration and to deal
with cross-ministry regulatory matters in relation to the internet industry.
The Circular on Strengthening the Administration of Foreign Investment in and Operation of Value-added
Telecommunications Business, issued by the MIIT in July 2006, prohibits domestic telecommunications service providers
from leasing, transferring or selling telecommunications business operating licenses to any foreign investor in any form, or
providing any resources, sites or facilities to any foreign investor for their illegal operation of a telecommunications
business in China. According to this circular, either the holder of a value-added telecommunications services operation
permit or its shareholders must directly own the domain names and trademarks used by such license holders in their
provision of value-added telecommunications services. The circular also requires each license holder to have the necessary
facilities, including servers, for its approved business operations and to maintain such facilities in the regions covered by its
license. Shanghai Xunmeng owns the relevant domain names and trademarks in connection with our online platform and
has the necessary personnel to operate our online platform.
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The interpretation and application of existing PRC laws, regulations and policies and possible new laws, regulations or
policies relating to the internet industry have created substantial uncertainties regarding the legality of existing and future
foreign investments in, and the businesses and activities of, internet businesses in China, including our business. We cannot
assure you that we have obtained all the permits or licenses required for conducting our business in China or will be able to
maintain our existing licenses or obtain new ones. If the PRC government considers that we were operating without the
proper approvals, licenses or permits or promulgates new laws and regulations that require additional approvals or licenses
or imposes additional restrictions on the operation of any part of our business, it has the power, among other things, to levy
fines, confiscate our income, revoke our business licenses, and require us to discontinue our relevant business or impose
restrictions on the affected portion of our business. Any of these actions by the PRC government may have a material
adverse effect on our business and results of operations.
Discontinuation of any preferential tax treatments or imposition of any additional taxes could adversely affect our
financial condition and results of operations.
Shanghai Xunmeng, a subsidiary of our VIE, was recognized as a “high and new technology enterprise” in November
2018 and was eligible for a preferential tax rate of 15% from 2018 to 2020. Shenzhen Qianhai Xinzhijiang Information
Technology Co., Ltd., a subsidiary of ours located in Qianhai District, Shenzhen, Guangdong Province, was eligible for a
preferential tax rate of 15% and has been applying such preferential tax rate since then. The preferential tax rate was
available from 2014 to 2020. Government subsidies and preferential tax treatments are subject to discretions of the relevant
governmental authorities and our eligibility for them are therefore out of our control. Discontinuation of any preferential
tax treatments or imposition of any additional taxes could adversely affect our financial condition and results of operations.
You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing actions in
China against us or our management named in the annual report based on foreign laws.
We are an exempted company incorporated under the laws of the Cayman Islands, we conduct substantially all of our
operations in China and substantially all of our assets are located in China. In addition, all our senior executive officers
reside within China for a significant portion of the time and most are PRC nationals. As a result, it may be difficult for you
to effect service of process upon us or those persons inside mainland China. It may also be difficult for you to enforce in
U.S. courts judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws
against us and our officers and directors as most of our current directors and officers are nationals and residents of
countries other than the United States and substantially all of the assets of these persons are located outside the United
States. In addition, there is uncertainty as to whether the courts of the Cayman Islands or the PRC would recognize or
enforce judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities
laws of the United States or any state.
The recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC
courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law
based either on treaties between China and the country where the judgment is made or on principles of reciprocity between
jurisdictions. China does not have any treaties or other forms of written arrangement with the United States that provide for
the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law,
the PRC courts will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment
violates the basic principles of PRC laws or national sovereignty, security or public interest. As a result, it is uncertain
whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States.
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We may rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and
financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us
could have a material and adverse effect on our ability to conduct our business.
We are a Cayman Islands holding company and we rely principally on dividends and other distributions on equity from
our PRC subsidiaries for our cash requirements, including the funds necessary to pay dividends and other cash distributions
to our shareholders for services of any debt we may incur. If any of our PRC subsidiaries incur debt on its own behalf in
the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us.
Under PRC laws and regulations, our PRC subsidiaries, each of which is a wholly foreign-owned enterprise may pay
dividends only out of its respective accumulated profits as determined in accordance with PRC accounting standards and
regulations. In addition, a wholly foreign-owned enterprise is required to set aside at least 10% of its after-tax profits each
year, if any, to fund a certain statutory reserve fund, until the aggregate amount of such fund reaches 50% of its registered
capital. At its discretion, a wholly foreign-owned enterprise may allocate a portion of its after-tax profits based on PRC
accounting standards to a staff welfare and bonus fund. These reserve fund and staff welfare and bonus fund cannot be
distributed to us as dividends.
Our PRC subsidiaries generate primarily all of their revenue in Renminbi, which is not freely convertible into other
currencies. As result, any restriction on currency exchange may limit the ability of our PRC subsidiaries to use their
Renminbi revenues to pay dividends to us.
The PRC government may continue to strengthen its capital controls, and more restrictions and substantial vetting
process may be put forward by SAFE for cross-border transactions falling under both the current account and the capital
account. Any limitation on the ability of our PRC subsidiaries to pay dividends or make other kinds of payments to us
could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our
business, pay dividends, or otherwise fund and conduct our business.
In addition, the Enterprise Income Tax Law and its implementation rules provide that a withholding tax rate of up to
10% will be applicable to dividends payable by Chinese companies to non-PRC-resident enterprises unless otherwise
exempted or reduced according to treaties or arrangements between the PRC central government and governments of other
countries or regions where the non-PRC-resident enterprises are incorporated.
PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental
control of currency conversion may delay or prevent us from using the proceeds of our offshore financing to make
loans or additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our
liquidity and our ability to fund and expand our business.
We are an offshore holding company conducting our operations in China. We may make loans to our PRC subsidiaries
and VIE subject to the approval, registration, and filing with governmental authorities and limitation of amount, or we may
make additional capital contributions to our wholly foreign-owned subsidiaries in China. Any loans to our wholly foreign-
owned subsidiaries in China, which are treated as foreign-invested enterprises under PRC law, are subject to foreign
exchange loan registrations. In addition, a foreign invested enterprise shall use its capital pursuant to the principle of
authenticity and self-use within its business scope. The capital of a foreign invested enterprise shall not be used for the
following purposes: (i) directly or indirectly used for payment beyond the business scope of the enterprises or the payment
prohibited by relevant laws and regulations; (ii) directly or indirectly used for investment in securities or investments other
than banks’ principal-secured products unless otherwise provided by relevant laws and regulations; (iii) the granting of
loans to non-affiliated enterprises, except where it is expressly permitted in the business license; and (iv) paying the
expenses related to the purchase of real estate that is not for self-use (except for the foreign-invested real estate
enterprises).
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In light of the various requirements imposed by PRC regulations on loans to and direct investment in PRC entities by
offshore holding companies, we cannot assure you that we will be able to complete the necessary government registrations
or obtain the necessary government approvals or filings on a timely basis, if at all, with respect to future loans by us to our
PRC subsidiary or VIE or with respect to future capital contributions by us to our PRC subsidiary. If we fail to complete
such registrations or obtain such approvals, our ability to use the proceeds from our offshore financing and to capitalize or
otherwise fund our PRC operations may be negatively affected, which could materially and adversely affect our liquidity
and our ability to fund and expand our business.
Fluctuations in exchange rates could have a material and adverse effect on our results of operations and the value of
your investment.
The conversion of Renminbi into foreign currencies, including U.S. dollars, is based on rates set by the People’s Bank
of China. The Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. The value of
Renminbi against the U.S. dollar and other currencies is affected by changes in China’s political and economic conditions
and by China’s foreign exchange policies, among other things. We cannot assure you that Renminbi will not appreciate or
depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC or
U.S. government policy may impact the exchange rate between Renminbi and the U.S. dollar in the future.
Any significant appreciation or depreciation of Renminbi may materially and adversely affect our revenues, earnings
and financial position, and the value of, and any dividends payable on, our ADSs in U.S. dollars. For example, to the extent
that we need to convert U.S. dollars we receive from our initial public offering, follow-on offerings or convertible senior
notes offerings into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an
adverse effect on the Renminbi amount we would receive from the conversion. Conversely, if we decide to convert our
Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs, payments
when due on the 2024 Notes or the 2025 Notes, or for other business purposes, appreciation of the U.S. dollar against the
Renminbi would have a negative effect on the U.S. dollar amount available to us.
Very limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. As of
December 31, 2020, we had used some 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 availability and effectiveness of
these hedges may be limited and we may not be able to adequately hedge our exposure or at all. In addition, our currency
exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into
foreign currency. As a result, fluctuations in exchange rates may have a material adverse effect on your investment.
Governmental control of currency conversion may limit our ability to utilize our revenues effectively and affect the
value of your investment.
The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain
cases, the remittance of currency out of China. We receive substantially all of our revenues in Renminbi. Under our current
corporate structure, our Cayman Islands holding company primarily relies on dividend payments from our PRC subsidiary
to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations, payments of
current account items, including profit distributions, interest payments and trade and service-related foreign exchange
transactions, can be made in foreign currencies without prior approval of SAFE by complying with certain procedural
requirements. Specifically, under the existing exchange restrictions, without prior approval of SAFE, cash generated from
the operations of our PRC subsidiary in China may be used to pay dividends to our company. However, approval from or
registration with appropriate government authorities is required where Renminbi is to be converted into foreign currency
and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. As a
result, we need to obtain SAFE approval to use cash generated from the operations of our PRC subsidiary and VIE to pay
off their respective debt in a currency other than Renminbi owed to entities outside China, or to make other capital
expenditure payments outside China in a currency other than Renminbi.
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In light of the flood of capital outflows from China, the PRC government may from time to time impose more
restrictive foreign exchange policies and step up scrutiny of major outbound capital movement. More restrictions and
substantial vetting process may be required by SAFE or other government authorities to regulate cross-border transactions
falling under the capital account. The PRC government may at its discretion restrict access to foreign currencies for current
account transactions in the future. If the foreign exchange control system prevents us from obtaining sufficient foreign
currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our
shareholders, including holders of our ADSs.
Certain PRC regulations may make it more difficult for us to pursue growth through acquisitions.
Among other things, the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or
the M&A Rules, adopted by six PRC regulatory agencies in 2006 and amended in 2009, established additional procedures
and requirements that could make merger and acquisition activities by foreign investors more time-consuming and
complex. Such regulation requires, among other things, that MOFCOM be notified in advance of any change-of-control
transaction in which a foreign investor acquires control of a PRC domestic enterprise and involves any of the following
circumstances: (i) any important industry is concerned, (ii) such transaction involves factors that impact or may impact
national economic security, or (iii) such transaction will lead to a change in control of a domestic enterprise which holds a
famous trademark or PRC time-honored brand. The M&A Rules also requires that in accordance with the Anti-Monopoly
Law promulgated by the Standing Committee of the NPC which became effective in 2008, any merger and acquisitions of
domestic enterprises by foreign investors which are deemed concentrations and involve parties with specified turnover
thresholds must be cleared by MOFCOM before they can be completed. In addition, PRC national security review rules
that became effective in September 2011 require acquisitions by foreign investors of PRC companies engaged in military
related or certain other industries that are crucial to national security be subject to security review before consummation of
any such acquisition. We may pursue potential strategic acquisitions that are complementary to our business and
operations. Complying with the requirements of these regulations to complete such transactions could be time-consuming,
and any required approval processes, including obtaining approval or clearance from MOFCOM, may delay or inhibit our
ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.
We are subject to anti-monopoly laws and regulations with respect to investments in or by us. According to the Anti-
Monopoly Law, companies conducting certain investments and acquisitions relating to businesses in China as described
under the Anti-Monopoly Law must file a notification with the PRC regulator in advance. Furthermore, in February 2021,
the Anti-monopoly Committee of the State Council published the Anti-monopoly Guidelines for the Platform Economy
Sector and included concentrations involving companies with VIE structure within the ambit of SAMR’s merger control
review, if certain reporting thresholds are met. Any failure or perceived failure to comply with the relevant anti-monopoly
laws and guidelines relating to investments in or by us may result in governmental investigations or enforcement actions,
litigations or claims against us and could have an adverse effect on our business, financial condition and results of
operations.
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PRC regulations relating to offshore investment activities by PRC residents may limit our PRC subsidiaries’ ability to
change their registered capital or distribute profits to us or otherwise expose us or our PRC resident beneficial owners
to liability and penalties under PRC laws.
In July 2014, SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic
Residents’ Offshore Investment and Financing and Roundtrip Investment Through Special Purpose Vehicles, or SAFE
Circular 37. SAFE Circular 37 requires PRC residents (including PRC individuals and PRC corporate entities as well as
foreign individuals that are deemed as PRC residents for foreign exchange administration purpose) to register with SAFE
or its local branches in connection with their direct or indirect offshore investment activities. SAFE Circular 37 further
requires amendment to the SAFE registrations in the event of any changes with respect to the basic information of the
offshore special purpose vehicle, such as change of a PRC individual shareholder, name and operation term, or any
significant changes with respect to the offshore special purpose vehicle, such as increase or decrease of capital
contribution, share transfer or exchange, or mergers or divisions. SAFE Circular 37 is applicable to our shareholders who
are PRC residents and may be applicable to any offshore acquisitions that we make in the future.
If our shareholders who are PRC residents fail to make the required registration or to update the previously filed
registration, our PRC subsidiaries may be prohibited from distributing their profits or the proceeds from any capital
reduction, share transfer or liquidation to us, and we may also be prohibited from making additional capital contributions
into our PRC subsidiaries. In February 2015, SAFE promulgated a Notice on Further Simplifying and Improving Foreign
Exchange Administration Policy on Direct Investment, or SAFE Notice 13, effective June 2015. Under SAFE Notice 13,
applications for foreign exchange registration of inbound foreign direct investments and outbound overseas direct
investments, including those required under SAFE Circular 37, will be filed with qualified banks instead of SAFE. The
qualified banks will directly examine the applications and accept registrations under the supervision of SAFE.
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All of our shareholders who we are aware of being subject to the SAFE regulations have completed the initial
registrations with the local SAFE branch or qualified banks as required by SAFE Circular 37. However, we may not be
informed of the identities of all the PRC residents holding direct or indirect interest in our company, and we cannot provide
any assurance that these PRC residents will comply with our request to make or obtain any applicable registrations or
continuously comply with all requirements under SAFE Circular No. 37 or other related rules. The failure or inability of
the relevant shareholders to comply with the registration procedures set forth in these regulations may subject us to fines
and legal sanctions, such as restrictions on our cross-border investment activities, on the ability of our wholly foreign-
owned subsidiaries in China to distribute dividends and the proceeds from any reduction in capital, share transfer or
liquidation to us. Moreover, failure to comply with the various foreign exchange registration requirements described above
could result in liability under PRC law for circumventing applicable foreign exchange restrictions. As a result, our business
operations and our ability to distribute profits to you could be materially and adversely affected.
Any failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans
may subject the PRC plan participants or us to fines and other legal or administrative sanctions.
In February 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for
Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly Listed Company, replacing earlier rules
promulgated in 2007. Pursuant to these rules, PRC citizens and non-PRC citizens who reside in China for a continuous
period of not less than one year who participate in any stock incentive plan of an overseas publicly listed company, subject
to a few exceptions, are required to register with SAFE through a domestic qualified agent, which could be the PRC
subsidiaries of such overseas-listed company, and complete certain other procedures. In addition, an overseas-entrusted
institution must be retained to handle matters in connection with the exercise or sale of stock options and the purchase or
sale of shares and interests. We and our executive officers and other employees who are PRC citizens or who reside in the
PRC for a continuous period of not less than one year and who have been granted options are subject to these regulations as
our company is an overseas-listed company. Failure to complete SAFE registrations may subject them to fines of up to
RMB300,000 for entities and up to RMB50,000 for individuals, and legal sanctions and may also limit our ability to
contribute additional capital into our PRC subsidiary and limit our PRC subsidiary’s ability to distribute dividends to us.
We also face regulatory uncertainties that could restrict our ability to adopt additional incentive plans for our directors,
executive officers and employees under PRC law. See “Item 4. Information on the Company—B. Business Overview—
Regulation—Regulations Relating to Foreign Exchange—Regulations on Stock Incentive Plans”.
In addition, the State Administration of Taxation, or SAT, has issued certain circulars concerning employee share
options and restricted shares. Under these circulars, our employees working in China who exercise share options or are
granted restricted shares will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file
documents related to employee share options or restricted shares with relevant tax authorities and to withhold individual
income taxes of those employees who exercise their share options. If our employees fail to pay or we fail to withhold their
income taxes according to relevant laws and regulations, we may face sanctions imposed by the tax authorities or other
PRC government authorities. See “Item 4. Information on the Company—B. Business Overview—Regulation—
Regulations Relating to Foreign Exchange—Regulations on Stock Incentive Plans”.
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Our use of some leased properties could be challenged by third parties or government authorities, which may cause
interruptions to our business operations.
Certain of our leasehold interests in leased properties have not been registered with the relevant PRC government
authorities as required by PRC law, which may expose us to potential fines if we fail to remediate after receiving notice
from the relevant PRC government authorities. In case of failure to register or file a lease, the parties to the unregistered
lease may be ordered to make rectifications (which would involve registering such lease with the relevant authority) before
being subject to penalties. The penalty ranges from RMB1,000 to RMB10,000 for each unregistered lease, at the discretion
of the relevant authority. The law is not clear as to which of the parties, the lessor or the lessee, is liable for the failure to
register the lease. Although we have proactively requested that the applicable lessors complete or cooperate with us to
complete the registration in a timely manner, we are unable to control whether and when such lessors will do so. In the
event that a fine or a portion thereof is imposed on the lessee, and if we are unable to recover from the lessor any fine paid
by us, such fine will be borne by us. Moreover, certain lessors have not provided us with valid ownership certificates or
authorization of sublease for our leased properties. As a result, there is a risk that these lessors may not have the right to
lease such properties to us, in which case the relevant lease agreements may be deemed invalid or we may face challenges
from the property owners or other third parties regarding our right to occupy the premises. We are not aware of any actions,
claims or investigations being initiated by third parties or competent governmental authorities with respect to the defects in
our leased real properties. However, if we are unable to continue our operations on the current premises and cannot find a
suitable replacement in a timely manner, our business, results of operations and financial condition could be materially and
adversely affected.
If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in
unfavorable tax consequences to us and our non-PRC shareholders or ADS holders.
Under the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside of the PRC
with “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. In 2009, the State Administration of Taxation, or SAT, issued a circular, known as
SAT 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. Although this circular only applies to offshore
enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners,
the criteria set forth in the circular may reflect 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. According to SAT Circular 82, an offshore
incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by
virtue of having its “de facto management body” in China and 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.
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We believe that we are not a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an
enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation
of the term “de facto management body.” If the PRC tax authorities determine that we are a PRC resident enterprise for
enterprise income tax purposes, we could be subject to PRC tax at a rate of 25% on our worldwide income, which could
materially reduce our net income, and we may be required to withhold a 10% withholding tax from dividends we pay to
our shareholders that are non-resident enterprises, including the holders of our ADSs. In addition, non-resident enterprise
shareholders (including our ADS holders) may be subject to PRC tax on gains realized on the sale or other disposition of
ADSs or ordinary shares, if such income is treated as sourced from within the PRC. Furthermore, if we are deemed a PRC
resident enterprise, dividends payable to our non-PRC individual shareholders (including our ADS holders) and any gain
realized on the transfer of ADSs or ordinary shares by such shareholders may be subject to PRC tax at a rate of 10% in the
case of non-PRC enterprises or a rate of 20% in the case of non-PRC individuals unless a reduced rate is available under an
applicable tax treaty. It is unclear whether non-PRC shareholders of our company would be able to claim the benefits of
any tax treaties between their country of tax residence and the PRC in the event that we are treated as a PRC resident
enterprise. Any such tax may reduce the returns on your investment in the ADSs or ordinary shares.
We face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC
holding companies.
Pursuant to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC
Resident Enterprises, or SAT Circular 698, issued by SAT in 2009 with retroactive effect from January 1, 2008, where a
non-resident enterprise transfers the equity interests of a PRC resident enterprise indirectly by disposition of the equity
interests of an overseas holding company, or an Indirect Transfer, and such overseas holding company is located in a tax
jurisdiction that: (i) has an effective tax rate less than 12.5% or (ii) does not tax foreign income of its residents, the non-
resident enterprise, being the transferor, shall report to the competent tax authority of the PRC resident enterprise this
Indirect Transfer.
In February 2015, SAT issued a Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer
of Properties by Non-Tax Resident Enterprises, or SAT Circular 7. SAT Circular 7 supersedes the rules with respect to the
Indirect Transfer under SAT Circular 698, but does not touch upon the other provisions of SAT Circular 698, which remain
in force. SAT Circular 7 has introduced a new tax regime that is significantly different from the previous one under SAT
Circular 698. SAT Circular 7 extends its tax jurisdiction to not only Indirect Transfers set forth under SAT Circular 698 but
also transactions involving transfer of other taxable assets through offshore transfer of a foreign intermediate holding
company. In addition, SAT Circular 7 provides clearer criteria than SAT Circular 698 for assessment of reasonable
commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and sale of equity
through a public securities market. SAT Circular 7 also brings challenges to both foreign transferor and transferee (or other
person who is obligated to pay for the transfer) of taxable assets. Where a non-resident enterprise transfers taxable assets
indirectly by disposing of the equity interests of an overseas holding company, which is an Indirect Transfer, the non-
resident enterprise as either transferor or transferee, or the PRC entity that directly owns the taxable assets, may report such
Indirect Transfer to the relevant tax authority. Using a “substance over form” principle, the PRC tax authority may
disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established
for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be
subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated
to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise.
Both the transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails to withhold the
taxes and the transferor fails to pay the taxes.
In October 2017, SAT issued an Announcement on Issues Relating to Withholding at Source of Income Tax of Non-
resident Enterprises, or SAT Circular 37. Effective December 2017, SAT Circular 37, among others, repealed the Circular
698 and amended certain provisions in SAT Circular 7. According to SAT Circular 37, where the non-resident enterprise
fails to declare the tax payable pursuant to Article 39 of the Enterprise Income Tax, the tax authority may order it to pay the
tax due within required time limits, and the non-resident enterprise shall declare and pay the tax payable within such time
limits specified by the tax authority. However, if the non-resident enterprise voluntarily declares and pays the tax payable
before the tax authority orders it to do so within required time limits, it shall be deemed that such enterprise has paid the
tax in time.
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We face uncertainties as to the reporting and other implications of certain past and future transactions where PRC
taxable assets are involved, such as offshore restructuring, sale of the shares in our offshore subsidiaries and investments.
Our company may be subject to filing obligations or taxed if our company is transferor in such transactions, and may be
subject to withholding obligations if our company is transferee in such transactions, under SAT Circular 7 and SAT
Circular 37. For transfer of shares in our company by investors who are non-PRC resident enterprises, our PRC subsidiary
may be requested to assist in the filing under the SAT circulars. As a result, we may be required to expend valuable
resources to comply with the SAT circulars or to request the relevant transferors from whom we purchase taxable assets to
comply with these circulars, or to establish that our company should not be taxed under these circulars, which may have a
material adverse effect on our financial condition and results of operations.
Our ADSs may be delisted under the Holding Foreign Companies Accountable Act if the PCAOB is unable to inspect
auditors who are located in China. The delisting of our ADSs, or the threat of their being delisted, may materially and
adversely affect the value of your investment. Additionally, the inability of the PCAOB to conduct inspections deprives
our investors with the benefits of such inspections.
The Holding Foreign Companies Accountable Act, or the HFCA Act, was enacted on December 18, 2020. The HFCA
Act states if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not
been subject to inspection by the Public Company Accounting Oversight Board, or the PCAOB, for three consecutive years
beginning in 2021, the SEC shall prohibit our shares or ADSs from being traded on a national securities exchange or in the
over the counter market in the U.S.
Our auditor is registered with the PCAOB. Pursuant to laws in the United States, the PCAOB has authority to conduct
regular inspections over independent registered public accounting firms registered with the PCAOB to assess their
compliance with the applicable professional standards. Our auditor is also located in China, a jurisdiction which does not
allow the PCAOB to conduct inspections without the approval of the Chinese authorities. As a result, we understand that
our auditor is not currently inspected by the PCAOB.
On March 24, 2021, the SEC adopted interim final rules relating to the implementation of certain disclosure and
documentation requirements of the HFCA Act. We will be required to comply with these rules if the SEC identifies us as
having a “non-inspection” year under a process to be subsequently established by the SEC. The SEC is assessing how to
implement other requirements of the HFCA Act, including the listing and trading prohibition requirements described
above.
The SEC may propose additional rules or guidance that could impact us if our auditor is not subject to PCAOB
inspection. For example, on August 6, 2020, the President’s Working Group on Financial Markets, or the PWG, issued the
Report on Protecting United States Investors from Significant Risks from Chinese Companies to the then President of the
United States. This report recommended the SEC implement five recommendations to address companies from
jurisdictions that do not provide the PCAOB with sufficient access to fulfil its statutory mandate. Some of the concepts of
these recommendations were implemented with the enactment of the HFCA Act. However, some of the recommendations
were more stringent than the HFCA Act. For example, if a company was not subject to PCAOB inspection, the report
recommended that the transition period before a company would be delisted would end on January 1, 2022.
The SEC has announced that the SEC staff is preparing a consolidated proposal for the rules regarding the
implementation of the HFCA Act and to address the recommendations in the PWG report. It is unclear when the SEC will
complete its rulemaking and when such rules will become effective and what, if any, of the PWG recommendations will be
adopted. The implications of this possible regulation in addition the requirements of the HFCA Act are uncertain. Such
uncertainty could cause the market price of our ADSs to be materially and adversely affected, and our securities could be
delisted or prohibited from being traded “over-the-counter” earlier than would be required by the HFCA Act. If our
securities are unable to be listed on another securities exchange by then, such a delisting would substantially impair your
ability to sell or purchase our ADSs when you wish to do so, and the risk and uncertainty associated with a potential
delisting would have a negative impact on the price of our ADSs.
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The PCAOB’s inability to conduct inspections in China prevents it from fully evaluating the audits and quality control
procedures of our independent registered public accounting firm. As a result, we and investors in our ordinary shares are
deprived of the benefits of such PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in
China makes it more difficult to evaluate the effectiveness of our independent registered public accounting firm’s audit
procedures or quality control procedures as compared to auditors outside of China that are subject to the PCAOB
inspections, which could cause investors and potential investors in our stock to lose confidence in our audit procedures and
reported financial information and the quality of our financial statements.
In May 2013, the PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement
Cooperation with the CSRC and the PRC Ministry of Finance, which establishes a cooperative framework between the
parties for the production and exchange of audit documents relevant to investigations undertaken by the PCAOB in the
PRC or by the CSRC or the PRC Ministry of Finance in the United States. The PCAOB continued to discuss with the
CSRC and the PRC Ministry of Finance on joint inspections in the PRC of PCAOB-registered audit firms that provide
auditing services to Chinese companies that trade on U.S. stock exchanges.
Proceedings instituted by the SEC against Chinese affiliates of the “big four” accounting firms, including our
independent registered public accounting firm, could result in financial statements being determined to not be in
compliance with the requirements of the Exchange Act.
Starting in 2011, the Chinese affiliates of the “big four” accounting firms, including our independent registered public
accounting firm, were affected by a conflict between U.S. and Chinese law. Specifically, for certain U.S.-listed companies
operating and audited in mainland China, the SEC and the PCAOB sought to obtain from the Chinese firms access to their
audit work papers and related documents. The firms were, however, advised and directed that under Chinese 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.
In late 2012, this impasse led the SEC to commence administrative proceedings under Rule 102(e) of its Rules of
Practice and also under the Sarbanes-Oxley Act of 2002 against the Chinese accounting firms, including our independent
registered public accounting firm. A first instance trial of the proceedings in July 2013 in the SEC’s internal administrative
court resulted in an adverse judgment against the firms. The administrative law judge proposed penalties on the firms
including a temporary suspension of their right to practice before the SEC, although that proposed penalty did not take
effect pending review by the Commissioners of the SEC. On February 6, 2015, before a review by the Commissioner had
taken place, the firms reached a settlement with the SEC. Under the settlement, the SEC accepts that future requests by the
SEC for the production of documents will normally be made to the CSRC. The firms will receive matching Section 106
requests, and are required to abide by a detailed set of procedures with respect to such requests, which in substance require
them to facilitate production via the CSRC. If they fail to meet specified criteria, the SEC retains authority to impose a
variety of additional remedial measures on the firms depending on the nature of the failure. Remedies for any future
noncompliance could include, as appropriate, an automatic six-month bar on a single firm’s performance of certain audit
work, commencement of a new proceeding against a firm, or in extreme cases the resumption of the current proceeding
against all four firms. If additional remedial measures are imposed on the Chinese affiliates of the “big four” accounting
firms, including our independent registered public accounting firm, in administrative proceedings brought by the SEC
alleging the firms’ failure to meet specific criteria set by the SEC with respect to requests for the production of documents,
we could be unable to timely file future financial statements in compliance with the requirements of the Exchange Act.
In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies
in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their
operations in the PRC, which could result in financial statements being determined to not be in compliance with the
requirements of the Exchange Act, including possible delisting. Moreover, any negative news about any such future
proceedings against these audit firms may cause investor uncertainty regarding China-based, U.S.-listed companies and the
market price of our ADSs may be adversely affected.
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If our independent registered public accounting firm was 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
Exchange Act. Such a determination could ultimately lead to the delisting of our ADSs from the Nasdaq Global Select
Market or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of
our ADSs in the United States.
Risks Related to Our ADSs
The trading price of our ADSs may be volatile, which could result in substantial losses to investors.
Since our ADSs became listed on the Nasdaq Global Select Market on July 26, 2018, the trading price of our ADSs
has ranged from US$16.53 to US$202.82 per ADS. The trading price of our ADSs may be volatile and could fluctuate
widely due to factors beyond our control. This may happen because of broad market and industry factors, including the
performance and fluctuation of the market prices of other companies with business operations located mainly in China that
have listed their securities in the United States. The trading performances of other Chinese companies’ securities, including
internet and e-commerce companies, may affect the attitudes of investors toward Chinese companies listed in the United
States, which consequently may impact the trading performance of our ADSs, regardless of our actual operating
performance. In addition, any negative news or perceptions about inadequate corporate governance practices or fraudulent
accounting, corporate structure or matters of other Chinese companies may also negatively affect the attitudes of investors
towards Chinese companies in general, including us, regardless of our conduct. In addition, securities markets may from
time to time experience significant price and volume fluctuations that are not related to our operating performance, such as
the recent large decline in share prices in the United States, which may have a material and adverse effect on the trading
price of our ADSs. In addition to market and industry factors, the price and trading volume for our ADSs may be highly
volatile for factors specific to our own operations, including the following:
● variations in our revenues, earnings and cash flow;
● announcements of new investments, acquisitions, strategic partnerships or joint ventures by us or our competitors;
● announcements of new offerings, solutions and expansions by us or our competitors;
● changes in financial estimates by securities analysts;
● detrimental adverse publicity about us, our brand, our services or our industry;
● additions or departures of key personnel;
● release of lock-up or other transfer restrictions on our outstanding equity securities or sales of additional equity
securities;
● convertible arbitrage strategy employed by certain investors in the convertible notes offered in the 2024 Notes
and/or the 2025 Notes, including related short selling of our ADS; and
● potential litigation or regulatory investigations.
Any of these factors may result in large and sudden changes in the volume and price at which our ADSs will trade.
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In the past, shareholders of public companies have often brought securities class action suits against those companies
following periods of instability in the market price of their securities, such as the putative class action lawsuits we
disclosed in the “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal
Proceedings”. These putative class action suits could divert a significant amount of our management’s attention and other
resources from our business and operations and require us to incur significant expenses to defend the suits, which could
harm our results of operations. Moreover, these class action suits, whether or not successful, could harm our reputation and
restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required
to pay significant damages or indemnification claims, which could have a material adverse effect on our financial condition
and results of operations.
Conversion of the 2024 Notes or the 2025 Notes may dilute the ownership interest of the existing shareholders,
including holders who had previously converted their 2024 Notes or 2025 Notes.
The conversion of some or all of the 2024 Notes and/or the 2025 Notes, will dilute the ownership interests of existing
shareholders and existing holders of our ADSs. Any sales in the public market of the ADSs, if any, issuable upon such
conversion may increase the opportunities to create short positions with respect to the ADSs, which could adversely affect
prevailing market prices of our ADSs. In addition, the existence of the 2024 Notes and/or the 2025 Notes may encourage
short selling by market participants because the conversion of the 2024 Notes and/or the 2025 Notes could depress the
price of our ADSs. The price of our ADSs could be affected by possible sales of our ADSs by investors who view the 2024
Notes and/or the 2025 Notes as a more attractive means of equity participation in us and by hedging or arbitrage trading
activity, which we expect to occur involving our ADSs.
If securities or industry analysts do not publish research or reports about our business, or if they adversely change their
recommendations regarding our ADSs, the market price for our ADSs and trading volume could decline.
The trading market for our ADSs will be influenced by research or reports that industry or securities analysts publish
about our business. If one or more analysts who cover us downgrade our ADSs, the market price for our ADSs would
likely decline. If one or more of these analysts cease to cover us or fail to regularly publish reports on us, we could lose
visibility in the financial markets, which in turn could cause the market price or trading volume for our ADSs to decline.
Techniques employed by short sellers may drive down the market price of the ADSs.
Short selling is the practice of selling securities that a seller does not own but rather has borrowed from a third party
with the intention of buying identical securities back at a later date to return to the lender. Short sellers hope to profit from
a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement
shares, as short sellers expect to pay less in that purchase than they received in the sale. As it is in short sellers’ interest for
the price of the security to decline, many short sellers publish, or arrange for the publication of, negative opinions and
allegations regarding the relevant issuer and its business prospects in order to create negative market momentum and
generate profits for themselves after selling a security short. These short attacks have, in the past, led to selling of shares in
the market.
We have been the subject of short selling, and it is not clear what long-term effect such negative publicity could have
on us. We may also be subject to short seller attacks from time to time in the future. If we were to become the subject of
any unfavorable allegations, whether such allegations are proven to be true or untrue, we may have to expend a significant
amount of resources to investigate such allegations and/or defend ourselves. While we would strongly defend against any
such short seller attacks, we may be constrained in the manner in which we can proceed against the relevant short sellers by
principles of freedom of speech, applicable state law or issues of commercial confidentiality. Such a situation could be
costly and time-consuming, and could divert management’s attention from the day-to-day operations of our company. Even
if such allegations are ultimately proven to be groundless, allegations against us could severely impact the market price of
our ADSs and our business operations.
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The sale or availability for sale of substantial amounts of our ADSs could adversely affect their market price.
Sales of substantial amounts of our ADSs in the public market or the perception that these sales could occur, could
adversely affect the market price of our ADSs and could materially impair our ability to raise capital through equity
offerings in the future. We cannot predict what effect, if any, market sales of securities held by our significant shareholders
or any other shareholder or the availability of these securities for future sale will have on the market price of our ADSs.
Because we do not expect to pay dividends in the foreseeable future, you must rely on a price appreciation of our ADSs
for return on your investment.
We currently intend to retain most, if not all, of our available funds and any future earnings to fund the development
and growth of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore,
you should not rely on an investment in our ADSs as a source for any future dividend income.
Our board of directors has complete discretion as to whether to distribute dividends, subject to certain requirements of
Cayman Islands law. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may
exceed the amount recommended by our directors. Under Cayman Islands law, a Cayman Islands company may pay a
dividend out of either profit or share premium account, provided that in no circumstances may a dividend be paid if this
would result in the company being unable to pay its debts as they fall due in the ordinary course of business. Even if our
board of directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will
depend on our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions,
if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed
relevant by our board of directors. Accordingly, the return on your investment in our ADSs will likely depend entirely upon
any future price appreciation of our ADSs. There is no guarantee that our ADSs will appreciate in value or even maintain
the price at which you purchased the ADSs. You may not realize a return on your investment in our ADSs and you may
even lose your entire investment in our ADSs.
Our memorandum and articles of association contain anti-takeover provisions that could have a material adverse effect
on the rights of holders of our ordinary shares and ADSs.
Our currently effective memorandum and articles of association contain provisions to limit the ability of others to
acquire control of our company or cause us to engage in change-of-control transactions. These provisions could have the
effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by
discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. Our board
of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and
to fix their designations, powers, preferences, privileges, and relative participating, optional or special rights and the
qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption
and liquidation preferences, any or all of which may be greater than the rights associated with our ordinary shares, in the
form of ADS or otherwise. Preferred shares could be issued quickly with terms calculated to delay or prevent a change in
control of our company or make removal of management more difficult. If our board of directors decides to issue preferred
shares, the price of our ADSs may fall and the voting and other rights of the holders of our ordinary shares and ADSs may
be materially and adversely affected.
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You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be
limited, because we are incorporated under Cayman Islands law.
We are an exempted company incorporated under the laws of the Cayman Islands. Our corporate affairs are governed
by our memorandum and articles of association, the Companies Act (2021 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 our minority
shareholders and the fiduciary duties 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 the common law of England, the decisions of whose courts are of
persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary
duties 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. In particular, the Cayman Islands has a less developed body of
securities laws than the United States. Some U.S. states, such as Delaware, have more fully developed and judicially
interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have
standing to initiate a shareholder derivative action in a federal court of the United States.
Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to
inspect corporate records (except the memorandum and articles of association) or to obtain copies of lists of shareholders
of these companies. Our directors have discretion under our currently effective articles of association to determine whether
or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make
them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish
any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy
contest.
As a result of all of the above, our public shareholders may have more difficulty in protecting their interests in the face
of actions taken by management, members of the board of directors or controlling shareholders than they would as public
shareholders of a company incorporated in the United States.
It may be difficult for overseas regulators to conduct investigations or collect evidence within China.
Shareholder claims or regulatory investigation that are common in the United States generally are difficult to pursue as
a matter of law or practicality in China. For example, in China, there are significant legal and other obstacles to providing
information needed for regulatory investigations or litigation initiated outside China. Although the authorities in China may
establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region to
implement cross-border supervision and administration, such cooperation with the securities regulatory authorities in the
Unities States may not be efficient in the absence of mutual and practical cooperation mechanism. Furthermore, according
to Article 177 of the PRC Securities Law, or Article 177, which became effective in March 2020, no overseas securities
regulator is allowed to directly conduct investigations or evidence collection activities within the territory of the PRC.
While detailed interpretation of or implementation rules under Article 177 have yet to be promulgated, the inability for an
overseas securities regulator to directly conduct investigations or evidence collection activities within China may further
increase difficulties faced by you in protecting your interests.
ADSs holders may not be entitled to a jury trial with respect to claims arising under the deposit agreements, which could
result in less favorable outcomes to the plaintiff(s) in any such action.
The deposit agreements governing the ADSs representing our ordinary shares provide that, subject to the depositary’s
right to require a claim to be submitted to arbitration, the federal or state courts in the City of New York have exclusive
jurisdiction to hear and determine claims arising under the deposit agreements and in that regard, to the fullest extent
permitted by law, ADS holders waive the right to a jury trial of any claim they may have against us or the depositary
arising out of or relating to our shares, the ADSs or the deposit agreements, including any claim under the U.S. federal
securities laws.
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If we or the depositary opposed a jury trial demand based on the waiver, the court would determine whether the waiver
was enforceable based on the facts and circumstances of that case in accordance with the applicable U.S. state and federal
law. To our knowledge, the enforceability of a contractual pre-dispute jury trial waiver in connection with claims arising
under the U.S. federal securities laws has not been finally adjudicated by the United States Supreme Court. However, based
on past court decisions, we believe that a contractual pre-dispute jury trial waiver provision is generally enforceable,
including under the laws of the State of New York, which govern the deposit agreements. In determining whether to
enforce a contractual pre-dispute jury trial waiver provision, courts will generally consider whether a party knowingly,
intelligently and voluntarily waived the right to a jury trial. We believe that this is the case with respect to the deposit
agreements and the ADSs. It is advisable that you consult legal counsel regarding the jury waiver provision under the
deposit agreements before investing in the ADSs.
If you or any other holders or beneficial owners of ADSs bring a claim against us or the depositary in connection with
matters arising under the deposit agreements or the ADSs, including claims under U.S. federal securities laws, you or such
other holder or beneficial owner may not be entitled to a jury trial with respect to such claims, which may have the effect of
limiting and discouraging lawsuits against us and/or the depositary. If a lawsuit is brought against us and/or the depositary
under the deposit agreements, it may be heard only by a judge or justice of the applicable trial court, which would be
conducted according to different civil procedures and may result in different outcomes than a trial by jury would have had,
including results that could be less favorable to the plaintiff(s) in any such action.
Nevertheless, if this jury trial waiver provision is not enforced, to the extent a court action proceeds, it would proceed
under the terms of the deposit agreements with a jury trial. No condition, stipulation or provision of the deposit agreements
or ADSs serves as a waiver by any holder or beneficial owner of ADSs or by us or the depositary of compliance with the
U.S. federal securities laws and the rules and regulations promulgated thereunder.
Certain judgments obtained against us by our shareholders may not be enforceable.
We are a Cayman Islands exempted company and substantially all of our assets are located outside of the United
States. Substantially all of our current operations are conducted in China. In addition, most of our current directors and
officers are nationals and residents of countries other than the United States. Substantially all of the assets of these persons
are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or
against these individuals in the United States in the event that you believe that your rights have been infringed under the
U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the
Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors
and officers.
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The voting rights of holders of ADSs are limited by the terms of the deposit agreements, and you may not be able to
exercise your right to vote your Class A ordinary shares.
Holders of ADSs do not have the same rights as our registered shareholders. As a holder of our ADSs, you will not
have any direct right to attend general meetings of our shareholders or to cast any votes at such meetings. As an ADS
holder, you will only be able to exercise the voting rights carried by the underlying Class A ordinary shares represented by
your ADSs indirectly by giving voting instructions to the depositary in accordance with the provisions of the relevant
deposit agreement. Under the deposit agreements, you may vote only by giving voting instructions to the depositary. Upon
receipt of your voting instructions, the depositary will try, as far as is practicable, to vote the underlying Class A ordinary
shares represented by your ADSs in accordance with your instructions. If we ask for your instructions, then upon receipt of
your voting instructions, the depositary will try to vote the underlying Class A ordinary shares represented by your ADSs
in accordance with these instructions. If we do not instruct the depositary to ask for your instructions, the depositary may
still vote in accordance with instructions you give, but it is not required to do so. You will not be able to directly exercise
your right to vote with respect to the underlying Class A ordinary shares represented by your ADSs unless you withdraw
such shares, and become the registered holder of such shares prior to the record date for the general meeting. When a
general meeting is convened, you may not receive sufficient advance notice of the meeting to withdraw the underlying
Class A ordinary shares represented by your ADSs and become the registered holder of such shares to allow you to attend
the general meeting and to vote directly with respect to any specific matter or resolution to be considered and voted upon at
the general meeting. In addition, under our currently effective memorandum and articles of association, for the purposes of
determining those shareholders who are entitled to attend and vote at any general meeting, our directors may close our
register of members and/or fix in advance a record date for such meeting, and such closure of our register of members or
the setting of such a record date may prevent you from withdrawing the underlying Class A ordinary shares represented by
your ADSs and becoming the registered holder of such shares prior to the record date, so that you would not be able to
attend the general meeting or to vote directly. If we ask for your instructions, the depositary will notify you of the
upcoming vote and will arrange to deliver our voting materials to you. We have agreed to give the depositary notice of
shareholder meetings sufficiently in advance of such meetings. Nevertheless, we cannot assure you that you will receive
the voting materials in time to ensure that you can instruct the depositary to vote the underlying Class A ordinary shares
represented by your ADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting
instructions or for their manner of carrying out your voting instructions. The deposit agreements provide that if the
depositary does not timely receive voting instructions from the ADS holders and if voting is by poll, then such holder shall
be deemed, and the depositary shall deem such holder, to have instructed the depositary to give a discretionary proxy to a
person designated by us to vote the underlying Class A ordinary shares represented by the relevant ADSs, with certain
limited exceptions. This means that you may not be able to exercise your right to direct how the underlying Class A
ordinary shares represented by your ADSs are voted and you may have no legal remedy if the underlying Class A ordinary
shares represented your ADSs are not voted as you requested.
You may experience dilution of your holdings due to the inability to participate in future rights offerings.
We may, from time to time, distribute rights to our shareholders, including rights to acquire securities. Under the
deposit agreements, the depositary will not distribute rights to holders of ADSs unless the distribution and sale of rights
and the securities to which these rights relate are either exempt from registration under the Securities Act with respect to all
holders of ADSs, or are registered under the provisions of the Securities Act. The depositary may, but is not required to,
attempt to sell these undistributed rights to third parties, and may allow the rights to lapse. We may be unable to establish
an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement with
respect to these rights or underlying securities or to endeavor to have a registration statement declared effective.
Accordingly, holders of ADSs may be unable to participate in our rights offerings and may experience dilution of their
holdings as a result.
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You may be subject to limitations on the transfer of your ADSs.
Your ADSs are transferable on the books of the depositary. However, the depositary may close its books at any time or
from time to time when it deems it expedient in connection with the performance of its duties. The depositary may close its
books from time to time for a number of reasons, including in connection with corporate events such as a rights offering,
during which time the depositary needs to maintain an exact number of ADS holders on its books for a specified period.
The depositary may also close its books in emergencies, and on weekends and public holidays. The depositary may refuse
to deliver, transfer or register transfers of our ADSs generally when our share register or the books of the depositary are
closed, or at any time if we or the depositary thinks it is 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, or for any other reason.
Your investment in our ADSs may be impacted if we are encouraged to issue CDRs in the future.
The Chinese central government is currently proposing new rules that would allow Chinese technology companies
listed outside China to list on the mainland stock market through the creation of CDRs. Once the CDR mechanism is in
place, we might consider and be encouraged by the evolving Chinese governmental policies to issue CDRs and allow
investors to trade our CDRs on Chinese stock exchanges. However, there are uncertainties as to whether a pursuit of CDRs
in China would bring positive or negative impact on your investment in our ADSs.
We may incur increased costs as a result of being a public company.
As a public company, we incur significant accounting, legal and other expenses. The Sarbanes-Oxley Act, as well as
rules subsequently implemented by the SEC and Nasdaq, have detailed requirements concerning corporate governance
practices of public companies, including Section 404 of the Sarbanes-Oxley Act relating to internal controls over financial
reporting. We expect to incur significant expenses and devote substantial management effort toward ensuring compliance
with the requirements of Section 404 of the Sarbanes-Oxley Act and the other rules and regulations of the SEC, for
example, adoption of policies regarding internal controls and disclosure controls and procedures. In addition, we incur
additional costs associated with our public company reporting requirements. We cannot predict or estimate with certainty
the amount of compliance costs we may incur or the timing of such costs.
As an exempted company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices
in relation to corporate governance matters that differ significantly from the Nasdaq corporate governance listing
standards; these practices may afford less protection to shareholders than they would enjoy if we complied fully with the
Nasdaq corporate governance listing standards.
As a Cayman Islands exempted company listed on the Nasdaq Global Select Market, we are subject to the Nasdaq
Stock Market corporate governance listing standards. However, Nasdaq Stock Market rules permit a foreign private issuer
like us to follow the corporate governance practices of its home country. Certain corporate governance practices in the
Cayman Islands, which is our home country, may differ significantly from the Nasdaq Stock Market corporate governance
listing standards. We relied on home country practice exemption with respect to the requirement for annual shareholders
meeting and did not hold an annual shareholders meeting in 2019. We relied on our home country practice exemption with
respect to the requirement for shareholders’ approval for amending share incentive plans and did not seek shareholders’
approval for the amendment to the 2018 Plan to increase the annual increase percentage from 1.0% to 3.0% effective from
the fiscal year beginning January 1, 2022. We may also opt to rely on additional home country practice exemptions in the
future. As a result, our shareholders may be afforded less protection than they would otherwise enjoy under the Nasdaq
Stock Market corporate governance listing standards applicable to U.S. domestic issuers.
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There can be no assurance that we will not be classified as a passive foreign investment company, or PFIC, for U.S.
federal income tax purposes for any taxable year, which could subject U.S. investors in our ADSs or Class A ordinary
shares to significant adverse U.S. income tax consequences.
We will be a “passive foreign investment company,” or “PFIC,” if, in any particular taxable year, either (a) 75% or
more of our gross income for such year consists of certain types of “passive” income or (b) 50% or more of the value of
our assets (generally determined on the basis of a quarterly average) during such year produce or are held for the
production of passive income. Although the law in this regard is unclear, we intend to treat our VIE (including its
subsidiaries) as being owned by us for U.S. federal income tax purposes, not only because we exercise effective control
over the operation of such entity but also because we are entitled to substantially all of its economic benefits, and, as a
result, we consolidate its results of operations in our consolidated financial statements. Assuming that we are the owner of
our VIE (including its subsidiaries) for U.S. federal income tax purposes, we do not believe that we were a PFIC for the
taxable year ended December 31, 2020 and based upon our current and expected income and assets, including goodwill,
and the current and projected value of our ADSs, we do not expect to be a PFIC in the current taxable year or for the
foreseeable future.
While we do not anticipate becoming a PFIC, changes in the nature of our income or assets, or fluctuations in the
market price of our Class A ordinary shares and/or ADSs, may cause us to become a PFIC for future taxable years. If it
were determined that we do not own the stock of our VIE for U.S. federal income tax purposes, our risk of being a PFIC
may substantially increase. Because PFIC status is a factual determination made annually after the close of each taxable
year, there can be no assurance that we will not be a PFIC for the current taxable year or any future taxable year.
If we are a PFIC in any taxable year, a U.S. holder (as defined in “Item 10. Additional Information—E. Taxation
—U.S. Federal Income Tax Considerations”) may incur significantly increased U.S. income tax on gain recognized on
the sale or other disposition of the ADSs or Class A ordinary shares and on the receipt of distributions on the ADSs or
Class A ordinary shares to the extent such gain or distribution is treated as an “excess distribution” under the U.S.
federal income tax rules and such holder may be subject to burdensome reporting requirements. Further, if we are a
PFIC for any year during which a U.S. holder holds our ADSs or Class A ordinary shares, we generally will continue
to be treated as a PFIC for all succeeding years during which such U.S. holder holds our ADSs or Class A ordinary
shares. For more information see “Item 10. Additional Information—E. Taxation—U.S. Federal Income Tax
Considerations—Passive Foreign Investment Company Considerations” in this annual report.
Item 4. Information on the Company
A. History and Development of the Company
We commenced our commercial operations in 2015 through Hangzhou Aimi Network Technology Co., Ltd., or
Hangzhou Aimi, and Shanghai Xunmeng Information Technology Co., Ltd., or Shanghai Xunmeng, in parallel. In
June 2016, to streamline the operations of these two companies, Hangzhou Aimi obtained 100% equity interest in Shanghai
Xunmeng, and Shanghai Xunmeng became a wholly-owned subsidiary of Hangzhou Aimi.
We incorporated Walnut Street Group Holding Limited under the laws of the Cayman Islands as our offshore holding
company in April 2015 to facilitate offshore financing. In the same month, we established HongKong Walnut Street
Limited, or Walnut HK, our wholly-owned Hong Kong subsidiary, and Walnut HK established a wholly-owned PRC
subsidiary, Hangzhou Weimi Network Technology Co., Ltd., or Hangzhou Weimi. Walnut HK established two additional
wholly-owned PRC subsidiaries, Walnut Street (Shanghai) Information Technology Co., Ltd. (formerly known as Shanghai
Pinduoduo Network Technology Co., Ltd.) and Shenzhen Qianhai Xinzhijiang Information Technology Co., Ltd., in
January 2018 and April 2018, respectively, which, together with Hangzhou Weimi, are referred to as our WFOEs in this
annual report. In July 2018, we renamed our company as Pinduoduo Inc.
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Due to restrictions imposed by PRC laws and regulations on foreign ownership of companies that engage in internet
and other related business, Hangzhou Weimi later entered into a series of contractual arrangements with Hangzhou Aimi,
which we refer to as our VIE in this annual report, and its shareholders. We depend on these contractual arrangements with
our VIE, in which we have no ownership interests, and its shareholders to conduct most aspects of our operation. We have
relied and expect to continue to rely on these contractual arrangements to conduct our business in China. The shareholders
of our VIE may have potential conflicts of interest with us. See “Item 3. Key Information—D. Risk Factors—Risks
Related to Our Corporate Structure—The shareholders of our VIE may have potential conflicts of interest with us, which
may materially and adversely affect our business and financial condition.”
Under PRC laws and regulations, our PRC subsidiaries may pay cash dividends to us out of their respective
accumulated profits. However, the ability of our PRC subsidiaries to make such distribution to us is subject to various PRC
laws and regulations, including the requirement to fund certain statutory funds, as well as potential restriction on currency
exchange and capital controls imposed by the PRC government. For more details, see “Item 3. Key Information—D. Risk
Factors—Risks Related to Doing Business in China—We may rely on dividends and other distributions on equity paid by
our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our
PRC subsidiaries to make payments to us could have a material and adverse effect on our ability to conduct our business”
and “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Relating to Dividend
Distributions.”
As a result of our direct ownership in our WFOEs and the variable interest entity contractual arrangements, we are
regarded as the primary beneficiary of our VIE. We treat it and its subsidiaries as our consolidated affiliated entities under
U.S. GAAP, and have consolidated the financial results of these entities in our consolidated financial statements in
accordance with U.S. GAAP.
On July 26, 2018, our ADSs commenced trading on the Nasdaq Global Select Market under the symbol “PDD.” We
raised approximately US$1.7 billion in net proceeds from the issuance of new shares from the initial public offering after
deducting underwriting commissions and the offering expenses payable by us. In February 2019, we completed a follow-on
public offering, and raised approximately US$1.2 billion in net proceeds after deducting underwriting discounts and
offering expenses payable by us. In September 2019, we completed an offering of US$1.0 billion in aggregate principal
amount of convertible senior notes due 2024. In April 2020, we raised US$1.1 billion in net proceeds from the private
placement of our Class A ordinary shares to certain long-term investors. In November 2020, we completed (i) an offering
of US$2.0 billion in aggregate principal amount of convertible senior notes due 2025, and (ii) a concurrent follow-on
public offering, which raised approximately US$4.1 billion in net proceeds after deducting underwriting discounts and
offering expenses payable by us. In December 2020, we raised US$500 million in net proceeds from the private placement
of our Class A ordinary shares to a global institutional investor.
Our principal executive offices are located at 28/F, No. 533 Loushanguan Road, Changning District, Shanghai,
People’s Republic of China. Our telephone number at this address is +86 21-52661300. Our registered office in the
Cayman Islands is located at the offices of Vistra (Cayman) Limited, P.O. Box 31119 Grand Pavilion, Hibiscus Way,
802 West Bay Road, Grand Cayman, KY1-1205, Cayman Islands. Our agent for service of process in the United States is
Puglisi & Associates, located at 850 Library Avenue, Suite 204, Newark, Delaware 19711.
B. Business Overview
Our Pinduoduo mobile platform provides buyers with a comprehensive selection of value-for-money merchandise
and fun and interactive shopping experiences. As a result of our innovative business model, we have been able to
quickly expand our buyer base and establish our brand recognition and market position. Our GMV in 2018, 2019 and
2020 was RMB471.6 billion, RMB1,006.6 billion and RMB1,667.6 billion (US$255.6 billion), respectively. In 2018,
2019 and 2020, the number of total orders placed on our Pinduoduo mobile platform reached 11.1 billion, 19.7 billion
and 38.3 billion, respectively.
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We pioneered an innovative “team purchase” model on our platform. Buyers can access our platform and make team
purchases by either visiting our platform directly or through popular social networks, such as Weixin and QQ. They are
encouraged to share product information on such social networks, and invite their friends, family and social contacts to
form a shopping team to enjoy the more attractive prices available under the “team purchase” option. As a result, buyers on
our platform actively introduce us and the products available on our platform to their friends, family and social contacts,
some of whom may be new to our platform. New buyers in turn further refer our platform to their broader family and social
networks, generating low-cost, effective and organic traffic and frequent interactions and leading to the exponential growth
of our buyer base. In 2018, 2019 and 2020, the number of active buyers on our platform reached 418.5 million, 585.2
million and 788.4 million, respectively.
Our active buyer base helps attract merchants to our platform, and the scale of our sales volume encourages merchants
to offer even more competitive prices and customized products and services to buyers, thus forming a virtuous cycle. In
2020, we had 8.6 million active merchants on our platform, offering a broad range of product categories.
Our “team purchase” model transforms online shopping into a dynamic social experience. We consciously build our
platform to resemble a “virtual bazaar” where buyers browse and explore a full spectrum of products while interacting with
one another. In contrast to the conventional search-based “inventory index” model, our platform brings out the fun and
excitement of discovery and shopping. This embedded social element fosters a highly engaged user base.
Not only is the “team purchase” model an efficient tool for user engagement and expansion, it also encourages users to
give feedback and actively participate in improving the supply chain efficiency of the retail market. Through demand
aggregation, user preferences and feedback can be channeled to merchants quickly and directly so that merchants can
adjust their product designs and production and sales plans accordingly. As a result, upstream suppliers who used to
manufacture for other brands joined our “New Brand” initiative and are transformed into manufacturers of their own
brands under the “C2M” (Consumer-to-Manufacturer) model.
We leveraged our platform and developed the “Internet + Agriculture” initiative to facilitate direct sales between
small-scale farmers and consumers. By making recommendations to consumers based on our understanding of their
shopping preferences, we are able to aggregate demand, thereby generating large volumes of orders for our farmer
merchants. The large demand helps the farmers to be less dependent on distributors and makes it possible for them to sell
directly to consumers, thereby improving the overall supply chain efficiency and reducing cost. Through such an initiative,
consumers get fresher and safer products for lower prices, while farmers earn more, which can be reinvested in their
farming practices and technology to further improve production efficiency and quality. We work with local governments
and academia to facilitate modernization of farming practices and improve production efficiency in rural China through our
“Duo Duo Farm” initiative. We also fund research and invest in technology in agriculture with the objective of improving
food production, quality control and food safety. In August 2020, we started Duo Duo Grocery, a next-day grocery pick-up
service that allows users to order groceries and related products online and collect goods the next day at nearby designated
pickup points.
We have experienced substantial growth since our inception in 2015. We currently generate revenues primarily from
online marketing services. Our revenues grew from RMB13,120.0 million in 2018 to RMB30,141.9 million in 2019, and
further to RMB59,491.9 million (US$9,117.5 million) in 2020. We incurred net loss of RMB10,217.1 million,
RMB6,967.6 million and RMB7,179.7 million (US$1,100.3 million) in 2018, 2019 and 2020, respectively.
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Our Platform
We conduct our business primarily through our Pinduoduo mobile platform. Buyers come to our platform to browse,
explore and purchase attractive value-for-money merchandise from third-party merchants. The scale of our sales volume
attracted merchants to our platform, and encouraged them to offer more competitive prices and customized products and
services to buyers. Since our inception, the number of our active buyers and active merchants grew exponentially, and
reached approximately 788.4 million and 8.6 million, respectively, in 2020. In 2018, 2019 and 2020, the number of total
orders placed on our Pinduoduo mobile platform reached 11.1 billion, 19.7 billion and 38.3 billion, respectively.
Our platform offers “individual purchase” and “team purchase” options. A buyer who opts for the individual purchase
option places the order or transacts with a merchant on an individual basis to get speedier order confirmation whereas team
purchase buyers combine their purchase orders for a particular merchandise with other buyers to enjoy a lower price.
Merchants on our platform typically require at least two buyers to team up in order to take advantage of the “team
purchase” option.
With the seamless integration of our platform with major social networks in China, such as Weixin and QQ, our buyers
can quickly and smoothly find other potential buyers to form teams either directly on our app or through sending team
purchase invitations, or sharing product information or their Pinduoduo shopping experiences with their friends, family and
social contacts. The act of sharing is then rewarded by the more attractive purchase price offered through the team purchase
option. The embedded social element helps foster a highly engaged user base.
We cooperate with leading third-party online payment service providers in China, including Weixin Pay, QQ Wallet,
Alipay and Apple Pay, and enable our buyers to make payments for their purchases easily and efficiently. We do not
depend on any particular provider for such services.
Upon an individual purchase order or once a team purchase order is formed on our platform and confirmed to the
applicable merchant, the merchant will handle the fulfillment, select the most suitable third-party logistics service provider
and arrange for the delivery of products to the buyers. In order to provide our merchants a more efficient integration with
third-party logistics service providers, and to provide our buyers greater visibility on the delivery statuses of their purchase
orders, we launched our proprietary e-waybill system in the first quarter of 2019. Our e-waybill system is a paperless,
digital platform that automates the bulk printing of shipment labels, track and record orders fulfillment history and
shipment status, and generate real-time shipment tracking and alerts for our buyers. Most of China’s major third-party
logistics service providers have integrated their backend systems with our e-waybill system. Most of our merchants now
use our e-waybill system to initiate shipment orders with the third-party logistics service providers they select.
Our Buyers
Direct buyer traffic to our platform is primarily generated from word-of-mouth referrals by our existing buyers as well
as the effect of our marketing campaigns. A portion of our buyer traffic comes from our user recommendation or product
introduction feature which buyers can share with friends or contacts through social networks such as Weixin and QQ. In
addition, buyers may also access our platform and make purchases via our mini-program within Weixin. The user interface
of our mini-program is substantially identical to our own mobile app with the same product offerings by the same
merchants.
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Our Merchandise Selection
We provide a comprehensive suite of product categories on our platform, including apparel, shoes, bags, mother and
childcare products, food and beverage, fresh produce, electronic appliances, furniture and household goods, cosmetics and
other personal care items, sports and fitness items and auto accessories. Our GMV in 2018, 2019 and 2020 was RMB471.6
billion, RMB1,006.6 billion and RMB1,667.6 billion (US$255.6 billion), respectively. In 2020, our platform had 8.6
million active merchants.
Merchants on our platform set the price for their products. We encourage merchants to offer the most attractive prices
for merchandise sold on our platform. Two listed prices typically apply to each merchandise, one for the individual
purchase option and a lower price for the team purchase option. Due to the large sales volume generated on our platform,
some of the merchants on our platform also set aside exclusive product supplies for us and offer the most competitive
prices for our buyers.
At the same time, we implement strict policies and control measures aimed at ensuring the accuracy of product
descriptions on our platform. Our merchant onboarding system is integrated with an identity verification system. After a
merchant undergoes our registration process and is admitted to our platform but before it is allowed to place any
merchandise on our platform or launch a sales event, it must make a deposit to guarantee its compliance with our
platform’s policies and rules, and the amount of such deposit varies depending on merchant type and merchandise category.
Before the product information is posted on our platform, we leverage our artificial intelligence-based screening system to
identify potential issues and submit questionable merchandise for further review and verification. After product
information is posted, our system continues to monitor and conduct semantic analysis on buyer reviews, the results of
which are used as inputs for evaluation of the associated merchant’s compliance with our policies. If a merchant is found to
have violated our policies, such merchant is required to compensate the buyers in accordance with the service agreement
with the merchant on our platform. In addition to responding to buyer complaints, our dedicated merchandise control team
also conducts sample test purchases to verify whether product descriptions match the products delivered. A merchant’s
record of compliance, together with other factors such as its sales volume and buyer feedback and reviews, is taken into
account when our platform compiles such merchant’s ranking, which may affect the level of exposure it receives on our
platform and in turn may affect its sales volume. We invest in technical capabilities relating to keyword identification,
filtering images, text and video recognition and the development of a blacklisting mechanism. We also reward merchants
who sell high-quality products and provide superb services with preferential transaction services fee rates, as part of our
continued efforts to improve user experience, thereby creating a virtuous cycle that attracts high-quality merchants and
weeds out counterfeit and infringing goods.
Additionally, we require merchants on our platform to strictly abide by a seven-day return period policy for
nonperishable products sold by them on our platform. In accordance with the policy, buyers can return the products within
the period so long as the products are in their original condition and any usage of such products does not affect the
merchants’ ability to resell. Once a buyer submits a return request, the relevant merchant will first review and process the
request. In the event that the request cannot be resolved within 48 hours or a dispute escalates, we will be involved to
resolve the request or dispute.
Our Services and Values to Merchants
We provide online marketing services to help merchants promote their merchandise more effectively and also offer
them additional training resources and merchant support through Duo Duo University. Duo Duo University is easily
accessible through our main merchant dashboard and is frequently updated to guide merchants through the various tools
available to them on our platform.
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“New Brand” Initiative
In December 2018, we established a “New Brand” initiative to help upstream suppliers, primarily manufacturers, to
launch their own brands. By leveraging the traffic on our platform and directing users to discover these value-for-money
products, we are able to jump-start the growth of these domestic brands with a steady source of demand. With larger order
volumes, these manufacturers are able to realize greater economies of scale and can re-invest those savings by sharing
them with consumers or putting them into product development and marketing to build awareness of their own brands. Our
platform also channel consumer feedback to manufacturers, giving them guidance on emerging trends and consumer
preferences and helping them manage their inventory or improve product designs. In the first phase of the program, we
worked with more than 1,500 suppliers, launched more than 4,000 products and generated over 460 million cumulative
orders.
Digitizing Agriculture
Under our “Internet + Agriculture” initiative, we leverage our platform to facilitate direct sales between farmers and
consumers. By making recommendations to consumers based on our understanding of their shopping preferences, we are
able to aggregate demand, thereby generating large volumes of orders for our farmer merchants. The aggregated demand
helps them to be less dependent on distributors and makes it possible for them to sell directly to consumers, thereby
improving the overall supply chain efficiency and reducing cost.
Through such an initiative, consumers get fresher and safer products for lower prices while farmers earn more, which
can be reinvested in their farming practices and technology to further improve production efficiency and quality. This
market we created for fresh produce will also enable the logistics companies to optimize their procedures for delivering
fresh produce and reduce spoilage during the delivery process, resulting in savings along the supply chain.
We continue to focus on digitization of China’s agriculture value chain as a long-term strategic priority. Our aim is to
drive further e-commerce penetration in this segment by improving the efficiencies across the entire value chain and to
generate sustainable value to our consumers, our farmer merchants and other ecosystem partners. We take a systems-based
approach to this and view the entire agricultural value chain in three key parts: upstream production, midstream
transportation and downstream consumption.
At the upstream, we work with farmers and local partners to reorganize small-scale farms into co-operatives and
introduce know-how and technology in sustainable and precision farming to achieve better efficiency and economies of
scale. At the midstream, we continue to explore potential collaboration with logistics companies to develop a nationwide
logistics network optimized for the delivery of perishable agricultural goods. At the downstream, we help farmers sell
directly to our users and provide trainings to farmers on operating online agriculture business. We seek to create long-term
structural changes that would improve our users’ experience in buying agricultural products online and contribute to the
value creation of the agriculture industry.
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Duo Duo Grocery
In August 2020, we started Duo Duo Grocery, our next-day grocery pick-up service. The service caters to the rising
consumer demand for more timely and better value-for-money goods without home delivery requirements. Through Duo
Duo Grocery, we connect local farmers and distributors directly to local consumers on a daily basis and provide supporting
services on the delivery of such goods to consumers. Each day consumers place their orders with merchants through the
Duo Duo Grocery channel. The merchants supply the ordered items overnight to regional warehouses. The sorted goods
are then delivered from regional warehouses to designated pickup points the next day, where consumers can pick up their
purchases.
Technology
Our smooth operations and rapid growth are supported by our proprietary technology. Our leading technology team
have created opportunities for continuous improvements in our technology capabilities, which in turn draws new talents to
join us. As of December 31, 2020, we had a technology team of more than 4,800 engineers. Many of our engineers have
post-graduate degrees and had prior working experience in Google, Microsoft and leading internet companies in China.
Data Security and Protection
We have established a comprehensive security system, supported by our network situational awareness and risk
management system that spans from the individual end users across our entire network, covering our platforms, data and
services. Our back-end security system is capable of handling hundreds of millions of instances of malicious attacks each
day to safeguard the security of our platform and to protect the privacy of our buyers and merchants.
We have a data security team of engineers and technicians dedicated to protecting the security of our data. We have
also adopted strict data protection policy to ensure the security of our proprietary data. We collect anonymized, non-
confidential user behavior and pattern data based on their interactions with our platform through our social network
partners, which have been pre-processed to exclude user identity or other sensitive information. We encrypt confidential
personal information we gather from our own platform. To ensure data security and avoid data leakage, we have
established stringent internal protocols under which we grant classified access to confidential personal data only to limited
employees with strictly defined and layered access authority. We strictly control and manage the use of data within our
various departments and do not share data with external third parties, nor do we cooperate with third-party vendors in data
analytics efforts.
Marketing
We have been able to build a large base of loyal buyers primarily through word-of-mouth referrals via social networks.
To enhance our brand awareness, we conduct online and offline marketing and brand promotion activities such as online
advertisements and television commercials. Furthermore, we offer coupons to consumers from time to time.
Competition
The e-commerce industry in China is intensely competitive. Our current or potential competitors include (i) major e-
commerce companies in China, (ii) major traditional and brick-and-mortar retailers in China, (iii) retail companies in China
focused on specific product categories and (iv) major internet companies in China that do not operate e-commerce business
now but may enter the e-commerce business area or are in the process of initiating their e-commerce businesses.
We compete primarily on the basis of:
● our large and active buyer base;
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● the fun and interactive shopping experiences on our platform;
● our ability to seamlessly connect e-commerce with social networks;
● pricing of products sold on our platform;
● our ability to attract and retain merchants;
● product quality and selection;
● brand recognition and reputation; and
● the experience and expertise of our management team.
Seasonality
We experience seasonality in our business, reflecting a combination of seasonal fluctuations in internet usage and
traditional retail seasonality patterns. For example, we generally experience less buyer traffic and purchase orders during
the Chinese New Year holiday season in the first quarter of each year. Furthermore, sales are significantly higher in the
fourth quarter of each calendar year than in the preceding three quarters. E-commerce companies in China hold special
promotional campaigns on November 11 and December 12 each year that boost sales in the fourth quarter relative to other
quarters, and we hold a special promotional campaign in the fourth quarter of each year to celebrate the anniversary of the
founding of our platform. Due to our limited operating history, the seasonal trends that we have experienced in the past
may not apply to, or be indicative of, our future operating results.
Intellectual Property
As of December 31, 2020, we owned 51 computer software copyrights in China relating to various aspects of our
operations and maintained approximately 658 trademark registrations inside China and 56 trademark registrations outside
China. We also had 339 trademark applications inside China. Our registered domain names include www.pinduoduo.com,
among others.
Corporate Social Responsibility and Our Impact
Corporate social responsibility has been central to how we do business, starting with operating with integrity in all we
do and extending to serving the community at large in China. We are committed to leveraging our marketplace to better the
lives of millions and to promote sustainable development. In 2020, we supported our community of merchants and users
through the challenges imposed by the COVID-19 pandemic, and we contributed to the subsequent economic recovery. We
also continued our efforts to promote digital inclusion of rural communities around China and thereby helping to alleviate
poverty across the country.
Through our “Internet + Agriculture” initiative, our platform connects millions of farmers to the digital economy. We
coached farmers on setting up stores online, provided them with access to end demand, and helped them to increase their
household income. We trained young men and women from rural areas to become e-commerce savvy “new farmers.” Many
of them became champions for digital inclusion, often catalyzing a multiplier effect and wealth creation for their local
communities.
Our efforts in combating poverty through digital inclusion were recognized by China’s central government in February
2021, where we were one of three technology companies commended for their outstanding contributions to China’s
poverty alleviation drive. We expect to continue our efforts to promote digital inclusion of rural communities in 2021.
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Regulation
This section sets forth a summary of the most significant rules and regulations that affect our business and operations
in China or the rights of our shareholders to receive dividends and other distributions from us.
Regulations Relating to Foreign Investment
Guidance Catalogue of Industries for Foreign Investment
Investment activities in the PRC by foreign investors are in principal governed by the Guidance Catalogue of
Industries for Foreign Investment, which was promulgated and is amended from time to time by the Ministry of
Commerce, or MOFCOM, and the National Development and Reform Commission, or NDRC. Pursuant to relevant
regulations, foreign-invested projects are classified into three categories: “encouraged,” “restricted” and “prohibited.”
Industries not listed in these three categories are generally deemed as falling into a fourth category “permitted” unless
specifically restricted by other PRC laws. Formation of wholly foreign-owned enterprises is generally allowed in
encouraged and permitted industries. Some restricted industries are limited to equity or contractual joint ventures, and in
some cases Chinese partners are required to hold the majority interests in such joint ventures. In addition, foreign
investment in restricted category projects is subject to government approvals. Foreign investors are not allowed in
industries in the prohibited category.
In addition to restrictions on shareholding ownership by foreign investors, there are also requirements on corporate
governance practice, such as the composition of board or senior management. Foreign investment in value-added
telecommunications services (except for e-commerce, domestic multi-party communications, storage and forwarding
classes, and call centers) falls within a negative list, and foreign investors are not allowed to hold more than 50% of the
total shares in such business.
In October 2016, MOFCOM issued the Interim Measures for Record-filing Administration of the Establishment and
Change of Foreign-invested Enterprises, or FIE Record-filing Interim Measures. Pursuant to the latest FIE Record-filing
Interim Measures, except where a special approval is required, the formation of, and subsequent change made to foreign-
invested enterprises does not require pre-approval by the MOFCOM or its local counterpart and are only subject to record-
filing procedures as long as such action does not involve special entry administration measures. In December 2019, the
MOFCOM and the SAIC promulgated the Measures on Reporting of Foreign Investment Information, or the Foreign
Investment Information Measures, which became effective on January 1, 2020 and replaced the FIE Record-filing Interim
Measures. Pursuant to the Foreign Investment Information Measures, foreign investors and foreign-invested enterprises
shall submit investment information through the Enterprise Registration System and the National Enterprise Credit
Information Publicity System operated by the SAIC for their foreign investment directly or indirectly in the PRC.
Pursuant to the Provisions on Administration of Foreign-Invested Telecommunications Enterprises promulgated by the
State Council in December 2001 and most recently amended in February 2016, or the FITE Regulations, the ultimate
foreign equity ownership in a value-added telecommunications services provider may not exceed 50%. Moreover, foreign
investors need to meet a number of stringent requirements on historical performance and operation track record to be
qualified to acquire any equity interest in a value-added telecommunication business in China. Foreign investors that meet
these requirements must obtain approvals from the Ministry of Industry and Information Technology, or MIIT, and
MOFCOM or their authorized local counterparts, which retain considerable discretion in granting approvals. MIIT issued
the Circular on Strengthening the Administration of Foreign Investment in and Operation of Value-added
Telecommunications Business in July 2006. Under this circular from the MIIT Circular, a domestic company that holds an
telecommunications business operating licenses 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 that conduct value-added telecommunications business illegally in China.
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Pursuant to publicly available information, the PRC government has issued telecommunications business operating
licenses to only a limited number of FIEs, most of which are Sino-foreign joint ventures engaging in the value-added
telecommunication business. In June 2015, MIIT issued the Circular on Removing the Restrictions on Equity Ratio Held
by Foreign Investors in Online Data Processing and Transaction Processing (Operating E-Commerce) Business to amend
the relevant provisions in the FITE Regulations, allowing foreign investors to own more than 50% of equity interest in an
operator that “conducts e-commerce” business. However, other requirements provided by the Foreign Investment
Telecommunications Rules (such as the track record and experience requirement for a major foreign investor) still apply,
and foreign investors are still prohibited from holding more than 50% of equity interest in a provider of other subcategories
of value-added telecommunications services.
To comply with PRC laws and regulations, we rely on contractual arrangements with our VIE to operate our e-
commerce business in China. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure
—We rely on contractual arrangements with our VIE and its shareholders for a large portion of our business operations,
which may not be as effective as direct ownership in providing operational control.”
Foreign Investment Law
On March 15, 2019, the NPC approved the Foreign Investment Law, which took effect on January 1, 2020 and
replaced the Sino-Foreign Equity Joint Venture Enterprise Law, the Sino-Foreign Cooperative Joint Venture Enterprise
Law and the Foreign Owned Enterprise Law, together with their implementation rules and ancillary regulations. This new
law is now the foundation for regulation on foreign investments in China. The Foreign Investment Law implements a
system of pre-entry national treatment with a negative list for foreign investments, pursuant to which (i) foreign entities
and individuals are prohibited from investing in the areas that are not open to foreign investments, (ii) foreign investments
in the restricted industries must satisfy certain requirements under the law, and (iii) foreign investments in business sectors
outside of the negative list will be treated equally with domestic investments. The Foreign Investment Law stipulates three
forms of foreign investments, but does not explicitly name contractual arrangements as a form of foreign investments.
Notwithstanding the above, the Foreign Investment Law sets a very broad definition of “foreign investment” to catch any
activities where foreign investors investing in China through “any other methods” under laws, administrative regulations,
or provisions prescribed by the State Council. On December 26, 2019, the State Council promulgated the Implementation
Regulations on the Foreign Investment Law, which came into effect on January 1, 2020. However, the Implementation
Regulations on the Foreign Investment Law still remains silent on whether contractual arrangements should be deemed as a
form of foreign investment. Therefore, it still leaves leeway for future laws, administrative regulations or provisions
promulgated by the State Council to classify contractual arrangements as a form of foreign investments. In that case our
contractual arrangements might be deemed to be in violation of the foreign investment restriction. See “Item 3. Key
Information—D. Risk Factors—Risks Related to Our Corporate Structure—We face uncertainties with respect to the
implementation of the Foreign Investment Law and how it may impact the viability of our current corporate structure,
corporate governance and business operations.”
Licenses, Permits and Filings
The PRC government puts extensive regulation over the telecommunications industry, particularly the internet service
sector. The State Council, MIIT, MOFCOM, SAIC, the former State Administration of Press, Publication, Radio, Film and
Television (which has been replaced by the State Administration of Radio and Television), and other relevant government
authorities have promulgated an extensive regulatory scheme governing telecommunications, online sales and e-commerce.
New laws and regulations may be adopted from time to time that will require us to obtain additional licenses and permits in
addition to those that we currently have, and will require us to address new issues that arise from time to time. In addition,
uncertainties exist regarding the interpretation and implementation of current and any future PRC laws and regulations
applicable to the telecommunications, online sales and e-commerce. See “Item 3. Key Information—D. Risk Factors—
Risks Related to Our Business and Industry—Any lack of additional requisite approvals, licenses or permits required due
to regulatory changes of PRC governmental authorities or failure to comply with any requirements of PRC laws and
regulations may materially and adversely affect our daily operations and hinder our growth.”
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We are required to hold certain licenses and permits and to make certain filings with the relevant PRC governmental
authorities in connection with various aspects of our business, including the following:
Value-Added Telecommunication Business Operating Licenses
In September 2000, the Telecommunications Regulations of the People’s Republic of China were issued by the State
Council as the primary governing law on telecommunication services. The Telecom Regulations set out the general
framework for the provision of telecommunication services by PRC companies. Under the regulation, telecommunications
service providers are required to obtain operating licenses prior to commencement of operations. It draws a distinction
between “basic telecommunications services” and “value-added telecommunications services.” In December 2015, MIIT
released the Catalog of Telecommunication Business (2015 Revision), under which both the online data processing and
transaction processing business (i.e., operating e-commerce business) and information service business, were categorized
as value-added telecommunication services. This catalog further specifies the scope of information service business, which
covers information release and delivery services, information search and query services, information community platform
services, information real-time interactive services, and information protection and processing services.
In March 2009, MIIT issued the Administrative Measures for Telecommunications Business Operating Permit, which
confirm the two types of telecom operating licenses for operators in China, namely, licenses for basic telecommunications
services and licenses for value-added telecommunications services. The operation scope of the license will detail the
permitted activities of the enterprise to which it is granted. An approved telecommunication services operator shall conduct
its business in accordance with the specifications recorded on its value-added telecommunication business operating
licenses, or VATS Licenses. In addition, a VATS License holder is required to obtain approval from the original permit-
issuing authority before any change to its shareholders or business scope could occur. In February 2015, the State Council
has issued the Decisions on Cancelling and Adjusting a Batch of Administrative Approval Items, which, among others,
replaced the pre-registration approval requirement for telecommunications business with post-registration approval
requirement.
In September 2000, the State Council promulgated the Administrative Measures on Internet Information Services,
pursuant to which commercial internet content-related services operators shall obtain a VATS License for internet content
provision business, or the ICP License, from the relevant government authorities before engaging in any commercial
internet content-related services operations within China.
Our consolidated affiliated entity, Shanghai Xunmeng, the main operating entity which provides platform service to
third-party merchants for their sales of products, has obtained a VATS License for online data processing and transaction
processing business (operating e-commerce, excluding internet finance and e-hailing services) and internet information
services (excluding information search and inquiry services and real-time interactive information services) from Shanghai
Communications Administration, and this license will expire in August 2022. Another consolidated affiliated entity,
Hangzhou Aimi, has obtained a VATS License for online data processing and transaction processing business (operating e-
commerce, excluding internet finance and e-hailing services) and internet information services (excluding information
search and inquiry services and real-time interactive information services). The license was issued by Zhejiang
Communications Administration and is scheduled to expire in December 2025.
Internet Drug Information Service Qualification Certificate
The State Food and Drug Administration, or the SFDA (which has now been merged into SAIC), promulgated the
Administrative Measures on Internet Drug Information Service in July 2004 and certain implementing rules and notices
thereafter. These measures set out regulations governing the classification, application, approval, content, qualifications
and requirements for internet drug information services. An internet information service operator that provides information
regarding drugs or medical equipment must obtain an Internet Drug Information Service Qualification Certificate from the
province-level counterpart of the SFDA. Shanghai Xunmeng holds an Internet Drug Information Service Qualification
Certificate issued by the Shanghai Municipal Food and Drug Administration for the provision of internet medical
information services, and this license will remain valid until January 2022.
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Filing by Online Trading Platforms Providing Services for the Distribution of Publications
We are subject to regulations relating to online trading platform services provided for distribution of publications
including books and audio-video products. Pursuant to the Regulation on the Protection of the Right to Network
Dissemination of Information promulgated by the State Council, a network service provider of information storage,
searching and linking services, should remove the link to a work, performance or audio-video product if the work is
suspected of infringing on other’s right. The removal should take place promptly by the service provider upon receipt of a
notice alleging such infringement issued by the owner of such work or audio-video products. According to the Provisions
on the Administration of the Publication Market, an online trading platform that provides services for the distribution of
publications shall complete filing procedures with the competent publication administrative authority. An online trading
platform is required to examine the identity of the dealers distributing publications through the platform, verify their
business license and Publications Operation Permit, establish a mechanism to prevent and control the trading risks and take
effective measures to rectify illicit actions conducted by the dealers distributing publications on the platform. If any entity
subject to such requirements fails to complete the filing or fails to fulfill the relevant duties of examination and supervision
in accordance with this regulation, it may be subject to an order to cease illegal acts and a warning by the competent
publication administrative authority, as well as a penalty not exceeding RMB30,000. Shanghai Xunmeng has completed the
requisite procedures with the relevant publication authority.
Filing by Third-Party Platforms Providers for Medical Device Online Trading Services
The SFDA promulgated the Measures for the Supervision and Administration of Online Sale of Medical Devices in
December 2017, which became effective in March 2018. Pursuant to such measures, a third-party platform providing
online trading services for medical devices shall complete filing procedures with the competent provincial food and drug
administrative department. According to the measures, a third-party platform that fails to complete the filing in accordance
with the measures may be ordered by the competent provincial food and drug administrative department to make
rectification within a prescribed time limit, and failure to make such rectification may subject the platform to public
exposure of incompliance and a penalty of not exceeding RMB30,000. Shanghai Xunmeng has completed the requisite
procedures with the relevant administrative authority.
Filing by Third-Party Platform Providers for Online Food Trading
In July 2016, the SFDA promulgated the Measures for Investigation and Handling of Illegal Acts Involving Online
Food Safety, pursuant to which a third-party platform providing online food trading in the PRC shall file a record with the
food and drug administration at the provincial level and obtain a filing number. Where the platform fails to complete such
filing, it may be ordered to make rectifications and given a warning by the competent food and drug administration, and
failure to make such rectification may be subject to fines ranging from RMB5,000 to RMB30,000. Shanghai Xunmeng has
completed the requisite procedures with the competent food and drug administration.
Regulations Relating to E-Commerce
In January 2014, SAIC adopted the Administrative Measures for Online Trading, or the Online Trading Measures.
Under the Online Trading Measures, e-commerce platform operators shall examine and register the identity of the
merchants when such merchants apply for registration on their e-commerce platforms, review and update the identity
information regularly, and keep record of the identity information. It is further provided that e-commerce platform
operators shall make publicly available the link to, or the information contained, in the business licenses of such merchants
(if the merchants are business entities) or a label confirming the verified identity of the merchants (if the merchants are
individuals). A consumer is entitled to return the merchandise within seven days from the date after receipt of the
merchandise without a reason, except for customized products, fresh and perishable goods, audio-visual products
downloaded online or unpackaged by consumers, computer software and other digital products, and newspapers and
journals. Merchants shall, within seven days upon receipt of the returned merchandise, provide full refunds to consumers.
In addition, e-commerce platform operators shall not, through contractual terms or other means, set out the provisions that
are not fair or reasonable to consumers such as those that exclude or restrain consumers’ rights, relieve or exempt
operators’ responsibilities, and increase the consumers’ burdens, and shall not, through contractual terms or technical
means, conduct transactions in a forcible manner.
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In August 2018, the Standing Committee of the NPC promulgated the E-Commerce Law, which took effect in
January 2019. The E-commerce Law proposes a series of requirements on e-commerce operators including individuals and
entities carrying out business online, e-commerce platform operators and merchants on the platform. For example, the E-
Commerce Law requires e-commerce platform operators to respect and indiscriminately protect consumers’ legitimate
rights and provide options to consumers, and also requires e-commerce operators to clearly point out to consumers their
bundle sales in which additional services or products are added by merchants to a purchase, and not to assume consumers’
consent to such bundle sales by default. E-commerce platform operators are required under the E-Commerce Law to
establish a credit evaluation system and publicize the credit evaluation rules, and provide consumers with ways to evaluate
products sold or services provided on the platform. The E-Commerce Law also requires any e-commerce platform operator
to develop, and continuously publish or make publicly available by a prominent link on its home page, its platform service
agreement and transaction rules, specifying the rights and obligations of relevant parties with respect to registration and de-
registration on the platform, quality assurance and protection of consumer rights and personal information, and to ensure
convenient and full access to reading and downloading such service agreement and transaction rules by merchants and
consumers. Moreover, according to the E-Commerce Law, e-commerce platform operators, who fail to take necessary
actions when they know or should have known any intellectual property infringement, product defects or other
infringement of consumer rights by any merchant on the platform, will be imposed a joint liability with the merchants; with
respect to the products or services affecting consumers’ life and health, the e-commerce platform operators will bear
relevant responsibilities if they fail to review the qualifications of merchants or fail to safeguard the interests of the
consumers. In addition, the E-Commerce Law requires e-commerce operators, including individuals and entities carrying
out business online, e-commerce platform operators and merchants on these platforms, to display prominently on their
home page the information contained in their business licenses or administrative permits relating to their operating
businesses. Failure to take necessary actions against merchants on the e-commerce platforms that are not in compliance
with such requirements may subject the e-commerce platform operators to rectification within a specified period and a fine
between RMB20,000 and RMB100,000.
In December 2018, SAIC issued the “Opinions on Doing Well in E-Commerce Operator Registration,” which requires
e-commerce operators, including individuals and entities carrying out business online and e-commerce platform operators
and merchants on these platforms, to register with the local branches of SAIC. Individuals selling agricultural products or
conducting certain transactions with minimum economic value and low volume are not subject to these registration
requirements. Pursuant to these opinions, the e-commerce platform operators shall provide identity information of the
merchants on their platform to local branches of SAIC and prompt the merchants failing to make such registrations to
comply with the relevant registration requirements. Measures for the Supervision and Administration of Online
Transactions promulgated by SAMR in 2021 also require e-commerce platforms to timely remind individuals engaging in
online transaction activities across different platforms to register with local branches of SAMR if their cross-platform total
annual transaction volume exceeds RMB100,000.
In March 2016, the State Administration of Taxation, the Ministry of Finance and the General Administration of
Customs jointly issued the Circular on Tax Policy for Cross-Border E-commerce Retail Imports, which took effect in
April 2016. Pursuant to this circular, goods imported through the cross-border e-commerce retail are subject to tariff,
import value-added tax, or VAT, and consumption tax based on the types of goods. Individuals purchasing any goods
imported through cross-border e-commerce retail are taxpayers, and e-commerce companies, companies operating e-
commerce transaction platforms or logistic companies are required to withhold the taxes.
On November 12, 2020, the NRTA issued the Circular on Strengthening the Administration of Live Streaming, or the
Notice 78, which requires, among other things, platforms that provide live streaming to register their information and
business operations. Pursuant to the circular, internet platforms that operate live streaming business are subject to a series
of compliance requirements covering the areas of, among other things, maintenance of sufficient content review staff,
training and registration of the content review staff and dynamic adjustment of the content review protocols. Online e-
commerce live streaming platforms are required to design mechanisms for qualification verification and real-name
authentication of e-commerce business owners and individuals who conduct live streaming marketing on their platforms
and keep complete records.
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Regulations Relating to Internet Information Security and Privacy Protection
Internet information in China is regulated from a national security standpoint. The NPC has enacted the Decisions on
Preserving Internet Security, which subject violators to potential criminal punishment in China for any attempt 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 Ministry of
Public Security of the PRC has promulgated measures that prohibit use of the internet in ways which, among other things,
result in a leak of state secrets or a spread of socially destabilizing content. If an internet information service provider
violates these measures, the Ministry of Public Security and its local branches may revoke its operating license and shut
down its websites.
In recent years, PRC government authorities have enacted laws and regulations on internet use to protect personal
information from any unauthorized disclosure. Under the Several Provisions on Regulating the Market Order of Internet
Information Services issued by the MIIT, an internet information service provider may not collect any user personal
information or provide any such information to third parties without the consent of the user. An internet information
service provider must expressly inform the users of the method, content and purpose of the collection and processing of
such user personal information and may only collect such information necessary for the provision of its services. An
internet information service provider is also required to properly maintain the user’s personal information, and in case of
any leak or likely leak of the user’s personal information, the internet information service provider must take immediate
remedial measures and, in severe circumstances, immediately report to the telecommunications authority. Moreover,
pursuant to the Ninth Amendment to the Criminal Law issued by the Standing Committee of the NPC in August 2015, any
internet service provider that fails to fulfill the obligations related to internet information security administration as
required by applicable laws and refuses to rectify upon orders, shall be subject to criminal penalty for the result of (i) any
dissemination of illegal information in large scale; (ii) any severe effect due to the leakage of the client’s information;
(iii) any serious loss of criminal evidence; or (iv) other severe situation. Any individual or entity that (i) sells or provides
personal information to others in a way violating the applicable law, or (ii) steals or illegally obtains any personal
information, shall be subject to criminal penalty in severe situation. In addition, the Interpretations of the Supreme People’s
Court and the Supreme People’s Procuratorate of the PRC on Several Issues Concerning the Application of Law in
Handling Criminal Cases of Infringing Personal Information, issued in May 2017, clarified certain standards for the
conviction and sentencing of the criminals in relation to personal information infringement. Further, the NPC promulgated
a new National Security Law, effective July 2015, to replace the former National Security Law and covers various types of
national security including technology security and information security.
In addition, the Standing Committee of the NPC promulgated the Cyber Security Law of the People’s Republic of
China, or the Cyber Security Law, effective June 2017, to protect cyberspace security and order. Pursuant to the Cyber
Security Law, any individual or organization using the network must comply with the constitution and the applicable laws,
follow the public order and respect social moralities, and must not endanger cyber security, or leverage the network to
engage in activities that endanger the national security, honor and interests, or infringe on the fame, privacy, intellectual
property and other legitimate rights and interests of others. The Cyber Security Law sets forth various security protection
obligations for network operators, which are defined as “owners and administrators of networks and network service
providers”, including, among others, complying with a series of requirements of tiered cyber protection systems, verifying
users’ real identity, localizing the personal information and important data gathered and produced by key information
infrastructure operators during operations within the PRC, and providing assistance and support to government authorities
where necessary for protecting national security and investigating crimes. Furthermore, MIIT’s Rules on Protection of
Personal Information of Telecommunications and Internet Users promulgated in July 2013, effective September 2013,
contain detailed requirements on the use and collection of personal information as well as security measures required to be
taken by telecommunications business operators and internet information service providers. On November 28, 2019, the
Secretary Bureau of the Cyberspace Administration of China, the General Office of the MIIT, the General Office of the
Ministry of Public Security and the General Office of the State Administration for Market Regulation promulgated the
Identification Method of Illegal Collection and Use of Personal Information Through App, which provides guidance for
regulatory authorities to identify the illegal collection and use of personal information through mobile apps and for mobile
app operators to conduct self-examination and self-correction.
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Regulations Relating to Product Quality and Consumer Rights Protection
The PRC Consumer Rights and Interests Protection Law, as amended in and effective March 2014, and the Online
Trading Measures, have provided stringent requirements and obligations on business operators, including internet business
operators and platform service providers. For example, consumers are entitled to return goods purchased online, subject to
certain exceptions, within seven days upon receipt of such goods for no reason. To ensure that sellers and service providers
comply with these laws and regulations, the platform operators are required to implement rules governing transactions on
the platform, monitor the information posted by sellers and service providers, and report any violations by such sellers or
service providers to the relevant authorities. In addition, online marketplace platform providers may, pursuant to the
relevant PRC consumer protection laws, be exposed to liabilities if the lawful rights and interests of consumers are
infringed upon in connection with consumers’ purchase of goods or acceptance of services on online marketplace platforms
and the online marketplace platform providers fail to provide consumers with the contact information of the seller or
manufacturer. In addition, online marketplace platform providers may be jointly and severally liable with sellers and
manufacturers if they are aware or should be aware that any seller or manufacturer is using the online platform to infringe
upon the lawful rights and interests of consumers and fail to take measures necessary to prevent or stop such activity.
The Civil Code of the PRC, effective on January 1, 2021, also provides that if an online service provider is aware that
an online user is committing infringing activities, such as selling counterfeit products, through its internet services and fails
to take necessary measures, it shall be jointly liable with the said online user for such infringement. If the online service
provider receives any notice from the infringed party on any infringing activities, the online service provider shall take
necessary measures, including deleting, blocking and unlinking the infringing content, in a timely manner. Otherwise, it
will be held jointly liable with the relevant online user for the extended damages.
We are subject to the Civil Code of the PRC, the PRC Consumer Rights and Interests Protection Law, and the Online
Trading Measures as an e-commerce platform service provider and believe that we are currently in compliance with these
regulations in all material aspects.
Regulations Relating to Anti-unfair Competition and Anti-monopoly
On April 23, 2019, the Standing Committee of the NPC amended the PRC Anti-unfair Competition Law, pursuant to
which business operators may not engage in anti-competitive activities including but not limited to, unduly influencing
transactions, confusing or defrauding consumers, commercial bribery, trade secret infringement and commercial libel.
Failure to comply with the Anti-unfair Competition Law and related regulations could result in various administrative
penalties, including fines, confiscation of illegal gains and cessation of business activities.
After its promulgation, the relevant PRC anti-monopoly authorities further strengthened enforcement under the Anti-
monopoly Law. In February 2021, the Anti-monopoly Committee of the State Council published the Anti-monopoly
Guidelines for the Platform Economy Sector, aiming at enhancing anti-monopoly administration of businesses that operate
under the platform model and the overall platform economy. According to these guidelines, business practices such as
deploying big data analytics to set discriminatory terms for merchandise price or other transaction terms, coercive
exclusivity arrangements with transaction counterparties, blocking of competitor interface through technological means
and unlawful collection of user data without consent, are prohibited. In addition, the guidelines included concentrations
involving companies with VIE structure within the ambit of SAMR’s merger control review, if certain reporting thresholds
are met.
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Regulations Relating to Internet Advertising Business
In July 2016, SAIC issued the Interim Measures for the Administration of Internet Advertising to regulate internet
advertising activities. It defines internet advertising as any commercial advertising that directly or indirectly promotes
goods or services through websites, webpages, internet applications and other internet media in the forms of words, picture,
audio, video or others, including promotion through emails, texts, images, video with embedded links and paid-for search
results. According to these measures, no advertisement of any medical treatment, medicines, food for special medical
purpose, medical apparatuses, pesticides, veterinary medicines, dietary supplement or other special commodities or
services subject to examination by an advertising examination authority and may be only published after passing the
examination. In addition, no entity or individual may publish any advertisement of over-the-counter medicines or tobacco
on the internet. An internet advertisement must be identifiable and clearly identified as an “advertisement” to the
consumers. Paid search advertisements are required to be clearly distinguished from natural search results. In addition, the
following internet advertising activities are prohibited: providing or using any applications or hardware to intercept, filter,
cover, fast forward or otherwise restrict any authorized advertisement of other persons; using network pathways, network
equipment or applications to disrupt the normal data transmission of advertisements, alter or block authorized
advertisements of other persons or load advertisements without authorization; or using fraudulent statistical data,
transmission effect or matrices relating to online marketing performance to induce incorrect quotations, seek undue
interests or harm the interests of others. Internet advertisement publishers are required to verify relevant supporting
documents and check the content of the advertisement and are prohibited from publishing any advertisement with
unverified content or without all the necessary qualifications. Internet information service providers that are not involved in
internet advertising business activities but simply provide information services are required to block any attempt to publish
an illegal advisement that they are aware of or should reasonably be aware of through their information services.
Regulations Relating to Payment Services
In June 2010, the People’s Bank of China, or PBOC, issued the Administrative Measures for the Payment Services of
Non-Financial Institutions, or the Payment Services Measures. Under this rule, a non-financial institution must obtain a
payment business license, or Payment License, to provide payment services and qualifies as a paying institution. With the
Payment License, a non-financial institution may serve as an intermediary between payees and payers and provide some or
all of the following services: online payment, issuance and acceptance of prepaid card, bank card acceptance, and other
payment services as specified by PBOC. Without PBOC’s approval, no non-financial institution or individual may engage
in payment business whether explicitly or in a disguised form.
In November 2017, PBOC published a notice, or the PBOC Notice, on the investigation and administration of illegal
offering of settlement services by financial institutions and third-party payment service providers to unlicensed entities.
The PBOC Notice intended to prevent unlicensed entities from using licensed payment service providers as a conduit for
conducting the unlicensed payment settlement services, so as to safeguard the fund security and information security. We
believe that our pattern of receiving settlement services from commercial banks and third-party online payment service
providers are not in violation of the PBOC Notice. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our
Business and Industry—We rely on commercial banks and third-party online payment service providers for payment
processing and escrow services on our platform. If these payment services are restricted or curtailed in any way or become
unavailable to us or our buyers for any reason, our business may be materially and adversely affected.”
Regulations Relating to Intellectual Property in the PRC
Copyright
Pursuant to the Copyright Law of the PRC, copyrights include personal rights such as the right of publication and that
of attribution as well as property rights such as the right of production and that of distribution. Reproducing, distributing,
performing, projecting, broadcasting or compiling a work or communicating the same to the public via an information
network without permission from the owner of the copyright therein, unless otherwise provided in the Copyright Law of
the PRC, shall constitute infringements of copyrights. The infringer shall, according to the circumstances of the case,
undertake to cease the infringement, take remedial action, and offer an apology, pay damages, etc.
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Trademark
Pursuant to the Trademark Law of the PRC, the right to exclusive use of a registered trademark shall be limited to
trademarks which have been approved for registration and to goods for which the use of such trademark has been
approved. The period of validity of a registered trademark shall be ten years, counted from the day the registration is
approved. According to this law, using a trademark that is identical to or similar to a registered trademark in connection
with the same or similar goods without the authorization of the owner of the registered trademark constitutes an
infringement of the exclusive right to use a registered trademark. The infringer shall, in accordance with the regulations,
undertake to cease the infringement, take remedial action, and pay damages, etc.
Patent
Pursuant to the Patent Law of the PRC, after the grant of the patent right for an invention or utility model, except
where otherwise provided for in the Patent Law, no entity or individual may, without the authorization of the patent owner,
exploit the patent, that is, make, use, offer to sell, sell or import the patented product, or use the patented process, or use,
offer to sell, sell or import any product which is a direct result of the use of the patented process, for production or business
purposes. After a patent right is granted for a design, no entity or individual shall, without the permission of the patent
owner, exploit the patent, that is, for production or business purposes, manufacture, offer to sell, sell, or import any product
containing the patented design. Once the infringement of patent is confirmed, the infringer shall, in accordance with the
regulations, undertake to cease the infringement, take remedial action, and pay damages, etc.
Domain Name
Pursuant to the Measures for the Administration of Internet Domain Names of China, “domain name” shall refer to the
character mark of hierarchical structure, which identifies and locates a computer on the internet and corresponds to the
internet protocol (IP) address of that computer. The principle of “first come, first serve” is followed for the domain name
registration service. After completing the domain name registration, the applicant becomes the holder of the domain name
registered by him/it. Any organization or individual may file an application for settlement with the domain names dispute
resolution institution or file a lawsuit in the people’s court in accordance with the law, if such organization or individual
consider its/his legal rights and interests to be infringed by domain names registered or used by others.
Regulations Relating to Labor Protection in the PRC
According to the Labor Law of the PRC, or the Labor Law, an employer shall develop and improve its rules and
regulations to safeguard the rights of its workers. An employer shall develop and improve its labor safety and health
system, stringently implement national protocols and standards on labor safety and health, conduct labor safety and health
education for workers, guard against labor accidents and reduce occupational hazards.
The Labor Contract Law of the PRC and the Implementation Regulations on Labor Contract Law, regulate both parties
to a labor contract, namely the employer and the employee, and contain specific provisions involving the terms of the labor
contract. It is stipulated by the Labor Contract Law and the Implementation Regulations on Labor Contract Law that a
labor contract must be made in writing. An employer and an employee may enter into a fixed-term labor contract, an un-
fixed term labor contract, or a labor contract that concludes upon the completion of certain work assignments, after
reaching agreement upon due negotiations. An employer may legally terminate a labor contract and dismiss its employees
after reaching agreement upon due negotiations with the employee or by fulfilling the statutory conditions. Labor contracts
concluded prior to the enactment of the Labor Contract Law and subsisting within the validity period thereof shall continue
to be honored. With respect to a circumstance where a labor relationship has already been established but no formal
contract has been made, a written labor contract shall be entered into within one month from the effective date of the Labor
Contract Law.
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According to the Interim Regulations on the Collection and Payment of Social Insurance Premiums, the Regulations
on Workplace Injury Insurance, the Regulations on Unemployment Insurance and the Trial Measures on Employee
Maternity Insurance of Enterprises, enterprises in the PRC shall provide benefit plans for their employees, which include
basic pension insurance, unemployment insurance, maternity insurance, workplace injury insurance and basic medical
insurance. An enterprise must provide social insurance by processing social insurance registration with local social
insurance agencies, and shall pay or withhold relevant social insurance premiums for or on behalf of employees. The Law
on Social Insurance of the PRC has consolidated pertinent provisions for basic pension insurance, unemployment
insurance, maternity insurance, workplace injury insurance and basic medical insurance, and has elaborated in detail the
legal obligations and liabilities of employers who do not comply with relevant laws and regulations on social insurance.
According to the Interim Measures for Participation in the Social Insurance System by Foreigners Working within the
Territory of China, employers who employ foreigners shall participate in the basic pension insurance, unemployment
insurance, basic medical insurance, occupational injury insurance, and maternity leave insurance in accordance with the
relevant law, with the social insurance premiums to be contributed respectively by the employers and foreigner employees
as required. In accordance with such Interim Measures, the social insurance administrative agencies shall exercise their
right to supervise and examine the legal compliance of foreign employees and employers, and the employers who do not
pay social insurance premiums in conformity with the laws shall be subject to the administrative provisions provided in the
Social Insurance Law and other relevant regulations and rules.
According to the Regulations on the Administration of Housing Provident Fund, housing provident fund contributions
by an individual employee and housing provident fund contributions by his or her employer shall belong to the individual
employee.
The employer shall timely pay up and deposit housing provident fund contributions in full amount and late or
insufficient payments shall be prohibited. The employer shall process housing provident fund payment and deposit
registrations with the housing provident fund administration center. With respect to companies who violate the above
regulations and fail to process housing provident fund payment and deposit registrations or open housing provident fund
accounts for their employees, such companies shall be ordered by the housing provident fund administration center to
complete such procedures within a designated period. Those who fail to process their registrations within the designated
period shall be subject to a fine ranging from RMB10,000 to RMB50,000. When companies violate these regulations and
fail to pay up housing provident fund contributions in full amount as due, the housing provident fund administration center
shall order such companies to pay up within a designated period, and may further apply to the People’s Court for
mandatory enforcement against those who still fail to comply after the expiry of such period.
See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—Any lack of additional
requisite approvals, licenses or permits required due to regulatory changes of PRC governmental authorities or failure to
comply with any requirements of PRC laws and regulations may materially and adversely affect our daily operations and
hinder our growth.”
Regulations Relating to Tax in the PRC
Income Tax
The PRC Enterprise Income Tax Law was recently amended in February 2017. The PRC Enterprise Income Tax Law
applies a uniform 25% enterprise income tax rate to both foreign-invested enterprises and domestic enterprises, except
where tax incentives are granted to special industries and projects. Under the PRC Enterprise Income Tax Law, an
enterprise established outside China with “de facto management bodies” within China is considered a “resident enterprise”
for PRC enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its
worldwide income. Under the implementation regulations to the PRC Enterprise Income Tax Law, a “de facto management
body” is defined as the body that exercises full and substantial control and overall management over the business,
productions, personnel, accounts and properties of an enterprise.
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In January 2009, the State Administration of Taxation, or SAT, promulgated the Provisional Measures for the
Administration of Withholding of Enterprise Income Tax for Non-resident Enterprises, or the Non-resident Enterprises
Measures, pursuant to which entities that have direct obligation to make certain payments to a nonresident enterprise shall
be the relevant tax withholders for such non-resident enterprise. Further, the Non-resident Enterprises Measures provide
that, in case of an equity transfer between two non-resident enterprises occurring outside China, which is indirectly related
to the transfer of equity interests of a PRC resident enterprise, the non-resident enterprise which receives the equity transfer
payment shall, by itself or engage an agent to, file tax declaration with the PRC tax authority located at the place of the
PRC company whose equity has been transferred, and the PRC company whose equity has been transferred shall assist the
tax authorities to collect taxes from the relevant non-resident enterprise. In April 2009, the Ministry of Finance, or MOF,
and SAT jointly issued the Notice on Issues Concerning Process of Enterprise Income Tax in Enterprise Restructuring
Business. In December 2009, SAT issued the Notice on Strengthening Administration of Enterprise Income Tax for Share
Transfers by Non-PRC Resident Enterprises, or Circular 698. Both the Notice on Issues Concerning Process of Enterprise
Income Tax in Enterprise Restructuring Business and Circular 698 became effective retroactively as of January 2008. In
February 2011, SAT issued the Notice on Several Issues Regarding the Income Tax of Non-PRC Resident Enterprises, or
SAT Circular 24. By promulgating and implementing these circulars, the PRC tax authorities have enhanced their scrutiny
over the direct or indirect transfer of equity interests in a PRC resident enterprise by a non-resident enterprise.
In February 2015, SAT issued the Notice on Certain Corporate Income Tax Matters on Indirect Transfer of Properties
by Non-PRC Resident Enterprises, or SAT Circular 7, to supersede existing provisions in relation to the indirect transfer as
set forth in Circular 698, while the other provisions of Circular 698 remain in force. SAT Circular 7 introduces a new tax
regime that is significantly different from that under Circular 698. SAT Circular 7 extends its tax jurisdiction to capture not
only indirect transfers as set forth under Circular 698 but also transactions involving transfer of immovable property in
China and assets held under the establishment, and placement in China, of a foreign company through the offshore transfer
of a foreign intermediate holding company. SAT Circular 7 also addresses transfer of the equity interest in a foreign
intermediate holding company broadly. In addition, SAT Circular 7 provides clearer criteria than Circular 698 on how to
assess reasonable commercial purposes and introduces safe harbor scenarios applicable to internal group restructurings.
However, it also brings challenges to both the foreign transferor and transferee of the indirect transfer as they have to
determine whether the transaction should be subject to PRC tax and to file or withhold the PRC tax accordingly. In
October 2017, SAT issued the Announcement on Issues Relating to Withholding at Source of Income Tax of Non-resident
Enterprises, or SAT Circular 37. SAT Circular 37, effective from December 2017, superseded the Non-resident Enterprises
Measures and SAT Circular 698 as a whole and partially amended some provisions in SAT Circular 24 and SAT Circular 7.
SAT Circular 37 purports to clarify certain issues in the implementation of the above regime, by providing, among others,
the definition of equity transfer income and tax basis, the foreign exchange rate to be used in the calculation of withholding
amount, and the date of occurrence of the withholding obligation. Specifically, SAT Circular 37 provides that where the
transfer income subject to withholding at source is derived by a non-PRC resident enterprise in instalments, the instalments
may first be treated as recovery of costs of previous investments. Upon recovery of all costs, the tax amount to be withheld
must then be computed and withheld.
Value-Added Tax
According to the Temporary Regulations on Value-added Tax and the Detailed Implementing Rules of the Temporary
Regulations on Value-added Tax, all taxpayers selling goods, providing processing, repair or replacement services or
importing goods within the PRC shall pay value-added tax. The tax rate of 17% shall be levied on general taxpayers selling
or importing various goods; the tax rate of 17% shall be levied on the taxpayers providing processing, repairing or
replacement service; the applicable rate for the export of goods by taxpayers shall be nil, unless otherwise stipulated.
Furthermore, according to the Trial Scheme for the Conversion of Business Tax to Value-added Tax, promulgated by
the Ministry of Finance and SAT in November 2011, the State Council began to launch taxation reforms in a gradual
manner in January 2012, whereby the collection of value-added tax in lieu of business tax items was implemented on a trial
basis in regions showing significant radiating effects in economic development and providing outstanding reform
examples, beginning with production service industries such as transportation and certain modern service industries.
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In accordance with a SAT circular that took effect in May 2016, upon approval of the State Council, the pilot program
of the collection of value-added tax in lieu of business tax shall be promoted nationwide in a comprehensive manner
starting from May 2016, and all taxpayers of business tax engaged in the construction industry, the real estate industry, the
financial industry and the life science industry shall be included in the scope of the pilot program with regard to payment of
value-added tax instead of business tax.
In April 2018, MOF and SAT jointly promulgated the Circular of the Ministry of Finance and the State Administration
of Taxation on Adjustment of Value-Added Tax Rates, or Circular 32, according to which (i) for VAT taxable sales acts or
importation of goods originally subject to value-added tax rates of 17% and 11% respectively, such tax rates shall be
adjusted to 16% and 10%, respectively; (ii) for purchase of agricultural products originally subject to deduction rate of
11%, such deduction rate shall be adjusted to 10%; (iii) for purchase of agricultural products for the purpose of production
and sales or consigned processing of goods subject to tax rate of 16%, such tax shall be calculated at the deduction rate of
12%; (iv) for exported goods originally subject to tax rate of 17% and export tax refund rate of 17%, the export tax refund
rate shall be adjusted to 16%; and (v) for exported goods and cross-border taxable acts originally subject to tax rate of 11%
and export tax refund rate of 11%, the export tax refund rate shall be adjusted to 10%. Circular 32 became effective on
May 1, 2018 and shall supersede existing provisions which are inconsistent with Circular 32.
In March 2019, MOF, SAT and the General Administration of Customs jointly issued the Notice on Measures to
Implement the Reform on Value-Added Tax, which came into effect on April 1, 2019. According to the above-mentioned
notice, starting from April 1, 2019, taxable sales acts or importation of goods originally subject to value-added tax rates of
16% and 10%, respectively, become subject to lower value-added tax rates of 13% and 9%, respectively. No change of
value-added tax rates has been made with respect to our services.
Regulations Relating to Dividend Distributions
The principal regulations governing the distribution of dividends paid by wholly foreign-owned enterprises include the
PRC Company Law and the Foreign Investment Law. Under these regulations, foreign-invested enterprises in China may
pay dividends only out of their accumulated profits, if any, as determined in accordance with PRC accounting standards
and regulations. In addition, a PRC company is required to set aside at least 10% of its after-tax profit based on PRC
accounting standards each year to its general reserves until its cumulative total reserve funds reaches 50% of its registered
capital. These reserve funds, however, may not be distributed as cash dividends.
Regulations Relating to Foreign Exchange
Regulations Relating to Foreign Exchange Registration of Overseas Investment by PRC Residents
Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and
Financing and Roundtrip Investment Through Special Purpose Vehicles, or Circular 37, issued by SAFE in and effective
July 2014, regulates foreign exchange matters in relation to the use of special purpose vehicles, or SPVs, by PRC residents
or entities to seek offshore investment and financing and conduct round trip investment in China. Under Circular 37, a SPV
refers to an offshore entity established or controlled, directly or indirectly, by PRC residents or entities for the purpose of
seeking offshore financing or making offshore investment, using legitimate domestic or offshore assets or interests, while
“round trip investment” refers to the direct investment in China by PRC residents or entities through SPVs, namely,
establishing foreign-invested enterprises to obtain the ownership, control rights and management rights. Circular 37
requires that, before making contribution into an SPV, PRC residents or entities are required to complete foreign exchange
registration with SAFE or its local branch. Circular 37 further provides that option or share-based incentive holders of a
non-listed SPV can exercise the options or share incentive grants to become a shareholder of such non-listed SPV, subject
to registration with SAFE or its local branch.
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PRC residents or entities who have contributed domestic or offshore interests or assets to SPVs but have yet to obtain
SAFE registration before the implementation of the Circular 37 shall register their ownership interests or control in such
SPVs with SAFE or its local branch. An amendment to the registration is required if there is a material change in the
registered SPV, such as any change of basic information (including change of such PRC resident’s name and operation
term), increases or decreases in investment amounts, transfers or exchanges of shares, or mergers or divisions. Failure to
comply with the registration procedures set forth in Circular 37, or making misrepresentation or failure to disclose
controllers of foreign-invested enterprise that is established through round-trip investment, may result in restrictions on the
foreign exchange activities of the relevant foreign-invested enterprises, including payment of dividends and other
distributions, to its offshore parent or affiliate, and the capital inflow from the offshore parent, and may also subject
relevant PRC residents or entities to penalties under PRC foreign exchange administration regulations. In February 2015,
SAFE further promulgated the Circular on Further Simplifying and Improving the Administration of the Foreign Exchange
Concerning Direct Investment, or SAFE Circular 13. This SAFE Circular 13 has amended SAFE Circular 37 by requiring
PRC residents or entities to register with qualified banks rather than SAFE or its local branch in connection with their
establishment or control of an offshore entity established for the purpose of overseas investment or financing. Circular 37 is
applicable to our shareholders who are PRC residents and may be applicable to any offshore acquisitions that we make in
the future. All of our shareholders who, to our knowledge, are subject to the above SAFE regulations have completed the
necessary registrations with the local SAFE branch or qualified banks as required by SAFE Circular 37.
In March 2015, SAFE promulgated the Circular on Reforming the Management Approach regarding the Settlement of
Foreign Exchange Capital of Foreign-invested Enterprises, or Circular 19. According to Circular 19, the foreign exchange
capital of foreign-invested enterprises shall be subject to the Discretional Foreign Exchange Settlement. The Discretional
Foreign Exchange Settlement refers to the foreign exchange capital in the capital account of a foreign-invested enterprise
for which the rights and interests of monetary contribution has been confirmed by the local foreign exchange bureau (or the
book-entry registration of monetary contribution by the banks), and this foreign exchange capital can be settled at the
banks based on the actual operational needs of the foreign-invested enterprise. The proportion of Discretional Foreign
Exchange Settlement of the foreign exchange capital of a foreign-invested enterprise is temporarily determined to be
100%.
SAFE issued the Circular on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of
Capital Accounts, or Circular 16. Pursuant to Circular 16, enterprises registered in the PRC may also convert their foreign
debts from foreign currency to Renminbi on a discretionary basis. Circular 16 provides an integrated standard for
conversion of foreign exchange under capital account items (including but not limited to foreign currency capital and
foreign debts) on a discretionary basis which applies to all enterprises registered in the PRC. Circular 16 reiterates the
principle that Renminbi converted from foreign currency-denominated capital of a company may not be directly or
indirectly used for purposes beyond its business scope or prohibited by PRC laws or regulations, and such converted
Renminbi shall not be provided as loans to its non-affiliated entities. As Circular 16 is newly issued, and SAFE has not
provided detailed guidelines with respect to its interpretation or implementations, it is uncertain how these rules will be
interpreted and implemented.
In January 2017, SAFE promulgated the Circular on Further Improving Reform of Foreign Exchange Administration
and Optimizing Genuineness and Compliance Verification, or Circular 3. Circular 3 sets out various measures to tighten
genuineness and compliance verification of cross-border transactions and cross-border capital flow, which include
requiring banks to verify board resolutions, tax filing form, and audited financial statements before wiring foreign invested
enterprises’ foreign exchange distribution above US$50,000, and strengthening genuineness and compliance verification of
foreign direct investments.
On October 23, 2019, SAFE promulgated the Notice of the Administration of Foreign Exchange on Further Promoting
the Convenience of Cross-Border Trade and Investment, which, among other things, non-investment foreign-invested
entities may use foreign exchange capital or Renminbi funds converted from the foreign exchange capital to make
domestic equity investments, provided that such investments should comply with relevant PRC laws and regulations.
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Our PRC subsidiaries’ distributions to their offshore parents are required to comply with the requirements as described
above.
Regulations on Stock Incentive Plans
Pursuant to the Notice on Issues Concerning the Foreign Exchange Administration for Domestic Individuals
Participating in Stock Incentive Plan of Overseas Publicly Listed Company, or Circular 7, issued by SAFE in
February 2012, employees, directors, supervisors and other senior management participating in any stock incentive plan of
an overseas publicly listed company who are PRC citizens or who are non-PRC citizens residing in China for a continuous
period of not less than one year are generally required to register with SAFE through a domestic qualified agent. We and
our directors, executive officers and other employees who are PRC citizens or who reside in the PRC for a continuous
period of not less than one year and who have been granted options are subject to these regulations as our company is an
overseas-listed company. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—
Any failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans
may subject the PRC plan participants or us to fines and other legal or administrative sanctions.”
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In addition, SAT has issued certain circulars concerning employee share options or restricted shares. Under these
circulars, the employees working in the PRC who exercise share options or are granted restricted shares will be subject to
PRC individual income tax. The PRC subsidiaries of such overseas listed company have obligations to file documents
related to employee share options or restricted shares with relevant tax authorities and to withhold individual income taxes
of those employees who exercise their share options. If the employees fail to pay or the PRC subsidiaries fail to withhold
their income taxes according to relevant laws and regulations, the PRC subsidiaries may face sanctions imposed by the tax
authorities or other PRC government authorities.
C. Organizational Structure
The following diagram illustrates our corporate structure, including our principal subsidiaries and our VIE and its
principal subsidiary, as of the date of this annual report:
Note:
(1) Messrs. Lei Chen and Jianchong Zhu hold 86.6% and 13.4% equity interests in Hangzhou Aimi, respectively. They are
employees of our company and have entered into a series of contractual arrangements with Hangzhou Weimi, pursuant
to which we have control over and are the primary beneficiary of Hangzhou Aimi.
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Contractual Arrangements with Our VIE and Its Shareholders
The following is a summary of the currently effective contractual arrangements by and among our wholly-owned
subsidiary, Hangzhou Weimi, our VIE and its shareholders. These contractual arrangements enable us to (i) exercise
effective control over our VIE; (ii) receive substantially all of the economic benefits of our VIE; and (iii) have an exclusive
option to purchase all or part of the equity interests in and assets of it when and to the extent permitted by PRC law.
Agreements that provide us effective control over our VIE
Shareholders’ Voting Rights Proxy Agreement. Pursuant to the amended and restated shareholders’ voting rights
proxy agreement dated July 15, 2020, by and among Hangzhou Weimi, Hangzhou Aimi and the shareholders of Hangzhou
Aimi, each shareholder of Hangzhou Aimi irrevocably authorized Hangzhou Weimi or any person(s) designated by
Hangzhou Weimi to exercise such shareholder’s rights in Hangzhou Aimi, including without limitation, the power to
participate in and vote at shareholder’s meetings, the power to nominate and appoint the directors, senior management, the
power to sell or transfer such shareholder’s equity interest in Hangzhou Aimi, the power to propose to convene an
extraordinary shareholders meeting, and other shareholders’ voting rights permitted by the Articles of Association of
Hangzhou Aimi. The shareholders’ voting rights proxy agreement remains irrevocable and continuously valid from the
date of execution so long as each shareholder remains as a shareholder of Hangzhou Aimi.
Equity Pledge Agreement. Pursuant to the amended and restated equity pledge agreement dated July 15, 2020, by and
among Hangzhou Weimi, Hangzhou Aimi and the shareholders of Hangzhou Aimi, the shareholders of Hangzhou Aimi
pledged all of their equity interests in Hangzhou Aimi to Hangzhou Weimi to guarantee their and Hangzhou Aimi’s
obligations under the contractual arrangements including the exclusive consulting and services agreement, the exclusive
option agreement and the shareholders’ voting rights proxy agreement and this equity pledge agreement, as well as any loss
incurred due to events of default defined therein and all expenses incurred by Hangzhou Weimi in enforcing such
obligations of Hangzhou Aimi or its shareholders. In the event of default defined therein, upon written notice to the
shareholders of Hangzhou Aimi, Hangzhou Weimi, as pledgee, will have the right to dispose of the pledged equity interests
in Hangzhou Aimi and priority in receiving the proceeds from such disposition. The shareholders of Hangzhou Aimi agree
that, without Hangzhou Weimi’s prior written approval, during the term of the equity pledge agreement, they will not
dispose of the pledged equity interests or create or allow any other encumbrance on the pledged equity interests. We have
completed the registration of the equity pledges with the relevant office of SAIC in accordance with the PRC Property
Rights Law.
Spousal Consent Letter. Pursuant to each spousal consent letter, the spouse of the signing shareholder of our VIE
unconditionally and irrevocably agreed that the equity interest in Hangzhou Aimi held by such shareholder and registered
in his name will be disposed of pursuant to the equity interest pledge agreement, the exclusive option agreement and the
shareholders’ voting rights proxy agreement. The spouse of the signing shareholder of our VIE agreed not to assert any
rights over the equity interest in Hangzhou Aimi held by the signing shareholder. In addition, in the event that the spouse of
the signing shareholder of our VIE obtains any equity interest in Hangzhou Aimi held by the signing shareholder for any
reason, the spouse agreed to be bound by the contractual arrangements.
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Agreements that allow us to receive economic benefits from our VIE
Exclusive Consulting and Services Agreement. Under the exclusive consulting and services agreement between
Hangzhou Weimi and Hangzhou Aimi, dated June 5, 2015, Hangzhou Weimi has the exclusive right to provide to
Hangzhou Aimi consulting and services related to, among other things, design and development, operation maintenance,
product consulting, and management and marketing consulting. Hangzhou Weimi has the exclusive ownership of
intellectual property rights created as a result of the performance of this agreement. Hangzhou Aimi agrees to pay
Hangzhou Weimi service fee at an amount as determined by Hangzhou Weimi. This agreement will remain effective for a
ten-year term and then be automatically renewed, unless Hangzhou Weimi gives Hangzhou Aimi a termination notice 90
days before the term ends.
Agreements that provide us with the option to purchase the equity interests in our VIE
Exclusive Option Agreement. Pursuant to the amended and restated exclusive option agreement date July 15, 2020, by
and among Hangzhou Weimi, Hangzhou Aimi and each of the shareholders of Hangzhou Aimi, each of the shareholders of
Hangzhou Aimi irrevocably granted Hangzhou Weimi an exclusive call option to purchase, or have its designated person(s)
to purchase, at its discretion, all or part of their equity interests in Hangzhou Aimi, and the purchase price shall be the
lowest price permitted by applicable PRC law. In addition, Hangzhou Aimi has granted Hangzhou Weimi an exclusive call
option to purchase, or have its designated person(s) to purchase, at its discretion, to the extent permitted under PRC law, all
or part of Hangzhou Aimi’s assets at the book value of such assets, or at the lowest price permitted by applicable PRC law,
whichever is higher. Each of the shareholders of Hangzhou Aimi undertakes that, without the prior written consent of
Hangzhou Weimi or us, they may not increase or decrease the registered capital, dispose of its assets, incur any debts or
guarantee liabilities, enter into any material purchase agreements, enter into any merger, acquisition or investments, amend
its articles of association or provide any loans to third parties. Unless terminated by Hangzhou Weimi at its sole discretion,
the exclusive option agreement will remain effective until all equity interests in Hangzhou Aimi held by the shareholders of
Hangzhou Aimi and all assets of Hangzhou Aimi are transferred or assigned to Hangzhou Weimi or its designated
representatives.
In the opinion of King & Wood Mallesons, our PRC legal counsel:
● the ownership structures of Hangzhou Weimi and Hangzhou Aimi are not in any violation of PRC laws or
regulations currently in effect; and
● the contractual arrangements among Hangzhou Weimi and Hangzhou Aimi and its shareholders governed by PRC
law are legal, valid, binding and enforceable in accordance with its terms and applicable PRC laws, and do not
and will not result in any violation of PRC laws or regulations currently in effect.
However, we have been further advised by our PRC legal counsel that there are substantial uncertainties regarding the
interpretation and application of current and future PRC laws, regulations and rules. If the PRC government finds that the
agreements that establish the structure for operating our e-commerce business do not comply with PRC government
restrictions on foreign investment in our businesses, we could be subject to severe penalties including being prohibited
from continuing operations. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—
If the PRC government finds that the agreements that establish the structure for operating some of our operations in China
do not comply with PRC regulations relating to the relevant industries, or if these regulations or the interpretation of
existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in
those operations.”
D. Property, Plant and Equipment
As of December 31, 2020, our principal executive offices were located on leased premises comprising approximately
56,871 square meters in Shanghai, China. Our principal executive offices are leased from independent third parties, and we
plan to renew our lease from time to time as needed.
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Our servers are hosted in leased internet data centers in different geographic regions in China. We typically enter
into leasing and hosting service agreements with these internet data center providers that are renewed periodically. We
believe that our existing facilities are sufficient for our current needs, and we will obtain additional facilities,
principally through leasing, to accommodate our future expansion plans.
Item 4A. Unresolved Staff Comments
None.
Item 5. Operating and Financial Review and Prospects
You should read the following discussion and analysis of our financial condition and results of operations in
conjunction with our audited consolidated financial statements and the related notes included elsewhere in this annual
report. This discussion may contain forward-looking statements based upon current expectations that involve risks and
uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result
of various factors, including those set forth under “Item 3. Key Information—D. Risk Factors” or in other parts of this
annual report on Form 20-F.
A. Operating Results
Key Factors Affecting Our Results of Operations
Our results of operations and financial conditions are affected by the general factors affecting China’s retail industry,
including China’s overall economic growth, the increase in per capita disposable income and the growth in consumer
spending in China. In addition, they are also affected by factors driving online retail in China, such as the growing number
of online shoppers, the improved logistics infrastructure and the increasing adoption of mobile payment. Unfavorable
changes in any of these general factors could materially and adversely affect our results of operations.
While our business is influenced by general factors affecting our industry, our results of operations are more directly
affected by certain company specific factors, including:
Our ability to attract and retain buyers and increase buyer activities
User experience is our utmost priority. Attracting, engaging and retaining buyers have been our key focuses since our
inception. We measure our effectiveness in attracting and retaining buyers through several key performance indicators,
including our active buyers, GMV, annual spending per active buyer and average monthly active users. In 2020, we
achieved 788.4 millions of active buyers, RMB1,667.6 billion (US$255.6 billion) of GMV, and RMB2,115.2 (US$324.2)
of annual spending per active buyer. For the three months of October to December of 2020, the average monthly active
users on our platform was 719.9 million.
Our number of active buyers, annual spending per active buyer and average monthly active users have been increasing.
The increases have primarily been driven by the growing popularity and recognition of our brand and platform, the
consumer preferences for our innovative shopping experience, wide selection and attractive prices of merchandise offered
on our platform, and the positive impact of our promotional and marketing campaigns. As a result, our GMV has also
experienced significant growth.
Our ability to grow and retain our buyer base and increase buyer activities depends on our ability to continue to
provide value-for-money products and fun and interactive shopping experiences. We also plan to further leverage social
networks and word-of-mouth viral marketing, and conduct online and offline marketing and brand promotion activities to
attract new buyers and increase buyer activities. In addition, we plan to continue to encourage buyers to place more orders
with us through a variety of means, including granting coupons and holding special promotional events. As our business is
still at a growth phase and in light of our ability to develop a highly engaged buyer base, we expect continuing growth in
our buyer base and buyer activities.
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Our ability to establish and maintain relationships with merchants
In addition to the scale and engagement of active buyers, our growth is also driven by the scale of merchants on our
platform. In 2020, the number of active merchants on our platform reached 8.6 million. Merchants are attracted to our
platform by our large buyer base and scale of sales volume as well as targeted online marketing and other services provided
by us. The increase in the number of active merchants leads to more competitive prices and broader product categories
offered on our platform, which in turn helps us attract more buyers, generating powerful network effects.
Our ability to provide popular products on our platform at attractive prices also depends on our ability to maintain
mutually beneficial relationships with our merchants. For example, we rely on our merchants to make available sufficient
inventory and fulfill large volumes of orders in an efficient and timely manner to ensure our user experience. To date, our
buyers and merchants have been increasing in parallel as a result of the network effects of our platform.
Our ability to provide innovative online marketplace services and broaden service offerings
We currently generate revenues primarily from online marketplace services that we provide to merchants. We believe
that increasing the value and variety of our online marketplace services and the consequent return on investment to
merchants from utilizing these services will increase demand for our services. We aim to enhance the value of our online
marketplace services through such means as broadening our service offerings, increasing the size and engagement of our
buyer base, improving recommendation features, developing innovative marketing services, and improving the
measurement tools available to merchants. For example, in August 2020, we started Duo Duo Grocery, a next-day grocery
pick-up service that allows users to order groceries and related products online and collect goods the next day at nearby
designated pickup points.
Our ability to manage our costs and expenses by leveraging our scale of business
Our results of operations depend on our ability to manage our costs and expenses. We expect our costs and expenses to
continue to increase as we grow our business and attract more buyers and merchants to our platform. Our costs of revenues
consist primarily of payment processing fees paid to third party online payment platforms, costs associated with the
operation of our platform and others, such as costs and expenses attributable to merchandise sales, delivery and storage
fees, bandwidths and server costs, amortizations, depreciation and maintenance costs, payroll, employee benefits and
share-based compensation expenses, call center, merchant support services, surcharges and other expenses directly
attributable to the online marketplace services. In addition, we have invested significantly in marketing activities to
promote our brand and our products and services. Our sales and marketing expenses increased from RMB13,441.8 million
in 2018 to RMB27,174.2 million in 2019, and further to RMB41,194.6 million (US$6,313.3 million) in 2020, while sales
and marketing expenses as a percentage of our revenues decreased from 102.5% in 2018 to 90.2% in 2019, and further
decreased to 69.2% in 2020.
We believe our marketplace model has significant operating leverage and enables us to realize structural cost savings.
For example, due to our large buyer base, we are able to attract a large number of merchants, which in turn generates a
strong source of demand for our online marketing and other services for merchants. As our business further grows in scale,
we believe our massive scale, coupled with the network effects, will allow us to benefit from substantial economies of
scale. For example, the costs associated with the operation of our platform as well as our operating expenses do not
increase at the same pace as our GMV growth as we do not require a proportional increase in the size of our workforce to
support our growth. We achieve economies of scale in our operation as a wider selection of merchandise attracts a larger
number of buyers, which in turn drives an increase in the scale of our sales volume and attracts more merchants to our
platform. In addition, our scale creates value for our merchants by providing an effective channel for selling large volumes
of products and by offering them comprehensive data insights on buyer preferences and market demand. We believe this
value proposition will make our platform more attractive to merchants and further increase their sales and spending on our
platform. This business model also enables us to avoid the costs, risks and capital requirements associated with sourcing
merchandise or holding inventory. As our business further grows, we believe we will be able to take advantage of
economies of scale to further improve our operational efficiency over time.
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Impact of COVID-19 on Our Operations and Financial Performance
Substantially all of our revenues and workforce are concentrated in China. In early 2020, in response to the
intensifying efforts to contain the spread of COVID-19, the Chinese government took a number of actions, which included
extending the Chinese New Year holiday, quarantining individuals suspected of having COVID-19, asking residents in
China to stay at home and to avoid public gathering, among other things. COVID-19 also resulted in temporary closure of
many corporate offices, retail stores, and manufacturing facilities and factories across China, and put significant strain on
merchandise shipping and delivery. Many of the quarantine measures within China have since been significantly relaxed as
of the date of this annual report. However, there remain significant uncertainties surrounding the COVID-19 outbreak and
its further development as a global pandemic. Hence, the extent of the business disruption and the related impact on our
financial results and outlook for 2021 and the periods beyond cannot be reasonably estimated at this time.
As of December 31, 2020, we had cash and cash equivalents of RMB22,421.2 million (US$3,436.2 million) and short-
term investments of RMB64,551.1 million (US$9,892.9 million). Our short-term investments mainly include time deposits
and wealth management products in financial institutions, which are highly liquid. We believe this level of liquidity is
sufficient to successfully navigate an extended period of uncertainty. See also “Item 3. Key Information—D. Risk Factors
—Risks Related to Our Business and Industry—We face risks related to natural disasters, health epidemics and other
outbreaks, most notably those related to the outbreak of COVID-19, which could significantly disrupt our operations.”
Key Line Items and Specific Factors Affecting Our Results of Operations
Revenues
Under our current business model, we generate revenues primarily from online marketing services. We also generate
revenues from transaction services and merchandise sales. The following table sets forth the components of our revenues
by amounts and percentages of our total revenues for the periods presented:
2018
RMB
%
For the Year Ended December 31,
2019
RMB
%
(in thousands, except for percentages)
RMB
2020
US$
%
Revenues:
Online marketing services and others
Transaction services
Merchandise sales
11,515,575
1,604,415
—
87.8
12.2
—
26,813,641
3,328,245
—
89.0
11.0
47,953,779
5,787,415
— 5,750,671
7,349,238
886,960
881,329
80.6
9.7
9.7
Total revenues
13,119,990
100.0
30,141,886
100.0
59,491,865
9,117,527
100.0
Online marketing services and others. We provide online marketing services primarily to allow merchants to bid for
keywords that match product listings appearing in search results on our platform and advertising placements such as
banners, links and logos. The placement and the price for such placement are determined through an online bidding system.
Transaction services. We charge merchants fees for transaction-related services that we provide to merchants on our
platform. As part of our continued efforts to improve user experience, we reward merchants who sell high-quality products
and provide superb services with preferential fee rates.
Merchandise sales. We generate a small portion of revenues from online direct sales, where we acquired products from
suppliers and sold them directly to users.
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Costs of revenues
The following table sets forth the components of our costs of revenues by amounts and percentages of costs of
revenues for the periods presented:
2018
RMB
%
For the Year Ended December 31,
2019
RMB
%
(in thousands, except for percentages)
RMB
2020
US$
%
Costs of revenues:
Payment processing fees
Costs associated with the operation
(639,290)
22.0
(341,879)
5.4
(1,545,564)
(236,868)
8.0
of our platform and others
(2,265,959)
78.0
(5,996,899)
94.6
(17,733,077)
(2,717,713)
92.0
Total costs of revenues
(2,905,249)
100.0
(6,338,778)
100.0
(19,278,641)
(2,954,581)
100.0
Costs of revenues consist primarily of payment processing fees paid to third party online payment platforms, costs
associated with the operation of our platform and others, such as costs and expenses attributable to merchandise sales,
delivery and storage fees, bandwidths and server costs, amortization, depreciation and maintenance costs, payroll,
employee benefits and share-based compensation expenses, call center, merchant support services, surcharges and other
expenses directly attributable to the online marketplace services.
Operating expenses
The following table sets forth the components of our operating expenses by amounts and percentages of operating
expenses for the periods presented:
Operating expenses:
Sales and marketing expenses
General and administrative
expenses
Research and development
expenses
2018
RMB
%
For the Year Ended December 31,
2019
RMB
RMB
%
(in thousands, except for percentages)
2020
US$
%
(13,441,813)
64.0
(27,174,249)
84.0
(41,194,599)
(6,313,349)
83.1
(6,456,612)
30.7
(1,296,712)
4.0
(1,507,297)
(231,003)
3.0
(1,116,057)
5.3
(3,870,358)
12.0
(6,891,653)
(1,056,192)
13.9
Total operating expenses
(21,014,482)
100.0
(32,341,319)
100.0
(49,593,549)
(7,600,544)
100.0
Sales and marketing expenses. Sales and marketing expenses consist primarily of online and offline advertising,
promotion and coupon expenses, as well as payroll, employee benefits, share-based compensation expenses and other
related expenses associated with sales and marketing. We expect our sales and marketing expenses to increase in absolute
amounts in the foreseeable future as we seek to increase our brand awareness, enhance user engagement and build scale.
General and administrative expenses. General and administrative expenses consist primarily of payroll, employee
benefits, share-based compensation expenses and other related expenses. We expect our general and administrative
expenses to increase in absolute amounts in the foreseeable future due to the anticipated growth of our business as well as
accounting, insurance, investor relations and other public company costs.
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Research and development expenses. Research and development expenses consist primarily of payroll, employee
benefits, share-based compensation expenses, R&D-related cloud services and other related expenses associated with
research and platform development. We expect our research and development expenses to increase as we expand our
research and development team to enhance our artificial intelligence technology and big data analytics capabilities and
develop new features and functionalities on our platform.
Taxation
Cayman Islands
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.
There are no other taxes likely to be material to us levied by the government of the Cayman Islands except for stamp
duties which may be applicable on instruments executed in, or brought within the jurisdiction of the Cayman Islands. There
are no exchange control regulations or currency restrictions in the Cayman Islands.
Payments of dividends and capital in respect of the shares will not be subject to taxation in the Cayman Islands and no
withholding will be required on the payment of a dividend or capital to any holder of the shares, nor will gains derived
from the disposal of the shares be subject to Cayman Islands income or corporation tax.
Hong Kong
Walnut HK is incorporated in Hong Kong and is subject to Hong Kong profits tax of 16.5% on its activities conducted
in Hong Kong and may be exempted for income tax on its foreign-derived income. There are no withholding taxes in Hong
Kong for distribution of dividends by a company incorporated in Hong Kong.
PRC
Generally, our PRC subsidiaries, VIEs and their subsidiaries are subject to enterprise income tax on their taxable
income in China at a statutory rate of 25%. The enterprise income tax is calculated based on the entity’s global income as
determined under PRC tax laws and accounting standards. Shanghai Xunmeng, a subsidiary of our VIE, was recognized as
a “high and new technology enterprise” in November 2018 and was eligible for a preferential tax rate of 15% from 2018 to
2020. Xinzhijiang, a subsidiary of ours established in April 2018, located in Qianhai District, Shenzhen, Guangdong
Province, was eligible for a preferential tax rate of 15% and has been applying such preferential tax rate since then. The
preferential tax rate is available from 2014 to 2020.
We are subject to value-added tax at a rate of 16% before April 1, 2019 and 13% starting from April 1, 2019 on sales
and 6% on the services (research and development services, technology services, and/or information technology services),
in each case less any deductible value-added tax we have already paid or borne. We are also subject to surcharges on value-
added tax payments in accordance with PRC law.
Dividends paid by our wholly foreign-owned subsidiary in China to our intermediary holding company in Hong Kong
will be subject to a withholding tax rate of 10%, unless the relevant Hong Kong entity satisfies all the requirements under
the Arrangement between China and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation
and Prevention of Fiscal Evasion with respect to Taxes on Income and Capital and receives approval from the relevant tax
authority. If our Hong Kong subsidiary satisfies all the requirements under the tax arrangement and receives approval from
the relevant tax authority, then the dividends paid to the Hong Kong subsidiary would be subject to withholding tax at the
standard rate of 5%. Effective from November 1, 2015, the above mentioned approval requirement has been abolished, but
a Hong Kong entity is still required to file application package with the relevant tax authority, and settle the overdue taxes
if the preferential 5% tax rate is denied based on the subsequent review of the application package by the relevant tax
authority. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—We may rely on
dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we
may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material and
adverse effect on our ability to conduct our business.”
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If our holding company in the Cayman Islands or any of our subsidiaries outside of China were deemed to be a
“resident enterprise” under the PRC Enterprise Income Tax Law, it would be subject to enterprise income tax on its
worldwide income at a rate of 25%. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in
China—If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in
unfavorable tax consequences to us and our non-PRC shareholders or ADS holders.”
Results of Operations
The following table sets forth a summary of our consolidated results of operations for the periods presented, both in
absolute amount and as a percentage of our revenues for the periods presented. This information should be read together
with our audited consolidated financial statements and related notes included elsewhere in this annual report. The results of
operations in any period are not necessarily indicative of our future trends.
As disclosed in “Item 3. Key Information—A. Selected Financial Data”, due to the loss of the EGC status, we adopted
ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), as amended, effective January 1, 2018 using the
modified retrospective approach. There were no changes made to our revenue recognition policy as a result of the adoption
of Topic 606. We also changed the classification and presentation of restricted cash on the consolidated statements of cash
flows for each of the three years in the period ended December 31, 2018 due to the adoption of ASU No. 2016-18,
Statement of Cash Flows: Restricted Cash. We adopted ASU No. 2016-02: Leases on January 1, 2019 using the modified
retrospective transition method. ROU assets and lease liabilities (including current and non-current) for operating leases are
presented on the face of the consolidated balance sheet as of December 31, 2019 and 2020, while the consolidated balance
sheet data for the years ended December 31, 2016, 2017 and 2018 have been prepared in accordance with ASC Topic 840,
Accounting for Leases. We adopted Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments-Credit
Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) on January 1, 2020, which
requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-
13 replaces the incurred loss methodology with a forward-looking current expected credit losses.
Revenues
Online marketing services and others
Transaction services
Merchandise sales
Total revenues
Costs of revenues(1)
Gross profit
Operating expenses
Sales and marketing expenses(1)
General and administrative expenses(1)
Research and development expenses(1)
Total operating expenses
Operating loss
Other income
Interest and investment gain, net
Interest expense
Foreign exchange gain
Other (loss)/income, net
Loss before income tax and share of results of equity
investees
Income tax expenses
Share of results of equity investees
Net loss
For the Year Ended December 31,
2018
2019
2020
RMB
%
RMB
%
RMB
US$
%
(in thousands, except for percentages)
11,515,575
1,604,415
—
13,119,990
(2,905,249)
10,214,741
(13,441,813)
(6,456,612)
(1,116,057)
(21,014,482)
(10,799,741)
87.8
12.2
—
100.0
(22.1)
77.9
26,813,641
3,328,245
—
30,141,886
(6,338,778)
23,803,108
89.0
11.0
—
100.0
(21.0)
79.0
47,953,779
5,787,415
5,750,671
59,491,865
(19,278,641)
40,213,224
7,349,238
886,960
881,329
9,117,527
(2,954,581)
6,162,946
(102.5)
(49.2)
(8.5)
(160.2)
(82.3)
(27,174,249)
(1,296,712)
(3,870,358)
(32,341,319)
(8,538,211)
(90.2)
(4.3)
(12.8)
(107.3)
(28.3)
(41,194,599)
(1,507,297)
(6,891,653)
(49,593,549)
(9,380,325)
(6,313,349)
(231,003)
(1,056,192)
(7,600,544)
(1,437,598)
584,940
—
10,037
(12,361)
4.5
—
0.1
(0.1)
1,541,825
(145,858)
63,179
82,786
(10,217,125)
—
—
(10,217,125)
(77.9)
—
—
(77.9)
(6,996,279)
—
28,676
(6,967,603)
5.1
(0.5)
0.2
0.3
(23.2)
—
0.1
(23.1)
2,455,366
(757,336)
225,197
193,702
376,301
(116,067)
34,513
29,686
(7,263,396)
—
83,654
(7,179,742)
(1,113,165)
—
12,821
(1,100,344)
80.6
9.7
9.7
100.0
(32.4)
67.6
(69.2)
(2.5)
(11.6)
(83.4)
(15.8)
4.1
(1.3)
0.4
0.3
(12.2)
—
0.1
(12.1)
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Note:
(1) Share-based compensation expenses were allocated as follows:
Costs of revenues
Sales and marketing expenses
General and administrative expenses
Research and development expenses
Total
For the Year Ended December 31,
2018
RMB
2019
RMB
2020
RMB
US$
(in thousands)
3,488
405,805
6,296,186
136,094
6,841,573
23,835
860,862
786,641
886,368
2,557,706
32,291
1,093,547
966,985
1,520,220
3,613,043
4,949
167,593
148,197
232,984
553,723
Year ended December 31, 2020 compared to year ended December 31, 2019
Revenues
Our revenues, which consist of revenues from online marketing services and others, transaction services and
merchandise sales, increased by 97.4% from RMB30,141.9 million in 2019 to RMB59,491.9 million (US$9,117.5 million)
in 2020. Revenues from online marketing services and others increased from RMB26,813.6 million in 2019 to
RMB47,953.8 million (US$7,349.2 million), primarily attributable to our stronger brand and market position as a result of
our branding campaigns, more active merchants offering greater breadth of products and the significant increase in the
number of our active buyers and annual spending per active buyer. Revenues from transaction services increased from
RMB3,328.2 million in 2019 to RMB5,787.4 million (US$887.0 million) in 2020, primarily due to the increase in GMV.
Revenues from merchandise sales increased from nil to RMB5,750.7 million (US$881.3 million) in 2020, primarily
attributable to our online direct sales, where we acquired products from suppliers and sold them directly to users.
Costs of revenues
Our costs of revenues increased by 204.1% from RMB6,338.8 million in 2019 to RMB19,278.6 million (US$2,954.6
million) in 2020, primarily due to the increases in payment processing fees and costs directly attributable to the operation
of our platform and others. The increase in payment processing fees from RMB341.9 million in 2019 to RMB1,545.6
million (US$236.9 million) in 2020 was primarily due to the growth of our GMV. The increase in costs directly attributable
to the operation of our platform and others from RMB5,996.9 million in 2019 to RMB17,733.1 million (US$2,717.7
million) in 2020 was primarily due to the increase of RMB7,198.7 million in cost and expenses attributable to merchandise
sales and delivery and storage fees, the increase of RMB2,061.8 million in bandwidths and server costs to keep pace with
the growth of our online marketplace services, and the increase of RMB1,466.2 million in call center and merchant support
services.
Gross profit
As a result of the foregoing, our gross profit increased to RMB40,213.2 million (US$6,162.9 million) in 2020, from
RMB23,803.1 million in 2019. The improvement was primarily attributable to the continued growth in revenues.
Operating expenses
Our total operating expenses increased by 53.3% from RMB32,341.3 million in 2019 to RMB49,593.5 million
(US$7,600.5 million) in 2020 primarily due to the increases in sales and marketing expenses and research and development
expenses.
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Sales and marketing expenses. Our sales and marketing expenses increased substantially from RMB27,174.2 million
in 2019 to RMB41,194.6 million (US$6,313.3 million) in 2020, primarily attributable to the increases of RMB13,430.1
million in advertising expenses and promotion and coupon expenses. The increase in advertising expenses and promotion
and coupon expenses were focused on building our brand awareness and driving user growth and engagement on our
platform.
General and administrative expenses. Our general and administrative expenses increased from RMB1,296.7 million in
2019 to RMB1,507.3 million (US$231.0 million) in 2020. The increase was primarily attributable to the increase in
headcount.
Research and development expenses. Our research and development expenses increased substantially from
RMB3,870.4 million in 2019 to RMB6,891.7 million (US$1,056.2 million) in 2020, primarily due to the increase of
RMB1,987.2 million in staff related costs and the increase of RMB946.6 million in R&D-related cloud services expenses.
The increase in staff costs was primarily attributable to the increase in headcount for our research and development
personnel, as we hired additional experienced research and development personnel to execute our technology-related
strategies of improving our platform.
Operating loss
As a result of the foregoing, we incurred operating loss of RMB8,538.2 million and RMB9,380.3 million (US$1,437.6
million) in 2019 and 2020, respectively.
Other income/(expenses)
Interest and investment income, net. Net interest and investment income mainly represents interest earned on demand
deposits, time deposits and wealth management products in financial institutions. We had net interest and investment
income of RMB1,541.8 million and RMB2,455.4 million (US$376.3 million) in 2019 and 2020, respectively. The increase
was primarily attributable to the increase of our short-term investments and cash balance.
Interest expense. We had interest expense of RMB757.3 million (US$116.1 million) in 2020, compared to interest
expense of RMB145.9 million in 2019, primarily due to the increase in interest expenses of RMB551.7 million related to
the convertible bonds’ amortization to face value.
Other income, net. We had other net income of RMB193.7 million (US$29.7 million) in 2020, compared to other net
income of RMB82.8 million in 2019, primarily due to the tax benefit available under the Notice on Measures to Implement
the Reform on Value-Added Tax.
Share of results of equity investees
We had share of results of equity investees of RMB83.7 million (US$12.8 million) in 2020, compared to RMB28.7
million in 2019.
Net loss
As a result of the foregoing, we incurred net loss of RMB7,179.7 million (US$1,100.3 million) in 2020, compared to
net loss of RMB6,967.6 million in 2019.
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Year ended December 31, 2019 compared to year ended December 31, 2018
Revenues
Our revenues, which only consist of revenues from online marketplace services from 2018 onward, increased by
129.7% from RMB13,120.0 million in 2018 to RMB30,141.9 million in 2019, primarily attributable to strong growth of
revenues from online marketing services. Revenues from online marketing services increased from RMB11,515.6 million
in 2018 to RMB26,813.6 million in 2019. This increase was primarily attributable to our stronger brand and market
position as a result of our branding campaigns, more active merchants offering greater breadth of products and the
significant increase in the number of our active buyers and annual spending per active buyer. Revenues from transaction
services increased from RMB1,604.4 million in 2018 to RMB3,328.2 million in 2019, primarily due to the increase in
GMV.
Costs of revenues
Our costs of revenues, which only consist of costs of online marketplace services from 2018 onward, increased by
118.2% from RMB2,905.2 million in 2018 to RMB6,338.8 million in 2019, primarily due to increases in bandwidths and
server costs, staff costs and other expenses directly attributable to the online marketplace services, partially offset by
rebates of payment processing fees. The increase in bandwidths and server costs from RMB578.9 million in 2018 to
RMB1,496.9 million in 2019 was due to the increase in server capacity to keep pace with the growth of our online
marketplace services. The increase in staff costs from RMB116.4 million in 2018 to RMB286.2 million in 2019 was
primarily due to the increase of annual average headcount for employees dedicated to the operations of our platform. The
increase in other expenses directly attributable to the online marketplace services was primarily due to the higher costs of
call center and merchant support services from RMB991.6 million in 2018 to RMB3,093.8 million in 2019. The decrease
in payment processing fees from RMB639.3 million in 2018 to RMB341.9 million in 2019 was primarily attributable to
payment rebate received relating to processing fees.
Gross profit
As a result of the foregoing, our gross profit increased to RMB23,803.1 million in 2019, from RMB10,214.7 million in
2018. The improvement was primarily attributable to the continued growth in revenues and increased economies of scale
achieved through our current marketplace model.
Operating expenses
Our total operating expenses increased by 53.9% from RMB21,014.5 million in 2018 to RMB32,341.3 million in 2019
due to the increases in sales and marketing expenses and research and development expenses.
Sales and marketing expenses. Our sales and marketing expenses increased substantially from RMB13,441.8 million
in 2018 to RMB27,174.2 million in 2019, primarily attributable to increases of RMB12,999.9 million in advertising
expenses and promotion and coupon expenses. The increase in advertising expenses and promotion and coupon expenses
were focused on building our brand awareness and driving user growth and engagement on our platform.
General and administrative expenses. Our general and administrative expenses decreased substantially from
RMB6,456.6 million in 2018 to RMB1,296.7 million in 2019. The decrease was primarily attributable to a one-time share-
based compensation expense recorded in April 2018.
Research and development expenses. Our research and development expenses increased substantially from
RMB1,116.1 million in 2018 to RMB3,870.4 million in 2019, primarily due to an increase of RMB2,037.1 million in staff
costs and an increase of RMB649.6 million in R&D-related cloud services expenses. The increase in staff costs was
primarily attributable to the increase in headcount for our research and development personnel, as we hired additional
experienced research and development personnel to execute our technology-related strategies of improving our platform.
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Operating loss
As a result of the foregoing, we incurred operating loss of RMB10,799.7 million and RMB8,538.2 million in 2018 and
2019, respectively.
Other income/(expenses)
Interest and investment income, net. Net interest and investment gain mainly represents interest earned on demand
deposits, time deposits and wealth management products in financial institutions. We had net interest and investment
income of RMB584.9 million and RMB1,541.8 million in 2018 and 2019, respectively. The increase was primarily
attributable to the increase of our short-term investments and cash balance.
Interest expense. We had interest expense of RMB145.9 million in 2019, compared to interest expense of nil in 2018,
primarily due to interest expenses of RMB144.1 million related to the convertible bonds’ amortization to face value.
Foreign exchange gain. We had foreign exchange gain of RMB63.2 million in 2019, compared to foreign exchange
gain of RMB10.0 million in 2018, primarily due to the depreciation of Renminbi against the U.S. dollar.
Other income/(loss), net. We had other net income of RMB82.8 million in 2019, compared to other net loss of
RMB12.4 million in 2018, primarily due to the tax benefit available under the Notice on Measures to Implement the
Reform on Value-Added Tax, which came into effect on April 1, 2019.
Net loss
As a result of the foregoing, we incurred net loss of RMB6,967.6 million in 2019, compared to net loss of
RMB10,217.1 million in 2018.
Critical Accounting Policies
The Jumpstart Our Business Startups Act (“JOBS Act”) provides that an emerging growth company (“EGC”) as
defined therein can take advantage of an extended transition period for complying with new or revised accounting
standards. This allows an EGC to delay adoption of certain accounting standards until those standards would otherwise
apply to private companies. We as an EGC elected to take advantage of the extended transition period. However, we ceased
to be an EGC on December 31, 2018 due to our rapid revenue growth in 2018.
An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions
about matters that are highly uncertain at the time such estimate is made, and if different accounting estimates that
reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically,
could materially impact the consolidated financial statements.
We prepare our financial statements in conformity with U.S. GAAP, which requires us to make judgments, estimates
and assumptions. We continually evaluate these estimates and assumptions based on the most recently available
information, our own historical experiences and various other assumptions that we believe to be reasonable under the
circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could
differ from our expectations as a result of changes in our estimates. Some of our accounting policies require a higher
degree of judgment than others in their application and require us to make significant accounting estimates.
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The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with
our consolidated financial statements and accompanying notes and other disclosures included in this annual report. When
reviewing our financial statements, you should consider (i) our selection of critical accounting policies, (ii) the judgments
and other uncertainties affecting the application of such policies, and (iii) the sensitivity of reported results to changes in
conditions and assumptions.
Revenue recognition
We adopted ASU 2014-09, Revenue from contracts with Customers (Topic 606) including related amendments and
implementation guidance within ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20
(collectively, “ASC 606”), from January 1, 2018, using the modified retrospective method applying to those contracts not
yet completed as of January 1, 2018. There were no changes made to our revenue recognition policy as a result of the
adoption of ASC 606.
Revenues are principally comprised of those generated from online marketplace services and merchandise sales.
Revenues from online marketplace services primarily consist of online marketing services revenues and transaction
services fees. Revenues represent the amount of consideration that we are entitled to in exchange for the transfer of
promised goods or services in the ordinary course of our activities and are recorded net of value-added tax (“VAT”).
Consistent with the criteria of ASC 606, we recognize revenue when the performance obligation in a contract is satisfied by
transferring the control of a promised good or service to a customer. We also evaluate whether it is appropriate to record
the gross amounts of goods and services sold and the related costs, or the net amounts earned as commissions. Payments
for services or goods are generally received before deliveries.
Online marketing services
We entered into contractual agreements with certain merchants to provide online marketing services on our online
marketplace for which we receive service fees from merchants. Online marketing services allow merchants to bid for
keywords that match product listings appearing in search or browser results on our online marketplace. Merchants prepay
for online marketing services that are charged on a cost-per-click basis. Under ASC 606, the related revenues are
recognized at a point of time when consumers click the merchants’ product listings and the online marketing services are
completed by us for the merchants. The positioning of such listings and the price for such positioning are determined
through an online auction system, which facilitates price discovery through a market-based mechanism.
We also provide display marketing services that allow merchants to place advertisements on the platform primarily at
fixed prices. In general, merchants need to prepay for display marketing which is accounted for as customer advances and
deferred revenues and revenues are primarily recognized over the period during which the advertising services are
provided.
Transaction services
We charge fees for transaction services to merchants for sales transactions completed on our platform, where we do not
take control of products provided by merchants at any point in the time during the transactions and do not have latitude
over pricing of the merchandise. Transaction services fee is primarily determined as a percentage based on the purchase
price of merchandise being sold by merchants. Revenues related to transaction services are recognized in consolidated
statements of comprehensive loss at the time when our service obligations to the merchants are determined to have been
completed under each sales transaction upon the confirmation of the receipts of goods by the consumers. The majority fees
charged for transaction services are not refundable if and when consumers return the merchandise to merchants
We provide rebates to certain merchants on the online marketplace services by meeting certain requirements. Such
rebates are netted against the online marketplace services revenues.
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Merchandise sales
We in certain cases acquire merchandises from suppliers and sell directly to consumers. We act as a principal for and
take control of the merchandises, are primarily obligated for the merchandises sold to consumers, bear inventory risks and
have the latitude in establishing prices. Revenues from merchandise sales are recorded on a gross basis, net of discounts
and return allowances when the products are delivered and title is passed to the consumers who are our customers in these
transactions. Proceeds received in advance of customer acceptance are recorded as current liabilities in customer advances
and deferred revenues.
Membership services
Certain consumers pay in advance for certain periods memberships in exchange for the access to a suite of benefits
including coupons, which represent a single stand-ready obligation. As the members receive and consume the benefits of
our promise throughout the subscription periods, the membership fees are recognized as revenue over the subscription
periods on a straight-line basis. Coupons provided by us to the members are netted against the membership revenue with
the resulting negative revenue, if any, being reclassed to marketing expenses for each membership contract. The
membership revenue as recorded in the consolidated financial statements was immaterial during each presented period.
Incentives provided to the consumers
In order to promote our online marketplace and attract more registered consumers, we at our own discretion offers
various forms of incentives, for example, coupons, credits and discounts that are not specific to any merchant, to
consumers that are not our customers. Despite the absence of any explicit contractual obligations to incentivize the non-
customer consumers on behalf of the merchants, we further evaluated the varying features of different incentive programs
to determine that whether the incentives represent implicit obligations to consumers on behalf of merchants and if so,
should be recorded as reduction of revenues. Based on the evaluation, we determined that incentives offered to consumers
are not considered as payments to customers.
We, at our discretion, issue to consumers coupons and credits upon their completion of certain actions to promote our
platform. The coupons can be used for future purchases of eligible merchandise offered on our online marketplace to
reduce purchase price and the credits can be used to redeem cash from us. We recognize the amounts of coupons and
credits as marketing expenses when future purchases are completed or when credits are issued. Discounts unconditionally
provided to consumers are recognized as marketing expenses when the related transaction services revenues from
merchants are recognized. Certain discounts are offered to consumers upon their completion of certain actions to promote
the platform, we record the related costs in marketing expenses upon the completion of such promotion tasks
Income taxes
We follow the liability method of accounting for income taxes in accordance with ASC 740, Income Taxes, or ASC
740. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial
reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the
differences are expected to reverse. We record a valuation allowance to offset deferred tax assets if based on the weight of
available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The
effect on deferred taxes of a change in tax rate is recognized in tax expense in the period that includes the enactment date of
the change in tax rate.
We accounted for uncertainties in income taxes in accordance with ASC 740. Interest and penalties related to
unrecognized tax benefit recognized in accordance with ASC 740 are classified in the consolidated statements of
comprehensive loss as income tax expense.
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Share-based compensation
We adopted a global share incentive plan in 2015, which we refer to as the 2015 Plan in this annual report, for the
purpose of granting share-based compensation awards to employees, directors and consultants to incentivize their
performance and align their interests with ours. As of December 31, 2020, the maximum aggregate number of ordinary
shares which may be issued pursuant to all options granted under the 2015 Plan was 581,972,860 Class A ordinary shares,
subject to adjustment and amendment.
In July 2018, we adopted the 2018 Share Incentive Plan, which we refer to as the 2018 Plan in this annual report, to
attract and retain the best available personnel, provide additional incentives to employees, directors and consultants and
promote the success of our business. The maximum aggregate number of shares which may be issued pursuant to all
awards under the 2018 Plan was initially 363,130,400, plus an annual increase on the first day of each fiscal year of our
company during the term of the 2018 Plan commencing with the fiscal year beginning January 1, 2019, by an amount equal
to the lessor of (i) 1.0% of the total number of shares issued and outstanding on the last day of the immediately preceding
fiscal year, and (ii) such number of shares as may be determined by our board of directors. In March 2021, our board of
directors approved an amendment to the 2018 Plan to increase the annual increase percentage from 1.0% to 3.0% effective
from the fiscal year beginning January 1, 2022. As of December 31, 2020, the maximum aggregate numbers of ordinary
shares which may be issued pursuant to all options and the restricted share units, RSUs, granted under the 2018 Plan were
149,078,240 and 43,820,456 Class A ordinary shares, respectively, subject to adjustment and amendment.
We apply ASC 718 (“ASC 718”), Compensation-Stock Compensation, to account for our employee share-based
payments. In accordance with ASC 718, we determine whether an award should be classified and accounted for as a
liability award or an equity award. All of our share-based awards to employees were classified as equity awards. We
measure the employee share-based compensation based on the fair value of the award at the grant date. Expense is
recognized using accelerated method over the requisite service period. The fair value of share options at the time of grant is
determined using the binomial-lattice option pricing model. In accordance with ASU No. 2016-09, Compensation-Stock
Compensation (Topic 718): Improvement to Employee Share-based Payment Accounting, we elected to account for
forfeitures as they occurred.
We recognized total share-based compensation expenses of RMB6,841.6 million, RMB2,557.7 million and
RMB3,613.0 million (US$553.7 million), for the years ended December 31, 2018, 2019 and 2020, respectively.
As of December 31, 2020, total unrecognized share-based compensation expenses relating to options and RSUs were
RMB9,773.6 million (US$1,497.9 million) and RMB1,516.3 million (US$232.4 million), which are expected to be
recognized over a weighted-average period of 3.94 years and 2.64 years, respectively.
Recent Accounting Pronouncements
See Item 17 of Part III, “Financial Statements—Note 2—Summary of significant accounting policies—Recent
accounting pronouncements.”
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B. Liquidity and Capital Resources
The following table sets forth a summary of our cash flows for the periods presented:
Summary Consolidated Cash Flow Data:
Net cash generated from operating activities
Net cash used in investing activities
Net cash generated from financing activities
Exchange rate effect on cash, cash equivalents and restricted
cash
Net increase in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of the
For the Year Ended December 31,
2018
RMB
2019
RMB
2020
RMB
US$
7,767,927
(7,548,509)
17,344,357
14,820,976
(28,319,678)
15,854,731
28,196,627
(38,357,901)
51,798,996
4,321,323
(5,878,606)
7,938,543
546,910
18,110,685
450,142
2,806,171
(139,943)
41,497,779
(21,447)
6,359,813
year
Cash, cash equivalents and restricted cash at end of the year
12,429,001
30,539,686
30,539,686
33,345,857
33,345,857
74,843,636
5,110,476
11,470,289
To date, we have financed our operating and investing activities through cash generated by historical equity financing
activities. We also raised proceeds from the initial public offering of our ADSs in July 2018, a follow-on offering of our
ADSs in February 2019, a convertible senior notes offering in September 2019, a private placement in April 2020, a
convertible senior notes offering and a concurrent follow-on offering of our ADSs in November 2020, and a private
placement in December 2020. As of December 31, 2020, our cash and cash equivalents were RMB22,421.2 million
(US$3,436.2 million). Our cash and cash equivalents primarily consist of cash at banks. As of the same date, we had
restricted cash of RMB52,422.4 million (US$8,034.1 million), mainly representing cash received from buyers and reserved
in a bank supervised account for payments to merchants.
We believe that our current cash and cash equivalents and our anticipated cash flows from operations will be sufficient
to meet our anticipated working capital requirements and capital expenditures for at least the next 12 months. We may
decide to enhance our liquidity position or increase our cash reserve for future investments through additional equity and
debt financing. The issuance and sale of additional equity would result in further dilution to our shareholders. The
incurrence of indebtedness would result in an increase in fixed obligations and could result in operating covenants that
would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to
us, if at all.
As of December 31, 2020, 33.2% of our cash and cash equivalents were held in China, and 16.0% were held by our
VIE and denominated in Renminbi. Although we consolidate the results of our VIE and its subsidiaries, we only have
access to the assets or earnings of our VIE and its subsidiaries through our contractual arrangements with our VIE and its
shareholders. See “Item 4. Information on the Company—C. Organizational Structure.” For restrictions and limitations on
liquidity and capital resources as a result of our corporate structure, see “Item 5. Operating and Financial Review and
Prospects—B. Liquidity and Capital Resources—Holding Company Structure.”
In utilizing the proceeds we received from our initial public offerings, follow-on offerings, convertible senior notes
offerings and private placements, we may make additional capital contributions to our PRC subsidiaries, establish new
PRC subsidiaries and make capital contributions to these new PRC subsidiaries, make loans to our PRC subsidiaries, or
acquire offshore entities with operations in China in offshore transactions. However, most of these uses are subject to PRC
regulations. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—PRC regulation
of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency
conversion may delay or prevent us from using the proceeds of our offshore financing to make loans or additional capital
contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and
expand our business.”
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A majority of our future revenues are likely to continue to be in the form of Renminbi. Under existing PRC foreign
exchange regulations, Renminbi may be converted into foreign exchange for current account items, including profit
distributions, interest payments and trade- and service-related foreign exchange transactions, without prior SAFE approval
as long as certain routine procedural requirements are fulfilled. Therefore, our PRC subsidiaries are allowed to pay
dividends in foreign currencies to us without prior SAFE approval by following certain routine procedural requirements.
However, approval from or registration with competent government authorities is required where the Renminbi is to be
converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans
denominated in foreign currencies. The PRC government may at its discretion restrict access to foreign currencies for
current account transactions in the future.
Operating activities
Net cash generated from operating activities in 2020 was RMB28,196.6 million (US$4,321.3 million), as compared to
net loss of RMB7,179.7 million (US$1,100.3 million) in the same period. The difference was primarily due to an increase
of RMB23,934.2 million (US$3,668.1 million) in payables to merchants, an increase of RMB3,085.4 million (US$472.9
million) in merchant deposits, an increase of RMB5,849.1 million (US$896.4 million) in accrued expenses and other
liabilities, an increase of RMB1,883.0 million (US$288.6 million) in amounts due to related parties, and an increase of
RMB1,817.2 million (US$278.5 million) in customer advances and deferred revenues, partially offset by an increase of
RMB4,048.5 million (US$620.5 million) in prepayments and other current assets and an increase of RMB1,636.5 million
(US$250.8 million) in amounts due from related parties. The increase in payables to merchants, merchant deposits, accrued
expenses and other liabilities and customer advances and deferred revenues were primarily attributable to our business
expansion and the increase of number of merchants on our platform. The principal non-cash items affecting the difference
between our net loss and our net cash generated from operating activities in 2020 were RMB3,613.0 million (US$553.7
million) in share-based compensation expenses.
Net cash generated from operating activities in 2019 was RMB14,821.0 million, as compared to net loss of
RMB6,967.6 million in the same period. The difference was primarily due to an increase of RMB12,650.8 million in
payables to merchants, an increase of RMB3,652.6 million in merchant deposits, an increase of RMB2,648.9 million in
accrued expenses and other liabilities, and an increase of RMB1,024.8 million in amounts due to related parties, partially
offset by an increase of RMB886.9 million in amounts due from related parties and an increase of RMB803.4 million in
receivables from online payment platforms. The increase in payables to merchants, merchant deposits and accrued
expenses and other liabilities were attributable to our business expansion and the increase of number of merchants on our
platform. The principal non-cash item affecting the difference between our net loss and our net cash generated from
operating activities in 2019 was RMB2,557.7 million in share-based compensation expenses.
Net cash generated from operating activities in 2018 was RMB7,767.9 million, as compared to net loss of
RMB10,217.1 million in the same period. The difference was primarily due to an increase of RMB2,410.2 million in
merchant deposits, an increase of 7,437.4 million in payables to merchants, and an increase of 1,864.2 million in accrued
expenses and other liabilities, partially offset by an increase of RMB788.6 million in prepayments and other current assets.
The increase in merchant deposits, payables to merchants and accrued expenses and other liabilities were attributable to our
business expansion and the increase of number of merchants on our platform. The principal non-cash items affecting the
difference between our net loss and our net cash generated from operating activities in 2018 were RMB6,841.6 million in
share-based compensation expenses.
Investing activities
Net cash used in investing activities in 2020 was RMB38,357.9 million (US$5,878.6 million), primarily due to
purchase of short-term investments of RMB86,438.1 million (US$13,247.2 million) and purchase of long-term investments
of RMB6,722.2 million (US$1,030.2 million), partially offset by proceeds from sales of short-term investments of
RMB55,083.4 million (US$8,441.9 million).
Net cash used in investing activities in 2019 was RMB28,319.7 million, primarily due to purchase of short-term
investments of RMB52,451.6 million, partially offset by proceeds from sales of short-term investments of RMB24,797.6
million.
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Net cash used in investing activities in 2018 was RMB7,548.5 million, primarily due to purchase of short-term
investments of RMB7,516.4 million, partially offset by repayment from a related party of RMB159.8 million.
Financing activities
Net cash generated from financing activities in 2020 was RMB51,799.0 million (US$7,938.5 million), primarily
attributable to the net proceeds from the follow-on offering, net proceeds from issuance of convertible bonds, and proceeds
from the private placements.
Net cash generated from financing activities in 2019 was RMB15,854.7 million, primarily attributable to net proceeds
from the follow-on offering, net proceeds from issuance of convertible bonds, and net proceeds from short-term
borrowings.
Net cash generated from financing activities in 2018 was RMB17,344.4 million, primarily attributable to net proceeds
from the initial public offering of our ADSs and net proceeds of our issuance of Series D preferred shares to investors.
Holding Company Structure
Pinduoduo Inc. is a holding company with no material operations of its own. We conduct our operations primarily
through our PRC subsidiaries, our VIE and its subsidiaries in China. As a result, Pinduoduo Inc.’s ability to pay dividends
depends upon dividends paid by our PRC subsidiaries. If our existing PRC subsidiaries or any newly formed ones incur
debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us.
In addition, our wholly foreign-owned subsidiaries in China are permitted to pay dividends to us only out of its retained
earnings, if any, as determined in accordance with PRC accounting standards and regulations. Under PRC law, each of our
subsidiaries and our VIE in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund
certain statutory reserve funds until such reserve funds reach 50% of their registered capital. In addition, our wholly
foreign-owned subsidiaries in China may allocate a portion of their after-tax profits based on PRC accounting standards to
a staff welfare and bonus fund at their discretion. The statutory reserve funds and the discretionary funds are not
distributable as cash dividends. Remittance of dividends by a wholly foreign-owned company out of China is subject to
examination by the banks designated by SAFE. Our PRC subsidiaries have not paid dividends and will not be able to pay
dividends until they generate accumulated profits and meet the requirements for statutory reserve funds.
Capital Expenditures
Our capital expenditures are primarily incurred for purchases of computer equipment relating to the operation of our
platform, furniture, office equipment and leasehold improvement for our office facilities and software. Our capital
expenditures were RMB27.3 million in 2018, RMB27.4 million in 2019 and RMB43.0 million (US$6.6 million) in 2020.
We intend to fund our future capital expenditures with our existing cash balance. We will continue to make capital
expenditures to meet the expected growth of our business.
C. Research and Development
See “Item 4. Information on the Company—B. Business Overview—Technology” and “Item 4. Information on the
Company—B. Business Overview—Intellectual Property.”
D. Trend Information
Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands,
commitments or events for the year ended December 31, 2020 that are reasonably likely to have a material and adverse
effect on our net revenues, income, profitability, liquidity or capital resources, or that would cause the disclosed financial
information to be not necessarily indicative of future results of operations or financial conditions.
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E. Off-Balance Sheet Arrangements
We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any
third parties. In addition, 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 engages in leasing, hedging or product development services with us.
F. Tabular Disclosure of Contractual Obligations
The following table sets forth our contractual obligations as of December 31, 2020:
Convertible bonds obligations(1)
Operating lease commitments(2)
Investment commitments(3)
Total
Note:
2021
—
2022
—
2023
2024
— 5,761,643
2025 and
after
13,049,800
271,898
173,110
127,738
107,851
N/A
N/A
N/A
N/A
34,889
N/A
271,898
173,110
127,738
5,869,494
13,084,689
Total
18,811,443
715,486
782,703
20,309,632
(1) Convertible bonds obligations represent our principal payments. Please see “convertible bonds” under Note 12 to our
audited consolidated financial statements.
(2) Operating lease commitments mainly represent our obligations for leasing office premises, which include all future
cash outflows under ASC Topic 842, Leases. Please see “Leases” under Note 8 to our audited consolidated financial
statements.
(3) Investment commitments primarily relate to capital contributions obligation under certain arrangement which does not
have contractual maturity date.
Other than as shown above, we did not have any significant capital and other commitments, long-term obligations or
guarantees as of December 31, 2020.
G. Safe Harbor
See “Forward-Looking Information”.
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Item 6. Directors, Senior Management and Employees
A. Directors and Senior Management
Pinduoduo Partnership
To ensure the sustainability and governance of our company and better align them with the interests of our
shareholders, our management has established an executive partnership, the Pinduoduo Partnership, to help us better
manage our business and to carry out our vision, mission and value continuously. The structure of the Pinduoduo
Partnership is designed to promote people with diverse skillsets but sharing the same core values and beliefs that we hold
dear.
The Pinduoduo Partnership will be operated under principles, policies and procedures that evolve with our business
and encompass the following major aspects:
Nomination and Election of Partners
Partners will be elected annually through a nomination process, whereby any existing partner may propose candidates
to the partnership committee (the “Partnership Committee”), which reviews the nomination and propose candidates to the
entire partnership for election. Election of new partners requires the affirmative vote of at least 75% of all the partners. In
order to be elected a partner, the partner candidate must meet certain quality standards including, among other things, a
high standard of personal character and integrity, continued service as a director, officer or employee with our company for
no less than five years (or a shorter period before our company reaches a five-year operating history), a consistent
commitment to our company’s mission, vision and values as well as a track record of contribution to our business.
In order to align the interests of partners with the interests of shareholders, the Partnership Committee may require a
partner to maintain a meaningful level of equity interests in our company during his or her tenure as a partner. The specific
level of equity interests to be maintained shall be determined by the Partnership Committee from time to time.
The Pinduoduo Partnership’s major rights and functions, such as its right to appoint the executive director to our board
and CEO nomination right, will not become effective until the Pinduoduo Partnership consists of no less than five limited
partners (the “Partnership Condition”). Currently, such rights and functions have yet to come into effect.
Partnership Committee
The Partnership Committee will be the primary management body of the Pinduoduo Partnership. The Partnership
Committee must consist of no more than five partners, and all decisions of the Partnership Committee will be made by
majority vote of the members.
Partnership Committee members serve for a term of three years and may serve multiple terms, unless terminated upon
his or her death, resignation, removal or termination of his or her membership in the partnership. Prior to each election that
takes place once every three years, the Partnership Committee will nominate a number of partners equal to the number of
Partnership Committee members plus three additional nominees. After voting, all except the three nominees who receive
the least votes from the partners are elected to the Partnership Committee.
Executive Director Appointment and CEO Nomination Right
The Pinduoduo Partnership will be entitled to appoint executive directors and nominate and recommend the chief
executive officer of the company.
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An executive director refers to the director of the company that is (i) neither a director who satisfies the
“independence” requirements of Rule 5605(a)(2) of the Nasdaq Stock Market Rules or Section 303A of the Corporate
Governance Rules of the New York Stock Exchange nor a director who is affiliated with or was appointed to our board by
a holder or a group of affiliated holders of preferred shares and/or Class A ordinary shares converted from preferred shares
of our company prior to our initial public offering, and (ii) maintains an employment relationship with our company.
Pursuant to our currently effective articles of association, our board of directors shall consist of not less than three but not
more than nine directors, and shall include (i) two executive directors, if there are no more than five directors, and (ii) three
executive directors, if there are more than five but no more than nine directors. The executive directors shall be nominated
by the Pinduoduo Partnership for so long as certain conditions are satisfied. Our board of directors is obligated to cause the
executive director candidate duly nominated by the Pinduoduo Partnership to be appointed by the board upon the delivery
by the Pinduoduo Partnership of a written notice (duly executed by the general partner of the Pinduoduo Partnership) to us,
and such executive director shall serve until expiry of his or her terms, unless removed by the shareholders by ordinary
resolutions in accordance with our articles of association, removed by the Pinduoduo Partnership or the office is vacated
upon, among other things, his or her death or resignation. Our board of directors may, by a majority of the remaining
directors present and voting at a board meeting, appoint any person as a director to fill vacancy on the board upon
resignation of a non-executive director member of the board. If at any time the total number of executive directors on the
board nominated by the Pinduoduo Partnership is less than two or three, as applicable based on the then board composition,
for any reason, the Pinduoduo Partnership shall be entitled to appoint such number of executive directors to the board as
may be necessary to ensure that the board includes the number of executive directors as required pursuant to our articles of
association. Such appointment of the executive directors to the board shall become effective immediately upon the delivery
by the Pinduoduo Partnership of a written notice to us, without the requirement for any further resolution, vote or approval
by the shareholders or the board. Mr. Lei Chen is an executive director of our company.
The chief executive officer candidate nominated by the Pinduoduo Partnership shall stand for appointment by the
nominating and corporate governance committee of the board of directors. If the candidate is not appointed by the
nominating and corporate governance committee in accordance with our articles of association of the company, the
Pinduoduo Partnership may nominate a replacement nominee until the nominating and corporate governance committee
appoints such nominee as chief executive officer, or if the nominating and corporate governance committee fails to
appoint more than three candidates nominated by the Pinduoduo Partnership consecutively, the board of directors may then
nominate and appoint any person to serve as the chief executive officer of the company in accordance with our articles of
association of the company.
Any partner may propose to the Partnership Committee any qualified individual to stand for nomination for executive
director or chief executive officer. The Partnership Committee shall select from the proposed individuals one or more
candidates for partnership approval. Nomination by the Pinduoduo Partnership of such candidate as the executive director
or chief executive officer, as applicable, shall require the affirmative votes of a majority of the partners.
Partner Termination, Retirement and Removal
Partners may elect to retire or withdraw from the Pinduoduo Partnership at any time. All partners are required to retire
upon reaching the age of sixty or upon termination of their employment. Any partner may be removed upon affirmative
vote of a majority of all partners, in the event that the Partnership Committee determines that such partner fails to meet any
of the qualifying standards and so recommend to the partnership.
Retired partners upon meeting certain requirements may be designated as honorary partners by the Partnership
Committee. Honorary partners may not act as partner, but may be entitled to allocations from the deferred portion of the
bonus pool.
Amendment of Partnership Agreement
Pursuant to the partnership agreement, amendment of the partnership agreement requires the approval of 75% of the
partners.
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Directors and Executive Officers
The following table sets forth information regarding our directors and executive officers as of the date of this annual
report.
Directors and Executive Officers
Lei Chen
Anthony Kam Ping Leung
Haifeng Lin
Qi Lu
Nanpeng Shen
George Yong-Boon Yeo
Jing Ma
Junyun Xiao
Zhenwei Zheng
Jianchong Zhu
Age
Position/Title
Independent Director
41 Chairman of the Board of Directors and Chief Executive Officer
60
44 Director
59 Independent Director
53 Independent Director
66 Independent Director
43
41
37 Senior Vice President of Product Development
42
Vice President of Finance
Senior Vice President of Operation
General Counsel
Lei Chen is a founding member of our company and has served as director and our chief executive officer since July
2020. Mr. Chen was appointed as our chairman of the board of directors in March 2021. Mr. Chen served as our chief
technology officer since 2016 and as our director from February 2017 to July 2018. Prior to joining our company, Mr. Chen
served as chief technology officer of Xinyoudi Studio since 2011. Mr. Chen’s prior working experience includes
internships with Google (Nasdaq: GOOG), Yahoo Inc. and IBM (NYSE: IBM) in the United States. Mr. Chen was trained
as a data scientist and is a prolific publisher on the subject of data mining, and has presented his works in large
international conferences, such as the ACM SIGMOD Conference, Very Large Data Bases (VLDB) Conferences and
International Conference on Machine Learning. Mr. Chen received his bachelor’s degree in computer science from
Tsinghua University and his doctoral degree in computer science from University of Wisconsin-Madison.
Anthony Kam Ping Leung has served as our independent director and chairman of the audit committee since August
2019. Mr. Kam has more than 30 years of experience in the financial services industry in Asia. He is a Chartered Financial
Analyst and a chartered accountant in Singapore. Mr. Kam served as the deputy chief executive officer and the executive
director of HSBC Bank (China) Company Limited (“HSBC China”) from February 2016 to April 2018 and served as the
chief financial officer of HSBC China from May 2013 to February 2016. Prior to that, Mr. Kam served as the chief
financial officer of HSBC Bank (Singapore) Limited (“HSBC Singapore”) from September 2005 to May 2013. In addition
to financial accounting and control, management accounting and tax responsibilities, Mr. Kam had direct oversight on
specific risk management functions such as treasury product control and asset & liabilities management. Mr. Kam was also
a member of the asset and liabilities management meeting and a member of the risk management meeting under the
executive committee of HSBC Singapore and HSBC China. Mr. Kam received bachelor of science from University of
Hong Kong and his master degree in applied finance from Macquarie University.
Haifeng Lin has served as our director since June 2017. Mr. Lin is currently the president of Tencent Financial
Technology, and a corporate vice president of Tencent Holdings Limited (HKEx: 00700). Prior to that, he served as general
manager of the merger and acquisitions department of Tencent Technology (Shenzhen) Company Limited, an affiliate of
Tencent Holdings. From July 2003 to November 2010, Mr. Lin served in different roles in finance, strategy and business
operation at Microsoft. Prior to that, Mr. Lin worked at Nokia China from 1999 to 2001. Mr. Lin received his bachelor’s
degree in engineering from Zhejiang University in June 1997 and his master’s degree in business administration from the
Wharton School of the University of Pennsylvania in May 2003.
Qi Lu has served as our independent director and chairman of our compensation committee since July 2018. Currently,
he is the founding CEO of Miracle Plus. He was president and COO of Baidu, and prior to that served as Microsoft’s global
executive vice president and led Applications and Services Group. Dr. Lu joined Microsoft in 2009 as president of its
Online Services Division. Earlier in his career, Dr. Lu joined Yahoo! in 1998, later becoming senior vice president in
charge of search and advertising technologies, and subsequently executive vice president in 2007. Dr. Lu holds both
bachelor and master degrees in computer science from Fudan University in Shanghai and a Ph.D. in computer science from
Carnegie Mellon University. He holds over 40 US patents and has authored many papers in his field.
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Nanpeng Shen has served as our independent director since April 2018. Mr. Shen is the founding managing partner of
Sequoia Capital China since September 2005. Prior to founding Sequoia Capital China, Mr. Shen co-founded Trip.com
Group Ltd (Nasdaq: TCOM), formerly Ctrip.com International, Ltd. (Nasdaq: CTRP), or Ctrip, a leading travel service
provider in China, in 1999. Mr. Shen served as Ctrip’s president from August 2003 to October 2005 and as chief financial
officer from 2000 to October 2005. Mr. Shen also co-founded and served as non-executive Co-Chairman of Homeinns
Hotel Group, a leading economy hotel chain in China, which commenced operations in July 2002. Currently, Mr. Shen also
serves as a director of a number of public and private companies, including an independent non-executive director of Ctrip
since October 2008, a non-executive director of BTG Hotels Group (SHSE: 600258) since January 2017, a non-executive
director of Noah Holdings Limited (NYSE: NOAH) since January 2016, a non-executive director of Meituan (formerly
Meituan Dianping) (HKEx: 3690) since October 2015, and a non-executive director of Ninebot Limited (SHSE: 689009)
since July 2015. Mr. Shen received his Master’s degree from Yale University in November 1992 and his Bachelor’s degree
in applied mathematics from Shanghai Jiao Tong University in July 1988.
George Yong-Boon Yeo has served as our independent director and chairman of our nominating and corporate
governance committee since July 2018. He currently serves as Senior Adviser to Kuok Group and is an independent non-
executive director of AIA Group Limited (HKEx: 01299). Prior to that, Mr. Yeo served 23 years in the government of
Singapore, and was Minister for Information and the Arts, Health, Trade & Industry, and Foreign Affairs of Singapore. Mr.
Yeo is also a member of the Board of Trustees of Berggruen Institute on Governance and International Advisory Panel of
Peking University, among others. Mr. Yeo studied Engineering at Cambridge University on a President’s Scholarship,
graduating with a Double First in 1976, and became a Signals Officer in the Singapore Armed Forces. After graduating
from the Singapore Command and Staff College in 1979, he was posted to the Republic of Singapore Air Force. Mr. Yeo
graduated with an MBA (Baker Scholar) from the Harvard Business School in 1985. He was appointed Chief-of-Staff of
the Air Staff from 1985 to 1986 and Director of Joint Operations and Planning in the Defence Ministry from 1985 to 1988,
attaining the rank of Brigadier-General.
Jing Ma has served as our vice president of finance since July 2020. Prior to joining our company, Mr. Ma had 17
years of finance-related experience in the Chanel group. At Chanel, Mr. Ma held a number of roles, including most recently
the corporate director of Chanel China Company Limited, the chief financial officer of Chanel Hong Kong Limited and
Chanel Macau Limitada, and the regional treasurer of Chanel Limited (Regional Headquarter) responsible for all treasury
matters across Greater China and APAC countries. Mr. Ma received his bachelor’s degree in chrematistics from Shanghai
University of Finance & Economics, his MBA degree from Fudan University and his EMBA degree from China European
International Business School.
Junyun Xiao is a founding member of our company and has served as our senior vice president of operation since 2016
and our director from April 2018 to July 2018. Prior to joining our company, Mr. Xiao served as operation director of
Xinyoudi Studio since 2011. Prior to that, he was a member of the founding team of Ouku.com and served as operation
manager from 2007 to 2010.
Zhenwei Zheng is a founding member of our company and has served as our senior vice president of product
development since 2016, and our director from April 2018 to July 2018. Prior to joining our company, Mr. Zheng served as
chief executive officer of Xinyoudi Studio since 2011. Prior to that, he held various positions at Baidu (Nasdaq: BIDU)
from 2008 to 2010. Mr. Zheng received his bachelor’s degree and master’s degree in computer science from Zhejiang
University.
Jianchong Zhu has served as our general counsel since July 2020. Mr. Zhu had served as senior vice president of our
company since 2018. Prior to joining our company, Mr. Zhu was a partner in the Beijing office of White & Case LLP. From
2010 to 2017, he was an associate and then counsel in Skadden, Arps, Slate, Meagher & Flom LLP. Mr. Zhu received his
bachelor’s degree in English language and literature from Tsinghua University, and his juris doctor’s degree from
University of California Hastings College of the Law.
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B. Compensation
In the year ended December 31, 2020, we paid an aggregate of US$1.5 million in cash to our directors and executive
officers as a group. We have not set aside or accrued any amount to provide pension, retirement or other similar benefits to
our executive officers and directors. Our PRC subsidiaries and VIE are required by law to make contributions equal to
certain percentages of each employee’s salary for his or her medical insurance, maternity insurance, workplace injury
insurance, unemployment insurance, pension benefits through a PRC government-mandated multi-employer defined
contribution plan and other statutory benefits.
Employment Agreements and Indemnification Agreements
We have entered into employment agreements with each of our executive officers. Under these agreements, each of
our executive officers is employed for a specified time period. We may terminate employment for cause, at any time,
without advance notice or remuneration, for certain acts of the executive officer, such as conviction or plea of guilty to a
felony or any crime involving moral turpitude, negligent or dishonest acts to our detriment, or misconduct or a failure to
perform agreed duties. We may also terminate an executive officer’s employment without cause upon three-month advance
written notice. In such case of termination by us, we will provide severance payments to the executive officer as expressly
required by applicable law of the jurisdiction where the executive officer is based. The executive officer may resign at any
time with a three-month advance written notice.
Each executive officer has agreed to hold, 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 or pursuant to applicable law, any of our confidential information or trade secrets, any confidential
information or trade secrets of our clients or prospective clients, or the confidential or proprietary information of any third
party received by us and for which we have confidential obligations. The executive officers have also agreed to disclose in
confidence to us all inventions, designs and trade secrets which they conceive, develop or reduce to practice during the
executive officer’s employment with us and to assign all right, title and interest in them to us, and assist us in obtaining and
enforcing patents, copyrights and other legal rights for these inventions, designs and trade secrets.
In addition, each executive officer has agreed to be bound by non-competition and non-solicitation restrictions during
the term of his or her employment and typically for one year following the last date of employment. Specifically, each
executive officer has agreed not to (i) approach our suppliers, clients, customers or contacts or other persons or entities
introduced to the executive officer in his or her capacity as a representative of us for the purpose of doing business with
such persons or entities that will harm our business relationships with these persons or entities; (ii) assume employment
with or provide services to any of our competitors, or engage, whether as principal, partner, licensor or otherwise, any of
our competitors, without our express consent; or (iii) seek directly or indirectly, to solicit the services of any of our
employees who is employed by us on or after the date of the executive officer’s termination, or in the year preceding such
termination, without our express consent.
We have also entered into indemnification agreements with each of our directors and executive officers. Under these
agreements, we agree to indemnify our directors and executive officers against certain liabilities and expenses incurred by
such persons in connection with claims made by reason of their being a director or officer of our company.
2015 Global Share Plan
In September 2015, our board of directors approved a 2015 global share plan, which we refer to as the 2015 Plan, to
attract and retain the best available personnel, provide additional incentives to employees, directors and consultants and
promote the success of our business. The maximum aggregate number of ordinary shares which may be issued pursuant to
all awards under the 2015 Plan is 581,972,860 Class A ordinary shares, subject to adjustment and amendment. As of
December 31, 2020, options to purchase 581,972,860 Class A ordinary shares under the 2015 Plan had been granted and
outstanding, excluding awards that were forfeited or cancelled after the relevant grant dates.
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The following paragraphs describe the principal terms of the 2015 Plan.
Types of awards. The 2015 Plan permits the awards of options or restricted shares.
Plan administration. Our board of directors or a committee of one or more members appointed by our board of
directors will administer the 2015 Plan. Subject to the terms of the 2015 Plan and in the case of the committee, the specific
duties delegated by our board of directors to the committee, the plan administrator has the authority to determine the
participants to receive awards, the type and number of awards to be granted to each participant, and the terms and
conditions of each award, among others.
Award agreement. Awards granted under the 2015 Plan are evidenced by an award agreement that sets forth terms,
conditions and limitations for each award, which may include the term of the award, the provisions applicable in the event
that the grantee’s employment or service terminates, and our authority to unilaterally or bilaterally amend, modify, suspend,
cancel or rescind the award.
Eligibility. We may grant awards to our employees, directors and consultants of our company.
Vesting schedule. In general, the plan administrator determines the vesting schedule, which is specified in the relevant
award agreement.
Exercise of options. The plan administrator determines the exercise price for each award, which is stated in the award
agreement. The vested portion of option will expire if not exercised prior to the time as the plan administrator determines at
the time of its grant. However, the maximum exercisable term is ten years from the date of a grant.
Transfer restrictions. Awards may not be transferred in any manner by the participant other than in accordance with
the exceptions provided in the 2015 Plan, such as transfers by will or the laws of descent and distribution, or as provided in
the relevant award agreement or otherwise determined by the plan administrator.
Termination and amendment of the 2015 Plan. Unless terminated earlier, the 2015 Plan has a term of ten years. Our
board of directors has the authority to terminate, amend or modify the plan. No termination, amendment or modification
may adversely affect in any material way an outstanding award granted pursuant to the 2015 Plan unless mutually agreed
between the participant and the plan administrator.
2018 Share Incentive Plan
In July 2018, we adopted the 2018 Share Incentive Plan, which we refer to as the 2018 Plan in this annual report, to
attract and retain the best available personnel, provide additional incentives to employees, directors and consultants and
promote the success of our business. The maximum aggregate number of shares which may be issued pursuant to all
awards under the 2018 Plan was initially 363,130,400, plus an annual increase on the first day of each fiscal year of our
company during the term of the 2018 Plan commencing with the fiscal year beginning January 1, 2019, by an amount equal
to the lessor of (i) 1.0% of the total number of shares issued and outstanding on the last day of the immediately preceding
fiscal year, and (ii) such number of shares as may be determined by our board of directors. In March 2021, our board of
directors approved an amendment to the 2018 Plan to increase the annual increase percentage from 1.0% to 3.0% effective
from the fiscal year beginning January 1, 2022. As of December 31, 2020, options to purchase 149,078,240 Class A
ordinary shares and restricted share units representing 43,820,456 Class A ordinary shares had been granted and
outstanding under the 2018 Plan.
The following paragraphs describe the principal terms of the 2018 Plan.
Types of Awards. The 2018 Plan permits the awards of options, restricted shares, restricted share units or any other
type of awards approved by the administration committee.
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Plan Administration. Our board of directors or the administration committee will administer the 2018 Plan. The
administration committee or the full board of directors, as applicable, will determine the participants to receive awards, the
type and number of awards to be granted to each participant, and the terms and conditions of each award.
Award Agreement. Awards granted under the 2018 Plan are evidenced by an award agreement that sets forth terms,
conditions and limitations for each award, which may include the term of the award, the provisions applicable in the event
that the grantee’s employment or service terminates, and our authority to unilaterally or bilaterally amend, modify, suspend,
cancel or rescind the award.
Eligibility. We may grant awards to our employees, directors and consultants of our company. However, we may grant
options that are intended to qualify as incentive share options only to our employees and employees of our parent
companies and subsidiaries.
Vesting Schedule. In general, the administration committee determines the vesting schedule, which is specified in the
relevant award agreement.
Exercise of Options. The administration committee determines the exercise price for each award, which is stated in the
award agreement. The vested portion of option will expire if not exercised prior to the time as the administration committee
determines at the time of its grant. However, the maximum exercisable term is ten years from the date of a grant.
Transfer Restrictions. Awards may not be transferred in any manner by the recipient other than in accordance with the
exceptions provided in the 2018 Plan, such as transfers by will or the laws of descent and distribution.
Termination and Amendment of the 2018 Plan. Unless terminated earlier, the 2018 Plan has a term of ten years. Our
board of directors has the authority to amend or terminate the plan. However, no such action may adversely affect in any
material way any awards previously granted unless agreed by the recipient.
The following table summarizes, as of December 31, 2020, the number of Class A ordinary shares under outstanding
options, restricted share units and other equity awards that we granted to our directors and executive officers, excluding
awards that were forfeited or cancelled after the relevant grant dates.
Name
Lei Chen
Qi Lu
George Yong-Boon Yeo
Anthony Kam Ping Leung
Junyun Xiao
Zhenwei Zheng
Jing Ma
Jianchong Zhu
All directors and executive officers as a group
Class A
Ordinary Shares
Underlying
Equity Awards
Granted
*
*
*
*
*
*
*
*
Exercise Price
(US$/Share)
Nominal
Nominal
Nominal
Nominal
Nominal
Nominal
Nominal
Nominal
57,943,252
Nominal
Date of Grant
September 1, 2016 and September 1, 2020
Various dates between February 1, 2019
and August 1, 2020
Various dates between February 1, 2019
and August 1, 2020
March 1, 2020 and September 1, 2020
November 1, 2015 and September 1, 2016
Various dates from November 1, 2015
to March 1, 2019
August 1, 2020
June 1, 2019
Various dates between November 1, 2015
and September 1, 2020
Date of Expiration
August 31, 2026 and August 31, 2030
Various dates between January 31, 2029
and July 31, 2030
Various dates between January 31, 2029
and July 31, 2030
February 28, 2030 and August 31, 2030
October 31, 2025 and August 31, 2026
Various dates from October 31, 2025
to February 28, 2029
July 31, 2030
May 31, 2029
Various dates between October 31, 2025
and August 31, 2030
* Less than 1% of our total ordinary shares outstanding.
As of December 31, 2020, our employees other than members of our senior management as a group held options to
purchase 673,401,100 Class A ordinary shares, with nominal exercise prices, and restricted share units representing
43,527,204 Class A ordinary shares.
For discussions of our accounting policies and estimates for awards granted pursuant to the 2015 Plan and 2018 Plan,
see “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Critical Accounting Policies—
Measurement of share-based compensation.”
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C. Board Practices
Board of Directors
Our board of directors consists of six directors. 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 or transaction or proposed contract or transaction
notwithstanding that he may be interested therein provided (a) such director has declared the nature of his interest at the
earliest meeting of the board at which it is practicable for him to do so, either specifically or by way of a general notice and
(b) if such contract or arrangement is a transaction with a related party, such transaction has been approved by the audit
committee. The directors may from time to time at their discretion exercise all the powers of the company to raise or
borrow money, mortgage or charge its undertaking, property and assets (present and future) and uncalled capital or any part
thereof, to issue debentures, debenture stock, bonds and other securities, whether outright or as collateral security for any
debt, liability or obligation of the company or of any third party. None of our non-executive directors has a service contract
with us that provides for benefits upon termination of service.
Committees of the Board of Directors
As a Cayman Islands exempted company listed on the Nasdaq Stock Market, we are subject to the Nasdaq corporate
governance listing standards. However, Nasdaq rules permit a foreign private issuer like us to follow the corporate
governance practices of its home country. Certain corporate governance practices in the Cayman Islands, which is our
home country, may differ significantly from the Nasdaq corporate governance listing standards. For example, neither the
Companies Act of the Cayman Islands nor our memorandum and articles of association requires a majority of our directors
to be independent, we could include non-independent directors as members of our compensation committee and
nominating committee, and our independent directors would not necessarily hold regularly scheduled meetings at which
only independent directors are present. However, we currently intend to comply with the rules of the Nasdaq in lieu of
following home country practice.
We have established three committees under the board of directors: an audit committee, a compensation committee
and a nominating and corporate governance committee. Each committee’s members and functions are described below.
Audit Committee. Our audit committee consists of Mr. Anthony Kam Ping Leung, Mr. Nanpeng Shen and Mr. George
Yong-Boon Yeo. Mr. Anthony Kam Ping Leung is the chairman of our audit committee. We have determined that Mr.
Anthony Kam Ping Leung, Mr. Nanpeng Shen and Mr. George Yong-Boon Yeo each satisfies the “independence”
requirements of Rule 5605(c)(2) of the Nasdaq Stock Market Rules and meet the independence standards under Rule 10A-
3 under the Exchange Act, as amended. We have determined that Mr. Anthony Kam Ping Leung qualifies as an “audit
committee financial expert.” The audit committee oversees our accounting and financial reporting processes and the audits
of the financial statements of our company. The audit committee is responsible for, among other things:
● appointing the independent auditors and pre-approving all auditing and non-auditing services permitted to be
performed by the independent auditors;
● reviewing with the independent auditors any audit problems or difficulties and management’s response;
● discussing the annual audited financial statements with management and the independent auditors;
● reviewing the adequacy and effectiveness of our accounting and internal control policies and procedures and any
steps taken to monitor and control major financial risk exposures;
● reviewing and approving all proposed related party transactions;
● meeting separately and periodically with management and the independent auditors; and
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● monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and
effectiveness of our procedures to ensure proper compliance.
Compensation Committee. Our compensation committee consists of Dr. Qi Lu and Mr. Nanpeng Shen. Dr. Qi Lu is the
chairman of our compensation committee. We have determined that Dr. Qi Lu and Mr. Nanpeng Shen each satisfies the
“independence” requirements of Rule 5605(a)(2) of the Nasdaq Stock Market Rules. The compensation committee assists
the board in reviewing and approving the compensation structure, including all forms of compensation, relating to our
directors and executive officers. Our chief executive officer may not be present at any committee meeting during which his
compensation is deliberated. The compensation committee is responsible for, among other things:
● reviewing and approving, or recommending to the board for its approval, the compensation for our chief
executive officer and other executive officers;
● reviewing and recommending to the board for determination with respect to the compensation of our non-
employee directors;
● reviewing periodically and approving any incentive compensation or equity plans, programs or similar
arrangements; and
● selecting compensation consultant, legal counsel or other adviser only after taking into consideration all factors
relevant to that person’s independence from management.
Nominating and Corporate Governance Committee. Our nominating and corporate governance committee consists of
Dr. Qi Lu and Mr. George Yong-Boon Yeo. Mr. George Yong-Boon Yeo is the chairman of our nominating and corporate
governance committee. Dr. Qi Lu and Mr. George Yong-Boon Yeo each satisfies the “independence” requirements of Rule
5605(a)(2) of the Nasdaq Stock Market Rules. The nominating and corporate governance committee assists the board of
directors in selecting individuals qualified to become our directors and in determining the composition of the board and its
committees. The nominating and corporate governance committee is responsible for, among other things:
● selecting and recommending to the board nominees for election by the shareholders or appointment by the board;
● reviewing annually with the board the current composition of the board with regards to characteristics such as
independence, knowledge, skills, experience and diversity;
● making recommendations on the frequency and structure of board meetings and monitoring the functioning of the
committees of the board; and
● advising the board periodically with regards to significant developments in the law and practice of corporate
governance as well as our compliance with applicable laws and regulations, and making recommendations to the
board on all matters of corporate governance and on any remedial action to be taken.
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Duties of Directors
Under Cayman Islands law, our directors owe fiduciary duties to our company, including a duty to act honestly, and a
duty to act in what they consider in good faith to be in our best interests. Our directors must also exercise their powers only
for a proper purpose. A director must exercise the skill and care of a reasonably diligent person having both – (i) the
general knowledge, skill and experience that may reasonably be expected of a person in the same position (an objective
test), and (ii) 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, as amended and restated from time to time, and the rights vested thereunder in the holders of the shares. Our
directors owe their fiduciary duties to our company and not to our company’s individual shareholders, and it is our
company which has the right to seek damages if a duty owed by our directors is breached. In limited exceptional
circumstances, a shareholder may have the right to seek damages in our name if a duty owed by our directors is breached.
Our board of directors has all the powers necessary for managing, and for directing and supervising, our business
affairs. The functions and powers of our board of directors include, among others:
● convening shareholders’ annual general meetings and reporting its work to shareholders at such meetings;
● declaring dividends and distributions;
● appointing officers and determining the term of office of the officers;
● exercising the borrowing powers of our company and mortgaging the property of our company; and
● approving the transfer of shares in our company, including the registration of such shares in our share register.
Terms of Directors and Officers
Our officers are elected by and serve at the discretion of the board of directors. Our directors shall serve and hold
office until expiry of his or her terms or until such time as they are removed from office by ordinary resolutions of the
shareholders. Pursuant to our currently effective articles of association, our board of directors shall consist of not less than
three but not more than nine directors, and shall include (i) two executive directors, if there are no more than five directors,
and (ii) three executive directors, if there are more than five but no more than nine directors. The executive directors shall
be nominated by the Pinduoduo Partnership. Our board of directors is obligated to cause the executive director candidate
duly nominated by the Pinduoduo Partnership to be appointed by the board upon the delivery by the Pinduoduo Partnership
of a written notice (duly executed by the general partner of the Pinduoduo Partnership) to us. The Pinduoduo Partnership is
entitled to nominate the chief executive officer of our company, subject to appointment by the nominating and corporate
governance committee of our board of directors. For additional information, see “Item 6. Directors, Senior Management
and Employees—A. Directors and Senior Management—Pinduoduo Partnership.” The office of a director will be vacated
if the director (i) becomes bankrupt or makes any arrangement or composition with his creditors; (ii) is found to be or
becomes of unsound mind; (iii) resigns his or her office by notice in writing to us; (iv) without special leave of absence
from the board of directors, is absent from meetings of the board of directors for four consecutive meetings and the board
of directors resolves that his office be vacated; or (v) is removed from office pursuant to the provisions of our
memorandum and articles of association.
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D. Employees
Employees
As of December 31, 2020, we had a total of 7,986 employees. We had a total of 3,683 and 5,828 employees as of
December 31, 2018 and 2019, respectively.
The following table gives breakdowns of our employees as of December 31, 2020 by function:
Function:
Sales and marketing
Product development
Platform operation
Management and administration
Total
As of December 31,
2020
1,936
4,864
583
603
7,986
We are dedicated to providing employees with social benefits, diversified work environment and a wide range of
career development opportunities. We have invested significant resources in employee career development and training
opportunities. For example, we have established training programs that cover topics such as our corporate culture,
employee rights and responsibilities, team-building, professional conduct and job performance. We are committed to
making continued efforts to provide better working environment and benefits to our employees.
As required by regulations in China, we participate in various government statutory employee benefit plans, including
medical insurance, maternity insurance, workplace injury insurance, unemployment insurance and pension benefits through
a PRC government-mandated multi-employer defined contribution plan. We are required under PRC law to contribute to
employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of our employees up to a
maximum amount specified by the local government from time to time.
We enter into standard labor contracts with our employees. We also enter into standard confidentiality and non-
compete agreements with all of our senior management and employees. The non-compete restricted period typically
expires two years after the termination of employment, and we may have to compensate the employee with a certain
percentage of his or her pre-departure salary during the restricted period.
We believe that we maintain a good working relationship with our employees, and we have not experienced any major
labor disputes.
E. Share Ownership
Except as specifically noted, the following table sets forth information with respect to the beneficial ownership of our
Class A and Class B ordinary shares as of March 31, 2021 by:
● each of our directors and executive officers; and
● each person known to us to beneficially own more than 5% of our total outstanding ordinary shares.
On March 17, 2021, Mr. Zheng Huang converted all Class B ordinary shares beneficially owned by him into the same
number of Class A ordinary shares. The calculations in the table below are based on 5,013,155,204 Class A ordinary shares
and no Class B ordinary Shares outstanding as of March 31, 2021.
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Beneficial ownership is determined in accordance with the rules and regulations of the SEC. In computing the number
of shares beneficially owned by a person and the percentage ownership of that person, we have included shares that the
person has the right to acquire within 60 days, including through the exercise of any option, warrant or other right or the
conversion of any other security. These shares, however, are not included in the computation of the percentage ownership
of any other person.
Directors and Executive Officers**:
Lei Chen(1)
Anthony Kam Ping Leung
Haifeng Lin(2)
Qi Lu
Nanpeng Shen(3)
George Yong-Boon Yeo(4)
Jing Ma
Junyun Xiao(5)
Zhenwei Zheng(6)
Jianchong Zhu(7)
All Directors and Executive Officers as a Group
Principal Shareholders:
Entities affiliated with Zheng Huang(8)
Entities affiliated with Tencent(9)
Entities affiliated with Pinduoduo Partnership (10)
Banyan Partners Funds(11)
Sequoia(12)
Notes:
* Less than 1% of our total outstanding shares.
Class A Ordinary Shares Beneficially Owned***
Number
%
*
—
*
—
183,684,400
*
—
*
*
*
234,779,104
1,409,744,080
783,217,772
370,772,220
359,176,508
318,658,104
*
—
*
—
3.7
*
—
*
*
*
4.7
28.1
15.6
7.4
7.2
6.4
** Except as indicated otherwise below, the business address of our directors and executive officers is 28/F, No. 533
Loushanguan Road, Changning District, Shanghai, People’s Republic of China.
*** Beneficial ownership information disclosed herein represents direct and indirect holdings of entities owned, controlled
or otherwise affiliated with the applicable holder as determined in accordance with the rules and regulations of the
SEC.
(1) Represents Class A ordinary shares that Mr. Lei Chen may purchase upon exercise of options within 60 days of March
31, 2021.
(2) Represents the ADSs held by Mr. Haifeng Lin. The business address of Mr. Lin is 44/F, Tencent Binhai Towers, No.33
Haitian 2nd Road, Nanshan District, Shenzhen, People’s Republic of China.
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(3) Represents (i) 172,739,072 Class A ordinary shares directly held by SCC Growth IV Holdco A, Ltd., an exempted
company with limited liability incorporated under the laws of the Cayman Islands; (ii) 2,277,749 ADSs, representing
9,110,996 Class A ordinary shares, directly held by Sequoia Capital China Growth Fund V, L.P., an exempted
partnership with limited liability formed under the laws of the Cayman Islands; (iii) 124,750 ADSs, representing
499,000 Class A ordinary shares, directly held by Sequoia Capital China Growth Partners Fund V, L.P., an exempted
partnership with limited liability formed under the law of the Cayman Islands; (iv) 97,499 ADSs, representing 389,996
Class A ordinary shares, directly held by Sequoia Capital China Growth V Principals Fund, L.P., an exempted
partnership with limited liability formed under the law of the Cayman Islands; and (v) 844,796 Class A ordinary
shares, and 25,135 ADSs, representing 945,336 Class A ordinary shares, held by Mr. Nanpeng Shen. SCC Growth IV
Holdco A, Ltd. is wholly owned by Sequoia Capital China Growth Fund IV, L.P. The general partner of Sequoia
Capital China Growth Fund IV, L.P. is SC China Growth IV Management, L.P., whose general partner is SC China
Holding Limited. The general partner of each of Sequoia Capital China Growth Fund V, L.P., Sequoia Capital China
Growth Partners Fund V, L.P. and Sequoia Capital China Growth V Principals Fund, L.P. is SC China Growth V
Management L.P., whose general partner is SC China Holding Limited. SC China Holding Limited is wholly owned
by SNP China Enterprises Limited, which in turn is wholly owned by Mr. Nanpeng Shen. The business address of Mr.
Shen is Suite 3613, 36/F, Two Pacific Place, 88 Queensway, Hong Kong.
(4) Represents the ADSs held by Mr. George Yong-Boon Yeo. The business address of Mr. Yeo is Suite 6219, Cape
Mansions, 62 Mount Davis Road, Hong Kong.
(5) Represents Class A ordinary shares that Mr. Junyun Xiao may purchase upon exercise of options within 60 days of
March 31, 2021.
(6) Represents Class A ordinary shares that Mr. Zhenwei Zheng may purchase upon exercise of options within 60 days of
March 31, 2021.
(7) Represents Class A ordinary shares that Mr. Jianchong Zhu may purchase upon exercise of options within 60 days of
March 31, 2021.
(8) Represents (i) 1,134,932,140 Class A ordinary shares directly held by Walnut Street Investment, Ltd., a business
company limited by shares incorporated in the British Virgin Islands, and (ii) 274,811,940 Class A ordinary shares
directly held by Walnut Street Management, Ltd., a business company limited by shares incorporated in the British
Virgin Islands. Each of Walnut Street Investment, Ltd. and Walnut Street Management, Ltd. is controlled by Steam
Water Limited, a business company limited by shares incorporated in the British Virgin Islands, which is beneficially
owned by Mr. Zheng Huang through a trust established under the laws of the British Virgin Islands. Mr. Huang is the
settlor of the trust, and Mr. Huang and his family members are the trust’s beneficiaries. Walnut Street Investment, Ltd.,
Walnut Street Management, Ltd. and Steam Water Limited are collectively referred to as entities affiliated with Mr.
Huang. The registered address of each of Walnut Street Investment, Ltd. and Walnut Street Management, Ltd. is
Trinity Chambers, P.O. Box 4301, Road Town, Tortola, British Virgin Islands. The registered address of Steam Water
Limited is Ritter House, Wickhams Cay II, Road Town, Tortola, British Virgin Islands.
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(9) Represents (i) 754,359,876 Class A ordinary shares held by Tencent Mobility Limited, a limited liability company
incorporated in Hong Kong, (ii) 473,956 Class A ordinary held by TPP Follow-on I Holding G Limited, a limited
liability company incorporated in the Cayman Islands, (iii) 27,781,280 Class A ordinary shares held by Chinese Rose
Investment Limited, a limited liability company incorporated in the British Virgin Islands, and (vi) 602,660 Class A
ordinary shares held by Distribution Pool Limited, a limited liability company incorporated in British Virgin Islands,
as reported in a Schedule 13D/A filed by Tencent Holdings Limited on November 20, 2020. Tencent Mobility Limited,
TPP Follow-on I Holding G Limited, Chinese Rose Investment Limited and Distribution Pool Limited are investing
entities either directly or beneficially owned by Tencent Holdings Limited, and are collectively referred to as entities
affiliated with Tencent. Tencent Holdings Limited is a limited liability company incorporated in the Cayman Islands
and is listed on the Hong Kong Stock Exchange. The registered address of Tencent Mobility Limited is 29/F, Three
Pacific Place, No. 1 Queen’s Road East, Wanchai, Hong Kong. The registered address of TPP Follow-on I Holding G
Limited is P.O. Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands. The registered address of
Chinese Rose Investment Limited is P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin
Islands. The registered address of Distribution Pool Limited is Vistra Corporate Services Centre, Wickhams Cay II,
Road Town, Tortola, VG1110, British Virgin Islands.
(10) Represents 370,772,220 Class A ordinary shares directly held by Quantum Dot Limited, a business company limited
by shares incorporated in the British Virgin Islands. Quantum Dot Limited is a wholly-owned subsidiary of Qubit
Partners L.P., an exempted limited partnership formed under the laws of the Cayman Islands. Qubit GP Limited, an
exempted company with limited liability incorporated under the law of the Cayman Islands, is the general partner of
Qubit Partners L.P. Mr. Zheng Huang is the sole director of Qubit GP Limited and the sole director of Quantum Dot
Limited. Quantum Dot Limited, Qubit GP Limited and Qubit Partners L.P. are collectively referred to as entities
affiliated with Pinduoduo Partnership. The principal address of the entities affiliated with Pinduoduo Partnership is
28/F, No. 533 Loushanguan Road, Changning District, Shanghai, People's Republic of China.
(11) Represents (i) 341,643,348 Class A ordinary shares directly held by Banyan Partners Fund II, L.P., an exempted
limited partnership formed under the law of the Cayman Islands, (ii) 14,903,181 Class A ordinary shares directly held
by Banyan Partners Fund III, L.P., an exempted limited partnership formed under the law of the Cayman Islands, and
(iii) 2,629,979 Class A shares directly held by Banyan Partners Fund III-A, L.P., an exempted limited partnership
formed under the law of the Cayman Islands. The general partner of Banyan Partners Fund II, L.P. is Banyan Partners
II Ltd., a Cayman Islands company. The general partner of each of Banyan Partners Fund III, L.P. and Banyan Partners
Fund III-A, L.P. is Banyan Partners III Ltd., a Cayman Islands company. Messrs. Zhen Zhang, Bin Yue and Xiang Gao
are the shareholders of each of Banyan Partners II Ltd. and Banyan Partners III Ltd. Banyan Partners Fund II, L.P.,
Banyan Partners Fund III, L.P. and Banyan Partners Fund III-A, L.P. are collectively referred to as Banyan Partners
Funds. The registered address of Banyan Partners Fund II, L.P. is Intertrust Corporate Services (Cayman) Limited, 190
Elgin Avenue, George Town, Grand Cayman KY1-9005, Cayman Islands. The registered address of each of Banyan
Partners Fund III, L.P. and Banyan Partners Fund III-A, L.P. is Walkers Corporate Limited, Cayman Corporate Centre,
27 Hospital Road, George Town, Grand Cayman, KY1-9008, Cayman Islands.
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(12) Represents (i) 172,739,072 Class A ordinary shares directly held by SCC Growth IV Holdco A, Ltd., an exempted
company with limited liability incorporated under the law of the Cayman Islands, (ii) 114,742,940 Class A ordinary
shares held by SC GGFII Holdco, Ltd., an exempted company with limited liability incorporated under the law of the
Cayman Islands, (iii) 2,277,749 ADSs, representing 9,110,996 Class A ordinary shares, directly held by Sequoia
Capital China Growth Fund V, L.P., an exempted partnership with limited liability formed under the law of the
Cayman Islands, (iv) 4,896,499 ADSs, representing 19,585,996 Class A ordinary shares, directly held by Sequoia
Capital Global Growth Fund III—Endurance Partners, L.P., an exempted partnership with limited liability formed
under the law of the Cayman Islands, (v) 124,750 ADSs, representing 499,000 Class A ordinary shares, directly held
by Sequoia Capital China Growth Partners Fund V, L.P., an exempted partnership with limited liability formed under
the law of the Cayman Islands, (vi) 97,499 ADSs, representing 389,996 Class A ordinary shares, directly held by
Sequoia Capital China Growth V Principals Fund, L.P., an exempted partnership with limited liability formed under
the law of the Cayman Islands, (vii) 103,500 ADSs, representing 414,000 Class A ordinary shares, directly held by
Sequoia Capital Global Growth Fund III—Endurance Partners Principals Fund, L.P., an exempted partnership with
limited liability formed under the law of the Cayman Islands, (viii) 844,796 Class A ordinary shares, and 25,135
ADSs, representing 945,336 Class A ordinary shares, held by Mr. Nanpeng Shen, and (ix) 111,192 Class A ordinary
shares, and 2,582 ADSs, representing 121,520 Class A ordinary shares, held by Mr. Douglas Leone, and (x) 99,108
Class A ordinary shares, and 2,535 ADSs, representing 109,248 Class A ordinary shares held by Mr. Roelof Botha.
SCC Growth IV Holdco A, Ltd. is wholly owned by Sequoia Capital China Growth Fund IV, L.P. The general partner
of Sequoia Capital China Growth Fund IV, L.P. is SC China Growth IV Management, L.P., whose general partner is
SC China Holding Limited. The general partner of each of Sequoia Capital China Growth Fund V, L.P., Sequoia
Capital China Growth Partners Fund V, L.P. and Sequoia Capital China Growth V Principals Fund, L.P. is SC China
Growth V Management, L.P., whose general partner is SC China Holding Limited. SC China Holding Limited is
wholly owned by SNP China Enterprises Limited, which in turn is wholly owned by Mr. Nanpeng Shen. Mr. Shen,
together with SCC Growth IV Holdco A, Ltd., Sequoia Capital China Growth Fund IV, L.P., SC China Growth IV
Management, L.P., Sequoia Capital China Growth Fund V, L.P., Sequoia Capital China Growth Partners Fund V, L.P.
and Sequoia Capital China Growth V Principals Fund, L.P., SC China Growth V Management, L.P., SC China Holding
Limited and SNP China Enterprises Limited, are collectively referred to as Sequoia Capital China. SC GGFII Holdco,
Ltd. is owned by Sequoia Capital Global Growth Fund II, L.P. and Sequoia Capital Global Growth II Principals Fund,
L.P., whose general partner is SC Global Growth II Management, L.P. The general partner of SC Global Growth II
Management, L.P. is SC US (TTGP), Ltd. The directors and stockholders of SC US (TTGP), Ltd. who exercise voting
and investment discretion with respect to the shares held by SC GGFII Holdco, Ltd. are Messrs. Roelof Botha and
Douglas Leone. The general partner of each of Sequoia Capital Global Growth Fund III—Endurance Partners, L.P. and
Sequoia Capital Global Growth Fund III—Endurance Partners Principals Fund, L.P. is SCGGF III—Endurance
Partners Management, L.P. The general partner of SCGGF III—Endurance Partners Management, L.P. is SC US
(TTGP), Ltd. The directors and stockholders of SC US (TTGP), Ltd. who exercise voting and investment discretion
with respect to the shares held by each of Sequoia Capital Global Growth Fund III—Endurance Partners, L.P. and
Sequoia Capital Global Growth Fund III—Endurance Partners Principals Fund, L.P. are Messrs. Botha and Leone.
Messrs. Botha and Leone, together with SC GGFII Holdco, Ltd., Sequoia Capital Global Growth Fund II, L.P.,
Sequoia Capital Global Growth II Principals Fund, L.P., SC Global Growth II Management, L.P., Sequoia Capital
Global Growth Fund III—Endurance Partners, L.P., Sequoia Capital Global Growth Fund III—Endurance Partners
Principals Fund, L.P., SCGGF III—Endurance Partners Management, L.P. and SC US (TTGP), Ltd., are collectively
referred to as Sequoia Capital Global Growth. Sequoia Capital China and Sequoia Capital Global Growth may be
deemed to be a group within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended,
with respect to their ownership of our shares, and are collectively referred to as Sequoia Funds. The registered address
of SCC Growth IV Holdco A, Ltd., Sequoia Capital China Growth Fund V, L.P., Sequoia Capital China Growth
Partners Fund V, L.P. and Sequoia Capital China Growth V Principals Fund, L.P. is Maples Corporate Services
Limited, PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands, and the address for each of the
Sequoia Capital Global Growth entities is 2800 Sand Hill Road, Suite 101, Menlo Park, CA, the United States of
America.
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To our knowledge, as of March 31, 2021, a total of 1,513,856,176 Class A ordinary shares are held by one record
holder in the United States, representing approximately 30.2% of our total outstanding shares. The holder is Deutsche Bank
Trust Company Americas, the depositary of our ADS program. The number of beneficial owners of our ADSs in the
United States is likely to be much larger than the number of record holders of our ordinary shares in the United States.
Item 7. Major Shareholders and Related Party Transactions
A. Major Shareholders
Please refer to “Item 6. Directors, Senior Management and Employees—E. Share Ownership.”
B. Related Party Transactions
Contractual Arrangements with Our Variable Interest Entity and its Shareholders
For a description of these contractual arrangements, see “Item 4. Information on the Company—C. Organizational
Structure.”
Shareholders Agreement
We entered into our seventh amended and restated shareholders agreement on March 5, 2018 with our then
shareholders. Pursuant to this shareholders agreement, we have granted certain registration rights to our shareholders. Set
forth below is a description of the registration rights granted under the agreement.
Demand Registration Rights. Holders holding at least 30% or more of the issued and outstanding registrable securities
(on an as converted basis) held by the preferred shareholders, the Class B ordinary shareholders and Class A ordinary
shareholders have the right to demand in writing that we file a registration statement covering the registration of at least
25% of their registrable securities. We have the right to defer filing of a registration statement for a period of not more than
90 days if we determine in good faith that filing of a registration statement in the near future will be materially detrimental
to us or our shareholders, but we cannot exercise the deferral right for more than once during any twelve-month period and
cannot register any other securities during such 90-day period. We are not obligated to effect more than two demand
registrations. Further, if the registrable securities are offered by means of an underwritten offering, and the underwriters
advise us that marketing factors require a limitation of the number of securities to be underwritten, the number of
registrable securities that may be included in the underwriting shall be reduced as required by the underwriters and
allocated among the holders of registrable securities on a pro rata basis according to the number of registrable securities
requested by each holder, provided that all other equity securities are first excluded and 25% of shares of registrable
securities requested by the holders are included.
Registration on Form F-3. Any holder may request us to file a registration statement on Form F-3 if we qualify for
registration on Form F-3. The holders are entitled to an unlimited number of registrations on Form F-3 so long as such
registration offerings are in excess of US$500,000. We, however, are not obligated to consummate a registration if we have
consummated two registrations within any twelve-month period. We have the right to defer filing of a registration
statement for a period of not more than 60 days if we determine in good faith that filing of a registration statement in the
near future will be materially detrimental to us or our shareholders, but we cannot exercise the deferral right for more than
once during any twelve-month period and cannot register any other securities during such 60-day period.
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Piggyback Registration Rights. If we propose to register for a public offering or our securities other than relating to
any share incentive plan or a corporate reorganization, we must notify all holders of registrable securities and offer them an
opportunity to be included in such registration. If the managing underwriter determines in good faith that market factors
require a limitation of the number of registrable securities to be underwritten, the managing underwriter may decide to
exclude shares from the registration and the underwriting, and the number of shares that may be included in the registration
and the underwriting will be allocated, first, to us, second, to each of the holders requesting inclusion of their registrable
securities on a pro rata basis based on the total amount of registrable securities requested by each such holder, and third, to
holders of other securities of our company, provided that all other equity securities are first excluded and 25% of shares of
registrable securities requested by the holders are included.
Expenses of Registration. We will bear all registration expenses, other than the underwriting discounts and
commissions, fees for special counsel for the holders participating in such registration and certain excepted expenses as
described in the shareholders agreement, incurred in connection with registrations, filings or qualification pursuant to the
shareholders agreement.
Termination of Obligations. We have no obligation to effect any demand, piggyback or Form F-3 registration upon
(i) the fifth anniversary from the date of closing of a Qualified Initial Public Offering (as defined in the shareholders
agreement), (ii) upon the termination, liquidation or dissolution of our company or a Liquidation Event (as defined in the
shareholders agreement), or (iii) all registrable securities proposed to be sold by a holder may then be sold without
registration in any 90-day period under Rule 144 of the Securities Act.
Employment Agreements and Indemnification Agreements
See “Item 6. Directors, Senior Management and Employees—B. Compensation.”
Share Incentive Plans
See “Item 6. Directors, Senior Management and Employees—B. Compensation.”
Agreement and Business Cooperation with Tencent
Strategic Cooperation Framework Agreement. In February 2018, we entered into a Strategic Cooperation Framework
Agreement with Tencent, a provider of internet value-added services serving the largest online community in China.
Pursuant to the Strategic Cooperation Framework Agreement, Tencent agreed to offer us access points on the interface of
Weixin Pay enabling us to utilize traffic from Tencent’s Weixin Pay. In addition, we and Tencent have agreed to cooperate
in a number of areas including payment solutions, cloud services and user engagement, and to explore and pursue
additional opportunities for potential cooperation. Tencent agreed to provide us with Weixin payment services and charge
the payment processing fee corresponding to each transaction payment through Weixin Wallet on our platform at a rate no
higher than the normal rate of its payment solutions charged to third parties. Tencent also agreed to share technical and
administrative resources with us and make reasonable efforts to provide support in a variety of professional areas, such as
talent recruiting, training and technical resources. The Strategic Cooperation Framework Agreement has a term of five
years.
Business Cooperation with Tencent. Tencent has been a principal shareholder of us since February 2017. In 2018, 2019
and 2020, we purchased certain services, including payment processing, advertising and cloud services, from Tencent in
the total amount of RMB1,266.4 million, RMB2,298.1 million and RMB10,541.5 million (US$1,615.6 million),
respectively. As of December 31, 2018, 2019 and 2020, we had a receivable balance from Tencent of RMB1,019.0 million,
RMB1,905.8 million and RMB3,177.5 million (US$487.0 million), respectively, and a payable balance to Tencent of
RMB458.1 million, RMB1,502.9 million and RMB3,370.9 million (US$516.6 million), respectively.
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Passive Investments in Related-Party Funds
The Company set up funds as a limited partner with related parties to make investments in privately-held companies.
As of December 31, 2018, the advances made to set up funds was RMB182.7 million. As of December 31, 2019 and 2020,
the carrying amount for the investments was RMB249.6 million and RMB252.4 million (US$38.7 million).
Loan to Ningbo Hexin and Business Cooperation Agreement with Shanghai Fufeitong
We currently rely on commercial banks and third-party online payment service providers for payment processing and
escrow services on our platform. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We
currently rely on commercial banks and third-party online payment service providers for payment processing and escrow
services on our platform. If these payment services are restricted or curtailed in any way, are offered to us on less favorable
terms, or become unavailable to us or our buyers for any reason, our business may be materially and adversely affected.”
To mitigate risk and impact on our business operations in the event of disruption or discontinuance of our relationship with
commercial banks and third-party online payment service providers, we facilitated Messrs. Lei Chen and Zhenwei Zheng,
our executive officers, to acquire the controlling equity interests in Shanghai Fufeitong, a licensed payment service
company, by providing interest-free loans in the aggregate amount of RMB697.6 million (US$106.9 million) to Ningbo
Hexin Equity Investment Partnership, or Ningbo Hexin, a limited partnership controlled by Messrs. Lei Chen and Zhenwei
Zheng.
As of December 31, 2020, Ningbo Hexin beneficially owned 50.01% equity interests in Shanghai Fufeitong. Subject
to compliance with applicable laws and regulations and approval by relevant regulatory authorities, Hangzhou Aimi may
require Hexin to repay the loans at any time and use the proceeds to pay for the limited partnership interests in Ningbo
Hexin. As of December 31, 2020, the loans were still outstanding.
In April 2020, Shanghai Xunmeng entered into a business cooperation agreement with Shanghai Fufeitong, pursuant to
which both parties agreed to conduct comprehensive business cooperation in payment services, technical resources and
other related professional areas. As of December 31, 2020, we had a receivable balance from Shanghai Fufeitong of
RMB364.5 million (US$55.9 million), and a payable balance to Shanghai Fufeitong of RMB14.9 million (US$2.3 million).
C. Interests of Experts and Counsel
Not applicable.
Item 8. Financial Information
A. Consolidated Statements and Other Financial Information
We have appended consolidated financial statements filed as part of this annual report.
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Legal Proceedings
From time to time, we may be involved in disputes and legal or administrative proceedings in the ordinary course of
our business, including actions with respect to product quality complaints, breach of contract, labor and employment
claims, copyright, trademark and patent infringement, and other matters. For example, in July 2018, a complaint was filed
against us in the U.S. federal court alleging contributory trademark infringement and unfair competition based on certain
allegedly counterfeit and unauthorized merchandise sold by merchants to U.S. consumers on our platform. In August 2019,
the court dismissed all claims against us. In February 2020, the District Court awarded the Company a fee award and
entered final judgment. The time period for plaintiff to appeal the dismissal of the amended complaint and the fee award
expired, but plaintiff would not confirm that it would pay the fee award, and plaintiff's U.S. counsel in the litigation stated
that it no longer represents plaintiff in this matter. Accordingly, starting in April 2020, the Company commenced efforts to
enforce the judgment. Those efforts were successful, and in November 2020, the plaintiff paid the Company the full
amount of the judgment plus additional interest for the delay. The Company filed a Satisfaction of Judgment with the
District Court, and the matter is now closed.
Between August and December 2018, several putative shareholder class action lawsuits were filed against us and
certain of our officers and directors in the U.S. District Court for the Southern District of New York (“SDNY”) and the
Superior Court of the State of California. The plaintiffs in these cases allege, in sum and substance, that certain disclosure
and statements made by our company in connection with our initial public offering contained material misstatements and
omissions in violation of the federal securities laws. In March 2020, the court granted our motion to dismiss the claims in
the consolidated action in the SDNY. In August 2020, plaintiffs in the SDNY action filed an appeal in the United States
Court of Appeals for the Second Circuit. Appellate briefing was completed in November 2020, and a decision is pending.
The consolidated action in the Superior Court of the State of California was stayed in June 2019 at our request while the
abovementioned SDNY action was pending. In October 2020, the stay was lifted. In February 2021, the Superior Court of
the State of California dismissed all claims against us for lack of personal jurisdiction. For risks and uncertainties relating
to the pending cases against us, please see “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—
We and certain of our directors and officers have been named as defendants in several shareholder class action lawsuits,
which could have a material adverse impact on our business, financial condition, results of operation, cash flows and
reputation” and “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We may incur liability for
counterfeit, unauthorized, illegal, or infringing products sold or misleading information available on our platforms.”
Dividend Policy
Our board of directors has complete discretion on whether to distribute dividends, subject to our memorandum and
articles of association and certain requirements of Cayman Islands law. In addition, our shareholders may by ordinary
resolution declare a dividend, but no dividend may exceed the amount recommended by our board of directors. Even if our
board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and
earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the
board of directors may deem relevant.
We do not have any present plan to pay any cash dividends on our ordinary shares in the foreseeable future. We
currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.
We are a holding company incorporated in the Cayman Islands. We may rely on dividends from our subsidiaries in
China for our cash requirements, including any payment of dividends to our shareholders. PRC regulations may restrict the
ability of our PRC subsidiaries to pay dividends to us. See “Item 4. Information on the Company—B. Business Overview
—Regulation—Regulations Relating to Dividend Distributions.”
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If we pay any dividends on our ordinary shares, we will pay those dividends which are payable in respect of the
Class A ordinary shares underlying our ADSs to the depositary, as the registered holder of such Class A ordinary shares,
and the depositary then will pay such amounts to our ADS holders in proportion to Class A ordinary shares underlying the
ADSs held by such ADS holders, subject to the terms of the deposit agreement, including the fees and expenses payable
thereunder. Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.
B. Significant Changes
Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of
our audited consolidated financial statements included in this annual report.
Item 9. The Offer and Listing
A. Offering and Listing Details
Our ADSs, each representing four Class A ordinary shares, have been listed on Nasdaq Stock Market since July 26,
2018. Our ADSs trade under the symbol “PDD.”
B. Plan of Distribution
Not applicable.
C. Markets
Our ADSs, each representing four Class A ordinary shares of ours, have been listed on Nasdaq Stock Market since
July 26, 2018 under the symbol “PDD.”
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
Item 10. Additional Information
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
The following are summaries of material provisions of our currently effective memorandum and articles of association
and of the Companies Act, insofar as they relate to the material terms of our ordinary shares.
Objects of Our Company. Under our memorandum and articles of association, the objects of our company are
unrestricted and we have the full power and authority to carry out any object not prohibited by the law of the Cayman
Islands.
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Ordinary Shares. Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of
our Class A ordinary shares and Class B ordinary shares will have the same rights except for voting and conversion rights.
Each Class A ordinary share shall entitle the holder thereof to one (1) vote on all matters subject to vote at our general
meetings, and each Class B ordinary share shall entitle the holder thereof to ten (10) votes on all matters subject to vote at
our general meetings. Our ordinary shares are issued in registered form and are issued when registered in our register of
members.
Conversion. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder
thereof. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any sale ,
transfer, assignment or disposition of any Class B ordinary shares by a holder thereof to any person other than Mr. Zheng
Huang or any entity which is not ultimately controlled by Mr. Zheng Huang, such Class B ordinary shares shall be
automatically and immediately converted into the same number of Class A ordinary shares.
Dividends. The holders of our ordinary shares are entitled to such dividends as may be declared by our board of
directors. Under the laws of the Cayman Islands, our company may declare and pay a dividend out of either profit or share
premium account, provided that in no circumstances may a dividend be paid if this would result in our company being
unable to pay its debts as they fall due in the ordinary course of business.
Voting Rights. Our Class A ordinary shares and Class B ordinary shares vote together as a single class on all matters
submitted to a vote of our shareholders, except as may otherwise be required by law or provided for in our memorandum
and articles of association. In respect of matters requiring shareholders’ vote, each Class A ordinary share is entitled to one
vote, and each Class B ordinary share is entitled to ten votes. At any general meeting a resolution put to the vote of the
meeting shall be decided on a show of hands, unless a poll is (before or on the declaration of the result of the show of
hands) demanded by the chairman or any shareholder present in person or by proxy.
A quorum required for a meeting of shareholders consists of one or more shareholders holding not less than a majority
of all votes attaching to all of our shares in issue and entitled to vote present in person or by proxy or, if a corporation or
other non-natural person, by its duly authorized representative. Advance notice of at least ten calendar days is required for
the convening of our annual general meeting and other shareholders meetings.
An ordinary resolution to be passed at a meeting by the shareholders requires the affirmative vote of a simple majority
of the votes attaching to the ordinary shares cast at a meeting. A special resolution requires the affirmative vote of no less
than two-thirds of the votes cast attaching to the outstanding shares at a meeting. Our articles of association provide that a
special resolution shall be required, and that for the purposes of any such special resolution, the affirmative vote of no less
than 95% of votes cast by the shareholders entitled to vote who are present in person or by proxy at a general meeting shall
be required to approve any amendments to any provisions of our articles of association that relate to or have an impact
upon: (i) the right of the Pinduoduo Partnership to appoint executive directors and nominate the chief executive officer
candidate of our company as described under “Item 6. Directors, Senior Management and Employees—A. Directors and
Senior Management—Pinduoduo Partnership—Executive Director Appointment and CEO Nomination Right,” and (ii) the
procedures regarding the election, appointment and removal of directors or size of the board. Both ordinary resolutions and
special resolutions may also be passed by a unanimous written resolution signed by all the shareholders of our company, as
permitted by the Companies Act and our memorandum and articles of association. A special resolution will be required for
important matters such as a change of name or making changes to our articles of association.
General Meetings of Shareholders. As a Cayman Islands exempted company, we are not obliged by the Companies
Act to call shareholders’ annual general meetings. Our articles of association provide that we may (but are not obliged to)
in each year hold a general meeting as our annual general meeting in which case we shall specify the meeting as such in the
notices calling it, and the annual general meeting shall be held at such time and place as may be determined by our
directors.
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Shareholders’ general meetings may be convened by the chairman or a majority of our board of directors. Advance
notice of at least ten (10) calendar days is required for the convening of our annual general shareholders’ meeting (if any)
and any other general meeting of our shareholders. A quorum required for any general meeting of shareholders consists of
one or more shareholders present or by proxy, representing not less than a majority of all votes attaching to all of our shares
in issue and entitled to vote.
The Companies Act does not provide shareholders with any right to put any proposal before a general meeting.
However, these rights may be provided in a company’s articles of association. Our memorandum and articles of association
provide that upon the requisition of shareholders representing in aggregate not less than one-third of all votes attaching to
all issued and outstanding shares of our company that as at the date of the deposit carry the right to vote at general
meetings of our company, our board of directors will convene an extraordinary general meeting and put the resolutions so
requisitioned to a vote at such meeting. However, our memorandum and articles of association do not provide our
shareholders with any right to put any proposals before annual general meetings or extraordinary general meetings not
called by such shareholders.
Transfer of Ordinary Shares. Subject to the restrictions set out below, any of our shareholders may transfer all or any
of his or her ordinary shares by an instrument of transfer in writing, and shall be executed by or on behalf of the transferor,
and if in respect of a nil or partly paid up share, or the directors so require, shall also be executed by the transferee.
Our board of directors may, in its absolute discretion, decline to register any transfer of any ordinary share which is not
fully paid up or on which we have a lien. Our board of directors may also decline to register any transfer of any ordinary
share unless:
● the instrument of transfer is lodged with us, accompanied by the certificate for the ordinary shares to which it
relates and such other evidence as our board of directors may reasonably require to show the right of the
transferor to make the transfer;
● the instrument of transfer is in respect of only one class of ordinary shares;
● the instrument of transfer is properly stamped, if required;
● in the case of a transfer to joint holders, the number of joint holders to whom the ordinary share is to be
transferred does not exceed four; and
● a fee of such maximum sum as the Nasdaq Global Select Market may determine to be payable or such lesser sum
as our directors may from time to time require is paid to us in respect thereof.
If our directors refuse to register a transfer they shall, within three calendar months after the date on which the
instrument of transfer was lodged, send to each of the transferor and the transferee notice of such refusal.
The registration of transfers may, after compliance with any notice required of the Nasdaq Stock Market, be suspended
and the register closed at such times and for such periods as our board of directors may from time to time determine,
provided, however, that the registration of transfers shall not be suspended nor the register closed for more than 30 calendar
days in any calendar year as our board may determine.
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Liquidation. On the winding up of our company, if the assets available for distribution amongst our shareholders shall
be more than sufficient to repay the whole of the share capital at the commencement of the winding up, the surplus shall be
distributed amongst our shareholders in proportion to the par value of the shares held by them at the commencement of the
winding up, subject to a deduction from those shares in respect of which there are monies due, of all monies payable to our
company for unpaid calls or otherwise. If our assets available for distribution are insufficient to repay all of the paid-up
capital, the assets will be distributed so that the losses are borne by our shareholders in proportion to the par value of the
shares held by them.
Calls on Shares and Forfeiture of Shares. Our board of directors may from time to time make calls upon shareholders
for any amounts unpaid on their shares in a notice served to such shareholders at least 14 calendar days prior to the
specified time of payment. The shares that have been called upon and remain unpaid are subject to forfeiture.
Redemption, Repurchase and Surrender of Shares. We may issue shares on terms that such shares are subject to
redemption, at our option or at the option of the holders of these shares, on such terms and in such manner as may be
determined by our board of directors, or by the shareholders by special resolutions. Our Company may also repurchase any
of our shares on such terms and in such manner as have been approved by our board of directors or by an ordinary
resolution of our shareholders. Under the Companies Act, the redemption or repurchase of any share may be paid out of
our Company’s profits, out of the share premium account, or out of the proceeds of a new issue of shares made for the
purpose of such redemption or repurchase, or out of capital if our company can, immediately following such payment, pay
its debts as they fall due in the ordinary course of business. In addition, under the Companies Act no such share may be
redeemed or repurchased (a) unless it is fully paid up, (b) if such redemption or repurchase would result in there being no
shares outstanding or (c) if the company has commenced liquidation. In addition, our company may accept the surrender of
any fully paid share for no consideration.
Variations of Rights of Shares. If at any time, our share capital is divided into different classes of shares, the rights
attached to any class of shares (unless otherwise provided by the terms of issue of the shares of that class), whether or not
our company is being wound-up, may be varied with the consent in writing of the holders of two-thirds of the issued shares
of that class or with the sanction of a resolution passed at a separate meeting of the holders of the shares of the class by the
holders of two-thirds of the issued shares of that class. The rights conferred upon the holders of the shares of any class
issued shall not, unless otherwise expressly provided by the terms of issue of the shares of that class, be deemed to be
varied by the creation or issue of further shares ranking pari passu with such existing class of shares.
Issuance of Additional Shares. Our memorandum and articles of association authorizes our board of directors to issue
additional ordinary shares from time to time as our board of directors shall determine, to the extent of available authorized
but unissued shares.
Our memorandum of association also authorizes our board of directors to establish from time to time one or more
series of preference shares and to determine, with respect to any series of preference shares, the terms and rights of that
series, including:
● the designation of the series;
● the number of shares of the series;
● the dividend rights, dividend rates, conversion rights, voting rights; and
● the rights and terms of redemption and liquidation preferences.
Our board of directors may issue preference shares without action by our shareholders to the extent authorized but
unissued. Issuance of these shares may dilute the voting power of holders of ordinary shares.
Inspection of Books and Records. Holders of our ordinary shares will have no general right under Cayman Islands law
to inspect or obtain copies of our list of shareholders or our corporate records. However, we will provide our shareholders
with annual audited financial statements.
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Anti-Takeover Provisions. Some provisions of our memorandum and articles of association may discourage, delay or
prevent a change of control of our company or management that shareholders may consider favorable, including provisions
that:
● authorize our board of directors to issue preference shares in one or more series and to designate the price, rights,
preferences, privileges and restrictions of such preference shares without any further vote or action by our
shareholders; and
● regulate the ability of shareholders to requisition and convene general meetings of shareholders.
However, under Cayman Islands law, our directors may only exercise the rights and powers granted to them under our
memorandum and articles of association for a proper purpose and for what they believe in good faith to be in the best
interests of our company.
Exempted Company. We are an exempted company with limited liability under the Companies Act. The Companies
Act distinguishes between ordinary resident companies and exempted companies. Any company that is registered in the
Cayman Islands but conducts business mainly outside of the Cayman Islands may apply to be registered as an exempted
company. The requirements for an exempted company are essentially the same as for an ordinary company except that an
exempted company:
● does not have to file an annual return of its shareholders with the Registrar of Companies;
● is not required to open its register of members for inspection;
● does not have to hold an annual general meeting;
● may issue shares with no par value;
● may obtain an undertaking against the imposition of any future taxation (such undertakings are usually given for
20 years in the first instance);
● may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands;
● may register as an exempted limited duration company;
● may register as a segregated portfolio company; and
● may apply to be registered as a special economic zone company.
“Limited liability” means that the liability of each shareholder is limited to the amount unpaid by the shareholder on
the shares of the company.
C. Material Contracts
We have not entered into any material contracts other than in the ordinary course of business and other than those
described in “Item 4. Information on the Company” and “Item 7. Major Shareholders and Related Party Transactions—B.
Related Party Transactions” or elsewhere in this annual report on Form 20-F.
D. Exchange Controls
See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Relating to Foreign
Exchange.”
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E. Taxation
The following summary of the material Cayman Islands, PRC and U.S. 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 deal with all possible tax consequences
relating to an investment in our ADSs or ordinary shares, such as the tax consequences under U.S. state and local tax laws
or under the tax laws of jurisdictions other than the Cayman Islands, China and the United States.
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. There are no other taxes likely to be
material to us levied by the government of the Cayman Islands except for stamp duties which may be applicable on
instruments executed in, or brought within the jurisdiction of the Cayman Islands. The Cayman Islands is not party to any
double tax treaties that are applicable to any payments made to or by our company. There are no exchange control
regulations or currency restrictions in the Cayman Islands.
Payments of dividends and capital in respect of our ordinary shares and ADSs will not be subject to taxation in the
Cayman Islands, and no withholding will be required on the payment of a dividend or capital to any holder of our ordinary
shares or ADSs, nor will gains derived from the disposal of our ordinary shares or ADSs be subject to Cayman Islands
income or corporation tax.
No stamp duty is payable in respect of the issue of the shares or on an instrument of transfer in respect of shares in
Cayman Islands exempted companies, except for those companies which hold interests in land in the Cayman Islands or if
the relevant instrument is brought into the Cayman Islands.
PRC Taxation
Under the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside the PRC
with “de facto management body” within the PRC is considered a resident enterprise. 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. In April 2009, the State Administration of
Taxation 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. Although this
circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled
by PRC individuals or foreigners, the criteria set forth in the circular may reflect the State Administration of Taxation’s
general position on how the “de facto management body” text should be applied in determining the tax resident status of all
offshore enterprises. According to Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC
enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China 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.
We believe that Pinduoduo Inc. is not a PRC resident enterprise for PRC tax purposes. Pinduoduo Inc. is not controlled
by a PRC enterprise or PRC enterprise group and we do not believe that Pinduoduo Inc. meets all of the conditions above.
Pinduoduo Inc. is a company incorporated outside China. As a holding company, its key assets are its ownership interests
in its subsidiaries, and its records (including the resolutions of its board of directors and the resolutions of its shareholders)
are maintained, outside China. In addition, we are not aware of any offshore holding companies with a similar corporate
structure as ours ever having been deemed a PRC “resident enterprise” by the PRC tax authorities. However, the tax
resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect
to the interpretation of the term “de facto management body.”
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If the PRC tax authorities determine that Pinduoduo Inc. is a PRC resident enterprise for enterprise income tax
purposes, we may be required to withhold a 10% withholding tax from dividends we pay to our shareholders that are non-
resident enterprises, including the holders of our ADSs. In addition, non-resident enterprise shareholders (including our
ADS holders) may be subject to a 10% PRC tax on gains realized on the sale or other disposition of ADSs or ordinary
shares, if such income is treated as sourced from within China. It is unclear whether our non-PRC individual shareholders
(including our ADS holders) would be subject to any PRC tax on dividends or gains obtained by such non-PRC individual
shareholders in the event we are determined to be a PRC resident enterprise. If any PRC tax were to apply to such
dividends or gains, it would generally apply at a rate of 20% unless a reduced rate is available under an applicable tax
treaty. However, it is also unclear whether non-PRC shareholders of Pinduoduo Inc. would be able to claim the benefits of
any tax treaties between their country of tax residence and China in the event that Pinduoduo Inc. is treated as a PRC
resident enterprise. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—If we are
classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavourable tax
consequences to us and our non-PRC shareholders or ADS holders.”
U.S. Federal Income Tax Considerations
The following discussion is a summary of U.S. federal income tax considerations generally applicable to the
ownership and disposition of our ADSs or Class A ordinary shares by a U.S. holder (as defined below) that holds our
ADSs or Class A ordinary shares as “capital assets” (generally, property held for investment) under the U.S. Internal
Revenue Code of 1986, as amended (the “Code”). This discussion is based upon existing U.S. federal income tax law,
which is subject to differing interpretations and may be changed, possibly with retroactive effect. There can be no
assurance that the Internal Revenue Service (the “IRS”) or a court will not take a contrary position. This discussion does
not address all aspects of U.S. federal income taxation that may be important to particular investors in light of their
individual circumstances, including investors subject to special tax rules (for example, banks and certain financial
institutions, insurance companies, pension plans, cooperatives, broker-dealers, traders in securities that have elected the
mark-to-market method of accounting for their securities, partnerships and their partners, regulated investment companies,
real estate investment trusts, certain former U.S. citizens or long-term residents, persons liable for alternative minimum tax,
and tax-exempt organizations (including private foundations)), investors who are not U.S. holders, investors who own
(directly, indirectly, or constructively) 10% or more of our stock (by vote or value), investors that will hold their ADSs or
Class A ordinary shares as part of a straddle, hedge, conversion, constructive sale, or other integrated transaction for U.S.
federal income tax purposes, or investors that have a functional currency other than the U.S. dollar, all of whom may be
subject to tax rules that differ significantly from those summarized below. In addition, this discussion does not discuss any
non-U.S., alternative minimum tax, state, or local tax or any non-income tax (such as the U.S. federal gift or estate tax)
considerations, or the Medicare tax on net investment income. Each U.S. holder is urged to consult its tax advisor regarding
the U.S. federal, state, local, and non-U.S. income and other tax considerations of an investment in our ADSs or Class A
ordinary shares.
General
For purposes of this discussion, a “U.S. holder” is a beneficial owner of our ADSs or Class A ordinary shares that is,
for U.S. federal income tax purposes, (i) an individual who is a citizen or resident of the United States, (ii) a corporation (or
other entity treated as a corporation for U.S. federal income tax purposes) created in, or organized under the laws of, the
United States or any state thereof or the District of Columbia, (iii) an estate the income of which is subject to U.S. federal
income taxation regardless of its source, or (iv) a trust (A) the administration of which is subject to the primary supervision
of a U.S. court and which has one or more U.S. persons who have the authority to control all substantial decisions of the
trust or (B) that has otherwise elected to be treated as a U.S. person under applicable U.S. Treasury regulations.
If a partnership (or other entity or arrangement treated as a partnership for U.S. federal income tax purposes) is a
beneficial owner of our ADSs or Class A ordinary shares, the tax treatment of a partner in the partnership will generally
depend upon the status of the partner and the activities of the partnership. Partnerships holding our ADSs or Class A
ordinary shares and partners in such partnerships are urged to consult their tax advisors as to the particular U.S. federal
income tax consequences of an investment in our ADSs or Class A ordinary shares.
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For U.S. federal income tax purposes, a U.S. holder of ADSs will generally be treated as the beneficial owner of the
underlying shares represented by the ADSs. The remainder of this discussion assumes that a U.S. holder of our ADSs will
be treated as the beneficial owner of the underlying shares represented by the ADSs. Accordingly, deposits or withdrawals
of Class A ordinary shares for ADSs will generally not be subject to U.S. federal income tax.
Passive Foreign Investment Company Considerations
A non-U.S. corporation, such as our company, will be a “passive foreign investment company,” or “PFIC,” for U.S.
federal income tax purposes, if, in any particular taxable year, either (i) 75% or more of its gross income for such year
consists of certain types of “passive” income or (ii) 50% or more of the value of its assets (generally determined on the
basis of a quarterly average) during such year produce or are held for the production of passive income. Cash is categorized
as a passive asset and the company’s unbooked intangibles associated with active business activities may generally be
classified as active assets. Passive income generally includes, among other things, dividends, interest, rents, royalties, and
gains from the disposition of passive assets.
We will be treated as owning a proportionate share of the assets and earning a proportionate share of the income of any
other corporation in which we own, directly or indirectly, 25% or more (by value) of the stock. Although the law in this
regard is unclear, we intend to treat our VIE (including its subsidiaries) as being owned by us for U.S. federal income tax
purposes, and we treat it that way, not only because we exercise effective control over the operation of such entity but also
because we are entitled to substantially all of its economic benefits, and, as a result, we consolidate its results of operations
in our consolidated financial statements. Assuming that we are the owner of our VIE (including its subsidiaries) for U.S.
federal income tax purposes, and based upon our current income and assets and the value of our ADSs, we do not believe
that we were a PFIC for the taxable year ended December 31, 2020 and we do not expect to be classified as a PFIC in the
current taxable year or for the foreseeable future.
While we do not expect to be or become a PFIC in the current or future taxable years, the determination of whether we
are or will become a PFIC will depend in part upon the value of our goodwill and other unbooked intangibles (which will
depend upon the market price of our ADSs from time-to-time, which may be volatile). In estimating the value of our
goodwill and other unbooked intangibles, we have taken into account our market capitalization. Among other matters, if
our market capitalization is less than anticipated or subsequently declines, we may be or become a PFIC for the current or
future taxable years.
The determination of whether we will be or become a PFIC will also depend, in part, on the composition of our
income and assets, which may be affected by how, and how quickly, we use our liquid assets. If we determine not to deploy
significant amounts of cash for active purposes or if we were treated as not owning our VIE for U.S. federal income tax
purposes, our risk of being classified as a PFIC may substantially increase. Because our PFIC status for any taxable year is
a factual determination that can be made only after the close of a taxable year, there can be no assurance that we will not be
a PFIC for the current taxable year or any future taxable year. If we are a PFIC for any year during which a U.S. holder
holds our ADSs or Class A ordinary shares, we generally will continue to be treated as a PFIC for all succeeding years
during which such U.S. holder holds our ADSs or Class A ordinary shares.
The discussion below under “Dividends” and “Sale or Other Disposition of ADSs or Class A Ordinary Shares” is
written on the basis that we will not be or become a PFIC for U.S. federal income tax purposes. The U.S. federal income
tax rules that apply if we are a PFIC for the current taxable year or any subsequent taxable year are generally discussed
below under “Passive Foreign Investment Company Rules.”
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Dividends
Subject to the PFIC rules discussed below, any cash distributions paid on our ADSs or Class A ordinary shares
(including the amount of any tax withheld) out of our current or accumulated earnings and profits, as determined under
U.S. federal income tax principles, will generally be includible in the gross income of a U.S. holder as dividend income on
the day actually or constructively received by the U.S. holder, in the case of Class A ordinary shares, or by the depositary,
in the case of ADSs. Because we do not intend to determine our earnings and profits on the basis of U.S. federal income
tax principles, we will generally report any distribution paid as a dividend for U.S. federal income tax purposes. Dividends
received on the ADSs or Class A ordinary shares will not be eligible for the dividends received deduction allowed to
corporations.
Individuals and other non-corporate U.S. holders will generally be subject to tax at the lower capital gain tax rate
applicable to “qualified dividend income,” provided that certain conditions are satisfied, including that (1) our ADSs are
readily tradable on an established securities market in the United States, or, in the event that we are deemed to be a PRC
resident enterprise under the PRC tax law, we are eligible for the benefit of the United States-PRC income tax treaty, (2) we
are neither a PFIC nor treated as such with respect to a U.S. holder (as discussed below) for the taxable year in which the
dividend was paid and the preceding taxable year, and (3) certain holding period requirements are met. Our ADSs are listed
on the Nasdaq Global Select Market. We believe that the ADSs are readily tradable on an established securities market in
the United States and that we are a qualified foreign corporation with respect to dividends paid on the ADSs. There can be
no assurance that our ADSs will continue to be considered readily tradable on an established securities market in later
years. Since we do not expect that our Class A ordinary shares will be listed on established securities markets, we do not
believe that dividends that we pay on our Class A ordinary shares that are not backed by ADSs currently meet the
conditions required for the reduced tax rate. However, in the event we are deemed to be a resident enterprise under the PRC
Enterprise Income Tax Law, we may be eligible for the benefits of the United States-PRC income tax treaty (which the
U.S. Treasury Department has determined is satisfactory for this purpose) and in that case, we would be treated as a
qualified foreign corporation with respect to dividends paid on our Class A ordinary shares as well as our ADSs. Each non-
corporate U.S. holder is advised to consult its tax advisors regarding the availability of the reduced tax rate applicable to
qualified dividend income for any dividends we pay with respect to our ADSs or Class A ordinary shares.
Dividends generally will be treated as income from foreign sources for U.S. foreign tax credit purposes and generally
will constitute passive category income. In the event that we are deemed to be a PRC “resident enterprise” under the
Enterprise Income Tax Law, a U.S. holder may be subject to PRC withholding taxes on dividends paid on our ADSs or
Class A ordinary shares. See “Item 10. Additional Information—E. Taxation—PRC Taxation.” In that case, a U.S. holder
may be eligible, subject to a number of complex limitations, to claim a foreign tax credit in respect of any foreign
withholding taxes imposed on dividends received on ADSs or Class A ordinary shares. A U.S. holder who does not elect to
claim a foreign tax credit for foreign tax withheld may instead claim a deduction, for U.S. federal income tax purposes, in
respect of such withholdings, but only for a year in which such U.S. holder elects to do so for all creditable foreign income
taxes. The rules governing the foreign tax credit are complex. U.S. holders are advised to consult their tax advisors
regarding the availability of the foreign tax credit under their particular circumstances.
Sale or Other Disposition of ADSs or Class A Ordinary Shares
Subject to the PFIC rules discussed below, a U.S. holder generally will recognize capital gain or loss upon the sale or
other disposition of ADSs or Class A ordinary shares in an amount equal to the difference between the amount realized
upon the disposition and the U.S. holder’s adjusted tax basis in such ADSs or Class A ordinary shares. Any capital gain or
loss will be long-term if the ADSs or Class A ordinary shares have been held for more than one year and generally will be
U.S. source gain or loss for U.S. foreign tax credit purposes. Long-term capital gains of individuals and other non-
corporate U.S. holders generally are eligible for a reduced rate of taxation. The deductibility of a capital loss may be
subject to limitations.
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In the event that we are treated as a PRC “resident enterprise” under the Enterprise Income Tax Law and gain from the
disposition of the ADSs or Class A ordinary shares is subject to tax in the PRC, 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.
If a U.S. holder is not eligible for the benefits of the income tax treaty or fails to make the election to treat any gain as
foreign source, then such U.S. holder may not be able to use the foreign tax credit arising from any PRC tax imposed on
the disposition of the ADSs or Class A ordinary shares unless such credit can be applied (subject to applicable limitations)
against U.S. federal income tax due on other income derived from foreign sources in the same income category (generally,
the passive category). U.S. holders are advised to consult their tax advisors regarding the tax consequences if a foreign tax
is imposed on a disposition of our ADSs or Class A ordinary shares, including the availability of the foreign tax credit
under their particular circumstances and the election to treat any gain as PRC source.
Passive Foreign Investment Company Rules
If we are a PFIC for any taxable year during which a U.S. holder holds our ADSs or Class A ordinary shares, and
unless the U.S. holder makes a mark-to-market election (as described below), the U.S. holder will generally be subject to
special tax rules that have a penalizing effect, regardless of whether we remain a PFIC, for subsequent taxable years, on
(i) any excess distribution that we make to the U.S. holder (which generally means any distribution paid during a taxable
year to a U.S. holder that is greater than 125% of the average annual distributions paid in the three preceding taxable years
or, if shorter, the U.S. holder’s holding period for the ADSs or Class A ordinary shares), and (ii) any gain realized on the
sale or other disposition, including, under certain circumstances, a pledge, of ADSs or Class A ordinary shares. Under the
PFIC rules:
● such excess distribution and/or gain will be allocated ratably over the U.S. holder’s holding period for the ADSs
or Class A ordinary shares;
● such amount allocated to the current taxable year and any taxable years in the U.S. holder’s holding period prior
to the first taxable year in which we are a PFIC, or pre-PFIC year, will be taxable as ordinary income;
● such amount allocated to each prior taxable year, other than a pre-PFIC year, will be subject to tax at the highest
tax rate in effect for that year; and
● an interest charge generally applicable to underpayments of tax will be imposed on the tax attributable to each
prior taxable year, other than a pre-PFIC year.
If we are a PFIC for any taxable year during which a U.S. holder holds our ADSs or Class A ordinary shares and any
of our non-U.S. subsidiaries is also a PFIC, such U.S. holder would be treated as owning a proportionate amount (by value)
of the shares of the lower-tier PFIC for purposes of the application of these rules. U.S. holders are advised to consult their
tax advisors regarding the application of the PFIC rules to any of our subsidiaries.
As an alternative to the foregoing rules, a U.S. holder of “marketable stock” in a PFIC may make a mark-to-market
election with respect to our ADSs, but not our Class A ordinary shares provided that the ADSs are regularly traded on the
Nasdaq Global Select Market. Our ADSs are expected to qualify as being regularly traded, but no assurances may be given
in this regard. Because a mark-to-market election technically cannot be made for any lower-tier PFICs that a PFIC may
own, a U.S. holder who makes a mark-to-market election with respect to our ADSs will generally continue to be subject to
the PFIC rules with respect to such U.S. holder’s indirect interest in any investments held by us that are treated as an equity
interest in a PFIC for U.S. federal income tax purposes.
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If a U.S. holder makes a mark-to-market election with respect to our ADSs, the U.S. holder generally will (i) include
as ordinary income for each taxable year that we are a PFIC the excess, if any, of the fair market value of ADSs held at the
end of the taxable year over the adjusted tax basis of such ADSs and (ii) deduct as an ordinary loss the excess, if any, of the
adjusted tax basis of the ADSs over the fair market value of such ADSs held at the end of the taxable year, but only to the
extent of the net amount previously included in income as a result of the mark-to-market election. The U.S. holder’s
adjusted tax basis in the ADSs would be adjusted to reflect any income or loss resulting from the mark-to-market election.
Further, in each year that we are a PFIC any gain recognized upon the sale or other disposition of the ADSs will be treated
as ordinary income and loss will be treated as ordinary loss, but only to the extent of the net amount previously included in
income as a result of the mark-to-market election. If a U.S. holder makes a mark-to-market election it will be effective for
the taxable year for which the election is made and all subsequent taxable years unless the ADSs are no longer regularly
traded on a qualified exchange or the IRS consents to the revocation of the election. It should also be noted that it is
intended that only the ADSs and not the Class A ordinary shares will be listed on the Nasdaq Global Select Market.
Consequently, if a U.S. holder holds Class A ordinary shares that are not represented by ADSs, such holder generally will
not be eligible to make a mark-to-market election if we are or were to become a PFIC.
If a U.S. holder makes a mark-to-market election in respect of a PFIC and such corporation ceases to be a PFIC, the
U.S. holder will not be required to take into account the mark-to-market gain or loss described above during any period that
such corporation is not a PFIC.
We do not intend to provide information necessary for U.S. holders to make qualified electing fund elections, which, if
available, would result in tax treatment different from (and generally less adverse than) the general tax treatment for PFICs
described above.
If a U.S. holder owns our ADSs or Class A ordinary shares during any taxable year that we are a PFIC, such holder
would generally be required to file an annual IRS Form 8621. Each U.S. holder is advised to consult its tax advisors
regarding the potential tax consequences to such holder if we are or become a PFIC, including the possibility of making a
mark-to-market election.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We are subject to periodic reporting and other informational requirements of the Exchange Act as applicable to foreign
private issuers, and are required to file reports and other information with the SEC. Specifically, we are required to file
annually an annual report on Form 20-F within four months after the end of each fiscal year, which is December 31. All
information filed with the SEC can be obtained over the internet at the SEC’s website at www.sec.gov or inspected and
copied at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. You can
request copies of documents, upon payment of a duplicating fee, by writing to the SEC. 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.
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We will furnish Deutsche Bank Trust Company Americas, the depositary of our ADSs, with our annual reports, which
will include a review of operations and annual audited consolidated financial statements prepared in conformity with U.S.
GAAP, and all notices of shareholders’ meetings and other reports and communications that are made generally available
to our shareholders. The depositary will make such notices, reports and communications available to holders of ADSs and,
upon our request, will mail to all record holders of ADSs the information contained in any notice of a shareholders’
meeting received by the depositary from us.
In accordance with Nasdaq Stock Market Rule 5250(d), we will post this annual report on Form 20-F on our website at
http://investor.pinduoduo.com. In addition, we will provide hardcopies of our annual report free of charge to shareholders
and ADS holders upon request.
I. Subsidiary Information
Not applicable.
Item 11. Quantitative and Qualitative Disclosures about Market Risk
Foreign exchange risk
Substantially all of our revenues and expenses are denominated in RMB. We do not believe that we currently have any
significant direct foreign exchange risk and have not used any derivative financial instruments to hedge exposure to such
risk. Although our exposure to foreign exchange risks should be limited in general, the value of your investment in our
ADSs will be affected by the exchange rate between U.S. dollar and Renminbi because the value of our business is
effectively denominated in RMB, while our ADSs will be traded in U.S. dollars.
The conversion of Renminbi into foreign currencies, including U.S. dollars, is based on rates set by the People’s Bank
of China. The Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. It is difficult to
predict how market forces or PRC or U.S. government policy may impact the exchange rate between Renminbi and the
U.S. dollar in the future.
To the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi
against the U.S. dollar would have an adverse effect on the RMB amount we receive from the conversion. Conversely, if
we decide to convert Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares
or ADSs or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect
on the U.S. dollar amounts available to us.
Interest rate risk
Our exposure to interest rate risk primarily relates to the interest income generated by excess cash, which is mostly
held in interest-bearing bank deposits, restricted cash and short-term investments. Interest-earning instruments carry a
degree of interest rate risk. We have not been exposed to material risks due to changes in interest rates, and we have not
used any derivative financial instruments to manage our interest risk exposure.
Inflation
To date, inflation in China has not materially impacted our results of operations. According to the National Bureau of
Statistics of China, the year-over-year percent changes in the consumer price index for December 2018, 2019 and 2020
were increases of 1.9%, 4.5% and 0.2%, respectively. Although we have not been materially affected by inflation in the
past, we can provide no assurance that we will not be affected by higher rates of inflation in China in the future.
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Item 12. Description of Securities Other than Equity Securities
A. Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
D. American Depositary Shares
Fees and Expenses Our ADS Holders May Have to Pay
As an ADS holder, you will be required to pay the following service fees to the depositary bank and certain taxes and
governmental charges (in addition to any applicable fees, expenses, taxes and other governmental charges payable on the
deposited securities represented by any of your ADSs):
Service
· To any person to which ADSs are issued or to any person to
which a distribution is made in respect of ADS distributions
pursuant to stock dividends or other free distributions of stock,
bonus distributions, stock splits or other distributions (except
where converted to cash)
Fees
Up to US$0.05 per ADS issued
· Cancellation of ADSs, including the case of termination of the
deposit agreement
Up to US$0.05 per ADS cancelled
· Distribution of cash dividends
Up to US$0.05 per ADS held
· Distribution of cash entitlements (other than cash dividends)
and/or cash proceeds from the sale of rights, securities and other
entitlements
Up to US$0.05 per ADS held
· Distribution of ADSs pursuant to exercise of rights.
Up to US$0.05 per ADS held
· Distribution of securities other than ADSs or rights to purchase
additional ADSs
· Depositary services
Up to US$0.05 per ADS held
Up to US$0.05 per ADS held on the applicable
record date(s) established by the depositary bank
As an ADS holder, you will also be responsible to pay certain fees and expenses incurred by the depositary bank and
certain taxes and governmental charges (in addition to any applicable fees, expenses, taxes and other governmental charges
payable on the deposited securities represented by any of your ADSs) such as:
● Fees for the transfer and registration of Class A ordinary shares charged by the registrar and transfer agent for the
Class A ordinary shares in the Cayman Islands (i.e., upon deposit and withdrawal of Class A ordinary shares).
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● Expenses incurred for converting foreign currency into U.S. dollars.
● Expenses for cable, telex and fax transmissions and for delivery of securities.
● Taxes and duties upon the transfer of securities, including any applicable stamp duties, any stock transfer charges
or withholding taxes (i.e., when Class A ordinary shares are deposited or withdrawn from deposit).
● Fees and expenses incurred in connection with the delivery or servicing of Class A ordinary shares on deposit.
● Fees and expenses incurred in connection with complying with exchange control regulations and other regulatory
requirements applicable to Class A ordinary shares, deposited securities, ADSs and ADRs.
● Any applicable fees and penalties thereon.
The depositary fees payable upon the issuance and cancellation of ADSs are typically paid to the depositary bank by
the brokers (on behalf of their clients) receiving the newly issued ADSs from the depositary bank and by the brokers (on
behalf of their clients) delivering the ADSs to the depositary bank for cancellation. The brokers in turn charge these fees to
their clients. Depositary fees payable in connection with distributions of cash or securities to ADS holders and the
depositary services fee are charged by the depositary bank to the holders of record of ADSs as of the applicable ADS
record date.
The depositary fees payable for cash distributions are generally deducted from the cash being distributed or by selling
a portion of distributable property to pay the fees. In the case of distributions other than cash (i.e., share dividends, rights),
the depositary bank charges the applicable fee to the ADS record date holders concurrent with the distribution. In the case
of ADSs registered in the name of the investor (whether certificated or uncertificated in direct registration), the depositary
bank sends invoices to the applicable record date ADS holders. In the case of ADSs held in brokerage and custodian
accounts (via DTC), the depositary bank generally collects its fees through the systems provided by DTC (whose nominee
is the registered holder of the ADSs held in DTC) from the brokers and custodians holding ADSs in their DTC accounts.
The brokers and custodians who hold their clients’ ADSs in DTC accounts in turn charge their clients’ accounts the amount
of the fees paid to the depositary banks.
In the event of refusal to pay the depositary fees, the depositary bank may, under the terms of the deposit agreement,
refuse the requested service until payment is received or may set off the amount of the depositary fees from any
distribution to be made to the ADS holder.
Fees and Other Payments Made by the Depositary to Us
The depositary has agreed to make payments to us and reimburse us for certain costs and expenses upon such rates and
terms as agreed between the depository and us. Pursuant to such agreement, we received from the depository US$7.0
million, after deduction of applicable U.S. taxes, in the year ended December 31, 2020.
Item 13. Defaults, Dividend Arrearages and Delinquencies
PART II
None.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
Material Modifications to the Rights of Security Holders
None.
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Use of Proceeds
The following “Use of Proceeds” information relates to the registration statement on Form F-1, as amended (File
Number 333-226014 ) (the “F-1 Registration Statement”) in relation to our initial public offering of 85,600,000 ADSs
representing 342,400,000 Class A ordinary shares, without taking into account over-allotment, at an initial offering price of
US$19.00 per ADS. Our initial public offering closed in July 2018. Credit Suisse Securities (USA) LLC, Goldman Sachs
(Asia) L.L.C., China International Capital Corporation Hong Kong Securities Limited, China Renaissance Securities (Hong
Kong) Limited were the representatives of the underwriters for our initial public offering.
The F-1 Registration Statement was declared effective by the SEC on July 25, 2018. For the period from the effective
date of the F-1 Registration Statement to December 31, 2020, the total expenses incurred for our company’s account in
connection with our initial public offering was approximately US$60.2 million, which included US$52.3 million in
underwriting discounts and commissions for the initial public offering and approximately US$7.9 million in other costs and
expenses for our initial public offering. We received net proceeds of approximately US$1.7 billion from our initial public
offering. None of the transaction expenses included payments to directors or officers of our company or their associates,
persons owning more than 10% or more of our equity securities or our affiliates. None of the net proceeds from the initial
public offering were paid, directly or indirectly, to any of our directors or officers or their associates, persons owning 10%
or more of our equity securities or our affiliates. As of the date of this annual report, we have used up all of the net
proceeds from our initial public offering.
Item 15. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our chief executive officer, carried out an
evaluation of the effectiveness of our disclosure controls and procedures, which is defined in Rules 13a-15(e) of the
Exchange Act, as of December 31, 2020. Based upon that evaluation, our management, with the participation of our chief
executive officer, has concluded that, as of the end of the period covered by this annual report, our disclosure controls and
procedures were effective in ensuring that the information required to be disclosed by us in the reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the
SEC’s rules and forms, and that the information required to be disclosed by us in the reports that we file or submit under
the Exchange Act is accumulated and communicated to our management, including our chief executive officer, 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) under the Exchange Act. Our management, with the participation of our chief executive officer,
evaluated the effectiveness of our internal control over financial reporting based on criteria established in the framework in
Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this evaluation, our management has concluded that our internal control over financial reporting
was effective as of December 31, 2020.
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 and procedures may
deteriorate.
Our independent registered public accounting firm, Ernst & Young Hua Ming LLP, has audited the effectiveness of our
internal control over financial reporting as of December 31, 2020, as stated in its report, which appears on page F-4 of this
annual report.
133
Table of Contents
Changes in Internal Control over Financial Reporting
Other than as described above, there were no changes in our internal controls over financial reporting that occurred
during the period covered by this annual report on Form 20-F 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 Mr. Anthony Kam Ping Leung, an independent director (under the
standards set forth in Nasdaq Stock Market Rule 5605(a)(2) and Rule 10A-3 under the Exchange Act) and member of our
audit committee, is an audit committee financial expert.
Item 16B. Code of Ethics
Our board of directors adopted a code of business conduct and ethics that applies to our directors, officers and
employees in June 2018. We have posted a copy of our code of business conduct and ethics on our website at
http://investor.pinduoduo.com.
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 Ernst & Young Hua Ming LLP, our principal external auditors, for the periods indicated.
Audit fees(1)
All other fees(2)
2019
US$
2020
US$
(in thousands)
946
23
2,170
43
(1) “Audit fees” represents the aggregate fees billed for each of the fiscal years listed for professional services rendered by
our principal auditors for the audit of our annual financial statements, issue of comfort letters in connection with our
initial public offering, follow-on offering, and issuance of unsecured senior notes, assistance with and review of
documents filed with the SEC.
(2) “All other fees” represents the aggregate fees billed in each of the fiscal years listed for services rendered by our
principal auditors other than services reported under “Audit Fees”.
The policy of our audit committee is to pre-approve all audit and non-audit services provided by Ernst & Young Hua
Ming LLP, including audit services, audit-related services, tax services and other services as described above, other than
those for de minimis services which are approved by the audit committee prior to the completion of the audit.
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.
Item 16F. Change in Registrant’s Certifying Accountant
Not applicable.
134
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Item 16G. Corporate Governance
As a Cayman Islands exempted company listed on Nasdaq Stock Market, we are subject to the Nasdaq corporate
governance listing standards. However, Nasdaq rules permit a foreign private issuer like us to follow the corporate
governance practices of its home country. Certain corporate governance practices in the Cayman Islands, which is our
home country, may differ significantly from the Nasdaq corporate governance listing standards. We relied on home country
practice exemption with respect to the requirement for annual shareholders meeting and did not hold an annual
shareholders meeting in 2019. We rely on our home country practice exemption with respect to the requirement for
shareholders’ approval for amending share incentive plans and did not seek shareholders’ approval for the amendment to
the 2018 Plan to increase the annual increase percentage from 1.0% to 3.0% effective from the fiscal year beginning
January 1, 2022. We may also opt to rely on additional home country practice exemptions in the future. As a result, our
shareholders may be afforded less protection than they would otherwise enjoy under the Nasdaq Stock Market corporate
governance listing standards applicable to U.S. domestic issuers. See “Item 3. Key Information—D. Risk Factors—Risks
Related to Our ADSs—As a company incorporated in the Cayman Islands, we are permitted to adopt certain home country
practices in relation to corporate governance matters that differ significantly from the Nasdaq corporate governance listing
standards; these practices may afford less protection to shareholders than they would enjoy if we complied fully with the
Nasdaq corporate governance listing standards.”
Item 16H. Mine Safety Disclosure
Not applicable.
PART III
Item 17. Financial Statements
We have elected to provide financial statements pursuant to Item 18.
Item 18. Financial Statements
The consolidated financial statements of Pinduoduo Inc., its subsidiaries and its consolidated variable interest entity
are included at the end of this annual report.
Item 19. Exhibits
Exhibit
Number
Description of Document
1.1
2.1
2.2
2.3
Ninth Amended and Restated Memorandum and Articles of Association of the Registrant (incorporated
herein by reference to Exhibit 3.2 to the registration statement on Form F-1/A filed with the Securities and
Exchange Commission on July 16, 2018 (File No. 333-226014))
Registrant’s Specimen American Depositary Receipt (included in Exhibit 2.3)
Registrant’s Specimen Certificate for Class A Ordinary Shares (incorporated herein by reference to
Exhibit 4.2 to the registration statement on Form F-1/A filed with the Securities and Exchange Commission
on July 16, 2018 (File No. 333-226014))
Deposit Agreement by and among the Registrant, the depositary and the holders and beneficial owners of
the American Depositary Receipts issued thereunder dated July 25, 2018 (incorporated herein by reference
to Exhibit 4.3 to the registration statement on Form F-1 filed with the Securities and Exchange Commission
on February 5, 2019 (File No. 333-229523))
135
Table of Contents
Exhibit
Number
2.4
2.5
2.6*
2.7*
2.8
2.9
4.1
4.2*
4.3
4.4
4.5*
4.6*
4.7
4.8*
Description of Document
Seventh Amended and Restated Shareholders Agreement between the Registrant and other parties thereto
dated March 5, 2018 (incorporated herein by reference to Exhibit 4.4 to the Form F-1 filed on June 29,
2018 (File No. 333-226014))
Indenture dated as of September 27, 2019 between Pinduoduo Inc. and Deutsche Bank Trust Company
Americas, as trustee (incorporated herein by reference to Exhibit 2.5 to the annual report on Form 20-F
filed on April 24, 2020 (File No. 001-38591))
Indenture dated as of November 20, 2020 between Pinduoduo Inc. and Deutsche Bank Trust Company
Americas, as trustee
First Supplemental Indenture dated as of November 20, 2020 between Pinduoduo Inc. and Deutsche Bank
Trust Company Americas, as trustee, supplementing the Indenture dated as of November 20, 2020 between
Pinduoduo Inc. and Deutsche Bank Trust Company Americas
Description of Securities (incorporated herein by reference to Exhibit 2.6 to the annual report on Form 20-F
filed on April 24, 2020 (File No. 001-38591))
Description of the Registrant’s US$2,000,000,000 0.00% Convertible Senior Notes Due 2025 (incorporated
herein by reference to (i) the section titled “Description of Debt Securities” in the Registrants’ registration
statement on Form F-3 (File No. 333-250117) filed with the Securities and Exchange Commission on
November 16, 2020 and (ii) the section titled “Description of the Notes” in the prospectus supplement, in
the form filed by the Registrant with the Securities and Exchange Commission on November 19, 2020
pursuant to Rule 424(b) under the Securities Act of 1933, as amended)
2015 Global Share Plan (incorporated herein by reference to Exhibit 10.1 to the registration statement on
Form F-1 filed with the Securities and Exchange Commission on June 29, 2018 (File No. 333-226014))
Amended and Restated 2018 Share Incentive Plan
Form of Indemnification Agreement between the Registrant and its directors and executive officers
(incorporated herein by reference to Exhibit 10.2 to the registration statement on Form F-1 filed with the
Securities and Exchange Commission on June 29, 2018 (File No. 333-226014))
Form of Employment Agreement between the Registrant and its executive officers(incorporated herein by
reference to Exhibit 10.3 to the registration statement on Form F-1 filed with the Securities and Exchange
Commission on June 29, 2018 (File No. 333-226014))
English translation of the Shareholders’ Voting Rights Proxy Agreement among Hangzhou Weimi,
Hangzhou Aimi and the shareholders of Hangzhou Aimi dated July 15, 2020
English translation of the Equity Pledge Agreement among Hangzhou Weimi, Hangzhou Aimi and the
shareholders of Hangzhou Aimi dated July 15, 2020
English translation of the Exclusive Consulting and Services Agreement between Hangzhou Weimi and
Hangzhou Aimi dated June 5, 2015 (incorporated herein by reference to Exhibit 10.6 to the registration
statement on Form F-1 filed with the Securities and Exchange Commission on June 29, 2018 (File No. 333-
226014))
English translation of the Exclusive Option Agreement among Hangzhou Weimi, Hangzhou Aimi and the
shareholders of Hangzhou Aimi dated July 15, 2020
4.9*
English translation of the Spousal Consent Letter
136
Table of Contents
Exhibit
Number
Description of Document
4.10
4.11
4.12
4.13
4.14
8.1*
11.1
Series D Preferred Shares Purchase Agreement between the Registrant and other parties thereto, dated
February 14, 2018 (incorporated herein by reference to Exhibit 10.9 to the registration statement on
Form F-1 filed with the Securities and Exchange Commission on June 29, 2018 (File No. 333-226014))
Series C-3 Preferred Shares Purchase Agreement between the Registrant and other parties thereto, dated
June 28, 2017 (incorporated herein by reference to Exhibit 10.10 to the registration statement on Form F-1
filed with the Securities and Exchange Commission on June 29, 2018 (File No. 333-226014))
Series C Preferred Shares Purchase Agreement between the Registrant and other parties thereto, dated
January 26, 2017 (incorporated herein by reference to Exhibit 10.11 to the registration statement on
Form F-1 filed with the Securities and Exchange Commission on June 29, 2018 (File No. 333-226014))
Series B-4 Preferred Shares Purchase Agreement between the Registrant and other parties thereto, dated
June 22, 2016 (incorporated herein by reference to Exhibit 10.12 to the registration statement on Form F-1
filed with the Securities and Exchange Commission on June 29, 2018 (File No. 333-226014))
English translation of the Strategic Cooperation Framework Agreement by and between the Registrant and
an affiliate of Tencent Holdings Limited dated February 27, 2018 (incorporated herein by reference to
Exhibit 10.13 to the registration statement on Form F-1 filed with the Securities and Exchange Commission
on June 29, 2018 (File No. 333-226014))
List of Subsidiaries and Consolidated Variable Interest Entities of the Registrant
Code of Business Conduct and Ethics of the Registrant (incorporated herein by reference to Exhibit 99.1 to
the registration statement on Form F-1 filed with the Securities and Exchange Commission on June 29,
2018 (File No. 333-226014))
12.1*
CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
12.2*
CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
13.1**
CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
13.2**
CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
15.1*
Consent of King & Wood Mallesons
15.2*
Consent of Ernst & Young Hua Ming LLP, Independent Registered Public Accounting Firm
101.INS*
Inline XBRL Instance Document
101.SCH*
Inline XBRL Taxonomy Extension Scheme Document
101.CAL*
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
137
Table of Contents
* Filed with this Annual Report on Form 20-F.
** Furnished with this Annual Report on Form 20-F.
138
Table of Contents
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused
and authorized the undersigned to sign this annual report on its behalf.
SIGNATURES
Date: April 30, 2021
Pinduoduo Inc.
By: /s/ Lei Chen
Name: Lei Chen
Title: Chief Executive Officer
139
Table of Contents
PINDUODUO INC.
Index to Consolidated Financial Statements
Contents
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2019 and 2020
Page(s)
F-2 – F-5
F-6 – F-7
Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2018, 2019 and 2020
F-8
Consolidated Statements of Shareholders’ (Deficits)/Equity for the Years Ended December 31, 2018,
2019 and 2020
F-9 – F-10
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2019 and 2020
F-11
Notes to Consolidated Financial Statements for the Years Ended December 31, 2018, 2019 and 2020
F-12– F-50
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Pinduoduo Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Pinduoduo Inc. (the Company) as of December 31, 2019
and 2020, the related consolidated statements of comprehensive loss, shareholders’ (deficits)/equity and cash flows for
each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the
“consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 2019 and 2020, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (2013 framework), and our report dated April 30, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion
on the Company’s financial statements based on our audits. We are a public accounting firm registered with the 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement,
whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the
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 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 financial statements. We believe that our audits provide a reasonable basis for our
opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements
that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or
disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex
judgements. The communication of the critical audit matter 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 matter below, providing a
separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
F-2
Table of Contents
Description
of the Matter
Accounting for Incentives Provided to the Consumers
As described in Note 2 to the consolidated financial statements, to promote its online marketplace and
attract more registered consumers, the Company at its own discretion offers various forms of
incentives, for example, coupons, credits and discounts, that are not specific to any merchant, to
consumers who are not customers of the Company. These incentives are primarily used by the
consumers to purchase merchandises offered on the Company’s online marketplace at reduced prices.
Despite the absence of any explicit contractual obligations to incentivize the non-customer consumers
on behalf of the merchants, the Company further evaluated the varying features of different incentive
programs to determine whether the incentives represent implicit obligations to consumers on behalf of
merchants. Based on that evaluation, the Company determined that incentives offered to consumers are
not considered as payments to customers.
Auditing the accounting for the Company’s incentives offered to consumers was complex due to
judgement involved in analyzing the varying features in the different incentive programs. This included
evaluating the Company’s determination of whether the incentives offered represent implicit
obligations to the consumers on behalf of the merchants and if so, the incentives should be considered
as payments to customers. Such determination is used in the process of evaluating the presentation and
disclosures of the costs associated with the incentives as marketing expenses or net of revenues.
How we
addressed
the matter in
our audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls
over the Company’s accounting for the incentive programs. For example, we tested the controls over
the approval of incentive programs and management’s review of the analysis of the varying features in
the incentive programs for the appropriate presentation and disclosures of the incentives.
To audit the presentation and disclosures of the incentives provided to the consumers, we compared the
incentive programs and their respective features documented in management’s analysis to the program
terms and conditions presented to the consumers and the merchants by the Company on its platform.
We also evaluated management’s judgement applied in determining whether the terms and conditions
underlying the incentive programs create any implicit obligations of the Company to incentivize the
consumers on behalf of the merchants. In addition, we assessed the adequacy of the Company’s
disclosures included in Note 2 to the consolidated financial statements regarding the accounting for the
incentives.
/s/ Ernst & Young Hua Ming LLP
We have served as the Company’s auditor since 2018.
Shanghai, the People’s Republic of China
April 30, 2021
F-3
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Pinduoduo Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Pinduoduo Inc.’s internal control over financial reporting as of December 31, 2020 based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Pinduoduo Inc. (the Company) maintained,
in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO
criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2020, and the related
consolidated statements of comprehensive loss, shareholders’ (deficits)/equity and cash flows for each of the three years in
the period ended December 31, 2020 and the related notes (collectively referred to as the “consolidated financial
statements”) and our report dated April 30, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s
Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit. We are a public accounting firm registered with the 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in
all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides
a reasonable basis for our opinion.
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 (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) 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 (3) 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.
F-4
Table of Contents
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.
/s/ Ernst & Young Hua Ming LLP
Shanghai, the People’s Republic of China
April 30, 2021
F-5
Table of Contents
PINDUODUO INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares and per share data)
ASSETS
Current assets
Cash and cash equivalents
Restricted cash
Receivables from online payment platforms
Short-term investments
Amounts due from related parties
Prepayments and other current assets
Total current assets
Non-current assets
Property, equipment and software, net
Intangible asset
Right-of-use assets
Other non-current assets
Total non-current assets
Total Assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Amounts due to related parties (including amounts due to related parties of the
consolidated VIE and its subsidiaries without recourse to the primary beneficiary of
RMB1,502,892 and RMB3,385,863 (US$518,906) as of December 31, 2019 and
2020, respectively)
Customer advances and deferred revenues (including customer advances and deferred
revenues of the consolidated VIE and its subsidiaries without recourse to the primary
beneficiary of RMB605,969 and RMB2,422,907 (US$371,327) as of December 31,
2019 and 2020, respectively)
Payable to merchants (including payable to merchants of the consolidated VIE and its
subsidiaries without recourse to the primary beneficiary of RMB29,657,227 and
RMB53,417,259 (US$8,186,553) as of December 31, 2019 and 2020, respectively)
Accrued expenses and other liabilities (including accrued expenses and other liabilities
of the consolidated VIE and its subsidiaries without recourse to the primary
beneficiary of RMB3,420,728 and RMB6,999,827 (US$1,072,770) as of December
31, 2019 and 2020, respectively)
Merchant deposits (including merchant deposits of the consolidated VIE and its
subsidiaries without recourse to the primary beneficiary of RMB7,840,912 and
RMB10,926,319 (US$1,674,532) as of December 31, 2019 and 2020, respectively)
Short-term borrowings (including short-term borrowings of the consolidated VIE and
its subsidiaries without recourse to the primary beneficiary of RMB898,748 and
RMB1,866,316 (US$286,025) as of December 31, 2019 and 2020, respectively)
Lease liabilities (including lease liabilities of the consolidated VIE and its subsidiaries
without recourse to the primary beneficiary of RMB90,523 and RMB134,131
(US$20,556) as of December 31, 2019 and 2020, respectively)
Total current liabilities
Non-current liabilities
Convertible bonds
Lease liabilities (including lease liabilities of the consolidated VIE and its subsidiaries
without recourse to the primary beneficiary of RMB382,673 and RMB366,834
(US$56,220) as of December 31, 2019 and 2020, respectively)
Other non-current liabilities
Total non-current liabilities
Total liabilities
Commitments and contingencies
Notes
2019
RMB
As of December 31,
2020
RMB
US$
4
18
5
6
7
8
9
5,768,186
27,577,671
1,050,974
35,288,827
2,365,528
950,277
73,001,463
41,273
1,994,292
517,188
503,120
3,055,873
76,057,336
22,421,189
52,422,447
729,548
64,551,094
4,240,069
5,159,531
149,523,878
202,853
1,276,751
629,827
7,275,305
9,384,736
158,908,614
3,436,198
8,034,091
111,808
9,892,888
649,819
790,733
22,915,537
31,089
195,671
96,525
1,114,989
1,438,274
24,353,811
18
1,502,892
3,385,863
518,906
605,970
2,423,190
371,370
29,926,488
53,833,981
8,250,419
10
4,877,062
11,193,372
1,715,461
7,840,912
10,926,319
1,674,532
898,748
1,866,316
286,025
115,734
45,767,806
253,036
83,882,077
38,779
12,855,492
5,206,682
14,432,792
2,211,922
428,593
7,389
5,642,664
51,410,470
414,939
2,918
14,850,649
98,732,726
63,592
447
2,275,961
15,131,453
11
8
12
8
22
The accompanying notes are an integral part of the consolidated financial statements.
F-6
Table of Contents
PINDUODUO INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
Notes
2019
RMB
As of December 31,
2020
RMB
US$
Shareholders’ equity
Class A ordinary shares (US$0.000005 par value; 77,300,000,000 shares authorized,
2,575,580,988 and 3,545,065,888 shares issued and outstanding as of December 31,
2019 and 2020, respectively)
Class B ordinary shares (US$0.000005 par value; 2,200,000,000 shares authorized,
2,074,447,700 and 1,409,744,080 shares issued and outstanding as of December 31,
2019 and 2020, respectively)
14
14
Additional paid-in capital
Accumulated other comprehensive income/(loss)
Accumulated deficits
Total shareholders’ equity
Total liabilities and shareholders’ equity
84
115
18
64
41,493,949
1,448,230
(18,295,461)
24,646,866
76,057,336
44
86,698,660
(1,047,728)
(25,475,203)
60,175,888
158,908,614
6
13,287,151
(160,571)
(3,904,246)
9,222,358
24,353,811
The accompanying notes are an integral part of the consolidated financial statements.
F-7
Table of Contents
PINDUODUO INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
Revenues
Costs of revenues (including services received from related parties of
RMB1,042,630, RMB1,424,786 and RMB4,570,292 (US$700,427)
for the years ended December 31, 2018, 2019 and 2020,
respectively)
Gross profit
Sales and marketing expenses (including services received from a
related party of nil, nil and RMB4,166,230 (US$638,503) for the
years ended December 31, 2018, 2019 and 2020, respectively)
General and administrative expenses
Research and development expenses (including services received
from related parties of RMB223,732, RMB873,288 and
RMB1,850,321 (US$283,574) for the years ended December 31,
2018, 2019 and 2020, respectively)
Total operating expenses
Operating loss
Interest and investment income, net
Interest expenses
Foreign exchange gain
Other (loss)/income, net
Loss before income tax and share of results of equity investees
Income tax expenses
Share of results of equity investees
Net loss
Net loss
Deemed distribution to certain holders of convertible preferred shares
Net loss attributable to ordinary shareholders
Loss per share:
Basic
Diluted
Shares used in loss per share computation:
Basic
Diluted
Other comprehensive income/(loss), net of tax of nil
Foreign currency translation difference, net of tax of nil
Comprehensive loss
Notes
2018
RMB
2019
RMB
2020
RMB
US$
For the years ended December 31,
15
13,119,990
30,141,886
59,491,865
9,117,527
(2,905,249)
10,214,741
(6,338,778)
23,803,108
(19,278,641)
40,213,224
(2,954,581)
6,162,946
(13,441,813)
(6,456,612)
(27,174,249)
(1,296,712)
(41,194,599)
(1,507,297)
(6,313,349)
(231,003)
(1,116,057)
(21,014,482)
(3,870,358)
(32,341,319)
(6,891,653)
(49,593,549)
(10,799,741)
584,940
—
10,037
(12,361)
(10,217,125)
—
—
(10,217,125)
(10,217,125)
(80,496)
(10,297,621)
(8,538,211)
1,541,825
(145,858)
63,179
82,786
(6,996,279)
—
28,676
(6,967,603)
(6,967,603)
—
(6,967,603)
(9,380,325)
2,455,366
(757,336)
225,197
193,702
(7,263,396)
—
83,654
(7,179,742)
(7,179,742)
—
(7,179,742)
(1,056,192)
(7,600,544)
(1,437,598)
376,301
(116,067)
34,513
29,686
(1,113,165)
—
12,821
(1,100,344)
(1,100,344)
—
(1,100,344)
(3.47)
(3.47)
(1.51)
(1.51)
(1.51)
(1.51)
(0.23)
(0.23)
17
9
19
2,968,319,549
2,968,319,549
4,627,278,394
4,627,278,394
4,768,343,300
4,768,343,300
4,768,343,300
4,768,343,300
1,058,884
(9,158,241)
412,447
(6,555,156)
(2,495,958)
(9,675,700)
(382,522)
(1,482,866)
The accompanying notes are an integral part of the consolidated financial statements.
F-8
Table of Contents
PINDUODUO INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ (DEFICITS)/EQUITY
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
Balance as of January 1, 2018
Net loss
Foreign currency translation difference
Deemed distribution to certain holders of
convertible preferred shares
Conversion of convertible preferred shares to
ordinary shares
Initial public offering
Share-based compensation
Balance as of December 31, 2018
Notes
14
16
Number of
ordinary
shares
1,758,769,820
—
—
—
2,075,502,060
366,943,308
254,473,500
4,455,688,688
Ordinary
shares
RMB
Additional
paid-in
capital
RMB
Accumulated
other
comprehensive
(loss)/income
RMB
Accumulated
deficits
RMB
(1,030,237)
(10,217,125)
—
Total
shareholders’
(deficits)/equity
RMB
(991,958)
(10,217,125)
1,058,884
—
(80,496)
(80,496)
(23,101)
—
1,058,884
61,326
—
—
—
10,950,438
11,523,618
6,579,145
29,114,527
—
—
—
1,035,783
—
—
—
(11,327,858)
10,950,505
11,523,631
6,579,153
18,822,594
54
—
—
—
67
13
8
142
Accumulated
other
Number of
ordinary
shares
Notes
Ordinary
shares
RMB
Balance as of January 1, 2019
Net loss
Foreign currency translation difference
Follow-on offering
Equity component of convertible bonds
Shares issued to depository bank
Restricted share units vested
Settlement of share-based compensation with
shares held by depository bank
Share-based compensation
Balance as of December 31, 2019
4,455,688,688
—
—
193,740,000
—
600,000
567,636
(567,636)
—
4,650,028,688
14
19
19
16
142
—
—
6
—
—
—
—
—
148
Additional
paid-in
capital
RMB
29,114,527
—
—
7,993,822
1,827,894
—
—
—
2,557,706
41,493,949
comprehensive Accumulated
income
RMB
1,035,783
—
412,447
—
—
—
—
deficits
RMB
(11,327,858)
(6,967,603)
—
—
—
—
—
—
—
1,448,230
—
—
(18,295,461)
Total shareholders’
equity
RMB
18,822,594
(6,967,603)
412,447
7,993,828
1,827,894
—
—
—
2,557,706
24,646,866
The accompanying notes are an integral part of the consolidated financial statements.
F-9
Table of Contents
PINDUODUO INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ (DEFICITS)/EQUITY (CONTINUED)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
Number of
ordinary
shares
Notes
Ordinary
shares
RMB
Balance as of January 1, 2020
Net loss
Foreign currency translation difference
Issuance of ordinary shares for private
placements
Follow-on offering
Conversion of the convertible bonds into
ordinary shares
Equity component of convertible bonds
Shares issued to depository bank
Restricted share units vested
Settlement of share-based compensation with
shares held by depository bank
Share-based compensation
Balance as of December 31, 2020
Balance as of December 31, 2020 (US$)
4,650,028,688
—
—
150,810,912
132,020,000
9,900,368
—
12,050,000
4,950,492
(4,950,492)
—
4,954,809,968
4,954,809,968
14
14
12
12
19
19
16
148
—
—
5
5
1
—
—
—
—
—
159
24
Additional
paid-in
capital
RMB
41,493,949
—
—
11,063,334
26,805,433
317,541
3,405,360
—
—
—
3,613,043
86,698,660
13,287,151
Accumulated
other
comprehensive Accumulated
income
RMB
1,448,230
—
(2,495,958)
deficits
RMB
(18,295,461)
(7,179,742)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1,047,728)
(160,571)
—
—
(25,475,203)
(3,904,246)
Total shareholders'
equity
RMB
24,646,866
(7,179,742)
(2,495,958)
11,063,339
26,805,438
317,542
3,405,360
—
—
—
3,613,043
60,175,888
9,222,358
The accompanying notes are an integral part of the consolidated financial statements.
F-10
Table of Contents
PINDUODUO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
For the years ended December 31,
2020
2018
RMB
2019
RMB
RMB
US$
CASH FLOW FROM OPERATING ACTIVITIES
Net loss
Interest expense
Allowance for credit losses
Depreciation and amortization
Amortization of right-of-use assets
Interest and investment income, net
Loss on disposal of property and equipment
Share-based compensation
Foreign exchange gain
Share of results of equity investees
Fair value change of investments
Gain on extinguishment of convertible bonds
Changes in operating assets and liabilities:
Receivables from online payment platforms
Amounts due from related parties
Prepayments and other current assets
Customer advances and deferred revenues
Amounts due to related parties
Payable to merchants
Accrued expenses and other liabilities
Merchant deposits
Lease liabilities
Other non-current assets
Other non-current liabilities
Net cash provided by operating activities
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of short-term investments
Proceeds from sales of short-term investments
Purchase of long-term investments
Proceeds from disposal of a long-term investment
Purchase of property, equipment and software
Proceeds from disposal of property and equipment
Loans to a related party
Repayments from related parties
(Loans to)/Repayments from third parties
Net cash used in investing activities
CASH FLOW FROM FINANCING ACTIVITIES
Net proceeds from the initial public offering
Net proceeds from the follow-on offerings
Proceeds from the private placements
Net proceeds from the issuance of convertible preferred shares
Net proceeds from the issuance of convertible bonds
Proceeds from short-term borrowings
Repayment of short-term borrowings
Others
Net cash provided by financing activities
Effect of exchange rate changes on cash, cash equivalents and restricted cash
Increase in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of year
Cash, cash equivalents and restricted cash at end of year
Supplement disclosure of cash flow information：
Interest income received
Supplement disclosure of non-cash operating activities：
Recognition of right-of-use assets and lease liabilities
Supplement disclosure of non-cash investing activities：
Purchase of property, equipment and software included in accrued expenses and other liabilities
Acquisition of intangible asset
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents
Restricted cash
Total cash, cash equivalents and restricted cash in the statements of cash flows
(10,217,125)
—
2,155
497,003
—
(78,267)
13
6,841,573
—
—
—
—
(159,413)
(576,121)
(790,732)
135,029
402,056
7,437,415
1,864,153
2,410,188
—
—
—
7,767,927
(7,516,370)
50,000
(184,637)
5,000
(27,331)
39
—
159,790
(35,000)
(7,548,509)
11,523,631
—
—
5,820,726
—
—
—
—
17,344,357
546,910
18,110,685
12,429,001
30,539,686
(6,967,603)
145,858
11,782
637,831
73,206
(209,580)
175
2,557,706
(5,380)
(28,676)
—
—
(803,388)
(886,863)
12,449
414,488
1,024,779
12,650,833
2,648,869
3,652,639
(46,067)
(69,471)
7,389
14,820,976
(52,451,615)
24,797,630
(214,100)
—
(27,436)
475
(459,632)
—
35,000
(7,179,742)
757,336
43,434
651,523
148,945
(469,486)
24
3,613,043
(225,197)
(83,654)
(104,068)
(5,188)
321,426
(1,636,541)
(4,048,536)
1,817,220
1,882,971
23,934,151
5,849,148
3,085,407
(137,936)
(13,182)
(4,471)
28,196,627
(86,438,068)
55,083,390
(6,722,228)
—
(43,046)
51
(238,000)
—
—
(28,319,678)
(38,357,901)
—
7,993,828
—
—
6,963,881
897,022
—
—
15,854,731
450,142
2,806,171
30,539,686
33,345,857
—
26,805,438
11,063,339
—
13,024,199
1,828,923
(922,897)
(6)
51,798,996
(139,943)
41,497,779
33,345,857
74,843,636
(1,100,344)
116,067
6,657
99,850
22,827
(71,952)
4
553,723
(34,513)
(12,821)
(15,949)
(795)
49,261
(250,811)
(620,465)
278,501
288,578
3,668,070
896,421
472,859
(21,140)
(2,020)
(685)
4,321,323
(13,247,214)
8,441,899
(1,030,227)
—
(6,597)
8
(36,475)
—
—
(5,878,606)
—
4,108,113
1,695,531
—
1,996,046
280,294
(141,440)
(1)
7,938,543
(21,447)
6,359,813
5,110,476
11,470,289
433,390
1,211,443
1,881,812
288,400
—
632,507
265,821
40,739
1,319
2,852,370
2,160
—
162,641
—
24,926
—
14,160,322
16,379,364
30,539,686
5,768,186
27,577,671
33,345,857
22,421,189
52,422,447
74,843,636
3,436,198
8,034,091
11,470,289
The accompanying notes are an integral part of the consolidated financial statements.
F-11
Table of Contents
PINDUODUO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
1. Organization
Pinduoduo Inc. (the ‘‘Company’’) was incorporated in the Cayman Islands on April 20, 2015 under the Cayman
Islands Companies Law as an exempted company with limited liability. The Company through its consolidated
subsidiaries, variable interest entity (the ‘‘VIE’’) and the subsidiaries of the VIE (collectively, the ‘‘Group’’) are
principally engaged in the merchandise sales and the provision of online marketplace to help merchants leverage the
power of the internet to engage with their customers in the People’s Republic of China (the ‘‘PRC’’ or ‘‘China’’). Due
to the PRC legal restrictions on foreign ownership and investment in such business, the Company conducts its primary
business operations through its VIE and subsidiaries of the VIE.
As of December 31, 2020, the details of the Company’s major subsidiaries, consolidated VIE and the subsidiaries of
the VIE are as follows:
Entity
Subsidiaries:
HongKong Walnut Street Limited (“Walnut HK”)
Hangzhou Weimi Network Technology Co., Ltd. (“Hangzhou
Weimi” or the “WFOE”)
Date of
incorporation
Place of
incorporation
April 28, 2015 Hong Kong
May 28, 2015
PRC
Walnut Street (Shanghai) Information Technology Co., Ltd.
January 25,2018
Shenzhen Qianhai Xinzhijiang Information Technology Co., Ltd.
April 25, 2018
(“Xinzhijiang”)
PRC
PRC
VIE:
Hangzhou Aimi Network Technology Co., Ltd. (“Hangzhou
Aimi” or the “VIE”)
April 14, 2015
PRC
VIE’s subsidiary:
Shanghai Xunmeng Information Technology Co., Ltd. (“Shanghai
January 9, 2014
PRC
Xunmeng”)
The VIE agreements
Percentage of
ownership by the
Company
Direct
Indirect
Principal
activities
100 %
100 %
100 %
—
—
—
Holding company
Technology research
and development
Technology research
and development
100 %
—
E-commerce platform
—
100 % E-commerce platform
—
100 % E-commerce platform
The PRC laws and regulations currently place certain restrictions on foreign ownership of companies that engage in
internet content and other restricted businesses. To comply with PRC laws and regulations, the Group conducts the
majority of its business in China through the VIE and subsidiaries of the VIE. Despite the lack of technical majority
ownership, the Company has effective control of the VIE through a series of contractual arrangements (the
‘‘Contractual Agreements’’) and a parent-subsidiary relationship exists between the Company and the VIE. The equity
interests of the VIE are legally held by PRC individuals (the ‘‘Nominee Shareholders’’). Through the Contractual
Agreements, the Nominee Shareholders of the VIE effectively assigned all of their voting rights underlying their
equity interests in the VIE to the Company, via the WFOE, and therefore, the Company has the power to direct the
activities of the VIE that most significantly impact its economic performance. The Company also has the right to
receive economic benefits and obligations to absorb losses from the VIE, via the WFOE, that potentially could be
significant to the VIE. Based on the above, the Company consolidates the VIE in accordance with SEC Regulation
SX-3A-02 and ASC810-10, Consolidation: Overall.
F-12
Table of Contents
PINDUODUO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
1. Organization (Continued)
The VIE agreements (Continued)
The following is a summary of the Contractual Agreements:
Exclusive Option Agreements Pursuant to the Exclusive Option Agreements entered into among the Nominee
Shareholders, the VIE and the WFOE, the Nominee Shareholders granted to the WFOE or its designees proxy of
shareholders rights and voting rights of their respective equity interests in the VIE. The WFOE has the sole discretion
as to when to exercise the options, whether in part or full. The exercise price of the options to purchase all or part of
the equity interests in the VIE will be the minimum amount of consideration permitted by the applicable PRC laws.
Any proceeds received by the Nominee Shareholders from the exercise of the options shall be remitted to the WFOE
or its designated party, to the extent permitted under PRC laws. The Exclusive Option Agreements will remain in
effect until all the equity interests in VIE held by Nominee Shareholders are transferred to the WFOE or its designated
party. The WFOE may terminate the Exclusive Option Agreements at its sole discretion, whereas under no
circumstances may the VIE or the Nominee Shareholders terminate the agreements.
Equity Pledge Agreement Pursuant to the Equity Pledge Agreement entered into among the WFOE (the ‘‘Pledge
Agreement’’), the Nominee Shareholders and the VIE, the Nominee Shareholders pledged all of their equity interests
in the VIE to the WFOE as collateral to secure their obligations under the Contractual Agreements. The Nominee
Shareholders further undertake that they will remit any distributions in connection with such shareholders’ equity
interests in the VIE to the WFOE, to the extent permitted by PRC laws. If the VIE or any of their Nominee
Shareholders breach any of their respective contractual obligations under the above agreements, the WFOE, as the
pledgee, will be entitled to certain rights, including the right to sell, transfer or dispose of the pledged equity interest.
The Nominee Shareholders of the VIE agree not to create any encumbrance on or otherwise transfer or dispose of their
respective equity interest in the VIE, without the prior consent of the WFOE. The Equity Pledge Agreement will be
valid until the VIE and the shareholders fulfill all the contractual obligations under the Contractual Agreements in full
and the pledged equity interests have been transferred to the WFOE and/or its designee.
Shareholders’ Voting Rights Proxy Agreement Pursuant to the Shareholders’ Voting Rights Proxy Agreement
entered into among the Nominee Shareholders, the VIE and the WFOE (the ‘‘Proxy Agreement’’), the Nominee
Shareholders authorized the WFOE or its designated party to (1) act on behalf of the Nominee Shareholders as
exclusive agent and attorney with all respect to all matters concerning the shareholding including but not limited to
attend shareholders’ meetings of the VIE; (2) exercise all the shareholders’ rights, including voting rights; and
(3) designate and appoint on behalf of each shareholder and the senior management members of the VIE. The proxy
remains irrevocable and continuously valid from the date of execution so long as each Nominee Shareholder remains
as a shareholder of the VIE. The proxy agreements were subsequently reassigned to the Company.
Exclusive Consulting and Services Agreement Pursuant to the Exclusive Consulting and Services Agreement
(the ‘‘Consulting and Services Agreement’’), WFOE retains exclusive right to provide to the VIE the technical support
and consulting services, including but not limited to, technology development and maintenance service, marketing
consulting service and administrative consulting service. WFOE owns the intellectual property rights developed in the
performance of the agreement. In exchange for these services, WFOE is entitled to charge the VIE annual service fees
which typically amount to what would be substantially all of the VIE’s pre-tax profits, resulting in a transfer of
substantially all of the profits from the VIE to the WFOE. The term of the agreement is 10 years, expiring on June 5,
2025, which will be automatically renewed every ten-year thereafter if the WFOE does not provide notice of
termination to the Nominee Shareholders three months prior to expiration.
F-13
Table of Contents
PINDUODUO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
1. Organization (Continued)
The VIE agreements (Continued)
Financial support undertaking letter The Company and the VIE entered into a financial support undertaking letter
pursuant to which, the Company is obligated and hereby undertakes to provide unlimited financial support to the VIE,
to the extent permissible under the applicable PRC laws and regulations, whether or not any such operational loss is
actually incurred. The Company will not request repayment of the loans or borrowings if the VIE or its shareholders
do not have sufficient funds or are unable to repay.
In the opinion of the Company’s management and PRC counsel, (i) the ownership structure of the Group, including its
subsidiaries, the VIE and the subsidiaries of the VIE, is not in violation with any applicable PRC laws and (ii) each of
the VIE agreements is legal, valid, binding and enforceable to each party of such agreements in accordance with its
terms and applicable PRC Laws.
However, uncertainties in the PRC legal system could cause the relevant regulatory authorities to find the current
Contractual Agreements and businesses to be in violation of any existing or future PRC laws or regulations. If the
Company, the WFOE or any of its current or future VIE are found in violation of any existing or future laws or
regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory
authorities would have broad discretion in dealing with such violations, which may include, but not limited to,
revocation of business and operating licenses, being required to discontinue or restrict its business operations,
restriction of the Group’s right to collect revenues, being required to restructure its operations, imposition of additional
conditions or requirements with which the Group may not be able to comply, or other regulatory or enforcement
actions against the Group that could be harmful to its business. The imposition of any of these or other penalties may
result in a material and adverse effect on the Group’s ability to conduct its business. In addition, if the imposition of
any of these penalties causes the Company to lose the rights to direct the activities of the VIE or the right to receive
their economic benefits, the Company would no longer be able to consolidate the VIE.
In addition, if the VIE or the Nominee Shareholders fail to perform their obligations under the Contractual
Agreements, the Group may have to incur substantial costs and expend resources to enforce the primary beneficiary’
rights under the contracts. The Group may have to rely on legal remedies under PRC laws, including seeking specific
performance or injunctive relief and claiming damages, which may not be effective. All of the Contractual Agreements
are governed by PRC laws and provide for the resolution of disputes through arbitration in the PRC. Accordingly,
these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance
with PRC legal procedures. The legal system in PRC is not as developed as in other jurisdictions, such as the
United States. As a result, uncertainties in the PRC legal system could limit the Group’s ability to enforce these
contractual arrangements. Under PRC laws, rulings by arbitrators are final, parties cannot appeal the arbitration results
in courts, and prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award
recognition proceedings, which would incur additional expenses and delay. In the event the Group is unable to enforce
the Contractual Agreements, the primary beneficiary may not be able to exert effective control over its VIE, and the
Group’s ability to conduct its business may be negatively affected.
The VIE and its subsidiaries contributed to 77.3%, 58.5% and 65.1% of the Group’s consolidated revenues for
the years ended December 31, 2018, 2019 and 2020, respectively. As of December 31, 2019 and 2020, the VIE and its
subsidiaries accounted for an aggregate of 54.1% and 48.2%, respectively of the consolidated total assets, and 86.4%
and 80.5%, respectively of the consolidated total liabilities.
Other revenue-producing assets held by the VIE and its subsidiaries mainly include licenses, such as the internet
content provision license and internally-developed intangible assets including trademarks, patents, copyrights and
domain names.
F-14
Table of Contents
PINDUODUO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
1. Organization (Continued)
The VIE agreements (Continued)
The following tables represent the financial information for the VIE as of December 31, 2019 and 2020 and for
the years ended December 31, 2018, 2019 and 2020 before eliminating the inter-company balances and transactions
between the VIE, the subsidiaries of the VIE and other entities within the Group:
ASSETS
Current assets
Cash and cash equivalents
Restricted cash
Receivables from online payment platforms
Short-term investments
Amounts due from related parties (i)
Amounts due from Group companies
Prepayments and other current assets
Total current assets
Non-current assets
Property, equipment and software, net
Right-of-use assets
Other non-current assets
Total non-current assets
Total assets
LIABILITIES
Current liabilities
Amounts due to related parties (i)
Amounts due to Group companies
Customer advances and deferred revenues
Payable to merchants
Accrued expenses and other liabilities
Merchant deposits
Short-term borrowings
Lease liabilities
Total current liabilities
Lease liabilities
Total non-current liabilities
Total liabilities
2019
RMB
As of December 31,
2020
RMB
US$
2,816,894
27,528,793
1,050,974
6,560,665
2,360,267
3,337,273
295,377
43,950,243
27,719
452,883
60,306
540,908
44,491,151
3,593,192
52,148,852
726,063
7,026,442
3,999,612
9,932,418
4,062,849
81,489,428
186,403
468,387
4,380,476
5,035,266
86,524,694
550,681
7,992,161
111,274
1,076,849
612,967
1,522,210
622,659
12,488,801
28,568
71,783
671,337
771,688
13,260,489
2019
RMB
As of December 31,
2020
RMB
US$
1,502,892
5,393,858
605,969
29,657,227
3,420,728
7,840,912
898,748
90,523
49,410,857
382,673
382,673
49,793,530
3,385,863
9,759,506
2,422,907
53,417,259
6,999,827
10,926,319
1,866,316
134,131
88,912,128
366,834
366,834
89,278,962
518,906
1,495,710
371,327
8,186,553
1,072,770
1,674,532
286,025
20,556
13,626,379
56,220
56,220
13,682,599
F-15
Table of Contents
PINDUODUO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
1. Organization (Continued)
The VIE agreements (Continued)
Net revenues from
Group companies
External
Net revenues
Net (loss)/income
For the years ended December 31,
2018
RMB
2019
RMB
2020
RMB
US$
298,415
10,136,874
10,435,289
(1,552,789)
2,244,429
17,630,903
19,875,332
(3,611,656)
12,602,673
38,749,188
51,351,861
2,552,665
1,931,444
5,938,573
7,870,017
391,213
(i) Information with respect to related parties is discussed in Note 18.
Net cash generated from operating activities
Net cash used in investing activities
Net cash provided by financing activities
Net increase in cash, cash equivalents and restricted cash
For the years ended December 31,
2018
RMB
2019
RMB
8,984,498 11,139,572
(5,249,046)
(1,147,101)
4,546,481
507,767
8,345,164 10,437,007
2020
RMB
29,379,799
(11,802,074)
7,818,632
25,396,357
US$
4,502,651
(1,808,747)
1,198,258
3,892,162
There are no consolidated VIE’s assets that are pledged or collateralized for the VIE’s obligations and which can only
be used to settle the VIE’s obligations, except for registered capital and the PRC statutory reserves. Relevant PRC laws
and regulations restrict the VIE from transferring a portion of its net assets, equivalent to the balance of their statutory
reserves and its share capital, to the Company in the form of loans and advances or cash dividends. Please refer to
Note 20 for disclosure of the restricted net assets. As the VIE is incorporated as a limited liability company under the
PRC Company Law, creditors of the VIE do not have recourse to the general credit of the Company for any of the
liabilities of the VIE. There were no other pledges or collateralization of the VIE’s assets.
2. Summary of Significant Accounting Policies
(a) Basis of presentation
The accompanying consolidated financial statements have been prepared in accordance with the accounting principles
generally accepted in the United States of America (“US GAAP”).
(b) Principles of consolidation
The consolidated financial statements include the financial statements of the Company, its subsidiaries, the VIE and
the subsidiaries of the VIE. All significant inter-company transactions and balances between the Company, its
subsidiaries, the VIE and subsidiaries of the VIE have been eliminated upon consolidation.
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PINDUODUO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
2. Summary of Significant Accounting Policies (Continued)
(c) Use of estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the balance sheet dates and revenues and
expenses during the reporting periods. Significant accounting estimates reflected in the Group’s consolidated financial
statements include, but are not limited to provision for prepayments made on behalf of merchants, economic lives and
impairment of long-lived assets, valuation of short-term and long-term investments, valuation allowance for deferred
tax assets, uncertain tax position, valuation for share-based compensation, liability component of convertible bonds
and incremental borrowing rates for operating lease liabilities. Changes in facts and circumstances may result in
revised estimates. Actual results could differ from those estimates, and as such, differences may be material to the
consolidated financial statements.
(d) Foreign currency
The functional currency of the Company and its overseas subsidiaries is the US$. The Company’s PRC subsidiaries,
the VIE and subsidiaries of the VIE determined their functional currencies to be RMB based on the criteria of
ASC 830, Foreign Currency Matters. The Group uses the RMB as its reporting currency.
Transactions denominated in foreign currencies are re-measured into the functional currency at the exchange rates
prevailing on the transaction dates. Monetary assets and liabilities denominated in foreign currencies are re-measured
at the exchange rates prevailing at the balance sheet date. Non-monetary items that are measured in terms of historical
cost in foreign currency are re-measured using the exchange rates at the dates of the initial transactions. Exchange
gains and losses are included in the consolidated statements of comprehensive loss.
The Company uses the average exchange rate for the year and the exchange rate at the balance sheet date to translate
the operating results and financial position, respectively. Translation differences are recorded in accumulated other
comprehensive income/(loss), a component of shareholders’ (deficits)/equity.
(e) Convenience translation
Amounts in US$ are presented for the convenience of the reader and are translated at the noon buying rate of US$1.00
to RMB6.5250 on December 31, 2020, the last business day in December 2020, as published on the website of the
United States Federal Reserve Board. No representation is made that the RMB amounts could have been, or could be,
converted into US$ at such rate.
(f) Cash and cash equivalents
Cash and cash equivalents consist of cash on hand and highly liquid investments which are unrestricted as to
withdrawal or use and have original maturities of three months or less when purchased.
(g) Restricted cash
Restricted cash mainly represents cash received from consumers and reserved in a bank supervised account for
payments to merchants.
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PINDUODUO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
2. Summary of Significant Accounting Policies (Continued)
(h) Short-term investments
All highly liquid investments with original maturities of greater than three months but less than twelve months, are
classified as short-term investments. Investments that are expected to be realized in cash during the next twelve
months are also included in short-term investments.
The Group accounts for short-term debt investments in accordance with ASC Topic 320 (“ASC 320”), Investments-
Debt Securities, and short-term equity investments in accordance with ASC Topic 321 (“ASC 321”), Investments —
Equity Securities.
Short-term debt investments include time deposits and wealth management products in financial institutions that the
Group has positive intent and ability to hold to maturity, both of which are categorized as “held to maturity”. Wealth
management products with the intention to sell in the near term are classified as trading securities and measured at fair
value. The Company also holds marketable equity securities in a listed company and measures it at fair value.
Any realized gains or losses on the sale of the short-term investments are determined on a specific identification
method and are reflected in earnings during the period in which gains or losses are realized. Realized and unrealized
gains and losses and interest income from the short-term investments are recorded in “Interest and investment income,
net” in the consolidated statements of comprehensive loss.
(i) Long-term investments
The Group’s long-term investments consist of long-term held-to-maturity debt securities, investment in convertible
bonds and equity method investments, which are included in other non-current assets.
The Group accounts for long-term held-to-maturity debt securities in accordance with ASC Topic 320 (“ASC 320”),
Investments-Debt Securities. Long-term held-to-maturity debt securities include time deposits in financial institutions,
with maturities of greater than twelve months, that the Group has positive intent and ability to hold to maturity, which
are stated at amortized cost.
The Group has elected the fair value option for investment in convertible bonds in accordance with ASC Subtopic
825-10 (“ASC 825-10”), Recognition and Measurement of Financial Assets and Financial Liabilities. The financial
instruments guidance in ASC 825-10 permits reporting entities to apply the fair value option on an instrument-by-
instrument basis. Therefore, a reporting entity can elect the fair value option for certain instruments but not others
within a group of similar instruments. The fair value option permits the irrevocable election on an instrument-by-
instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of
accounting for that instrument. The investments accounted for under the fair value option are carried at fair value with
realized and unrealized gains or losses recorded in the consolidated statements of comprehensive loss.
The Group’s investments in common stock or in-substance common stock in entities in which it can exercise
significant influence but does not own a majority equity interest or control are accounted for using the equity method
of accounting and classified as “equity method investments” in accordance with ASC Subtopics 323-10 (“ASC 323-
10”), Investments-Equity Method and Joint Ventures: Overall. The Group applies the equity method of accounting that
is consistent with ASC 323-10 in limited partnerships which the Group has significant influence. After the date of
investment, the Group subsequently adjusts the carrying amount of the investment to recognize the Group’s
proportionate share of each equity investees’ profits or loss into earnings. The Group evaluates the equity method
investments for impairment under ASC 323-10. An impairment loss on the equity method investments is recognized in
earnings when the decline in value is determined to be other-than-temporary.
F-18
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PINDUODUO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
2. Summary of Significant Accounting Policies (Continued)
(j) Property, equipment and software, net
Property, equipment and software are stated at cost and are depreciated and amortized using the straight-line method
over the estimated useful lives of the assets, as follows:
Category
Computer equipment
Office equipment
Purchased software
Leasehold improvements
Estimated useful life
3-4 years
3 years
3-5 years
Over the shorter of lease terms or the estimated useful lives of the assets
Repair and maintenance costs are charged to expense as incurred, whereas the costs of renewals and betterments that
extend the useful lives of property, equipment and software are capitalized as additions to the related assets.
Retirements, sales and disposals of assets are recorded by removing the cost and accumulated depreciation from the
asset and accumulated depreciation accounts with any resulting gain or loss reflected in the consolidated statements of
comprehensive loss.
Direct costs that are related to the construction of property, equipment and software and incurred in connection with
bringing the assets to their intended use are capitalized as construction in progress. Construction in progress is
transferred to specific property, equipment and software, and the depreciation of these assets commences when the
assets are ready for their intended use.
(k) Inventories
Inventories, primarily consisting of products available for sale, are stated at the lower of cost and net realizable value.
Cost of inventories is determined using the weighted average cost method.
(l) Impairment of long-lived assets other than goodwill
The Group evaluates its long-lived assets, including fixed assets and intangible assets with finite lives, for impairment
whenever events or changes in circumstances, such as a significant adverse change to market conditions that will
impact the future use of the assets, indicate that the carrying amount of an asset may not be fully recoverable. When
these events occur, the Group evaluates the recoverability of long-lived assets by comparing the carrying amounts of
the assets to the future undiscounted cash flows expected to result from the use of the assets and their eventual
disposition. If the sum of the expected undiscounted cash flows is less than the carrying amounts of the assets, the
Group recognizes an impairment loss based on the excess of the carrying amounts of the assets over their fair value.
Fair value is generally determined by discounting the cash flows expected to be generated by the assets, when the
market prices are not readily available.
For all periods presented, there were no impairment of any of the Group’s long-lived assets.
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PINDUODUO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
2. Summary of Significant Accounting Policies (Continued)
(m) Fair value of financial instruments
The Group’s financial instruments include cash and cash equivalents, restricted cash, receivables from online payment
platforms, amount due from/to related parties, prepayment made on behalf of merchants, merchant deposits, payables
to merchants, short-term investments, long-term debt investments and convertible bonds. For the aforementioned
financial instruments included in current assets and liabilities, except for ones measured at fair value, their carrying
amount approximate to their respective fair values because of the general short maturities. The carrying amounts of
long-term held-to-maturity debt securities approximate to fair values as the related interest rates currently offered by
financial institutions for similar debt instruments of comparable maturities. The fair value of convertible bonds that are
not reported at fair value are disclosed in Note 13.
The Group applies ASC 820, Fair Value Measurements and Disclosures (”ASC 820”). ASC 820 defines fair value,
establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC 820
requires disclosures to be provided on fair value measurement.
ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value
as follows:
Level 1 — Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 — Other inputs that are directly or indirectly observable in the marketplace.
Level 3 — Unobservable inputs which are supported by little or no market activity.
ASC 820 describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach;
(2) income approach; and (3) cost approach. The market approach uses prices and other relevant information generated
from market transactions involving identical or comparable assets or liabilities. The income approach uses valuation
techniques to convert future amounts to a single present value amount. The measurement is based on the value
indicated by current market expectations about those future amounts. The cost approach is based on the amount that
would currently be required to replace an asset.
(n) Revenue recognition
The Group adopted ASU 2014-09, Revenue from contracts with Customers (Topic 606) including related amendments
and implementation guidance within ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20
(collectively, “ASC 606”), from January 1, 2018, using the modified retrospective method applying to those contracts
not yet completed as of January 1, 2018. There were no changes made to the Company’s revenue recognition policy as
a result of the adoption of ASC 606.
Revenues are principally comprised of those generated from online marketplace services and merchandise sales.
Revenues from online marketplace services primarily consist of online marketing services revenues and transaction
services fees. Revenues represent the amount of consideration that the Company is entitled to in exchange for the
transfer of promised goods or services in the ordinary course of the Company’s activities and is recorded net of value-
added tax (“VAT”). Consistent with the criteria of ASC 606, the Group recognizes revenue when the performance
obligation in a contract is satisfied by transferring the control of a promised good or service to a customer. The Group
also evaluates whether it is appropriate to record the gross amounts of goods and services sold and the related costs, or
the net amounts earned as commissions. Payments for services or goods are generally received before deliveries.
F-20
Table of Contents
PINDUODUO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
2. Summary of Significant Accounting Policies (Continued)
(n) Revenue recognition (Continued)
Online marketing services
The Group entered into contractual agreements with certain merchants to provide online marketing services on the
Group’s online marketplace for which the Group receives service fees from merchants. Online marketing services
allow merchants to bid for keywords that match product listings appearing in search or browser results on the Group’s
online marketplace. Merchants prepay for online marketing services that are charged on a cost-per-click basis. Under
ASC 606, the related revenues are recognized at a point of time when consumers click the merchants’ product listings
and the online marketing services are completed by the Group for the merchants. The positioning of such listings and
the price for such positioning are determined through an online auction system, which facilitates price discovery
through a market-based mechanism.
The Group also provides display marketing services that allow the merchants to place advertisements on the platform
primarily at fixed prices. In general, the merchants need to prepay for display marketing which is accounted for as
customer advances and deferred revenues and revenues are primarily recognized over the period during which the
advertising services are provided.
Transaction services
The Group charges fees for transaction services to merchants for sales transactions completed on the Group’s platform,
where the Group does not take control of the products provided by the merchants at any point in the time during the
transactions and does not have latitude over pricing of the merchandise. Transaction services fee is primarily
determined as a percentage based on the purchase price of merchandise sold by the merchants. Revenues related to
transaction services are recognized in consolidated statements of comprehensive loss at the time when the Group’s
service obligations to the merchants are determined to have been completed under each sales transaction upon the
confirmation of the receipts of goods by the consumers. The majority fees charged for transaction services are not
refundable if and when consumers return the merchandise to merchants.
The Group provides rebates to certain merchants on the online marketplace services by meeting certain requirements.
Such rebates are netted against the online marketplace services revenues.
Merchandise sales
The Group in certain cases acquires the merchandises from suppliers and sells directly to the consumers. The Group
acts as a principal for it takes control of the merchandises, is primarily obligated for the merchandise sold to the
consumers, bears inventory risks and has the latitude in establishing prices. Revenues from merchandise sales are
recorded on a gross basis, net of discounts and return allowances when the products are delivered and title is passed to
the consumers who are the Group’s customers in these transactions. Proceeds received in advance of customer
acceptance are recorded as current liabilities in customer advances and deferred revenues.
Membership services
Certain consumers pay in advance for certain periods memberships in exchange for the access to a suite of benefits
including coupons, which represent a single stand-ready obligation. As the members receive and consume the benefits
of the Group’s promise throughout the subscription periods, the membership fees are recognized as revenue over the
subscription periods on a straight-line basis. Coupons provided by the Group to the members are netted against the
membership revenue with the resulting negative revenue, if any, being reclassed to marketing expenses for each
membership contract. The membership revenue as recorded in the Group’s consolidated financial statements was
immaterial during each presented period.
F-21
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PINDUODUO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
2. Summary of Significant Accounting Policies (Continued)
(n) Revenue recognition (Continued)
Incentives provided to the consumers
In order to promote its online marketplace and attract more registered consumers, the Group at its own discretion
offers various forms of incentives, for example, coupons, credits and discounts that are not specific to any merchant, to
consumers that are not customers of the Group. Despite the absence of any explicit contractual obligations to
incentivize the non-customer consumers on behalf of the merchants, the Group further evaluated the varying features
of different incentive programs to determine that whether the incentives represent implicit obligations to consumers on
behalf of merchants and if so, should be recorded as reduction of revenues. Based on that evaluation, the Group
determined that incentives offered to consumers are not considered as payments to customers.
The Group at its discretion issues to consumers coupons and credits upon completion of certain actions to promote the
Group’s platform. The coupons can be used for future purchases of eligible merchandise offered on the Group’s online
marketplace to reduce purchase price and the credits can be used to redeem cash from the Group. The Group
recognizes the amounts of coupons and credits as marketing expenses when future purchases are completed or when
the credits are issued. Discounts unconditionally provided to consumers are recognized as marketing expenses when
the related transaction services revenues from merchants are recognized. Certain discounts are offered to consumers
upon their completion of certain actions to promote the platform, the Group records the related costs in marketing
expenses upon the completion of such promotion tasks.
(o) Costs of revenues
Costs of revenues consist primarily of payment processing fees paid to third party online payment platforms, costs
associated with the operation of the platform and others, such as costs and expenses attributable to merchandise sales,
delivery and storage fees, bandwidths and server costs, amortization, depreciation and maintenance costs, payroll,
employee benefits and share-based compensation expenses, call center, merchant support services, surcharges and
other expenses directly attributable to the online marketplace services.
(p) Advertising expenditures
Advertising expenditures are expensed when incurred and are included in sales and marketing expenses. Total amount
of advertising expenditures and incentive programs recognized in sales and marketing expenses were RMB12,867,833,
RMB25,867,772 and RMB39,297,890 (US$6,022,665) for the years ended December 31, 2018, 2019 and 2020,
respectively.
(q) Research and development expenses
Research and development expenses include payroll, employee benefits, and other operating expenses associated with
research and platform development. Research and development expenses also include rent, depreciation and other
related expenses. To date, expenditures incurred between when the application has reached the development stage and
when it is substantially complete and ready for its intended use have been inconsequential and, as a result, the Group
did not capitalize any software development costs in the accompanying consolidated financial statements.
F-22
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PINDUODUO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
2. Summary of Significant Accounting Policies (Continued)
(r) Credit loss
On January 1, 2020, the Group adopted Accounting Standards Update No. 2016-13, Financial Instruments-Credit
Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, using the modified retrospective
transition method. Upon adoption, the Group changed the impairment model to utilize a forward-looking current
expected credit losses (CECL) model in place of the incurred loss methodology for financial instruments measured at
amortized cost, including the short-term investments and other non-current assets categorized as “held to maturity”
and payments made on behalf of merchants. CECL estimates are recorded as general and administrative expenses in
the consolidated statements of comprehensive loss. The cumulative effect adjustment from adoption as of January 1,
2020 was immaterial. As a result of the adoption of the Topic 326, the Group’s allowance for credit losses as of
December 31, 2020 reflects the best estimation of the expected future losses for its financial instruments measured at
amortized cost, based on the current economic conditions; however, as a result of the uncertainty caused by the
coronavirus (COVID-19) pandemic and other factors, these estimates may change and future actual losses may differ
from the estimates. The Group will continue to monitor economic conditions and will revise the estimates of the
expected future losses for financial instruments measured at amortized cost as necessary.
(s) Leases
The Group adopted ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), effective January 1, 2019 using the
modified retrospective method and did not restate comparable periods. The Group elected the package of practical
expedients permitted under the transition guidance, which allowed the Group to carry forward the historical lease
classification for any expired or existing contract and the accounting for the initial direct costs on those leases on the
adoption date. The Group also elected the practical expedient of the short-term lease exemption for contracts with
lease terms of 12 months or less.
The Group as the lessee determines if an arrangement is a lease at inception. Leases are classified as operating or
finance leases in accordance with the recognition criteria in ASC 842-20-25. The Group’s lease portfolio consisted
entirely of operating leases as of December 31, 2019 and 2020. The Group’s leases do not contain any residual value
guarantees or material restrictive covenants.
At the commencement date of an operating lease, the Group records a right-of-use (“ROU”) asset and lease liability
based on the present value of the lease payments over the lease term. Variable lease payments not dependent on an
index or rate are excluded from the ROU asset and lease liability calculations and are recognized in expense in the
period which the obligation for those payments is incurred. As the rate implicit in the Group’s lease is not typically
readily available, the Group uses an incremental borrowing rate based on the information available at the lease
commencement date in determining the present value of lease payments. This incremental borrowing rate reflects the
fixed rate at which the Group could borrow on a collateralized basis the amount of the lease payments in the same
currency, for a similar term, in a similar economic environment. ROU assets include any lease prepayments and are
reduced by lease incentives. Operating lease expense for lease payments is recognized on a straight-line basis over the
lease term. Lease terms are based on the non-cancelable term of the lease and may contain options to extend the lease
when it is reasonably certain that the Group will exercise that option.
F-23
Table of Contents
PINDUODUO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
2. Summary of Significant Accounting Policies (Continued)
(t) Income taxes
The Group follows the liability method of accounting for income taxes in accordance with ASC 740 (‘‘ASC 740’’),
Income Taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between
the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period
in which the differences are expected to reverse. The Group records a valuation allowance to offset deferred tax assets
if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax
assets will not be realized. The effect on deferred taxes of a change in tax rate is recognized in tax expense in the
period that includes the enactment date of the change in tax rate.
The Group accounted for uncertainties in income taxes in accordance with ASC 740. Interest and penalties related to
unrecognized tax benefit recognized in accordance with ASC 740 are classified in the consolidated statements of
comprehensive loss as income tax expenses.
(u) Share-based compensation
The Group applies ASC 718 (‘‘ASC 718’’), Compensation—Stock Compensation, to account for its employee share-
based payments. In accordance with ASC 718, the Group determines whether an award should be classified and
accounted for as a liability award or an equity award. All of the Group’s share-based awards to employees were
classified as equity awards. The Group measures the employee share-based compensation based on the fair value of
the award at the grant date. Expense is recognized using accelerated method over the requisite service period. The fair
value of share options at the time of grant is determined using the binomial-lattice option pricing model. In accordance
with ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvement to Employee Share-based
Payment Accounting, the Group elected to account for forfeitures as they occurred.
(v) Employee benefit expenses
As stipulated by the regulations of the PRC, full-time employees of the Group are entitled to various government
statutory employee benefit plans, including medical insurance, maternity insurance, workplace injury insurance,
unemployment insurance and pension benefits through a PRC government-mandated multi-employer defined
contribution plan. The Group is required to make contributions to the plan and accrues for these benefits based on
certain percentages of the qualified employees’ salaries.
(w) Comprehensive loss
Comprehensive loss is defined as the changes in equity of the Group during a period from transactions and other
events and circumstances excluding transactions resulting from investments by owners and distributions to owners.
Among other disclosures, ASC 220, Comprehensive Income, requires that all items that are required to be recognized
under current accounting standards as components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements. For each of the periods presented, the Group’s
comprehensive loss includes net loss and foreign currency translation difference and is presented in the consolidated
statements of comprehensive loss.
F-24
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PINDUODUO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
2. Summary of Significant Accounting Policies (Continued)
(x) Loss per share
Basic loss per share is computed by dividing net loss attributable to ordinary shareholders by the weighted average
number of ordinary shares outstanding during the period using the two-class method. Under the two-class method, net
loss is allocated between ordinary shares and other participating securities based on their participating rights. Diluted
loss per share is calculated by dividing net loss attributable to ordinary shareholders by the weighted average number
of ordinary and dilutive ordinary equivalent shares outstanding during the period. Ordinary equivalent shares consist
of unvested restricted share unites (“RSUs”) and shares issuable upon the exercise of share options using the treasury
stock method, and conversion of convertible bonds using the if-converted method. Ordinary equivalent shares are not
included in the denominator of the diluted loss per share calculation when inclusion of such shares would be anti-
dilutive.
Basic and diluted loss per share are not reported separately for Class A ordinary shares or Class B ordinary shares
(the ‘‘Ordinary Shares’’) as each class of shares has the same rights to undistributed and distributed earnings.
(y) Segment reporting
The Group follows ASC 280, Segment Reporting. The Group’s Chief Executive Officer as the chief operating
decision-maker reviews the consolidated financial results when making decisions about allocating resources and
assessing the performance of the Group as a whole and hence, the Group has only one reportable segment. The Group
operates and manages its business as a single segment. As the Group’s long-lived assets are substantially all located in
the PRC and substantially all the Group revenues are derived from within the PRC, no geographical segments
are presented.
F-25
Table of Contents
PINDUODUO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
2. Summary of Significant Accounting Policies (Continued)
(z) Recent accounting pronouncements
The Company ceased to be an emerging growth company since December 31, 2018.
In January 2020, the FASB issued ASU 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. This guidance addresses accounting for the transition into and out of the
equity method and provides clarification of the interaction of rules for equity securities, the equity method of
accounting, and forward contracts and purchase options on certain types of securities. This standard is effective for the
Company beginning January 1, 2021 including interim periods within the fiscal year. Early adoption is permitted. The
Company is still evaluating the impact on its consolidated financial statements.
In June 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-06, Debt—Debt with Conversion and
Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40).
For convertible instruments, the new guidance simplifies an issuer’s accounting for convertible instruments by
eliminating two of the three models in ASC 470-20 that require separate accounting for embedded conversion features.
As a result, more convertible instruments will be reported as single units of account. This standard is effective for the
Company beginning January 1, 2022 including interim periods within the fiscal year. Early adoption is permitted. The
Company is still evaluating the impact on its consolidated financial statements.
(aa) Comparatives
Certain prior period amounts have been reclassified to conform to the current period presentation.
3. Concentration of Risks
(a) Concentration of credit risk
Financial instruments that potentially subject the Group to significant concentration of credit risk consist primarily of
cash and cash equivalents, restricted cash, receivables from online payment platforms, amounts due from related
parties, short-term investments, and long-term debt investments. As of December 31, 2019 and 2020, majority of the
Group’s cash and cash equivalents, restricted cash, short-term investments and long-term debt investments were held
at reputable financial institutions with high-credit ratings. In the event of bankruptcy of one of these financial
institutions, the Group may not be able to claim its cash and demand deposits back in full. The Group continues to
monitor the financial strength of the financial institutions. There has been no recent history of default in relation to
these financial institutions. Receivables from online payment platforms and amounts due from related parties (Note
18), unsecured and denominated in RMB and US$, derived from transactions on the Group’s online marketplace to
consumers, are exposed to credit risk. The risk is mitigated by credit evaluations the Group performs on the selected
online payment platforms that are highly reputable and market leaders. There has been no default of payments from
these online payment platforms.
(b) Business, customer, political, social and economic risks
The Group participates in a dynamic and competitive high technology industry and believes that changes in any of the
following areas could have a material adverse effect on the Group’s future financial position, results of operations or
cash flows: changes in the overall demand for services; changes in competitive landscape including potential new
entrants; advances and new trends in new technology; strategic relationships or customer relationships; regulatory
considerations; and risks associated with the Group’s ability to attract and retain employees necessary to support its
growth.
F-26
Table of Contents
PINDUODUO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
3. Concentration of Risks (Continued)
(c) Business, customer, political, social and economic risks (continued)
(i) Business supplier risk - there were no suppliers whose purchases individually represent greater than 10% of the
total purchases of the Group for the years ended December 31, 2018 and 2019. The purchases from Tencent Group
accounted for over 10% of the total purchases of the Group for the years ended December 31, 2020. Please refer to
Note 18 for disclosure of the related party transactions.
(ii) Customer risk - there were no customers whose revenues individually represent greater than 10% of the total
revenues of the Group for the years ended December 31, 2018, 2019 and 2020.
(iii) Economic risk - the Group’s operations could be adversely affected by significant political, economic and social
uncertainties in the PRC. Although the PRC government has been pursuing economic reform policies for more than 20
years, no assurance can be given that the PRC government will continue to pursue such policies or that such policies
may not be significantly altered, especially in the event of a change in leadership, social or political disruption or
unforeseen circumstances affecting the PRC political, economic and social conditions. There is also no guarantee that
the PRC government’s pursuit of economic reforms will be consistent or effective.
(d) Foreign currency exchange rate risk
The Group is exposed to foreign currency exchange rate risk, which mainly affects the monetary assets denominated in
the currencies other than the functional currencies of the respective entities. From July 21, 2005, the RMB is permitted
to fluctuate within a narrow and managed band against a basket of certain foreign currencies. The
appreciation/(depreciation) of the US$ against RMB was approximately 5.0%, 1.6% and (6.5)% for the years ended
December 31, 2018, 2019 and 2020, respectively. The functional currency and the reporting currency of the Company
are the US$ and the RMB, respectively. Most of the Group’s revenues and costs are denominated in RMB, while a
portion of cash and cash equivalents and short-term investments, are denominated in US$. It is difficult to predict how
market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the US$ in the
future.
(e) Currency convertibility risk
The Group transacts most of its business in RMB, which is not freely convertible into foreign currencies. On
January 1, 1994, the PRC government abolished the dual rate system and introduced a single rate of exchange as
quoted daily by the People’s Bank of China (the ‘‘PBOC’’). However, the unification of the exchange rates does not
imply that the RMB may be readily convertible into US$ or other foreign currencies. All foreign exchange transactions
continue to take place either through the PBOC or other banks authorized to buy and sell foreign currencies at the
exchange rates quoted by the PBOC. Approval of foreign currency payments by the PBOC or other institutions
requires submitting a payment application form together with suppliers’ invoices, shipping documents and signed
contracts.
F-27
Table of Contents
PINDUODUO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
4. Short-term Investments
Short-term investments classification as of December 31, 2019 and 2020 were shown as below:
2019
RMB
As of December 31,
2020
RMB
2020
US$
Held-to-maturity debt securities
Trading debt securities
Marketable equity securities
34,481,053 61,549,143 9,432,819
460,069
—
9,892,888
795,849
11,925
35,288,827
3,001,951
—
64,551,094
The gross unrecognized holding gain or loss on the held-to-maturity debt securities was nil and nil as of December 31,
2019 and 2020, respectively.
The cost of trading debt securities was RMB795,849 and RMB2,998,310 (US$459,511), with net unrealized gain of
nil and RMB3,641 (US$558) as of December 31, 2019 and 2020, respectively.
For the years ended December 31, 2018, 2019 and 2020, interest income related to short-term debt securities was
RMB115,737, RMB500,298 and RMB1,175,842 (US$180,206), respectively.
As of December 31, 2019 and 2020, the cost of marketable equity securities was RMB23,398 and nil, respectively;
and the unrealized loss included in the carrying amount was RMB11,473 and nil, respectively. For the years ended
December 31, 2018, 2019 and 2020, the realized loss from the marketable equity securities was nil, RMB5,435 and
RMB14,332 (US$2,196), respectively.
5. Prepayments and Other Current Assets
The components of prepayments and other current assets are as follows:
Prepayments
Inventories
VAT recoverable
Interest receivables
Rental and other deposits
Others
The prepayments primarily consist of advertising fees paid in advance.
F-28
2019
RMB
645,169
—
102,426
146,294
12,060
44,328
950,277
As of December 31,
2020
RMB
2,515,711
1,718,410
371,958
309,027
54,773
189,652
5,159,531
2020
US$
385,550
263,358
57,005
47,360
8,394
29,066
790,733
Table of Contents
PINDUODUO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
6. Property, Equipment and Software, Net
At cost:
Computer equipment, office equipment and purchased software
Leasehold improvement
Less: accumulated depreciation
2019
RMB
As of December 31,
2020
RMB
2020
US$
49,129
18,826
67,955
(26,682)
41,273
229,387
23,780
253,167
(50,314)
202,853
35,156
3,644
38,800
(7,711)
31,089
For the years ended December 31, 2018, 2019 and 2020, the Group recorded depreciation expenses included in the
following captions:
Costs of revenues
Sales and marketing expenses
General and administrative expenses
Research and development expenses
For the years ended December 31,
2018
RMB
1,291
805
1,074
2,764
5,934
2019
RMB
3,603
2,415
1,901
10,179
18,098
2020
RMB
10,983
2,477
1,936
12,603
27,999
2020
US$
1,683
380
297
1,931
4,291
F-29
Table of Contents
PINDUODUO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
7. Intangible Asset
Intangible asset consisted of the following:
Balance as of January 1, 2019
Amortization
Foreign currency translation difference
Balance as of December 31, 2019
Amortization
Foreign currency translation difference
Balance as of December 31, 2020
Total
RMB
2,579,338
(619,733)
34,687
1,994,292
(623,524)
(94,017)
1,276,751
In February 2018, the Company entered into a strategic cooperation framework agreement (the “Agreement”) with an
affiliate of Tencent Group. The Company and Tencent Group agreed to cooperate in a number of areas primarily for
Tencent Group to provide the Company with Weixin access point and other services and to pursue additional
opportunities for future potential cooperation. The Agreement is valid for five years, from March 1, 2018 to February
28, 2023. The Company recognized the Agreement as an intangible asset at the fair value of consideration paid in the
form of convertible preferred shares of RMB2,852 million. The Group recognizes the related amortization expense in
costs of revenues, over the period of five years using the straight-line method. Amortization expense for intangible
asset were RMB491,069, RMB619,733 and RMB623,524 (US$95,559) for the years ended December 31, 2018, 2019
and 2020, respectively. No impairment charge was recognized on the intangible asset for any of the three years ended
December 31, 2020.
The estimated annual amortization expense for each of the remaining fiscal years is as follows:
2021
2022
2023
Amortization
RMB
586,919
586,919
102,913
US$
89,949
89,949
15,773
F-30
Table of Contents
PINDUODUO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
8. Leases
The Group has operating leases mainly for offices in China. For the year ended December 31, 2019 and 2020,
operating lease costs were RMB94,929 and RMB177,976 (US$27,276); and short-term lease costs were RMB34,255
and RMB31,394 (US$4,811), respectively. There were no leasing costs other than the operating lease costs and short-
term lease costs for the year ended December 31, 2019 and 2020.
A maturity analysis of the Company’s operating lease liabilities and reconciliation of the undiscounted cash flows to
the operating lease liabilities recognized on the consolidated balance sheet was as below:
2021
2022
2023
2024
2025 and after
Total undiscounted cash flows
Less: imputed interest
Present value of lease liabilities
Rental
RMB
US$
271,898
173,110
127,738
107,851
34,889
715,486
(47,511)
667,975
41,670
26,530
19,577
16,529
5,347
109,653
(7,282)
102,371
As of December 31, 2019 and 2020, the Company had no operating leases that had not yet commenced.
As of December 31, 2019 and 2020, the weighted average remaining lease term was 4.37 years and 3.39 years; and the
weighted average discount rate was 5.36% and 4.90% for the Company’s operating leases, respectively.
Other supplemental information related to leases is summarized below:
2019
RMB
As of December 31,
2020
RMB
2020
US$
Operating cash flows for operating leases
ROU assets obtained in exchange for new operating lease liabilities
76,130
402,646
166,967
265,821
25,589
40,739
9. Other Non-current Assets
Other Non-Current Assets mainly include held-to-maturity debt securities, investment in convertible bonds, and equity
method investments.
Held-to-maturity debt securities mainly represent the time deposits made in financial institutions that the Group has
positive intent and ability to hold to maturity. As of December 31, 2019 and 2020, the carrying amount for the
investments, net of allowance for credit losses, was nil and RMB4,315,096 (US$661,317), respectively. As of
December 31, 2019 and 2020, the allowance for credit losses was nil and RMB6,343 (US$972), respectively. The
gross unrecognized holding gain or loss on the investments was nil and nil as of December 31, 2019 and 2020,
respectively. Gains recorded on these time deposits in the consolidated statements of comprehensive loss were nil, nil
and RMB66,602 (US$10,207) for the year ended December 31, 2018, 2019 and 2020, respectively.
F-31
Table of Contents
PINDUODUO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
9. Other Non-current Assets (Continued)
The Group invested in convertible bonds issued by a third party in 2020, which is accounted for under the fair value
option. As of December 31, 2020, the fair value was RMB1,388,916 (US$212,861). Unrealized gains recorded on
these convertible bonds in the consolidated statements of comprehensive loss was RMB88,928 (US$13,629) for the
year ended December 31, 2020.
Equity method investments consist of the Group’s investments as a limited partner in certain limited partnership funds,
including funds set up by the Company’s related parties, to make strategic investments. As of December 31, 2019 and
2020, the carrying amount for the investments was RMB433,649 and RMB1,135,141 (US$173,968), respectively. No
equity method investments were considered, individually or in aggregate, material as of December 31, 2019 and 2020.
During the year ended December 31, 2018, 2019 and 2020, the Group shared the profits of the equity investees and
recognized nil, RMB28,676 and RMB83,654 (US$12,821) in share of results of equity investees in the consolidated
statements of comprehensive loss, respectively. There was no impairment on these investments during the year ended
December 31, 2019 and 2020.
10. Accrued Expenses and Other Liabilities
The components of accrued expenses and other liabilities are as follows:
Accrued advertising and marketing expenses
VAT and other tax payable
Payroll payable
Accounts payable
Others
11. Short-term Borrowings
2019
RMB
2,411,521
1,045,796
1,061,228
307,698
50,819
4,877,062
As of December 31,
2020
RMB
4,552,069
2,882,177
1,806,787
1,137,566
814,773
11,193,372
2020
US$
697,635
441,713
276,902
174,340
124,871
1,715,461
As of December 31, 2019 and 2020, the short-term borrowings obtained from the banks were RMB897,022 and
RMB1,828,923 (US$280,294), respectively. As of December 31, 2019 and 2020, the borrowings were collateralized
by bank wealth management products of RMB923,800 and RMB1,876,250 (US$287,548), respectively, which were
classified as short-term investments as provided by one of the Group’s wholly-owned subsidiaries. As of December
31, 2020, the annual interest rates of these borrowings are 2.04% to 2.95%. For the years ended December 31, 2018,
2019 and 2020, the Group recognized interest expense of nil, RMB1,726 and RMB61,542 (US$9,432), respectively, in
the consolidated statements of comprehensive loss.
12. Convertible Bonds
(a) 2024 Convertible Bonds
In September 2019, the Company issued US$1,000,000 principal amount 0.00% convertible senior notes including
US$125,000 sold upon the exercise of the over-allotment option (the “2024 Notes”). The 2024 Notes will mature on
October 1, 2024 unless redeemed, repurchased or converted prior to such date.
F-32
Table of Contents
PINDUODUO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
12. Convertible Bonds (Continued)
(a) 2024 Convertible Bonds (Continued)
Holders may convert their 2024 Notes at their option prior to the close of business on the business day immediately
preceding April 1, 2024 only under the following circumstances: (1) during any calendar quarter commencing after the
calendar quarter ending on December 31, 2019 (and only during such calendar quarter), if the last reported sale price
of the Company’s American Depositary Shares (the ‘‘ADSs’’), each representing four Class A ordinary shares of the
Company, par value US$0.000005 per share, for at least 20 trading days (whether or not consecutive) during a period
of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar
quarter is greater than or equal to 130% of the conversion price on each applicable trading day (the “2024 Price
Condition”); (2) during the five-business-day-period after any ten-consecutive-trading-day-period (the “measurement
period”) in which the trading price per US$1,000 principal amount of the 2024 Notes for each trading day of the
measurement period was less than 98% of the product of the last reported sale price of the ADSs and the conversion
rate on each such trading day; (3) if the Company calls the 2024 Notes for a tax redemption; (4) if the Company calls
the 2024 Notes for redemption at its option or (5) upon the occurrence of specified corporate events. On or after April
1, 2024 until the close of business on the second scheduled trading day immediately preceding the maturity date,
holders may convert their 2024 Notes at any time. Upon conversion, the Company will pay or deliver, as the case may
be, cash, ADSs, or a combination of cash and ADSs, at its election.
The initial conversion rate of the 2024 Notes is 23.4680 of the Company’s ADS per US$1,000 principal amount of the
2024 Notes (which is equivalent to an initial conversion price of approximately US$42.61 per ADS). The conversion
rate will be subject to adjustment in some events. In addition, following certain corporate events that occur prior to the
maturity date, if a make-whole fundamental change occurs prior to the maturity date of the 2024 Notes, or under
certain circumstances upon a tax redemption or the Company’s optional redemption, the Company will, in certain
circumstances, increase the conversion rate for a holder who elects to convert its 2024 Notes in connection with such
corporate event, such make-whole fundamental change or such notice of tax redemption or notice of optional
redemption, as the case may be.
The Company may not redeem the 2024 Notes prior to October 1, 2022 unless certain tax-related events occur. On or
after October 1, 2022, the Company may redeem for cash all or part of the 2024 Notes, at its option, if the last reported
sale price of the Company’s American Depositary Shares has been at least 130% of the conversion price then in effect
on (i) each of at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period
ending on, and including, the trading day immediately prior to the date the Company provides notice of redemption;
and (ii) the trading day immediately preceding the date the Company sends such notice. Holders of the 2024 Notes
may require the Company to repurchase all or part of their 2024 Notes in cash on October 1, 2022 (the “Repurchase
Date”) or in the event of certain fundamental changes. No sinking fund is provided for the 2024 Notes.
(b) 2025 Convertible Bonds
In November 2020, the Company issued US$2,000,000 principal amount 0.00% convertible senior notes including
US$250,000 sold upon the exercise of the over-allotment option (the “2025 Notes”). The Notes will mature on
December 1, 2025 unless redeemed, repurchased or converted prior to such date.
F-33
Table of Contents
PINDUODUO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
12. Convertible Bonds (Continued)
(b) 2025 Convertible Bonds (Continued)
Holders may convert their 2025 Notes at their option prior to the close of business on the business day immediately
preceding June 1, 2025 only under the following circumstances: (1) during any calendar quarter commencing after the
calendar quarter ending on March 31, 2021 (and only during such calendar quarter), if the last reported sale price of
the Company’s ADS, par value US$0.000005 per share, for at least 20 trading days (whether or not consecutive)
during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately
preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2)
during the five-business-day period after any ten-consecutive-trading-day period (the ‘‘measurement period’’) in which
the ‘‘trading price’’ (as defined below) per US$1,000 principal amount of 2025 Notes for each trading day of the
measurement period was less than 98% of the product of the last reported sale price of the ADSs and the conversion
rate on each such trading day; (3) if the Company calls the 2025 Notes for a tax redemption; (4) if the Company calls
the 2024 Notes for redemption at its option or (5) upon the occurrence of specified corporate events. On or after June
1, 2025 until the close of business on the second scheduled trading day immediately preceding the maturity date,
holders may convert their 2025 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the
Company will pay or deliver, as the case may be, cash, ADSs, or a combination of cash and ADSs, at its election.
The conversion rate will initially be 5.2459 ADSs per US$1,000 principal amount of 2025 Notes (equivalent to an
initial conversion price of approximately US$190.63 per ADS). The conversion rate will be subject to adjustment in
some events but will not be adjusted for any accrued and unpaid special interest, if any. In addition, following certain
corporate events that occur prior to the maturity date or following the Company’s delivery of a notice of a tax or
optional redemption, the Company will, in certain circumstances, increase the conversion rate for a holder who elects
to convert its 2025 Notes in connection with such a corporate event or such notice of tax or optional redemption, as the
case may be.
The Company may not redeem the 2025 Notes prior to December 6, 2023 unless certain tax-related events occur. On
or after December 6, 2023, the Company may redeem for cash all or part of the 2025 Notes, at its option, if the last
reported sale price of its ADSs has been at least 130% of the conversion price then in effect on (i) each of at least 20
trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the
trading day immediately prior to the date the Company provide notice of redemption and (ii) the trading day
immediately preceding the date the Company send such notice. Holders of the 2025 Notes may require the Company
to repurchase all or part of their 2025 Notes in cash on December 1, 2023 (the “Repurchase Date”) or in the event of
certain fundamental changes. No sinking fund is provided for the 2025 Notes.
(c) Accounting for Convertible Bonds
As the conversion option may be settled in cash, ADSs, or a combination of cash and ADSs at the Company’s option,
the Company separated the 2024 Notes and the 2025 Notes (collectively as the “Notes”) into liability and equity
components in accordance with ASC 470-20, Debt with Conversion and Other Options. The carrying amount of the
liability component was initially calculated by measuring the fair value of a similar liability that does not have an
associated conversion feature. The carrying amount of the equity component representing the conversion option was
determined by deducting the fair value of the liability component from the initial proceeds and recorded as additional
paid-in capital. The resulting discount, together with the allocated issuance costs as mentioned below, are accreted at
an effective interest rate over the period from the issuance date to the Repurchase Date. The effective rate of the 2024
Notes and 2025 Notes are 11.15% and 10.87%, respectively. The Group made estimates and judgments in determining
the initial fair values of the liability components of the Notes with the assistance from independent valuation firms.
F-34
Table of Contents
PINDUODUO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
12. Convertible Bonds (Continued)
(c) Accounting for Convertible Bonds (Continued)
The gross proceeds from the issuance of the 2024 Notes were US$1,000,000. Debt issuance costs including
underwriting commissions and offering expenses were approximately US$15,680, which were allocated to the liability
and equity components proportionately.
The gross proceeds from the issuance of the 2025 Notes were US$2,000,000. Debt issuance costs including
underwriting commissions and offering expenses were approximately US$20,607, which were allocated to the liability
and equity components proportionately.
As of December 31, 2019 and 2020, the principal amount of the liability component of the Notes were US$1,000,000
and US$2,883,024, unamortized debt discount were US$253,651 and US$671,068, and net carrying amount of the
liability component was RMB5,206,682 and RMB14,432,792, respectively. The carrying amount of the equity
component was US$258,429 and US$478,633, respectively. For the year ended December 31, 2019 and 2020, the
amount of interest cost recognized relating to the amortization of the discount on the liability component was
RMB144,132 and RMB695,794 (US$106,635), respectively. As of December 31, 2020, the liability component of
2024 Notes and 2025 Notes will be accreted up to the principal amount over a remaining period of 1.75 years and 2.92
years, respectively.
For the year ended December 31, 2020, holders of US$116,976 in aggregate principal amount of 2024 Notes exercised
their right to convert their notes into shares under the 2024 Price Condition at its initial conversion price. Upon
conversion, the Company issued 9,900,368 ordinary shares. As of December 31, 2020, the if-converted values of
remaining 2024 Notes were US$3,676,400, which exceed their principal amount of US$883,024.
13. Fair Value Measurement
In accordance with ASC 820, the Company measures investment in convertible bonds and certain wealth management
products classified as trading securities on a recurring basis. The following tables set forth the financial instruments
measured at fair value on a recurring basis by level within the fair value hierarchy:
Quoted Price in
Active Market
for Identical
Assets (Level 1)
RMB
Fair Value Measurements
Significant
Other
Observable
Inputs (Level 2)
RMB
Unobservable
Inputs
(Level 3)
RMB
Recurring
As of December 31, 2019:
Short-term investments:
Trading debt securities
Marketable equity securities
—
11,925
11,925
795,849
—
795,849
—
—
—
F-35
Table of Contents
PINDUODUO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
13. Fair Value Measurement (Continued)
Recurring
As of December 31, 2020:
Short-term investments:
Trading debt securities
Other non-current assets:
Investment in convertible bonds
Quoted Price in
Active Market
for Identical
Assets (Level 1)
RMB
Fair Value Measurements
Significant
Other
Observable
Inputs (Level 2)
RMB
Unobservable
Inputs
(Level 3)
RMB
—
—
—
3,001,951
—
—
3,001,951
1,388,916
1,388,916
Investment in convertible notes is classified under level 3 in the fair value hierarchy, with the fair value estimated
based on the third-party appraisal report using the binomial model. Key inputs and parameters include volatility which
is an expected rate based on the historical stock price of the bond issuer, risk free rate which is based on the yield of
US government bond and discount rate which is based on yield of comparable bonds with similar credit rating
applicable for the bond issuer.
Certain wealth management products classified as trading securities is classified under level 2 in the fair value
hierarchy, with the fair value determined based on quoted prices of similar assets.
Reconciliations of assets categorized within Level 3 under the fair value hierarchy are as follow:
Balance at December 31, 2019
Additions
Net unrealized fair value
Foreign currency translation adjustments
Balance at December 31, 2020
F-36
Amounts
RMB
US$
—
1,414,200
88,928
(114,212)
1,388,916
—
216,736
13,629
(17,504)
212,861
Table of Contents
PINDUODUO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
13. Fair Value Measurement (Continued)
As of December 31, 2019 and 2020, the Group did not have any assets or liabilities that were measured at fair value on
a non-recurring basis and no impairment charge was recorded.
The followings are financial instruments not measured at fair value in the consolidated balance sheets, but for which
the fair value is estimated for disclosure purposes. The fair values of held-to-maturity debt investments are estimated
using prevailing interest rates. The fair values of the convertible bonds are based on broker quotes:
Quoted Price in
Active Market
for Identical
Assets (Level 1)
RMB
Fair Value Measurements
Significant
Other
Observable
Inputs (Level 2)
RMB
Unobservable
Inputs
(Level 3)
RMB
As of December 31, 2019:
Short-term investments:
Held-to-maturity debt securities
Convertible bonds
As of December 31, 2020:
Short-term investments:
Held-to-maturity debt securities
Other non-current assets:
Held-to-maturity debt securities
Convertible bonds
14. Ordinary Shares
—
—
—
—
—
34,481,053
8,037,280
61,549,143
4,315,096
40,760,994
—
—
—
—
—
Holders of Class A ordinary shares and Class B ordinary shares are entitled to the same rights except for voting rights.
In respect of matters requiring a shareholder’s vote, each Class A ordinary share is entitled to one vote and each
Class B ordinary share is entitled to ten votes.
In connection with the issuance of Series D convertible preferred shares, the Company effected a change of authorized
share capital by repurchasing all of the then issued and outstanding ordinary shares at par value and reissued
42,486,360 Class A ordinary shares and 1,716,283,460 Class B ordinary shares to its existing holders of ordinary
shares. The number of shares and per-share price in the consolidated financial statements were recasted on a
retroactive basis to reflect the effect of these changes.
In the third quarter of 2018, the Company completed its Initial Public Offering (“IPO”) on the National Association of
Securities Deal Automated Quotations under the symbol of “PDD” of 91,735,827 ADSs (including 6,135,827 ADSs
sold upon the exercise of the underwriters’ over-allotment option), representing 366,943,308 Class A ordinary shares
for a total proceeds net of issuance costs of US$1,690,696.
Upon completion of the IPO, all convertible preferred shares were converted into ordinary shares.
In February 2019, the Company completed a follow-on public offering and issued 48,435,000 ADSs, representing
193,740,000 Class A ordinary shares for total proceeds net of issuance costs of US$1,181,209.
In April 2020, the Company completed a private placement and issued 135,426,300 Class A Ordinary Shares for total
proceeds of US$1,100,000.
F-37
Table of Contents
PINDUODUO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
14. Ordinary Shares (Continued)
In June 2020, 664,703,620 Class B ordinary shares were converted into Class A ordinary shares by the holder on a
one-for-one basis.
In November 2020, the Company completed a follow-on public offering and issued 33,005,000 ADSs, representing
132,020,000 Class A ordinary shares for total proceeds net of issuance costs of US$4,074,642.
In December 2020, the Company completed a private placement and issued 15,384,612 Class A Ordinary Shares for
total proceeds of US$500,000.
15. Revenues
Online marketing services and others
Transaction services
Merchandise sales
Contract balances
For the years ended December 31,
2018
RMB
2019
RMB
2020
RMB
2020
US$
11,515,575 26,813,641 47,953,779 7,349,238
886,960
3,328,245
881,329
—
13,119,990 30,141,886 59,491,865 9,117,527
5,787,415
5,750,671
1,604,415
—
The Group’s contract liabilities comprised of customer advances and deferred revenues and portions of payable to
merchants:
Customer advances and deferred revenues
Payable to merchants
December 31, 2019
RMB
605,970
116,557
As of
December 31, 2020
RMB
2,423,190
224,896
December 31, 2020
US$
371,370
34,467
Customer advances and deferred revenues and payable to merchants relate to considerations received in advance for
online marketing services and transaction services, for which control of the services occur at a later point in time.
During the year ended December 31, 2020, revenues of RMB651,877 were recognized from the carrying value of
contract liabilities as of December 31, 2019. During the year ended December 31, 2019, revenues of RMB219,017
were recognized from the carrying value of contract liabilities as of December 31, 2018.
16. Share-Based Compensation
In order to provide additional incentives to employees and to promote the success of the Group’s business, the Group
adopted a share incentive plan in 2015 (the ‘‘2015 Plan’’). The 2015 Plan allows the Group to grant options to
employees, directors or consultants. Under the 2015 Plan, the maximum aggregate number of shares that may be
issued shall not exceed 581,972,860. The terms of the options shall not exceed ten years from the date of grant.
F-38
Table of Contents
PINDUODUO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
16. Share-Based Compensation (Continued)
In July 2018, the Group adopted the 2018 Share Incentive Plan (the “2018 Plan”). The 2018 Plan allows the Group to
grant options and RSUs to employees, directors or consultants. Under the 2018 Plan, the maximum aggregate number
of shares that may be issued pursuant to all awards is initially 363,130,400, plus an annual increase on the first day of
each fiscal year of the company during the term of the 2018 Plan commencing with the fiscal year beginning January
1, 2019, by an amount equal to the lessor of (i) 1.0% of the total number of shares issued and outstanding on the last
day of the immediately preceding fiscal year, and (ii) such number of shares as may be determined by our board of
directors. In March 2021, our board of directors approved an amendment to the 2018 Plan to increase the annual
increase percentage from 1.0% to 3.0% effective from the fiscal year beginning January 1, 2022.
For the share options granted under the 2015 Plan and the 2018 Plan, in addition to the explicit service periods of four
years, with 25% of the options vesting annually, Class A ordinary shares acquired from the exercise of vested options
cannot be sold or transferred by the employees without the prior written consents of the Company within the first three
years of vested (‘‘Restricted Shares’’). In the event that employment relationship is terminated with the Company,
voluntarily or involuntarily, within the three-year lock-up periods, the Company may, at its sole discretion, repurchase
the Restricted Shares at the employee’s exercise price. The Group determined the substance of the lock up periods to
be additional implicit service periods of three years, thereby extending the vesting terms of the options to be seven
years in total.
The RSUs granted under the 2018 Plan vest over a period of four years with 25% vesting on each anniversary from the
date of grant, or with 50% of the RSUs vesting on the second anniversary and 25% on each of the third and fourth
anniversary from the date of grant.
(a) Share options:
The following table summarize the Group’s option activities under the 2015 Plan and the 2018 Plan:
Outstanding as of January 1,2018
Granted
Forfeited
Outstanding as of December 31, 2018
Granted
Forfeited
Outstanding as of December 31, 2019
Granted
Forfeited
Outstanding as of December 31, 2020
Vested and expected to vest as of December 31, 2020
Exercisable as of December 31, 2020
Number of
share options
272,442,860
359,390,000
(2,240,000)
629,592,860
76,665,380
(7,937,140)
698,321,100
41,350,000
(8,620,000)
731,051,100
731,051,100
445,316,410
F-39
Aggregate
intrinsic
value
US$
144,258
Weighted Weighted
average
average
grant date
exercise
fair value
price
US$
US$
0.0706
0.0065
3.6289
0.0065
2.5006
0.0065
2.0931
0.0065
7.7632
0.0065
5.7059
0.0065
2.6745
0.0065
14.5801
0.0065
5.7091
0.0065
3.1775 32,466,710
0.0065
3.1775 32,466,710
0.0065
1.7667 19,776,947
0.0065
6,598,087
3,527,924
Weighted
average
remaining
contractual
term
Years
8.57
8.64
7.83
6.94
6.94
6.38
Table of Contents
PINDUODUO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
16. Share-Based Compensation (Continued)
(a) Share options: (Continued)
The aggregate intrinsic value is calculated as the difference between the exercise price of the awards and the fair value
of the underlying Ordinary Shares at each reporting date, for those awards that had exercise price below the estimated
fair value of the relevant Ordinary Shares.
The total fair value of vested options was RMB45,979, RMB2,243,028 and RMB 3,237,924 (US$ 496,234) for the
years ended December 31, 2018, 2019 and 2020, respectively. As of December 31, 2020, total unrecognized share-
based compensation expense relating to unvested awards was RMB9,773,595 (US$1,497,869) which is expected to be
recognized over a weighted-average period of 3.94 years.
The Group calculated the estimated fair value of the options on the respective grant dates using the binomial-lattice
option valuation model with the following assumptions for each applicable period which took into account variables
such as volatility, dividend yield, and risk-free interest rates:
Risk-free interest rates
Expected volatility
Expected dividend yield
Exercise multiple
Post-vesting forfeit rate
Fair value of underlying ordinary shares
Fair value of share option
2018
For the years ended December 31,
2019
2020
2.97%-3.13%
46.23%-48.63%
0%
2.80
0%
$1.5146-$5.7400
$1.5091-$5.7335
1.50%-2.90%
43.52%-57.59%
0%
2.80
0%
$4.8550-$8.9875
$4.8485-$8.9810
0.62%-1.13%
43.89%-46.68%
0%
2.80
0%
$8.9450-$34.1350
$8.9385-$34.1285
F-40
Table of Contents
PINDUODUO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
16. Share-Based Compensation (Continued)
(c) RSUs:
The following table summarize the Group’s RSU activities under the 2018 Plan:
Outstanding as of January 1, 2018
Granted
Outstanding as of January 1, 2019
Granted
Vested
Forfeited
Outstanding as of December 31, 2019
Granted
Vested
Forfeited
Outstanding as of December 31, 2020
Number of
RSUs
—
8,295,240
8,295,240
36,409,188
(567,636)
(2,761,724)
41,375,068
11,133,740
(4,950,492)
(3,737,860)
43,820,456
Weighted
average grant
date fair value
US$
—
6.2519
6.2519
6.7698
6.9225
6.4514
6.6855
16.6133
5.2263
8.4385
9.1088
The total fair value of the RSUs vested during the years ended December 31, 2019 and 2020 was RMB27,073 and
RMB 178,855 (US$ 27,411) respectively.
As of December 31, 2020, RMB1,516,338 (US$232,389) of unrecognized share-based compensation expenses related
to RSUs is expected to be recognized over a weighted average vesting period of 2.64 years using the accelerated
method. Total unrecognized share-based compensation expenses may be adjusted for future changes when actual
forfeitures incurred.
F-41
Table of Contents
PINDUODUO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
16. Share-Based Compensation (continued)
(d) Share-based compensation expense by function:
The Group recognized share-based compensation expenses for the years ended December 31, 2018, 2019 and 2020
as follows:
Costs of revenues
Sales and marketing expenses
General and administrative expenses i)
Research and development
For the years ended
December 31,
2018
RMB
3,488
405,805
6,296,186
136,094
6,841,573
2019
RMB
23,835
860,862
786,641
886,368
2,557,706
2020
RMB
32,291
1,093,547
966,985
1,520,220
3,613,043
2020
US$
4,949
167,593
148,197
232,984
553,723
i) In April 2018, the Company issued 254,473,500 Class A ordinary shares to a company controlled by Mr. Zheng
Huang, the founder, at the par value of US$0.000005 per share pursuant to a shareholders’ resolution. The
difference between the par value and estimated fair value of ordinary shares on the grant date was recorded as a
one-time share-based compensation expense of RMB5,953,717 in general and administration expenses. No such
transaction took place during the years ended December 31, 2019 and 2020.
17. Income Taxes
Cayman Islands
Under the current laws of the Cayman Islands, the Company is not subject to tax on income or capital gain arising in
Cayman Islands. Additionally, upon payments of dividends by the Company to its shareholders, no Cayman Islands
withholding tax will be imposed.
Hong Kong
Walnut HK is incorporated in Hong Kong and is subject to Hong Kong profits tax at the rate of 16.5% on its activities
conducted in Hong Kong and it may be exempted from income tax on its foreign-derived income and there are no
withholding taxes in Hong Kong on remittance of dividends.
PRC
The Company’s subsidiaries and VIE in the PRC are subject to the statutory rate of 25%, in accordance with the
Enterprise Income Tax law (the ”EIT Law”), which was effective since January 1, 2008, except for certain entities
eligible for preferential tax rates.
F-42
Table of Contents
PINDUODUO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
17. Income Taxes (Continued)
PRC (Continued)
Shanghai Xunmeng, a subsidiary of VIE, was recognized as a high and new technology enterprise (“HNTE”) in
November 2018 and was eligible for 15% preferential tax rate from 2018 to 2020.
Xinzhijiang, a subsidiary of the Company established in April 2018, located in Qianhai District, Shenzhen, Guangdong
Province, was eligible for a preferential tax rate of 15% and started to apply this rate from then on. The preferential tax
rate is awarded to companies that are located in Qianhai District which operate in certain encouraged industries, from
2014 to 2020.
Dividends, interests, rent or royalties payable by the Company’s PRC subsidiaries, to non-PRC resident enterprises,
and proceeds from any such non-resident enterprise investor’s disposition of assets (after deducting the net value of
such assets) shall be subject to 10% withholding tax, unless the respective non-PRC resident enterprise’s jurisdiction
of incorporation has a tax treaty or arrangements with China that provides for a reduced withholding tax rate or an
exemption from withholding tax.
The Group’s loss before income taxes consisted of:
Non-PRC
PRC
For the years ended December 31,
2018
RMB
(7,083,904)
(3,133,221)
(10,217,125)
2019
RMB
(2,741,219)
(4,226,384)
(6,967,603)
2020
RMB
(3,763,962)
(3,415,780)
(7,179,742)
2020
US$
(576,853)
(523,491)
(1,100,344)
The Group had no current or deferred income tax expenses or benefits for the years ended December 31, 2018, 2019
and 2020.
The reconciliations of the income tax expenses for the years ended December 31, 2018, 2019 and 2020 were
as follows:
Loss before income tax expense
PRC statutory tax rate
Income tax benefits at PRC statutory tax rate
International tax rate differential
Preferential tax rate
Non-deductible expenses
Non-taxable income
Deferred tax items tax rate differential
Additional deduction of research and development expenses
Change in valuation allowance
Income tax expenses
For the years ended December 31,
2018
RMB
(10,217,125)
2019
RMB
(6,967,603)
2020
RMB
(7,179,742)
2020
US$
(1,100,344)
25 %
25 %
25 %
25 %
(2,554,281)
1,779,100
197,828
36,726
(20,973)
(34,236)
(22,672)
618,508
—
(1,741,901)
735,028
358,796
(5,980)
(61,151)
(570,382)
(67,628)
1,353,218
—
(1,794,935)
1,077,383
57,483
108
(164,120)
(110,821)
(124,858)
1,059,760
—
(275,086)
165,116
8,810
17
(25,153)
(16,984)
(19,135)
162,415
—
F-43
Table of Contents
PINDUODUO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
17. Income Taxes (Continued)
PRC (Continued)
The significant components of the Group’s deferred tax assets were as follows:
Deferred tax assets
Tax losses carried forward
Carryforwards of non-deductible advertising expenses and donations
Others
Less: valuation allowance
Deferred tax assets, net
2019
RMB
As of December 31,
2020
RMB
2020
US$
1,840,246
251,829
43,111
(2,135,186)
—
1,956,901
1,143,858
94,186
(3,194,945)
—
299,908
175,304
14,435
(489,647)
—
The Group operates through several subsidiaries, the VIE and the subsidiaries of the VIE. Realization of the net
deferred tax assets is dependent on factors including future reversals of existing taxable temporary differences and
adequate future taxable income, exclusive of reversing deductible temporary differences and tax loss or credit carry
forwards. The Group evaluates the potential realization of deferred tax assets on an entity-by-entity basis. As of
December 31, 2019 and 2020, valuation allowances were provided against deferred tax assets in entities where it was
determined it was more likely than not that the benefits of the deferred tax assets will not be realized.
As of December 31, 2019 and 2020, the Group had taxable losses of RMB8,174,339 and RMB8,689,427
(US$1,331,713) derived from entities in the PRC, which can be carried forward for five years to offset future taxable
profit, and the period was extended to ten years for entities qualified as HNTE in 2020 and thereafter. The PRC taxable
loss will expire from December 31, 2021 to 2029 if not utilized.
The Group plans to indefinitely reinvest the undistributed earnings of its subsidiaries, the VIE and the subsidiaries of
the VIE located in the PRC. As of December 31, 2019 and 2020, there were no undistributed earnings from these
entities and no withholding tax has been accrued.
As of December 31, 2019 and 2020, the Group did not have significant unrecognized tax benefit, all of which were
presented on a net basis against the deferred tax assets related to tax loss carry forwards on the consolidated balance
sheets. It is possible that the amount of unrecognized benefit will further change in the next 12 months; however, an
estimate of the range of the possible change cannot be made at this moment.
For the years ended December 31, 2018, 2019 and 2020, no interest expense was accrued in relation to the
unrecognized tax benefit. As of December 31, 2019 and 2020 there were no accumulated interest expenses recorded in
unrecognized tax benefit.
As of December 31, 2020, the tax years ended December 31, 2015 through period ended as of the reporting dates for
the WFOE, the VIE and the subsidiaries of the VIE remain open to examination by the PRC tax authorities.
F-44
Table of Contents
PINDUODUO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
18. Related Party Transactions
(a) Related parties
Names of related parties
Tencent and its affiliates (“Tencent Group”)
Ningbo Hexin Equity Investment Partnership
Shanghai Fufeitong Information Service Co., Ltd.
Relationship with the Group
A shareholder of the Company
Company controlled by one of the executive officers of the
Company
Company controlled by one of the executive officers of the
(“Shanghai Fufeitong”)
Company
(b) Other than disclosed elsewhere, the Group had the following significant related party transactions for the years ended
December 31, 2018, 2019 and 2020, respectively:
Services received from:
Tencent Group
Shanghai Fufeitong
For the years ended December 31,
2018
RMB
2019
RMB
2020
RMB
2020
US$
1,266,362
—
2,298,074
—
10,541,479
45,364
1,615,552
6,952
(c) The Group had the following significant related party balances as of December 31, 2019 and 2020:
Accounts due from related parties:
Current:
Tencent Group*
Ningbo Hexin Equity Investment Partnership **
Shanghai Fufeitong
Accounts due to related parties:
Current:
Tencent Group
Shanghai Fufeitong
2019
RMB
As of December 31,
2020
RMB
2020
US$
1,905,793
459,632
—
3,177,536
697,632
364,517
486,979
106,917
55,865
1,502,892
—
3,370,928
14,935
516,617
2,289
* The balance primarily represents receivables due from the online payment platform operated by Tencent Group.
** The balance represents loans to Ningbo Hexin Equity Investment Partnership, an entity controlled by one of the
executive officers of the Company.
F-45
Table of Contents
PINDUODUO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
19. Loss Per Share
The following table sets forth the computation of basic and diluted net loss per share for the following periods:
Numerator:
Net loss
Deemed distribution to certain holders of convertible
preferred shares
Net loss attributable to ordinary shareholders
Denominator (in thousands of shares):
Weighted-average number of ordinary shares outstanding –
2018
RMB
For the year ended December 31,
2019
RMB
2020
RMB
2020
US$
(10,217,125)
(6,967,603)
(7,179,742)
(1,100,344)
(80,496)
(10,297,621)
—
(6,967,603)
—
(7,179,742)
—
(1,100,344)
basic and diluted
2,968,320
4,627,278
4,768,343
4,768,343
Loss per share – basic and diluted
(3.47)
(1.51)
(1.51)
(0.23)
During the years ended December 31, 2019 and 2020, the Company issued 600,000 and 12,050,000 ordinary shares to
its share depositary bank, respectively. No consideration was received by the Company for the issuance. As of
December 31, 2020, 5,518,128 out of the total 12,650,000 ordinary shares were used to settle share-based
compensation. The remaining 7,131,872 ordinary shares are legally issued and outstanding but are treated as escrowed
shares for accounting purposes and therefore, have been excluded from the computation of loss per share.
20. Restricted Net Assets
The Company’s ability to pay dividends is primarily dependent on the Company receiving distributions of funds from
its subsidiaries, the VIE and subsidiaries of the VIE. Relevant PRC statutory laws and regulations permit payments of
dividends by the Company’s PRC subsidiaries, the VIE and subsidiaries of the VIE only out of their retained earnings,
if any, as determined in accordance with PRC accounting standards and regulations. The results of operations reflected
in the consolidated financial statements prepared in accordance with U.S. GAAP differ from those reflected in the
statutory financial statements of the Company’s subsidiaries, the VIE and subsidiaries of the VIE.
In accordance with the PRC Regulations on Enterprises with Foreign Investment and the articles of association of the
Company’s PRC subsidiaries, a foreign-invested enterprise established in the PRC is required to provide certain
statutory reserves, namely general reserve fund, the enterprise expansion fund and staff welfare and bonus fund which
are appropriated from net profit as reported in the enterprise’s PRC statutory accounts. A foreign-invested enterprise is
required to allocate at least 10% of its annual after-tax profit to the general reserve fund until such reserve has reached
50% of its respective registered capital based on the enterprise’s PRC statutory accounts. Appropriations to the
enterprise expansion fund and staff welfare and bonus fund are at the discretion of the board of directors for all
foreign-invested enterprises. The aforementioned reserves can only be used for specific purposes and are not
distributable as cash dividends. The WFOE was established as a foreign-invested enterprise and, therefore, is subject
to the above mandated restrictions on distributable profits. For the years ended December 31, 2018, 2019 and 2020,
WFOE did not have after-tax profit and therefore no statutory reserves have been allocated.
Foreign exchange and other regulations in the PRC may further restrict the Company’s VIE from transferring funds to
the Company in the form of dividends, loans and advances. Amounts restricted include paid-in capital and statutory
reserves of the Company’s PRC Subsidiaries and the equity of the VIE, as determined pursuant to PRC
generally accepted accounting principles. As of December 31, 2020, restricted net assets of the Company’s PRC
subsidiaries, the VIE and subsidiaries of the VIE were RMB10,789,088 (US$1,653,500).
F-46
Table of Contents
PINDUODUO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
21. Mainland China Employee Contribution Plan
As stipulated by the regulations of the PRC, full-time employees of the Group are entitled to various government
statutory employee benefit plans, including medical insurance, maternity insurance, workplace injury insurance,
unemployment insurance and pension benefits through a PRC government-mandated multi-employer defined
contribution plan. The Group is required to make contributions to the plan based on certain percentages of employees’
salaries.The total expenses the Group incurred for the plan were RMB133,699, RMB334,434 and RMB277,429
(US$42,518) for the years ended December 31, 2018, 2019 and 2020, respectively.
22. Commitments and Contingencies
(a) Operating lease commitments
The Company leases offices for operation under operating leases. Future minimum lease payments under non-
cancellable operating leases with initial terms in excess of one year is included in Note 8.
(b) Investment commitments
The Group’s investment commitments primarily relate to capital contributions obligation under certain arrangement
which does not have contractual maturity date. As of 31 December 2020, the total investment commitments contracted
but not yet reflected in the financial statements amounted to approximately RMB782,703 (US$119,954).
(c) Contingencies
In the ordinary course of business, the Group is from time to time involved in legal proceedings and litigations.
Between August and December 2018, several putative shareholder class action lawsuits were filed against the Group
and certain of its officers and directors in the U.S. District Court for the Southern District of New York (“SDNY”) and
the Superior Court of the State of California. In March 2020, the court granted the Group’s motion to dismiss the
claims in the consolidated action in the SDNY, following which the plaintiffs filed an appeal in April 2020. In
February 2021, the Superior Court of the State of California dismissed all claims against the Group for lack of
personal jurisdiction. As the appeal of the consolidated action in the SDNY is still pending, the Group cannot reliably
estimate the likelihood of an unfavorable outcome or any estimate of the amounts or range of any potential loss. As of
December 31, 2020, the Group did not consider an unfavorable outcome in any material respects in the outstanding
legal proceedings and litigations to be probable.
F-47
Table of Contents
PINDUODUO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
23. Condensed Financial Information of the Company
The following is the condensed financial information of the Company on a parent company only basis.
ASSETS
Current assets
Cash and cash equivalents
Short-term investments
Prepayments and other current assets
Total current assets
Non-current assets
Intangible asset
Investments in subsidiaries, the VIE and subsidiaries of the VIE
Total non-current assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accrued expenses and other liabilities
Total current liabilities
Convertible bonds
Other non-current liabilities
Total non-current liabilities
Total liabilities
Shareholders’ equity
Class A ordinary shares (US$0.000005 par value; 77,300,000,000 shares authorized; 2,575,580,988 and
3,545,065,888 shares issued and outstanding as of December 31, 2019 and 2020, respectively)
Class B ordinary shares (US$0.000005 par value; 2,200,000,000 shares authorized, 2,074,447,700 and
1,409,744,080 shares issued and outstanding as of December 31, 2019 and 2020, respectively)
Additional paid-in capital
Accumulated other comprehensive income
Accumulated deficits
Total shareholders’ equity
Total liabilities and shareholders’ equity
F-48
2019
RMB
As of December 31,
2020
RMB
US$
661,714
6,157,221
17,906
6,836,841
1,994,292
21,053,370
23,047,662
29,884,503
23,566
23,566
5,206,682
7,389
5,214,071
5,237,637
6,566
5,840,247
359
5,847,172
1,276,751
67,814,679
69,091,430
74,938,602
327,004
327,004
14,432,792
2,918
14,435,710
14,762,714
1,006
895,057
55
896,118
195,671
10,393,054
10,588,725
11,484,843
50,116
50,116
2,211,922
447
2,212,369
2,262,485
84
115
18
64
41,493,949
1,448,230
(18,295,461)
24,646,866
29,884,503
44
86,698,660
(1,047,728)
(25,475,203)
60,175,888
74,938,602
6
13,287,151
(160,571)
(3,904,246)
9,222,358
11,484,843
Table of Contents
PINDUODUO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
23. Condensed Financial Information of the Company (continued)
Costs of revenues
Sales and marketing expenses
General and administrative expenses
Total operating expenses
Operating loss
Interest income
Interest expense
Foreign exchange gain
Other (loss)/gain
Share of losses from subsidiaries, the VIE and subsidiaries of the VIE
Loss before income tax
Income tax expenses
Net loss
Other comprehensive income, net of tax of nil
Foreign currency translation difference, net of tax of nil
Comprehensive loss
Net cash generated from operating activities
Cash flows from investing activities:
Proceeds from sales of short-term investments
Cash given to purchase of short-term investments
Cash given to subsidiaries, the VIE and subsidiaries of the VIE
Net cash used in investing activities
Cash flows from financing activities:
Net proceeds from the initial public offering
Proceeds from the private placements
Net proceeds from the follow-on offerings
Net proceeds from the issuance of convertible bonds
Net proceeds from the issuance of convertible preferred shares
Others
Net cash generated from financing activities
Exchange rate effect on cash, cash equivalents and restricted cash
Net increase/(decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of year
Cash, cash equivalents and restricted cash at end of year
For the years ended December 31,
2020
2018
RMB
2019
RMB
(491,069)
(4,106)
(4,101)
(8,207)
(499,276)
207,597
—
113
—
(9,925,559)
(10,217,125)
—
(619,733)
(47,746)
(3,245)
(50,991)
(670,724)
318,166
(144,132)
—
(31)
(6,470,882)
(6,967,603)
—
(10,217,125)
(6,967,603)
RMB
US$
(623,524)
(36,940)
(6,746)
(43,686)
(667,210)
126,502
(695,794)
—
53,244
(5,996,484)
(7,179,742)
—
(7,179,742)
(95,559)
(5,661)
(1,034)
(6,695)
(102,254)
19,387
(106,635)
—
8,160
(919,002)
(1,100,344)
—
(1,100,344)
1,058,884
(9,158,241)
412,447
(6,555,156)
(2,495,958)
(9,675,700)
(382,522)
(1,482,866)
For the years ended December 31,
2020
2018
RMB
110,724
2019
RMB
259,409
RMB
735,231
US$
112,679
—
(6,146,370)
(6,749,831)
(12,896,201)
6,049,590
(5,998,024)
(20,293,132)
(20,241,566)
6,034,863
(6,250,248)
(52,051,474)
(52,266,859)
924,883
(957,892)
(7,977,237)
(8,010,246)
11,523,631
—
—
—
5,820,726
—
17,344,357
319,221
4,878,101
663,645
5,541,746
—
—
7,993,828
6,966,757
—
—
14,960,585
141,540
(4,880,032)
5,541,746
661,714
—
11,063,339
26,805,438
13,024,199
—
(6)
50,892,970
(16,490)
(655,148)
661,714
6,566
—
1,695,531
4,108,113
1,996,046
—
(1)
7,799,689
(2,528)
(100,406)
101,412
1,006
F-49
Table of Contents
PINDUODUO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands of RMB and US$, except for number of shares and per share data)
23. Condensed Financial Information of the Company (continued)
Basis of presentation
Condensed financial information is used for the presentation of the Company, or the parent company. The condensed
financial information of the parent company has been prepared using the same accounting policies as set out in the
Company’s consolidated financial statements except that the parent company used the equity method to account for
investment in its subsidiaries, the VIE and subsidiaries of the VIE.
The parent company records its investment in its subsidiaries, the VIE and its subsidiaries under the equity method of
accounting as prescribed in ASC 323, Investments-Equity Method and Joint Ventures. Such investments are presented
on the condensed balance sheets as ‘‘Investments in subsidiaries, the VIE and a subsidiaries of the VIE’’ or ‘‘Loss in
excess of investments in subsidiaries, the VIE and subsidiaries of the VIE’’ and their respective loss as ‘‘Share of loss
in subsidiaries, the VIE and a subsidiaries of the VIE’’ on the condensed statements of comprehensive loss. Equity
method accounting ceases when the carrying amount of the investment, including any additional financial support, in
subsidiaries, the VIE and subsidiaries of the VIE is reduced to zero unless the parent company has guaranteed
obligations of the subsidiaries, the VIE and subsidiaries of the VIE or is otherwise committed to provide further
financial support. If the subsidiaries, the VIE subsidiaries of the VIE subsequently reports net income, the parent
company shall resume applying the equity method only after its share of that net income equals the share of net loss
not recognized during the period the equity method was suspended.
The parent company’s condensed financial statements should be read in conjunction with the Company’s consolidated
financial statements.
F-50
Exhibit 2.6
Execution version
INDENTURE
Dated as of
November 20, 2020
Between
PINDUODUO INC.
as Company
and
DEUTSCHE BANK TRUST COMPANY AMERICAS
as Trustee
DEBT SECURITIES
Section 1.01 Definitions.
Section 1.02 Rules of Construction
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS
ARTICLE II
FORMS OF SECURITIES
Section 2.01 Form Generally.
Section 2.02 Form of Trustee’s Certificate of Authentication.
ARTICLE III
THE DEBT SECURITIES
Section 3.01 Amount Unlimited; Issuable in Series
Section 3.02 Denominations
Section 3.03 Execution, Authentication, Delivery and Dating.
Section 3.04 Temporary Securities.
Section 3.05 Registrar.
Section 3.06 Transfer and Exchange.
Section 3.07 Mutilated, Destroyed, Lost and Stolen Securities.
Section 3.08 Payment of Interest; Interest Rights Preserved.
Section 3.09 Cancellation
Section 3.10 Computation of Interest
Section 3.11 Currency of Payments in Respect of Securities.
Section 3.12 CUSIP Numbers
i
Page
1
9
9
10
10
13
13
15
16
17
20
21
22
23
23
23
ARTICLE IV
REDEMPTION OF SECURITIES
Section 4.01 Applicability of Right of Redemption
Section 4.02 Selection of Securities to be Redeemed.
Section 4.03 Notice of Redemption.
Section 4.04 Deposit of Redemption Price
Section 4.05 Securities Payable on Redemption Date
Section 4.06 Securities Redeemed in Part
Section 4.07 Tax Redemption
ARTICLE V
SINKING FUNDS
Section 5.01 Applicability of Sinking Fund.
Section 5.02 Mandatory Sinking Fund Obligation
Section 5.03 Optional Redemption at Sinking Fund Redemption Price
Section 5.04 Application of Sinking Fund Payment.
ARTICLE VI
PARTICULAR COVENANTS OF THE COMPANY
Section 6.01 Payments of Principal, Premium and Interest
Section 6.02 Maintenance of Office or Agency; Paying Agent.
Section 6.03 To Hold Payment in Trust.
Section 6.04 Merger, Consolidation and Sale of Assets
Section 6.05 Additional Amounts
Section 6.06 Payment for Consent
Section 6.07 Compliance Certificate
Section 6.08 Conditional Waiver by Holders of Securities
Section 6.09 Statement by Officers as to Default
ii
23
23
24
24
25
25
25
26
27
27
28
29
29
29
31
32
34
35
35
35
ARTICLE VII
REMEDIES OF TRUSTEE AND SECURITYHOLDERS
Section 7.01 Events of Default
Section 7.02 Acceleration; Rescission and Annulment.
Section 7.03 Other Remedies
Section 7.04 Trustee as Attorney-in-Fact
Section 7.05 Priorities
Section 7.06 Control by Securityholders; Waiver of Past Defaults
Section 7.07 Limitation on Suits
Section 7.08 Undertaking for Costs
Section 7.09 Remedies Cumulative; Delay or Omission Not Waiver
ARTICLE VIII
CONCERNING THE SECURITYHOLDERS
Section 8.01 Evidence of Action of Securityholders
Section 8.02 Proof of Execution or Holding of Securities
Section 8.03 Persons Deemed Owners.
Section 8.04 Effect of Consents
ARTICLE IX
SECURITYHOLDERS’ MEETINGS
Section 9.01 Purposes of Meetings
Section 9.02 Call of Meetings by Trustee
Section 9.03 Call of Meetings by Company or Securityholders
Section 9.04 Qualifications for Voting
Section 9.05 Regulation of Meetings.
Section 9.06 Voting
Section 9.07 No Delay of Rights by Meeting
iii
35
37
39
39
39
40
41
41
42
42
42
43
44
44
44
44
45
45
45
46
ARTICLE X
REPORTS BY THE COMPANY AND THE TRUSTEE AND
SECURITYHOLDERS’ LISTS
Section 10.01 Reports by Trustee.
Section 10.02 Reports by the Company
Section 10.03 Securityholders’ Lists
ARTICLE XI
CONCERNING THE TRUSTEE
Section 11.01 Rights of Trustees; Compensation and Indemnity
Section 11.02 Duties of Trustee.
Section 11.03 Notice of Defaults
Section 11.04 Eligibility; Disqualification.
Section 11.05 Resignation and Notice; Removal
Section 11.06 Successor Trustee by Appointment.
Section 11.07 Successor Trustee by Merger
Section 11.08 Right to Rely on Opinion of Counsel and/or Officers’ Certificate
Section 11.09 Communications by Securityholders with Other Securityholders
ARTICLE XII
SATISFACTION AND DISCHARGE; DEFEASANCE
Section 12.01 Applicability of Article
Section 12.02 Satisfaction and Discharge of Indenture
Section 12.03 Defeasance upon Deposit of Moneys or U.S. Government Obligations
Section 12.04 Repayment to Company
Section 12.05 Indemnity for U.S. Government Obligations
Section 12.06 Deposits to Be Held in Escrow
Section 12.07 Application of Trust Money.
iv
46
47
47
47
51
52
52
52
54
55
55
56
56
56
57
59
59
60
60
Section 13.01 No Personal Liability
ARTICLE XIII
IMMUNITY OF CERTAIN PERSONS
ARTICLE XIV
SUPPLEMENTAL INDENTURES
Section 14.01 Without Consent of Securityholders
Section 14.02 With Consent of Securityholders; Limitations.
Section 14.03 Trustee Protected
Section 14.04 Effect of Execution of Supplemental Indenture
Section 14.05 Notation on or Exchange of Securities
Section 14.06 Conformity with TIA
ARTICLE XV
SUBORDINATION OF SECURITIES
Section 15.01 Agreement to Subordinate
Section 15.02 Distribution on Dissolution, Liquidation and Reorganization; Subrogation of Securities
Section 15.03 No Payment on Securities in Event of Default on Senior Indebtedness
Section 15.04 Payments on Securities Permitted
Section 15.05 Authorization of Securityholders to Trustee to Effect Subordination
Section 15.06 Notices to Trustee
Section 15.07 Trustee as Holder of Senior Indebtedness
Section 15.08 Modifications of Terms of Senior Indebtedness
Section 15.09 Reliance on Judicial Order or Certificate of Liquidating Agent
Section 15.10 Satisfaction and Discharge; Defeasance and Covenant Defeasance
Section 15.11 Trustee Not Fiduciary for Holders of Senior Indebtedness
v
61
61
63
64
64
65
65
65
65
67
68
68
69
69
70
70
70
70
ARTICLE XVI
MISCELLANEOUS PROVISIONS
Section 16.01 Certificates and Opinions as to Conditions Precedent.
Section 16.02 Trust Indenture Act Controls
Section 16.03 Notices to the Company and Trustee
Section 16.04 Notices to Securityholders; Waiver
Section 16.05 Legal Holiday
Section 16.06 Judgment Currency
Section 16.07 Effects of Headings and Table of Contents
Section 16.08 Successors and Assigns
Section 16.09 Severability
Section 16.10 Benefits of Indenture
Section 16.11 Counterparts
Section 16.12 Governing Law; Waiver of Trial by Jury
Section 16.13 Submission to Jurisdiction
Section 16.14 Waiver of Immunity
Section 16.15 Force Majeure
EXHIBITS
EXHIBIT A Form of Security
EXHIBIT B Form of Compliance Certificate
vi
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72
72
73
74
74
74
74
74
74
75
75
75
75
75
INDENTURE dated as of November 20, 2020, between Pinduoduo Inc., an exempted company
incorporated in the Cayman Islands (the “Company”), and Deutsche Bank Trust Company Americas, a New York
banking corporation, as trustee (the “Trustee”).
WITNESSETH:
WHEREAS, the Company has duly authorized the execution and delivery of this Indenture to provide for
the issuance of debentures, notes, bonds or other evidences of indebtedness (the “Securities”) in an unlimited
aggregate principal amount to be issued from time to time in one or more series as provided in this Indenture; and
WHEREAS, all things necessary to make this Indenture a valid and legally binding agreement of the
Company, in accordance with its terms, have been done.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
That, in consideration of the premises and the purchase of the Securities by the Holders (as defined below)
thereof for the equal and proportionate benefit of all of the present and future Holders of the Securities, each party
agrees and covenants as follows:
ARTICLE I
DEFINITIONS
Section 1.01 Definitions.
(a)
Unless otherwise defined in this Indenture or the context otherwise requires, all terms used
herein shall have the meanings assigned to them in the Trust Indenture Act.
(b)
Unless the context otherwise requires, the terms defined in this Section 1.01(b) shall for all
purposes of this Indenture have the meanings hereinafter set forth, the following definitions to be equally
applicable to both the singular and the plural forms of any of the terms herein defined:
“Additional Amounts” has the meaning provided in Section 6.05(a).
“Affiliate” means, with respect to any Person, any other Person directly or indirectly controlling,
controlled by, or under direct or indirect common control with, such Person. For the purposes of this definition,
“control” when used with respect to any Person means the power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and
the terms “controlling” and “controlled” have meanings correlative to the foregoing.
“Agents” means the Paying Agents, the Registrar, and any other agent appointed under the terms of
this Indenture.
“Bankruptcy Code” means Title 11 of the United States Code.
“Board of Directors” means the board of directors elected or appointed by the shareholders of the
Company to manage its business or any committee of such board duly authorized to take the action purported to
be taken by such committee.
“Board Resolution” means a copy of a resolution certified by the Secretary or an Assistant
Secretary of the Company to have been duly adopted by the Board of Directors, and to be in full force and effect
on the date of such certification, and delivered to the Trustee.
“Business Day” means a day other than a Saturday, Sunday or a day on which banking institutions
or trust companies in The City of New York, Hong Kong or Beijing are authorized or obligated by law, regulation
or executive order to remain closed
“Capital Stock” of any Person means any and all shares, interests, rights to purchase, warrants,
options, participations or other equivalents of or interests in (however designated) equity of such Person,
including any Preferred Shares and limited liability or partnership interests (whether general or limited), but
excluding any debt securities convertible or exchangeable into such equity.
“Code” means the U.S. Internal Revenue Code of 1986, as amended.
“Company” means the Person named as the “Company” in the recitals, until a successor Person
shall have become such pursuant to the applicable provisions of this Indenture, and thereafter “Company” shall
mean such successor Person.
“Company Order” means a written order of the Company, signed by an Officer and delivered to the
Trustee.
“Consolidated Affiliated Entity” of any Person means any corporation, association or other entity
which is or is required to be consolidated with such Person under Accounting Standards Codification subtopic
810-10, Consolidation: Overall (including any changes, amendments or supplements thereto) or, if such Person
prepares its financial statements in accordance with accounting principles other than U.S. GAAP, the equivalent of
Accounting Standards Codification subtopic 810-10, Consolidation: Overall under such accounting principles.
Unless otherwise specified herein, each reference to a Consolidated Affiliated Entity will refer to a Consolidated
Affiliated Entity of the Company.
“Controlled Entity” of any Person means a Subsidiary or a Consolidated Affiliated Entity of such
Person.
“Corporate Trust Office,” or other similar term, means the principal office of the Trustee at which
at any particular time its corporate trust business shall be administered, which office at the date hereof is located at
60 Wall Street, 24th Floor, New York, New York, 10005, Attention: Global Transaction Banking – Pinduoduo, or
such other address as the Trustee may designate from time to time by notice to the Holders and the Company, or
the principal corporate trust officer of any successor Trustee (or such other address as such successor Trustee may
designate from time to time by notice to the Holders and the Company).
“Covenant Defeasance” has the meaning provided in Section 12.03(c).
2
“CUSIP” means the identification number provided by the Committee on Uniform Securities
Identification Procedures.
“Default” has the meaning provided in Section 11.03.
“Defaulted Interest” has the meaning provided in Section 3.08(b).
“Depositary” means, with respect to the Securities of any series issuable in whole or in part in the
form of one or more Global Securities, the Person designated as Depositary by the Company pursuant to Section
3.01 until a successor Depositary shall have become such pursuant to the applicable provisions of this Indenture,
and thereafter “Depositary” shall mean or include each Person who is then a Depositary hereunder, and if at any
time there is more than one such Person, “Depositary” as used with respect to the Securities of any such series
shall mean the Depositary with respect to the Securities of that series.
“Discharged” has the meaning provided in Section 12.03(b).
“Event of Default” has the meaning provided in Section 7.01.
“Exchange Act” means the U.S. Securities Exchange Act of 1934, as amended, and the rules and
regulations promulgated thereunder.
“External Legal Counsel” means an external legal firm of nationally recognized standing that is
reasonably acceptable to the Trustee.
“FATCA” has the meaning provided in Section 6.05(a)(viii).
“Floating Rate Security” means a Security that provides for the payment of interest at a variable
rate determined periodically by reference to an interest rate index specified pursuant to Section 3.01.
“Global Security” means any Security that evidences all or part of a series of Securities, issued in
fully-registered certificated form to the Depositary for such series in accordance with Section 3.03 and bearing the
legend prescribed in Section 3.03(f).
“Holder,” “Holder of Securities,” or “Securityholder” mean the Person in whose name Securities
are registered in the Register.
“Indebtedness” means any and all obligations of a Person for money borrowed which, in
accordance with U.S. GAAP, would be reflected on the balance sheet of such Person as a liability on the date as of
which Indebtedness is to be determined.
“Indenture” means this instrument and all indentures supplemental hereto entered into pursuant to
the applicable provisions hereof and shall include the terms of particular series of Securities established as
contemplated by Section 3.01.
“Independent Tax Consultant” means an independent accounting firm or consultant of nationally
recognized standing.
3
“Interest Payment Date” means, with respect to any Security, the Stated Maturity of an installment
of interest on such Security.
“ISIN” means the International Securities Identification Number.
“Issue Date” means, with respect to any Security, the date on which such Security is originally
issued under this Indenture.
“Judgment Currency” has the meaning provided in Section 16.06.
“Legal Defeasance” has the meaning provided in Section 12.03(b).
“Mandatory Sinking Fund Payment” has the meaning provided in Section 5.01(b).
“Maturity” means, with respect to any Security, the date on which the principal of such Security
shall become due and payable as therein and herein provided, whether by declaration, call for redemption or
otherwise.
“Members” has the meaning provided in Section 3.03(h).
“Officer” means, with respect to the Company, the Chairman, the President, the Chief Executive
Officer, the Chief Financial Officer, the Treasurer, the Secretary, or any Vice President (in each case, whether or
not such person is designated by a number or numbers or word or words added before or after the title of such
person).
“Officers’ Certificate” when used with respect to the Company, means a certificate that is delivered
to the Trustee and that is signed by an Officer of the Company.
“Opinion of Counsel” means an opinion in writing reasonably acceptable to the Trustee signed by
legal counsel, who may be counsel to the Company or who may be other counsel, that meets the applicable
requirements provided for in Section 16.01.
“Optional Sinking Fund Payment” has the meaning provided in Section 5.01(b).
“Original Issue Discount Security” means any Security that is issued with “original issue discount”
within the meaning of Section 1273(a) of the Code and the regulations thereunder and any other Security
designated by the Company as issued with original issue discount for United States federal income tax purposes.
“Outstanding” means, when used with respect to Securities, as of the date of determination, all
Securities theretofore authenticated and delivered under this Indenture, except:
(i)
Securities theretofore cancelled by the Paying Agent or delivered to the Paying Agent for
cancellation;
4
(ii)
Securities or portions thereof for which payment or redemption money in the necessary
amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in
trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying
Agent) for the Holders of such Securities or Securities as to which the Company’s obligations have been
Discharged; provided, however, that if such Securities or portions thereof are to be redeemed, notice of
such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the
Trustee has been made; and
(iii)
Securities that have been paid pursuant to Section 3.07(b) or in exchange for or in lieu of
which other Securities have been authenticated and delivered pursuant to this Indenture, other than any
such Securities in respect of which there shall have been presented to a Responsible Officer of the Trustee
proof satisfactory to it that such Securities are held by a protected purchaser in whose hands such
Securities are valid obligations of the Company;
provided, however, that in determining whether the Holders of the requisite principal amount of Securities
of a series Outstanding have performed any action (including the making of any demand or request, the giving of
any notice, consent or waiver or the taking of any other action) hereunder, Securities owned by the Company or
any other obligor upon the Securities of such series or any Affiliate of the Company or of such other obligor shall
be disregarded and deemed not to be Outstanding unless the Company, such Affiliate or such other obligor owns
all of such Securities, except that, in determining whether the Trustee shall be protected in relying upon any such
action, only Securities of such series for which the Trustee has received written notice to be so owned shall be so
disregarded. Securities so owned that have been pledged in good faith may be regarded as Outstanding if the
pledgee establishes to the satisfaction of the Trustee the pledgee’s right to act with respect to such Securities and
that the pledgee is not the Company or any other obligor upon such Securities or any Affiliate of the Company or
of such other obligor. In case of a dispute as to such right, the decision of the Trustee upon the advice of counsel
shall be full protection to the Trustee. Upon request of the Trustee, the Company shall furnish to the Trustee
promptly an Officers’ Certificate listing and identifying all such Securities, if any, known by the Company to be
owned or held by or for the account of any of the above described Persons; and, subject to the provisions of
Section 11.01, the Trustee shall be entitled to accept such Officers’ Certificate as conclusive evidence of the facts
therein set forth and of the fact that all such Securities not listed therein are Outstanding for the purpose of any
such determination. In determining whether the Holders of the requisite principal amount of Outstanding
Securities of a series have performed any action hereunder, the principal amount of an Original Issue Discount
Security that shall be deemed to be Outstanding for such purpose shall be the amount of the principal thereof that
would be due and payable as of the date of such determination upon a declaration of acceleration of the Maturity
thereof pursuant to Section 7.02.
“Paying Agent” means any Person authorized by the Company to pay the principal of, premium, if
any, or interest on any Securities on behalf of the Company. The Company may act as Paying Agent with respect
to Securities of any series issued hereunder.
“Payment Default” has the meaning provided in Section 7.01(e).
“Person” means any individual, corporation, firm, limited liability company, partnership, joint
venture, undertaking, association, joint stock company, trust, unincorporated organization, trust, state, government
or any agency or political subdivision thereof or any other entity (in each case whether or not being a separate
legal entity).
5
“Place of Payment” has the meaning provided in Section 3.01(f).
“PRC” means the People’s Republic of China, excluding, for purposes of this definition, the Hong
Kong Special Administrative Region, the Macau Special Administrative Region and Taiwan.
“Predecessor Security” means, with respect to any Security, every previous Security evidencing all
or a portion of the same debt as that evidenced by such particular Security, and, for the purposes of this definition,
any Security authenticated and delivered under Section 3.07 in lieu of a lost, destroyed or stolen Security shall be
deemed to evidence the same debt as the lost, destroyed or stolen Security.
“Preferred Shares,” as applied to the Capital Stock of any corporation, means Capital Stock of any
class or classes (however designated) that is preferred as to the payment of dividends upon liquidation, dissolution
or winding up.
“Prospectus” means the prospectus, dated November 16, 2020, relating to the offering of
Securities.
“Record Date” means, with respect to any interest payable on any Security on any Interest Payment
Date, the close of business on such date specified in such Security for the payment of interest pursuant to Section
3.01.
“Redemption Date” means, when used with respect to any Security to be redeemed, in whole or in
part, the date fixed for such redemption by or pursuant to this Indenture and the terms of such Security, which, in
the case of a Floating Rate Security, unless otherwise specified pursuant to Section 3.01, shall be an Interest
Payment Date only.
“Redemption Price” means, when used with respect to any Security to be redeemed, in whole or in
part, the price at which it is to be redeemed pursuant to the terms of the Security and this Indenture.
“Register” has the meaning provided in Section 3.05(a).
“Registrar” has the meaning provided in Section 3.05(a).
“Relevant Jurisdiction” has the meaning provided in Section 6.05(a).
“Responsible Officer” means, with respect to the Trustee, any officer located at the Corporate Trust
Office (or any successor division or unit) of the Trustee having direct responsibility for the day to day
administration of this Indenture, or to whom any corporate trust matter is referred because of such person’s
knowledge of and familiarity with the particular subject.
6
“SEC” means the United States Securities and Exchange Commission, as constituted from time to
time.
“Security” or “Securities” means any security or securities, as the case may be, duly authenticated
by the Trustee and delivered under this Indenture.
“Security Custodian” means the custodian with respect to any Global Security appointed by the
Depositary, or any successor Person thereto, and shall initially be the Paying Agent.
“Senior Indebtedness” means the principal of, premium, if any, or interest on (i) Indebtedness of
the Company, whether outstanding on the date hereof or thereafter created, incurred, assumed or guaranteed, for
money borrowed other than (A) any Indebtedness of the Company which when incurred, and without respect to
any election under Section 1111(b) of the Bankruptcy Code, was without recourse to the Company, (B) any
Indebtedness of the Company to any of its Subsidiaries, (C) Indebtedness to any employee of the Company, (D)
any liability for taxes, (E) Trade Payables and (F) any Indebtedness of the Company which is expressly
subordinate in right of payment to any other Indebtedness of the Company, and (ii) renewals, extensions,
modifications and refundings of any such Indebtedness. For purposes of the foregoing and the definition of
“Senior Indebtedness,” the phrase “subordinated in right of payment” means debt subordination only and not lien
subordination, and accordingly, (x) unsecured indebtedness shall not be deemed to be subordinated in right of
payment to secured indebtedness merely by virtue of the fact that it is unsecured, and (y) junior liens, second liens
and other contractual arrangements that provide for priorities among Holders of the same or different issues of
indebtedness with respect to any collateral or the proceeds of collateral shall not constitute subordination in right
of payment. This definition may be modified or superseded by a supplemental indenture.
“Significant Subsidiary” means a Subsidiary of the Company that meets the definition of
“significant subsidiary” in Article 1, Rule 1-02 of Regulation S-X under the Exchange Act. Each of the
Company’s consolidated affiliated entities will be deemed to be a “subsidiary” for the purposes of the definition of
“significant subsidiary” in Article 1, Rule 1-02 of Regulation S-X.
“Special Record Date” has the meaning provided in Section 3.08(b)(i).
“Stated Maturity” means, when used with respect to any Security or any installment of interest
thereon, the date specified in such Security as the fixed date on which the principal (or any portion thereof) of or
premium, if any, on such Security or such installment of interest is due and payable.
“Subsidiary” of any Person means (i) any corporation, association or other business entity (other
than a partnership, joint venture, limited liability company or similar entity) of which more than 50% of the total
ordinary voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof (or Persons performing similar functions) or (ii) any
partnership, joint venture limited liability company or similar entity of which more than 50% of the capital
accounts, distribution rights, total equity and voting interests or general or limited partnership interests, as
applicable, is, in the case of clauses (i) and (ii), voting at the time owned or controlled, directly or indirectly, by
(A) such Person, (B) such Person and one or more Subsidiaries of such Person or (C) one or more Subsidiaries of
such Person. Unless otherwise specified herein, each reference to a Subsidiary will refer to a Subsidiary of the
Company. For the avoidance of doubt, the term “Subsidiary” or “Subsidiaries” should include the Company’s
consolidated affiliated entities, including its variable interest entities and their Subsidiaries.
7
“Successor Company” has the meaning provided in Section 3.06(i).
“Successor Jurisdiction” has the meaning provided in Section 6.05(d).
“Tax Change” has the meaning provided in Section 4.07(a).
“Taxes” has the meaning provided in Section 6.05(a).
“Total Equity” as of any date, means the total equity attributable to the Company’s shareholders on
a consolidated basis determined in accordance with U.S. GAAP, as shown on the consolidated balance sheet of the
Company for the most recent fiscal quarter.
“Trade Payables” means accounts payable or any other Indebtedness or monetary obligations to
trade creditors created or assumed by the Company or any Subsidiary of the Company in the ordinary course of
business (including guarantees thereof or instruments evidencing such liabilities).
“Trust Indenture Act” or “TIA” means the Trust Indenture Act of 1939, as amended.
“Trustee” means the Person named as the “Trustee” in the first paragraph of this Indenture until a
successor Trustee shall have become such with respect to one or more series of Securities pursuant to the
applicable provisions of this Indenture, and thereafter “Trustee” shall mean or include each Person who is then a
Trustee hereunder, and if at any time there is more than one such Person, “Trustee” as used with respect to the
Securities of any series shall mean the Trustee with respect to Securities of that series.
“U.S. Dollars” or “US$” means such currency of the United States as at the time of payment shall
be legal tender for the payment of public and private debts.
“U.S. GAAP” refers to generally accepted accounting principles in the United States.
“U.S. Government Obligations” means securities that are (i) direct obligations of the United States
for the payment of which its full faith and credit is pledged or (ii) obligations of an agency or instrumentality of
the United States the payment of which is unconditionally guaranteed as a full faith and credit obligation by the
United States, and shall also include a depositary receipt issued by a bank or trust company as custodian with
respect to any such U.S. Government Obligation or a specific payment of interest on or principal of any such U.S.
Government Obligation held by such custodian for the account of the holder of a depositary receipt; provided that
(except as required by law) such custodian is not authorized to make any deduction from the amount payable to
the holder of such depositary receipt from any amount received by the custodian in respect of the U.S.
Government Obligation or the specific payment of interest on or principal of the U.S. Government Obligation
evidenced by such depositary receipt.
8
“United States” shall mean the United States of America (including the States and the District of
Columbia), its territories and its possessions and other areas subject to its jurisdiction.
“Voting Stock” of a Person means all classes of Capital Stock of such Person then outstanding and
normally entitled to vote in the election of directors, managers or trustees, as applicable, of such Person.
Section 1.02 Rules of Construction. For all purposes of this Indenture, except as otherwise expressly
provided or unless the context otherwise requires:
(a)
the words “herein”, “hereof” and “hereunder” and other words of similar import refer to
this Indenture as a whole and not to any particular Article, Section or other subdivision;
(b)
references to “Article” or “Section” or other subdivision herein are references to an Article,
Section or other subdivision of the Indenture, unless the context otherwise requires; and
(c)
references to any agreement, instrument, statute or regulation defined or referred to herein
or in any instrument establishing the terms of any Securities (or executed in connection therewith) are references
to such agreement, instrument, statute or regulation as from time to time amended, modified, supplemented or
replaced, including (in the case of agreements or instruments) by waiver or consent and by succession of
comparable successor agreements, instruments, statutes or regulations.
ARTICLE II
FORMS OF SECURITIES
Section 2.01 Form Generally.
(a)
The Securities of each series shall be substantially in the form set forth in Exhibit A
attached hereto or as shall be established pursuant to a Company Order, Officers’ Certificate or in one or more
indentures supplemental hereto, in each case with such appropriate insertions, omissions, substitutions and other
variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of
identification or designation and such legends or endorsements placed thereon as the Company may deem
appropriate and as are not inconsistent with the provisions of this Indenture, or as may be required to comply with
any law or with any rule or regulation made pursuant thereto or with any rule or regulation of any securities
exchange on which any series of the Securities may be listed or of any automated quotation system on which any
such series may be quoted, or to conform to usage, all as determined by the officers executing such Securities as
conclusively evidenced by their execution of such Securities.
9
(b)
The terms and provisions of the Securities shall constitute, and are hereby expressly made,
a part of this Indenture, and, to the extent applicable, the Company and the Trustee, by their execution and
delivery of this Indenture expressly agree to such terms and provisions and to be bound thereby.
Section 2.02 Form of Trustee’s Certificate of Authentication.
(a)
Only such of the Securities as shall bear thereon a certificate substantially in the form of the
Trustee’s certificate of authentication hereinafter recited, executed by the Trustee by manual or electronic
signature, shall be valid or become obligatory for any purpose or entitle the Holder thereof to any right or benefit
under this Indenture.
(b)
(c)
Each Security shall be dated the date of its authentication.
The form of the Trustee’s certificate of authentication to be borne by the Securities shall be
substantially as follows:
TRUSTEE’S CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture.
Date of authentication: ______________
DEUTSCHE BANK TRUST COMPANY
AMERICAS,
as Trustee
By:
Name:
Title:
ARTICLE III
THE DEBT SECURITIES
Section 3.01 Amount Unlimited; Issuable in Series. The aggregate principal amount of Securities which
may be authenticated and delivered under this Indenture is unlimited. The Securities may be issued from time to
time in one or more series. There shall be set forth in a Company Order, Officers’ Certificate or in one or more
indentures supplemental hereto, prior to the issuance of Securities of any series:
(a)
the title of the Securities of the series (which shall distinguish the Securities of such series
from the Securities of all other series, except to the extent that additional Securities of an existing series are being
issued);
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(b)
any limit upon the aggregate principal amount of the Securities of the series that may be
authenticated and delivered under this Indenture (except for Securities authenticated and delivered upon transfer
of, or in exchange for, or in lieu of, other Securities of such series pursuant to Section 3.04, 3.06, 3.07, 4.06, or
14.05) and the percentage or percentages of principal amount at which the Securities of the series will be issued;
(c)
the dates on which or periods during which the Securities of the series may be issued, and
the dates on, or the range of dates within, which the principal of and premium, if any, on the Securities of such
series are or may be payable or the method by which such date or dates shall be determined or extended;
(d)
the rate or rates at which the Securities of the series shall bear interest, if any, or the method
by which such rate or rates shall be determined, the date or dates from which such interest shall accrue, or the
method by which such date or dates shall be determined, the Interest Payment Dates on which any such interest
shall be payable, and the Record Dates for the determination of Holders to whom interest is payable on such
Interest Payment Dates or the method by which such date or dates shall be determined, the right, if any, to extend
or defer interest payments and the duration of such extension or deferral;
(e)
if the amount of payment of principal of, premium, if any, or interest on, the Securities of
the series may be determined with reference to an index, formula or other method;
(f)
the place or places, if any, in addition to or instead of the Corporate Trust Office of the
Trustee where the principal of, premium, if any, and interest on Securities of the series shall be payable, and where
Securities of any series may be presented for registration of transfer, exchange or conversion, and the place or
places where notices and demands to or upon the Company in respect of the Securities of such series may be made
(each such place, the “Place of Payment”);
(g)
the price or prices at which, the period or periods within which or the date or dates on
which, and the terms and conditions upon which Securities of the series may be redeemed, in whole or in part, at
the option of the Company, if the Company is to have that option;
(h)
the obligation or right, if any, of the Company to redeem, purchase or repay Securities of
the series pursuant to any sinking fund, amortization or analogous provisions or at the option of a Holder thereof
and the price or prices at which, the period or periods within which or the date or dates on which and the terms
and conditions upon which Securities of the series shall be redeemed, purchased or repaid, in whole or in part,
pursuant to such obligation;
(i)
if other than denominations of US$1,000 and multiples of US$1,000 in excess thereof, the
denominations in which Securities of the series shall be issuable;
(j)
if other than the principal amount thereof, the portion of the principal amount of the
Securities of the series which shall be payable upon declaration of acceleration of the Maturity thereof pursuant to
Section 7.02;
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(k)
whether the Securities of the series are to be issued as Original Issue Discount Securities
and the amount of discount or premium, if any, with which such Securities may be issued;
(l)
provisions, if any, for the defeasance of Securities of the series in whole or in part and any
addition or change in the provisions related to satisfaction and discharge;
(m)
whether the Securities of the series are to be issued in whole or in part in the form of one or
more Global Securities and, in such case, (i) the Depositary for such Global Security or Securities, (ii) the form of
legend in addition to or in lieu of that in Section 3.03(f) which shall be borne by such Global Security and (iii) the
terms and conditions, if any, upon which interests in such Global Security or Securities may be exchanged in
whole or in part for the individual Securities represented thereby;
(n)
the date as of which any Global Security of the series shall be dated if other than the
original issuance of the first Security of the series to be issued;
subordination;
(o)
(p)
(q)
(r)
the form of the Securities of the series;
whether the Securities of the series are subject to subordination and the terms of such
whether the Securities of the series shall be secured;
the securities exchange(s) or automated quotation system(s) on which the Securities of the
series will be listed or admitted to trading, as applicable, if any;
(s)
(t)
any restriction or condition on the transferability of the Securities of the series;
any addition or change in the provisions related to compensation and reimbursement of the
Trustee which applies to the Securities of the series;
(u)
any addition or change in the provisions related to supplemental indentures set forth in
Sections 14.01, 14.02 and 14.04 which applies to the Securities of the series;
(v)
provisions, if any, granting special rights to Holders upon the occurrence of specified
events;
(w)
any addition to or change in the Events of Default which applies to any Securities of the
series and any change in the right of the Trustee or the requisite Holders of such Securities to declare the principal
amount thereof due and payable pursuant to Section 7.02 and any addition or change in the provisions set forth in
Article VII which applies to Securities of the series;
(x)
any addition to or change in the covenants set forth in Article VI which applies to the
Securities of the series
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(y)
if the Securities of such series are to be convertible into or exchangeable for any securities
or property of any Person (including the Company), the terms and conditions upon which such Securities will be
so convertible or exchangeable, and any additions or changes to this Indenture, if any, to permit or facilitate such
conversion or exchange; and
(z)
any other terms of the Securities of the series, including any terms which may be required
by or advisable under the laws of the United States or regulations thereunder or advisable (as determined by the
Company) in connection with the marketing of Securities of the series.
All Securities of any one series shall be substantially identical, except as to denomination and except as
may otherwise be provided herein or set forth in a Company Order, Officers’ Certificate or in one or more
indentures supplemental hereto; provided that, if additional Securities of an outstanding series are issued, such
additional Securities shall not have the same CUSIP, ISIN or other identifying number unless such additional
Securities are fungible with the outstanding Securities of such series for U.S. federal income tax purposes.
Section 3.02 Denominations. In the absence of any specification pursuant to Section 3.01 with respect to
Securities of any series, the Securities of such series shall be issuable only as Securities in denominations of
US$1,000 and multiples of US$1,000 in excess thereof, and shall be payable only in U.S. Dollars.
Section 3.03 Execution, Authentication, Delivery and Dating.
(a)
The Securities shall be executed in the name and on behalf of the Company by an Officer.
Such signatures may be the manual or facsimile signatures of the present or any future such Officer. If the Person
whose signature is on a Security no longer holds that office at the time the Security is authenticated and delivered,
the Security shall nevertheless be valid.
(b)
At any time and from time to time after the execution and delivery of this Indenture, the
Company may deliver Securities of any series executed by the Company to the Trustee for authentication, together
with a Company Order for the authentication and delivery of such Securities and, if required pursuant to Section
3.01, a supplemental indenture, Company Order or Officers’ Certificate setting forth the terms of the Securities of
a series. The Trustee shall thereupon authenticate and deliver such Securities without any further action by the
Company. The Company Order shall specify the principal amount of Securities to be authenticated and the date
on which the original issue of Securities is to be authenticated.
(c)
In authenticating the first Securities of any series and accepting the additional
responsibilities under this Indenture in relation to such Securities, the Trustee shall receive, and (subject to Section
11.02) shall be fully protected in relying upon, an Officers’ Certificate, prepared in accordance with Section 16.01
stating that the conditions precedent, if any, provided for in the Indenture have been complied with, and an
Opinion of Counsel, prepared in accordance with Section 16.01 and substantially in the form set forth below:
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(i)
that the form or forms of such Securities have been established in accordance with
Article II and Section 3.01 and in conformity with the other provisions of this Indenture;
(ii)
that the terms of such Securities have been established in accordance with Section
3.01 and in conformity with the other provisions of this Indenture;
(iii)
that such Securities, when authenticated and delivered by the Trustee and issued by
the Company in the manner and subject to any conditions specified in such Opinion of Counsel, will
constitute valid and legally binding obligations of the Company, enforceable in accordance with their
terms, subject to bankruptcy, insolvency, reorganization and other laws of general applicability relating to
or affecting the enforcement of creditors’ rights and to general equity principles; and
(iv)
that all conditions precedent, if any, provided for in the Indenture in respect of the
authentication and delivery by the Company of such Securities have been complied with.
Notwithstanding the provisions of the preceding paragraph, if all Securities of a series are not to be
originally issued at one time, it shall not be necessary to deliver the Officers’ Certificate or Opinion of Counsel
otherwise required pursuant to such preceding paragraph at or prior to the authentication of each Security of such
series if such Officers’ Certificate or Opinion of Counsel is delivered at or prior to the authentication upon
original issuance of the first Security of such series to be issued; provided that nothing in this clause (c) is
intended to derogate Trustee’s rights to receive an Officers’ Certificate and Opinion of Counsel under Section
16.01.
(d)
The Trustee shall have the right to decline to authenticate and deliver the Securities under
this Section 3.03 if the issue of the Securities pursuant to this Indenture will affect the Trustee’s own rights, duties
or immunities under the Securities and this Indenture or otherwise.
(e)
Each Security shall be dated the date of its authentication.
(f)
If the Company shall establish pursuant to Section 3.01 that the Securities of a series are to
be issued in whole or in part in the form of one or more Global Securities, then the Company shall execute and the
Trustee shall authenticate and deliver one or more Global Securities that (i) shall represent an aggregate amount
equal to the aggregate principal amount of the Outstanding Securities of such series to be represented by such
Global Securities, (ii) shall be registered, if in registered form, in the name of the Depositary for such Global
Security or Securities or the nominee of such Depositary, (iii) shall be delivered by the Trustee to such Depositary
or pursuant to such Depositary’s instruction and (iv) shall bear a legend substantially to the following effect:
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR THE INDIVIDUAL SECURITIES REPRESENTED
HEREBY, THIS GLOBAL SECURITY MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A
NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER
NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITARY
OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY.
14
The aggregate principal amount of each Global Security may from time to time be increased or decreased
by adjustments made on the records of the Security Custodian, as provided in this Indenture.
(g)
Each Depositary designated pursuant to Section 3.01 for a Global Security in registered
form must, at the time of its designation and at all times while it serves as such Depositary, be a clearing agency
registered under the Exchange Act and any other applicable statute or regulation.
(h)
Members of, or participants in, the Depositary (“Members”) shall have no rights under this
Indenture with respect to any Global Security held on their behalf by the Depositary or by the Security Custodian
under such Global Security, and the Depositary may be treated by the Company, the Trustee, the Paying Agent
and the Registrar and any of their agents as the absolute owner of such Global Security for all purposes
whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee, the Paying
Agent or the Registrar or any of their agents from giving effect to any written certification, proxy or other
authorization furnished by the Depositary or impair, as between the Depositary and its Members, the operation of
customary practices of the Depositary governing the exercise of the rights of an owner of a beneficial interest in
any Global Security. The Holder of a Global Security may grant proxies and otherwise authorize any Person,
including Members and Persons that may hold interests through Members, to take any action that a Holder is
entitled to take under this Indenture or the Securities.
(i)
No Security shall be entitled to any benefit under this Indenture or be valid or obligatory for
any purpose unless there appears on such Security a certificate of authentication substantially in one of the forms
provided for herein duly executed by the Trustee by manual signature of an authorized signatory of the Trustee,
and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has
been duly authenticated and delivered hereunder and is entitled to the benefits of this Indenture.
Section 3.04 Temporary Securities.
(a)
Pending the preparation of definitive Securities of any series, the Company may execute
and, upon receipt of a Company Order, the Trustee shall authenticate and deliver, temporary Securities that are
printed, lithographed, typewritten, mimeographed or otherwise reproduced, in any authorized denomination,
substantially of the tenor of the definitive Securities in lieu of which they are issued, in registered form and with
such appropriate insertions, omissions, substitutions and other variations as the officers executing such temporary
Securities may determine, as conclusively evidenced by their execution of such temporary Securities. Any such
temporary Security may be in global form, representing all or a portion of the Outstanding Securities of such
series. Every such temporary Security shall be executed by the Company and shall be authenticated and delivered
by the Trustee upon the same conditions and in substantially the same manner, and with the same effect, as the
definitive Security or Securities in lieu of which it is issued.
15
(b)
If temporary Securities of any series are issued, the Company shall cause definitive
Securities of such series to be prepared without unreasonable delay. After the preparation of definitive Securities
of such series, the temporary Securities of such series shall be exchangeable for definitive Securities of such series
upon surrender of such temporary Securities at the office or agency maintained by the Company in a Place of
Payment for such purposes provided in Section 6.02, without charge to the Holder. Upon surrender for
cancellation of any one or more temporary Securities of any series, the Company shall execute and the Trustee
shall authenticate and deliver in exchange therefor a like principal amount of definitive Securities of the same
series of authorized denominations and of like tenor. Until so exchanged, the temporary Securities of any series
shall in all respects be entitled to the same benefits under this Indenture as definitive Securities of such series.
(c)
Upon any exchange of a portion of a temporary Global Security for a definitive Global
Security or for the individual Securities represented thereby pursuant to this Section 3.04 or Section 3.06, the
temporary Global Security shall be endorsed by the Trustee to reflect the reduction of the principal amount
evidenced thereby, whereupon the principal amount of such temporary Global Security shall be reduced for all
purposes by the amount so exchanged and endorsed.
Section 3.05 Registrar.
(a)
The Company shall keep, at an office or agency to be maintained by it in a Place of
Payment where Securities may be presented for registration or presented and surrendered for registration of
transfer or of exchange, and where Securities of any series that are convertible or exchangeable may be
surrendered for conversion or exchange, as applicable (the “Registrar”), a security register for the registration and
the registration of transfer or of exchange of the Securities (the registers maintained in such office and in any other
office or agency of the Company in a Place of Payment being herein sometimes collectively referred to as the
“Register”), as in this Indenture provided, which Register shall during normal office hours be open for inspection
by the Trustee. Such Register shall be in written form or in any other form capable of being converted into
written form within a reasonable time. The Company may have one or more co-Registrars; the term “Registrar”
includes any co-registrar. In acting hereunder and in connection with the Notes, the Registrar shall act solely as
agents of the Company, and will not thereby assume any obligations towards or relationship of agency or trust for
or with any Holder.
(b)
The Company shall enter into an appropriate agency agreement with any Registrar or co-
Registrar not a party to this Indenture. The agreement shall implement the provisions of this Indenture that relate
to such agent. The Company shall notify the Trustee of the name and address of each such agent. If the Company
fails to maintain a Registrar for any series, the Trustee shall act as such. The Company or any Affiliate thereof
may act as Registrar, co-Registrar or transfer agent.
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(c)
The Company hereby initially appoints Deutsche Bank Trust Company Americas located at
the Corporate Trust Office as Registrar in connection with the Securities and this Indenture, until such time as
another Person is appointed as such in replacement of the Trustee as such. In the case that the Trustee serves as
Registrar, it will be entitled as Registrar to the same rights of compensation, reimbursement and indemnification
under Section 11.01 and Section 11.02 as if it were Trustee. No Person shall at any time be appointed as or act as
Registrar unless such Person is at such time empowered under applicable law to act as such Registrar.
Section 3.06 Transfer and Exchange.
(a)
Transfer.
(i)
Upon surrender for registration of transfer of any Security of any series at the
Registrar, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the
designated transferee, one or more new Securities of the same series for like aggregate principal amount of
any authorized denomination or denominations. The transfer of any Security shall not be valid as against
the Company or the Trustee unless registered at the Registrar at the request of the Holder, or at the request
of his, her or its attorney duly authorized in writing.
(ii)
Notwithstanding any other provision of this Section, unless and until it is exchanged
in whole or in part for the individual Securities represented thereby, a Global Security representing all or a
portion of the Securities of a series may not be transferred except as a whole by the Depositary for such
series to a nominee of such Depositary or by a nominee of such Depositary to such Depositary or another
nominee of such Depositary or by such Depositary or any such nominee to a successor Depositary for such
series or a nominee of such successor Depositary.
(b)
Exchange.
(i)
At the option of the Holder, Securities of any series (other than a Global Security,
except as set forth below) may be exchanged for other Securities of the same series for like aggregate
principal amount of any authorized denomination or denominations, upon surrender of the Securities to be
exchanged at the Registrar.
(ii) Whenever any Securities are so surrendered for exchange, the Company shall
execute, and the Trustee shall authenticate and deliver, the Securities that the Holder making the exchange
is entitled to receive.
(c)
Exchange of Global Securities for Individual Securities. Except as provided below, owners
of beneficial interests in Global Securities shall not be entitled to receive individual Securities.
(i)
Individual Securities shall be issued to all owners of beneficial interests in a Global
Security in exchange for such interests if at any time the Depositary for the Securities of a series notifies
the Company that it is unwilling or unable to continue as Depositary for the Securities of such series or if
at any time the Depositary for the Securities of such series shall no longer be eligible under Section
3.03(g) and, in each case, a successor Depositary is not appointed by the Company within 90 days of such
notice.
17
In connection with the exchange of an entire Global Security for individual Securities
pursuant to this subsection (c), such Global Security shall be deemed to be surrendered to the Paying
Agent for cancellation, and the Company shall execute, and the Trustee, upon receipt of a Company Order
for the authentication and delivery of individual Securities of such series, shall authenticate and deliver to
each beneficial owner identified by the Depositary in exchange for its beneficial interest in such Global
Security, an equal aggregate principal amount of individual Securities of authorized denominations.
(ii)
The owner of a beneficial interest in a Global Security shall be entitled to receive an
individual Security in exchange for such interest if an Event of Default has occurred and is continuing.
Upon receipt by the Security Custodian and Registrar of instructions from the Holder of a Global Security
directing the Security Custodian and Registrar to (x) issue one or more individual Securities in the
amounts specified to the owner of a beneficial interest in such Global Security and (y) debit or cause to be
debited an equivalent amount of beneficial interest in such Global Security, subject to the rules and
regulations of the Depositary:
(A)
the Security Custodian and Registrar shall notify the Company and the
Trustee of such instructions, identifying the owner and amount of such beneficial interest in
such Global Security;
(B)
the Company shall promptly execute and the Trustee, upon receipt of a
Company Order for the authentication and delivery of individual Securities of such series,
shall authenticate and deliver to such beneficial owner individual Securities in an equivalent
amount to such beneficial interest in such Global Security; and
(C)
the Security Custodian and Registrar shall decrease such Global Security by
such amount in accordance with the foregoing. In the event that the individual Securities
are not issued to each such beneficial owner promptly after the Registrar has received a
request from the Holder of a Global Security to issue such individual Securities, the
Company expressly acknowledges, with respect to the right of any Holder to pursue a
remedy pursuant to Section 7.07, the right of any beneficial Holder of Securities to pursue
such remedy with respect to the portion of the Global Security that represents such
beneficial Holder’s Securities as if such individual Securities had been issued.
(iii)
If specified by the Company pursuant to Section 3.01 with respect to a series of
Securities, the Depositary for such series of Securities may surrender a Global Security for such series of
Securities in exchange in whole or in part for individual Securities of such series on such terms as are
acceptable to the Company and such Depositary. Thereupon, the Company shall execute, and the Trustee
shall authenticate and deliver at the expense of the Company, without service charge,
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(A)
to each Person specified by such Depositary a new individual Security or
Securities of the same series, of any authorized denomination as requested by such Person
in aggregate principal amount equal to and in exchange for such Person’s beneficial interest
in the Global Security; and
(B)
to such Depositary a new Global Security in a denomination equal to the
difference, if any, between the principal amount of the surrendered Global Security and the
aggregate principal amount of individual Securities delivered to Holders thereof.
(iv)
In any exchange provided for in clauses (i) through (iii), the Company shall execute
and the Trustee shall authenticate and deliver individual Securities in registered form in authorized
denominations.
(v)
Upon the exchange in full of a Global Security for individual Securities, such
Global Security shall be cancelled by the Paying Agent. Individual Securities issued in exchange for a
Global Security pursuant to this Section shall be registered in such names and in such authorized
denominations as the Depositary for such Global Security, pursuant to instructions from its direct or
indirect participants or otherwise, shall instruct the Registrar. The Registrar shall deliver such Securities to
the Persons in whose names such Securities are so registered.
(d)
All Securities issued upon any registration of transfer or exchange of Securities shall be
valid obligations of the Company evidencing the same debt, and entitled to the same benefits under this Indenture,
as the Securities surrendered for such registration of transfer or exchange.
(e)
Every Security presented or surrendered for registration of transfer or exchange, or for
payment shall (if so required by the Company, the Trustee or the Registrar) be duly endorsed, or be accompanied
by a written instrument or instruments of transfer in form satisfactory to the Company, the Trustee and the
Registrar, duly executed by the Holder thereof or by his, her or its attorney duly authorized in writing.
(f)
No service charge shall be made for any registration of transfer or exchange of Securities.
The Company and the Trustee may require payment of a sum sufficient to cover any tax, assessment or other
governmental charge that may be imposed in connection with any registration of transfer or exchange of
Securities, other than those expressly provided in this Indenture to be made at the Company’s own expense or
without expense or charge to the Holders.
(g)
The Company shall not be required to (i) register, transfer or exchange Securities of any
series during a period beginning at the opening of business 15 calendar days before the day of the transmission of
a notice of redemption of Securities of such series selected for redemption under Section 4.03 and ending at the
close of business on the day of such transmission, or (ii) register, transfer or exchange any Security so selected for
redemption in whole or in part, except the unredeemed portion of any Security being redeemed in part.
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(h)
Prior to the due presentation for registration of transfer or exchange of any Security, the
Company, the Trustee, the Paying Agent, the Registrar, any co-Registrar or any of their agents may deem and treat
the Person in whose name a Security is registered as the absolute owner of such Security (whether or not such
Security shall be overdue and notwithstanding any notation of ownership or other writing thereon) for all purposes
whatsoever, and none of the Company, the Trustee, the Paying Agent, the Registrar, any co-Registrar or any of
their agents shall be affected by any notice to the contrary.
(i)
In case a successor Company (“Successor Company”) has executed an indenture
supplemental hereto with the Trustee pursuant to Article XIV, any of the Securities authenticated or delivered
pursuant to such transaction may, from time to time, at the request of the Successor Company, be exchanged for
other Securities executed in the name of the Successor Company with such changes in phraseology and form as
may be appropriate, but otherwise identical to the Securities surrendered for such exchange and of like principal
amount; and the Trustee, upon Company Order of the Successor Company, shall authenticate and deliver
Securities as specified in such Company Order for the purpose of such exchange. If Securities shall at any time be
authenticated and delivered in any new name of a Successor Company pursuant to this Section 3.06 in exchange
or substitution for or upon registration of transfer of any Securities, such Successor Company, at the option of the
Holders but without expense to them, shall provide for the exchange of all Securities at the time Outstanding for
Securities authenticated and delivered in such new name.
(j)
Each Holder of a Security agrees to indemnify the Company and the Trustee against any
liability that may result from the transfer, exchange or assignment of such Holder’s Security in violation of any
provision of this Indenture and/or applicable United States federal or state securities laws.
(k)
The Trustee shall have no obligation or duty to monitor, determine or inquire as to
compliance with any restrictions on transfer imposed under this Indenture or under applicable law with respect to
any transfer of any interest in any Security other than to require delivery of such certificates and other
documentation or evidence as are expressly required by, and to do so if and when expressly required by the terms
of, this Indenture, and to examine the same to determine substantial compliance as to form with the express
requirements hereof.
(l)
Neither the Trustee nor any agent of the Trustee shall have any responsibility for any
actions taken or not taken by the Depositary.
Section 3.07 Mutilated, Destroyed, Lost and Stolen Securities.
(a)
If (i) any mutilated Security is surrendered to the Trustee at its Corporate Trust Office or (ii)
the Company and the Trustee receive evidence to their satisfaction of the destruction, loss or theft of any Security,
and there is delivered to the Company and the Trustee security and/or indemnity satisfactory to them to save each
of them and any Paying Agent harmless, and neither the Company nor the Trustee receives notice that such
Security has been acquired by a protected purchaser, then the Company shall execute and upon Company Order
the Trustee shall authenticate and deliver, in exchange for or in lieu of any such mutilated, destroyed, lost or stolen
Security, a new Security of the same series and of like tenor, form, terms and principal amount, bearing a number
not contemporaneously Outstanding, and neither gain nor loss in interest shall result from such exchange or
substitution.
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(b)
In case any such mutilated, destroyed, lost or stolen Security has become or is about to
become due and payable, the Company in its discretion may, instead of issuing a new Security, pay the amount
due on such Security in accordance with its terms.
(c)
Upon the issuance of any new Security under this Section 3.07, the Company may require
the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in respect
thereto and any other expenses (including the fees and expenses of the Trustee) in connection therewith.
(d)
Every new Security of any series issued pursuant to this Section shall constitute an original
additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be at
any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and
proportionately with any and all other Securities of that series duly issued hereunder.
(e)
The provisions of this Section 3.07 are exclusive and shall preclude (to the extent lawful)
all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen
Securities.
Section 3.08 Payment of Interest; Interest Rights Preserved.
(a)
Interest on any Security which is payable, and is punctually paid or duly provided for, on
any Interest Payment Date shall be paid to the Person in whose name such Security (or one or more Predecessor
Securities) is registered at the close of business on the Record Date for such interest notwithstanding the
cancellation of such Security upon any transfer or exchange subsequent to the Record Date. Payment of interest
on Securities shall be made at the Corporate Trust Office (except as otherwise specified pursuant to Section 3.01)
or, at the option of the Company, by check mailed to the address of the Person entitled thereto as such address
shall appear in the Register or, in accordance with arrangements satisfactory to the Trustee, by wire transfer to an
account designated by the Holder.
(b)
Any interest on any Security that is payable, but is not punctually paid or duly provided for,
on any Interest Payment Date (herein called “Defaulted Interest”) shall forthwith cease to be payable to the Holder
on the relevant Record Date by virtue of his, her or its having been such a Holder, and such Defaulted Interest
may be paid by the Company, at its election in each case, as provided in clause (i) or (ii) below:
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(i)
The Company may elect to make payment of any Defaulted Interest to the Persons
in whose names such Securities (or their respective Predecessor Securities) are registered at the close of
business on a special record date for the payment of such Defaulted Interest (a “Special Record Date”),
which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the
amount of Defaulted Interest proposed to be paid on each such Security and the date of the proposed
payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to
the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements
satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when
deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this
clause provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted
Interest which shall be not more than 15 calendar days and not less than 10 calendar days prior to the date
of the proposed payment and not less than 10 calendar days after the receipt by the Trustee of the notice of
the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date and,
in the name and at the expense of the Company, shall cause notice of the proposed payment of such
Defaulted Interest and the Special Record Date therefor to be mailed, first-class postage prepaid, to the
Holders of such Securities at their addresses as they appear in the Register, not less than 10 calendar days
prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the
Special Record Date therefor having been mailed as aforesaid, such Defaulted Interest shall be paid to the
Persons in whose names such Securities (or their respective Predecessor Securities) are registered at the
close of business on such Special Record Date and shall no longer be payable pursuant to the following
clause (ii).
(ii)
The Company may make payment of any Defaulted Interest on Securities in any
other lawful manner not inconsistent with the requirements of any securities exchange on which such
Securities may be listed or of any automated quotation system on which any such Securities may be
quoted, and upon such notice as may be required by such exchange or quotation system, as applicable, if,
after notice given by the Company to the Trustee of the proposed payment pursuant to this clause, such
manner of payment shall be deemed practicable by the Trustee.
(c)
Subject to the foregoing provisions in this Section 3.08, each Security delivered under this
Indenture in exchange or substitution for, or upon registration of transfer of, any other Security shall carry all the
rights to interest accrued and unpaid, and to accrue, which were carried by such other Security.
Section 3.09 Cancellation. Unless otherwise specified pursuant to Section 3.01 for Securities of any
series, all Securities surrendered for payment, redemption, registration of transfer or exchange or credit against
any sinking fund or otherwise shall, if surrendered to any Person other than the Paying Agent, be delivered to the
Paying Agent for cancellation and shall be promptly cancelled by it and, if surrendered to the Paying Agent, shall
be promptly cancelled by it. The Company may at any time deliver to the Paying Agent for cancellation any
Securities previously authenticated and delivered hereunder that the Company may have acquired in any manner
whatsoever, and all Securities so delivered shall be promptly cancelled by the Paying Agent. No Securities shall
be authenticated in lieu of or in exchange for any Securities cancelled as provided in this Section, except as
expressly permitted by this Indenture. The Paying Agent shall dispose of all cancelled Securities held by it in
accordance with its then customary procedures, unless otherwise directed by a Company Order, and deliver a
certificate of such disposal to the Company upon its request therefor. The acquisition of any Securities by the
Company shall not operate as a redemption or satisfaction of the Indebtedness represented thereby unless and until
such Securities are surrendered to the Paying Agent for cancellation.
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Section 3.10 Computation of Interest. Except as otherwise specified pursuant to Section 3.01 for
Securities of any series, interest on the Securities of each series shall be computed on the basis of a 360-day year
of twelve 30-day months.
Section 3.11 Currency of Payments in Respect of Securities. Any series, payment of the principal of,
premium, if any, and interest on, Securities of such series shall be made in U.S. Dollars.
Section 3.12 CUSIP Numbers. The Company in issuing any Securities may use CUSIP, ISIN or other
similar numbers, if then generally in use, and thereafter with respect to such series, the Trustee may use such
numbers in any notice of redemption or exchange, as a convenience to Holders, with respect to such series;
provided that any such notice may state that no representation is made as to the correctness of such numbers
either as printed on the Securities or as contained in any notice of a redemption and that reliance may be placed
only on the other identification numbers printed on the Securities, and any such redemption shall not be affected
by any defect in or omission of such numbers. The Company shall promptly notify the Trustee, in writing, of any
change in the CUSIP, ISIN or other similar numbers.
ARTICLE IV
REDEMPTION OF SECURITIES
Section 4.01 Applicability of Right of Redemption. Redemption of Securities (other than pursuant to a
sinking fund, amortization or analogous provision) permitted by the terms of any series of Securities shall be
made (except as otherwise specified pursuant to Section 3.01 for Securities of any series) in accordance with this
Article; provided, however, that if any such terms of a series of Securities shall conflict with any provision of this
Article, the terms of such series shall govern.
Section 4.02 Selection of Securities to be Redeemed.
(a)
If the Company shall at any time elect to redeem all or any portion of the Securities of a
series then Outstanding, it shall at least 15 calendar days (or such shorter period acceptable to the Trustee) prior to
the date the notice of redemption is to be delivered to the Holders, notify the Trustee of such Redemption Date
and of the principal amount of Securities to be redeemed. If less than all of the Securities of a series are to be
redeemed, the Securities for redemption will be selected as follows: (i) if the Securities are listed on a securities
exchange then in compliance with the rules of such securities exchange and if the Securities are held through the
clearing systems then in compliance with the rules and procedures of the clearing systems, or (ii) if the Securities
are not listed on a securities exchange or held through the clearing systems, then by lot or such other method as
the Trustee shall deem to be fair and appropriate in its sole and absolute discretion or as otherwise required by
applicable law, in the case of any Global Note in accordance with the then applicable procedures of the
Depositary; provided that the unredeemed portion of the principal amount of any Security shall be in an
authorized denomination (which shall not be less than the minimum authorized denomination) for such Security.
In any case where more than one Security of such series is registered in the same name, the Trustee may treat the
aggregate principal amount so registered as if it were represented by one Security of such series. The Trustee
shall, as soon as practicable, notify the Company in writing of the Securities and portions of Securities so selected.
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(b)
For all purposes of this Indenture, unless the context otherwise requires, all provisions
relating to the redemption of Securities shall relate, in the case of any Security redeemed or to be redeemed only
in part, to the portion of the principal amount of such Security that has been or is to be redeemed. If the Company
shall so direct, Securities registered in the name of the Company, any Affiliate or any Subsidiary thereof shall not
be included in the Securities selected for redemption.
Section 4.03 Notice of Redemption.
(a)
Notice of redemption shall be given by the Company or, at the Company’s request, by the
Trustee in the name and at the expense of the Company, not less than 30 nor more than 60 calendar days prior to
the Redemption Date, to the Holders of Securities of any series to be redeemed in whole or in part pursuant to this
Article, in the manner provided in Section 16.04; provided that the Trustee be provided with the draft notice at
least 15 days prior to sending such notice of redemption. Any notice given in the manner herein provided shall be
conclusively presumed to have been duly given, whether or not the Holder receives such notice. Failure to give
such notice, or any defect in such notice to the Holder of any Security of a series designated for redemption, in
whole or in part, shall not affect the sufficiency of any notice of redemption with respect to the Holder of any
other Security of such series.
(b)
All notices of redemption shall identify the Securities to be redeemed (including CUSIP,
ISIN or other similar numbers, if available) and shall state:
(i)
such election by the Company to redeem Securities of such series pursuant to
provisions contained in this Indenture or the terms of the Securities of such series in a Company Order,
Officers’ Certificate or a supplemental indenture establishing such series, if such be the case;
(ii)
the Redemption Date;
(iii)
the Redemption Price;
(iv)
if less than all Outstanding Securities of any series are to be redeemed, the
identification (and, in the case of partial redemption, the principal amounts) of the Securities of such series
to be redeemed;
(v)
that on the Redemption Date the Redemption Price shall become due and payable
upon each such Security to be redeemed, and that, if applicable, interest thereon shall cease to accrue on
and after said date;
(vi)
the Place or Places of Payment where such Securities are to be surrendered for
payment of the Redemption Price; and
(vii)
if applicable, that the redemption is for a sinking fund, if such is the case.
Section 4.04 Deposit of Redemption Price. On or prior to 11:00 a.m., New York City time, one Business
Day prior to the Redemption Date for any Securities, the Company shall deposit with the Paying Agent (or, if the
Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 6.03) an amount of
money in the currency in which such Securities are denominated sufficient to pay the Redemption Price of such
Securities or any portions thereof that are to be redeemed on that date.
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Section 4.05 Securities Payable on Redemption Date. If notice of redemption has been given as above
provided, any Securities so to be redeemed shall, on the Redemption Date, become due and payable at the
Redemption Price and from and after such date (unless the Company shall Default in the payment of the
Redemption Price) such Securities shall cease to bear interest, and, except as provided in Section 12.07, such
Securities shall cease from and after the Redemption Date to be entitled to any benefit or security under the
Indenture, and the Holders thereof shall have no right in respect of such Securities except the right to receive the
Redemption Price thereof and unpaid interest to the Redemption Date. Upon surrender of any such Security for
redemption in accordance with said notice, such Security shall be paid by the Paying Agent with the moneys
deposited in accordance with Section 4.04 above at the Redemption Price (unless the Company shall Default in
the payment of the Redemption Price); provided, however, that (unless otherwise provided pursuant to Section
3.01) installments of interest that have a Stated Maturity on or prior to the Redemption Date for such Securities
shall be payable according to the terms of such Securities and the provisions of Section 3.08.
If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the
principal thereof shall, until paid or duly provided for, bear interest from the Redemption Date at the rate
prescribed therefor in the Security.
Section 4.06 Securities Redeemed in Part. Any Security that is to be redeemed only in part shall be
surrendered at the Corporate Trust Office or such other office or agency of the Company as is specified pursuant
to Section 3.01 with, if the Company, the Registrar or the Trustee so requires, due endorsement by, or a written
instrument of transfer in form satisfactory to the Company, the Registrar and the Trustee duly executed by the
Holder thereof or his, her or its attorney duly authorized in writing, and the Company shall execute, and the
Trustee shall authenticate and deliver to the Holder of such Security, without service charge, a new Security or
Securities of the same series, of like tenor and form, of any authorized denomination as requested by such Holder
in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Security
so surrendered; provided that if a Global Security is so surrendered, the Company shall execute, and the Trustee
shall authenticate and deliver to the Depositary for such Global Security, without service charge, a new Global
Security in a denomination equal to and in exchange for the unredeemed portion of the principal of the Global
Security so surrendered. In the case of a Security providing appropriate space for such notation, at the option of
the Holder thereof, the Registrar, in lieu of delivering a new Security or Securities as aforesaid, may make a
notation on such Security of the payment of the redeemed portion thereof.
Section 4.07 Tax Redemption.
(a)
Each series of Securities may be redeemed at any time, at the option of the Company, in
whole but not in part, upon written notice as described below, at a redemption price equal to 100% of the principal
amount thereof, together with accrued and unpaid interest, if any, to, but not including, the Redemption Date, if (i)
as a result of any change in, or amendment to, the laws or regulations of the Relevant Jurisdiction (or, in the case
of Additional Amounts payable by a successor Person to the Company, the applicable Successor Jurisdiction), or
any change in the official application or official interpretation of such laws or regulations, which change or
amendment becomes effective on or after the Issue Date (or, in the case of Additional Amounts payable by a
successor Person to the Company, the date on which such successor Person to the Company became such pursuant
to the applicable provisions of this Indenture) (a “Tax Change”), the Company or any such successor Person to the
Company is, or would be, obligated to pay Additional Amounts upon the next payment of principal, premium, if
any, or interest in respect of such Securities and (ii) such obligation cannot be avoided by the Company or any
such successor Person to the Company taking reasonable measures available to it, provided that changing the
jurisdiction of the Company or such successor Person to Company is not a reasonable measure for purposes of this
Section 4.07(a).
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(b)
Prior to the giving of any notice of redemption of the Securities pursuant to Section 4.07(a),
the Company or any such successor Person to the Company shall deliver to the Trustee (i) a notice of such
redemption election, (ii) an opinion of External Legal Counsel or an opinion of an Independent Tax Consultant to
the effect that the Company or any such successor Person to the Company is, or would become, obligated to pay
such Additional Amounts as the result of a Tax Change and (iii) an Officers’ Certificate from the Company or any
such successor Person to the Company, stating that such amendment or change has occurred, describing the facts
leading thereto and stating that such requirement cannot be avoided by the Company or any such successor Person
to the Company taking reasonable measures available to it. The Trustee shall be entitled to rely conclusively upon
such Officers’ Certificate and opinion as sufficient evidence of the conditions precedent described in Section
4.07(a), in which event it shall be conclusive and binding on the relevant Holders.
(c)
Any redemption of Securities pursuant to Section 4.07 shall be made (except as otherwise
specified pursuant to Section 3.01 for Securities of any series) in accordance with this Article; provided that no
such notice of redemption shall be given earlier than 90 days prior to the earliest date on which the Company or
any such successor Person to the Company would be required to pay Additional Amounts if a payment in respect
of such Securities was then due.
ARTICLE V
SINKING FUNDS
Section 5.01 Applicability of Sinking Fund.
(a)
Redemption of Securities permitted or required pursuant to a sinking fund for the retirement
of Securities of a series by the terms of such series of Securities shall be made in accordance with such terms of
such series of Securities and this Article, except as otherwise specified pursuant to Section 3.01 for Securities of
such series; provided, however, that if any such terms of a series of Securities shall conflict with any provision of
this Article, the terms of such series shall govern.
(b)
The minimum amount of any sinking fund payment provided for by the terms of Securities
of any series is herein referred to as a “Mandatory Sinking Fund Payment,” and any payment in excess of such
minimum amount provided for by the terms of Securities of any series is herein referred to as an “Optional
Sinking Fund Payment.” If provided for by the terms of Securities of any series, the cash amount of any
Mandatory Sinking Fund Payment may be subject to reduction as provided in Section 5.02.
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Section 5.02 Mandatory Sinking Fund Obligation. The Company may, at its option, satisfy any
Mandatory Sinking Fund Payment obligation, in whole or in part, with respect to a particular series of Securities
by (a) delivering to the Paying Agent Securities of such series in transferable form theretofore purchased or
otherwise acquired by the Company or redeemed at the election of the Company pursuant to Section 4.03 or (b)
receiving credit for Securities of such series (not previously so credited) acquired by the Company and theretofore
delivered to the Paying Agent. The Paying Agent shall credit such Mandatory Sinking Fund Payment obligation
with an amount equal to the Redemption Price specified in such Securities for redemption through operation of
the sinking fund and the amount of such Mandatory Sinking Fund Payment shall be reduced accordingly. If the
Company shall elect to so satisfy any Mandatory Sinking Fund Payment obligation, it shall deliver to the Trustee
and the Paying Agent not less than 45 calendar days prior to the relevant sinking fund payment date a written
notice signed on behalf of the Company by an Officer, which shall designate the Securities (and portions thereof,
if any) so delivered or credited and which shall be accompanied by such Securities (to the extent not theretofore
delivered) in transferable form. In case of the failure of the Company, at or before the time so required, to give
such notice and deliver such Securities, the Mandatory Sinking Fund Payment obligation shall be paid entirely in
moneys.
Section 5.03 Optional Redemption at Sinking Fund Redemption Price. In addition to the sinking fund
requirements of Section 5.02, to the extent, if any, provided for by the terms of a particular series of Securities, the
Company may, at its option, make an Optional Sinking Fund Payment with respect to such Securities. Unless
otherwise provided by such terms, (a) to the extent that the right of the Company to make such Optional Sinking
Fund Payment is not exercised in any year, it shall not be cumulative or carried forward to any subsequent year,
and (b) such optional payment shall operate to reduce the amount of any Mandatory Sinking Fund Payment
obligation as to Securities of the same series. If the Company intends to exercise its right to make such optional
payment in any year, it shall deliver to the Trustee and the Paying Agent not less than 45 calendar days prior to the
relevant sinking fund payment date a certificate signed by an Officer, stating that the Company shall exercise such
optional right, and specifying the amount which the Company shall pay on or before the next succeeding sinking
fund payment date. Such certificate shall also state that no Event of Default has occurred and is continuing.
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Section 5.04 Application of Sinking Fund Payment.
(a)
If the sinking fund payment or payments made in funds pursuant to either Section 5.02 or
5.03 with respect to a particular series of Securities plus any unused balance of any preceding sinking fund
payments made in funds with respect to such series shall exceed US$50,000 (or a lesser sum if the Company shall
so request, or such equivalent sum for Securities denominated other than in U.S. Dollars), it shall be applied by
the Paying Agent on the sinking fund payment date next following the date of such payment; provided that, if the
date of such payment shall be a sinking fund payment date, such payment shall be applied on such sinking fund
payment date to the redemption of Securities of such series at the Redemption Price specified pursuant to Section
4.03(b). The Securities of such series shall be selected, in the manner provided in Section 4.02, for redemption on
such sinking fund payment date, a sufficient principal amount of Securities of such series to absorb said funds, as
nearly as may be, and shall, at the expense and in the name of the Company, thereupon cause notice of
redemption, prepared by the Company, of the Securities to be given in substantially the manner provided in
Section 4.03(a) for the redemption of Securities in part at the option of the Company, except that the notice of
redemption shall also state that the Securities are being redeemed for the sinking fund. Any sinking fund moneys
not so applied by the Paying Agent to the redemption of Securities of such series shall be added to the next
sinking fund payment received in funds by the Paying Agent and, together with such payment, shall be applied in
accordance with the provisions of this Section 5.04. Any and all sinking fund moneys held by the Paying Agent
on the last sinking fund payment date with respect to Securities of such series, and not held for the payment or
redemption of particular Securities of such series, shall be applied by the Paying Agent to the payment of the
principal of the Securities of such series at Maturity.
(b)
On or prior to each sinking fund payment date, the Company shall pay to the Paying Agent
a sum equal to all interest accrued to, but not including, the Redemption Date on Securities to be redeemed on
such sinking fund payment date pursuant to this Section 5.04.
(c)
The Paying Agent shall not redeem any Securities of a series with sinking fund moneys or
mail any notice of redemption of Securities of such series by operation of the sinking fund during the continuance
of a Default in payment of interest on any Securities of such series or of any Event of Default (other than an Event
of Default occurring as a consequence of this paragraph) of which the Paying Agent has written notice, except that
if the notice of redemption of any Securities of such series shall theretofore have been mailed in accordance with
the provisions hereof, the Paying Agent shall redeem such Securities if funds sufficient for that purpose shall be
deposited with the Paying Agent in accordance with the terms of this Article. Except as above provided, any
moneys in the sinking fund at the time any such Default or Event of Default shall occur and any moneys thereafter
paid into the sinking fund shall, during the continuance of such Default or Event of Default, be held as security for
the payment of all the Securities of such series; provided, however, that in case such Default or Event of Default
shall have been cured or waived as provided herein, such moneys shall thereafter be applied on the next sinking
fund payment date on which such moneys are required to be applied pursuant to the provisions of this Section
5.04.
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ARTICLE VI
PARTICULAR COVENANTS OF THE COMPANY
The Company hereby covenants and agrees as follows:
Section 6.01 Payments of Principal, Premium and Interest. The Company, for the benefit of each series
of Securities, shall duly and punctually pay or cause to be paid the principal of, premium, if any, and interest on,
each series of Securities, at the dates and place and in the manner provided in the Securities and in this Indenture.
Section 6.02 Maintenance of Office or Agency; Paying Agent.
(a)
The Company shall maintain in each Place of Payment for any series of Securities, if any,
an office or agency where Securities may be presented or surrendered for payment, where Securities of such series
may be surrendered for registration of transfer or exchange, and where notices and demands to or upon the
Company in respect of the Securities and this Indenture may be served. The Company shall give prompt written
notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the
Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the
address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate
Trust Office of the Trustee. The Company hereby initially appoints the Trustee as Paying Agent to receive all
presentations, surrenders, notices and demands. So long as the Trustee serves as Paying Agent, it will be entitled
as Paying Agent to the same rights of compensation, reimbursement and indemnification under Section 11.01 and
Section 11.02 as if it were Trustee. In acting hereunder and in connection with the Notes, the Paying Agent shall
act solely as agents of the Company, and will not thereby assume any obligations towards or relationship of
agency or trust for or with any Holder.
(b)
The Company may also from time to time designate different or additional offices or
agencies where the Securities of any series may be presented or surrendered for any or all such purposes (in or
outside of such Place of Payment), and may from time to time rescind any such designations; provided, however,
that no such designation or rescission shall in any manner relieve the Company of its obligations described in the
preceding paragraph. The Company shall give prompt written notice to the Trustee of any such additional
designation or rescission of designation and of any change in the location of any such different or additional office
or agency. The Company shall enter into an appropriate agency agreement with any Paying Agent not a party to
this Indenture. The agreement shall implement the provisions of this Indenture that relate to such agent. The
Company shall notify the Trustee of the name and address of each such agent. The Company or any Affiliate
thereof may act as Paying Agent.
Section 6.03 To Hold Payment in Trust.
(a)
If the Company or an Affiliate thereof shall at any time act as Paying Agent with respect to
any series of Securities, then, on or before the date on which the principal of, premium, if any, or interest on any
of the Securities of that series by their terms or as a result of the calling thereof for redemption shall become
payable, the Company or such Affiliate shall segregate and hold in trust for the benefit of the Holders of such
Securities or the Trustee a sum sufficient to pay such principal, premium, if any, or interest which shall have so
become payable until such sums shall be paid to such Holders or otherwise disposed of as herein provided, and
shall notify the Trustee of its action or failure to act in that regard.
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Upon any proceeding under the Bankruptcy Code or any applicable state bankruptcy laws with
respect to the Company or any Affiliate thereof, if the Company or such Affiliate is then acting as Paying Agent,
the Trustee shall promptly replace the Company or such Affiliate as Paying Agent.
(b)
If the Company shall appoint, and at the time have, a Paying Agent for the payment of the
principal of, premium, if any, or interest on any series of Securities, then prior to 11:00 a.m., New York City time,
one Business Day prior to the date on which the principal of, premium, if any, or interest on any of the Securities
of that series shall become payable as above provided, whether by their terms or as a result of the calling thereof
for redemption, the Company shall deposit with such Paying Agent a sum sufficient to pay such principal,
premium, if any, or interest, such sum to be held in trust for the benefit of the Holders of such Securities or the
Trustee, and (unless such Paying Agent is the Trustee), the Company or any other obligor of such Securities shall
promptly notify the Trustee of its payment or failure to make such payment.
(c)
If the Paying Agent shall be a Person other than the Trustee, the Company shall cause such
Paying Agent to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the
Trustee, subject to the provisions of this Section 6.03, that such Paying Agent shall:
(i)
comply with the provisions of the Trust Indenture Act applicable to it as Paying
Agent;
(ii)
hold all moneys held by it for the payment of the principal of, premium, if any, or
interest on the Securities of that series in trust for the benefit of the Holders of such Securities until such
sums shall be paid to such Holders or otherwise disposed of as herein provided;
(iii)
give to the Trustee notice of any Default by the Company or any other obligor upon
the Securities of that series in the making of any payment of the principal of, premium, if any, or interest
on the Securities of that series; and
(iv)
at any time during the continuance of any such Default, upon the written request of
the Trustee, pay to the Trustee all sums so held in trust by such Paying Agent.
(d)
Anything in this Section 6.03 to the contrary notwithstanding, the Company may at any
time, for the purpose of obtaining a release, satisfaction or discharge of this Indenture or for any other reason, pay
or cause to be paid to the Trustee all sums held in trust by the Company or by any Paying Agent other than the
Trustee as required by this Section 6.03, such sums to be held by the Trustee upon the same trusts as those upon
which such sums were held by the Company or such Paying Agent and, upon such payment by a Paying Agent to
the Trustee, such Paying Agent shall be released from all further liability with respect to such moneys.
(e)
Any money deposited with the Trustee or any Paying Agent, or then held by the Company,
in trust for the payment of the principal of, premium, if any, or interest on any Security of any series and
remaining unclaimed for two years after such principal, premium, if any, or interest has become due and payable
shall be paid to the Company upon Company Order along with any interest that has accumulated thereon as a
result of such money being invested at the direction of the Company (or, if then held by the Company, shall be
discharged from such trust), and the Holder of such Security shall thereafter, as an unsecured general creditor,
look only to the Company for payment of such amounts without interest thereon, and all liability of the Trustee or
such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall
thereupon cease.
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Section 6.04 Merger, Consolidation and Sale of Assets. Except as otherwise provided as contemplated
by Section 3.01 with respect to any series of Securities:
(a)
The Company shall not consolidate with or merge into any other Person in a transaction in
which the Company is not the surviving entity, or convey, transfer or lease its properties and assets substantially as
an entirety to, any Person, unless
(i)
any Person formed by such consolidation or into or with which the Company is
merged or to whom the Company has conveyed, transferred or leased its properties and assets substantially
as an entirety is a corporation, partnership, trust or other entity validly existing under the laws of Bermuda,
the British Virgin Islands, Cayman Islands or Hong Kong and such Person expressly assumes by an
indenture supplemental to this Indenture all the obligations of the Company under this Indenture and the
Securities, including the obligation to pay Additional Amounts with respect to any jurisdiction in which it
is organized or resident for tax purposes;
(ii)
immediately after giving effect to the transaction, no Event of Default, and no event
which, after notice or lapse of time or both, would become an Event of Default, shall have occurred and be
continuing; and
(iii)
the Company has delivered to the Trustee an Officers’ Certificate and an Opinion of
Counsel, each stating that such consolidation, merger, conveyance, transfer or lease and such supplemental
indenture comply with this Indenture and that all conditions precedent therein provided for relating to such
transaction have been complied with.
(b)
Upon any consolidation with or merger into any other entity, or any sale other than for cash,
or any conveyance or lease, of all or substantially all of the assets of the Company in accordance with this Section
6.04, the successor entity formed by such consolidation or into or with which the Company is merged or to which
the Company is sold or to which such conveyance, transfer or lease is made shall succeed to, and be substituted
for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such
successor entity had been named as the Company herein, and thereafter, except in the case of a lease, the
predecessor Company shall be relieved of all obligations and covenants under this Indenture and the Securities,
and from time to time such entity may exercise each and every right and power of the Company under this
Indenture, in the name of the Company, or in its own name; and any act or proceeding by any provision of this
Indenture required or permitted to be done by the Board of Directors or any officer of the Company may be done
with like force and effect by the like board of directors or officer of any entity that shall at the time be the
successor of the Company hereunder. In the event of any such sale or conveyance, but not any such lease, the
Company (or any successor entity which shall theretofore have become such in the manner described in this
Section 6.04) shall be discharged from all obligations and covenants under this Indenture and the Securities and
may thereupon be dissolved and liquidated.
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Section 6.05 Additional Amounts.
(a)
All payments of principal, premium, if any, and interest made by or on behalf of the
Company in respect of any Security shall be made without withholding or deduction for, or on account of, any
present or future taxes, duties, assessments or governmental charges of whatever nature (collectively, “Taxes”)
imposed or levied by or within Bermuda, the British Virgin Islands, Cayman Islands, Hong Kong, the PRC or any
jurisdiction where the Company or the Paying Agent is otherwise considered by a taxing authority to be a resident
for tax purposes (in each case, including any political subdivision or any authority therein or thereof having power
to tax) (the “Relevant Jurisdiction”), unless such withholding or deduction of such Taxes is required by law. If the
Company is required to make such withholding or deduction, the Company shall pay such additional amounts
(“Additional Amounts”) as will result in receipt by each Holder of Securities of such amounts as would have been
received by such Holder had no such withholding or deduction of such Taxes been required, except that no such
Additional Amounts shall be payable:
(i)
in respect of any such Taxes that would not have been imposed, deducted or
withheld but for the existence of any connection (whether present or former) between the Holder or
beneficial owner of a Security and the Relevant Jurisdiction other than merely holding such Security or
receiving principal, premium, if any, or interest in respect thereof (including such Holder or beneficial
owner being or having been a national, domiciliary or resident of such Relevant Jurisdiction or treated as a
resident thereof or being or having been physically present or engaged in a trade or business therein or
having or having had a permanent establishment therein);
(ii)
in respect of any Security presented for payment (where presentation is required)
more than 30 days after the relevant date, except to the extent that the Holder thereof would have been
entitled to such Additional Amounts on presenting the same for payment on the last day of such 30-day
period. For this purpose, the “relevant date” in relation to any Security means the later of (a) the due date
for such payment or (b) the date such payment was made or duly provided for;
(iii)
in respect of any Taxes that would not have been imposed, deducted or withheld but
for a failure of the Holder or beneficial owner of a Security to comply with a timely request by the
Company addressed to the Holder or beneficial owner to provide information concerning such Holder’s or
beneficial owner’s nationality, residence, identity or connection with any Relevant Jurisdiction, if and to
the extent that due and timely compliance with such request is required under the tax laws of such
jurisdiction in order to reduce or eliminate any withholding or deduction as to which Additional Amounts
would have otherwise been payable to such Holder;
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(iv)
in respect of any Taxes imposed as a result of a Security being presented for
payment (where presentation is required) in the Relevant Jurisdiction, unless such Security could not have
been presented for payment elsewhere;
(v)
in respect of any estate, inheritance, gift, sale, transfer, personal property or similar
Taxes;
(vi)
to any Holder of a Security that is a fiduciary, partnership or person other than the
sole beneficial owner of any payment to the extent that such payment would be required to be included in
the income under the laws of a Relevant Jurisdiction, for tax purposes, of a beneficiary or settlor with
respect to the fiduciary, or a member of that partnership or a beneficial owner who would not have been
entitled to such Additional Amounts had that beneficiary, settlor, partner or beneficial owner been the
Holder thereof;
(vii)
in respect of any such Taxes withheld or deducted from any payment under or with
respect to any Security where such withholding or deduction is imposed on a payment to an individual and
is required to be made pursuant to European Council Directive 2003/48/EC or any other directive
implementing the conclusions of the ECOFIN Council meeting of November 26–27, 2000 on the taxation
of saving income or any law implementing or complying with, or introduced in order to conform to, any
such directive;
(viii) with respect to any withholding or deduction that is imposed in connection with
Sections 1471-1474 of the U.S. Internal Revenue Code and U.S. Treasury regulations thereunder
(“FATCA”), any intergovernmental agreement between the United States and any other jurisdiction
implementing or relating to FATCA or any non-U.S. law, regulation or guidance enacted or issued with
respect thereto;
(ix)
any such Taxes payable otherwise than by deduction or withholding from payments
under or with respect to any Security; or
(x)
any combination of Taxes referred to in the preceding clauses (i) through (ix) above.
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(b)
In the event that any withholding or deduction for or on account of any Taxes is required
and Additional Amounts are payable with respect thereto, at least 10 Business Days prior to each date of payment
of principal of, premium, if any, or interest on the Securities, the Company shall furnish to the Trustee and the
Paying Agent, if other than the Trustee, an Officers’ Certificate specifying the amount required to be withheld or
deducted on such payments to such Holders, certifying that the Company shall pay such amounts required to be
withheld to the appropriate governmental authority and certifying to the fact that the Additional Amounts will be
payable and the amounts so payable to each Holder, and that the Company will pay to the Trustee or such Paying
Agent the Additional Amounts required to be paid; provided that no such Officers’ Certificate will be required
prior to any date of payment of principal of, premium, if any, or interest on such Securities if there has been no
change with respect to the matters set forth in a prior Officers’ Certificate. The Trustee and each Paying Agent
shall be entitled to rely on the fact that any Officers’ Certificate contemplated by this Section 6.05(b) has not been
furnished as evidence of the fact that no withholding or deduction for or on account of any Taxes is required. The
Company covenants to indemnify the Trustee and any Paying Agent for and to hold them harmless against any
loss, liability or reasonably incurred expense without fraudulent activity, gross negligence or willful misconduct
on their part arising out of or in connection with actions taken or omitted by any of them in reliance on any such
Officers’ Certificate furnished pursuant to this Section 6.05(b) or on the fact that any Officers’ Certificate
contemplated by this Section 6.05(b) has not been furnished.
(c)
Whenever in this Indenture there is mentioned, in any context, the payment of principal,
premium, if any, or interest in respect of any Security, such mention shall be deemed to include the payment of
Additional Amounts provided for in this Indenture, to the extent that, in such context, Additional Amounts are,
were or would be payable in respect thereof pursuant to this Indenture.
(d)
Sections 6.05(a), (b) and (c) shall apply in the same manner with respect to the jurisdiction
in which any successor Person to the Company is organized or resident for tax purposes or any authority therein or
thereof having the power to tax (a “Successor Jurisdiction”), substituting such Successor Jurisdiction for the
Relevant Jurisdiction.
(e)
If the Company or its successor is required to make any deduction or withholding from any
payments or deliveries with respect to the Notes, it shall deliver to the Trustee, the Paying Agent and the Holders
official tax receipts evidencing the remittance to the relevant tax authorities of the amounts so withheld or
deducted.
(f)
The obligation of the Company to make payments of Additional Amounts under this
Section 6.05 shall survive any termination, defeasance or discharge of this Indenture.
Section 6.06 Payment for Consent. The Company will not, and will not permit any of its Controlled
Entities to, directly or indirectly, pay or cause to be paid any consideration to or for the benefit of any Holder for
or as an inducement to any consent, waiver or amendment of any of the terms or provisions of this Indenture or
any series of the Securities unless such consideration is offered to be paid and is paid to all Holders of such series
of Securities as may be affected thereby that consent, waive or agree to amend in the time frame set forth in the
solicitation documents relating to consent, waiver or amendment.
34
Section 6.07 Compliance Certificate. The Company shall furnish to the Trustee (a) annually, within 120
days after the end of each fiscal year of the Company (with fiscal year ends on December 31), and (b) within 14
days of a written request from the Trustee, a certificate in or substantially in the form attached hereto as Exhibit B
from the principal executive officer, principal financial officer, principal accounting officer or treasurer as to his or
her knowledge of the Company’s compliance with all conditions and covenants under this Indenture (which
compliance shall be determined without regard to any period of grace or requirement of notice provided under this
Indenture), specifying if any Default has occurred and, in the event that any Default has occurred, specifying each
such Default and the nature and status thereof of which such person may have knowledge.
Section 6.08 Conditional Waiver by Holders of Securities. Anything in this Indenture to the contrary
notwithstanding, the Company may fail or omit in any particular instance to comply with a covenant or condition
set forth herein with respect to any series of Securities if the Company shall have obtained and filed with the
Trustee, prior to the time of such failure or omission, evidence (as provided in Article VIII) of the consent of the
Holders of a majority in aggregate principal amount of the Securities of such series affected by such waiver and at
the time Outstanding, either waiving such compliance in such instance or generally waiving compliance with such
covenant or condition, but no such waiver shall extend to or affect such covenant or condition except to the extent
so expressly waived, or impair any right consequent thereon and, until such waiver shall have become effective,
the obligations of the Company and the duties of the Trustee in respect of any such covenant or condition shall
remain in full force and effect.
Section 6.09 Statement by Officers as to Default. The Company shall deliver to the Trustee as soon as
possible and in any event within 30 calendar days after the Company becomes aware of the occurrence of any
Event of Default or an event which, with the giving of notice or the lapse of time or both, would constitute an
Event of Default, an Officers’ Certificate setting forth the details of such Event of Default or Default and the
action which the Company proposes to take with respect thereto.
ARTICLE VII
REMEDIES OF TRUSTEE AND SECURITYHOLDERS
Section 7.01 Events of Default. Except where otherwise indicated by the context or where the term is
otherwise defined for a specific purpose, the term “Event of Default” as used in this Indenture with respect to
Securities of any series shall mean one of the following described events unless it is either inapplicable to a
particular series or it is specifically deleted or modified in the manner contemplated in Section 3.01:
(a)
the Company fails to pay principal or premium, if any, in respect of a Security of such
series by the due date for such payment (whether at Stated Maturity or upon acceleration, repurchase, redemption
or otherwise);
(b)
the Company fails to pay interest on a Security of such series within 30 days after the due
date for such payment;
(c)
the Company defaults in the performance of or breaches its obligations under Section 6.04;
35
(d)
the Company, subject to the provisions of Section 6.08, defaults in the performance of or
breaches any covenant or agreement in this Indenture or under the Securities of such series (other than a default
specified in clause (a), (b) or (c) above) and such default or breach continues for a period of 60 consecutive days
after written notice by the Trustee or the Holders of 25% or more in aggregate principal amount of the Securities
of such series then Outstanding;
(e)
(i) there occurs with respect to any indebtedness of the Company or any of its Significant
Subsidiaries, whether such indebtedness exists as of the date hereof or shall hereafter be created, (A) an event of
default that has resulted in the holder thereof declaring the principal of such indebtedness to be due and payable
prior to its stated maturity or (B) a failure to make a payment of principal, interest or premium when due (after
giving effect to the expiration of any applicable grace period therefor, a “Payment Default”) and (ii) the
outstanding principal amount of such indebtedness, together with the outstanding principal amount of any other
indebtedness of such Persons under which there has been a Payment Default or the maturity of which has been so
accelerated, is equal to or exceeds US$60,000,000, and in each case, such indebtedness is not discharged, or such
acceleration is not otherwise cured or rescinded, within 30 days;
(f)
one or more final judgments or orders for the payment of money are rendered against the
Company or any of the Significant Subsidiaries and are not paid or discharged, and there is a period of 90
consecutive days following entry of the final judgment or order that causes the aggregate amount for all such final
judgments or orders outstanding and not paid or discharged against all such Persons (net of any amounts that the
Company’s insurance carriers have paid or agreed to pay with respect thereto under applicable policies) to exceed
US$60,000,000, during which a stay of enforcement, by reason of a pending appeal or otherwise, is not in effect;
(g)
the entry by a court having jurisdiction in the premises of (i) a decree or order for relief in
respect of the Company or any of the Significant Subsidiaries in an involuntary case or proceeding under any
applicable bankruptcy, insolvency or other similar law or (ii) a decree or order adjudging the Company or any of
the Significant Subsidiaries bankrupt or insolvent, or approving as final and nonappealable a petition seeking
reorganization, arrangement, adjustment, or composition of or in respect of the Company or any of the Significant
Subsidiaries under any applicable bankruptcy, insolvency or other similar law, or appointing a custodian, receiver,
liquidator, assignee, trustee, sequestrator, or other similar official of the Company or any of the Significant
Subsidiaries or of any substantial part of its or their respective property, or ordering the winding up or liquidation
of their respective affairs (or any similar relief granted under any foreign laws), and in any such case the
continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a
period of 90 consecutive calendar days;
36
(h)
the commencement by the Company or any of the Significant Subsidiaries of a voluntary
case or proceeding under any applicable federal, state or foreign bankruptcy, insolvency or other similar law or of
any other case or proceeding to be adjudicated bankrupt or insolvent, or the consent by the Company or any
Significant Subsidiary to the entry of a decree or order for relief in respect of the Company or any of the
Significant Subsidiaries in an involuntary case or proceeding under any applicable bankruptcy, insolvency or other
similar law or the commencement of any bankruptcy or insolvency case or proceeding against the Company or
any Significant Subsidiary, or the filing by the Company or any Significant Subsidiary of a petition or answer or
consent seeking reorganization or relief with respect to the Company or any of the Significant Subsidiaries under
any applicable bankruptcy, insolvency or other similar law, or the consent by the Company or any Significant
Subsidiary to the filing of such petition or to the appointment of or taking possession by a custodian, receiver,
liquidator, assignee, trustee, sequestrator, or other similar official of the Company or any of the Significant
Subsidiaries or of any substantial part of its or their respective property pursuant to any such law, or the making
by the Company or any of the Significant Subsidiaries of a general assignment for the benefit of creditors in
respect of any indebtedness as a result of an inability to pay such indebtedness as it becomes due, or the admission
by the Company or any of the Significant Subsidiaries in writing of the inability of the Company to pay its debts
generally as they become due, or the taking of corporate action by the Company or any of the Significant
Subsidiaries that resolves to commence any such action;
(i)
the Securities of such series or the Indenture is or becomes or is claimed by the Company to
be unenforceable, invalid or ceases to be in full force and effect otherwise than is permitted by the Indenture; or
(j)
the occurrence of any other Event of Default with respect to Securities of such series as
provided in Section 3.01;
provided, however, that a Default under Section 7.01(d) above will not constitute an Event of Default until
the Trustee or the Holders of 25% or more in aggregate principal amount of the Securities of such series then
Outstanding provide written notice to the Company of the Default and the Company does not cure such Default
within the time specified in Section 7.01(d) above after receipt of such notice. In the case of such notice given to
the Company by the Holders, the Company will provide a copy of such notice to the Trustee.
Section 7.02 Acceleration; Rescission and Annulment.
(a)
Except as otherwise provided as contemplated by Section 3.01 with respect to any series of
Securities, if any one or more of the above-described Events of Default (other than an Event of Default specified
in Section 7.01(g) or 7.01(h)) shall happen with respect to Securities of any series at the time Outstanding, then,
and in each and every such case, during the continuance of any such Event of Default, the Trustee or the Holders
of not less than 25% in aggregate principal amount of the Securities of such series then Outstanding may declare
the principal (or, if the Securities of that series are Original Issue Discount Securities, such portion of the principal
amount as may be specified in the terms of that series) of and all accrued but unpaid interest on all the Securities
of such series then Outstanding to be due and payable immediately by a notice in writing to the Company (and to
the Trustee if given by Holders), and upon any such declaration such principal amount (or specified amount) shall
become immediately due and payable. If an Event of Default specified in Section 7.01(g) or 7.01(h) occurs and is
continuing, then in every such case, the principal amount of all of the Securities of that series then Outstanding
shall automatically, and without any declaration or any other action on the part of the Trustee or any Holder,
become due and payable immediately. Upon payment of such amounts in the currency in which such Securities
are denominated, all obligations of the Company in respect of the payment of principal of and interest on the
Securities of such series shall terminate.
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(b)
In the event of a declaration of acceleration with respect to the Securities of any series
because of an Event of Default specified in Section 7.01(e) above shall occur, the declaration of acceleration with
respect to the Securities of such series shall be automatically annulled if the Default triggering such Event of
Default pursuant to Section 7.01(e) above shall be remedied or cured by the Company or any of the Significant
Subsidiaries or waived by the holders of the relevant indebtedness within 30 days after the declaration of
acceleration with respect thereto and if:
(i)
the annulment of the acceleration with respect to the Securities of such series would
not conflict with any judgment or decree of a court of competent jurisdiction;
(ii)
all Events of Default with respect to the Securities of such series, other than the non-
payment of principal, premium, if any, or interest on the Securities of such series that became due solely
because of such acceleration, have been cured or waived as provided in Section 7.06; and
iii)
the Issuer has paid or deposited with the Trustee a sum sufficient to pay all sums
paid or advanced by the Trustee under the Indenture and the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel.
(c)
At any time after such a declaration of acceleration with respect to the Securities of any
series has been made and before a judgment or decree for payment of the money due has been obtained by the
Trustee as hereinafter provided in this Article, the Holders of at least a majority in aggregate principal amount of
the Securities of such series at the time Outstanding may, subject to Sections 7.06 and 14.02, waive all past
Defaults and rescind and annul such acceleration if:
(i)
the rescission of the acceleration with respect to the Securities of such series would
not conflict with any judgment or decree of a court of competent jurisdiction; and
(ii)
all Events of Default with respect to the Securities of such series, other than the non-
payment of principal, premium, if any, or interest on the Securities of such series that became due solely
because of such acceleration, have been cured or waived as provided in Section 7.06.
(d)
No rescission as provided in this Section 7.02 shall affect any subsequent default or impair
any right consequent thereon.
(e)
For all purposes under this Indenture, if a portion of the principal of any Original Issue
Discount Securities shall have been accelerated and declared due and payable pursuant to the provisions hereof,
then, from and after such declaration, unless such declaration has been rescinded and annulled, the principal
amount of such Original Issue Discount Securities shall be deemed, for all purposes hereunder, to be such portion
of the principal thereof as shall be due and payable as a result of such acceleration, and payment of such portion of
the principal thereof as shall be due and payable as a result of such acceleration, together with interest, if any,
thereon and all other amounts owing thereunder, shall constitute payment in full of such Original Issue Discount
Securities.
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Section 7.03 Other Remedies. If the Company shall fail for a period of 30 calendar days to pay any
installment of interest on the Securities of any series or shall fail to pay the principal of and premium, if any, on
any of the Securities of such series when and as the same shall become due and payable, whether at Maturity, or
by call for redemption (other than pursuant to the sinking fund), by declaration as authorized by this Indenture, or
otherwise, or shall fail for a period of 30 calendar days to make any required sinking fund payment as to a series
of Securities, then, upon demand of the Trustee, the Company shall pay to the Paying Agent, for the benefit of the
Holders of Securities of such series then Outstanding, the whole amount which then shall have become due and
payable on all the Securities of such series, with interest on the overdue principal and premium, if any, and (so far
as the same may be legally enforceable) on the overdue installments of interest at the rate borne by the Securities
of such series, and all amounts owing the Trustee and any predecessor trustee hereunder under Section 11.01(a).
In case the Company shall fail forthwith to pay such amounts upon such demand, the Trustee, in its own
name and as trustee of an express trust, shall be entitled and empowered to institute any action or proceeding at
law or in equity for the collection of the sums so due and unpaid, and may prosecute any such action or
proceeding to judgment or final decree, and may enforce any such judgment or final decree against the Company
or any other obligor upon the Securities of such series, and collect the moneys adjudged or decreed to be payable
out of the property of the Company or any other obligor upon the Securities of such series, wherever situated, in
the manner provided by law. Every recovery of judgment in any such action or other proceeding, subject to the
payment to the Trustee of all amounts owing the Trustee and any predecessor trustee hereunder under Section
11.01(a), shall be for the ratable benefit of the Holders of such series of Securities which shall be the subject of
such action or proceeding. All rights of action upon or under any of the Securities or this Indenture may be
enforced by the Trustee without the possession of any of the Securities and without the production of any thereof
at any trial or any proceeding relative thereto.
Section 7.04 Trustee as Attorney-in-Fact. Nothing herein contained shall be deemed to authorize or
empower the Trustee to consent to or accept or adopt, on behalf of any Holder of Securities, any plan of
reorganization or readjustment affecting the Securities or the rights of any Holder thereof, or to authorize or
empower the Trustee to vote in respect of the claim of any Holder of any Securities in any such proceeding.
Section 7.05 Priorities. Any moneys or properties collected by the Trustee, or, after an Event of Default,
any moneys or other property distributable in respect of the Company’s obligations under this Indenture, in either
case with respect to a series of Securities under this Article VII shall be applied in the following order, at the date
or dates fixed by the Trustee for the distribution of such moneys or properties and, in the case of the distribution
of such moneys or properties on account of the Securities of any series, upon presentation of the Securities of such
series, and stamping thereon the payment, if only partially paid, and upon surrender thereof, if fully paid:
First:
To the payment of all amounts (including indemnity payments) due to the Trustee,
Paying Agent, Registrar and any other Agent and any predecessor trustee, paying agent, registrar and other Agent
under Section 11.01(a) and the reasonably incurred expenses and disbursements of its agents, delegates, attorneys
and counsel.
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Second:
In case the principal of the Outstanding Securities of such series shall not have
become due and be unpaid, to the payment of interest on the Securities of such series, in the chronological order
of the Stated Maturity of the installments of such interest, with interest (to the extent that such interest has been
collected by the Trustee) upon the overdue installments of interest at the rate borne by such Securities, such
payments to be made ratably to the Persons entitled thereto.
Third:
In case the principal of the Outstanding Securities of such series shall have become
due, by declaration or otherwise, to the payment of the whole amount then owing and unpaid upon the Securities
of such series for principal and premium, if any, and interest, with interest on the overdue principal and premium,
if any, and (to the extent that such interest has been collected by the Trustee) upon overdue installments of interest
at the rate borne by the Securities of such series, and in case such moneys shall be insufficient to pay in full the
whole amounts so due and unpaid upon the Securities of such series, then to the payment of such principal and
premium, if any, and interest without preference or priority of principal and premium, if any, over interest, or of
interest over principal and premium, if any, or of any installment of interest over any other installment of interest,
or of any Security of such series over any other Security of such series, ratably to the aggregate of such principal
and premium, if any, and accrued and unpaid interest.
Fourth:
Any surplus then remaining shall be paid to the Company, its successors or assigns,
or to whomsoever may be determined by a court of competent jurisdiction to be so entitled.
Section 7.06 Control by Securityholders; Waiver of Past Defaults. The Holders of a majority in principal
amount of the Securities of any series at the time Outstanding may direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee hereunder, or of exercising any trust or power
hereby conferred upon the Trustee with respect to the Securities of such series; provided, however, that, subject to
the provisions of Section 11.02, the Trustee shall have the right to decline to follow any such direction if the
Trustee being advised by counsel determines that the action so directed may not lawfully be taken or would
involve the Trustee in personal liability. The Holders of not less than a majority in aggregate principal amount of
such series of Securities at the time Outstanding may on behalf of all Holders of the Securities of such series
waive any existing or past Default or Event of Default and its consequences hereunder, except a continuing
Default or Event of Default (i) in the payment of principal of, premium, if any, or interest on (or Additional
Amount payable in respect of), the Securities of such series then Outstanding, in which event the consent of all
Holders of the Securities of such series then Outstanding affected thereby is required, or (ii) in respect of a
covenant or provision which under Section 14.02 cannot be modified or amended without the consent of the
Holder of each Security of such series then Outstanding affected thereby. Upon any such waiver, the Company,
the Trustee and the Holders of the Securities of such series shall be restored to their former positions and rights
hereunder, respectively; provided that no such waiver shall extend to any subsequent or other Default or Event of
Default or impair any right consequent thereon. Whenever any Default or Event of Default hereunder shall have
been waived as permitted by this Section 7.06, said Default or Event of Default shall for all purposes of the
Securities of such series and this Indenture be deemed to have been cured and to be not continuing.
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Section 7.07 Limitation on Suits. No Holder of any Security of any series shall have any right to
institute any action, suit or proceeding at law or in equity for the execution of any trust hereunder or for the
appointment of a receiver or for any other remedy hereunder, in each case with respect to an Event of Default with
respect to such series of Securities, unless (i) such Holder previously shall have given to the Trustee written notice
of one or more of the Events of Default herein specified with respect to such series of Securities, (ii) the Holders
of not less than 25% in aggregate principal amount of the Securities of such series then Outstanding shall have
requested the Trustee in writing to take action in respect of the matter complained of, (iii) there shall have been
offered to the Trustee pre-funding, security and/or indemnity satisfactory to it against the costs, expenses and
liabilities to be incurred therein or thereby, and (iv) the Trustee, for 60 calendar days after receipt of such
notification, request and offer of pre-funding, security and/or indemnity, shall have failed to institute any such
action, suit or proceeding and have not received from the Holders of a majority in aggregate principal amount of
the Securities of such series then Outstanding a direction inconsistent with such request; and such notification,
request and offer of pre-funding, security and/or indemnity are hereby declared in every such case to be conditions
precedent to any such action, suit or proceeding by any Holder of any Security of such series; it being understood
and intended that no one or more of the Holders of Securities of such series shall have any right in any manner
whatsoever by his, her, its or their action to enforce any right hereunder, except in the manner herein provided,
and that every action, suit or proceeding at law or in equity shall be instituted, had and maintained in the manner
herein provided and for the equal benefit of all Holders of the Outstanding Securities of such series; provided,
however, that nothing in this Indenture or in the Securities of such series shall affect or impair the obligation of
the Company, which is absolute and unconditional, to pay the principal of, premium, if any, and interest on, the
Securities of such series to the respective Holders of such Securities at the respective due dates in such Securities
stated, or affect or impair the right, which is also absolute and unconditional, of such Holders to institute suit to
enforce the payment thereof.
Section 7.08 Undertaking for Costs. All parties to this Indenture and each Holder of any Security, by
such Holder’s acceptance thereof, shall be deemed to have agreed that any court may in its discretion require, in
any action, suit or proceeding for the enforcement of any right or remedy under this Indenture, or in any action,
suit or proceeding against the Trustee for any action taken or omitted by it as Trustee, the filing by any party
litigant in such action, suit or proceeding of an undertaking to pay the costs of such action, suit or proceeding, and
that such court may in its discretion assess reasonable costs, including reasonable attorneys’ fees and expenses,
against any party litigant in such action, suit or proceeding, having due regard to the merits and good faith of the
claims or defenses made by such party litigant; provided, however, that the provisions of this Section 7.08 shall
not apply to any action, suit or proceeding instituted by the Trustee, to any action, suit or proceeding instituted by
any one or more Holders of Securities holding in the aggregate more than 10% in principal amount of the
Securities of any series Outstanding, or to any action, suit or proceeding instituted by any Holder of Securities of
any series for the enforcement of the payment of the principal of, premium, if any, or the interest on, any of the
Securities of such series, on or after the respective due dates expressed in such Securities.
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Section 7.09 Remedies Cumulative; Delay or Omission Not Waiver. No remedy herein conferred upon
or reserved to the Trustee or to the Holders of Securities of any series is intended to be exclusive of any other
remedy or remedies, and each and every remedy shall be cumulative and shall be in addition to every other
remedy given hereunder or now or hereafter existing at law or in equity or by statute. No delay or omission of the
Trustee or of any Holder of the Securities of any series to exercise any right or power accruing upon any Default
or Event of Default shall impair any such right or power or shall be construed to be a waiver of any such Default
or Event of Default or an acquiescence therein; and every power and remedy given by this Article VII to the
Trustee and to the Holders of Securities of any series, respectively, may be exercised from time to time and as
often as may be deemed expedient by the Trustee or by the Holders of Securities of such series, as the case may
be. In case the Trustee or any Holder of Securities of any series shall have proceeded to enforce any right under
this Indenture and the proceedings for the enforcement thereof shall have been discontinued or abandoned because
of waiver or for any other reason, or shall have been adjudicated adversely to the Trustee or to such Holder of
Securities, then and in every such case, subject to any determinations in such proceedings, the Company, the
Trustee and the Holders of the Securities of such series shall severally and respectively be restored to their former
positions and rights hereunder, and thereafter all rights, remedies and powers of the Trustee and the Holders of the
Securities of such series shall continue as though no such proceedings had been taken, except as to any matters so
waived or adjudicated.
ARTICLE VIII
CONCERNING THE SECURITYHOLDERS
Section 8.01 Evidence of Action of Securityholders. Whenever in this Indenture it is provided that the
Holders of a specified percentage or a majority in aggregate principal amount of the Securities or of any series of
Securities may take any action (including the making of any demand or request, the giving of any notice, consent
or waiver or the taking of any other action), the fact that at the time of taking any such action the Holders of such
specified percentage or majority have joined therein may be evidenced by (a) any instrument or any number of
instruments of similar tenor executed by Securityholders in person, by an agent or by a proxy appointed in
writing, including through an electronic system for tabulating consents operated by the Depositary for such series
or otherwise (such action becoming effective, except as herein otherwise expressly provided, when such
instruments or evidence of electronic consents are delivered to the Trustee and, where it is hereby expressly
required, to the Company), or (b) by the record of the Holders of Securities voting in favor thereof at any meeting
of Securityholders duly called and held in accordance with the provisions of Article IX, or (c) by a combination of
such instrument or instruments and any such record of such a meeting of Securityholders.
Section 8.02 Proof of Execution or Holding of Securities. Proof of the execution of any instrument by a
Securityholder or his, her or its agent or proxy and proof of the holding by any Person of any of the Securities
shall be sufficient if made in the following manner:
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(a)
The fact and date of the execution by any Person of any such instrument may be proved (i)
by the certificate of any notary public or other officer in any jurisdiction who, by the laws thereof, has power to
take acknowledgments or proof of deeds to be recorded within such jurisdiction, that the Person who signed such
instrument did acknowledge before such notary public or other officer the execution thereof, or (ii) by the
affidavit of a witness of such execution sworn to before any such notary or other officer. Where such execution is
by a Person acting in other than his or her individual capacity, such certificate or affidavit shall also constitute
sufficient proof of his or her authority.
(b)
The ownership of Securities of any series shall be proved by the Register of such Securities
or by a certificate of the Registrar for such series.
(c)
(d)
The record of any Holders’ meeting shall be proved in the manner provided in Section 9.06.
The Trustee may require such additional proof of any matter referred to in this Section 8.02
as it shall deem appropriate or necessary, so long as the request is a reasonable one.
(e)
If the Company shall solicit from the Holders of Securities of any series any action, the
Company may, at its option, fix in advance a record date for the determination of Holders of Securities entitled to
take such action, but the Company shall have no obligation to do so. Any such record date shall be fixed at the
Company’s discretion; provided that such record date shall not be more than 30 calendar days prior to the first
solicitation of any consent or waiver or more than 30 calendar days prior to the date of the most recent list of
Holders furnished to the Trustee prior to such solicitation pursuant to Section 312 of the TIA. If such a record
date is fixed, such action may be sought or given before or after the record date, but only the Holders of Securities
of record at the close of business on such record date shall be deemed to be Holders of Securities for the purpose
of determining whether Holders of the requisite proportion of Outstanding Securities of such series have
authorized or agreed or consented to such action, and for that purpose the Outstanding Securities of such series
shall be computed as of such record date.
Section 8.03 Persons Deemed Owners.
(a)
The Company, the Trustee and any agent of the Company or the Trustee may treat the
Person in whose name any Security is registered in the Register as the owner of such Security for the purpose of
receiving payment of principal of and premium, if any, and (subject to Section 3.08) interest, if any, on, such
Security and for all other purposes whatsoever, whether or not such Security be overdue, and neither the
Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary. All
payments made to any Holder, or upon his, her or its order, shall be valid, and, to the extent of the sum or sums
paid, effectual to satisfy and discharge the liability for moneys payable upon such Security.
(b)
None of the Company, the Trustee, any Paying Agent or the Registrar shall have any
responsibility or liability for any aspect of the records relating to or payments made on account of beneficial
ownership interests in a Global Security or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
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Section 8.04 Effect of Consents. After an amendment, supplement, waiver or other action becomes
effective as to any series of Securities, a consent to it by a Holder of such series of Securities is a continuing
consent conclusive and binding upon such Holder and every subsequent Holder of the same Securities or portion
thereof, and of any Security issued upon the transfer thereof or in exchange therefor or in place thereof, even if
notation of the consent is not made on any such Security. An amendment, supplement or waiver becomes
effective in accordance with its terms and thereafter binds every Holder.
ARTICLE IX
SECURITYHOLDERS’ MEETINGS
Section 9.01 Purposes of Meetings. A meeting of Securityholders of any or all series may be called at
any time and from time to time pursuant to the provisions of this Article IX for any of the following purposes:
(a)
to give any notice to the Company or to the Trustee, or to give any directions to the Trustee,
or to consent to the waiving of any Default or Event of Default hereunder and its consequences, or to take any
other action authorized to be taken by Securityholders pursuant to any of the provisions of Article VIII;
(b)
to remove the Trustee and nominate a successor trustee pursuant to the provisions of Article
XI;
(c)
the provisions of Section 14.02; or
to consent to the execution of an Indenture or of indentures supplemental hereto pursuant to
(d)
to take any other action authorized to be taken by or on behalf of the Holders of any
specified aggregate principal amount of the Securities of any one or more or all series, as the case may be, under
any other provision of this Indenture or under applicable law.
Section 9.02 Call of Meetings by Trustee. The Trustee may at any time call a meeting of all
Securityholders of all series that may be affected by the action proposed to be taken, to take any action specified
in Section 9.01, to be held at such time and at such place as the Trustee shall determine. Notice of every meeting
of the Securityholders of a series, setting forth the time and the place of such meeting and in general terms the
action proposed to be taken at such meeting, shall be mailed to Holders of Securities of such series at their
addresses as they shall appear on the Register. Such notice shall be mailed not less than 20 nor more than 90
calendar days prior to the date fixed for the meeting.
Section 9.03 Call of Meetings by Company or Securityholders. In case at any time the Company or the
Holders of at least 10% in aggregate principal amount of the Securities of a series (or of all series, as the case may
be) then Outstanding that may be affected by the action proposed to be taken shall have requested the Trustee to
call a meeting of Securityholders of such series (or of all series), by written request setting forth in reasonable
detail the action proposed to be taken at the meeting, and the Trustee shall not have mailed the notice of such
meeting within 20 days after receipt of such request, then the Company or such Securityholders may determine
the time and the place for such meeting and may call such meeting to take any action authorized in Section 9.01,
by mailing notice thereof as provided in Section 9.02.
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Section 9.04 Qualifications for Voting. To be entitled to vote at any meeting of Securityholders, a Person
shall (a) be a Holder of one or more Securities affected by the action proposed to be taken at the meeting or (b) be
a Person appointed by an instrument in writing as proxy by a Holder of one or more such Securities. The only
Persons who shall be entitled to be present or to speak at any meeting of Securityholders shall be the Persons
entitled to vote at such meeting and their counsel and any representatives of the Trustee and its counsel and any
representatives of the Company and its counsel.
Section 9.05 Regulation of Meetings.
(a)
Notwithstanding any other provisions of this Indenture, the Trustee may make such
reasonable regulations as it may deem advisable for any meeting of Securityholders, in regard to proof of the
holding of Securities and of the appointment of proxies, and in regard to the appointment and duties of inspectors
of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such
other matters concerning the conduct of the meeting as it shall deem fit.
(b)
The Trustee shall, by an instrument in writing, appoint a temporary chairman of the
meeting, unless the meeting shall have been called by the Company or by Securityholders as provided in Section
9.03, in which case the Company or the Securityholders calling the meeting, as the case may be, shall in like
manner appoint a temporary chair. A permanent chairman and a permanent secretary of the meeting shall be
elected by majority vote of the meeting.
(c)
At any meeting of Securityholders of a series, each Securityholder of such series of such
Securityholder’s proxy shall be entitled to one vote for each US$1,000 principal amount of Securities of such
series Outstanding held or represented by him or her; provided, however, that no vote shall be cast or counted at
any meeting in respect of any Security challenged as not Outstanding and ruled by the chairman of the meeting to
be not Outstanding. The chairman of the meeting shall have no right to vote other than by virtue of Securities of
such series held by him or her or instruments in writing as aforesaid duly designating him or her as the Person to
vote on behalf of other Securityholders. At any meeting of the Securityholders duly called pursuant to the
provisions of Section 9.02 or 9.03, the presence of Persons holding or representing Securities in an aggregate
principal amount sufficient to take action upon the business for the transaction of which such meeting was called
shall be necessary to constitute a quorum, and any such meeting may be adjourned from time to time by a
majority of those present, whether or not constituting a quorum, and the meeting may be held as so adjourned
without further notice.
Section 9.06 Voting. The vote upon any resolution submitted to any meeting of Securityholders of a
series shall be by written ballots on which shall be subscribed the signatures of the Holders of Securities of such
series or of their representatives by proxy and the principal amounts of the Securities of such series held or
represented by them. The permanent chairman of the meeting shall appoint two inspectors of votes who shall
count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of
the meeting their verified written reports in duplicate of all votes cast at the meeting. A record in duplicate of the
proceedings of each meeting of Securityholders shall be prepared by the secretary of the meeting and there shall
be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and
affidavits by one or more Persons having knowledge of the facts setting forth a copy of the notice of the meeting
and showing that said notice was mailed as provided in Section 9.02. The record shall show the principal amounts
of the Securities voting in favor of or against any resolution. The record shall be signed and verified by the
affidavits of the permanent chairman and secretary of the meeting and one of the duplicates shall be delivered to
the Company and the other to the Trustee to be preserved by the Trustee.
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Any record so signed and verified shall be conclusive evidence of the matters therein stated.
Section 9.07 No Delay of Rights by Meeting. Nothing contained in this Article IX shall be deemed or
construed to authorize or permit, by reason of any call of a meeting of Securityholders of any series or any rights
expressly or impliedly conferred hereunder to make such call, any hindrance or delay in the exercise of any right
or rights conferred upon or reserved to the Trustee or to the Securityholders of such series under any of the
provisions of this Indenture or of the Securities of such series.
ARTICLE X
REPORTS BY THE COMPANY AND THE TRUSTEE AND
SECURITYHOLDERS’ LISTS
Section 10.01 Reports by Trustee.
(a)
Any Trustee’s report required under Section 313(a) of the Trust Indenture Act shall be
transmitted on or before April 1 in each year following the date hereof, so long as any Securities are Outstanding
hereunder, and shall be dated as of a date convenient to the Trustee no more than 60 nor less than 45 days prior
thereto.
(b)
The Trustee shall, at the time of the transmission to the Holders of Securities of any report
pursuant to the provisions of this Section 10.01, file a copy of such report with each securities exchange upon
which the Securities are listed or each automated quotation system on which the Securities are quoted, if any, and
also with the SEC in respect of a Security listed and registered on a national securities exchange or automated
quotation system, if any. The Company agrees to notify the Trustee when, as and if the Securities become listed
or delisted on any securities exchange or admitted to trading on any automated quotation system and of any
delisting thereof.
The Company shall reimburse the Trustee for all reasonable expenses incurred in the preparation and
transmission of any report pursuant to the provisions of this Section 10.01 and of Section 10.02.
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Section 10.02 Reports by the Company. The Company shall file with the Trustee and the SEC, and
transmit to Holders, such information, documents and other reports, and such summaries thereof, as may be
required pursuant to the Trust Indenture Act at the times and in the manner provided in the Trust Indenture Act;
provided that, any such information, documents or reports required to be filed with the SEC pursuant to Section
13 or 15(d) of the Exchange Act shall be filed with the Trustee within 30 calendar days after the same is filed with
the SEC; provided further that the filing of the reports specified in Section 13 or 15(d) of the Exchange Act by an
entity that is the direct or indirect parent of the Company shall satisfy the requirements of this Section 10.02 so
long as such entity is an obligor or guarantor on the Securities; provided further that the reports of such entity
shall not be required to include condensed consolidating financial information for the Company in a footnote to
the financial statements of such entity.
Delivery of such reports, information and documents to the Trustee is for informational purposes only and
the Trustee’s receipt of such shall not constitute actual or constructive notice or knowledge of any information
contained therein or determinable from information contained therein, including the Company’s compliance with
any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers’ Certificates). It
is expressly understood that materials transmitted electronically by the Company to the Trustee or filed pursuant
to the SEC’s EDGAR system (or any successor electronic filing system) shall be deemed filed with the Trustee
and transmitted to Holders for purposes of this Section 10.02. The Trustee shall have no responsibility to
determine if and when such reports have been filed electronically by the Company.
Section 10.03 Securityholders’ Lists. The Company covenants and agrees that it shall furnish or cause to
be furnished to the Trustee:
(a)
semi-annually, within 15 calendar days after each Record Date, but in any event not less
frequently than semi-annually, a list in such form as the Trustee may reasonably require of the names and
addresses of the Holders of Securities to which such Record Date applies, as of such Record Date, and
(b)
at such other times as the Trustee may request in writing, within 30 calendar days after
receipt by the Company of any such request, a list of similar form and content as of a date not more than 15
calendar days prior to the time such list is furnished;
provided, however, that so long as the Trustee shall be the Registrar, such lists shall not be required to be
furnished.
ARTICLE XI
CONCERNING THE TRUSTEE
Section 11.01 Rights of Trustees; Compensation and Indemnity. The Trustee accepts the trusts created by
this Indenture upon the terms and conditions hereof, including the following, to all of which the parties hereto and
the Holders from time to time of the Securities agree:
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(a)
The Trustee shall be entitled to such compensation as the Company and the Trustee shall
from time to time agree in writing for all services rendered by it hereunder (including in any agent capacity in
which it acts). The compensation of the Trustee shall not be limited by any provision of law in regard to the
compensation of a trustee of an express trust. The Company shall reimburse the Trustee promptly upon its request
for all out-of-pocket expenses, disbursements and advances properly incurred or made by the Trustee (including,
without limitation, the reasonably incurred expenses and disbursements of its agents, delegates, attorneys and
counsel), except any such expense, disbursement or advance caused by its own gross negligence, fraudulent
activity or willful misconduct (as determined by a competent court of appropriate jurisdiction in a final, non-
appealable judgment).
The Company also agrees to indemnify each of the Trustee and any predecessor Trustee and their
respective officers, employees and directors hereunder for, and to hold it harmless against, any and all loss,
liability, damage, claim, or expense incurred without its own gross negligence, fraudulent activity or willful
misconduct (as determined by a competent court of appropriate jurisdiction in a final, non-appealable judgment),
arising out of or in connection with the acceptance or administration of the trust or trusts hereunder and the
performance of its duties (including in any agent capacity in which it acts), as well as the costs and expenses of
defending itself against any claim or liability in connection with the exercise or performance of any of its powers
or duties hereunder, except those caused by its own gross negligence, fraudulent activity or willful misconduct (as
determined by a competent court of appropriate jurisdiction in a final, non-appealable judgment). The Trustee
shall notify the Company promptly of any claim for which it may seek indemnity; provided, however, that the
failure to so notify the Company shall not affect the obligations of the Company hereunder to indemnify. In the
absence of a Default or an Event of Default, the Company need not pay for any settlement made without its
consent, which consent shall not be unreasonably withheld.
As security for the performance of the obligations of the Company under this Section 11.01(a), the
Trustee shall have a lien upon all property and funds held or collected by the Trustee as such, except funds held in
trust by the Trustee to pay principal of and interest on any Securities. Notwithstanding any provisions of this
Indenture to the contrary, the obligations of the Company to compensate and indemnify the Trustee under this
Section 11.01(a) shall survive the resignation or removal of the Trustee, any satisfaction and discharge under
Article XII , the payment of any Securities and the termination of this Indenture for any reason. In addition to and
without prejudice to its other rights hereunder, when the Trustee incurs expenses or renders services after an Event
of Default specified in clause (g) or (h) of Section 7.01 occurs, the expenses and compensation for the services are
intended to constitute expenses of administration under the Bankruptcy Code or any applicable state bankruptcy,
insolvency or similar laws.
(b)
The Trustee may execute any of the trusts or powers hereof and perform any duty hereunder
either directly or by its agents, delegates and attorneys and shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed with due care by it hereunder.
(c)
The Trustee shall not be responsible in any manner whatsoever for the correctness of the
recitals herein or in the Securities (except its certificates of authentication thereon) contained, all of which are
made solely by the Company; and the Trustee shall not be responsible or accountable in any manner whatsoever
for or with respect to the validity or execution or sufficiency of this Indenture or of the Securities (except its
certificates of authentication thereon), and the Trustee makes no representation with respect thereto, except that
the Trustee represents that it is duly authorized to execute and deliver this Indenture, authenticate the Securities
and perform its obligations hereunder and that the statements made by it in a Statement of Eligibility on Form T-1
supplied to the Company are true and accurate, subject to the qualifications set forth therein. The Trustee shall not
be accountable for the use or application by the Company of any Securities, or the proceeds of any Securities.
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(d)
The Trustee may consult with counsel of its selection, and, subject to Section 11.02, the
advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in
respect of any action taken, suffered or omitted by the Trustee hereunder in reliance thereon.
(e)
The Trustee, subject to Section 11.02, may rely upon the certificate of the Secretary or one
of the Assistant Secretaries of the Company as to the adoption of any Board Resolution or resolution of the
stockholders of the Company, and any request, direction, order or demand of the Company mentioned herein shall
be sufficiently evidenced by, and whenever in the administration of this Indenture the Trustee shall deem it
desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the
Trustee may rely upon, an Officers’ Certificate of the Company (unless other evidence in respect thereof be herein
specifically prescribed).
(f)
Subject to Section 11.04, the Trustee or any agent of the Trustee, in its individual or any
other capacity, may become the owner or pledgee of Securities and, subject to Sections 310(b) and 311 of the TIA,
may otherwise deal with the Company with the same rights it would have had if it were not the Trustee or such
agent.
(g)
Money held by the Trustee in trust hereunder need not be segregated from other funds
except to the extent required by law. The Trustee shall be under no liability for interest on or investment of any
money received by it hereunder except as otherwise agreed in writing with the Company. To the extent the
Company does not provide the written instructions to the Trustee, such funds on deposit in the shall remain
uninvested
(h)
Any action taken by the Trustee pursuant to any provision hereof at the request or with the
consent of any Person who at the time is the Holder of any Security shall be conclusive and binding in respect of
such Security upon all future Holders thereof or of any Security or Securities which may be issued for or in lieu
thereof in whole or in part, whether or not such Security shall have noted thereon the fact that such request or
consent had been made or given.
(i)
The Trustee shall be entitled to conclusively rely and shall be fully protected in acting or
refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request,
consent, order, approval, bond, debenture or other paper or document believed by it to be genuine and to have
been signed or presented by the proper party or parties.
(j)
The Trustee shall not be under any obligation to exercise any of the rights or powers vested
in it by this Indenture at the request, order or direction of any of the Holders of the Securities, pursuant to any
provision of this Indenture, unless one or more of the Holders of the Securities shall have offered to the Trustee
pre-funding, security and/or indemnity satisfactory to it against the costs, expenses and liabilities which may be
incurred by it therein or thereby.
(k)
The Trustee shall not be liable for any action taken, suffered or omitted to be taken by it in
good faith and believed by it to be authorized or within its discretion or within the rights or powers conferred upon
it by this Indenture.
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(l)
The Trustee shall not be deemed to have knowledge or be charged with notice of any
Default or Event of Default with respect to any Securities unless a Responsible Officer of the Trustee has received
written notice thereof or unless the Holders of not less than 25% of the Outstanding Securities notify the Trustee
thereof by a written notice to a Responsible Officer of the Trustee that is received by the Trustee at its Corporate
Trust Office and such notice references such Securities, the Company and this Indenture.
(m)
The Trustee shall not be bound to make any investigation into the facts or matters stated in
any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond,
debenture, note, other evidence of Indebtedness or other paper or document; provided, however, that the Trustee,
may, but shall not be required to, make further inquiry or investigation into such facts or matters as it may see fit
at the expense of the Company and shall incur no liability of any kind by reason of such inquiry or investigation.
(n)
The rights, privileges, protections, immunities and benefits given to the Trustee, including,
without limitation, its right to be indemnified, are extended to, and shall be enforceable by, Deutsche Bank Trust
Company Americas in each of its capacities hereunder (including, as of the date of this Indenture, the Paying
Agent and the Registrar), and to each agent, custodian and other person employed to act hereunder.
(o)
In no event shall the Trustee be responsible or liable for special, indirect, punitive, or
consequential loss or damage of any kind whatsoever (including, but not limited to, loss of profit, goodwill or
opportunity), whether or not foreseeable, even if the Trustee has been advised of the possibility of such loss or
damage and regardless of the form of action. The provisions of this Section 11.01(o) shall survive the
termination or discharge of this Indenture and the resignation or removal of the Trustee.
(p)
The Trustee may request that the Company deliver an Officers’ Certificate setting forth the
names of individuals and/or titles of officers authorized at such time to take specified actions pursuant to this
Indenture, which Officers’ Certificate may be signed by any person authorized to sign an Officers’ Certificate,
including any person specified as so authorized in any such certificate previously delivered and not superseded.
(q)
The permissive right of the Trustee to take or refrain from taking action hereunder shall not
be construed as a duty.
(r)
The Trustee is not required to give any bond or surety with respect to the performance of its
duties or the exercise of its powers under this Indenture.
(s)
The Trustee may refrain from taking any action in any jurisdiction if taking such action in
that jurisdiction would, in the reasonable opinion of the Trustee based on written legal advice received from
qualified legal counsel in the relevant jurisdiction, be contrary to any law of that jurisdiction or, to the extent
applicable, the State of New York. Furthermore, the Trustee may refrain from taking such action if, in the
reasonable opinion of the Trustee based on such legal advice, it would otherwise render the Trustee liable to any
person in that jurisdiction or the State of New York and there has not been offered to the Trustee pre-funding,
security and/or indemnity satisfactory to it against the liabilities to be incurred therein or thereby, or the Trustee
would not have the legal capacity to take such action in that jurisdiction by virtue of applicable law in that
jurisdiction or the State of New York or by virtue of a written order of any court or other competent authority in
that jurisdiction that the Trustee does not have such legal capacity.
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Section 11.02 Duties of Trustee.
(a)
If one or more of the Events of Default specified in Section 7.01 with respect to the
Securities of any series shall have happened, then, during the continuance thereof, the Trustee shall, with respect
to such Securities, exercise such of the rights and powers vested in it by this Indenture, and shall use the same
degree of care and skill in its exercise, as a prudent person would exercise or use under the circumstances in the
conduct of such person’s own affairs.
(b)
Unless and until an Event of Default specified in Section 7.01 with respect to the Securities
of any series shall have happened which at the time is continuing,
(i)
the Trustee undertakes to perform such duties and only such duties with respect to
the Securities of that series as are specifically set out in this Indenture, and no implied covenants or
obligations shall be read into this Indenture against the Trustee, whose duties and obligations shall be
determined solely by the express provisions of this Indenture; and
(ii)
the Trustee shall be entitled to conclusively rely, as to the truth of the statements and
the correctness of the opinions expressed therein, in the absence of bad faith on the part of the Trustee,
upon certificates and opinions furnished to it pursuant to the express provisions of this Indenture; provided
that, in the case of any such certificates or opinions which, by the provisions of this Indenture, are
specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same
to determine whether or not they conform to the requirements of this Indenture (but need not confirm or
investigate the accuracy of mathematical calculations or other facts, statements, opinions or conclusions
stated therein).
(c)
None of the provisions of this Indenture shall be construed as relieving the Trustee from
liability for its own grossly negligent action, grossly negligent failure to act, or its own willful misconduct, except
that, anything in this Indenture contained to the contrary notwithstanding,
(i)
the Trustee shall not be liable to any Holder of Securities or to any other Person for
any error of judgment made in good faith by a Responsible Officer of the Trustee, unless it shall be proved
that the Trustee was grossly negligent in ascertaining the pertinent facts;
(ii)
the Trustee shall not be liable to any Holder of Securities or to any other Person
with respect to any action taken or omitted to be taken by it in good faith, in accordance with the direction
of Securityholders given as provided in Section 7.06, relating to the time, method and place of conducting
any proceeding for any remedy available to it or exercising any trust or power conferred upon it by this
Indenture;
(iii)
none of the provisions of this Indenture shall require the Trustee to expend or risk its
own funds or otherwise to incur any financial liability in the performance of any of its duties hereunder, or
in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that
repayment of such funds or adequate pre-funding, security and/or indemnity against such risk or liability is
not reasonably assured to it; and
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(iv)
this subsection (c) shall not be construed to limit the effect of subsection (b) of this
Section 11.02.
(d) Whether or not therein expressly so provided, every provision of this Indenture relating to
the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of
this Section 11.02.
Section 11.03 Notice of Defaults. Within 90 calendar days after the occurrence thereof and if known to a
Responsible Officer of the Trustee, the Trustee shall give to the Holders of the Securities of a series notice of each
Default or Event of Default with respect to the Securities of such series known to the Trustee, by transmitting such
notice to Holders at their addresses as the same shall then appear on the Register, unless such Default shall have
been cured or waived before the giving of such notice (the term “Default” being hereby defined to be the events
specified in Section 7.01, which are, or after notice or lapse of time or both would become, Events of Default as
defined in said Section). Except in the case of a Default or Event of Default in payment of the principal of,
premium, if any, or interest on, any of the Securities of such series when and as the same shall become payable, or
to make any sinking fund payment as to Securities of the same series, the Trustee shall be protected in
withholding such notice, if and so long as a Responsible Officer or Responsible Officers of the Trustee in good
faith determines that the withholding of such notice is in the interests of the Holders of the Securities of such
series (it being understood that the trustee does not have an affirmative duty to ascertain whether or not any such
notice is in the interests of such Holders).
Section 11.04 Eligibility; Disqualification.
(a)
The Trustee shall at all times satisfy the requirements of Section 310(a) of the TIA. The
Trustee shall have a combined capital and surplus of at least US$50 million as set forth in its most recent
published annual report of condition and shall have a Corporate Trust Office. If at any time the Trustee shall
cease to be eligible in accordance with the provisions of this Section 11.04, it shall resign immediately in the
manner and with the effect hereinafter specified in this Article.
(b)
The Trustee shall comply with Section 310(b) of the TIA; provided, however, that there
shall be excluded from the operation of Section 310(b)(i) of the TIA any indenture or indentures under which
other securities or certificates of interest or participation in other securities of the Company are Outstanding if the
requirements for such exclusion set forth in Section 310(b)(1) of the TIA are met. If the Trustee has or shall
acquire a conflicting interest within the meaning of Section 310(b) of the TIA, the Trustee shall either eliminate
such interest or resign, to the extent and in the manner provided by, and subject to the provisions of, the Trust
Indenture Act and this Indenture. If Section 310(b) of the TIA is amended any time after the date of this Indenture
to change the circumstances under which a Trustee shall be deemed to have a conflicting interest with respect to
the Securities of any series or to change any of the definitions in connection therewith, this Section 11.04 shall be
automatically amended to incorporate such changes.
Section 11.05 Resignation and Notice; Removal. The Trustee, or any successor to it hereafter appointed,
may at any time resign and be discharged of the trusts hereby created with respect to any one or more or all series
of Securities by giving to the Company notice in writing. Such resignation shall take effect upon the appointment
of a successor Trustee and the acceptance of such appointment by such successor Trustee. Any Trustee hereunder
may be removed with respect to any series of Securities at any time by the filing with such Trustee and the
delivery to the Company of an instrument or instruments in writing signed by the Holders of a majority in
principal amount of the Securities of such series then Outstanding, specifying such removal and the date when it
shall become effective.
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If at any time:
(1)
the Trustee shall fail to comply with the provisions of Section 310(b) of the TIA after written
request therefor by the Company or by any Holder who has been a bona fide Holder of a Security for at least six
months, or
(2)
the Trustee shall cease to be eligible under Section 11.04 and shall fail to resign after written
request therefor by the Company or by any Holder who has been a bona fide Holder of a Security for at least six
months, or
(3)
the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a
receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the
Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation,
then, in any such case, (i) the Company by written notice to the Trustee may remove the Trustee and appoint a
successor Trustee with respect to all Securities, or (ii) subject to Section 315(e) of the TIA, any Securityholder
who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others
similarly situated, petition any court of competent jurisdiction for the removal of the Trustee with respect to all
Securities and the appointment of a successor Trustee or Trustees.
Upon its resignation or removal, any Trustee shall be entitled to the payment of compensation for the
services rendered hereunder by such Trustee and to the payment of all reasonable expenses incurred hereunder
and all moneys then due to it hereunder. The Trustee’s rights to indemnification and its lien provided in Section
11.01(a) shall survive its resignation or removal, the satisfaction and discharge of this Indenture and the
termination of this Indenture for any reason.
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Section 11.06 Successor Trustee by Appointment.
(a)
In case at any time the Trustee shall resign, or shall be removed (unless the Trustee shall be
removed as provided in Section 11.04(b), in which event the vacancy shall be filled as provided in Section
11.04(b)), or shall become incapable of acting, or shall be adjudged bankrupt or insolvent, or if a receiver of the
Trustee or of its property shall be appointed, or if any public officer shall take charge or control of the Trustee or
of its property or affairs for the purpose of rehabilitation, conservation or liquidation with respect to the Securities
of one or more series, a successor Trustee with respect to the Securities of that or those series (it being understood
that any such successor Trustee may be appointed with respect to the Securities of one or more or all of such
series and that at any time there shall be only one Trustee with respect to the Securities of any series) may be
appointed by the Holders of a majority in aggregate principal amount of the Securities of that or those series then
Outstanding, by an instrument or instruments in writing signed in duplicate by such Holders and filed, one
original thereof with the Company and the other with the successor Trustee; provided that, until a successor
Trustee shall have been so appointed by the Holders of Securities of that or those series as herein authorized, the
Company, or, in case all or substantially all the assets of the Company shall be in the possession of one or more
custodians or receivers lawfully appointed, or of trustees in bankruptcy or reorganization proceedings (including a
trustee or trustees appointed under the provisions of the Bankruptcy Code), or of assignees for the benefit of
creditors, such receivers, custodians, trustees or assignees, as the case may be, by an instrument in writing, shall
appoint a successor Trustee with respect to the Securities of such series. Subject to the provisions of Sections
11.04 and 11.05, upon the appointment as above provided of a successor Trustee with respect to the Securities of
any series, the Trustee with respect to the Securities of such series shall cease to be Trustee hereunder. After any
such appointment other than by the Holders of Securities of that or those series, the Person making such
appointment shall forthwith cause notice thereof to be mailed to the Holders of Securities of such series at their
addresses as the same shall then appear on the Register but any successor Trustee with respect to the Securities of
such series so appointed shall, immediately and without further act, be superseded by a successor Trustee
appointed by the Holders of Securities of such series in the manner above prescribed, if such appointment be
made prior to the expiration of one year from the date of the mailing of such notice by the Company, or by such
receivers, trustees or assignees.
(b)
If any Trustee with respect to the Securities of one or more series shall resign or be
removed and a successor Trustee shall not have been appointed by the Company or by the Holders of the
Securities of such series or, if any successor Trustee so appointed shall not have accepted its appointment within
30 calendar days after such appointment shall have been made, the resigning Trustee may, on behalf of and at the
expense of the Company, appoint its own successor or the retiring Trustee or the Company may apply to any court
of competent jurisdiction for the appointment of a successor Trustee. If in any other case a successor Trustee shall
not be appointed pursuant to the foregoing provisions of this Section 11.06 within three months after such
appointment might have been made hereunder, the Holder of any Security of the applicable series or any retiring
Trustee at the expense of the Company may apply to any court of competent jurisdiction to appoint a successor
Trustee. Such court may thereupon, in any such case, after such notice, if any, as such court may deem proper and
prescribe, appoint a successor Trustee.
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(c)
Any successor Trustee appointed hereunder with respect to the Securities of one or more
series shall execute, acknowledge and deliver to its predecessor Trustee and to the Company, or to the receivers,
trustees, assignees or court appointing it, as the case may be, an instrument accepting such appointment hereunder,
and thereupon such successor Trustee, without any further act, deed or conveyance, shall become vested with all
the authority, rights, powers, trusts, immunities, duties and obligations with respect to such series of such
predecessor Trustee with like effect as if originally named as Trustee hereunder, and such predecessor Trustee,
upon payment of its charges and disbursements then unpaid, shall thereupon become obligated to pay over, and
such successor Trustee shall be entitled to receive, all moneys and properties held by such predecessor Trustee as
Trustee hereunder, subject nevertheless to its lien provided for in Section 11.01(a). Nevertheless, on the written
request of the Company or of the successor Trustee or of the Holders of at least 10% in aggregate principal
amount of the Securities of such series then Outstanding, such predecessor Trustee, upon payment of its said
charges and disbursements, shall execute and deliver an instrument transferring to such successor Trustee upon the
trusts herein expressed all the rights, powers and trusts of such predecessor Trustee and shall assign, transfer and
deliver to the successor Trustee all moneys and properties held by such predecessor Trustee, subject nevertheless
to its lien provided for in Section 11.01(a); and, upon request of any such successor Trustee and the Company
shall make, execute, acknowledge and deliver any and all instruments in writing for more fully and effectually
vesting in and confirming to such successor Trustee all such authority, rights, powers, trusts, immunities, duties
and obligations.
Section 11.07 Successor Trustee by Merger. Any Person into which the Trustee or any successor to it in
the trusts created by this Indenture shall be merged or converted, or any Person with which it or any successor to it
shall be consolidated, or any Person resulting from any merger, conversion or consolidation to which the Trustee
or any such successor to it shall be a party, or any Person to which the Trustee or any successor to it shall sell or
otherwise transfer all or substantially all of the corporate trust business of the Trustee, shall be the successor
Trustee under this Indenture without the execution or filing of any paper or any further act on the part of any of
the parties hereto; provided that such Person shall be otherwise qualified and eligible under this Article. In case at
the time such successor to the Trustee shall succeed to the trusts created by this Indenture with respect to one or
more series of Securities, any of such Securities shall have been authenticated but not delivered by the Trustee
then in office, any successor to such Trustee may adopt the certificate of authentication of any predecessor
Trustee, and deliver such Securities so authenticated; and in case at that time any of the Securities shall not have
been authenticated, any successor to such Trustee may authenticate such Securities either in the name of any
predecessor Trustee hereunder or in the name of the successor Trustee; and in all such cases such certificates shall
have the full force which it is anywhere in the Securities or in this Indenture provided that the certificate of the
Trustee shall have; provided, however, that the right to adopt the certificate of authentication of any predecessor
Trustee or authenticate Securities in the name of any predecessor Trustee shall apply only to its successor or
successors by merger, conversion or consolidation.
Section 11.08 Right to Rely on Opinion of Counsel and/or Officers’ Certificate. Subject to Section 11.02,
and subject to the provisions of Section 16.01 with respect to the opinions and certificates required thereby,
whenever in the administration of the provisions of this Indenture the Trustee shall deem it necessary or desirable
that a matter be proved or established prior to taking or suffering any action hereunder, such matter (unless other
evidence in respect thereof be herein specifically prescribed) may, in the absence of negligence or willful
misconduct on the part of the Trustee, be deemed to be conclusively proved and established by an Opinion of
Counsel and/or Officers’ Certificate with respect thereto delivered to the Trustee, and such Opinion of Counsel
and/or Officers’ Certificate, in the absence of negligence or willful misconduct on the part of the Trustee, shall be
full warrant to the Trustee for any action taken, suffered or omitted by it under the provisions of this Indenture
upon the faith thereof.
55
Section 11.09 Communications by Securityholders with Other Securityholders. Holders of Securities may
communicate pursuant to Section 312(b) of the TIA with other Holders with respect to their rights under this
Indenture or the Securities. The Company, the Trustee, the Registrar and anyone else shall have the protection of
Section 312(c) of the TIA with respect to such communications.
ARTICLE XII
SATISFACTION AND DISCHARGE; DEFEASANCE
Section 12.01 Applicability of Article. If, pursuant to Section 3.01, provision is made for the defeasance
of Securities of a series and if the Securities of such series are denominated and payable only in U.S. Dollars
(except as provided pursuant to Section 3.01), then the provisions of this Article shall be applicable except as
otherwise specified pursuant to Section 3.01 for Securities of such series.
Section 12.02 Satisfaction and Discharge of Indenture.
(a)
This Indenture, with respect to the Securities of any series (if all series issued under this
Indenture are not to be affected), shall cease to be of further effect (except as to any surviving rights of registration
of transfer or exchange of such Securities herein expressly provided for and rights to receive payments of
principal of, premium, if any, and interest on, such Securities) when:
(i)
either:
(A)
all Securities of such series that have been authenticated, except (x) lost,
stolen or destroyed Securities that have been replaced or paid and (y) Securities for whose payment
money has been deposited in trust and thereafter repaid to the Company, have been delivered to the
Paying Agent for cancellation; or
(B)
all Securities of such series that have not been delivered to the Paying Agent
for cancellation have become due and payable by reason of the mailing of a notice of redemption
or otherwise or will become due and payable within one year and the Company has irrevocably
deposited or caused to be deposited with the Trustee or the Paying Agent as trust funds in trust
solely for the benefit of the Holders, cash in U.S. Dollars, U.S. Government Obligation, or a
combination of cash in U.S. Dollars and U.S. Government Obligation, in amounts as will be
sufficient (in the case of a deposit not entirely in cash, in the opinion of an internationally
recognized investment bank, appraisal firm or firm of independent public accountants), without
consideration of any reinvestment of interest, to pay and discharge the entire Indebtedness on such
Securities not delivered to the Paying Agent for cancellation for principal, premium, if any, and
accrued interest to the Stated Maturity or Redemption Date, as the case may be; provided, however,
in the event a petition for relief under the Bankruptcy Code or any applicable state bankruptcy,
insolvency or other similar law is filed with respect to the Company within 91 days after the
deposit and the Trustee or the Paying Agent (as the case may be) is required to return the moneys
then on deposit with the Trustee or the Paying Agent (as the case may be) to the Company, the
obligations of the Company under this Indenture with respect to such Securities shall not be
deemed terminated or discharged;
56
(ii)
no Default or Event of Default under this Indenture has occurred and is continuing
on the date of the deposit (other than a Default or Event of Default resulting from the borrowing of funds
to be applied to such deposit) and the deposit will not result in a breach or violation of, or constitute a
default under, any other instrument to which the Company is a party or by which it is bound;
(iii)
the Company has paid or caused to be paid all sums payable by it under this
Indenture with respect to all Securities of such series; and
(iv)
the Company has delivered irrevocable instructions to the Trustee or the Paying
Agent (as the case may be) under this Indenture to apply the deposited money toward the payment of the
Securities of such series at the Stated Maturity or Redemption Date, as the case may be.
(b)
The Company shall deliver an Officers’ Certificate and an Opinion of Counsel (which
opinion may be subject to customary assumptions and exclusions) to the Trustee stating that all conditions
precedent to satisfaction and discharge have been satisfied.
(c)
Notwithstanding the satisfaction and discharge of this Indenture, if money shall have been
deposited with the Trustee or the Paying Agent (as the case may be) pursuant to subclause (A)(y) of clause (i) of
Section 12.02(a), the obligations of the Trustee or the Paying Agent (as the case may be) under Section 12.07 and
Section 6.03(e) shall survive such satisfaction and discharge.
Section 12.03 Defeasance upon Deposit of Moneys or U.S. Government Obligations.
(a)
The Company may, at its option and at any time, elect to have either Section 12.03(b) or
Section 12.03(c) applied to all Outstanding Securities of any series upon compliance with the conditions set forth
below in this Section 12.03.
(b)
Upon the Company’s exercise under Section 12.03(a) of the option applicable to this
Section 12.03(b), the Company shall, subject to the satisfaction of the conditions set forth in Section 12.03(d), be
deemed to have been Discharged from its obligations with respect to all Outstanding Securities of such series on
the date such conditions are satisfied (“Legal Defeasance”). For this purpose, “Legal Defeasance” means that the
Company shall be deemed to have paid and Discharged the entire Indebtedness represented by the Securities of
such series then Outstanding and to have satisfied all of its other obligations under the Securities of such series
and this Indenture, except for the following provisions which shall survive until otherwise terminated or
discharged hereunder:
(i)
the rights of Holders of the Securities of such series then Outstanding to receive
payments in respect of the principal of, or interest or premium on the Securities when such payments are
due from the trust referred to in Section 12.03(d);
(ii)
the Company’s obligations concerning issuing temporary Securities, registration of
Securities, mutilated, destroyed, lost or stolen Securities and the maintenance of an office or agency for
payment and money for security payments held in trust;
(iii)
the rights, powers, trusts, duties and immunities of the Trustee, and the Company’s
obligations in connection therewith; and
57
(iv)
this Section 12.03(b) and Section 12.03(c) with respect to the Securities of such
series.
Following the Company’s exercise of its Legal Defeasance option, payment of the Securities of
such series may not be accelerated because of an Event of Default. Subject to compliance with this Article XII,
the Company may exercise its option under this Section 12.03(b) notwithstanding the prior exercise of its option
under Section 12.03(c).
“Discharged” means that the Company shall be deemed to have paid and discharged the entire
Indebtedness represented by, and obligations under, the Securities of a series and to have satisfied all the
obligations under this Indenture relating to the Securities of such series (and the Trustee, at the expense of the
Company, shall execute proper instruments acknowledging the same), except (A) the rights of Holders of
Securities of such series to receive, from the trust fund described in clause (i) of 12.03(d), payment of the
principal of, premium, if any, or interest on such Securities when such payments are due, (B) the Company’s
obligations with respect to Securities of such series under Sections 3.04, 3.06, 3.07, 6.02, 6.03, 12.06 and 12.07
and (C) the rights, powers, trusts, duties and immunities of the Trustee hereunder.
(c)
Upon the Company’s exercise under Section 12.03(a) of the option applicable to this
Section 12.03(c), the Company shall, subject to the satisfaction of the conditions set forth in Section 12.03(d), be
released from its obligations under the covenants contained in Section 6.04, Section 6.06 and as provided pursuant
to Section 3.01(x), on and after the date the conditions set forth in Section 12.03(d) are satisfied (“Covenant
Defeasance”). For this purpose, “Covenant Defeasance” means that, with respect to this Indenture and the
Securities of such Series then Outstanding, the Company may omit to comply with and shall have no liability in
respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by
reason of any reference elsewhere herein to any such covenant or by reason of any reference in any such covenant
to any other provision herein or in any other document, and such omission to comply shall not constitute a Default
or an Event of Default under Section 7.01, but, except as specified above, the remainder of this Indenture and the
Securities shall be unaffected thereby. In addition, upon the Company’s exercise under Section 12.03(a) of the
option applicable to this Section 12.03(c), subject to the satisfaction of the conditions set forth in Section 12.03(d),
Sections 7.01(c), 7.01(d) (only with respect to covenants that are released as a result of such Covenant
Defeasance), 7.01(e) and 7.01(f), in each case, shall not constitute Events of Default.
(d)
The following shall be the conditions to the exercise of either the Legal Defeasance option
under Section 12.03(b) or the Covenant Defeasance option under Section 12.03(c):
(i)
the Company must irrevocably deposit with the Trustee or the Paying Agent as trust
funds, in trust, for the benefit of the Holders of all Securities subject to Legal Defeasance or Covenant
Defeasance, cash in U.S. Dollars, U.S. Government Obligation, or a combination of cash in U.S. Dollars
and U.S. Government Obligation, in amounts as will be sufficient, in the opinion of a nationally
recognized investment bank, appraisal firm or firm of independent public accountants to pay the principal
of, or interest and premium on such Securities that are then Outstanding on the Stated Maturity or
Redemption Date, as the case may be, and the Company must specify whether such Securities are being
defeased to maturity or to a particular Redemption Date;
58
(ii)
in the case of Legal Defeasance, the Company must deliver to the Trustee an
opinion of External Legal Counsel of recognized standing with respect to U.S. federal income tax matters
that is acceptable to the Trustee confirming that (A) the Company has received from, or there has been
published by, the U.S. Internal Revenue Service a ruling or (B) since the date of this Indenture, there has
been a change in the applicable federal income tax law, in either case to the effect that, and based thereon
such opinion of External Legal Counsel will confirm that, the beneficial owners of the Securities then
Outstanding will not recognize income, gain or loss for federal income tax purposes as a result of such
Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such Legal Defeasance had not occurred;
(iii)
in the case of Covenant Defeasance, the Company must deliver to the Trustee an
opinion of External Legal Counsel of recognized standing with respect to U.S. federal income tax matters
that is acceptable to the Trustee confirming that the beneficial owners of the Securities of such series then
Outstanding will not recognize income, gain or loss for federal income tax purposes as a result of such
Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such Covenant Defeasance had not occurred;
(iv)
no Default or Event of Default must have occurred and be continuing on the date of
such deposit (other than a Default or Event of Default resulting from the borrowing of funds to be applied
to such deposit);
(v)
the Company must deliver to the Trustee an Officers’ Certificate stating that the
deposit was not made by it with the intent of preferring the Holders of Securities over the Company’s other
creditors with the intent of defeating, hindering, delaying or defrauding its creditors or others; and
(vi)
the Company must deliver to the Trustee an Officers’ Certificate and an opinion of
External Legal Counsel, each stating that all conditions precedent relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
Section 12.04 Repayment to Company. The Trustee and any Paying Agent shall promptly pay to the
Company (or to its designee) upon Company Order any excess moneys or U.S. Government Obligations held by
them at any time, including any such moneys or U.S. Government Obligations held by the Trustee under any
escrow trust agreement entered into pursuant to Section 12.06. The provisions of the last paragraph of Section
6.03 shall apply to any moneys or U.S. Government Obligations held by the Trustee or any Paying Agent under
this Article that remains unclaimed for two years after the Maturity of any series of Securities for which moneys
or U.S. Government Obligations have been deposited pursuant to Section 12.03.
Section 12.05 Indemnity for U.S. Government Obligations. The Company shall pay and shall indemnify
the Trustee against any tax, fee or other charge imposed on or assessed against the deposited U.S. Government
Obligations or the principal or interest received on such U.S. Government Obligations.
59
Section 12.06 Deposits to Be Held in Escrow. Any deposits with the Trustee referred to in Section 12.03
above shall be irrevocable (except to the extent provided in Sections 12.04 and 12.07) and shall be made under the
terms of an escrow trust agreement. As contemplated under this Article 12, if any Outstanding Securities of a
series are to be redeemed prior to their Stated Maturity, whether pursuant to any optional redemption provisions or
in accordance with any mandatory or optional sinking fund requirement, the applicable escrow trust agreement
shall provide therefor and the Company shall make such arrangements as are satisfactory to the Trustee for the
giving of notice of redemption by the Trustee in the name, and at the expense, of the Company. The agreement
shall provide that, upon satisfaction of any Mandatory Sinking Fund Payment requirements, whether by deposit of
moneys, application of proceeds of deposited U.S. Government Obligations or, if permitted, by delivery of
Securities, the Trustee shall pay or deliver over to the Company as excess moneys pursuant to Section 12.04 all
funds or obligations then held under the agreement and allocable to the sinking fund payment requirements so
satisfied.
If Securities of a series with respect to which such deposits are made may be subject to later redemption at
the option of the Company or pursuant to Optional Sinking Fund Payments, the applicable escrow trust agreement
may, at the option of the Company, provide therefor. In the case of an optional redemption in whole or in part,
such agreement shall require the Company to deposit with the Trustee on or before the date notice of redemption
is given funds sufficient to pay the Redemption Price of the Securities to be redeemed together with all unpaid
interest thereon to the Redemption Date. Upon such deposit of funds, the Trustee shall pay or deliver over to the
Company as excess funds pursuant to Section 12.04 all funds or obligations then held under such agreement and
allocable to the Securities to be redeemed. In the case of exercise of Optional Sinking Fund Payment rights by the
Company, such agreement shall, at the option of the Company, provide that upon deposit by the Company with
the Trustee of funds pursuant to such exercise the Trustee shall pay or deliver over to the Company as excess
funds pursuant to Section 12.04 all funds or obligations then held under such agreement for such series and
allocable to the Securities to be redeemed.
Section 12.07 Application of Trust Money.
(a)
Neither the Trustee nor any other paying agent shall be required to pay interest on any
moneys deposited pursuant to the provisions of this Indenture, except such as it shall agree with the Company in
writing to pay thereon. Any moneys so deposited for the payment of the principal of, or premium, if any, or
interest on the Securities of any series and remaining unclaimed for two years after the date of the maturity of the
Securities of such series or the date fixed for the redemption of all the Securities of such series at the time
Outstanding, as the case may be, shall be applied as provided in Section 6.03(e).
(b)
Subject to the provisions of clause (a) above, any moneys or U.S. Government Obligations
which at any time shall be deposited by the Company or on its behalf with the Trustee or any other paying agent
for the purpose of paying the principal of, premium, if any, and interest on any of the Securities shall be and are
hereby assigned, transferred and set over to the Trustee or such other paying agent in trust for the respective
Holders of the Securities for the purpose for which such moneys or U.S. Government Obligations shall have been
deposited; provided that such moneys or U.S. Government Obligations need not be segregated from other funds
except to the extent required by law.
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ARTICLE XIII
IMMUNITY OF CERTAIN PERSONS
Section 13.01 No Personal Liability. No recourse shall be had for the payment of the principal of, or the
premium, if any, or interest on, any Security or for any claim based thereon or otherwise in respect thereof or of
the Indebtedness represented thereby, or upon any obligation, covenant or agreement of this Indenture, against any
incorporator, stockholder, officer or director, as such, past, present or future, of the Company or of any successor
thereto, either directly or through the Company or any successor thereto, whether by virtue of any constitutional
provision, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being
expressly agreed and understood that this Indenture and the Securities are solely corporate obligations, and that no
personal liability whatsoever shall attach to, or be incurred by, any incorporator, stockholder, officer or director, as
such, past, present or future, of the Company or of any successor thereto, either directly or through the Company
or any successor corporation, because of the incurring of the Indebtedness hereby authorized or under or by reason
of any of the obligations, covenants, promises or agreements contained in this Indenture or in any of the
Securities, or to be implied herefrom or therefrom, and that all liability, if any, of that character against every such
incorporator, stockholder, officer and director is, by the acceptance of the Securities and as a condition of, and as
part of the consideration for, the execution of this Indenture and the issue of the Securities expressly waived and
released.
ARTICLE XIV
SUPPLEMENTAL INDENTURES
Section 14.01 Without Consent of Securityholders. Except as otherwise provided as contemplated by
Section 3.01 with respect to any series of Securities, the Company and the Trustee, at any time and from time to
time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any one
or more of or all the following purposes:
(a)
to cure any ambiguity, omission, defect or inconsistency contained herein or in any
supplemental indenture; provided, however, that such amendment does not materially and adversely affect the
rights of Holders;
(b)
to evidence the succession of another corporation to the Company, or successive
successions, and the assumption by such successor of the covenants and obligations of the Company contained in
the Securities of one or more series and in this Indenture or any supplemental indenture;
(c)
(d)
(e)
to comply with the rules of any applicable Depositary;
to secure any series of Securities;
to add to the covenants and agreements of the Company, to be observed thereafter and
during the period, if any, in such supplemental indenture or indentures expressed, and to add Events of Default, in
each case for the protection or benefit of the Holders of all or any series of the Securities (and if such covenants,
agreements and Events of Default are to be for the benefit of fewer than all series of Securities, stating that such
covenants, agreements and Events of Default are expressly being included for the benefit of such series as shall be
identified therein), or to surrender any right or power herein conferred upon the Company;
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(f)
to make any change in any series of Securities that does not adversely affect the legal rights
under this Indenture of any Holder of such Securities in any material respect;
(g)
to evidence and provide for the acceptance of an appointment under this Indenture of a
successor Trustee; provided that the successor Trustee is otherwise qualified and eligible to act as such under the
terms hereof;
(h)
to conform the text of this Indenture or any series of the Securities to any provision of the
section entitled “Description of Debt Securities” in the Prospectus to the extent that such provision in the
Prospectus was intended to be a verbatim recitation of a provision of this Indenture or such series of the Securities
as evidenced by an Officers’ Certificate;
(i)
to make any amendment to the provisions of this Indenture relating to the transfer and
legending of Securities as permitted by this Indenture, including, but not limited to, facilitating the issuance and
administration of any series of the Securities or, if incurred in compliance with this Indenture, additional
Securities; provided, however, that (i) compliance with this Indenture as so amended would not result in any
series of the Securities being transferred in violation of the U.S. Securities Act of 1933, as amended, or any
applicable securities law and (ii) such amendment does not materially and adversely affect the rights of Holders to
transfer Securities;
(j)
to change or eliminate any of the provisions of this Indenture; provided that any such
change or elimination shall become effective only when there is no Outstanding Security of any series created
prior to the execution of such supplemental indenture that is entitled to the benefit of such provision and as to
which such supplemental indenture would apply;
(k)
to make any amendment to this Indenture necessary to qualify this Indenture under the
Trust Indenture Act;
(l)
to add guarantors or co-obligors with respect to any series of Securities; and
(m)
to establish the form and terms of Securities of any series as permitted in Section 3.01, or to
provide for the issuance of additional Securities in accordance with the limitations set forth in this Indenture, or to
add to the conditions, limitations or restrictions on the authorized amount, terms or purposes of issue,
authentication or delivery of the Securities of any series, as herein set forth, or other conditions, limitations or
restrictions thereafter to be observed.
Subject to the provisions of Section 14.03, the Trustee is authorized to join with the Company in the
execution of any such supplemental indenture, to make the further agreements and stipulations which may be
therein contained and to accept the conveyance, transfer, assignment, mortgage or pledge of any property or assets
thereunder.
Any supplemental indenture authorized by the provisions of this Section 14.01 may be executed by the
Company and the Trustee without the consent of the Holders of any of the Securities at the time Outstanding,
notwithstanding any of the provisions of Section 14.02.
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Section 14.02 With Consent of Securityholders; Limitations.
(a)
With the consent of the Holders (evidenced as provided in Article VIII) of a majority in
aggregate principal amount of the Outstanding Securities of each series affected by such supplemental indenture
voting separately, the Company and the Trustee may, from time to time and at any time, enter into an indenture or
indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or
eliminating any provisions of this Indenture or of modifying in any manner the rights of the Holders of the
Securities of such series to be affected; provided, however, that no such supplemental indenture shall, without the
consent of the Holder of each Outstanding Security of each such series affected thereby,
(i)
change the Stated Maturity of the principal of and premium, if any, or any
installment of interest on any Security;
(ii)
reduce the principal amount of, payments of interest on or stated time for payment
of interest on any Security;
(iii)
change any obligation of the Company to pay Additional Amounts with respect to
any Security;
(iv)
reduce the amount of the principal of an Original Issue Discount Security that would
be due and payable upon a declaration of acceleration of the Maturity thereof pursuant to Section 7.02;
(v)
impair the right to institute suit for the enforcement of any payment due on or with
respect to any Security;
(vi)
reduce the percentage in principal amount of the Outstanding Securities of any
series, the consent of whose Holders is required for any supplemental indenture;
(vii)
reduce the percentage in principal amount of the Outstanding Securities of any
series, the consent of whose Holders is required for any waiver of compliance with certain provisions of
this Indenture or certain Defaults hereunder and their consequences provided for in this Indenture;
(viii) modify any of the provisions of this Section 14.02, Section 7.06 or Section 6.08,
except to increase any such percentage or to provide that certain other provisions of this Indenture cannot
be modified or waived without the consent of the Holder of each Outstanding Security affected thereby;
provided, however, that this clause shall not be deemed to require the consent of any Holder with respect
to changes in the references to the “Trustee” and concomitant changes in this Section 14.02 and Section
6.08, or the deletion of this proviso, in accordance with the requirements of Sections 11.06 and 14.01(g);
(ix)
amend, change or modify any provision of this Indenture or the related definition
affecting the ranking of any series of Securities in a manner which adversely affects the Holders of such
Securities; or
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(x)
reduce the amount of the premium payable upon the redemption or repurchase of
any Security or change the time at which any Security may be redeemed or repurchased as described in
Section 4.07 or as provided pursuant to Section 3.01, whether through an amendment or waiver of
provisions in the covenants, definitions or otherwise.
(b)
A supplemental indenture that changes or eliminates any provision of this Indenture which
has expressly been included solely for the benefit of one or more particular series of Securities or which modifies
the rights of the Holders of Securities of such series with respect to such covenant or other provision, shall be
deemed not to affect the rights under this Indenture of the Holders of Securities of any other series.
(c)
It shall not be necessary for the consent of the Securityholders under this Section 14.02 to
approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall
approve the substance thereof.
(d)
The Company may set a record date pursuant to Section 8.02(e) for purposes of
determining the identity of the Holders of each series of Securities entitled to give a written consent or waive
compliance by the Company as authorized or permitted by this Section 14.02.
(e)
Promptly after the execution by the Company and the Trustee of any supplemental
indenture pursuant to the provisions of this Section 14.02, the Company shall mail a notice, setting forth in
general terms the substance of such supplemental indenture, to the Holders of Securities at their addresses as the
same shall then appear in the Register. Any failure of the Company to mail such notice, or any defect therein,
shall not, however, in any way impair or affect the validity of any such supplemental indenture.
Section 14.03 Trustee Protected. Upon the request of the Company, accompanied by the Officers’
Certificate and Opinion of Counsel required by Section 16.01 stating that the execution of such supplemental
indenture to be entered into pursuant to Section 14.01 or Section 14.02 is authorized or permitted by this
Indenture, and evidence reasonably satisfactory to the Trustee of consent of the Holders if the supplemental
indenture is to be executed pursuant to Section 14.02, the Trustee shall join with the Company in the execution of
said supplemental indenture unless said supplemental indenture affects the Trustee’s own rights, duties or
immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be
obligated to, enter into said supplemental indenture. The Trustee shall be fully protected in relying upon such
Officers’ Certificate and Opinion of Counsel.
Section 14.04 Effect of Execution of Supplemental Indenture. Upon the execution of any supplemental
indenture pursuant to the provisions of this Article XIV, this Indenture shall be deemed to be modified and
amended in accordance therewith and, except as herein otherwise expressly provided, the respective rights,
limitations of rights, obligations, duties and immunities under this Indenture of the Trustee, the Company and the
Holders of all of the Securities or of the Securities of any series affected, as the case may be, shall thereafter be
determined, exercised and enforced hereunder subject in all respects to such modifications and amendments, and
all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and
conditions of this Indenture for any and all purposes.
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Section 14.05 Notation on or Exchange of Securities. Securities of any series authenticated and delivered
after the execution of any supplemental indenture pursuant to the provisions of this Article may bear a notation in
the form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company
or the Trustee shall so determine, new Securities so modified as to conform, in the opinion of the Trustee and the
Board of Directors of the Company, to any modification of this Indenture contained in any such supplemental
indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in
exchange for the Securities then Outstanding in equal aggregate principal amounts, and such exchange shall be
made without cost to the Holders of the Securities.
Section 14.06 Conformity with TIA. Every supplemental indenture executed pursuant to the provisions of
this Article shall conform to the requirements of the Trust Indenture Act as then in effect.
ARTICLE XV
SUBORDINATION OF SECURITIES
Section 15.01 Agreement to Subordinate. In the event a series of Securities is designated as subordinated
pursuant to Section 3.01, and except as otherwise provided in a Company Order, Officers’ Certificate or in one or
more indentures supplemental hereto, the Company, for itself, its successors and assigns, covenants and agrees,
and each Holder of Securities of such series by his, her or its acceptance thereof, likewise covenants and agrees,
that the payment of the principal of, premium, if any, or interest on each and all of the Securities of such series is
hereby expressly subordinated, to the extent and in the manner hereinafter set forth, in right of payment to the
prior payment in full of all Senior Indebtedness. In the event a series of Securities is not designated as
subordinated pursuant to Section 3.01(p), this Article XV shall have no effect upon such series of Securities.
Section 15.02 Distribution on Dissolution, Liquidation and Reorganization; Subrogation of Securities.
Subject to Section 15.01, upon any distribution of assets of the Company upon any dissolution, winding up,
liquidation or reorganization of the Company, whether in bankruptcy, insolvency, reorganization or receivership
proceedings or upon an assignment for the benefit of creditors or any other marshalling of the assets and liabilities
of the Company or otherwise (subject to the power of a court of competent jurisdiction to make other equitable
provision reflecting the rights conferred in this Indenture upon the Senior Indebtedness and the holders thereof
with respect to the Securities and the holders thereof by a lawful plan of reorganization under the Bankruptcy
Code or any applicable state bankruptcy laws):
(a)
the holders of all Senior Indebtedness shall be entitled to receive payment in full of the
principal, premium, if any, or interest thereon before the Holders of the Securities are entitled to receive any
payment upon the principal of, premium, if any, or interest on Indebtedness evidenced by the Securities; and
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(b)
any payment or distribution of assets of the Company of any kind or character, whether in
cash, property or securities, to which the Holders of the Securities or the Trustee would be entitled except for the
provisions of this Article XV in respect of the principal of, premium, if any, or interest, on the Securities shall be
paid by the liquidation trustee or agent or other Person making such payment or distribution, whether a trustee in
bankruptcy, a receiver or liquidating trustee or otherwise, directly to the holders of Senior Indebtedness or their
representative or representatives or to the trustee or trustees under any indenture under which any instruments
evidencing any of such Senior Indebtedness may have been issued, ratably according to the aggregate amounts
remaining unpaid on account of the principal of, premium, if any, or interest on the Senior Indebtedness held or
represented by each, to the extent necessary to make payment in full of all Senior Indebtedness remaining unpaid,
after giving effect to any concurrent payment or distribution to the holders of such Senior Indebtedness; and
(c)
in the event that, notwithstanding the foregoing, any payment or distribution of assets of the
Company of any kind or character in respect of the principal of, premium, if any, or interest on Indebtedness
evidenced by the Securities, whether in cash, property or securities prohibited by the foregoing, shall be received
by the Trustee or the Holders of the Securities before all Senior Indebtedness is paid in full, such payment or
distribution shall be paid over, upon and pursuant to the terms of a Company Order to a Responsible Officer of the
Trustee, to the holder of such Senior Indebtedness identified in such Company Order or his, her or its
representative or representatives or to the trustee or trustees under any indenture identified in such Company
Order under which any instrument evidencing any of such Senior Indebtedness may have been issued, ratably as
aforesaid, as calculated by the Company, for application to payment of all Senior Indebtedness remaining unpaid
until all such Senior Indebtedness shall have been paid in full, after giving effect to any concurrent payment or
distribution to the holders of such Senior Indebtedness.
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(d)
Subject to the payment in full of all Senior Indebtedness, the Holders of the Securities shall
be subrogated to the rights of the holders of Senior Indebtedness (to the extent that distributions otherwise payable
to such holder have been applied to the payment of Senior Indebtedness) to receive payments or distributions of
cash, property or securities of the Company applicable to Senior Indebtedness until the principal of, premium, if
any, or interest on the Securities shall be paid in full and no such payments or distributions to the Holders of the
Securities of cash, property or securities otherwise distributable to the holders of Senior Indebtedness shall, as
between the Company, its creditors other than the holders of Senior Indebtedness, and the Holders of the
Securities be deemed to be a payment by the Company to or on account of the Securities. It is understood that the
provisions of this Article XV are and are intended solely for the purpose of defining the relative rights of the
Holders of the Securities, on the one hand, and the holders of the Senior Indebtedness, on the other hand. Nothing
contained in this Article XV or elsewhere in this Indenture or in the Securities is intended to or shall impair, as
between the Company, its creditors other than the holders of Senior Indebtedness, and the Holders of the
Securities, the obligation of the Company, which is unconditional and absolute, to pay to the Holders of the
Securities the principal of, premium, if any, or interest on the Securities as and when the same shall become due
and payable in accordance with their terms, or to affect the relative rights of the Holders of the Securities and
creditors of the Company other than the holders of Senior Indebtedness, nor shall anything herein or in the
Securities prevent the Trustee or the Holder of any Security from exercising all remedies otherwise permitted by
applicable law upon default under this Indenture, subject to the rights, if any, under this Article XV of the holders
of Senior Indebtedness in respect of cash, property or securities of the Company received upon the exercise of any
such remedy. Upon any payment or distribution of assets of the Company referred to in this Article XV, the
Trustee, subject to the provisions of Section 15.05, shall be entitled to conclusively rely upon a certificate of the
liquidating trustee or agent or other person making any distribution to the Trustee for the purpose of ascertaining
the Persons entitled to participate in such distribution, the holders of Senior Indebtedness and other indebtedness
of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereof and all
other facts pertinent thereto or to this Article XV.
Section 15.03 No Payment on Securities in Event of Default on Senior Indebtedness. Subject to Section
15.01, no payment by the Company on account of principal (or premium, if any), sinking funds or interest, if any,
on the Securities shall be made at any time if: (i) a default on Senior Indebtedness exists that permits the holders
of such Senior Indebtedness to accelerate its maturity and (ii) the default is the subject of judicial proceedings or
the Company has received notice of such default. The Company may resume payments on the Securities when
full payment of amounts then due for principal (premium, if any), sinking funds and interest on Senior
Indebtedness has been made or duly provided for in money or money’s worth.
In the event that, notwithstanding the foregoing, any payment shall be received by the Trustee when such
payment is prohibited by the preceding paragraph of this Section 15.03, such payment shall be held in trust for the
benefit of, and shall be paid over or delivered to, the holders of such Senior Indebtedness or their respective
representatives, or to the trustee or trustees under any indenture pursuant to which any of such Senior
Indebtedness may have been issued, as their respective interests may appear, as calculated by the Company, but
only to the extent that the holders of such Senior Indebtedness (or their representative or representatives or a
trustee) notify the Trustee in writing within 90 calendar days of such payment of the amounts then due and owing
on such Senior Indebtedness and only the amounts specified in such notice to the Trustee shall be paid to the
holders of such Senior Indebtedness and it has received a written notice from the Company pursuant to Section
15.06 hereof that verifies the notice from the holders of the Senior Indebtedness and confirms that such payments
subject to such notice are prohibited under this Article XV and to instruct the Trustee to make the payments as
provided for in such Company Order.
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Section 15.04 Payments on Securities Permitted. Subject to Section 15.01, nothing contained in this
Indenture or in any of the Securities shall (a) affect the obligation of the Company to make, or prevent the
Company from making, at any time except as provided in Sections 15.02 and 15.03, payments of principal of (or
premium, if any) or interest, if any, on the Securities or (b) prevent the application by the Trustee of any moneys
or assets deposited with it hereunder to the payment of or on account of the principal of, premium, if any, or
interest on the Securities, unless a Responsible Officer of the Trustee shall have received (i) written notice of any
fact prohibiting the making of such payment from the Company, or (ii) from the holder of any Senior
Indebtedness or from the trustee for any such holder, together with proof satisfactory to the Trustee of such
holding of Senior Indebtedness or of the authority of such trustee, together with a Company Order confirming
such holding of Senior Indebtedness or authority of such trustee and directing the Trustee to comply with such
notice in accordance with the terms of this Article XV, more than two Business Days prior to the date fixed for
such payment.
Section 15.05 Authorization of Securityholders to Trustee to Effect Subordination. Subject to Section
15.01, each Holder of Securities by his acceptance thereof authorizes and directs the Trustee on his, her or its
behalf to take such action as may be necessary or appropriate to effectuate the subordination as provided in this
Article XV.
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Section 15.06 Notices to Trustee. The Company shall give prompt written notice to a Responsible Officer
of the Trustee of any fact known to the Company that would prohibit the making of any payment of moneys or
assets to or by the Trustee in respect of the Securities of any series pursuant to the provisions of this Article XV.
Subject to Section 15.01, notwithstanding the provisions of this Article XV or any other provisions of this
Indenture, neither the Trustee nor any Paying Agent (other than the Company) shall be charged with knowledge of
the existence of any Senior Indebtedness or of any fact which would prohibit the making of any payment of
moneys or assets to or by the Trustee or such Paying Agent, unless and until a Responsible Officer of the Trustee
shall have received (in the case of a Responsible Officer of the Trustee) either (i) written notice thereof from the
Company, or (ii) from the holder of any Senior Indebtedness or from the trustee for any such holder, together with
proof satisfactory to the Trustee of such holding of Senior Indebtedness or of the authority of such trustee,
together with a Company Order confirming such holding of Senior Indebtedness or authority of such trustee and
directing the Trustee to comply with such notice in accordance with the terms of this Article XV, and, prior to the
receipt of any such written notice, the Trustee shall be entitled in all respects conclusively to presume that no such
facts exist; provided, however, that if at least two Business Days prior to the date upon which by the terms hereof
any such moneys or assets may become payable for any purpose (including, without limitation, the payment of
either the principal of, premium, if any, or interest on any Security) a Responsible Officer of the Trustee shall not
have received with respect to such moneys or assets the notice provided for in this Section 15.06, then, anything
herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such
moneys or assets and to apply the same to the purpose for which they were received, and shall not be affected by
any notice to the contrary which may be received by it within two Business Days prior to such date. The Trustee
shall be entitled to conclusively rely on the delivery to it of a written notice by a Person representing himself to be
a holder of Senior Indebtedness (or a trustee on behalf of such holder) to establish that such a notice has been
given by a holder of Senior Indebtedness or a trustee on behalf of any such holder; provided however, the Trustee
shall not be required to act under this Article XV unless and until it has received the aforementioned Company
Order instructing it to do so. In the event that the Trustee determines in good faith that further evidence is
required with respect to the right of any Person as a holder of Senior Indebtedness to participate in any payment or
distribution pursuant to this Article XV, the Trustee may request such Person to furnish evidence to the reasonable
satisfaction of the Trustee as to the amount of Senior Indebtedness held by such Person, the extent to which such
Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such
Person under this Article XV and, if such evidence is not furnished, the Trustee may defer any payment to such
Person pending its receipt of the aforementioned Company Order and/or judicial determination as to the right of
such Person to receive such payment. The Trustee shall not incur any liability for its reliance upon any such
notice, evidence, order or other writing delivered to it hereunder that it believes to be genuine. The Trustee may
consult with legal counsel (who may be counsel for the Company) and other experts selected by it in connection
with any notice, evidence, order or other request received by it under this Article XV, and shall not be liable for
any action take or not taken by it.
Section 15.07 Trustee as Holder of Senior Indebtedness. Subject to Section 15.01, the Trustee in its
individual capacity shall be entitled to all the rights set forth in this Article XV in respect of any Senior
Indebtedness at any time held by it to the same extent as any other holder of Senior Indebtedness and nothing in
this Indenture shall be construed to deprive the Trustee of any of its rights as such holder. Nothing in this Article
XV shall apply to claims of, or payments to, the Trustee under or pursuant to Sections 7.05 or 11.01.
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Section 15.08 Modifications of Terms of Senior Indebtedness. Subject to Section 15.01, any renewal or
extension of the time of payment of any Senior Indebtedness or the exercise by the holders of Senior Indebtedness
of any of their rights under any instrument creating or evidencing Senior Indebtedness, including, without
limitation, the waiver of default thereunder, may be made or done all without notice to or assent from the Holders
of the Securities or the Trustee. No compromise, alteration, amendment, modification, extension, renewal or other
change of, or waiver, consent or other action in respect of, any liability or obligation under or in respect of, or of
any of the terms, covenants or conditions of any indenture or other instrument under which any Senior
Indebtedness is Outstanding or of such Senior Indebtedness, whether or not such release is in accordance with the
provisions of any applicable document, shall in any way alter or affect any of the provisions of this Article XV or
of the Securities relating to the subordination thereof.
Section 15.09 Reliance on Judicial Order or Certificate of Liquidating Agent. Subject to Section 15.01,
upon any payment or distribution of assets of the Company referred to in this Article XV, the Trustee and the
Holders of the Securities shall be entitled to conclusively rely upon any order or decree entered by any court of
competent jurisdiction in which such insolvency, bankruptcy, receivership, liquidation, reorganization, dissolution,
winding up or similar case or proceeding is pending, or a certificate of the trustee in bankruptcy, liquidating
trustee, custodian, receiver, assignee for the benefit of creditors, agent or other person making such payment or
distribution, delivered to the Trustee or to the Holders of Securities, for the purpose of ascertaining the Persons
entitled to participate in such payment or distribution, the holders of Senior Indebtedness and other indebtedness
of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all
other facts pertinent thereto or to this Article XV.
Section 15.10 Satisfaction and Discharge; Defeasance and Covenant Defeasance. Subject to Section
15.01, moneys and U.S. Government Obligations deposited in trust with the Trustee pursuant to and in accordance
with Article XII and not, at the time of such deposit, prohibited to be deposited under Sections 15.02 or 15.03
shall not be subject to this Article XV.
Section 15.11 Trustee Not Fiduciary for Holders of Senior Indebtedness. With respect to the holders of
Senior Indebtedness, the Trustee undertakes to perform or observe only such of its covenants and obligations as
are specifically set forth in this Article XV, and no implied covenants or obligations with respect to the holders of
Senior Indebtedness shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe
any fiduciary duty to the holders of Senior Indebtedness. The Trustee shall not be liable to any such holder if it
shall pay over or distribute to or on behalf of Holders of Securities or the Company, or any other Person, moneys
or assets to which any holder of Senior Indebtedness shall be entitled by virtue of this Article XV or otherwise.
For the avoidance of doubt, (i) when acting under this Article, the Trustee shall have all of the rights, benefits,
privileges, protections and indemnities provided to the Trustee under Article 7 of this Indenture, and (ii) the
Trustee shall not have any duty to take any discretionary action or exercise any discretionary powers in acting
under this Article.
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ARTICLE XVI
MISCELLANEOUS PROVISIONS
Section 16.01 Certificates and Opinions as to Conditions Precedent.
(a)
Upon any request or application by the Company to the Trustee to take any action under
any of the provisions of this Indenture, the Company shall furnish to the Trustee an Officers’ Certificate stating
that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been
complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent
have been complied with, except that in the case of any such application or demand as to which the furnishing of
such document is specifically required by any provision of this Indenture relating to such particular application or
request, no additional certificate or opinion need be furnished.
(b)
Each certificate or opinion provided for in this Indenture and delivered to the Trustee with
respect to compliance with a condition or covenant provided for in this Indenture (other than the certificates
provided pursuant to Section 6.05 of this Indenture) shall include (i) a statement that the Person giving such
certificate or opinion has read such covenant or condition; (ii) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions contained in such certificate or opinion are
based; (iii) a statement that, in the opinion of such Person, he or she has made such examination or investigation
as is necessary to enable such Person to express an informed view or opinion as to whether or not such covenant
or condition has been complied with; and (iv) a statement as to whether or not, in the opinion of such Person, such
condition or covenant has been complied with.
(c)
Any certificate, statement or opinion of an officer of the Company may be based, insofar as
it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer
knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with
respect to the matters upon which his or her certificate, statement or opinion is based are erroneous. Any
certificate, statement or opinion of counsel may be based, insofar as it relates to factual matters, upon a certificate,
statement or opinion of, or representations by, an officer or officers of the Company stating that the information
with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the
exercise of reasonable care should know, that the certificate, statement or opinion or representations with respect
to such matters are erroneous.
(d)
Any certificate, statement or opinion of an officer of the Company or of counsel to the
Company may be based, insofar as it relates to accounting matters, upon a certificate or opinion of, or
representations by, an accountant or firm of accountants, unless such officer or counsel, as the case may be,
knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with
respect to the accounting matters upon which his or her certificate, statement or opinion may be based are
erroneous. Any certificate or opinion of any firm of independent registered public accountants filed with the
Trustee shall contain a statement that such firm is independent.
(e)
In any case where several matters are required to be certified by, or covered by an opinion
of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only
one such Person, or that they be so certified or covered by only one document, but one such Person may certify or
give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such
Person may certify or give an opinion as to such matters in one or several documents.
71
(f)
Where any Person is required to make, give or execute two or more applications, requests,
consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be
consolidated and form one instrument.
Section 16.02 Trust Indenture Act Controls. If and to the extent that any provision of this Indenture
limits, qualifies or conflicts with the duties imposed by, or with a provision included in this Indenture which is
required to be included in this Indenture by any of the provisions of Sections 310 to 318, inclusive, of, the TIA,
such imposed duties or incorporated provision shall control.
Section 16.03 Notices to the Company and Trustee. Any notice or demand authorized or permitted by this
Indenture to be made upon, given or furnished to, or filed with, the Company or the Trustee shall be sufficiently
made, given, furnished or filed for all purposes if it shall be mailed, by regular mail or overnight courier, delivered
or faxed to:
(a)
the Company, at Pinduoduo Inc., 28/F, No. 533 Loushanguan Road, Changning District,
Shanghai, 200051, People’s Republic of China, or at such other address or facsimile number as may have been
furnished in writing to the Trustee by the Company.
(b)
the Trustee, at the Corporate Trust Office, Attention: Agency and Trust – Pinduoduo Inc.
Any such notice, demand or other document shall be in the English language. Anything herein to the
contrary notwithstanding, no such notice or demand shall be effective as to the Trustee unless it is actually
received by the Trustee at its Corporate Trust Office.
The Trustee and the Agents agree to accept and act upon instructions or directions pursuant to this
Indenture sent by unsecured e-mail, pdf, facsimile transmission or other similar unsecured electronic methods;
provided, however, that the Trustee and the Agents shall have received an incumbency certificate listing persons
designated to give such instructions or directions and containing specimen signatures of such designated persons,
which such incumbency certificate shall be amended and replaced whenever a person is to be added or deleted
from the listing. If the Company elects to give the Trustee and the Agents e-mail or facsimile instructions (or
instructions by a similar electronic method), the Trustee’s and the Agents’ understanding of such instructions shall
be deemed controlling. The Trustee and the Agents shall have no duty or obligation to verify or confirm that the
person who sent such instructions or directions is, in fact, a person authorized to give instructions or directions on
behalf of the Company (other than to verify that the signature on a pdf or facsimile transmission is the signature of
a person authorized to give instructions and directions on behalf of the Company). The Trustee and the Agents
shall not be liable for any losses, liabilities, costs or expenses arising directly or indirectly from the Trustee’s and
the Agents’ reliance upon and compliance with such instructions notwithstanding such instructions conflict or are
inconsistent with a subsequent written instruction. The Company agrees to assume all risks arising out of the use
of such electronic methods to submit instructions and directions to the Trustee and the Agents, including without
limitation the risk of the Trustee and the Agents acting on unauthorized instructions, and the risk or interception
and misuse by third parties.
72
Facsimile, documents executed, scanned and transmitted electronically and electronic signatures, including
those created or transmitted through a software platform or application, shall be deemed original signatures for
purposes of this Indenture and all matters and agreements related thereto, with such facsimile, scanned and
electronic signatures having the same legal effect as original signatures. The parties agree that this Indenture or
any instrument, agreement or document necessary for the consummation of the transactions contemplated by this
Indenture or related hereto or thereto (including, without limitation, addendums, amendments, notices,
instructions, communications with respect to the delivery of securities or the wire transfer of funds or other
communications) (“Executed Documentation”) may be accepted, executed or agreed to through the use of an
electronic signature in accordance with applicable laws, rules and regulations in effect from time to time
applicable to the effectiveness and enforceability of electronic signatures. Any Executed Documentation
accepted, executed or agreed to in conformity with such laws, rules and regulations will be binding on all parties
hereto to the same extent as if it were physically executed and each party hereby consents to the use of any third
party electronic signature capture service providers as may be reasonably chosen by a signatory hereto or thereto.
When the Trustee or an Agent acts on any Executed Documentation sent by electronic transmission, the Trustee or
Agent will not be responsible or liable for any losses, costs or expenses arising directly or indirectly from its
reliance upon and compliance with such Executed Documentation, notwithstanding that such Executed
Documentation (a) may not be an authorized or authentic communication of the party involved or in the form such
party sent or intended to send (whether due to fraud, distortion or otherwise) or (b) may conflict with, or be
inconsistent with, a subsequent written instruction or communication; it being understood and agreed that the
Trustee and each Agent shall conclusively presume that Executed Documentation that purports to have been sent
by an authorized officer of a Person has been sent by an authorized officer of such Person. The party providing
Executed Documentation through electronic transmission or otherwise with electronic signatures agrees to assume
all risks arising out of such electronic methods, including, without limitation, the risk of the Trustee or an Agent
acting on unauthorized instructions and the risk of interception and misuse by third parties (subject to negligence
or willful misconduct on the part of the Trustee or Agent).
Section 16.04 Notices to Securityholders; Waiver. Any notice required or permitted to be given to
Securityholders shall be sufficiently given (unless otherwise herein expressly provided), if to Holders, if given in
writing by first class mail, postage prepaid, to such Holders at their addresses as the same shall appear on the
Register.
(a)
In the event of suspension of regular mail service or by reason of any other cause it shall be
impracticable to give notice by mail, then such notification as shall be given with the approval of the Trustee shall
constitute sufficient notice for every purpose hereunder.
(b) Where this Indenture provides for notice in any manner, such notice may be waived in
writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the
equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be
a condition precedent to the validity of any action taken in reliance on such waiver. In any case where notice to
Holders is given by mail, neither the failure to mail such notice nor any defect in any notice so mailed to any
particular Holder shall affect the sufficiency of such notice with respect to other Holders, and any notice that is
mailed in the manner herein provided shall be conclusively presumed to have been duly given. In any case where
notice to Holders is given by publication, any defect in any notice so published as to any particular Holder shall
not affect the sufficiency of such notice with respect to other Holders, and any notice that is published in the
manner herein provided shall be conclusively presumed to have been duly given.
73
Section 16.05 Legal Holiday. Unless otherwise specified pursuant to Section 3.01, in any case where any
Interest Payment Date, Redemption Date or Maturity of any Security of any series shall not be a Business Day at
any Place of Payment for the Securities of that series, then payment of principal and premium, if any, or interest
need not be made at such Place of Payment on such date, but may be made on the next succeeding Business Day
at such Place of Payment with the same force and effect as if made on such Interest Payment Date, Redemption
Date or Maturity and no interest shall accrue on such payment for the period from and after such Interest Payment
Date, Redemption Date or Maturity, as the case may be, to such Business Day if such payment is made or duly
provided for on such Business Day.
Section 16.06 Judgment Currency. To the fullest extent permitted by law, the obligations of the Company
to any Holder under this Indenture or the Securities of any series, as the case may be, shall, notwithstanding any
judgment in a currency (the “Judgment Currency”) other than U.S. Dollars, be discharged only to the extent that
on the Business Day following receipt by such Holder or the Trustee, as the case may be, of any amount in the
Judgment Currency, such Holder or the Trustee, as the case may be, may in accordance with normal banking
procedures purchase the U.S. Dollars with the Judgment Currency. If the amount of U.S. Dollars so purchased is
less than the amount originally to be paid to such Holder or the Trustee, as the case may be, in U.S. Dollars, the
Company agrees, as a separate obligation and notwithstanding such judgment, to pay the difference, and if the
amount of U.S. Dollars so purchased exceeds the amount originally to be paid to such Holder, such Holder or the
Trustee, as the case may be, agrees to pay to or for the account of the Company such excess; provided that such
Holder shall not have any obligation to pay any such excess as long as a Default by the Company in its obligations
under this Indenture or such series of Securities has occurred and is continuing, in which case such excess may be
applied by such Holder to such obligations. In the event the Trustee is required or requested to make such
purchases of U.S. Dollars with the Judgment Currency, the Trustee will in good faith select a recognized banking
institution in The City of New York through which the Trustee will purchase the U.S. Dollars with the Judgment
Currency; provided that the Trustee will not be liable for any losses or shortfalls in amounts so paid as a result of
the foreign exchange rate applied by such banking institution to such purchases of the U.S. Dollars with the
Judgment Currency in accordance with normal banking procedures.
Section 16.07 Effects of Headings and Table of Contents. The Article and Section headings herein and
the Table of Contents are for convenience only and shall not affect the construction hereof.
Section 16.08 Successors and Assigns. All covenants and agreements in this Indenture by the parties
hereto shall bind their respective successors and assigns and inure to the benefit of their permitted successors and
assigns, whether so expressed or not.
Section 16.09 Severability. If any provision hereof shall be held to be invalid, illegal or unenforceable
under applicable law, then the remaining provisions hereof shall be construed as though such invalid, illegal or
unenforceable provision were not contained herein.
Section 16.10 Benefits of Indenture. Nothing in this Indenture expressed and nothing that may be implied
from any of the provisions hereof is intended, or shall be construed, to confer upon, or to give to, any Person other
than the parties hereto and their successors and the Holders of the Securities any benefit or any right, remedy or
claim under or by reason of this Indenture or any covenant, condition, stipulation, promise or agreement hereof,
and all covenants, conditions, stipulations, promises and agreements in this Indenture contained shall be for the
sole and exclusive benefit of the parties hereto and their successors and of the Holders of the Securities.
74
Section 16.11 Counterparts. This Indenture may be executed in any number of counterparts, each of
which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and
the same instrument.
Section 16.12 Governing Law; Waiver of Trial by Jury. This Indenture and the Securities shall be deemed
to be contracts made under the law of the State of New York, and for all purposes shall be governed by and
construed in accordance with the law of said State.
EACH OF THE COMPANY AND THE TRUSTEE HEREBY WAIVES, TO THE FULLEST EXTENT
PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT
OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION
WITH THIS INDENTURE.
Section 16.13 Submission to Jurisdiction. The Company irrevocably and unconditionally submits to the
non-exclusive jurisdiction of any U.S. federal or New York State court located in the Borough of Manhattan, The
City of New York over any suit, action or proceeding arising out of or relating to this Indenture or the Securities.
Service of any process, summons, notice or document by registered mail addressed to the Company’s agent,
Cogency Global Inc., at the address 122 East 42nd Street, 18th Floor, New York, NY 10168, shall be effective
service of process against the Company for any suit, action or proceeding brought in any such court. The
Company irrevocably and unconditionally waives, to the fullest extent permitted by applicable law, any objection
to the laying of venue of any such suit, action or proceeding brought in any such court and any claim that any such
suit, action or proceeding has been brought in an inconvenient forum. A final judgment in any such suit, action or
proceeding brought in any such court shall be conclusive and binding upon the Company and may be enforced in
any other courts to whose jurisdiction the Company is or may be subject, by suit upon judgment. The Company
further agrees that nothing herein shall affect any Holder’s right to effect service of process in any other manner
permitted by law or bring a suit action or proceeding (including a proceeding for enforcement of a judgment) in
any other court or jurisdiction in accordance with applicable law.
Section 16.14 Waiver of Immunity. To the extent that the Company or any of its properties, assets or
revenues may have or may hereafter become entitled to, or have attributed to each of the Company, any right of
immunity, on the grounds of sovereignty or otherwise, from any legal action, suit or proceeding, from the giving
of any relief in any such legal action, suit or proceeding, from setoff or counterclaim, from the jurisdiction of any
Cayman Islands, PRC, New York state or U.S. federal court, from service of process, from attachment upon or
prior to judgment, from attachment in aid of execution of judgment, or from execution of judgment, or other legal
process or proceeding for the giving of any relief or for the enforcement of any judgment, in any such court in
which proceedings may at any time be commenced, with respect to the obligations and liabilities of the Company
or any other matter under or arising out of or in connection with this Indenture, the Company hereby irrevocably
and unconditionally waives or will waive such right to the extent permitted by applicable law, and agree not to
plead or claim, any such immunity and consent to such relief and enforcement.
Section 16.15 Force Majeure. In no event shall the Trustee be responsible or liable for any failure or
delay in the performance of its obligations hereunder arising out of or caused by, directly or indirectly, forces
beyond its control, including, without limitation, strikes, work stoppages, accidents, acts of war or terrorism, civil
or military disturbances, nuclear or natural catastrophes or acts of God, and interruptions, loss or malfunctions of
utilities, communications or computer (software and hardware) services; it being understood that the Trustee shall
use reasonable efforts which are consistent with accepted practices in the banking industry to resume performance
as soon as practicable under the circumstances.
75
Section 16.16. USA PATRIOT ACT.In order to comply with the laws, rules, regulations and executive
orders in effect from time to time applicable to banking institutions, including, without limitation, those relating to
the funding of terrorist activities and money laundering, including Section 326 of the USA PATRIOT Act of the
United States, the Trustee is required to obtain, verify, record and update certain information relating to
individuals and entities which maintain a business relationship with the Trustee. Accordingly, each of the parties
to this Indenture agrees to provide to the Trustee, upon its request from time to time, such identifying information
and documentation as may be available for such party in order to enable the Trustee to comply with the USA
PATRIOT Act.
[Signatures on following page]
76
IN WITNESS WHEREOF, the parties have caused this Indenture to be duly executed as of the date first
written above.
PINDUODUO INC.,
as Company
By:/s/ Lei Chen
Name: Lei Chen
Title: Chief Executive Officer
DEUTSCHE BANK TRUST COMPANY
AMERICAS,
as Trustee
By:/s/ Bridgette Casasnovas
Name: Bridgette Casasnovas
Title: Vice President
By:/s/ Robert Peschler
Name: Robert Peschler
Title: Vice President
EXHIBIT A
FORM OF SECURITY
FACE OF NOTE
[For Inclusion in a Global Security only -- UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN
PART FOR THE INDIVIDUAL SECURITIES REPRESENTED HEREBY, THIS GLOBAL SECURITY MAY
NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE
DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER
NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A
SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY.]
PINDUODUO INC.
___% Note Due _________
PRINCIPAL AMOUNT: _________
CUSIP: ___________
No.: ___________
Pinduoduo Inc., an exempted company incorporated in the Cayman Islands (the “Company,” which
term includes any successor thereto under the Indenture referred to on the reverse hereof), for value received,
hereby promises to pay to ___________, or registered assigns, the principal sum of __________________
(_____) (or such other principal amount as shall be set forth in the Schedule of Increases or Decreases in Note
attached hereto) on _____________, or on such earlier date as the principal hereof may become due in accordance
with the provisions of this Note.
Interest Rate: ___________% per annum.
Interest Payment Dates: ___________ and ___________ of each year, commencing on
___________.
Interest Record Dates: ___________ and ___________.
Reference is made to the further provisions of this Note set forth on the reverse hereof. Such
further provisions shall for all purposes have the same effect as though fully set forth at this place.
This Note shall not be valid or become obligatory for any purpose until the certificate of
authentication hereon shall have been manually signed by the Trustee under the Indenture referred to on the
reverse hereof.
A-2
IN WITNESS WHEREOF, the Company has caused this Note to be duly executed.
PINDUODUO INC.
By:
Name:
Title:
Dated:
TRUSTEE’S CERTIFICATE OF AUTHENTICATION
DEUTSCHE BANK TRUST COMPANY AMERICAS,
as Trustee, certifies that this is one of the Notes described
in the within-named Indenture.
By:
Authorized Officer
A-3
REVERSE OF NOTE
PINDUODUO INC.
___% Note Due _____
This Note is one of a duly authorized issue of debt securities of the Company of the series designated as
the “___% Note due _____” (the “Notes”), all issued or to be issued under and pursuant to an Indenture, dated as
of November 20, 2020 (the “Base Indenture”), duly executed and delivered by and between the Company and
Deutsche Bank Trust Company Americas, as trustee (the “Trustee,” which term includes any successor trustee)[,
as supplemented by the Supplemental Indenture, dated as of _________ (the “Supplemental Indenture”), duly
executed and delivered by and between the Company and the Trustee]. The Base Indenture [as supplemented and
amended by the Supplemental Indenture] is referred to herein as the “Indenture”. Capitalized terms used herein
and not otherwise defined shall have the meanings given them in the Indenture.
1. Interest. The Company promises to pay interest on the principal amount of this Note at a rate of ___%
per annum. The Company will pay interest semi-annually on _____ and _____ of each year. If a payment date is
not a Business Day as defined in the Indenture at a Place of Payment, payment may be made at that place on the
next succeeding day that is a Business Day, and no interest shall accrue for the intervening period. Interest shall
be computed on the basis of a 360-day year of twelve 30-day months.
2. Method of Payment. The Company shall pay interest on the Notes (except Defaulted Interest), if any, to
the Persons in whose name such Notes are registered at the close of business on the Record Date referred to on the
face of this Note for such interest installment. In the event that the Notes or a portion thereof are called for
redemption, and the Redemption Date is subsequent to a Record Date with respect to any Interest Payment Date
and prior to such Interest Payment Date, interest on such Notes will instead be paid upon presentation and
surrender of such Notes as provided in the Indenture. Payment of interest on the Notes shall be made, in the
currency of the United States of America that at the time is legal tender for payment of public and private debts, at
the Corporate Trust Office or, at the option of the Company, by check mailed to the address of the Person entitled
thereto as such address shall appear in the Register or, in accordance with arrangements satisfactory to the Trustee,
by wire transfer to an account designated by the Holder.
3. Paying Agent and Registrar. Initially, Deutsche Bank Trust Company Americas, will act as Paying
Agent and Registrar. The Company may change or appoint any Paying Agent or Registrar without notice to any
Noteholder. The Company may act in any such capacity.
4. Indenture. The terms of the Notes include those stated in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939 (“TIA”) as in effect on the date the Indenture is
qualified. The Notes are subject to all such terms, and Noteholders are referred to the Indenture and TIA for a
statement of such terms. The Notes are unsecured general obligations of the Company and constitute the series
designated on the face of this Note as the “___% Note due _____,” initially limited to US$_________ in
aggregate principal amount. The Company will furnish to any Noteholder upon written request and without
charge a copy of the Base Indenture [and the Supplemental Indenture]. Requests may be made to: 28/F, No. 533
Loushanguan Road, Changning District, Shanghai, 200051, People’s Republic of China.
A-4
5. Redemption and Repurchase. [The Notes are subject to optional redemption, and may be the subject of
a mandatory redemption or offer to purchase, as further described in the Indenture.] [The Company shall not be
required to make mandatory redemption or sinking fund payments with respect to the Notes.]
6. Denominations, Transfer, Exchange. The Notes are in registered form without coupons in the
denominations of US$______ or any integral multiple of US$1,000 in excess thereof. The transfer of Notes may
be registered and Notes may be exchanged as provided in the Indenture. The Notes may be presented for
exchange or for registration of transfer (duly endorsed or with the form of transfer endorsed thereon duly executed
if so required by the Company or the Registrar) at the office of the Registrar or at the office of any transfer agent
designated by the Company for such purpose. The Company need not exchange or register the transfer of any
Note or portion of a Note selected for redemption, except for the unredeemed portion of any Note being redeemed
in part.
7. Persons Deemed Owners. The registered Noteholder may be treated as its owner for all purposes.
8. Amendments, Supplements and Waivers. The Indenture and the Notes may be amended or
supplemented as provided in the Indenture. Any consent or waiver by the Noteholders as provided in the
Indenture shall be conclusive and binding upon such Holders and upon all future Noteholders and holders of any
security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not
notation of such consent or waiver is made upon the Notes.
9. Defaults and Remedies. The Events of Default relating to the Notes are defined in Section 7.01 of the
Base Indenture. Upon the occurrence of an Event of Default, the rights and obligations of the Company, the
Trustee and the Noteholders shall be as set forth in the applicable provisions of the Indenture.
10. No Recourse Against Others. No recourse under or upon any obligation, covenant or agreement
contained in the Indenture or the Notes, or because of any indebtedness evidenced thereby, shall be had against
any incorporator as such, or against any past, present or future stockholder, officer, director or employee, as such,
of the Company or of any successor, either directly or through the Company or any successor, under any rule of
law, statute or constitutional provision or by the enforcement of any assessment or by any legal or equitable
proceeding or otherwise, all such liability being expressly waived and released by the acceptance hereof and as
part of the consideration for the issue hereof.
11. Authentication. This Note shall not be entitled to any benefit under the Indenture or be valid or
obligatory for any purpose until authenticated by the manual signature of the Trustee.
12. Governing Law. The Base Indenture, the Supplemental Indenture and this Note shall be deemed to be
contracts made under the law of the State of New York, and for all purposes shall be governed by and construed in
accordance with the law of said State.
A-5
FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and transfer(s) unto
[PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE]
ASSIGNMENT
[PLEASE PRINT OR TYPE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE]
the within Note and all rights thereunder, hereby irrevocably constituting and appointing
____________________________________________________________ Attorney to transfer such Note on the
books of the Company, with full power of substitution in the premises.
Signature:
Dated:
NOTICE: The signature to this assignment
must correspond with the name as written upon
the face of the within Note in every particular
without alteration or enlargement or any
change whatsoever.
SIGNATURE GUARANTEE
[Signatures must be guaranteed by an “eligible guarantor institution” meeting the requirements of the
Registrar, which requirements include membership or participation in the Security Transfer Agent Medallion
Program (“STAMP”) or such other “signature guarantee program” as may be determined by the Registrar in
addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as
amended.]
A-6
SCHEDULE OF INCREASES OR DECREASES IN NOTE*
The initial principal amount of this Note is US$___________. The following increases or decreases in a
part of this Note have been made:
Amount of
decrease in
principal amount
of this Note
Amount of
increase in
principal
amount of this
Note
Principal amount
of this Note
following such
decrease (or
increase)
Signature of
authorized
signatory of
Trustee
Date
* Insert in Global Notes.
A-7
EXHIBIT B
FORM OF COMPLIANCE CERTIFICATE
This Compliance Certificate is delivered pursuant to Section 6.07 of the Indenture, dated as of [·], as
amended, supplemented or modified from time to time (the “Indenture”), between Pinduoduo Inc., an exempted
company incorporated in the Cayman Islands (the “Company”) and Deutsche Bank Trust Company Americas, as
trustee (the “Trustee”). Capitalized terms defined in the Indenture are used herein as therein defined.
The undersigned hereby certifies to the Trustee as follows:
1.
2.
3.
4.
I am the duly elected, qualified and acting [title] or [title], as the case may be, of the Company.
I have reviewed and am familiar with the contents of this Compliance Certificate.
I have reviewed the terms of the Indenture.
A review has been conducted of the activities of the Company’s performance under the Indenture,
in each case since the [Issue Date/date of last Compliance Certificate], and since the [Issue
Date/date of last Compliance Certificate] the Company has been in compliance with all conditions
and covenants under the Indenture]/[if there has been a default in the fulfillment of any obligation
under the Indenture, specifying each such default and the nature and status thereof.]
[Signature page follows]
A-1
IN WITNESS WHEREOF, the undersigned has executed this Compliance Certificate as of the date set
forth below.
PINDUODUO INC.
By:
Name:
Title:
Date: [●], 20[●]
[Signature Page to Form of Compliance Certificate]
Exhibit 2.7
Execution Version
PINDUODUO INC.
AND
DEUTSCHE BANK TRUST COMPANY AMERICAS,
as Trustee
SUPPLEMENTAL INDENTURE
Dated as of November 20, 2020
to
Indenture dated as of November 20, 2020
0.00% Convertible Senior Notes due 2025
TABLE OF CONTENTS
Article 1
DEFINITIONS
Section 1.01
Section 1.02
Section 1.03
Definitions
Rules of Construction
References to Interest
Article 2
ISSUE, DESCRIPTION, EXECUTION, REGISTRATION AND EXCHANGE OF NOTES
Section 2.01
Section 2.02
Section 2.03
Section 2.04
Section 2.05
Section 2.06
Section 2.07
Section 2.08
Section 2.09
Section 2.10
Section 2.11
Section 2.12
Scope of Supplemental Indenture
Designation and Amount
Form of Notes
Date and Denomination of Notes; No Regular Interest; Payments of Special Interest
and Defaulted Amounts
Execution, Authentication and Delivery of Notes
Exchange and Registration of Transfer of Notes; Depositary
Mutilated, Destroyed, Lost or Stolen Notes
Temporary Notes
Cancellation of Notes Paid, Converted, Etc
CUSIP Numbers
Additional Notes; Repurchases
Appointment of Authenticating Agent
Article 3
SATISFACTION AND DISCHARGE
Section 3.01
Section 3.02
Applicability of Article XII of the Base Indenture
Satisfaction and Discharge
Article 4
PARTICULAR COVENANTS OF THE COMPANY
Section 4.01
Section 4.02
Section 4.03
Section 4.04
Section 4.05
Section 4.06
Section 4.07
Section 4.08
Section 4.09
Section 4.10
Payment of Principal and Special Interest
Maintenance of Office or Agency
Appointments to Fill Vacancies in Trustee’s Office
Provisions as to Paying Agent
Existence
Reports
Additional Amounts
Stay, Extension and Usury Laws
Compliance Certificate; Statements as to Defaults
Further Instruments and Acts
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Article 5
LISTS OF HOLDERS AND REPORTS BY THE COMPANY AND THE TRUSTEE
Section 5.01
Section 5.02
Lists of Holders
Preservation and Disclosure of Lists
Article 6
DEFAULTS AND REMEDIES
Applicability of Article VII of the Base Indenture
Events of Default
Acceleration; Rescission and Annulment
Special Interest
Payments of Notes on Default; Suit Therefor
Application of Monies Collected by Trustee
Proceedings by Holders
Proceedings by Trustee
Remedies Cumulative and Continuing
Direction of Proceedings and Waiver of Defaults by Majority of Holders
Notice of Defaults and Events of Default
Undertaking to Pay Costs
Article 7
CONCERNING THE TRUSTEE
Applicability of Article XI of the Base Indenture
Duties and Responsibilities of Trustee
Reliance on Documents, Opinions, Etc
No Responsibility for Recitals, Etc
Trustee, Paying Agents, Conversion Agents, Bid Solicitation Agent or Note Registrar
May Own Notes
Monies and ADSs to Be Held in Trust
Compensation and Expenses of Trustee
Officer’s Certificate as Evidence
Eligibility of Trustee
Resignation or Removal of Trustee
Acceptance by Successor Trustee
Succession by Merger, Etc
Trustee’s Application for Instructions from the Company
Section 6.01
Section 6.02
Section 6.03
Section 6.04
Section 6.05
Section 6.06
Section 6.07
Section 6.08
Section 6.09
Section 6.10
Section 6.11
Section 6.12
Section 7.01
Section 7.02
Section 7.03
Section 7.04
Section 7.05
Section 7.06
Section 7.07
Section 7.08
Section 7.09
Section 7.10
Section 7.11
Section 7.12
Section 7.13
Article 8
CONCERNING THE HOLDERS
Section 8.01
Section 8.02
Section 8.03
Action by Holders
Proof of Execution by Holders
Who Are Deemed Absolute Owners
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ii
Section 8.04
Section 8.05
Company-Owned Notes Disregarded
Revocation of Consents; Future Holders Bound
Article 9
HOLDERS’ MEETINGS
Section 9.01
Section 9.02
Section 9.03
Section 9.04
Section 9.05
Section 9.06
Section 9.07
Section 9.08
Applicability of Article IX
Purpose of Meetings
Call of Meetings by Trustee
Call of Meetings by Company or Holders
Qualifications for Voting
Regulations
Voting
No Delay of Rights by Meeting
Article 10
SUPPLEMENTAL INDENTURES
Section 10.01
Section 10.02
Section 10.03
Section 10.04
Section 10.05
Section 10.06
Section 10.07
Applicability of Article XIV of the Base Indenture
Supplemental Indentures Without Consent of Holders
Supplemental Indentures with Consent of Holders
Supplemental Indenture in respect of Fundamental Change
Effect of Supplemental Indentures
Notation on Notes
Evidence of Compliance of Supplemental Indenture to Be Furnished Trustee
Article 11
CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE
Section 11.01
Section 11.02
Section 11.03
Section 11.04
Applicability of Section 6.04 of the Base Indenture
Company May Consolidate, Etc. on Certain Terms
Successor Corporation to Be Substituted
Opinion of Counsel to Be Given to Trustee
Article 12
INTENTIONALLY OMITTED
Article 13
INTENTIONALLY OMITTED
Article 14
CONVERSION OF NOTES
Section 14.01
Section 14.02
Conversion Privilege
Conversion Procedure; Settlement Upon Conversion
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Section 14.03
Section 14.04
Section 14.05
Section 14.06
Section 14.07
Section 14.08
Section 14.09
Section 14.10
Section 14.11
Section 14.12
Section 14.13
Section 14.14
Increased Conversion Rate Applicable to Certain Notes Surrendered in Connection
with Make-Whole Fundamental Changes
Adjustment of Conversion Rate
Adjustments of Prices
Class A Ordinary Shares to Be Fully Paid
Effect of Recapitalizations, Reclassifications and Changes of the Class A Ordinary
Shares
Certain Covenants
Responsibility of Trustee
Notice to Holders Prior to Certain Actions. In case of any
Stockholder Rights Plans
Limit on Issuance of ADSs Upon Conversion
Termination of Depositary Receipt Program
Exchange In Lieu Of Conversion
Article 15
REPURCHASE OF NOTES AT OPTION OF HOLDERS
Section 15.01
Section 15.02
Section 15.03
Section 15.04
Section 15.05
Repurchase at Option of Holders
Repurchase at Option of Holders Upon a Fundamental Change
Withdrawal of Repurchase Notice or Fundamental Change Repurchase Notice
Deposit of Repurchase Price or Fundamental Change Repurchase Price
Covenant to Comply with Applicable Laws Upon Repurchase of Notes
Article 16
OPTIONAL REDEMPTION
Section 16.01
Section 16.02
Section 16.03
Applicability of Article IV of the Base Indenture
Optional Redemption for Changes in the Tax Law of the Relevant Taxing Jurisdiction
Optional Redemption by the Company
Article 17
MISCELLANEOUS PROVISIONS
Section 17.01
Section 17.02
Section 17.03
Section 17.04
Section 17.05
Section 17.06
Section 17.07
Provisions Binding on Company’s Successors
Official Acts by Successor Corporation
Addresses for Notices, Etc
Governing Law; Jurisdiction
Submission to Jurisdiction; Service of Process
Evidence of Compliance with Conditions Precedent; Certificates and Opinions of
Counsel to Trustee
Legal Holidays
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Section 17.08
Section 17.09
Section 17.10
Section 17.11
Section 17.12
Section 17.13
Section 17.14
Section 17.15
Section 17.16
Section 17.17
Section 17.18
Section 17.19
No Security Interest Created
Benefits of Indenture
Table of Contents, Headings, Etc
Execution in Counterparts
Severability
Waiver of Jury Trial
Force Majeure
Calculations
USA PATRIOT Act
Ratification of the Base Indenture
Trust Indenture Act Controls
Base Indenture Provisions
Exhibit A
Form of Note
EXHIBIT
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A-1
SUPPLEMENTAL INDENTURE dated as of November 20, 2020 (this “Supplemental Indenture”)
between PINDUODUO INC., a Cayman Islands exempted company, as issuer (the “Company,” as more fully set
forth in Section 1.01) and DEUTSCHE BANK TRUST COMPANY AMERICAS, a New York banking
corporation, as trustee (the “Trustee,” as more fully set forth in Section 1.01), supplementing the Indenture dated
as of November November 20, 2020 between the Company and the Trustee (the “Base Indenture” and the Base
Indenture, as amended and supplemented by this Supplemental Indenture, and as it may be further amended or
supplemented from time to time with respect to the Notes, the “Indenture”).
W I T N E S S E T H:
WHEREAS, the Company executed and delivered the Base Indenture to the Trustee to provide, among
other things, for the issuance, from time to time, of the Company’s Securities, in an unlimited aggregate principal
amount, in one or more series to be established by the Company under, and authenticated and delivered as
provided in, the Base Indenture;
WHEREAS, Section 3.01 of the Base Indenture provides for the Company to issue Securities thereunder
in the form and on the terms set forth in one or more Company Orders (as defined in the Base Indenture) and
Officers’ Certificates (as defined in the Base Indenture) or indentures supplemental thereto;
WHEREAS, for its lawful corporate purposes, the Company has duly authorized the issuance of its 0.00%
Convertible Senior Notes due 2025 (the “Notes”), initially in an aggregate principal amount not to exceed
US$2,000,000,000, and in order to provide the terms and conditions upon which the Notes are to be authenticated,
issued and delivered, the Company has duly authorized the execution and delivery of this Supplemental Indenture;
and
WHEREAS, the Form of Note, the certificate of authentication to be borne by each Note, the Form of
Notice of Conversion, the Form of Fundamental Change Repurchase Notice, the Form of Repurchase Notice and
the Form of Assignment and Transfer to be borne by the Notes are to be substantially in the forms hereinafter
provided; and
WHEREAS, all acts and things necessary to make the Notes, when executed by the Company and
authenticated and delivered by the Trustee, as in the Indenture provided, the valid, binding and legal obligations of
the Company, and the Indenture a valid agreement according to its terms, have been done and performed, and the
execution of the Indenture and the issuance hereunder of the Notes have in all respects been duly authorized.
NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE WITNESSETH:
That in order to declare the terms and conditions upon which the Notes are, and are to be, authenticated,
issued and delivered, and in consideration of the premises and of the purchase and acceptance of the Notes by the
Holders thereof, the Company covenants and agrees with the Trustee for the equal and proportionate benefit of the
respective Holders from time to time of the Notes (except as otherwise provided below), as follows:
ARTICLE 1
DEFINITIONS
Section 1.01 Definitions. For all purposes of the Indenture, except as otherwise expressly provided or
unless the context otherwise requires:
(a)
all words, terms and phrases defined in the Base Indenture (but not otherwise defined herein) shall
have the same meanings as in the Base Indenture;
(b)
the words “herein,” “hereof” and “hereunder” and other words of similar import (i) when used with
regard to any specified Article, Section or sub-division, refer to such Article, Section or sub-division of the
Indenture and (ii) otherwise, refer to the Indenture as a whole and not to any particular Article, Section or other
subdivision. The term “or” is not exclusive;
(c)
references to “Sections” and “Articles” are to the Sections and Articles of this Supplemental Indenture;
and
(d)
the terms defined in this Article 1 shall have the respective meanings assigned to them in this Article 1
and include the plural as well as the singular and, to the extent applicable, supersede the definitions thereof in the
Base Indenture:
“Additional ADSs” shall have the meaning specified in Section 14.03(a).
“Additional Amounts” shall have the meaning specified in Section 4.07(a), notwithstanding anything in
the Base Indenture to the contrary.
“ADS” means an American Depositary Share, issued by the ADS Depositary pursuant to the Deposit
Agreement, representing four Class A Ordinary Shares of the Company as of the date of the Prospectus
Supplement.
“ADS Depositary” means Deutsche Bank Trust Company Americas, as depositary for the ADSs, or any
successor entity thereto.
“ADS Price” shall have the meaning specified in Section 14.03(c).
“Agent Parties” shall have the meaning specified in Section 7.03(l).
“Agents” means the Paying Agent, the Transfer Agent, the Note Registrar, the Conversion Agent and the
Bid Solicitation Agent, in each case, unless the Company is acting in such capacity.
“Applicable PRC Rate” means (i) in the case of deduction or withholding of PRC income tax, 10%, (ii)
in the case of deduction or withholding of PRC value added tax (including any related local levies), 6.72%, or (iii)
in the case of deduction or withholding of both PRC income tax and PRC value added tax (including any related
local levies), 16.72%.
“Authenticating Agent” shall have the meaning specified in Section 2.11.
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“Base Indenture” has the meaning specified in the first paragraph of this Supplemental Indenture.
“Bid Solicitation Agent” means the Company or any Person appointed by the Company to solicit bids for
the Trading Price in accordance with Section 14.01(b)(i). The Company shall initially act as the Bid Solicitation
Agent.
“Business Day” means, with respect to any Note, each Monday, Tuesday, Wednesday, Thursday and
Friday that is not a day on which banking institutions in the State of New York or the Cayman Islands are
authorized or obligated by law or executive order to close, notwithstanding anything in the Base Indenture to the
contrary.
“Cash Settlement” shall have the meaning specified in Section 14.02(a).
“Change in Law” shall have the meaning specified in clause (e) of the definition of “Fundamental
Change” below.
“Change in Tax Law” shall have the meaning specified in Section 16.02(b).
“Class A Ordinary Shares” means the Class A ordinary shares of the Company, par value US$0.000005
per share, at the date of the Prospectus Supplement, subject to Section 14.07.
“Class B Ordinary Shares” means the Class B ordinary shares of the Company, par value US$0.000005
per share, at the date of the Prospectus Supplement, subject to Section 14.07.
“Clause A Distribution” shall have the meaning specified in Section 14.04(c).
“Clause B Distribution” shall have the meaning specified in Section 14.04(c).
“Clause C Distribution” shall have the meaning specified in Section 14.04(c).
“close of business” means 5:00 p.m. (New York City time).
“Combination Settlement” shall have the meaning specified in Section 14.02(a).
“Commission” means the U.S. Securities and Exchange Commission.
“Common Equity” of any Person means Capital Stock of such Person that is generally entitled (a) to vote
in the election of directors of such Person or (b) if such Person is not a corporation, to vote or otherwise
participate in the selection of the governing body, partners, managers or others that will control the management
or policies of such Person.
“Company” shall have the meaning specified in the first paragraph of this Supplemental Indenture, and
subject to the provisions of Article 11, shall include its successors and assigns.
“Company Group” shall have the meaning specified in clause (e) of the definition of “Fundamental
Change” below.
3
“Company Notice” shall have the meaning specified in Section 15.01(a). “Conversion Agent” means
Deutsche Bank Trust Company Americas, the conversion agent with respect to the Notes and shall also include
any successor conversion agent.
“Conversion Consideration” shall have the meaning specified in Section 14.14(a).
“Conversion Date” shall have the meaning specified in Section 14.02(c).
“Conversion Obligation” shall have the meaning specified in Section 14.01(a).
“Conversion Price” means as of any time, US$1,000, divided by the Conversion Rate as of such time.
“Conversion Rate” shall have the meaning specified in Section 14.01(a).
“Corporate Trust Office” means the designated office of the Trustee at which at any time this
Supplemental Indenture shall be administered, which office at the date hereof is located at 60 Wall Street, 24th
Floor, New York, New York, 10005, Attention: Global Transaction Banking – Pinduoduo, or such other address as
the Trustee may designate from time to time by notice to the Holders and the Company, or the designated
corporate trust office of any successor trustee (or such other address as such successor trustee may designate from
time to time by notice to the Holders and the Company).
“Daily Conversion Value” means, for each of the 40 consecutive Trading Days during the Observation
Period, 2.5% of the product of (a) the Conversion Rate on such Trading Day and (b) the Daily VWAP for such
Trading Day.
“Daily Measurement Value” means the Specified Dollar Amount (if any), divided by 40.
“Daily Settlement Amount,” for each of the 40 consecutive Trading Days during the Observation Period,
shall consist of:
(a)
cash in an amount equal to the lesser of (i) the Daily Measurement Value and (ii) the Daily
Conversion Value on such Trading Day; and
(b)
if the Daily Conversion Value on such Trading Day exceeds the Daily Measurement Value,
a number of ADSs equal to (i) the difference between the Daily Conversion Value and the Daily
Measurement Value, divided by (ii) the Daily VWAP for such Trading Day.
“Daily VWAP” means, for each of the 40 consecutive Trading Days during the relevant Observation
Period, the per ADS volume-weighted average price as displayed under the heading “Bloomberg VWAP” on
Bloomberg page “PDD
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