PDD Holdings
Annual Report 2021

Plain-text annual report

Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549FORM 20-F(Mark One)☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934OR☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2021.OR☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to OR☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934Date of event requiring this shell company reportFor the transition period from to Commission file number: 001-38591Pinduoduo 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 ZhuTel: +86-21-52661300Email: investor@pinduoduo.com28/F, No. 533 Loushanguan Road, Changning DistrictShanghai, 200051People’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 Ticker Symbol Name of each exchange on which registeredAmerican Depositary Shares (one American depositary share representing four Class A ordinary shares, par value US$0.000005 per share)PDDThe Nasdaq Stock Market LLC (The Nasdaq Global Select Market)Class A ordinary shares, par value US$0.000005 per share*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)Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.Table of ContentsNone(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: 5,057,542,676 Class Aordinary shares, par value US$0.000005 per share, and no Class B ordinary shares were outstanding as of December 31, 2021.Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.☒ Yes ☐ NoIf 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 of1934.☐ Yes ☒ NoIndicate 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 ☐ NoIndicate 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 thischapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ NoIndicate 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 “largeaccelerated 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 extendedtransition 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 afterApril 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 reportingunder 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 ☐☐ OtherIf “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.☐ Item 17 ☐ Item 18If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).☐ Yes ☒ No(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent tothe distribution of securities under a plan confirmed by a court.☐ Yes ☐ NoTable of ContentsiTABLE OF CONTENTSINTRODUCTION1FORWARD-LOOKING INFORMATION2Part I 3Item 1.Identity of Directors, Senior Management and Advisers3Item 2.Offer Statistics and Expected Timetable3Item 3.Key Information3Item 4.Information on the Company57Item 4A.Unresolved Staff Comments82Item 5.Operating and Financial Review and Prospects82Item 6.Directors, Senior Management and Employees97Item 7.Major Shareholders and Related Party Transactions109Item 8.Financial Information112Item 9.The Offer and Listing113Item 10.Additional Information113Item 11.Quantitative and Qualitative Disclosures about Market Risk123Item 12.Description of Securities Other than Equity Securities124Part II125Item 13.Defaults, Dividend Arrearages and Delinquencies125Item 14.Material Modifications to the Rights of Security Holders and Use of Proceeds125Item 15.Controls and Procedures125Item 16A.Audit Committee Financial Expert126Item 16B.Code of Ethics126Item 16C.Principal Accountant Fees and Services126Item 16D.Exemptions from the Listing Standards for Audit Committees126Item 16E.Purchases of Equity Securities by the Issuer and Affiliated Purchasers127Item 16F.Change in Registrant’s Certifying Accountant127Item 16G.Corporate Governance127Item 16H.Mine Safety Disclosure127Item 16I.Disclosure Regarding Foreign Jurisdictions That Prevent Inspections127Part III127Item 17.Financial Statements127Item 18.Financial Statements127Item 19.Exhibits127Table of Contents1INTRODUCTIONUnless 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) throughsocial networks or access points in that period, regardless of whether the products and services are actually sold, delivered orreturned;●“active merchants” in a given period are to merchant accounts that had one or more orders shipped to a buyer on our Pinduoduomobile 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 activebuyers 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 whetherthe products and services are actually sold, delivered or returned. Buyers on our platform are not charged for shipping fees in additionto the listed price of merchandise. Hence, merchants may embed the shipping fees in the listed price. If embedded, then the shippingfees are included in our GMV. As a prudential matter aimed at eliminating any influence on our GMV of irregular transactions, weexclude from our calculation of GMV transactions in certain product categories over certain amounts and transactions by buyers incertain 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 doesnot 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,” “the Company,” and “our” are to Pinduoduo Inc., its subsidiaries, and, in the context ofdescribing our operations and consolidated financial information, our consolidated affiliated entities in China, including HangzhouAimi Network Technology Co., Ltd., or Hangzhou Aimi, which we refer to as our variable interest entity or VIE in this annual report,and its subsidiaries, including but not limited to Shanghai Xunmeng Information Technology Co., Ltd., or Shanghai Xunmeng;●“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$0.000005 per share;●“total orders” are to the total number of orders for products and services placed on our Pinduoduo mobile platform, regardless ofwhether the products and services are actually sold, delivered or returned; and●“US$,” “U.S. dollars,” “$,” and “dollars” are to the legal currency of the United States.Table of Contents2Our reporting currency is Renminbi because our business is mainly conducted in China and substantially all of our revenues aredenominated in Renminbi. This annual report contains translations of Renminbi amounts into U.S. dollars at specific rates solely for theconvenience of the readers. Unless otherwise noted, all translations from Renminbi to U.S. dollars and from U.S. dollars to Renminbi in this annualreport were made at a rate of RMB6.3726 to US$1.00, the exchange rate on December 30, 2021 as set forth in the H.10 statistical release of theBoard of Governors of the Federal Reserve System. We make no representation that any Renminbi or U.S. dollar amounts could have been, orcould be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all.FORWARD-LOOKING INFORMATIONThis 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 theCompany—B. Business Overview” and “Item 5. Operating and Financial Review and Prospects.” These forward-looking statements are madeunder the “safe-harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. Known and unknown risks, uncertainties and otherfactors, including those listed under “Item 3. Key Information—D. Risk Factors,” may cause our actual results, performance or achievements to bematerially 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 us, and their future development.These forward-looking statements involve various risks and uncertainties. Although we believe that our expectations expressed in theseforward-looking statements are reasonable, our expectations may later be found to be incorrect. Our actual results could be materially differentfrom our expectations. Important risks and factors that could cause our actual results to be materially different from our expectations are generallyset forth in “Item 3. Key Information—D. Risk Factors,” “Item 4. Information on the Company—B. Business Overview,” “Item 5. Operating andFinancial Review and Prospects,” and other sections in this annual report. You should read thoroughly this annual report and the documents that werefer to with the understanding that our actual future results may be materially different from and worse than what we expect. We qualify all of ourforward-looking statements by these cautionary statements.This annual report contains certain data and information that we obtained from various government and private publications. We have notindependently verified the accuracy or completeness of the data contained in these industry publications and reports. Statistical data in thesepublications also include projections based on a number of assumptions. The e-commerce industry may not grow at the rate projected by marketdata, 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 ofour ADSs. In addition, the rapidly evolving nature of the e-commerce industry results in significant uncertainties for any projections or estimatesrelating to the growth prospects or future condition of our market. Furthermore, if any one or more of the assumptions underlying the market dataare later found to be incorrect, actual results may differ from the projections based on these assumptions. You should not place undue reliance onthese forward-looking statements.Table of Contents3The forward-looking statements made in this annual report relate only to events or information as of the date on which the statements aremade 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 ofunanticipated events. You should read this annual report and the documents that we refer to in this annual report and exhibits to this annual reportcompletely and with the understanding that our actual future results may be materially different from what we expect.PART IItem 1. Identity of Directors, Senior Management and AdvisersNot applicable.Item 2. Offer Statistics and Expected TimetableNot applicable.Item 3. Key InformationOur CompanyOur Pinduoduo mobile platform provides buyers with a comprehensive selection of value-for-money merchandise and fun and interactiveshopping experiences. We pioneered an innovative “team purchase” model on our platform. Buyers are encouraged to share product information onsocial networks, and invite their friends, family and social contacts to form shopping teams to enjoy the more attractive prices available under the“team purchase” option. This effectively generates frequent interactions and leads to user engagement on our platform. Our active buyer base helpsattract merchants to our platform, and the scale of our sales volume encourages merchants to offer even more competitive prices and customizedproducts and services to buyers, thus forming a virtuous cycle.We have always seen business opportunities in agriculture, and we seize these opportunities by leveraging our platform to promote digitalinclusion of smallholder farmers. Our ability to aggregate demand and generate large volumes of orders helps create economies of scale for ourfarmer merchants. Farmers can sell directly to consumers through our platform and become less dependent on wholesale distributors. We offerdedicated training programs to enable farmers to become better business operators. We collaborate with reputable agricultural institutions to investin technology and fund research with the objective of improving food production, quality control, food safety and sustainability, so that a greatervolume of better, fresher and safer agricultural products can go directly from farm to table.Table of Contents4Our Holding Company Structure and Contractual Arrangements with Our VIEThe following diagram illustrates our corporate structure, including our principal subsidiaries and our VIE and its principal subsidiary, asof 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 seriesof contractual arrangements with Hangzhou Weimi Network Technology Co., Ltd., or Hangzhou Weimi, pursuant to which we have control over and are the primary beneficiaryof Hangzhou Aimi.Pinduoduo Inc. is a Cayman Islands holding company. It does not operate directly in China, nor does it have any equity ownership in ourVIE or our VIE’s subsidiaries. We conduct our operations in China through (i) our PRC subsidiaries, (ii) our VIE with which we have maintainedcontractual arrangements, and (iii) the subsidiaries of our VIE. PRC laws and regulations restrict and impose conditions on foreign investment invalue-added telecommunications services business, such as internet content-related services and online data processing and transaction processingservices. Accordingly, we operate these businesses in China through our VIE and its subsidiaries, and rely on contractual arrangements amongHangzhou Weimi (one of our PRC subsidiaries), our VIE and its shareholders to control the business operations of our VIE and its subsidiaries.Revenues contributed by our VIE and its subsidiaries accounted for 58.5%, 65.1% and 59.3% of our total revenues for 2019, 2020 and 2021,respectively. Our VIE was established in April 2015 and holds the value-added telecommunication business operation license, or the VATSLicense, covering online data processing and transaction processing business (operating e-commerce) and internet content-related services.Shanghai Xunmeng was established in January 2014 and holds the VATS License covering (i) online data processing and transaction processingbusiness (operating e-commerce), (ii) internet content-related services, (iii) domestic call center business, and (iv) information services.Table of Contents5Holders of our ADSs hold equity interest in Pinduoduo Inc., our Cayman Islands holding company, and do not have direct or indirectequity interest in our VIE and its subsidiaries. A series of contractual arrangements, including a shareholders’ voting rights proxy agreement, equitypledge agreement, spousal consent letter, exclusive consulting and services agreement and exclusive option agreement, have been entered into byand among Hangzhou Weimi, our VIE, our VIE’s shareholders and, as applicable, their spouses. As a result of the contractual arrangements, wehave effective control over and are considered the primary beneficiary of our VIE and its subsidiaries, and we have consolidated their financialresults in our consolidated financial statements. For more details of these contractual arrangements, see “Item 4. Information on the Company—C.Organizational Structure—Contractual Arrangements with Our VIE and Its Shareholders.”However, the contractual arrangements may not be as effective as direct ownership in providing us with control over our VIE and itssubsidiaries, and we may incur substantial costs to enforce the terms of the arrangements. See “Item 3. Key Information—D. Risk Factors—RisksRelated to Our Corporate Structure—We rely on contractual arrangements with our VIE and its shareholders for a large portion of our businessoperations, which may not be as effective as direct ownership in providing operational control” and “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 andadversely affect our business and financial condition.”There are also uncertainties under PRC laws and regulations regarding the enforceability of the whole or any part of our contractualarrangements with our VIE. If the whole or any part of our contractual arrangements with our VIE is found to be unenforceable, we may not beable to consolidate, derive economic interests from, or exert effective control over our VIE and its subsidiaries, which could result in a materialadverse change in the financial performance of our company and the value of our ADSs. See “Item 3. Key Information—D. Risk Factors—RisksRelated to Our Corporate Structure—If the PRC government finds that the arrangements that establish the structure for operating some of ouroperations in China do not comply with PRC regulations relating to the relevant industries, or if these regulations or the interpretation of existingregulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.”Our Operations are subject to PRC Laws and RegulationsOur business operations are primarily conducted in China, and our operations are subject to PRC laws and regulations. The laws andregulations governing the internet industry in China are relatively new and quickly evolving, hence bringing uncertainties to their interpretation andenforcement. For example, we are subject to regulatory approvals and permit requirements, oversight on cybersecurity and data privacy, and anti-monopoly and anti-unfair competition laws, with respect to which the applicable laws and regulations have evolved substantially in recent years.For more information see “Item 4. Information on the Company—B. Business Overview—Regulation” in this annual report.As of the date of this annual report, our PRC subsidiaries, our VIE and its subsidiaries have obtained the requisite licenses and permitsfrom the PRC government authorities that are material for our business operations in China, including, among others, VATS Licenses. New lawsand regulations may be adopted from time to time, which may require us to obtain additional licenses and permits for our operations and services.If we offer new functions and services on our platform in the future, we may be required to obtain additional licenses, permits, filings or approvalsfor such functions or services. For more detailed information, see “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business andIndustry—Any lack of additional requisite approvals, licenses or permits or failure to comply with any requirements of PRC laws, regulations andpolicies may materially and adversely affect our daily operations and hinder our growth.”Table of Contents6The PRC governmental authorities have recently promulgated PRC laws and regulations relating to cybersecurity review and overseaslistings. Under PRC laws and regulations effective as of the date of this annual report, none of us, our PRC subsidiaries, our VIE or its subsidiaries(i) is required to obtain any permission from the China Securities Regulatory Commission, or the CSRC, (ii) is required to go through acybersecurity review conducted by the Cyberspace Administration of China, or the CAC, or (iii) has received any notice from any PRC authorityrequiring us to obtain any permissions, in each case in connection with our previous issuance of securities to foreign investors. However, inconnection with any future overseas capital markets activities, we may need to obtain permission from the CSRC, undergo a cybersecurity reviewconducted by the CAC, or meet other regulatory requirements that may be adopted in the future by PRC authorities. To the extent suchrequirements are or become applicable, we cannot assure you that we would be able to comply with them. Any failure to obtain or delay inobtaining such permission, clearing such review process or meeting such requirements would subject us to restrictions and penalties imposed by theCSRC, the CAC or other PRC regulatory authorities, which could include fines and penalties on our operations in China, delays of or restrictionson the repatriation of the proceeds from our offshore offerings into China, or other actions that could materially and adversely affect our business,financial condition, results of operations, and prospects, as well as the trading price of our ADSs. For more detailed information, see “Item 3. KeyInformation—D. Risk Factors—Risks Related to Our Business and Industry—Our business generates and processes a large amount of data, and weare required to comply with PRC and other applicable laws relating to privacy and cybersecurity. The improper use or disclosure of data could havea material and adverse effect on our business and prospects” and “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business andIndustry—The approval of or filing with the CSRC or other PRC government authorities may be required in connection with our future offshoreofferings under PRC laws, and, if required, we cannot predict whether or for how long we will be able to obtain such approval or complete suchfiling.In February 2021, the Anti-monopoly Committee of the State Council published the Anti-monopoly Guidelines for the Platform EconomySector, 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 othertransaction terms, coercive exclusivity arrangements with transaction counterparties, blocking of competitor interface through technological meansand unlawful collection of user data without consent, are prohibited. The heightened regulatory scrutiny of business operators under the Anti-monopoly Law may increase our compliance costs and subject us to heightened risks and challenges. For more detailed information, see “Item 3.Key Information—D. Risk Factors—Risks Related to Our Business and Industry— 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 Holding Foreign Companies Accountable ActThe Holding Foreign Companies Accountable Act, or the HFCA Act, was enacted on December 18, 2020. The HFCA Act states if theSEC determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the PublicCompany Accounting Oversight Board (United States), or the PCAOB, for three consecutive years beginning in 2021, the SEC shall prohibit ourshares or ADSs from being traded on a national securities exchange. Since our auditor is located in China, a jurisdiction where the PCAOB hasbeen unable to conduct inspections without the approval of the Chinese authorities, our auditor is not currently inspected by the PCAOB, whichmay impact our ability to remain listed on a United States or other foreign exchange. The related risks and uncertainties could cause the value ofour ADSs to significantly decline. For more details, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—The PCAOB is currently unable to inspect our auditor in relation to their audit work performed for our financial statements” and “—Our ADSs willbe prohibited from trading in the United States under the HFCA Act in 2024 if the PCAOB is unable to inspect or fully investigate auditors locatedin China, or in 2023 if proposed changes to the law are enacted. The delisting of our ADSs, or the threat of their being delisted, may materially andadversely affect the value of your investment.”Summary of Risk FactorsInvesting in our ADSs involves significant risks. You should carefully consider all of the information in this annual report before makingan investment in our ADSs. Below please find a summary of the principal risks we face, organized under relevant headings. These risks arediscussed more fully in the section titled “Item 3. Key Information—D. Risk Factors.”Risks Related to Our Business and IndustryRisks and uncertainties related to our business and industry include, but are not limited to, the following:Table of Contents7●Our limited operating history makes it difficult to evaluate our business and prospects. We cannot guarantee that we will be able tomaintain the growth rate that we have experienced to date.●If we fail to anticipate buyer needs and provide products and services to attract and retain buyers, or fail to adapt our services orbusiness model to changing buyer needs or emerging industry standards, our business may be materially and adversely affected.●Any harm to our brand or reputation may materially and adversely affect our business and results of operations.●Our merchants deliver their products to buyers through a variety of third-party logistics service providers, third-party warehouseoperators, third-party pick-up point operators and/or e-waybill systems. Service interruptions, failures, or constraints of these thirdparties or any disruptions or malfunctions of the e-waybill systems could severely harm our business and prospects.●We face intense competition, and if we fail to compete effectively, we may lose market share, buyers and merchants.●If we fail to maintain and expand our relationships with merchants, our revenues and results of operations will be harmed.●We incurred net losses in the past, and we may not be able to maintain profitability in the future.●We may incur liability for counterfeit, unauthorized, illegal, or infringing products sold or misleading information available on ourplatforms.●We may be subject to claims under consumer protection laws, including health and safety claims and product liability claims, ifproperty or people are harmed by the products and services sold on our platform. Meanwhile, we are subject to existing and new lawsand regulations imposing various requirements on our business operations.Risks Related to Our Corporate StructureRisks and uncertainties related to our corporate structure include, but are not limited to, the following:●Pinduoduo Inc. is a Cayman Islands holding company with no equity ownership in our VIE and its subsidiaries. We conduct ouroperations in China primarily through (i) our subsidiaries in China, (ii) our VIE with which we have maintained contractualarrangements, and (iii) the subsidiaries of our VIE. Holders of our ADSs hold equity interest in Pinduoduo Inc. and do not havedirect or indirect equity interest in our VIE and its subsidiaries. There are uncertainties under PRC laws and regulations regarding theenforceability of the whole or any part of these contractual arrangements. If the whole or any part of our contractual arrangementswith our VIE and its shareholders is found to be unenforceable, we may not be able to consolidate, derive economic interests from, orexert effective control over our VIE and its subsidiaries, which could result in a material adverse change in the financial performanceof our company and the value of our ADSs.●The rights and functions of the Pinduoduo Partnership, once effective, may impact your ability to appoint executive directors andnominate the chief executive officer of our company, and the interests of the Pinduoduo Partnership may conflict with your interests.●Any failure by our VIE or its shareholders to perform their obligations under our contractual arrangements with them would have amaterial and adverse effect on our business.●The shareholders of our VIE may have potential conflicts of interest with us, which may materially and adversely affect our businessand financial condition.Table of Contents8Risks Related to Doing Business in ChinaWe are also subject to risks and uncertainties relating to doing business in China in general, including, but not limited to, the following:●Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on ourbusiness and operations.●The laws and regulations governing the internet industry in China are relatively new and quickly evolving, hence bringing risks anduncertainties to their interpretation and enforcement. If we fail to meet or comply with requirements under the applicable laws andregulations, it could result in a material change in our operations and the value of our ADSs.●The PRC government’s authority in regulating our operations, our overseas offerings of securities and foreign investment in us couldlimit our ability or prevent us from conducting future offerings of securities to investors, which may cause the value of our ADSs tosignificantly decline.●Our ADSs will be prohibited from trading in the United States under the HFCA Act in 2024 if the PCAOB is unable to inspect orfully investigate auditors located in China, or in 2023 if proposed changes to the law are enacted. The PCAOB is currently unable toinspect our auditor in relation to their audit work performed for our financial statements. The delisting of our ADSs, or the threat oftheir being delisted, may materially and adversely affect the value of your investment.Risks Related to Our ADSsIn addition to the risks described above, we are subject to general risks relating to our ADSs, including, but not limited to, the following:●The trading price of our ADSs may be volatile, which could result in substantial losses to investors.●The sale or availability for sale of substantial amounts of our ADSs could adversely affect their market price.Cash and Asset Flows through Our OrganizationPinduoduo Inc. is a holding company with no operations of its own. We conduct our operations in China primarily through oursubsidiaries, our VIE and its subsidiaries. As a result, although other means are available for us to obtain financing at the holding company level,Pinduoduo Inc.’s ability to pay dividends to the shareholders and to service any debt it may incur may depend upon dividends paid by our PRCsubsidiaries and license and service fees paid by our VIE. If any of our subsidiaries incurs debt on its own behalf in the future, the instrumentsgoverning such debt may restrict its ability to pay dividends to Pinduoduo Inc. In addition, our PRC subsidiaries are permitted to pay dividends toPinduoduo Inc. only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Further, ourPRC subsidiaries, our VIE and its subsidiaries are required to make appropriations to certain statutory reserve funds or may make appropriations tocertain discretionary funds, which are not distributable as cash dividends except in the event of a solvent liquidation of the companies. For moredetails, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Holding Company Structure.”Under PRC laws and regulations, our PRC subsidiaries, our VIE and its subsidiaries are subject to certain restrictions with respect topaying dividends or otherwise transferring any of their net assets to us. Remittance of dividends by a wholly foreign-owned enterprise out of Chinais also subject to examination by the banks designated by the State Administration of Foreign Exchange, or SAFE. The amounts restricted includethe paid-up capital and the statutory reserve funds of our PRC subsidiaries and the net assets of our VIE in which we have no legal ownership,totaling RMB8,344.8 million, RMB10,789.1 million and RMB23,306.4 million (US$3,657.3 million) as of December 31, 2019, 2020 and 2021,respectively. For risks relating to the fund flows of our operations in China, see “Item 3. Key Information—D. Risk Factors—Risks Related toDoing Business in China—We may rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financingrequirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material and adverseeffect on our ability to conduct our business.”Table of Contents9Under PRC law, Pinduoduo Inc. may provide funding to our PRC subsidiaries only through capital contributions or loans, and to our VIEonly through loans, subject to satisfaction of applicable government registration and approval requirements. For the years ended December 31,2019, 2020 and 2021, (i) Pinduoduo Inc. provided loans to our subsidiaries in an aggregate principal amount of RMB20,527.4 million,RMB54,469.7 million and RMB15,520.1 million (US$2,435.4 million), respectively, (ii) our subsidiaries repaid loans to Pinduoduo Inc. in anaggregate principal amount of RMB234.3 million, RMB2,418.2 million, and RMB9,664.8 million (US$1,516.6 million), respectively, (iii) our VIEand its subsidiaries provided loans to our subsidiaries in an aggregate principal amount of RMB30.0 million, RMB21,545.3 million andRMB47,711.8 million (US$7,487.0 million), respectively, (iv) our subsidiaries repaid loans to our VIE and its subsidiaries in an aggregate principalamount of nil, RMB14,760.6 million and RMB29,999.3 (US$ 4,707.5 million), respectively, (v) our subsidiaries provided loans to our VIE and itssubsidiaries in an aggregate principal amount of RMB6,248.7 million, RMB12,204.2 million and RMB7,729.5 million (US$1,212.9 million),respectively, and (vi) our VIE and its subsidiaries repaid loans to our subsidiaries in an aggregate principal amount of RMB2,599.2 million,RMB5,291.6 million, and RMB7,300.0 million (US$1,145.5 million), respectively.Pinduoduo Inc. has not declared or paid any cash dividends, nor does it have any present plan to pay any cash dividends on our ordinaryshares in the foreseeable future. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expandour business. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Dividend Policy.” For PRC andUnited States federal income tax considerations of an investment in our ADSs, see “Item 10. Additional Information—E. Taxation.”Financial Information Related to Our VIEThe following table presents the condensed consolidating schedule of financial position for our VIE and other entities as of the datespresented.Selected Condensed Consolidated Statements of Income Information For the Year Ended December 31, 2021 Pinduoduo VIE and Its Consolidated Inc. Subsidiaries Subsidiaries Eliminations Total (RMB in thousands)Revenues — 52,756,114 77,877,339 (36,683,514) 93,949,939Net income/ (loss) 7,768,670 (5,589,442) 15,169,180 (9,579,738) 7,768,670 For the Year Ended December 31, 2020 Pinduoduo VIE and Its Consolidated Inc. Subsidiaries Subsidiaries Eliminations Total (RMB in thousands)Revenues — 22,716,003 51,351,861 (14,575,999) 59,491,865Net (loss)/ income (7,179,742) (8,549,149) 2,552,665 5,996,484 (7,179,742) For the Year Ended December 31, 2019 Pinduoduo VIE and Its Consolidated Inc.SubsidiariesSubsidiariesEliminationsTotal (RMB in thousands)Revenues — 13,785,660 19,875,332 (3,519,106) 30,141,886Net loss (6,967,603) (2,852,852) (3,611,656) 6,464,508 (6,967,603)Table of Contents10Selected Condensed Consolidated Balance Sheets InformationAs of December 31, 2021VIE and ItsConsolidated Pinduoduo Inc. Subsidiaries Subsidiaries Eliminations Total(RMB in thousands)Current assets: Cash and cash equivalents 2,269 3,994,006 2,430,440 — 6,426,715 Restricted cash— 215,177 59,402,079 — 59,617,256 Short-term investments — 74,210,278 12,306,340 — 86,516,618 Amounts due from Group companies(1) — 28,831,878 40,425,872 (69,257,750) —Others 390 2,150,073 6,198,116 — 8,348,579Total current assets 2,659 109,401,412 120,762,847 (69,257,750) 160,909,168Non-current assets: Other non-current assets — 11,125,028 5,300,938 — 16,425,966 Investments in subsidiaries, our VIE and its subsidiaries(2) 86,252,341 — — (86,252,341) —Others 674,057 619,435 2,581,092 — 3,874,584Total non-current assets 86,926,398 11,744,463 7,882,030 (86,252,341) 20,300,550Total assets 86,929,057 121,145,875 128,644,877 (155,510,091) 181,209,718 Current liabilities: Payable to merchants — 562,197 61,947,517 — 62,509,714 Merchant deposits — 217,143 13,360,409 — 13,577,552 Amounts due to Group companies(1) — 122,579,954 27,978,153 (150,558,107) —Others 24,607 4,998,241 12,619,600 — 17,642,448Total current liabilities 24,607 128,357,535 115,905,679 (150,558,107) 93,729,714 Non-current liabilitiesConvertible bonds11,788,907 — — —11,788,907Others996251,269324,285 —576,550Total non-current liabilities11,789,903251,269324,285 —12,365,457Total liabilities11,814,510128,608,804116,229,964(150,558,107)106,095,171Table of Contents11 As of December 31, 2020 VIE and Its Consolidated Pinduoduo Inc. Subsidiaries Subsidiaries Eliminations Total (RMB in thousands)Current assets:Cash and cash equivalents 6,566 18,821,431 3,593,192 — 22,421,189Restricted cash — 273,595 52,148,852 — 52,422,447Short-term investments 5,840,247 51,684,405 7,026,442 — 64,551,094Amounts due from Group companies(1) — 14,181,040 9,932,418 (24,113,458) —Others 359 1,340,265 8,788,524 — 10,129,148Total current assets 5,847,172 86,300,736 81,489,428 (24,113,458) 149,523,878Non-current assets:Other non-current assets — 2,894,829 4,380,476 — 7,275,305Investments in subsidiaries, our VIE and its subsidiaries(2) 67,814,679 — — (67,814,679) —Others 1,276,751 177,890 654,790 — 2,109,431Total non-current assets 69,091,430 3,072,719 5,035,266 (67,814,679) 9,384,736Total assets 74,938,602 89,373,455 86,524,694 (91,928,137) 158,908,614Current liabilities: Payable to merchants — 416,722 53,417,259 — 53,833,981Merchant deposits — — 10,926,319 — 10,926,319Amounts due to Group companies(1) — 91,774,456 9,759,506 (101,533,962) —Others 327,004 3,985,729 14,809,044 — 19,121,777Total current liabilities 327,004 96,176,907 88,912,128 (101,533,962) 83,882,077Non-current liabilities Convertible bonds 14,432,792 — — — 14,432,792Others 2,918 48,105 366,834 — 417,857Total non-current liabilities 14,435,710 48,105 366,834 — 14,850,649Total liabilities 14,762,714 96,225,012 89,278,962 (101,533,962) 98,732,726As of December 31, 2019 VIE and Its Consolidated Pinduoduo Inc. Subsidiaries Subsidiaries Eliminations Total (RMB in thousands)Current assets:Cash and cash equivalents 661,714 2,289,578 2,816,894 — 5,768,186Restricted cash — 48,878 27,528,793 — 27,577,671Short-term investments 6,157,221 22,570,941 6,560,665 — 35,288,827Amounts due from Group companies(1) — 5,350,359 3,337,273 (8,687,632) —Others 17,906 642,255 3,706,618 — 4,366,779Total current assets 6,836,841 30,902,011 43,950,243 (8,687,632) 73,001,463Non-current assets: Other non-current assets — 442,814 60,306 — 503,120Investments in subsidiaries, our VIE and its subsidiaries(2) 21,053,370 — — (21,053,370) —Others 1,994,292 77,859 480,602 — 2,552,753Total non-current assets 23,047,662 520,673 540,908 (21,053,370) 3,055,873Total assets 29,884,503 31,422,684 44,491,151 (29,741,002) 76,057,336Current liabilities: Payable to merchants — 269,261 29,657,227 — 29,926,488Merchant deposits — — 7,840,912 — 7,840,912Amounts due to Group companies(1) — 32,098,776 5,393,858 (37,492,634) —Others 23,566 1,457,980 6,518,860 — 8,000,406Total current liabilities 23,566 33,826,017 49,410,857 (37,492,634) 45,767,806Non-current liabilities Convertible bonds 5,206,682 — — — 5,206,682Others 7,389 45,920 382,673 — 435,982Total non-current liabilities 5,214,071 45,920 382,673 — 5,642,664Total liabilities 5,237,637 33,871,937 49,793,530 (37,492,634) 51,410,470Table of Contents12Selected Condensed Consolidated Cash Flows InformationFor the Year Ended December 31, 2021( RMB in thousands)VIE and ItsConsolidated Pinduoduo Inc. Subsidiaries Subsidiaries Eliminations TotalNet cash generated from/(used in) operating activities(3) 82,074 (5,664,088) 34,365,025 — 28,783,011 Net cash used in investing activities (91,170) (32,639,884) (26,828,581) 23,997,270 (35,562,365)Net cash generated from/(used in) financing activities 318 23,567,767 (1,445,969) (23,997,270) (1,875,154) For the Year Ended December 31, 2020 VIE and Its Consolidated Pinduoduo Inc. Subsidiaries Subsidiaries Eliminations Total (RMB in thousands)Net cash generated from/(used in) operating activities(3) 735,231 (1,918,403) 29,379,799 — 28,196,627Net cash used in investing activities (52,266,859) (40,037,787) (11,802,074) 65,748,819 (38,357,901)Net cash generated from financing activities 50,892,970 58,836,213 7,818,632 (65,748,819) 51,798,996 For the Year Ended December 31, 2019 VIE and Its Consolidated Pinduoduo Inc. Subsidiaries Subsidiaries Eliminations Total (RMB in thousands)Net cash generated from operating activities(3) 259,409 3,421,995 11,139,572 — 14,820,976Net cash used in investing activities (20,241,566) (26,801,658) (5,249,046) 23,972,592 (28,319,678)Net cash generated from financing activities 14,960,585 20,320,257 4,546,481 (23,972,592) 15,854,731Notes:(1)Represents the elimination of the intercompany balances among Pinduoduo Inc., our subsidiaries, our VIE and its subsidiaries.(2)Represents the elimination of the investments in our subsidiaries, our VIE and its subsidiaries.(3)For the years ended December 31 2019, 2020 and 2021, cash paid by our VIE and its subsidiaries to our subsidiaries, primarily for service fees, was RMB759.1 million,RMB1,717.5 million and RMB5,016.5 million (US$787.2 million), respectively, and cash paid by our subsidiaries to our VIE and its subsidiaries, primarily for service fees, wasRMB294.8 million, RMB10,268.9 million, and RMB18,160.4 million (US$2,849.8 million), respectively.A. [Reserved]B. Capitalization and IndebtednessNot applicable.C. Reasons for the Offer and Use of ProceedsNot applicable.Table of Contents13D. Risk FactorsRisks Related to Our Business and IndustryOur limited operating history makes it difficult to evaluate our business and prospects. We cannot guarantee that we will be able to maintainthe 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 wasapproximately 868.7 million in 2021. Our revenues grew from RMB59,491.9 million in 2020 to RMB93,949.9 million (US$14,742.8 million) in2021. However, our historical performance may not be indicative of our future growth or financial results. We cannot assure you that we will beable 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, andrevenues may decline for a number of possible reasons, some of which are beyond our control, including decreasing consumer spending, increasingcompetition, 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 ourrevenues since 2017, are a relatively new initiative and may not grow as quickly as we have anticipated. It is difficult to evaluate our prospects, aswe may not have sufficient experience in addressing the risks to which companies operating in rapidly evolving markets may be exposed. If ourgrowth rate declines, investors’ perceptions of our business, operating results and prospects may be materially and adversely affected and themarket price of our ADSs could decline. You should consider our prospects in light of the risks and uncertainties that companies with a limitedoperating history may encounter.If we fail to anticipate buyer needs and provide products and services to attract and retain buyers, or fail to adapt our services or businessmodel 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 mustcontinuously respond to changes in the market and buyer demand and preferences to remain competitive, grow our business and maintain ourmarket position. We intend to further diversify our product and service offerings to add to our revenue sources in the future. New products andservices, new types of buyers or new business models may involve risks and challenges we do not currently face. Any new initiatives may requireus to devote significant financial and management resources and may not perform as well as expected. For example, the e-waybill system welaunched 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 inaccordance with our expectations.Furthermore, we may have difficulty in anticipating buyer demand and preferences, and the products offered on our platform may not beaccepted by the market or be rendered obsolete or uneconomical. Therefore, any inability to adapt to these changes may result in a failure tocapture new buyers or retain existing buyers, the occurrence of which would materially and adversely affect our business, financial condition andresults of operations.In addition, to remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of ourplatform. 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 andpractices, 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 andpractices, in particular with respect to mobile internet, in a cost-effective and timely way. We cannot assure you that we will be successful in theseefforts.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 serviceproviders have contributed significantly to the growth and success of our business. Maintaining and enhancing the recognition and reputation of ourbrand are critical to our business and competitiveness. Many factors, some of which are beyond our control, are important to maintaining andenhancing 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;Table of Contents14●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, internetand data security, product quality, price or authenticity, performance measures, or other issues affecting us or other e-commercebusinesses in China.Public perception that counterfeit, unauthorized, illegal, or infringing products are sold on our platform or that we or merchants on ourplatform 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 newbuyers or retain our current buyers. In particular, we have been and may continue to be subject to negative publicity based on claims andallegations related to intellectual property. For example, the Office of the U.S. Trade Representative, or USTR, has identified our platform as a“notorious market” in its Special 301 Reports since 2019. The USTR may continue to identify our platform as a notorious market in the future. Thenegative public perception resulted therefrom could damage our reputation, harm our business, diminish the value of our brand name andnegatively 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 andservices, 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 anydisruptions 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 pointoperators. Interruptions to or failures in services provided by these third parties could affect timely and successful delivery of the ordered productsto 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 ortermination 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 logisticsservice providers raise the shipping rates for delivering products of merchants on our platform, our merchants may not be willing to bear theincreased costs or be able to offer competitive prices for products on our platform. As a result, our business and prospects, as well as our financialcondition 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 merchandisepurchased 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 tofind alternative cost-efficient service providers or operators to offer satisfactory services or pick-up points in a timely manner, or at all, which couldcause our business and reputation to suffer or cause merchants and buyers to move to other platforms and have negative impact on our financialconditions.Most merchants use e-waybill systems to arrange and track shipment. While we launched our e-waybill system during the first quarter of2019, the merchants on our platform are allowed to choose different e-waybill systems. Any disruptions or malfunctions of e-waybill systems usedby 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.Table of Contents15We 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 otherparticipants on our platforms. Our current or potential competitors include (i) major e-commerce operators in China, (ii) major traditional andbrick-and-mortar retailers in China, (iii) retail companies in China focused on specific product categories and (iv) major internet companies inChina 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 ormerchant relationships, stronger infrastructure, larger buyer bases or greater financial, technical or marketing resources than we do. Competitorsmay leverage their brand recognition, experience and resources to compete with us in a variety of ways, including making investments andacquisitions for the expansion of their product and service offerings. Some of our competitors may be able to secure more favorable terms frommerchants, devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing or inventory policies and devotesubstantially more resources to develop their IT systems and technology. Some of these competitors may also offer “team purchase” on theirplatforms or offer innovative purchase models that may turn out to be highly popular among buyers, and buyers may prefer them over our teampurchase model. In addition, new and enhanced technologies may increase the competition in the market we operate in. Increased competition mayreduce our profitability, market share, user base and brand recognition. There can be no assurance that we will be able to compete successfullyagainst current or future competitors, and such competitive pressures may have a material and adverse effect on our business, financial conditionand 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 providepopular products on our platform at attractive prices depends on our ability to develop mutually beneficial relationships with our merchants. Forexample, we rely on our merchants to make available sufficient inventory and fulfill large volumes of orders in an efficient and timely manner toensure our user experience. However, we may experience merchant attrition in the ordinary course of business resulting from several factors, suchas losses to competitors, perception that marketing on our platform is ineffective, reduction in merchants’ marketing budgets, and closures orbankruptcies of merchants. In addition, we may have disputes with merchants with respect to their compliance with our quality control policies andmeasures and the penalties imposed by us for violation of these policies or measures from time to time, which may cause them to be dissatisfiedwith our platform. Their complaints may in turn result in negative impact on our public image and reputation. If we experience significantmerchant attrition, or if we are unable to attract new merchants, our revenues and results of operations may be materially and adversely affected. Inaddition, our agreements with merchants also typically do not restrict them from establishing or maintaining business relationships with ourcompetitors. We cannot assure you that merchants will continue to offer merchandise on our platform if they are pressured to use only one platformto market their products.Any change, disruption, discontinuity in the features and functions of major social networks could severely limit our ability to continuegrowing 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 ourplatform 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 toenable buyers to share product information and their purchase experiences with their friends, family and other social contacts to generate effectiveand organic traffic and active interactions among buyers. A portion of our buyer traffic comes from such user recommendation or productintroduction feature which buyers can share with friends or contacts through social networks. Due to the nature of our business model, whichresembles a dynamic and interactive shopping experience, it is impracticable for us to accurately bifurcate and quantify the buyer traffic generateddirectly through our platform and through social networks. Therefore, during our daily operations, we focus more on the GMV on our platform as awhole and the seamless user experience across different access points, and believe that the final purchase destination cannot be used to reflect thesignificance 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 thesesocial networks makes changes to its functions or support, such as charging fees for functions or support that is currently provided for free, or stopsoffering its functions or support to us, we may not be able to locate alternative platforms of similar scale to provide similar functions or support oncommercially reasonable terms in a timely manner, or at all. Furthermore, we may fail to establish or maintain relationships with additional socialnetwork operators to support the growth of our business on economically viable terms, or at all. Any interruption to or discontinuation of ourrelationships with major social network operators may severely and negatively impact our ability to continue growing our buyer base, and anyoccurrence of the circumstances mentioned above may have a material adverse effect on our business, financial condition and results of operations.Table of Contents16We 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 storesoperated by third parties, such as Apple’s App Store, which could suspend or terminate users’ access to our mobile apps, increase access costs orchange 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 behindered if potential users experience difficulties in or are barred from accessing our mobile apps. In the past, our mobile apps were taken downfrom 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 inthe future. The occurrence of the similar incident may adversely affect our brand and reputation, business, financial condition and results ofoperations.Any disruption to our IT systems could materially affect our ability to maintain the satisfactory performance of our IT systems and deliverconsistent 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 ITsystems are critical to our success, our ability to attract and retain buyers and our ability to maintain and deliver consistent services to our buyersand merchants. However, our technology infrastructure may fail to keep pace with increased sales on our platform, in particular with respect to ournew product and service offerings, and therefore our buyers may experience delays as we seek to source additional capacity, which wouldadversely 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 cannotassure you that we will be successful in executing these system upgrades, and the failure to do so may impede our growth. We currently rely oncloud services and servers operated by external cloud service providers to store our data, to allow us to analyze a large amount of datasimultaneously and to update our buyer database and buyer profiles quickly. Any interruption or delay in the functionality of these external cloudservice and server providers may materially and adversely affect the operations of our business.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 surgesin online traffic and orders associated with promotional activities and generally as we scale, which can put additional demand on our platform atspecific times. Our technology or infrastructure may not function properly at all times. Any system interruptions caused by telecommunicationsfailures, computer viruses, hacking or other attempts to harm our systems that result in the unavailability or slowdown of our platform or reducedorder fulfillment performance could reduce the volume of products sold and the attractiveness of product offerings on our platform. Our serversmay 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 such occurrence could cause disruption to our daily operations. As a result, our reputation may be materially and adversely affected, ourmarket share could decline and we could be subject to liability claims.We have incurred net losses in the past, and we may not be able to maintain profitability in the future.We incurred net losses from our inception until 2020, before recording a net income of RMB7,768.7 million (US$1,219.1 million) in2021. We cannot assure you that we will be able to maintain profitability in the future. In particular, we expect our operating costs and expenses toincrease in absolute amounts in the future due to: (i) the continued expansion of our business operations, buyer base and merchant network, (ii) thecontinued investment in technology infrastructure and network, (iii) our promotion and marketing efforts as we continue to enhance our brandrecognition, retain and grow our buyer base, and increase our buyer activities, (iv) the launch of new services, and (v) the investment in newinitiatives, which may incur upfront costs, change our existing revenue and cost structures, and affect our ability to maintain profitability.Table of Contents17In addition to managing the foregoing costs and expenses, our ability to maintain profitability depends on our ability to, among otherthings, attract and retain buyers and increase buyer activities, establish and maintain relationships with merchants, provide valuable onlinemarketplace services and broaden service offerings, and optimize our cost structure. We may not be able to achieve any of the above. In particular,our sales and marketing expenses increased by 8.8% from RMB41,194.6 million in 2020 to RMB44,801.7 million (US$7,030.4 million) in 2021, aswe invested in cultivating greater user recognition and engagement through online and offline advertising campaigns and promotions. Similarly,our research and development expenses increased by 30.5% from RMB6,891.7 million in 2020 to RMB8,992.6 million (US$1,411.1 million) in2021, as we hired additional experienced research and development personnel. If we incur substantial sales and marketing expenses without beingable to achieve the anticipated growth in the number of active buyers and merchants or their spending, our operating results may be materially andadversely affected. Moreover, if our investment in our research and development does not result in improvements to the quality or efficiency of ourservices or otherwise fails to generate returns as expected, our operating results may also be materially and adversely affected. As a result, we mayexperience decreasing operating margin, and may incur net losses in the future. In addition, our ability to use our net losses, to the extent we recordsuch net losses in future periods, to offset future taxable income may be subject to certain limitations, including limitations resulting from thereorganization of our corporate structure and change of our primary operating entities. As such, we may not be able to fully utilize our net losses orat all.We rely on certain key operating metrics to evaluate the performance of our business, and perceived inaccuracies in such metrics may harmour 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 estimatespublished by third parties or from similarly titled metrics used by other companies due to differences in methodology and assumptions. If thesemetrics are perceived to be inaccurate by investors or investors make investment decisions based on operating metrics we disclosed but with theirown methodology and assumptions or those published or used by third parties or other companies, our reputation may be harmed, which couldnegatively affect our business, and we may also face potential lawsuits or disputes.We face risks related to natural disasters, health epidemics and other outbreaks, most notably those related to the outbreak of COVID-19, whichcould significantly disrupt our operations.We and our merchants are vulnerable to natural disasters, health epidemics, and other calamities. Any such occurrence could causedisruption to our and our merchants’ daily operations or the closure of facilities and logistics delivery networks, which may disrupt our businessoperations and adversely affect our results of operations. In recent years, there have been outbreaks of epidemics in China and globally. Forexample, since early 2020, to contain the spread of COVID-19, the Chinese government has taken a number of actions, including quarantiningindividuals suspected of having COVID-19 and asking residents in China to stay at home and to avoid public gatherings, among other things.COVID-19 has also resulted in the temporary closure of corporate offices, retail stores, manufacturing facilities and factories across China, and putsignificant strain on merchandise shipping and delivery. Any reduction in the number of product offerings on our e-commerce platform or delays indeliveries caused by the impairment of manufacturing and delivery capacity of our merchants and services providers may damage our reputationand cause us to lose buyers, and adversely affect our results of operations. The extent to which the outbreak of COVID-19 impacts our results willdepend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning theseverity of this outbreak and the actions to contain this outbreak or treat its impact, among others. In addition, our results of operations could beadversely affected to the extent that any epidemics or other catastrophic events, such as COVID-19, harm the Chinese economy in general.Our success depends on the continuing efforts of our key employees. If we fail to hire, retain and motivate our key employees, our business maysuffer.Our future success is significantly dependent upon the continued service of our key executives and other key employees. If we lose theservices of any member of our management or key personnel, we may not be able to locate suitable or qualified replacements, and may incuradditional expenses to recruit and train new staff, which could severely disrupt our business and growth. Our management and key personnel arecritical to our vision, strategic direction, culture and overall business success. If there is any internal organizational structure change or change inresponsibilities for our management or key personnel, the operation of our business and our business prospects may be adversely affected. Ouremployees, including members of our management, may choose to pursue other opportunities. If we are unable to motivate or retain keyemployees, our business may be severely disrupted and our prospects could suffer.Table of Contents18The increasing scale of our business also requires us to hire and retain a wide range of capable and experienced personnel and technologytalents who can adapt to a dynamic, competitive and challenging business environment. For example, we may need to hire additional personnelwith special sets of skills and experience for Duo Duo Grocery. Competition for talents is intense, and the availability of suitable and qualifiedcandidates 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 toattract 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 adverselyaffected.We have significantly expanded our headcount and office facilities, and we anticipate that further expansion will be required. Expansion ingeneral increases the complexity of our operations and places significant strains on our management, operational and financial resources, and maycause 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. Suchexpansion 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 achievebroad buyer acceptance. These offerings may present new and difficult technological or operational challenges, and we may be subject to claims ifbuyers 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 continueto 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 Grocerythat we started in August 2020, each may require financial, personnel and other resources commitment over time, including recruitment ofemployees and contractors, development of new technologies, collaboration with new business partners, launch of additional promotional activitiesand investments in logistics infrastructure. All of these endeavors involve risks and will require significant management, financial and humanresources. We cannot assure you that we will be able to effectively manage our growth or to implement our strategies successfully. If we are notable to manage our growth or implement our strategies effectively, or at all, our business and prospects may be materially and adversely affected.For example, we have developed an open, asset-light logistics technology platform. As the first pillar to such logistics technologyplatform, 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 platformthat would provide technology solutions to our sizable and growing merchant base, and fundamentally improve their efficiencies and services tousers as we deepen our relationships with them. 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 toits operations and intellectual property rights. In August 2020, we started Duo Duo Grocery, a next-day grocery pick-up service that allows users toorder groceries and related products online and collect goods the next day at nearby designated pickup points. We cannot assure you that we will beable 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 andoperate Duo Duo Grocery could materially and adversely affect our business, financial condition and results of operations.Table of Contents19We 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 separatelyresponsible for sourcing and coordinating delivery of the products that are sold on our platform. In 2021, we had 11.5 million active merchants onour platform, offering a broad range of product categories. We have been and may continue to be subject to allegations and lawsuits claiming thatproducts listed or sold through our platform by us or third-party merchants are counterfeit, unauthorized, illegal, or otherwise infringe third-partycopyrights, trademarks, patents or other intellectual property rights, or that content posted on our user interface contains misleading information ondescription of products and comparable prices. Although we have adopted strict measures to protect us against these potential liabilities, includingbut not limited to, proactively verifying the authenticity and authorization of products sold on our platform through working with brands andconducting offline investigations, blocking prior to product launch or immediately taking down any counterfeit or illegal products or misleadinginformation 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 tostrengthen supervision on the qualifications of the distributors of publications on our platform and to respond effectively to claims of copyrightinfringement. We have taken a number of measures in accordance with such requirements including the implementation of a comprehensive systemin reviewing and tracking the qualification status of the relevant merchants. In August 2018, we met with the officials from the relevantgovernmental authorities to discuss the alleged sale of counterfeit and infringing products on our platform upon their request. Shortly after themeetings, we adopted a number of remediation measures including more rigorous policies of closure of stores and removal of listings withinfringing 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 resourcesor result in reduced revenues. In addition, these measures may not appeal to consumers, merchants or other participants on our platforms. Amerchant whose account is suspended or terminated by us, regardless of our compliance with the applicable laws and regulations, may havedisputes with us and commence action against us for damages, make public complaints or engage in publicity campaigns against us. We may incursignificant costs to defend against these activities, which could harm our business.In the event that counterfeit, illegal, unauthorized or infringing products are sold on our platform or infringing or misleading content isposted on our user interface, we could face claims or be imposed penalties. Counterfeit products sold on our platform may damage our reputationand cause buyers to refrain from making future purchases from us, which would materially and adversely affect our business operations andfinancial results. We have in the past received claims alleging the sales of defective, counterfeit or unauthorized items on our platform. Forexample, in July 2018, a complaint was filed against us in U.S. federal court alleging contributory trademark infringement and unfair competitionbased on certain allegedly counterfeit and unauthorized merchandise sold by merchants to U.S. consumers on our platform. In 2019, the courtdismissed all claims against us and awarded us attorney’s fees and costs due to the plaintiff’s frivolous and problematic claims. Irrespective of thevalidity of such claims, we could incur significant costs and efforts in either defending against or settling such claims. If there is a successful claimagainst us in the United States, we might be required to pay substantial damages or be enjoined from permitting further sale of the relevant productsor activities by certain merchants. Potential liabilities under PRC law for negligence in participating or assisting in infringement activitiesassociated with counterfeit goods include injunctions to cease infringing activities, rectification, compensation, administrative penalties and evencriminal liability.Moreover, the alleged sales of counterfeit products and third-party claims or administrative penalties related to them could result insignificant negative publicity and our reputation could be severely damaged. For example, the Office of the U.S. Trade Representative, or USTR,has identified our platform as a “notorious market” in its Special 301 Reports since 2019. The USTR may continue to identify our platform as anotorious market in the future. The negative public perception resulted therefrom could damage our reputation, harm our business, diminish thevalue 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 isconducted in real time, we are unable to verify the information exchanged. Therefore, it is possible that users may engage in conversations oractivities 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 asprescription drugs and foreign currencies. Failure to identify and remove such products and content from our platform may subject us to liabilityand administrative penalties. Any of these events could have a material and adverse effect on our business, results of operations or financialcondition.Under our standard form agreements, we require our merchants to indemnify us for any losses we suffer or any costs that we incur due toany products sold by these merchants. However, we may not be able to successfully enforce our contractual rights and may need to initiate costlyand lengthy legal proceedings in China to protect our rights.Table of Contents20In addition to fraudulent transactions with legitimate buyers, merchants on our platform may engage in fictitious transactions withthemselves or collaborate with third parties in order to artificially inflate their sales records and search results rankings. Such activity may frustrateother merchants by enabling the perpetrating merchants to be favored over legitimate merchants, and may harm buyers by misleading them tobelieve that a merchant is more reliable or trustworthy than the merchant actually is. We are also aware that certain merchants and users engage infictitious transactions on e-commerce platforms to facilitate illegal activities such as online gambling. Fictitious transactions may result in inflatedGMV, total orders and other key metrics. Although we have implemented strict measures to detect and penalize merchants who engaged infictitious transactions on our platform, there can be no assurance that such measures will be effective in preventing all fraudulent transactions ordeter illegal activities.Moreover, illegal, fraudulent or collusive activities by our employees could also subject us to liability or negative publicity. There wereoccasions where we found our employees accepting payments from merchants in exchange for preferential treatment on our platform, and wereported such behavior to the relevant government authorities.Although we implement a zero-tolerance policy towards these activities and have not been charged with any wrongdoing, there can be noassurance that our controls and policies will prevent all fictitious, fraudulent or illegal activities by merchants, users or our employees or thatsimilar incidents will not occur in the future. Any inquiries, investigations and other governmental actions associated with and negative publicityand user sentiment resulting from similar incidents could divert significant management time and attention, severely diminish consumer confidencein 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 orpeople are harmed by the products and services sold on our platform. Meanwhile, we are subject to existing and new laws and regulationsimposing 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 mayexpose us to liabilities associated with consumer protection laws. Third parties who purchased defective products sold by us and sustained personalinjury or property damage may bring claims or legal proceedings against us as the retailer of the product. Although we would have legal recourseagainst 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 evenwhere the operator is not the manufacturer, provider or retailer of the products or services purchased by the consumer. For example, if we failed toprovide a consumer with the name, address and contact details of the merchant that sold the defective product, we may be liable to compensatesuch consumer damages suffered by him or her. In addition, if we do not take appropriate remedial action against merchants for their actions thatwe know, or should have known, would infringe upon the rights and interests of consumers, we may be held jointly liable for infringementalongside the merchants. Moreover, applicable consumer protection laws in China provide that a platform will be held liable for failing to meet anyundertaking that it made to consumers with regard to products listed on it. Furthermore, we are required to report violations of applicable consumerprotection laws, regulations or administrative rules by merchants to the State Administration for Market Regulation, or the SAMR, or its localbranches, and take appropriate remedial measures, including ceasing to provide services to the relevant merchants, as a platform. We may also beheld jointly liable with merchants who do not possess the proper licenses or authorizations to sell goods or sell goods that do not meet productstandards.We do not maintain product liability insurance for products transacted on our platform, and our rights of indemnity from the merchants orsuppliers 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 ourbusiness, financial condition and prospects.Table of Contents21In addition, the PRC government authorities may continue to promulgate new laws and regulations governing the e-commerce industry,tighten enforcement of existing laws and regulations, and impose additional requirements and other obligations on our business including theoperation of our e-commerce platform and our market promotion activities. Compliance with these laws and regulations may be costly, and anyincompliance or associated inquiries, investigations and other governmental actions may divert significant management time and attention and ourfinancial 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, whichtook effect in January 2019. According to the E-Commerce Law, e-commerce platform operators who fail to take necessary actionswhen they know or should have known that the merchants on their platform infringe others’ intellectual property rights or theproducts or services provided by the merchants do not meet the requirements for product safety, or otherwise infringe uponconsumers’ legitimate rights, will be held jointly liable with the merchants. Additionally, with respect to the products or servicesaffecting consumers’ life and health, the e-commerce platform operators will bear relevant responsibilities if they fail to review thequalifications of merchants or fail to safeguard the interests of the consumers. We may be held responsible if fresh produce or otherproducts sold through Duo Duo Grocery caused harm to the interests and health of consumers.●The E-Commerce Law requires e-commerce platform operators to take necessary actions if merchants on their platforms fail todisplay prominently on their platform web pages the information contained in their business licenses or administrative permitsrelating to their operating businesses. According to the E-Commerce Law, all e-commerce operators, including individuals andentities carrying out their business online and e-commerce platform operators and merchants on these platforms, should register withthe relevant local branches of the SAMR. Individuals selling agricultural products or conducting certain transactions with minimumeconomic value and low volume are not subject to these registration requirements. E-commerce platform operators should providethe identity information of the merchants on their platforms to local branches of the SAMR and procure the merchants who fail tomake such registrations to comply with the registration requirements. The Measures for the Supervision and Administration ofOnline Transactions, promulgated by the SAMR in 2021, also require e-commerce platforms to remind individual merchants totimely register with the applicable local branches of the SAMR if those merchants have an aggregate annual online business turnoverof RMB100,000 or more. Our policy expressly requires all merchants on our platform to complete these registrations. We may loseexisting or potential merchants who do not or are unwilling to comply with the registration and related requirements, and we may befound liable under the E-Commerce Law and related regulations if we are deemed to have failed to implement the requiredprocedures. The E-Commerce Law and the related regulations are relatively new and subject to implementation rules by localregulatory 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 onDecember 1, 2020. Among other things, these interim provisions are designed to promote consumer protection and prohibit false ormisleading commercial information used in promotional activities. As a platform operator, we are required by the interim provisionsto design rules and procedures to foster fair and transparent merchandise promotional activities, and assist the authorities in theirinvestigation 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 frominducing consumers into transactions via misleading pricing terms or engaging in other anti-competitive conducts associated withproduct price. If we are found to have violated these laws and regulations, we may be subject to fines and other administrativepenalties. For example, in March 2021, the SAMR fined five platforms a sum of RMB6.5 million, including RMB1.5 million againstus, 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 PlatformEconomy Sector, aiming at enhancing anti-monopoly administration of businesses that operate under the platform model and theoverall platform economy. According to these guidelines, business practices such as deploying big data analytics to set discriminatoryterms for merchandise price or other transaction terms, coercive exclusivity arrangements with transaction counterparties, blocking ofcompetitor interface through technological means and unlawful collection of user data without consent, are prohibited. As theguidelines were newly promulgated, it is still uncertain as to the specific impact on our business or results of operations andprospects. If we are found to have any non-compliance issues by relevant authorities, we may be subject to fines and other penalties.Table of Contents22●In April 2021, the SAMR, together with the Office of the Central Cyberspace Affairs Commission and the State Administration ofTaxation, or SAT, held a meeting with more than 30 major platform operators, including us. All platform operators that participated inthe 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 beentailed. As a result, we may incur additional costs and expenses, devote more management’s attention and allocate additionalresources in the compliance with relevant laws and regulations. If we are required to take any rectifying or remedial measures or aresubject to any penalty, our reputation and business operations may be materially and adversely affected.●In October 2021, the Standing Committee of the NPC issued the Draft Amendment to the Anti-monopoly Law for public comment.This is the second draft of the proposed amendments to the Anti-monopoly Law. The draft amendment proposed to increase themaximum amount of fines that may be imposed on a business operator for violations of certain market concentration requirements toup to 10% of the business operator’s sales revenue from the preceding year. The draft amendment also proposed that the relevantauthority should investigate a transaction if the concentration resulting from the transaction has or may have the effect of eliminatingor restricting competition, even if such concentration does not reach the filing threshold. If the Draft Amendment to the Anti-monopoly Law is enacted as currently proposed, the heightened regulatory scrutiny of business operators may increase ourcompliance costs and subject us to heightened risks and challenges.Due to the uncertainties associated with the evolving legislative activities and varied local implementation practices of consumerprotection, anti-monopoly and competition laws and regulations in the PRC, compliance with these laws, regulations, rules, guidelines andimplementations may be costly, and any incompliance or associated inquiries, investigations and other governmental actions may divert significantmanagement time and attention and our financial resources, bring negative publicity, subject us to liabilities or administrative penalties, and maymaterially 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 agricultural produce, apparel, shoes, bags, mother and childcareproducts, food and beverage, electronic appliances, furniture and household goods, cosmetics and other personal care items, sports and fitnessitems and auto accessories. Expansion of product offerings both in categories and items involve new risks and challenges. Our lack of familiaritywith these products and lack of relevant buyer data relating to these products may make it more difficult for us to anticipate buyer demand andpreferences and to inspect and control quality and ensure proper handling, storage and delivery by our merchants. Our merchants may experiencehigher return rates on new products, receive more buyer complaints about such products and face costly product liability claims as a result ofselling such products, which would harm our brand and reputation as well as our financial performance. We may also be involved in disputes withthe 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 maintainmutually beneficial relationships with our existing and new merchants. To support our growth and our expansion, we will need to devotemanagement, operating, financial and human resources which may divert our attention from existing businesses, incur upfront costs, andimplement a variety of new and upgraded management, operating, financial and human resource systems, procedures and controls. There is noassurance that we will be able to implement all of these systems, procedures and control measures successfully or address the various challenges inexpanding our future businesses and operations effectively. In addition, our newly launched initiatives such as livestreaming and Duo Duo Grocerymay 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 lesseffective 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 ourbusiness, including our mini-programs within Weixin and the entry point to our Pinduoduo mini-program in Weixin Pay, which serves as one of ouraccess points to our platform, as well as services such as payment processing, advertising and cloud technology. We have entered into a strategiccooperation framework agreement with Tencent, pursuant to which we and Tencent have agreed to cooperate in a number of areas includingpayment solutions, cloud services and user engagement, and to explore and pursue additional opportunities for potential cooperation.Table of Contents23If services provided by Tencent to us become limited, compromised, restricted, curtailed or less effective or become more expensive orunavailable to us for any reason, including the availability of our mini-programs within Weixin and the entry point to our Pinduoduo mini-programin Weixin Pay, our business may be materially and adversely affected. We may also encounter difficulties in implementing the StrategicCooperation Framework Agreement, which may divert significant management attention from existing business operations. Failure to maintain ourrelationship with Tencent could materially and adversely affect our business and results of operations. See “Item 7. Major Shareholders and RelatedParty Transactions—B. Related Party Transactions.”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 thebook value of long-lived assets is impaired, such impairment would be charged to earnings in the period when such impairment is determined. Anyfuture impairment of long-lived assets could have a material and adverse effect on our profitability, results of operations and book value. For moreinformation 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 satisfactoryperformance, reliability and availability of our mobile platform are critical to our success and our ability to attract and retain buyers. Our businessdepends on the performance and reliability of the internet infrastructure in China. The reliability and availability of our mobile platform depends ontelecommunications 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 existingagreements with such providers are terminated as a result of our breach or otherwise, our ability to provide our services to our buyers could beadversely affected. Access to internet in China is maintained through state-owned telecommunications carriers under administrative control, and weobtain access to end-user networks operated by such telecommunications carriers and internet service providers to give buyers access to our mobileplatform. The failure of telecommunications network operators to provide us with the requisite bandwidth could also interfere with the speed andavailability of our mobile platform. Service interruptions prevent buyers from accessing our mobile platform and placing orders, and frequentinterruptions could frustrate buyers and discourage them from attempting to place orders, which could cause us to lose buyers and harm ouroperating results. In addition, we have no control over the costs of the services provided by the telecommunications operators. If the prices that wepay 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 andadversely 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 orbusinesses that are complementary to our existing business. These transactions may involve minority investments in other companies, acquisitionsof 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 developedfrom 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 uncertaintiesin 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 negativedevelopments 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 businessesmay not generate anticipated synergies with our business or achieve anticipated financial growth as we would expect. They could result insignificant investments and goodwill impairment charges and amortization expenses for other intangible assets, which would adversely affect ourfinancial condition and operating results.Table of Contents24Undetected programming errors or flaws or failure to maintain effective customer service could damage our reputation or even cause directloss 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 systemsdepend on the ability of such software to store, retrieve, process and manage an immense amount of data and the ability of their operators tooperate these complex systems properly. The software on which we rely may contain undetected programming errors or design defects, some ofwhich may only be discovered after the code has been released. Improper operations or other human errors may also occur from time to time as aresult of operating such software and complex systems. Programming errors or design defects within the software or human errors in connectionwith 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 orcompromise in our ability to provide effective customer service and enjoyable user engagement or exploitation of loopholes by dishonest buyers ormerchants. 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 toprivacy and cybersecurity. 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 amount of data. We face risks inherent in handling and protecting them. In particular, we facea 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 orimproper use by our employees;●addressing concerns related to privacy and sharing, safety, security and other factors; and●complying with applicable laws and regulations relating to the collection, use, storage, transfer, disclosure and security of personaldata, including any requests from regulatory and government authorities relating to these data.The PRC regulatory and enforcement regime relating to data security and data protection is evolving and may be subject to differentinterpretations or substantive changes. Moreover, different PRC regulatory bodies, including the Standing Committee of the NPC, the Ministry ofIndustry and Information Technology, or the MIIT, the CAC, the Ministry of Public Security, or the MPS, and the SAMR, have enforced dataprivacy and protections laws and regulations with varying standards and applications. See “Item 4. Information on the Company—B. BusinessOverview—Regulation—Regulations Relating to Internet Information Security and Privacy Protection.” The following are examples of certainrecent PRC regulatory activities in this area:Table of Contents25Cybersecurity and Data Security●PRC authorities have promulgated a number of laws and regulations relating to cybersecurity and data security in the past year. InJune 2021, the Standing Committee of the NPC promulgated the Data Security Law, which took effect on September 1, 2021. In July2021, the state council promulgated the Regulations on the Protection of Critical Information Infrastructure, which became effectiveon September 1, 2021. In December 2021, the CAC, together with other authorities, jointly promulgated the Cybersecurity ReviewMeasures, which became effective on February 15, 2022. These laws and regulations impose cybersecurity review obligations oncritical information infrastructure operators and network platform operators. Under the Regulations on the Protection of CriticalInformation Infrastructure, “critical information infrastructure” is defined as those network facilities or information systems that mayendanger national security, people’s livelihoods and the public interest if such facilities or systems were to experience data breaches,damage, or system malfunctions. In particular, the network facilities or information systems used in certain critical industries orsectors (such as telecommunications, energy, transportation, finance, public services and national defense) are considered criticalinformation infrastructure. Critical information infrastructure operators, as determined and notified by the applicable governingauthorities, are required to undergo cybersecurity reviews if they procure network products and services which could affect thesecurity of their information infrastructure, network or data. As of the date of this annual report, we have not received any notice thatwe are a critical information infrastructure operator by any government authority. Under the Cybersecurity Review Measures, anynetwork platform operator that holds personal data of more than one million users must apply for a cybersecurity review before itmakes any public offering on a foreign stock exchange. As these laws and regulations are relatively new, certain concepts thereunder,including the exact scope of the term “critical information infrastructure operators” and “network platform operators,” remain subjectto further clarification. Therefore, it is uncertain whether we would be deemed to be a critical information infrastructure operator or anetwork platform operator under PRC law and become subject to the relevant PRC cybersecurity laws and regulations.●In addition to the currently effective laws and regulations described above, PRC authorities may adopt additional laws andregulations in the future that further heighten the regulation of data security. For example, in November 2021, the CAC released aconsultation draft of the Regulations on Network Data Security Management, or the Draft Network Data Security Regulations, forpublic comment. These regulations create cybersecurity review obligations for data processors, which are broadly defined asindividuals or organizations that have discretion in deciding the objectives and means of their data processing activities, such as datacollection, storage, utilization, transmission, publication and deletion. In particular, pursuant to the Draft Network Data SecurityRegulations, a data processor must apply for cybersecurity review if, among others, it (i) seeks a public offering on a foreign stockexchange and processes the data of more than one million users, (ii) it seeks a Hong Kong listing that affects or may affect nationalsecurity, or (iii) otherwise conducts data processing activities that affect or may affect national security. However, as of the date ofthis annual report, there have been no clarifications from the relevant authorities as to the standards for determining whether anactivity is one that “affects or may affect national security.” In addition to the foregoing cybersecurity review obligations, the DraftNetwork Data Security Regulations also proposed to create a system of annual data security self-assessments, whereby dataprocessors that (i) process “important data” or (ii) are listed overseas must conduct an annual data security assessment, and submitthe annual assessment report to the applicable municipal cybersecurity department by the end of January in the following year. As ofthe date of this annual report, the Draft Network Data Security Regulations have only been released for public comment, and theirrespective provisions and anticipated adoption or effective date remain subject to change with substantial uncertainty. However, ifsuch regulations were to be adopted in their current form, we would be subject to additional regulatory obligations with respect todata security, and may face challenges in addressing their requirements and amending our internal data processing policies andpractices to ensure compliance therewith.Personal Data and Privacy●The Anti-monopoly Guidelines for the Platform Economy Sector published by the Anti-monopoly Committee of the State Council,effective February 7, 2021, prohibit collection of user information through coercive means by online platforms operators.Table of Contents26●In August 2021, the Standing Committee of the NPC promulgated the Personal Information Protection Law, which unified a numberof hitherto separate rules with respect to personal information rights and privacy protection, and took effect on November 1, 2021.The Personal Information Protection Law strengthened the protection of personal information. As a general principle, the processingof personal data must be directly related to a specific and reasonable purpose and the related collection of personal information mustbe tailored to what is necessary to meet that purpose. The Personal Information Protection Law also created a number of specificrequirements for the processing of personal data. For example, the law prohibits any person that processes personal data fromengaging in price discrimination or otherwise applying unreasonable differential treatment to individuals based on automated analysisof collected personal information. To meet the latest regulatory requirements of the PRC authorities, we update our privacy policiesfrom time to time and adopt technical measures to protect data and ensure that we systematically protect personal information rights.However, many of the specific requirements of the Personal Information Protection Law remain to be clarified by the CAC, otherregulatory authorities, and courts in practice. We may be required to make further adjustments to our business practices to complywith personal information protection laws and regulations.There are uncertainties with respect to how such PRC laws and regulations will be implemented and interpreted in practice. Many data-related laws and regulations are relatively new and certain concepts thereunder remain subject to interpretation by the regulators. We are subject toheightened scrutiny and required to adopt stricter measures to protect and manage certain categories of data, such as sensitive personal informationas defined under Personal Information Protection Law. Some of the provisions under the Cybersecurity Review Measures and the Draft NetworkData Security Regulations remain unclear on whether they are, or will be, applicable to companies that are already listed in the United States, suchas us. However, if the Cybersecurity Review Measures and the enacted version of the Draft Network Data Security Regulations mandate thatissuers like us must clear cybersecurity review or obtain other regulatory approvals for their previous issuances of securities in the United States orfuture offerings, it is unclear whether we would be able to complete such regulatory procedures in a timely fashion, or at all. Failure to do so maysubject us to government actions, investigations, fines, penalties, suspension of our operations or removal of our apps from the relevant applicationstores, which could have a material and adverse effect on our business and results of operations. In sum, complying with PRC laws and regulationsrelating to data security and personal information protection may be costly and result in additional expenses to us, and may subject us to negativepublicity and harm our reputation and business operations.In addition to regulations in the PRC, regulatory authorities around the world have adopted or are considering a number of legislative andregulatory proposals concerning data protection. These legislative and regulatory proposals, if adopted, and the uncertain interpretations andapplication thereof could, in addition to the possibility of fines, result in an order requiring that we change our data practices and policies, whichcould have an adverse effect on our business and results of operations. For example, 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 ofresidents of the European Economic Area. The GDPR establishes new requirements applicable to the processing of personal data, affords new dataprotection rights to individuals and imposes penalties for serious data breaches. Individuals also have a right to compensation under the GDPR forfinancial or non-financial losses. Although we do not conduct any business in the European Economic Area, in the event that residents of theEuropean Economic Area access our website or our mobile platform and input protected information, we may become subject to provisions of theGDPR.Failure to protect confidential information of buyers, merchants and our network against security breaches could damage our reputation andbrand 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 overpublic networks. A majority of the orders and the payments for products offered on our platform are made through our mobile app. In addition, allonline payments for products sold on our platform are settled through third-party online payment services. Maintaining complete security on ourplatform and systems for the storage and transmission of confidential or private information, such as buyers’ personal information, payment-relatedinformation and transaction information, is essential to maintain consumer confidence in our platform and systems.Table of Contents27We have adopted strict security policies and measures, including encryption technology, to protect our proprietary data and buyerinformation. However, advances in technology, the expertise of hackers, new discoveries in the field of cryptography or other events ordevelopments could result in a compromise or breach of the technology that we use to protect confidential information. We may not be able toprevent third parties, especially hackers or other individuals or entities engaging in similar activities through viruses, Trojan horses, malicioussoftware, break-ins, phishing attacks, third-party manipulation or security breaches, from illegally obtaining such confidential or privateinformation we hold with respect to buyers and merchants on our platform. Such individuals or entities obtaining confidential or privateinformation may further engage in various other illegal activities using such information. The methods used by hackers and others engaging inillegal online activities are increasingly more sophisticated and constantly evolving. Significant capital, managerial and other resources, includingcosts incurred to deploy additional personnel and develop network protection technologies, train employees, and engage third-party experts andconsultants, 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 paymentservices through which some of our buyers may choose to make payment for purchases. Any negative publicity on our platform’s safety or privacyprotection mechanisms and policies, and any claims asserted against us or fines imposed upon us as a result of actual or perceived failures, couldhave a material and adverse effect on our public image, reputation, financial condition and results of operations. Any compromise of ourinformation security or the information security measures of our contracted third-party online payment service providers could have a material andadverse 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 ourplatform. If these payment services are restricted or curtailed in any way, are offered to us on less favorable terms, or become unavailable to usor 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 businessdepends on the billing, payment and escrow systems of these payment service providers to maintain accurate records of payments of sales proceedsby 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 andadversely affected.Business involving online payment services is subject to a number of risks that could materially and adversely affect third-party onlinepayment 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 companiesengaged in other financial technology services;●changes to rules or practices applicable to payment systems that link to third-party online payment service providers;●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 throughonline 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’ bankaccounts to their linked accounts with third-party online payment services. We cannot predict whether these and any additional restrictions thatcould be put in place would have a material adverse effect on our platform.Table of Contents28The commercial banks and third-party online payment service providers that we work with are subject to the supervision of the People’sBank of China, or the PBOC. The PBOC may publish rules, guidelines and interpretations from time to time regulating the operation of financialinstitutions and payment service providers that may in turn affect the pattern of services provided by such entities for us. For example, inNovember 2017, the PBOC published a notice, or the PBOC Notice, on the investigation and administration of illegal offering of settlementservices by financial institutions and third-party payment service providers to unlicensed entities. The PBOC Notice intended to prevent unlicensedentities from using licensed payment service providers as a conduit for conducting the unlicensed payment settlement services, so as to safeguardthe fund security and information security. We believe that our pattern of receiving settlement services from third-party online payment serviceproviders is not in violation of the PBOC Notice because the relevant commercial bank opens an internal special account to receive payment fromthe buyers and we will submit to the bank materials verifying the truthfulness of the relevant transactions and the bank will also verify otherinformation if it deems necessary before it distributes the payment to merchants and us. However, we cannot assure you that the PBOC or othergovernmental authorities will take the same view as ours. If required by the PBOC or new legislation, our cooperative payment service providerswill 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 exclusivecontrol of the payments from the buyers in the bank accounts opened with the relevant commercial banks, and we may incur additional expenses orinvest considerable resources in complying with the requirements. If the PBOC or other governmental authorities deem our cooperation withpayment service providers to be violative of law, we may also have to suspend or terminate our cooperation with these payment service providersor explore new models for using their services, and our income derived from the accrued interests in the relevant bank accounts may beconfiscated, 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 andonline payment service providers. Identifying, negotiating and maintaining relationships with these providers require significant time andresources. Our current agreements with these service providers also do not prohibit them from working with our competitors. They could choose toterminate their relationships with us or propose terms that we cannot accept. Moreover, we cannot guarantee that the terms we negotiated withthese payment service providers, including the payment processing fee rates, will remain as favorable. If the terms with these payment serviceproviders become less favorable to us, such as the increase of payment processing fee rate, we may have to raise the transaction services fees forcertain of our merchants, which may cause us to lose merchants, or absorb the additional costs by ourselves, both of which may materially andadversely affect our business, financial condition and results of operations. Furthermore, these service providers may not perform as expectedunder our agreements with them, and we may have disagreements or disputes with such payment service providers, any of which could adverselyaffect our brand and reputation as well as our business operations.We do not control Shanghai Fufeitong and the majority of its equity interests is indirectly controlled by our executive officers. If any conflictarises between us and Shanghai Fufeitong and cannot be resolved in our favor, our business, financial condition, results of operations andprospects may be materially and adversely affected.In April 2020, Shanghai Xunmeng, a subsidiary of our VIE, entered into a business cooperation agreement with Shanghai FufeitongInformation Service Co., Ltd., or Shanghai Fufeitong, pursuant to which both parties agreed to conduct comprehensive business cooperation inpayment services, technical resources and other related professional areas. As Shanghai Fufeitong is a company which Messrs. Lei Chen andZhenwei 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 BusinessCooperation 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 cannotassure you that Shanghai Fufeitong’s transactions with other parties or its pursuit of opportunities and development would not conflict with ourinterests. There can be no assurance that Messrs. Lei Chen and Zhenwei Zheng, in light of their control over Shanghai Fufeitong, would act infavor 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 negativelyaffect the perception of our customers, merchants, regulators and other third parties on us and may further adversely and materially affect ourreputation, business, results of operations and prospects.Table of Contents29Any lack of additional requisite approvals, licenses or permits or failure to comply with any requirements of PRC laws, regulations and policiesmay 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 Ministryof Commerce, or MOFCOM, the MIIT, the National Radio and Television Administration, or the NRTA, and other governmental authorities incharge of the relevant categories of products sold by us. Together, these government authorities promulgate and enforce regulations that covermany 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 connectionwith our business operation, including the ICP license and approvals for the establishment of foreign-invested enterprises engaging in the sale ofgoods over the internet. We have in the past held and currently hold all material licenses and permits described above and may apply for certainadditional 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 material penalties or other material disciplinary action from the relevantgovernmental authorities regarding conducting our business without proper approvals, licenses and permits. However, we cannot assure you thatwe 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 stillevolving in China, new laws and regulations may be adopted from time to time to require additional licenses and permits other than those wecurrently have, and to address new issues that arise from time to time. As a result, substantial uncertainties exist regarding the interpretation andimplementation of current and any future PRC laws and regulations applicable to online retail and related businesses. If the PRC governmentconsiders us operating without proper approvals, licenses, filings, registrations or permits or promulgates new laws and regulations that requireadditional 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 orimpose 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 ourbusiness and have a material and adverse effect on our results of operations. In addition, if we were to use new or additional domain names toconduct our business, we would have to apply for the same set of government authorizations or amend the current ones. There is no assurance thatwe 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 somay subject the e-commerce platform operators to rectification requirements and penalties. Although we endeavor to comply with the relevant lawsand regulations, there is no assurance that we can timely react to the evolving requirements. If the competent governmental authorities deem thatwe fail to meet such requirements, we may receive warnings, be ordered to make rectifications, or subject to other administrative sanctions and/orpenalties that may have a material adverse effect on our reputation, business, financial condition and results of operations.On November 12, 2020, the NRTA issued the Circular on Strengthening the Administration of Livestreaming, or Notice 78. Pursuant toNotice 78, platforms that provide livestreaming must register their information and business operations. On April 23, 2021, seven PRC regulatoryauthorities jointly promulgated the Administrative Measures on Online Livestreaming Marketing (Trial), effective May 25, 2021, which requireslivestreaming platforms to adopt measures to (i) intervene in risky or illegal transactions by limiting traffic, suspending livestreaming or othermethods, and (ii) prominently warn users of the risks involved in transactions conducted outside of the livestreaming platforms. As thelivestreaming and e-commerce industries in China are still evolving rapidly, regulatory authorities may promulgate new laws and regulations fromtime to time to address new issues and regulate emerging activities. There also remains uncertainties in the interpretation and implementation ofexisting laws and regulations applicable to business activities in livestreaming and e-commerce. We cannot assure you that we will not be found inviolation of any of the laws and regulations currently in effect due to the evolving interpretation and implementation of these laws and regulations.Table of Contents30We are required by PRC laws and regulations to comply with labor laws and regulations and pay overtime compensation and variousgovernment statutory employee benefit plans, including medical insurance, maternity insurance, workplace injury insurance, unemploymentinsurance and pension benefits through a PRC government-mandated multi-employer defined contribution plan. The relevant government agenciesmay examine whether an employer has made adequate payments of the requisite statutory employee benefits, and those employers who fail tomake adequate payments may be subject to late payment fees, fines and/or other penalties. If the relevant PRC authorities determine that we shallmake supplemental contributions, that we are not in compliance with labor laws and regulations, or that we are subject to fines or other legalsanctions, 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, anindividual’s taxable income shall be an amount equal to such individual’s total annual income less a general deductible of RMB60,000 and variousspecial deductibles permitted under relevant laws. Determination and calculation of such special deductibles in accordance with relevant laws mayresult in an increase of our operating costs and expenses. However, as these laws and implementing rules were only recently promulgated and theirinterpretations have not been entirely settled yet, our determination and calculation of the special deductibles based on our understanding may bedifferent 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 publicdissemination of malicious reports or accusations about our business, all of which could severely damage our reputation and materially andadversely 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 placeon 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 socialresponsibilities and increased scrutiny and negative publicity over these issues, due to the large number of transactions that take place on ourplatform and the increasing scope of our overall business operations. In addition, changes in our services or policies have resulted and could resultin objections by members of the public, the traditional, new and social media, social network operators, merchants on our platform or others. Fromtime to time, these objections or allegations, regardless of their veracity, may result in consumer dissatisfaction, public protests or negativepublicity, 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 newjurisdictions where we may operate. There is no assurance that we would not become a target for regulatory or public scrutiny in the future or thatscrutiny and public exposure would not severely damage our reputation as well as our business and prospects.Furthermore, our brand name and our business may be harmed by aggressive marketing and communication strategies by third parties. Wemay be subject to government or regulatory investigation or third-party claims as a result and we may be required to spend significant time andincur substantial costs to react to and address these consequences. There is no assurance that we will be able to effectively refute each of theallegations within a reasonable period of time, or at all. Additionally, public allegations, directly or indirectly, against us or the merchants on ourplatform, may be posted on internet forums, blogs or websites by anyone on an anonymous basis. The availability of information on social mediaplatforms is virtually immediate, as is its impact. Social media platforms may not necessarily filter or check the accuracy of information beforepublishing them and we are often afforded little or no time to respond. As a result, our reputation may be materially and adversely affected and ourability to attract and retain customers and maintain our market share and profitability may suffer.Our online marketing services constitute internet advertisement, which subjects us to laws and regulations applicable to advertising.We derive a significant amount of our revenues from online marketing services and other related services. In July 2016, the StateAdministration of Industry and Commerce of the PRC, or the SAIC, which has now been merged into the SAMR, promulgated the InterimAdministrative Measures on Internet Advertising, or the Internet Advertising Measures, effective September 2016, pursuant to which internetadvertisements are defined as any commercial advertising that directly or indirectly promotes goods or services through internet media in any formincluding paid-for search results. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Relating toInternet Advertising Business.” Under the Internet Advertising Measures, our online marketing services and other related services constituteinternet advertisement.Table of Contents31PRC advertising laws and regulations require advertisers, advertising operators and advertising distributors to ensure that the content ofthe advertisements they prepare or distribute is fair and accurate and is in full compliance with applicable law. We currently generate revenuesprimarily from online marketing services. Violation of these laws, rules or regulations may result in penalties, including fines, confiscation ofadvertising fees and orders to cease dissemination of the advertisements. In circumstances involving serious violations, the PRC government maysuspend or revoke a violator’s business license or license for operating advertising business. In addition, the Internet Advertising Measures requirepaid-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 bythese merchants. Complying with these requirements and any penalties or fines for any failure to comply may significantly reduce theattractiveness of our platform and increase our costs and could have a material adverse effect on our business, financial condition and results ofoperations.In addition, for advertising content related to specific types of products and services, advertisers, advertising operators and advertisingdistributors 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 theadvertisement and filing with the local authorities. Pursuant to the Internet Advertising Measures, we are required to take steps to monitor thecontent of advertisements displayed on our platforms. Complying with PRC requirements on online advertising requires considerable resources andtime, and could significantly affect the operation of our business, while at the same time also exposing us to increased liability under the relevantlaws and regulations. The costs associated with complying with these laws and regulations, including any penalties or fines for our failure to socomply if required, could have a material adverse effect on our business, financial condition and results of operations. Any further change in theclassification of our online marketing and other related services by the PRC government may also significantly disrupt our operations andmaterially and adversely affect our business and prospects.In addition, the Chinese government may, from time to time, promulgate new advertising laws and regulations in the future to imposefurther requirements on online advertising services. For example, on November 26, 2021, the SAMR promulgated a draft of the Measures for theAdministration of Internet Advertisements for public comment, which stipulates that the promotion of commodities or services in the form of paidlistings on the Internet must be prominently identified as advertisements, among other heightened obligations. To the extent these measures areenacted into law, our costs of complying with and our potential liability under the relevant laws and regulations would increase, which may have amaterial adverse effect on our business, financial condition and results of operations.Table of Contents32We 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 legalproceedings and claims relating to the intellectual property rights of others. In addition, there may be other third-party intellectual property that isinfringed by products offered by our merchants and our services or other aspects of our business. There could also be existing patents of which weare not aware that our products may inadvertently infringe. We cannot assure you that holders of patents purportedly relating to some aspect of ourtechnology platform or business, if any such holders exist, would not seek to enforce such patents against us in China, the United States or anyother jurisdictions. Further, the application and interpretation of China’s patent laws and the procedures and standards for granting patents in Chinaare still evolving and are uncertain, and we cannot assure you that PRC courts or regulatory authorities would agree with our analysis. If we arefound to have violated the intellectual property rights of others, we may be subject to liability for our infringement activities or may be prohibitedfrom using such intellectual property, and we may incur licensing fees or be forced to develop alternatives of our own. In addition, we may incursignificant expenses, and may be forced to divert management’s time and other resources from our business and operations to defend against theseinfringement claims, regardless of their merits. Successful infringement or licensing claims made against us may result in significant monetaryliabilities 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 theirproducts and services have, from time to time, faced claims challenging the ownership of open-source software and compliance with open-sourcelicense terms. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open-source software ornoncompliance with open-source licensing terms. Some open-source software licenses require users who distribute open-source software as part oftheir software to publicly disclose all or part of the source code to such software and make available any derivative works of the open-source codeon unfavorable terms or at no cost. Any requirement to disclose our source code or pay damages for breach of contract could be harmful to ourbusiness, results of operations and financial condition.We may not be able to prevent others from unauthorized use of our intellectual property, which could harm our business and competitiveposition.We regard our trademarks, copyrights, patents, domain names, know-how, proprietary technologies, and similar intellectual property ascritical to our success, and we rely on a combination of intellectual property laws and contractual arrangements, including confidentiality, inventionassignment and non-compete agreements with our employees and others, to protect our proprietary rights. We are aware of certain copycat websitesthat attempt to cause confusion or diversion of traffic from us at the moment, against which we are considering initiating lawsuits, and we maycontinue to become an attractive target to such attacks in the future because of our brand recognition in the online retail industry in China. Despitethese measures, any of our intellectual property rights could be challenged, invalidated, circumvented or misappropriated, or such intellectualproperty may not be sufficient to provide us with competitive advantages. In addition, there can be no assurance that (i) our application forregistration of trademarks, patents, and other intellectual property rights will be approved, (ii) any intellectual property rights will be adequatelyprotected, or (iii) such intellectual property rights will not be challenged by third parties or found by a judicial authority to be invalid orunenforceable. Further, because of the rapid pace of technological change in our industry, parts of our business rely on technologies developed orlicensed 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 onreasonable terms.Confidentiality, invention assignment and non-compete agreements may be breached by counterparties, and there may not be adequateremedies available to us for any such breach. Accordingly, we may not be able to effectively protect our intellectual property rights or to enforceour contractual rights. Policing any unauthorized use of our intellectual property is difficult and costly and the steps we take may be inadequate toprevent the infringement or misappropriation of our intellectual property. In the event that we resort to litigation to enforce our intellectual propertyrights, such litigation could result in substantial costs and a diversion of our management and financial resources, and could put our intellectualproperty 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 doprevail, we may not obtain a meaningful recovery. In addition, our trade secrets may be leaked or otherwise become available to, or beindependently discovered by, our competitors. Any failure in maintaining, protecting or enforcing our intellectual property rights could have amaterial adverse effect on our business, financial condition and results of operations.Table of Contents33Tightening of tax compliance efforts that affect merchants on our platform could materially and adversely affect our business, financialcondition 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 ourcompany, 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 registrationrequirements that target these merchants on our platforms and may request our assistance in these efforts. As a result, these merchants may besubject to more stringent tax compliance requirements and liabilities and their business on our platforms could suffer or they could decide toterminate their relationship with us, which could in turn negatively affect us. According to the E-Commerce Law, the e-commerce platformoperators 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 bankaccount information of the merchants, and withholding against our merchants. If that occurs, we may lose existing merchants and potentialmerchants might not be willing to operate their business on our platforms. We may be subject to liabilities if we fail to cooperate with the relevantPRC tax authorities to assist in the enforcement as requested. Stricter tax enforcement by the PRC tax authorities may also reduce the activities bymerchants on our platforms. Any of these results could have a material adverse effect on our business, financial condition and results of operations.Our business may be subject to seasonal sales fluctuations which could result in volatility or have an adverse effect on the market price of ourADSs.We experience seasonality in our business, reflecting a combination of seasonal fluctuations in internet usage and traditional retailseasonality patterns. For example, we generally experience less buyer traffic and purchase orders in the first quarter of each year. Furthermore,sales are generally higher in the fourth quarter of each calendar year than in the preceding three quarters. Due to the foregoing factors, our financialcondition and results of operations for future quarters may continue to fluctuate and our historical quarterly results may not be comparable to futurequarters. Moreover, due to our limited operating history, the seasonal trends that we have experienced in the past may not apply to, or be indicativeof, our future operating results. 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 increasedshare-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 purposeof granting share-based compensation awards to employees, directors and consultants to incentivize their performance and align their interests withours. Under each of the share incentive plans, we are authorized to grant options and other types of awards. The maximum aggregate number ofordinary shares which may be issued pursuant to all awards under the 2015 Plan is 581,972,860 Class A ordinary shares, subject to adjustment andamendment, and the maximum aggregate number of shares which may be issued pursuant to all awards under the 2018 Plan was initially363,130,400 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 Plancommencing 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 andoutstanding 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 6. Directors, Senior Management and Employees—B. Compensation” forfurther details. We recognized substantial share-based compensation expenses in our consolidated financial statements in connection with thesegrants, 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 andemployees, 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 wechoose to do so, our expenses associated with share-based compensation may increase, which may have an adverse effect on our results ofoperations.Table of Contents34If we fail to implement and maintain an effective system of internal control over financial reporting, our ability to accurately and timely reportour financial results or prevent fraud may be adversely affected, and investor confidence and the market price of our ADSs may be adverselyimpacted.We are subject to the reporting requirements of the Exchange Act of 1934, or Exchange Act, the Sarbanes-Oxley Act of 2002, orSarbanes-Oxley Act, and the rules and regulations of the Nasdaq Global Select Market. The Sarbanes-Oxley Act requires, among other things, thatwe maintain effective disclosure controls and procedures and internal control over financial reporting. Commencing with our fiscal year endedDecember 31, 2019, we must perform system and process evaluation and testing of our internal control over financial reporting to allowmanagement to report on the effectiveness of our internal control over financial reporting in our Form 20-F filing for that year, as required bySection 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 JOBSAct, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reportingbeginning with our annual report for the fiscal year ended December 31, 2020. Our management has concluded that our internal control overfinancial reporting was effective as of December 31, 2021. See “Item 15. Controls and Procedures.” If we fail to implement and maintain aneffective system of internal control, we will not be able to conclude and our independent registered public accounting firm will not be able to reportthat we have effective internal control over financial reporting in accordance with the Sarbanes-Oxley Act in our future annual report on Form 20-Fcovering the fiscal year in which this failure occurs. Effective internal control over financial reporting is necessary for us to produce reliablefinancial reports. Any failure to maintain effective internal control over financial reporting could prevent us from identifying fraud and result in theloss of investor confidence in the reliability of our financial statements, which in turn could have a material and adverse effect on the trading priceof our ADSs. Furthermore, we may need to incur additional costs and use additional management and other resources as our business andoperations 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”). The2024 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”). The2025 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 2024Notes 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 Notesand/or the 2025 Notes upon a tax redemption or an optional redemption thereof or, at the holders’ election, upon a fundamental change (as definedin 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 2025Notes.We derive most of our revenues from, and hold most of our assets through, our subsidiaries. As a result, we may rely in part upondistributions and advances from our subsidiaries in order to help us meet our payment obligations under the 2024 Notes, the 2025 Notes and ourother obligations. Our subsidiaries are distinct legal entities and do not have any obligation, legal or otherwise, to provide us with distributions oradvances. We may face tax or other adverse consequences, or legal limitations, on our ability to obtain funds from these entities. In addition, ourability 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.If we are unable to obtain funding in a timely manner or on commercially acceptable terms, we may not be able to meet our paymentobligations under the 2024 Notes and/or the 2025 Notes, which in turn may constitute a default under the existing and/or future agreementsgoverning our indebtedness.Table of Contents35Changes 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 fromChina to penalize China for what it characterizes as unfair trade practices and China has responded by proposing new or higher tariffs on specifiedproducts imported from the United States. For example, in 2018, the United States announced three finalized tariffs that applied exclusively toproducts imported from China, totaling approximately US$250 billion, and in May 2019 the United States increased from 10% to 25% the rate ofcertain tariffs previously levied on Chinese products. Trade tension between China and the United States may intensify, and the United States mayadopt 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 productsinternationally in the future, any unfavorable government policies on international trade, such as capital controls or tariffs, may affect the demandfor our products and services, impact the competitive position of our products or prevent us from being able to sell products in certain countries. Ifany new tariffs, legislation and/or regulations are implemented, or if existing trade agreements are renegotiated such changes could have an adverseeffect on our business, financial condition, results of operations. In addition, future actions or escalations by either the United States or China thataffect 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-basedtechnology companies have raised concerns as to whether, in the future, there may be additional regulatory challenges or enhanced restrictionsinvolving other China-based technology companies in areas such as data security, information technology or other business activities. Similar ormore expansive restrictions that may be imposed by the U.S. or other jurisdictions in the future, may materially and adversely affect our ability toacquire 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 limitedbusiness-related insurance products. We do not have any business liability or disruption insurance to cover our operations. We have determined thatthe costs of insuring for these risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make itimpractical for us to have such insurance. Any uninsured risks may result in substantial costs and the diversion of resources, which could adverselyaffect our results of operations and financial condition.A severe or prolonged downturn in the global economy could materially and adversely affect our business and financial condition.The COVID-19 pandemic has had a widespread impact on the global economy since 2020. The pandemic remains ongoing and continuesto evolve, and its long-term impact on economic growth is unknown. Even before the outbreak of COVID-19, the global macroeconomicenvironment was facing numerous challenges. There was considerable uncertainty over the long-term effects of the expansionary monetary andfiscal policies which had been adopted by the central banks and financial authorities of some of the world’s leading economies, including theUnited States and China. The conflict in Ukraine and the imposition of broad economic sanctions on Russia could raise energy prices and disruptglobal markets. 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 maypotentially have economic effects. In particular, there is significant uncertainty about the future relationship between the United States and Chinawith respect to trade policies, treaties, government regulations and tariffs. Any severe or prolonged slowdown in the global economy maymaterially and adversely affect our business, results of operations and financial condition.Table of Contents36We and certain of our directors and officers have been named as defendants in several lawsuits, which could have a material adverse impact onour business, financial condition, results of operation, cash flows and reputation.Between August and December 2018, several putative shareholder class action lawsuits were filed against us and certain of our directorsand officers. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings” for moredetails. We may continue to be a target for lawsuits in the future, including putative class action lawsuits brought by shareholders and lawsuitsarising 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 orreverse 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 ourbusiness practices, and thus have a material adverse effect on our business, financial condition, results of operation, cash flows and reputation. Inaddition, all or part of the defense costs, or any liabilities that may arise from these matters may not be covered by any insurance. The litigationprocess 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 theimpact that indemnification claims may have on our business or financial results.Risks Related to Our Corporate StructureIf the PRC government finds that the arrangements that establish the structure for operating some of our operations in China do not complywith PRC regulations relating to the relevant industries, or if these regulations or the interpretation of existing regulations change in thefuture, 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 torestrictions under current PRC laws and regulations. For example, foreign investors are not allowed to own more than 50% of the equity interests ina value-added telecommunications service provider (except for e-commerce, domestic multi-party communications, storage and forwarding classes,and call centers).Pinduoduo Inc. is a Cayman Islands holding company and our PRC subsidiaries, namely our WFOEs, are considered foreign-investedenterprises. Accordingly, our WFOEs are not eligible to provide value-added telecommunications services. As a result, we conduct our operationsin China through (i) our PRC subsidiaries, (ii) our VIE with which we have maintained contractual arrangements, and (iii) the subsidiaries of ourVIE. In particular, we currently conduct our e-commerce business activities through Shanghai Xunmeng, a subsidiary of our VIE, which holds theVATS 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 hasobtained a VATS License covering online data processing and transaction processing business (operating e-commerce) and internet content-relatedservices. We, through Hangzhou Weimi, entered into a series of contractual arrangements, including a shareholders’ voting rights proxy agreement,equity pledge agreement, spousal consent letter, exclusive consulting and services agreement and exclusive option agreement, with HangzhouAimi, its shareholders and, as applicable, their spouses, which enable us to (i) exercise effective control over our VIE, (ii) receive substantially allof the economic benefits of our VIE and its subsidiaries, and (iii) have an exclusive option to purchase all or part of the equity interests and assetsin 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 primarybeneficiary of our VIE and its subsidiaries and hence consolidate their financial results into our consolidated financial statements under U.S.GAAP. Our PRC subsidiaries contributed 40.7% of our revenues in 2021. Our VIE and its subsidiaries contributed 59.3% of our revenues in 2021.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 ofapplicable PRC laws and regulations currently in effect; and (ii) the contractual arrangements between Hangzhou Weimi, our VIE and itsshareholders governed by PRC law are legal, valid, binding and enforceable in accordance with its terms and applicable PRC laws.Table of Contents37However, our PRC legal counsel has also advised us that there are substantial uncertainties regarding the interpretation and application ofcurrent and future PRC laws and regulations. Accordingly, the PRC regulatory authorities may take a view that is contrary to the opinion of ourPRC legal counsel. It is uncertain whether any new PRC laws or regulations relating to variable interest entity structures will be adopted or ifadopted, what they would provide. The PRC government has broad discretion in determining rectifiable or punitive measures for non-compliancewith or violations of PRC laws and regulations. If we, our VIE or its subsidiaries are found to be in violation of any existing or future PRC laws orregulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broaddiscretion to take action in dealing with such violations or failures, including, but not limited to:●revoking the business license and/or operating license of such entities;●discontinuing or placing restrictions or onerous conditions on our operations, including by blocking our VIE’s websites or apps;●imposing fines, confiscating the income from Hangzhou Weimi, our VIE or its subsidiaries, or imposing other requirements withwhich we, our VIE or its subsidiaries may not be able to comply;●requiring us to restructure our ownership structure or operations, including terminating the contractual arrangements with our VIEand 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 and its subsidiaries; 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 the penalties listed above would result in a material and adverse effect on our ability to conduct our business. Wemay not be able to repay the notes and other indebtedness, and our shares may decline in value or become worthless, if we are unable to assert ourcontractual control rights over our VIE and its subsidiaries. In addition, if the PRC government authorities were to find our legal structure andcontractual arrangements to be in violation of PRC laws and regulations, it is unclear what impact the PRC government actions would have on usand on our ability to consolidate the financial results of our VIE and its subsidiaries in our consolidated financial statements. If the imposition ofany of these government actions causes us to lose our right to direct the activities of our VIE and its subsidiaries or our right to receive substantiallyall the economic benefits and residual returns from our VIE and its subsidiaries and we are not able to restructure our ownership structure andoperations in a satisfactory manner, we would no longer be able to consolidate the financial results of our VIE and its subsidiaries in ourconsolidated financial statements. Either of these results, or any other significant penalties that might be imposed on us in this event, would have amaterial adverse effect on our financial condition and results of operations.We face uncertainties with respect to the implementation of the Foreign Investment Law and how it may impact the viability of our currentcorporate structure, corporate governance and business operations.On March 15, 2019, the NPC approved the Foreign Investment Law, which took effect on January 1, 2020 and replaced most of the lawsand regulations previously governing foreign investment in the PRC. The Foreign Investment Law is the foundation for regulating foreigninvestments in China. Subsequently, on December 26, 2019, the State Council promulgated the Implementation Regulations on the ForeignInvestment Law, which came into effect on January 1, 2020.Table of Contents38Under the Foreign Investment Law, “foreign investment” refers to the investment activities directly or indirectly conducted by foreignindividuals, enterprises or other foreign entities in China. The Foreign Investment Law stipulates three forms of foreign investment, but is silent asto whether contractual arrangements are a form of foreign investment. The Implementation Regulations on the Foreign Investment Law are alsosilent as to whether contractual arrangements should be deemed to be a form of foreign investment. However, the definition of “foreigninvestment” under the Foreign Investment Law is broad and covers all activities whereby foreign investors invest in China, including investmentsmade through “any other methods” under laws, administrative regulations, or provisions prescribed by the State Council. Before clarification orconfirmation by future laws, administrative regulations or provisions promulgated by the State Council on the nature of contractual arrangements,there is no assurance that contractual arrangements would not be considered to be foreign investment under the Foreign Investment Law. The StateCouncil may in the future enact laws or issue administrative regulations or provisions to classify contractual arrangements as a form of foreigninvestment, at which time it would be uncertain as to how contractual arrangements would be regulated and whether such contractual arrangementswould be deemed to be in violation of the foreign investment restrictions. There is no guarantee that our contractual arrangements and our businesswill not be materially and adversely affected in the future due to changes in PRC laws and regulations. If future laws, administrative regulations orprovisions prescribed by the State Council mandate further actions to be completed by companies with existing contractual arrangements, we mayface substantial uncertainties as to the timely completion of such actions. Failure to take timely and appropriate measures to cope with any of theseor 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 thechief executive officer of our 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 five directors on the board of directors) or three executive directors(if there are more than five but no more than nine directors on the board of directors) and nominate the chief executive officer candidate of ourcompany. Such executive director candidate duly nominated by the Pinduoduo Partnership shall be approved and appointed by our board ofdirectors and serve as an executive director of our company until expiry of his or her terms (if any), removal by the Pinduoduo Partnership, theshareholders by an ordinary resolution or vacation of office if such executive director, among other things, resigns his office by notice in writing tous or dies or is found to be or becomes of unsound mind. The chief executive officer candidate nominated by the Pinduoduo Partnership shall standfor appointment by the nominating and corporate governance committee of the board of directors. If the candidate is not appointed by thenominating and corporate governance committee in accordance with the then effective articles of association of the company, the PinduoduoPartnership may nominate a replacement nominee until the nominating and corporate governance committee appoints such nominee as chiefexecutive officer, or if the nominating and corporate governance committee fails to appoint more than three candidates nominated by thePinduoduo Partnership consecutively, the board of directors may then nominate and appoint any person to serve as our chief executive officer inaccordance 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 toinfluence corporate matters, including the matters determined at the board level.In addition, the interests of the Pinduoduo Partnership may not coincide with your interests, including certain managerial decisions such aspartner compensation. For example, each year, once an aggregate bonus pool is approved by the board of directors, the partnership committee ofthe Pinduoduo Partnership will make further determinations as to, among other things, the allocation of the current bonus pool among all partnersand these allocations may not be entirely aligned with the interest of shareholders who are not partners. Because the partners may be largelycomprised of members of our management team, the Pinduoduo Partnership and its executive director nominees may focus on the operational andfinancial results that may differ from the expectations and desires of shareholders. To the extent that the interests of the Pinduoduo Partnershipdiffer 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 aseffective as direct ownership in providing operational control.Our VIE contributed 58.5%, 65.1% and 59.3% of our consolidated total revenues in 2019, 2020 and 2021, respectively. We have reliedand expect to continue to rely on contractual arrangements with our VIE and its shareholders to conduct our business. For a description of thesecontractual arrangements, see “Item 4. Information on the Company—C. Organizational Structure.” These contractual arrangements may not be aseffective as direct ownership in providing us with control over our VIE and its subsidiaries. For example, our VIE and its shareholders could breachtheir contractual arrangements with us by, among other things, failing to conduct their operations in an acceptable manner or taking other actionsthat are detrimental to our interests.Table of Contents39If 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 directorsof 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 thecontracts to exercise control over our VIE and its subsidiaries. The shareholders of our consolidated VIE may not act in the best interests of ourcompany or may not perform their obligations under these contracts. Such risks exist throughout the period in which we intend to operate certainportions of our business through the contractual arrangements with our VIE. If any dispute relating to these contracts remains unresolved, we willhave to enforce our rights under these contracts through the operations of PRC law and arbitration, litigation and other legal proceedings andtherefore will be subject to uncertainties in the PRC legal system. See “Item 3. Key Information—D. Risk Factors—Risks Related to OurCorporate Structure—Any failure by our VIE or its shareholders to perform their obligations under our contractual arrangements with them wouldhave a material and adverse effect on our business.” Therefore, our contractual arrangements with our VIE may not be as effective in ensuring ourcontrol 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 materialand adverse effect on our business.Although the shareholders of our VIE hold equity interests on record in our VIE, each such shareholder has irrevocably authorizedHangzhou Weimi to exercise his rights as a shareholder of our VIE pursuant to the terms of the relevant shareholders’ voting rights proxyagreement. However, if our VIE or its shareholders fail to perform their respective obligations under the contractual arrangements, we may have toincur 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 theshareholders 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 thesecontractual arrangements, or if they otherwise act in bad faith toward us, then we may have to take legal actions to compel them to perform theircontractual obligations.All of the arrangements under our contractual arrangements are governed by PRC law and provide for the resolution of disputes througharbitration in China. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved inaccordance 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 andregulations in China could adversely affect us.” Meanwhile, there are very few precedents and little formal guidance as to how contractualarrangements in the context of a VIE should be interpreted or enforced under PRC law. There remain significant uncertainties regarding theultimate outcome of such arbitration should legal action become necessary. In addition, under PRC law, rulings by arbitrators are final, partiescannot appeal the arbitration results in courts, and if the losing parties fail to carry out the arbitration awards within a prescribed time limit, theprevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would requireadditional expenses and delay. In the event we are unable to enforce these contractual arrangements, or if we suffer significant delays or otherobstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over our VIE and itssubsidiaries, 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 andfinancial condition.Messrs. Lei Chen and Jianchong Zhu hold 86.6% and 13.4% equity interests in our VIE, respectively. They are employees of our companyand have entered into a series of contractual arrangements with Hangzhou Weimi, pursuant to which we have control over and are considered theprimary beneficiary of our VIE and its subsidiaries. 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, theexisting contractual arrangements we have with them and our VIE, which would have a material and adverse effect on our ability to effectivelycontrol our VIE and its subsidiaries and receive economic benefits from it. For example, the shareholders may be able to cause our arrangementswith our VIE to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangementsto 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 ourcompany or such conflicts will be resolved in our favor.Table of Contents40Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and our company, exceptthat we could exercise our purchase option under the exclusive option arrangements with these shareholders to request them to transfer all of theirequity interests in our VIE to a PRC entity or individual designated by us, to the extent permitted by PRC law. We also rely on these shareholdersto 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 actin 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 ofour VIE have executed shareholders’ voting rights proxy agreement to appoint Hangzhou Weimi or a person designated by Hangzhou Weimi tovote on their behalf and exercise voting rights as shareholders of our VIE. If we cannot resolve any conflict of interest or dispute between us andthe shareholders of our VIE, we would have to rely on legal proceedings, which could result in disruption of our business and subject us tosubstantial 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 ontheir respective equity interests in our VIE and the validity or enforceability of our contractual arrangements with the relevant entity and itsshareholders. For example, in the event that any of the shareholders of our VIE divorces his spouse, the spouse may claim that the equity interest ofour VIE held by such shareholder is part of their community property and should be divided between such shareholder and his spouse. If suchclaim 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 toobligations under our contractual arrangements, which could result in a loss of the effective control over our VIE and its subsidiaries 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, wecould lose our control over our VIE and its subsidiaries or have to maintain such control by incurring unpredictable costs, which could causesignificant disruption to our business and operations and harm our financial condition and results of operations.Although under our current contractual arrangements, (i) to the extent applicable, the spouse of each of the shareholders of our VIE hasexecuted a spousal consent letter, under which the spouse agrees not to raise any claim against the equity interest, and to take every action to ensurethe performance of the contractual arrangements, and (ii) it is expressly provided that the rights and obligations under the contractual arrangementsshall 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 andobligations under the contractual arrangements to third parties without our prior consent, we cannot assure you that these undertakings andarrangements will be complied with or effectively enforced. In the case any of them is breached or becomes unenforceable and leads to legalproceedings, it could disrupt our business, distract our management’s attention and subject us to substantial uncertainties as to the outcome of anysuch 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, ourVIE or its subsidiaries 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 bythe PRC tax authorities. We could face material and adverse tax consequences if the PRC tax authorities determine that the VIE contractualarrangements 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 PRClaws and regulations, and adjust the income of our VIE in the form of a transfer pricing adjustment. A transfer pricing adjustment could, amongother things, result in a reduction of expense deductions recorded by our VIE for PRC tax purposes, which could in turn increase its tax liabilitieswithout reducing Hangzhou Weimi’s tax expenses. In addition, the PRC tax authorities may impose late payment fees and other penalties on ourVIE for the adjusted but unpaid taxes according to the applicable regulations. Our financial position could be materially and adversely affected ifour 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 our VIEgoes 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 ofcertain portion of our business, including intellectual property and premise and VATS licenses. If our VIE goes bankrupt and all or part of its assetsbecome subject to liens or rights of third-party creditors, we may be unable to continue some or all of our business activities, which couldmaterially and adversely affect our business, financial condition and results of operations. Under the contractual arrangements, our VIE may not, inany manner, sell, transfer, mortgage or dispose of their assets or legal or beneficial interests in the business without our prior consent. If our VIEundergoes 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 ofoperations.Table of Contents41If the chops of our PRC subsidiaries and our VIE are not kept safely, are stolen or are used by unauthorized persons or for unauthorizedpurposes, 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 asignature. Each legally registered company in China is required to maintain a company chop, which must be registered with the local PublicSecurity 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 our VIE are generally held securely by personnel designated or approved by us in accordance with ourinternal control procedures. To the extent those chops are not kept safely, are stolen or are used by unauthorized persons or for unauthorizedpurposes, the corporate governance of these entities could be severely and adversely compromised and those corporate entities may be bound toabide by the terms of any documents so chopped, even if they were chopped by an individual who lacked the requisite power and authority to doso. In addition, if the chops are misused by unauthorized persons, we could experience disruption to our normal business operations. We may haveto take corporate or legal action, which could involve significant time and resources to resolve while distracting management from our operations.Risks Related to Doing Business in ChinaChanges in China’s economic, political or social conditions or government policies could have a material adverse effect on our business andoperations.Substantially all of our assets and operations are located in China. Accordingly, our business, financial condition, results of operations andprospects may be influenced to a significant degree by political, economic and social conditions in China generally. The Chinese economy differsfrom the economies of most developed countries in many respects, including the level of government involvement, level of development, growthrate, control of foreign exchange and allocation of resources. Although the Chinese government has implemented measures emphasizing theutilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improvedcorporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, theChinese 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, controllingpayment of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to particular industries orcompanies.While the Chinese economy has experienced significant growth over the past decades, growth has been uneven, both geographically andamong various sectors of the economy, and the rate of growth has been slowing since 2012, and the impact of COVID-19 on the Chinese economyin 2020 was severe. According to the National Bureau of Statistics of China, China’s real GDP growth rate was 6.0%, 2.3% and 8.1% in 2019,2020 and 2021, respectively. There have also been concerns about the relationships among China and other Asian countries, the relationshipbetween China and the United States, as well as the relationship between the United States and certain Asian countries such as North Korea, whichmay result in or intensify potential conflicts in relation to territorial, regional security and trade disputes. Any adverse changes in economicconditions in China, in the policies of the Chinese government or in the laws and regulations in China could have a material adverse effect on theoverall economic growth of China. Such developments could adversely affect our business and operating results, lead to reduction in demand forour services and adversely affect our competitive position. Any disruptions or continuing or worsening slowdown could significantly reducedomestic commerce activities in China, which could lead to significant reduction in merchants’ demand for and spending on the various serviceswe offer. An economic downturn, whether actual or perceived, a further decrease in economic growth rates or an otherwise uncertain economicoutlook in China could have a material adverse effect on business and consumer spending and, as a result, adversely affect our business, financialcondition and results of operations. The Chinese government has implemented various measures to encourage economic growth and guide theallocation of resources. Some of these measures may benefit the overall Chinese economy, but may have a negative effect on us. For example, ourfinancial condition and results of operations may be adversely affected by government control over capital investments or changes in taxregulations.In addition, because we hold a significant amount of cash and cash equivalents and short-term investments, if financial institutions andissuers of financial instruments that we hold become insolvent or if the market for these financial instruments become illiquid as a result of a severeeconomic downturn, our business and financial condition could be materially and adversely affected.Table of Contents42Uncertainties 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 its subsidiaries in China. Our operations in China aregoverned by PRC laws and regulations. Our PRC subsidiaries are subject to laws and regulations applicable to foreign investment in China. ThePRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions under the civil law systemmay be cited for reference but have limited precedential value. In addition, any new or changes in PRC laws and regulations related to foreigninvestment in China could affect the business environment and our ability to operate our business in China.From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. Any administrative and courtproceedings in China may be protracted, resulting in substantial costs and diversion of resources and management’s attention. Since PRCadministrative and court authorities have significant discretion in interpreting and implementing statutory provisions and contractual terms, it maybe more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developedlegal systems. These uncertainties may impede our ability to enforce the contracts we have entered into and could materially and adversely affectour 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 timelybasis 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 sometimeafter the violation. Such unpredictability towards our contractual, property and procedural rights could adversely affect our business and impedeour 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 andresults of operations.The PRC government extensively regulates the internet industry, including foreign ownership of, and the licensing and permitrequirements pertaining to, companies in the internet industry. These internet-related laws and regulations are relatively new and evolving. As aresult, in certain circumstances it may be difficult to determine what actions or omissions may be deemed to be in violation of applicable laws andregulations.We only have contractual control over our Pinduoduo mobile app. We do not directly own the mobile app due to the restrictions on foreigninvestment in businesses providing value-added telecommunications services in China, including e-commerce services and internet content-relatedservices. This may significantly disrupt our business, subject us to sanctions, compromise enforceability of related contractual arrangements, orhave 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, inMay 2011, the State Council announced the establishment of the State Internet Information Office (with the involvement of the State CouncilInformation Office, the MIIT and the MPS). The primary role of the State Internet Information Office is to facilitate the policy-making andlegislative development in this field, to direct and coordinate with the relevant departments in connection with online content administration and todeal 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 VATS Licenses toany foreign investor in any form, or providing any resources, sites or facilities to any foreign investor for their illegal operation of atelecommunications business in China. According to this circular, either the holder of a value-added telecommunications services operation permitor its shareholders must directly own the domain names and trademarks used by such license holders in their provision of value-addedtelecommunications services. The circular also requires each license holder to have the necessary facilities, including servers, for its approvedbusiness operations and to maintain such facilities in the regions covered by its license. Shanghai Xunmeng owns the relevant domain names andtrademarks in connection with our online platform and has the necessary personnel to operate our online platform.Table of Contents43The interpretation and application of existing PRC laws, regulations and policies and possible new laws, regulations or policies relating tothe internet industry have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businessesand activities of, internet businesses in China, including our business. We cannot assure you that we have obtained all the permits or licensesrequired for conducting our business in China or will be able to maintain our existing licenses or obtain new ones. If the PRC government considersthat we were operating without the proper approvals, licenses or permits or promulgates new laws and regulations that require additional approvalsor 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 affectedportion of our business. Any of these actions by the PRC government may have a material adverse effect on our business and results of operations.The PRC government’s significant oversight and discretion over our business operations could result in a material change in our operationsand the value of our ADSs.We conduct our business primarily in China. Our operations in China are governed by PRC laws and regulations. The PRC governmenthas significant oversight and discretion over the conduct of our business. The PRC government has released regulations and policies that havesignificantly impacted various industries in general and specific operators within such industries, and may in the future release new regulations orpolicies that could intervene in or influence our operations or the industry sectors in which we operate. The PRC government may also require us toobtain new permits or approvals to continue our operations. If we fail to comply with these regulations, policies or requirements, it could result in amaterial change in our operations or the value of our ADSs. Therefore, investors of our company and our business face uncertainty from potentialactions taken by regulators that may affect our business.Discontinuation of any preferential tax treatments or imposition of any additional taxes could adversely affect our financial condition andresults of operations.Each of Shanghai Xunmeng and Walnut Street (Shanghai) Information Technology Co., Ltd. (formerly known as Shanghai PinduoduoNetwork Technology Co., Ltd.), or Walnut Shanghai, one of our PRC subsidiaries, was recognized as a “high and new technology enterprise” andis eligible for a preferential corporate income tax rate of 15% until 2023. Shenzhen Qianhai Xinzhijiang Information Technology Co., Ltd., orXinzhijiang, one of our PRC subsidiaries in Qianhai District, Shenzhen, Guangdong Province, is also eligible for a preferential corporate incometax rate of 15% until 2025. These preferential corporate income tax treatments are subject to the discretion of the relevant governmental authorities.The discontinuation of any preferential tax treatments or the imposition of any additional taxes could adversely affect our financial condition andresults of operations.You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing actions in China against us or ourmanagement 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 Chinaand substantially all of our assets are located in China. In addition, most of our directors and officers reside within China for a significant portion ofthe time and 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. federalsecurities laws against us and our officers and directors as most of our current directors and officers are nationals and residents of countries otherthan the United States and substantially all of the assets of these persons are located outside the United States. In addition, there is uncertainty as towhether the courts of the Cayman Islands or the PRC would recognize or enforce judgments of U.S. courts against us or such persons predicatedupon 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 recognizeand enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China andthe country where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties or other forms ofwritten arrangement with the United States that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, accordingto 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 thejudgment violates the basic principles of PRC laws or national sovereignty, security or public interest. As a result, it is uncertain whether and onwhat basis a PRC court would enforce a judgment rendered by a court in the United States.Table of Contents44We may rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we mayhave, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material and adverse effect on our abilityto conduct our business.We are a Cayman Islands holding company and we rely principally on dividends and other distributions on equity from our PRCsubsidiaries for our cash requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders for servicesof any debt we may incur. If any of our PRC subsidiaries incur debt on its own behalf, the instruments governing the debt may restrict its ability topay dividends or make other distributions to us. Under PRC laws and regulations, our PRC subsidiaries, each of which is a wholly foreign-ownedenterprise may pay dividends only out of its respective accumulated profits as determined in accordance with PRC accounting standards andregulations. 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 acertain 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 reservefund 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 putforward by SAFE for cross-border transactions falling under both the current account and the capital account. Any limitation on the ability of ourPRC subsidiaries to pay dividends or make other kinds of payments to us could materially and adversely limit our ability to grow, makeinvestments 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 beapplicable to dividends payable by Chinese companies to non-PRC-resident enterprises unless otherwise exempted or reduced according to treatiesor arrangements between the PRC central government and governments of other countries or regions where the non-PRC-resident enterprises areincorporated.PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currencyconversion may delay or prevent us from using the proceeds of our offshore financing to make loans or additional capital contributions to ourPRC 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 our VIEsubject to the approval, registration, and filing with governmental authorities and limitation of amount, or we may make additional capitalcontributions to our wholly foreign-owned subsidiaries in China. Any loans to our wholly foreign-owned subsidiaries in China, which are treated asforeign-invested enterprises under PRC law, are subject to foreign exchange loan registrations. In addition, a foreign invested enterprise shall useits capital pursuant to the principle of authenticity and self-use within its business scope. The capital of a foreign invested enterprise shall not beused for the following purposes: (i) directly or indirectly used for payment beyond the business scope of the enterprises or the payment prohibitedby relevant laws and regulations; (ii) directly or indirectly used for investment in securities or investments other than banks’ principal-securedproducts unless otherwise provided by relevant laws and regulations; (iii) the granting of loans to non-affiliated enterprises, except where it isexpressly 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 theforeign-invested real estate enterprises).In light of the various requirements imposed by PRC regulations on loans to and direct investment in PRC entities by offshore holdingcompanies, we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary governmentapprovals or filings on a timely basis, if at all, with respect to future loans by us to our PRC subsidiaries or our VIE or with respect to future capitalcontributions by us to our PRC subsidiaries. If we fail to complete such registrations or obtain such approvals, our ability to use the proceeds fromour offshore financing and to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially and adverselyaffect our liquidity and our ability to fund and expand our business.Table of Contents45Fluctuations 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. TheRenminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. The value of Renminbi against the U.S. dollar and othercurrencies is affected by changes in China’s political and economic conditions and by China’s foreign exchange policies, among other things. Wecannot assure you that Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predicthow 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 financialposition, 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. dollarswe receive from our initial public offering, follow-on offerings or convertible senior notes offerings into Renminbi for our operations, appreciationof 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 Renminbiwould 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, 2021, wehad not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enterinto hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to adequatelyhedge our exposure or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict ourability to convert Renminbi into foreign currency. As a result, fluctuations in exchange rates may have a material adverse effect on yourinvestment.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 remittanceof currency out of China. We receive substantially all of our revenues in Renminbi. Under our current corporate structure, our Cayman Islandsholding company primarily relies on dividend payments from our PRC subsidiaries 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 tradeand service-related foreign exchange transactions, can be made in foreign currencies without prior approval of SAFE by complying with certainprocedural requirements. Specifically, under the existing exchange restrictions, without prior approval of SAFE, cash generated from the operationsof our PRC subsidiaries in China may be used to pay dividends to our company. However, approval from or registration with appropriategovernment authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses suchas the repayment of loans denominated in foreign currencies. As a result, we need to obtain SAFE approval to use cash generated from theoperations of our PRC subsidiaries and our 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.In light of the flood of capital outflows from China, the PRC government may from time to time impose more restrictive foreign exchangepolicies and step up scrutiny of major outbound capital movement. More restrictions and substantial vetting process may be required by SAFE orother government authorities to regulate cross-border transactions falling under the capital account. The PRC government may at its discretionrestrict access to foreign currencies for current account transactions in the future. If the foreign exchange control system prevents us from obtainingsufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to ourshareholders, including holders of our ADSs.Table of Contents46Certain 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 mergerand acquisition activities by foreign investors more time-consuming and complex. The M&A Rules require, among other things, that MOFCOM benotified in advance of any change-of-control transaction in which a foreign investor acquires control of a PRC domestic enterprise and involves anyof the following circumstances: (i) an important industry is concerned, (ii) the transaction involves factors that impact or may impact nationaleconomic security, or (iii) the 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 require that, in accordance with the Anti-monopoly Law promulgated by the Standing Committee of theNPC, which became effective in 2008, any merger and acquisitions of domestic enterprises by foreign investors which are deemed concentrationsand involve parties with specified turnover thresholds must be cleared by MOFCOM before they can be completed. In addition, PRC nationalsecurity review rules that became effective in September 2011 require acquisitions by foreign investors of PRC companies engaged in militaryrelated 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 theseregulations to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval or clearancefrom MOFCOM, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintainour 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 anotification with the PRC regulator in advance. Furthermore, in February 2021, the Anti-monopoly Committee of the State Council published theAnti-monopoly Guidelines for the Platform Economy Sector and included concentrations involving companies with VIE structure within the ambitof the 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 orclaims against us and could have an adverse effect on our business, financial condition and results of operations.PRC regulations relating to offshore investment activities by PRC residents may limit our PRC subsidiaries’ ability to change their registeredcapital 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’ OffshoreInvestment and Financing and Roundtrip Investment Through Special Purpose Vehicles, or SAFE Circular 37. SAFE Circular 37 requires PRCresidents (including PRC individuals and PRC corporate entities as well as foreign individuals that are deemed as PRC residents for foreignexchange administration purpose) to register with SAFE or its local branches in connection with their direct or indirect offshore investmentactivities. SAFE Circular 37 further requires amendment to the SAFE registrations in the event of any changes with respect to the basic informationof the offshore special purpose vehicle, such as change of a PRC individual shareholder, name and operation term, or any significant changes withrespect to the offshore special purpose vehicle, such as increase or decrease of capital contribution, share transfer or exchange, or mergers ordivisions. SAFE Circular 37 is applicable to our shareholders who are PRC residents and may be applicable to any offshore acquisitions that wemake in the future.If our shareholders who are PRC residents fail to make the required registration or to update the previously filed registration, our PRCsubsidiaries may be prohibited from distributing their profits or the proceeds from any capital reduction, share transfer or liquidation to us, and wemay also be prohibited from making additional capital contributions into our PRC subsidiaries. In February 2015, SAFE promulgated a Notice onFurther Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment, or SAFE Notice 13, effective June 2015. UnderSAFE 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 theapplications and accept registrations under the supervision of SAFE.Table of Contents47All of our shareholders who we are aware of being subject to the SAFE regulations have completed the initial registrations with the localSAFE branch or qualified banks as required by SAFE Circular 37. However, we may not be informed of the identities of all the PRC residentsholding direct or indirect interest in our company, and we cannot provide any assurance that these PRC residents will comply with our request tomake or obtain any applicable registrations or continuously comply with all requirements under SAFE Circular No. 37 or other related rules. Thefailure or inability of the relevant shareholders to comply with the registration procedures set forth in these regulations may subject us to fines andlegal sanctions, such as restrictions on our cross-border investment activities, on the ability of our wholly foreign-owned subsidiaries in China todistribute dividends and the proceeds from any reduction in capital, share transfer or liquidation to us. Moreover, failure to comply with the variousforeign exchange registration requirements described above could result in liability under PRC law for circumventing applicable foreign exchangerestrictions. 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 PRCplan 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 IndividualsParticipating 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 incentiveplan 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-entrustedinstitution must be retained to handle matters in connection with the exercise or sale of stock options and the purchase or sale of shares andinterests. We and our executive officers and other employees who are PRC citizens or who reside in the PRC for a continuous period of not lessthan one year and who have been granted options are subject to these regulations as our company is an overseas-listed company. Failure tocomplete SAFE registrations may subject them to fines of up to RMB300,000 for entities and up to RMB50,000 for individuals, and legal sanctionsand may also limit our ability to contribute additional capital into our PRC subsidiaries and limit our PRC subsidiaries’ ability to distributedividends to us. We also face regulatory uncertainties that could restrict our ability to adopt additional incentive plans for our directors, executiveofficers and employees under PRC law. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Relating toForeign Exchange—Regulations on Stock Incentive Plans.”In addition, the SAT has issued certain circulars concerning employee share options and restricted shares. Under these circulars, ouremployees working in China who exercise share options or are granted restricted shares will be subject to PRC individual income tax. Our PRCsubsidiaries have obligations to file documents related to employee share options or restricted shares with relevant tax authorities and to withholdindividual income taxes of those employees who exercise their share options. If our employees fail to pay or we fail to withhold their income taxesaccording to relevant laws and regulations, we may face sanctions imposed by the tax authorities or other PRC government authorities. See “Item4. Information on the Company—B. Business Overview—Regulation—Regulations Relating to Foreign Exchange—Regulations on StockIncentive Plans.”Table of Contents48Our use of some leased properties could be challenged by third parties or government authorities, which may cause interruptions to ourbusiness operations.Certain of our leasehold interests in leased properties have not been registered with the relevant PRC government authorities as requiredby PRC law, which may expose us to potential fines if we fail to remediate after receiving notice from the relevant PRC government authorities. Incase of failure to register or file a lease, the parties to the unregistered lease may be ordered to make rectifications (which would involve registeringsuch lease with the relevant authority) before being subject to penalties. The penalty ranges from RMB1,000 to RMB10,000 for each unregisteredlease, 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 toregister the lease. Although we have proactively requested that the applicable lessors complete or cooperate with us to complete the registration in atimely 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 thelessee, 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 notprovided us with valid ownership certificates or authorization of sublease for our leased properties. As a result, there is a risk that these lessors maynot have the right to lease such properties to us, in which case the relevant lease agreements may be deemed invalid or we may face challengesfrom the property owners or other third parties regarding our right to occupy the premises. We are not aware of any actions, claims or investigationsbeing initiated by third parties or competent governmental authorities with respect to the defects in our leased real properties. However, if we areunable to continue our operations on the current premises and cannot find a suitable replacement in a timely manner, our business, results ofoperations 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 consequencesto 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 factomanagement body” within the PRC is considered a “resident enterprise” and will be subject to the enterprise income tax on its global income at therate of 25%. The implementation rules define the term “de facto management body” as the body that exercises full and substantial control andoverall management over the business, productions, personnel, accounts and properties of an enterprise. In 2009, the SAT issued a circular, knownas SAT Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlledenterprise that is incorporated offshore is located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprisesor PRC enterprise groups, not those controlled by PRC individuals or foreigners, the criteria set forth in the circular may reflect SAT’s generalposition on how the “de facto management body” text should be applied in determining the tax resident status of all offshore enterprises. Accordingto SAT Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC taxresident 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 ifall of the following conditions are met: (i) the primary location of the day-to-day operational management is in the PRC; (ii) decisions relating tothe enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) theenterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions, are located or maintained in thePRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the PRC.We believe that we are not a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an enterprise is subject todetermination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” If thePRC 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 of25% on our worldwide income, which could materially reduce our net income, and we may be required to withhold a 10% withholding tax fromdividends we pay to our shareholders that are non-resident enterprises, including the holders of our ADSs. In addition, non-resident enterpriseshareholders (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 shareholdersmay 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 reducedrate is available under an applicable tax treaty. It is unclear whether non-PRC shareholders of our company would be able to claim the benefits ofany 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 mayreduce the returns on your investment in the ADSs or ordinary shares.Table of Contents49We 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 equityinterests of a PRC resident enterprise indirectly by disposition of the equity interests of an overseas holding company, or an Indirect Transfer, andsuch 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 incomeof its residents, the non-resident enterprise, being the transferor, shall report to the competent tax authority of the PRC resident enterprise thisIndirect Transfer.In February 2015, SAT issued a Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties byNon-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 issignificantly different from the previous one under SAT Circular 698. SAT Circular 7 extends its tax jurisdiction to not only Indirect Transfers setforth under SAT Circular 698 but also transactions involving transfer of other taxable assets through offshore transfer of a foreign intermediateholding company. In addition, SAT Circular 7 provides clearer criteria than SAT Circular 698 for assessment of reasonable commercial purposesand has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market. SATCircular 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 anIndirect Transfer, the non-resident enterprise as either transferor or transferee, or the PRC entity that directly owns the taxable assets, may reportsuch Indirect Transfer to the relevant tax authority. Using a “substance over form” principle, the PRC tax authority may disregard the existence ofthe overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferringPRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC enterprise income tax, and the transferee or other personwho 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 ina PRC resident enterprise. Both the transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails to withholdthe 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 SATCircular 7. According to SAT Circular 37, where the non-resident enterprise fails to declare the tax payable pursuant to Article 39 of the EnterpriseIncome 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 thetax payable within such time limits specified by the tax authority. However, if the non-resident enterprise voluntarily declares and pays the taxpayable 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.We face uncertainties as to the reporting and other implications of certain past and future transactions where PRC taxable assets areinvolved, such as offshore restructuring, sale of the shares in our offshore subsidiaries and investments. Our company may be subject to filingobligations or taxed if our company is transferor in such transactions, and may be subject to withholding obligations if our company is transferee insuch transactions, under SAT Circular 7 and SAT Circular 37. For transfer of shares in our company by investors who are non-PRC residententerprises, our PRC subsidiaries may be requested to assist in the filing under the SAT circulars. As a result, we may be required to expendvaluable resources to comply with the SAT circulars or to request the relevant transferors from whom we purchase taxable assets to comply withthese circulars, or to establish that our company should not be taxed under these circulars, which may have a material adverse effect on ourfinancial condition and results of operations.The approval of or filing with the CSRC or other PRC government authorities may be required in connection with our previous or futureoffshore offerings under PRC laws, and, if required, we cannot predict whether or for how long we will be able to obtain such approval orcomplete such filing.Pursuant to the M&A Rules, an offshore special purpose vehicle that (i) was formed for listing purposes through the acquisition of PRCdomestic companies and (ii) is controlled by PRC persons or entities must obtain the approval of the CSRC before it can list its securities on anoverseas stock exchange. Based on the advice of our PRC legal counsel, we are of the view that we did not need, and will not need, to obtain theCSRC’s approval for our previous offshore offerings. However, the interpretation and application of the regulations could change so that we mayneed to obtain the CSRC’s approval with respect to our previous or future offshore offerings. To the extent such CSRC approvals are required, wecannot assure you that we would be able to obtain them in a timely manner. Any failure to obtain or delay in obtaining the requisite CSRCapprovals for any of our previous or future offshore offerings would subject us to sanctions imposed by the CSRC or other PRC regulatoryauthorities, which could include fines and penalties on our operations in China, restrictions or limitations on our ability to pay dividends outside ofChina.Table of Contents50The PRC government authorities have recently indicated an intent to exert more oversight and control over securities offerings and othercapital markets activities that are or have been conducted overseas and foreign investment in China-based companies like us. In July 2021, theGeneral Office of the Central Committee of the Communist Party of China and the General Office of the State Council issued the Opinions onStrictly Scrutinizing Illegal Securities Activities in Accordance with the Law. These opinions emphasized the need to, among other things,strengthen the supervision of overseas listings by China-based companies. These opinions also proposed the development of a regulatory system tooversee China-based overseas-listed companies.In December 2021, the State Council issued for public comment the Draft Administrative Provisions of the State Council on the OverseasIssuance and Listing of Securities by Domestic Companies, or the Draft Administrative Provisions on Overseas Securities Offerings, and the CSRCissued for public comment the Draft Measures for the Overseas Issuance and Listing of Securities Record-filings by Domestic Companies, or theDraft Measures on Overseas Securities Offerings. Pursuant to these draft regulations, in connection with an overseas offering and listing (such asan initial public offering or a follow-on offering) by a PRC company, the issuer or its affiliated PRC company, as the case may be, must make afiling with the CSRC, regardless of whether the overseas offering and listing is made directly or indirectly. Failure to comply with the filingrequirements under the Draft Administrative Provisions on Overseas Securities Offerings may subject a PRC company to a warning or a fine ofbetween RMB1 million and RMB10 million. As currently proposed, if the competent governmental authorities deem the overseas offering ofsecurities by a PRC company to be a serious violation of the Draft Administrative Provisions on Overseas Securities Offerings or the DraftMeasures on Overseas Securities Offerings, such authorities may order the PRC company to suspend its business or revoke its permits or businesslicense.As of the date of this annual report, the Draft Administrative Provisions on Overseas Securities Offerings and the Draft Measures onOverseas Securities Offerings have only been released for public comment. There are uncertainties as to whether they will be further amendedbefore their official enactment. Substantial uncertainties exist with respect to the timing of their enactment and final content. For details about theDraft Administrative Provisions on Overseas Securities Offerings and the Draft Measures on Overseas Securities Offerings, please refer to “Item 4.Information on the Company—B. Business Overview—Regulation—Regulations Relating to Overseas Listings and M&A.”In December 2021, the National Development and Reform Commission, or the NDRC, and MOFCOM jointly issued the SpecialAdministrative Measures (Negative List) for Foreign Investment Access (2021 Version), or the 2021 Negative List, which became effective onJanuary 1, 2022. Pursuant to the 2021 Negative List, if a PRC company that is engaged in a prohibited businesses under the 2021 Negative Listseeks an overseas offering and listing of securities, it must obtain approval from the competent governmental authorities. In addition, the foreigninvestors of such PRC company may not be involved in the company’s operations and management, and their shareholding percentage is subject tothe relevant regulations on domestic securities investments by foreign investors, which regulations are set out in more detail under “Item 4.Information on the Company—B. Business Overview—Regulation—Regulations Relating to Foreign Investment.” As the 2021 Negative List isrelatively new, there are substantial uncertainties as to the interpretation and implementation of these new requirements, and it is unclear as towhether and to what extent listed companies like us will be subject to these new requirements.If it is determined in the future that approval and filing from the CSRC or other regulatory authorities or other procedures, including thecybersecurity review under the Cybersecurity Review Measures, are required for our offshore offerings, it is uncertain whether we can or how longit will take us to obtain such approval or complete such filing procedures. Any failure to obtain (including possible rescission of any approvals thathad been obtained) or delay in obtaining such approval or completing such filing procedures for our offshore offerings could subject us to penaltiesand sanctions such as fines and penalties on our operations in China, orders limiting our ability to pay dividends outside of China, reduction of ouroperating privileges in China, or delay or restrictions on repatriation of the proceeds from our offshore offerings into China. These penalties andsanctions could materially and adversely affect our business, financial condition, results of operations, and prospects, as well as the trading price ofour securities. Similarly, the CSRC or other PRC regulatory authorities could also require us to halt our offshore offerings before settlement anddelivery of the shares offered. Consequently, if investors engage in trading or hedging activities in anticipation of and prior to settlement anddelivery, they do so at the risk that settlement and delivery may not occur. In addition, if the CSRC or other regulatory authorities subsequentlypromulgate new rules or explanations requiring that we obtain their approvals or accomplish the required filing or other regulatory procedures forour prior offshore offerings, we may be unable to obtain a waiver of such approval requirements, if and when procedures are established to obtainsuch a waiver. Any uncertainties or negative publicity regarding such approval requirement could materially and adversely affect our business,prospects, financial condition, reputation, and the trading price of our listed securities.Table of Contents51The PCAOB is currently unable to inspect our auditor in relation to their audit work performed for our financial statements.Our auditor is registered with the PCAOB. The Sarbanes-Oxley Act authorizes the PCAOB to conduct regular inspections to assess thecompliance of registered public accounting firms, such as our auditor, with the applicable professional standards. Since our auditor is located inChina, a jurisdiction where the PCAOB has been unable to conduct inspections without the approval of the Chinese authorities, our auditor is notcurrently inspected by the PCAOB. The inability of the PCAOB to conduct inspections of our auditor makes it more difficult to evaluate theeffectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors that are subject to the PCAOB inspections,which could cause investors and potential investors in our ADSs to lose confidence in our audit procedures and reported financial information andthe quality of our financial statements.Our ADSs will be prohibited from trading in the United States under the HFCA Act in 2024 if the PCAOB is unable to inspect or fullyinvestigate auditors located in China, or in 2023 if proposed changes to the law are enacted. The delisting of our ADSs, or the threat of theirbeing delisted, may materially and adversely affect the value of your investment.The HFCA Act was signed into law on December 18, 2020. The HFCA Act states if the SEC determines that we have filed audit reportsissued by a registered public accounting firm that has not been subject to inspection by 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 trading market in theUnited States. On December 16, 2021, the PCAOB issued a report to notify the SEC of its determination that the PCAOB is unable to inspect orinvestigate completely registered public accounting firms headquartered in mainland China and Hong Kong. The PCAOB identified our auditor asone of the registered public accounting firms that the PCAOB is unable to inspect or investigate completely.Whether the PCAOB will be able to conduct inspections of our auditor before the issuance of our financial statements on Form 20-F forthe year ending December 31, 2023 which is due by April 30, 2024, or at all, is subject to substantial uncertainty and depends on a number offactors out of our, or our auditor’s control. If our shares and ADSs are prohibited from trading in the United States, there is no certainty that we willbe able to list on a non-U.S. exchange or that a market for our shares will develop outside the United States. Such a prohibition would substantiallyimpair your ability to sell or purchase our ADSs when you wish to do so, and the risk and uncertainty associated with delisting would have anegative impact on the price of our ADSs. Also, such a prohibition would significantly affect our ability to raise capital on terms acceptable to us,or at all, which would have a material adverse impact on our business, financial condition, and prospects.On June 22, 2021, the U.S. Senate passed a bill which would reduce the number of consecutive non-inspection years required fortriggering the prohibitions under the HFCA Act from three years to two. On February 4, 2022, the U.S. House of Representatives passed a billwhich contained, among other things, an identical provision. If this provision is enacted into law and the number of consecutive non-inspectionyears required for triggering the prohibitions under the HFCA Act is reduced from three years to two, then our shares and ADSs could beprohibited from trading in the United States as early as 2023.Risks Related to Our ADSsThe 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 fluctuatedsignificantly. The trading price of our ADSs may be volatile and could fluctuate widely due to factors beyond our control. This may happenbecause of broad market and industry factors, including the performance and fluctuation of the market prices of other companies with businessoperations 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 UnitedStates, which consequently may impact the trading performance of our ADSs, regardless of our actual operating performance. In addition, anynegative news or perceptions about inadequate corporate governance practices or fraudulent accounting, corporate structure or matters of otherChinese companies may also negatively affect the attitudes of investors towards Chinese companies in general, including us, regardless of ourconduct. In addition, securities markets may from time to time experience significant price and volume fluctuations that are not related to ouroperating performance, such as the recent large decline in share prices in the United States, which may have a material and adverse effect on thetrading price of our ADSs. In addition to market and industry factors, the price and trading volume for our ADSs may be highly volatile for factorsspecific to our own operations, including the following:●variations in our revenues, earnings and cash flow;Table of Contents52●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.In the past, shareholders of public companies have often brought securities class action suits against those companies following periods ofinstability 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 amountof 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 ourability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages orindemnification 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 hadpreviously 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 andexisting holders of our ADSs. Any sales in the public market of the ADSs, if any, issuable upon such conversion may increase the opportunities tocreate short positions with respect to the ADSs, which could adversely affect prevailing market prices of our ADSs. In addition, the existence of the2024 Notes and/or the 2025 Notes may encourage short selling by market participants because the conversion of the 2024 Notes and/or the 2025Notes 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 2024Notes and/or the 2025 Notes as a more attractive means of equity participation in us and by hedging or arbitrage trading activity, which we expectto occur involving our ADSs.If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendationsregarding 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 analystscease 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 marketprice 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 ofbuying 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 securitiesbetween the sale of the borrowed securities and the purchase of the replacement shares, as short sellers expect to pay less in that purchase than theyreceived 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 publicationof, negative opinions and allegations regarding the relevant issuer and its business prospects in order to create negative market momentum andgenerate profits for themselves after selling a security short. These short attacks have, in the past, led to selling of shares in the market.Table of Contents53We 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 alsobe subject to short seller attacks from time to time in the future. If we were to become the subject of any unfavorable allegations, whether suchallegations are proven to be true or untrue, we may have to expend a significant amount of resources to investigate such allegations and/or defendourselves. While we would strongly defend against any such short seller attacks, we may be constrained in the manner in which we can proceedagainst the relevant short sellers by principles of freedom of speech, applicable state law or issues of commercial confidentiality. Such a situationcould be costly and time-consuming, and could divert management’s attention from the day-to-day operations of our company. Even if suchallegations are ultimately proven to be groundless, allegations against us could severely impact the market price of our ADSs and our businessoperations.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 themarket price of our ADSs and could materially impair our ability to raise capital through equity offerings in the future. We cannot predict whateffect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities for futuresale 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 yourinvestment.We currently intend to retain most, if not all, of our available funds and any future earnings to fund the development and growth of ourbusiness. 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 ourADSs 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 Islandslaw. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by ourdirectors. Under Cayman Islands law, a Cayman Islands company may pay a dividend out of either profit or share premium account, provided thatin 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 courseof business. Even if our board of directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, willdepend on our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by usfrom our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, thereturn on your investment in our ADSs will likely depend entirely upon any future price appreciation of our ADSs. There is no guarantee that ourADSs 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 ourADSs 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 holdersof 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 ourcompany or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders of anopportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of ourcompany in a tender offer or similar transaction. Our board of directors has the authority, without further action by our shareholders, to issuepreferred shares in one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional or specialrights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption andliquidation 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 ofmanagement more difficult. If our board of directors decides to issue preferred shares, the price of our ADSs may fall and the voting and otherrights of the holders of our ordinary shares and ADSs may be materially and adversely affected.Table of Contents54You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we areincorporated under Cayman Islands law.We are an exempted company incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our memorandumand articles of association, the Companies Act (2022 Revision) of the Cayman Islands and the common law of the Cayman Islands. The rights ofshareholders to take action against our directors, actions by our minority shareholders and the fiduciary duties of our directors to us under CaymanIslands 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 partfrom comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England, the decisions of whose courtsare of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties of ourdirectors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in theUnited States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. Some U.S. states, such asDelaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islandscompanies 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 corporaterecords (except the memorandum and articles of association) or to obtain copies of lists of shareholders of these companies. Our directors havediscretion under our currently effective articles of association to determine whether or not, and under what conditions, our corporate records maybe inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtainthe information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with aproxy 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 bymanagement, members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated inthe 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 orpracticality in China. For example, in China, there are significant legal and other obstacles to providing information needed for regulatoryinvestigations or litigation initiated outside China. Although the authorities in China may establish a regulatory cooperation mechanism with thesecurities regulatory authorities of another country or region to implement cross-border supervision and administration, such cooperation with thesecurities 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 securitiesregulator is allowed to directly conduct investigations or evidence collection activities within the territory of the PRC. While detailed interpretationof or implementation rules under Article 177 have yet to be promulgated, the inability for an overseas securities regulator to directly conductinvestigations 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 favorableoutcomes 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 aclaim to be submitted to arbitration, the federal or state courts in the City of New York have exclusive jurisdiction to hear and determine claimsarising 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 anyclaim they may have against us or the depositary arising out of or relating to our shares, the ADSs or the deposit agreements, including any claimunder the U.S. federal securities laws.If we or the depositary opposed a jury trial demand based on the waiver, the court would determine whether the waiver was enforceablebased on the facts and circumstances of that case in accordance with the applicable U.S. state and federal law. To our knowledge, the enforceabilityof a contractual pre-dispute jury trial waiver in connection with claims arising under the U.S. federal securities laws has not been finallyadjudicated by the United States Supreme Court. However, based on past court decisions, we believe that a contractual pre-dispute jury trial waiverprovision is generally enforceable, including under the laws of the State of New York, which govern the deposit agreements. In determiningwhether to enforce a contractual pre-dispute jury trial waiver provision, courts will generally consider whether a party knowingly, intelligently andvoluntarily 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 thatyou consult legal counsel regarding the jury waiver provision under the deposit agreements before investing in the ADSs.Table of Contents55If you or any other holders or beneficial owners of ADSs bring a claim against us or the depositary in connection with matters arisingunder the deposit agreements or the ADSs, including claims under U.S. federal securities laws, you or such other holder or beneficial owner maynot 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 thedepositary. 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 theapplicable trial court, which would be conducted according to different civil procedures and may result in different outcomes than a trial by jurywould 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 ofthe deposit agreements with a jury trial. No condition, stipulation or provision of the deposit agreements or ADSs serves as a waiver by any holderor beneficial owner of ADSs or by us or the depositary of compliance with the U.S. federal securities laws and the rules and regulationspromulgated 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 allof our current operations are conducted in China. In addition, most of our current directors and officers are nationals and residents of countriesother 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 orimpossible 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 havebeen 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 theCayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers.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 voteyour 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 toattend 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 votingrights carried by the underlying Class A ordinary shares represented by your ADSs indirectly by giving voting instructions to the depositary inaccordance with the provisions of the relevant deposit agreement. Under the deposit agreements, you may vote only by giving voting instructions tothe depositary. Upon receipt of your voting instructions, the depositary will try, as far as is practicable, to vote the underlying Class A ordinaryshares represented by your ADSs in accordance with your instructions. If we ask for your instructions, then upon receipt of your votinginstructions, 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 notrequired 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 byyour 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 ordinaryshares represented by your ADSs and become the registered holder of such shares to allow you to attend the general meeting and to vote directlywith respect to any specific matter or resolution to be considered and voted upon at the general meeting. In addition, under our currently effectivememorandum and articles of association, for the purposes of determining those shareholders who are entitled to attend and vote at any generalmeeting, 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 ofmembers or the setting of such a record date may prevent you from withdrawing the underlying Class A ordinary shares represented by your ADSsand 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 votedirectly. 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 youthat you will receive the voting materials in time to ensure that you can instruct the depositary to vote the underlying Class A ordinary sharesrepresented by your ADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for theirmanner of carrying out your voting instructions. The deposit agreements provide that if the depositary does not timely receive voting instructionsfrom 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 thedepositary to give a discretionary proxy to a person designated by us to vote the underlying Class A ordinary shares represented by the relevantADSs, with certain limited exceptions. This means that you may not be able to exercise your right to direct how the underlying Class A ordinaryshares represented by your ADSs are voted and you may have no legal remedy if the underlying Class A ordinary shares represented your ADSsare not voted as you requested.Table of Contents56You 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, thedepositary will not distribute rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate areeither exempt from registration under the Securities Act with respect to all holders of ADSs, or are registered under the provisions of the SecuritiesAct. 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 maybe unable to establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement withrespect to these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, holders of ADSs maybe unable to participate in our rights offerings and may experience dilution of their holdings as a result.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 timewhen 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 ofreasons, including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exactnumber of ADS holders on its books for a specified period. The depositary may also close its books in emergencies, and on weekends and publicholidays. The depositary may refuse to deliver, transfer or register transfers of our ADSs generally when our share register or the books of thedepositary 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 governmentor 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 tolist on the mainland stock market through the creation of CDRs. Once the CDR mechanism is in place, we might consider and be encouraged bythe evolving Chinese governmental policies to issue CDRs and allow investors to trade our CDRs on Chinese stock exchanges. However, there areuncertainties 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 subsequentlyimplemented by the SEC and Nasdaq, have detailed requirements concerning corporate governance practices of public companies, includingSection 404 of the Sarbanes-Oxley Act relating to internal controls over financial reporting. We expect to incur significant expenses and devotesubstantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act and the other rules andregulations of the SEC, for example, adoption of policies regarding internal controls and disclosure controls and procedures. In addition, we incuradditional costs associated with our public company reporting requirements. We cannot predict or estimate with certainty the amount of compliancecosts 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 tocorporate governance matters that differ significantly from the Nasdaq corporate governance listing standards; these practices may afford lessprotection 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 corporategovernance listing standards. However, Nasdaq Stock Market rules permit a foreign private issuer like us to follow the corporate governancepractices of its home country. Certain corporate governance practices in the Cayman Islands, which is our home country, may differ significantlyfrom the Nasdaq Stock Market corporate governance listing standards. Although we did not rely on the home country practice exemption in 2021,we have relied on the exemption in prior years. 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 listingstandards applicable to U.S. domestic issuers.Table of Contents57There can be no assurance that we will not be classified as a passive foreign investment company, or PFIC, for U.S. federal income taxpurposes for any taxable year, which could subject U.S. investors in our ADSs or Class A ordinary shares to significant adverse U.S. income taxconsequences.We will be a “passive foreign investment company,” or “PFIC,” if, in any particular taxable year, either (a) 75% or more of our gross incomefor 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 aquarterly average) during such year produce or are held for the production of passive income. Although the law in this regard is unclear, we intendto treat our VIE (including its subsidiaries) as being owned by us for U.S. federal income tax purposes, not only because we exercise effectivecontrol over the operation of such entity but also because we are entitled to substantially all of its economic benefits, and, as a result, weconsolidate 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, 2021 and based upon ourcurrent 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 thecurrent 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 ourClass A ordinary shares and/or ADSs, may cause us to become a PFIC for future taxable years because the value of our assets for the purpose ofthe asset test may be determined by reference to the market price of our ADSs from time to time (which may be volatile). In particular, recentdeclines in the market price of our ADSs increased our risk of becoming a PFIC. The market price of our ADSs may continue to fluctuateconsiderably and, consequently, we cannot assure you of our PFIC status for any taxable year. Because PFIC status is a factual determination madeannually 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 taxableyear.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 IncomeTax Considerations”) may incur significantly increased U.S. income tax on gain recognized on the sale or other disposition of the ADSs or Class Aordinary 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 weare 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 PFICfor all succeeding years during which such U.S. holder holds our ADSs or Class A ordinary shares. For more information see “Item 10. AdditionalInformation—E. Taxation—U.S. Federal Income Tax Considerations—Passive Foreign Investment Company Considerations” in this annual report.Item 4. Information on the CompanyA. History and Development of the CompanyWe commenced our commercial operations in 2015 through Hangzhou Aimi and Shanghai Xunmeng in parallel. In June 2016, tostreamline the operations of these two companies, Hangzhou Aimi acquired 100% equity interest in Shanghai Xunmeng, and Shanghai Xunmengbecame 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 April2015 to facilitate offshore financing. In the same month, we established HongKong Walnut Street Limited, or Walnut HK, our wholly-owned HongKong subsidiary, and Walnut HK established a wholly-owned PRC subsidiary, Hangzhou Weimi. Walnut HK subsequently established twoadditional wholly-owned PRC subsidiaries, Walnut Shanghai and Xinzhijiang, in January 2018 and April 2018, respectively. In July 2018, werenamed our company “Pinduoduo Inc.” We established an additional wholly-owned PRC subsidiary, Shanghai Yucan Information TechnologyCo., Ltd., in September 2020 through offshore holding entities, which, together with Hangzhou Weimi, Walnut Shanghai and Xinzhijiang, arecollectively referred to as our WFOEs in this annual report.Table of Contents58Due to restrictions imposed by PRC laws and regulations on foreign ownership of companies that engage in internet and other relatedbusiness, Hangzhou Weimi entered into a series of contractual arrangements with Hangzhou Aimi, which we refer to as our VIE in this annualreport, and its shareholders. We depend on these contractual arrangements with our VIE, in which we have no ownership interests, and itsshareholders to conduct most aspects of our operation. We have relied and expect to continue to rely on these contractual arrangements to conductour business in China. The shareholders of our VIE may have potential conflicts of interest with us. See “Item 3. Key Information—D. RiskFactors—Risks Related to Our Corporate Structure—The shareholders of our VIE may have potential conflicts of interest with us, which maymaterially 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 therequirement to fund certain statutory funds, as well as potential restriction on currency exchange and capital controls imposed by the PRCgovernment. For more details, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—We may rely ondividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and anylimitation on the ability of our PRC subsidiaries to make payments to us could have a material and adverse effect on our ability to conduct ourbusiness” 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 VIE contractual arrangements, we are regarded as the primary beneficiary ofour VIE and its subsidiaries. We treat it and its subsidiaries as our consolidated affiliated entities under U.S. GAAP, and have consolidated thefinancial 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 approximatelyUS$1.7 billion in net proceeds from the issuance of new shares from the initial public offering after deducting underwriting commissions and theoffering expenses payable by us. In February 2019, we completed a follow-on public offering, and raised approximately US$1.2 billion in netproceeds after deducting underwriting discounts and offering expenses payable by us. In September 2019, we completed an offering of US$1.0billion in aggregate principal amount of convertible senior notes due 2024. In April 2020, we raised US$1.1 billion in net proceeds from the privateplacement of our Class A ordinary shares to certain long-term investors. In November 2020, we completed (i) an offering of US$2.0 billion inaggregate principal amount of convertible senior notes due 2025, and (ii) a concurrent follow-on public offering, which raised approximatelyUS$4.1 billion in net proceeds after deducting underwriting discounts and offering expenses payable by us. In December 2020, we raised US$500million 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 ofChina. Our telephone number at this address is +86 21-5266 1300. 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 forservice of process in the United States is Puglisi & Associates, located at 850 Library Avenue, Suite 204, Newark, Delaware 19711.B. Business OverviewOur Pinduoduo mobile platform provides buyers with a comprehensive selection of value-for-money merchandise and fun and interactiveshopping experiences. As a result of our innovative business model, we have been able to quickly expand our buyer base and establish our brandrecognition and market position. Our GMV in 2019, 2020 and 2021 was RMB1,006.6 billion, RMB1,667.6 billion and RMB2,441.0 billion(US$383.0 billion), respectively. In 2019, 2020 and 2021, the number of total orders placed on our Pinduoduo mobile platform was 19.7 billion,38.3 billion and 61.0 billion, respectively.We pioneered an innovative “team purchase” model on our platform. Buyers are encouraged to share product information on socialnetworks, and invite their friends, family and social contacts to form shopping teams to enjoy the more attractive prices available under the “teampurchase” option. This effectively generates frequent interactions and leads to user engagement on our platform. In 2019, 2020 and 2021, thenumber of active buyers on our platform was 585.2 million, 788.4 million and 868.7 million, respectively.Our active buyer base helps attract merchants to our platform, and the scale of our sales volume encourages merchants to offer even morecompetitive prices and customized products and services to buyers, thus forming a virtuous cycle. In 2021, we had 11.5 million active merchants onour platform, offering a broad range of product categories.Table of Contents59We have always seen business opportunities in agriculture, and we seize these opportunities by leveraging our platform to promote digitalinclusion of smallholder farmers. Our ability to aggregate demand and generate large volumes of orders helps create economies of scale for ourfarmer merchants. Farmers can sell directly to consumers through our platform and become less dependent on wholesale distributors. We offerdedicated training programs to enable farmers to become better business operators. We collaborate with reputable agricultural institutions to investin technology and fund research with the objective of improving food production, quality control, food safety and sustainability, so that a greatervolume of better, fresher and safer agricultural products can go directly from farm to table.We have experienced steady growth since our inception in 2015. We currently generate revenues primarily from online marketingservices. Our revenues grew from RMB30,141.9 million in 2019 to RMB59,491.9 million in 2020 and further to RMB93,949.9 million(US$14,742.8 million) in 2021. We incurred net loss of RMB6,967.6 million and RMB7,179.7 million, respectively, in 2019 and 2020, andgenerated net income of RMB7,768.7 million (US$1,219.1 million) in 2021.Our PlatformWe conduct our business primarily through our Pinduoduo mobile platform. Buyers come to our platform to browse, explore and purchaseattractive value-for-money merchandise from third-party merchants. The scale of our sales volume attracted merchants to our platform, andencouraged them to offer more competitive prices and customized products and services to buyers. In 2021, the number of our active buyers and ofour active merchants were approximately 868.7 million and 11.5 million, respectively. In 2019, 2020 and 2021, the number of total orders placedon our Pinduoduo mobile platform was 19.7 billion, 38.3 billion and 61.0 billion, respectively.Our platform offers “individual purchase” and “team purchase” options. A buyer who opts for the individual purchase option places theorder or transacts with a merchant on an individual basis to get speedier order confirmation whereas team purchase buyers combine their purchaseorders for a particular merchandise with other buyers to enjoy a lower price. Merchants on our platform typically require at least two buyers toteam up in order to take advantage of the “team purchase” option.With the seamless integration of our platform with major social networks in China, our buyers can quickly and smoothly find otherpotential buyers to form teams either directly on our app or through sending team purchase invitations, or sharing product information or theirPinduoduo shopping experiences with their friends, family and social contacts. The act of sharing is then rewarded by the more attractive purchaseprice 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 and enable our buyers to make payments for theirpurchases easily and efficiently. We do not depend on any particular provider for such services.Once an order is placed on our platform and confirmed with the applicable merchant, the merchant will handle fulfillment, select the mostsuitable third-party logistics service provider and arrange for the delivery of the products to the buyers. Our proprietary e-waybill system efficientlyintegrates our merchants with third-party logistics service providers, and provides our buyers real-time visibility on the delivery status of theirpurchase orders.Our BuyersDirect buyer traffic to our platform is primarily generated from word-of-mouth referrals by our existing buyers as well as the effect of ourmarketing campaigns. A portion of our buyer traffic comes from our user recommendation or product introduction feature which buyers can sharewith friends or contacts through social networks. In addition, buyers may also access our platform and make purchases via our mini-program withinWeixin. The user interface of our mini-program is substantially identical to our own mobile app with the same product offerings by the samemerchants.Our Merchandise SelectionWe provide a comprehensive suite of product categories on our platform, including agricultural produce, apparel, shoes, bags, mother andchildcare products, food and beverage, electronic appliances, furniture and household goods, cosmetics and other personal care items, sports andfitness items and auto accessories. Our GMV in 2019, 2020 and 2021 was RMB1,006.6 billion, RMB1,667.6 billion and RMB2,441.0 billion(US$383.0 billion), respectively. In 2021, we had 11.5 million active merchants on our platform.Table of Contents60Merchants on our platform set prices for their products. We encourage merchants to offer the most attractive prices for merchandise soldon our platform. Two listed prices typically apply to each merchandise, one for the individual purchase option and a lower price for the teampurchase option. Due to the large sales volume generated on our platform, some of the merchants on our platform also set aside exclusive productsupplies 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 ourplatform. Our merchant onboarding system is integrated with an identity verification system. After a merchant undergoes our registration processand 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 toguarantee its compliance with our platform’s policies and rules, and the amount of such deposit varies depending on merchant type andmerchandise category. Before the product information is posted on our platform, we leverage our artificial intelligence-based screening system toidentify potential issues and submit questionable merchandise for further review and verification. After product information is posted, our systemcontinues to monitor and conduct semantic analysis on buyer reviews, the results of which are used as inputs for evaluation of the associatedmerchant’s compliance with our policies. If a merchant is found to have violated our policies, such merchant is required to compensate the buyersin accordance with the service agreement with the merchant on our platform. In addition to responding to buyer complaints, our dedicatedmerchandise control team also conducts sample test purchases to verify whether product descriptions match the products delivered. A merchant’srecord of compliance, together with other factors such as its sales volume and buyer feedback and reviews, is taken into account when our platformcompiles such merchant’s ranking, which may affect the level of exposure it receives on our platform and in turn may affect its sales volume. Weinvest in technical capabilities relating to keyword identification, filtering images, text and video recognition and the development of a blacklistingmechanism. 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 outcounterfeit and infringing goods.Additionally, we require merchants on our platform to strictly abide by a seven-day return period policy for nonperishable products soldby 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 originalcondition and any usage of such products does not affect the merchants’ ability to resell. Once a buyer submits a return request, the relevantmerchant 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 beinvolved to resolve the request or dispute.Our Services and Values to MerchantsWe provide online marketing services to help merchants promote their merchandise more effectively and also offer them additionaltraining resources and merchant support through Duo Duo Academy. Duo Duo Academy is easily accessible through our main merchant dashboardand is frequently updated to guide merchants through the various tools available to them on our platform.Digital Inclusion in AgricultureWe have always seen business opportunities in agriculture, and we seize these opportunities by leveraging our platform to promote digitalinclusion of smallholder farmers.Our ability to aggregate demand and generate large volumes of orders helps create economies of scale for our farmer merchants. Farmerscan sell directly to consumers through our platform and become less dependent on wholesale distributors. Overall supply chain efficiency isimproved through this broadening of direct market access for producers and growers. Consumers therefore get fresher and safer products for lowerprices while farmers earn more, which can be reinvested in their farming practices and technology to further improve production efficiency andquality. We offer dedicated training programs to enable farmers to become better business operators.We collaborate with reputable agricultural institutions to invest in technology and fund research with the objective of improving foodproduction, quality control, food safety and sustainability, so that a greater volume of better, fresher and safer agricultural products can go directlyfrom farm to table. Since 2020, we have organized an annual Smart Agriculture Competition event to develop cost-effective technologies toenhance farming productivity and produce quality. In 2021, we co-hosted the event with China Agricultural University and Zhejiang University,with technical support from the Food and Agriculture Organization of the United Nations and Wageningen University and Research.In August 2021, we launched the “10 Billion Agriculture Initiative” to address some of the critical needs in the agricultural sector andrural areas. This initiative is not driven by profit or commercial goals, but instead strives to facilitate the advancement of agritech, promote digitalinclusion, and provide agritech talents and workers with greater motivation and a sense of achievement. We have been funding this initiative fromour profits.Table of Contents61We continue to focus on the digital inclusion of China’s agricultural sector as a long-term strategic priority with plans to step up ourinvestments. We seek to generate sustainable value to our consumers, our farmer merchants, our ecosystem partners and our communities.Duo Duo GroceryDuo Duo Grocery is our next-day grocery pick-up service. The service caters to the rising consumer demand for more timely turnaroundand better value-for-money goods without home delivery requirements. Through Duo Duo Grocery, we connect local farmers and distributorsdirectly to local consumers on a daily basis and provide supporting services on the delivery of such goods to consumers. Each day consumers placetheir orders with merchants through the Duo Duo Grocery channel. The merchants supply the ordered items overnight to regional warehouses. Thesorted goods are then delivered from regional warehouses to designated pickup points the next day, where consumers can pick up their purchases.TechnologyOur operations and growth are supported by our proprietary technology. Our leading technology team has created opportunities forcontinuous improvements in our technology capabilities, which in turn draws new talents to join us. As of December 31, 2021, we had atechnology team of more than 5,600 engineers. Many of our engineers have post-graduate degrees and had prior working experience in leadingtechnology companies.Data Security and ProtectionWe have established a comprehensive security system, supported by our network situational awareness and risk management system thatspans from the individual end users across our entire network, covering our platforms, data and services. Our back-end security system is capableof handling hundreds of millions of instances of malicious attacks each day to safeguard the security of our platform and to protect the privacy ofour 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 dataprotection policies to ensure the security of our proprietary data. We collect anonymized, non-confidential user behavior and pattern data based ontheir interactions with our platform through our social network partners, which have been pre-processed to exclude user identity or other sensitiveinformation. We encrypt confidential personal information we gather from our own platform. To ensure data security and avoid data leakage, wehave established stringent internal protocols under which we grant classified access to confidential personal data only to limited employees withstrictly defined and layered access authority. We strictly control and manage the use of data within our various departments and do not share datawith external third parties, nor do we cooperate with third-party vendors in data analytics efforts.MarketingWe have been able to build a large base of loyal buyers primarily through word-of-mouth referrals via social networks. To enhance ourbrand awareness, we conduct online and offline marketing and brand promotion activities such as online advertisements and televisioncommercials. Furthermore, we offer coupons to consumers from time to time.CompetitionThe e-commerce industry in China is intensely competitive. Our current or potential competitors include (i) major e-commerce operatorsin 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 theprocess of initiating their e-commerce businesses.We compete primarily on the basis of:●our large and active buyer base;●the fun and interactive shopping experiences on our platform;●our ability to seamlessly connect e-commerce with social networks;Table of Contents62●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.SeasonalityWe experience seasonality in our business, reflecting a combination of seasonal fluctuations in internet usage and traditional retailseasonality patterns. For example, we generally experience less buyer traffic and purchase orders in the first quarter of each year. Furthermore,sales are generally higher in the fourth quarter of each calendar year than in the preceding three quarters, as e-commerce companies in Chinatypically hold special promotional campaigns in the fourth quarter that boost sales. Due to our limited operating history, the seasonal trends that wehave experienced in the past may not apply to, or be indicative of, our future operating results.Intellectual PropertyAs of December 31, 2021, we owned 85 computer software copyrights in China relating to various aspects of our operations andmaintained approximately 937 trademark registrations inside China and 133 trademark registrations outside China. We also had 568 trademarkapplications inside China. Our registered domain names include www.pinduoduo.com, among others.Corporate Social Responsibility and Our ImpactCorporate social responsibility has been central to how we do business, starting with operating with integrity in all we do and extending toserving the community at large in China. We are committed to leveraging our marketplace to better the lives of millions and to promote sustainabledevelopment. In 2021, we continued to support our community of merchants and users through the challenges imposed by natural disasters and theCOVID-19 pandemic. We worked with the local governments to support relief efforts and maintain necessary provisions.Our platform connects millions of farmers to the digital economy. We coach farmers on setting up stores online, provide them with accessto end demand, and help them to increase their household income. We support young men and women from rural areas to become e-commercesavvy “new farmers.” Many of them have become better business operators through continuous training and learning by doing.We also launched Duo Duo Reading Month to support rural communities. In 2021, we donated over 120,000 carefully selected storybooksto rural youth communities around China. We seek to broaden the horizons of the youth and contribute to a better future for these communitiesthrough these efforts.RegulationThis section sets forth a summary of the most significant rules and regulations that affect our business and operations in China or therights of our shareholders to receive dividends and other distributions from us.Regulations Relating to Foreign InvestmentThe Foreign Investment LawOn March 15, 2019, the NPC approved the Foreign Investment Law, which took effect on January 1, 2020 and replaced most of the lawsand regulations previously governing foreign investment in the PRC. The Foreign Investment Law is the foundation for regulating foreigninvestments in China. Subsequently, on December 26, 2019, the State Council promulgated the Implementation Regulations on the ForeignInvestment Law, which came into effect on January 1, 2020.Table of Contents63Under the Foreign Investment Law, “foreign investment” refers to the investment activities directly or indirectly conducted by foreignindividuals, enterprises or other foreign entities in China. As a general principle, under the Foreign Investment Law, foreign investment is accordedpre-entry national treatment, which means that the treatment given to foreign investors and their investments must not be less favorable than thosegiven to domestic investors and their investments, except if a foreign investment falls under a negative list, such as the 2021 Negative List.The Foreign Investment Law stipulates three forms of foreign investment, but is silent as to whether contractual arrangements are a formof foreign investment. The Implementation Regulations on the Foreign Investment Law are also silent as to whether contractual arrangementsshould be deemed to be a form of foreign investment. However, the definition of “foreign investment” under the Foreign Investment Law is broadand covers all activities whereby foreign investors invest in China, including investments made through “any other methods” under laws,administrative regulations, or provisions prescribed by the State Council. Before clarification or confirmation by future laws, administrativeregulations or provisions promulgated by the State Council on the nature of contractual arrangements, there is no assurance that contractualarrangements would not be considered to be foreign investment under the Foreign Investment Law. The State Council may in the future enact lawsor issue administrative regulations or provisions to classify contractual arrangements as a form of foreign investment, at which time it would beuncertain as to how contractual arrangements would be regulated and whether such contractual arrangements would be deemed to be in violation ofthe foreign investment restrictions. There is no guarantee that our contractual arrangements and our business will not be materially and adverselyaffected in the future due to changes in PRC laws and regulations. See “Item 3. Key Information—D. Risk Factors—Risks Related to OurCorporate Structure—We face uncertainties with respect to the implementation of the Foreign Investment Law and how it may impact the viabilityof our current corporate structure, corporate governance and business operations.”The 2021 Negative List and the 2020 Encouraged Industries CatalogThe industries in which foreign investors and foreign-invested enterprises may make investments in the PRC are regulated by the Catalogof Industries in which Foreign Investment is Encouraged (2020 edition), or the 2020 Encouraged Industries Catalog, and the Special AdministrativeMeasures for Foreign Investment Access (Negative List 2021), or the 2021 Negative List. These lists were promulgated, and are amended fromtime to time, by MOFCOM and the NDRC.The 2021 Negative List limits the industries in which foreign investors may invest. It sets out a list of “restricted” and “prohibited”industries. Foreign investors may only invest in restricted industries if they satisfy certain conditions, including government approval. Foreigninvestors may not invest in prohibited industries. By contrast, the 2020 Encouraged Industries Catalog includes a list of “encouraged” industries inwhich foreign investors are incentivized to invest. Foreign investment in industries that are not listed in the 2021 Negative List or the 2020Encouraged Industries Catalog is generally permitted, unless specifically restricted by other PRC laws.The 2021 Negative List and the 2020 Encouraged Industries Catalog also regulate certain corporate matters. For example, in terms ofcorporate form, the formation of wholly foreign-owned enterprises is generally allowed only for investments in industries in which foreigninvestment is encouraged or permitted. By contrast, for restricted industries, foreign investors may only form equity or contractual joint ventures,and in some cases Chinese partners are required to hold the majority interests in such joint ventures. In addition to restrictions on shareholdingownership by foreign investors, the regulations also impose requirements on corporate governance practices, such as the composition of the boardor senior management.Regulations on Foreign Investment in Value-Added Telecommunications ServicesForeign investment in value-added telecommunications services (except for e-commerce, domestic multi-party communications, storageand forwarding classes, and call centers) is subject to equity ownership limitations. In particular, pursuant to the Provisions on Administration ofForeign-Invested Telecommunications Enterprises promulgated by the State Council in December 2001, as amended, or the FITE Regulations, thelevel of ultimate foreign equity ownership in a value-added telecommunications services provider may not exceed 50%. An exception to thislimitation was introduced in June 2015, when the MIIT issued the Circular on Removing the Restrictions on Equity Ratio Held by ForeignInvestors in Online Data Processing and Transaction Processing (Operating E-Commerce) Business, which amended the relevant provisions in theFITE Regulations to allow foreign investors to own more than 50% of the equity interest in an operator that conducts an e-commerce business.Foreign investors nonetheless remain prohibited from holding more than 50% of the equity interest in a provider of other subcategories of value-added telecommunications services.Table of Contents64There are also limitations on foreign ownership of VATS Licenses, which are required for the provision of value-added telecommunicationservices. Pursuant to publicly available information, the PRC government has issued VATS Licenses to only a limited number of foreign-investedenterprises, most of which are Sino-foreign joint ventures engaging in the value-added telecommunication business. In addition, pursuant to theCircular on Strengthening the Administration of Foreign Investment in and Operation of Value-added Telecommunications Business, which wasissued by the MIIT in July 2006, a PRC company that holds a VATS License is prohibited from leasing, transferring or selling such license toforeign investors in any form, and from providing any assistance, including providing resources, sites or facilities, to foreign investors that conductvalue-added telecommunications business illegally in China.To comply with PRC laws and regulations, we rely on contractual arrangements with our VIE to operate our e-commerce business inChina. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—We rely on contractual arrangements with ourVIE and its shareholders for a large portion of our business operations, which may not be as effective as direct ownership in providing operationalcontrol.”Information Reporting Requirements Applicable to Foreign InvestmentIn December 2019, MOFCOM and the SAMR promulgated the Measures on Reporting of Foreign Investment Information, which becameeffective on January 1, 2020. Pursuant to these measures, foreign investors and foreign-invested enterprises must submit investment informationthrough the Enterprise Registration System and the National Enterprise Credit Information Publicity System operated by the SAMR for their director indirect foreign investments in the PRC.The Foreign Investment Security Review MeasuresOn December 19, 2020, the NDRC and MOFCOM promulgated the Foreign Investment Security Review Measures, which took effect onJanuary 18, 2021. Under these measures, foreign investments in military, national defense-related areas or in locations close to military facilities, orforeign investments that would result in a foreign entity acquiring the actual control of assets in certain key sectors, including, among others,internet products and services, are required to obtain approval from the competent governmental authorities in advance.Licenses, Permits and FilingsThe PRC government extensively regulates the telecommunications industry, particularly the internet services sector. The State Council,the MIIT, MOFCOM, the SAIC (which has now been merged into the SAMR), the former State Administration of Press, Publication, Radio, Filmand Television (which has been replaced by the State Administration of Radio and Television), and other relevant government authorities havepromulgated an extensive regulatory scheme governing telecommunications, online sales and e-commerce. New laws and regulations may beadopted from time to time that will require us to obtain additional licenses and permits in addition to those that we currently have, and will requireus to address new issues that arise from time to time. In addition, uncertainties exist regarding the interpretation and implementation of current andany future PRC laws and regulations applicable to the telecommunications, online sales and e-commerce. See “Item 3. Key Information—D. RiskFactors—Risks Related to Our Business and Industry—Any lack of additional requisite approvals, licenses or permits or failure to comply with anyrequirements of PRC laws, regulations and policies may materially and adversely affect our daily operations and hinder our growth.”We are required to hold certain licenses and permits and to make certain filings with the relevant PRC governmental authorities inconnection with various aspects of our business, including the following:Value-Added Telecommunication Business Operation LicensesIn September 2000, the Telecommunications Regulations of the People’s Republic of China, or the Telecom Regulations, were issued bythe State Council as the primary governing law on telecommunication services. The Telecom Regulations set out the general framework for theprovision of telecommunication services by PRC companies.Table of Contents65The Telecom Regulations draw a distinction between “basic telecommunications services” and “value-added telecommunicationsservices.” In December 2015, the MIIT released the Catalog of Telecommunication Business (2015 Revision), which clarified the scope of “value-added telecommunications services.” In particular, under this catalog, both the online data processing and transaction processing business (i.e., thee-commerce business) and information service business, were categorized as value-added telecommunications services. This catalog also specifiesthat the scope of information service business includes 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.Under the Telecom Regulations, telecommunications service providers are required to obtain operating licenses before they commenceoperations. In March 2009, the MIIT issued the Administrative Measures for Telecommunications Business Operating Permit, which confirm thetwo types of telecom operating licenses for operators in China, namely, licenses for basic telecommunications services and licenses for value-addedtelecommunications services. The operation scope of the license will detail the permitted activities of the enterprise to which it is granted. Anapproved telecommunication services operator must conduct its business in accordance with the specifications recorded on its VATS License(s). Inaddition, a VATS License holder is required to obtain approval from the original permit-issuing authority before any change to its shareholders orbusiness scope may be made. In January 2014, the State Council has issued the Decisions on Cancelling and Adjusting a Batch of AdministrativeApproval Items, which, among others, replaced the pre-registration approval requirement for telecommunications business with a post-registrationapproval requirement.In September 2000, the State Council promulgated the Administrative Measures on Internet Information Services, pursuant to whichcommercial internet content-related services operators must obtain a VATS License for internet content-related business from the relevantgovernment 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 merchantsfor their sales of products, has obtained the VATS Licenses covering (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 from Shanghai CommunicationsAdministration. Certain of Shanghai Xunmeng’s VATS Licenses will expire in 2022, while the remaining licenses will expire in 2025. Anotherconsolidated affiliated entity, Hangzhou Aimi, has obtained a VATS License for online data processing and transaction processing business(operating e-commerce) and internet content-related services. Hangzhou Aimi’s VATS License will expire in 2025.Internet Drug Information Service Qualification CertificateThe State Food and Drug Administration, or the SFDA (which has now been merged into the SAMR), promulgated the AdministrativeMeasures on Internet Drug Information Service in July 2004, most recently amended in November 2017, and certain implementing rules andnotices thereafter. These measures set out regulations governing the classification, application, approval, content, qualifications and requirementsfor internet drug information services. An internet information service operator that provides information regarding drugs or medical equipmentmust obtain an Internet Drug Information Service Qualification Certificate from the province-level counterpart of the SFDA. Shanghai Xunmengholds an Internet Drug Information Service Qualification Certificate issued by the Shanghai Municipal Food and Drug Administration for theprovision of internet medical information services, and this license will expire in 2024.Filing by Online Trading Platforms Providing Services for the Distribution of PublicationsWe are subject to regulations relating to online trading platform services provided for distribution of publications including books andaudio-video products. Pursuant to the Regulation on the Protection of the Right to Network Dissemination of Information promulgated by the StateCouncil, a network service provider of information storage, searching and linking services must remove the link to a work, performance or audio-video product if the work is suspected of infringing upon the right of another person. The removal should take place promptly by the serviceprovider upon receipt of a notice alleging such infringement issued by the owner of such work or audio-video products. According to theProvisions on the Administration of the Publication Market, an online trading platform that provides services for the distribution of publicationsmust complete filing procedures with the competent publication administrative authority. An online trading platform is required to examine theidentity of the dealers distributing publications through the platform, verify their business license and Publications Operation Permit, establish amechanism to prevent and control the trading risks and take effective measures to rectify illicit actions conducted by the dealers distributingpublications on the platform. If any entity subject to such requirements fails to complete the filing or fails to fulfill the relevant duties ofexamination and supervision in accordance with this regulation, it may be subject to an order to cease illegal acts and a warning by the competentpublication administrative authority, as well as a penalty not exceeding RMB30,000. Shanghai Xunmeng has completed the requisite procedureswith the relevant publication authority.Table of Contents66Filing by Third-Party Platforms Providers for Medical Device Online Trading ServicesThe 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 devicesmust complete filing procedures with the competent provincial food and drug administrative department. According to the measures, a third-partyplatform that fails to complete the filing in accordance with the measures may be ordered by the competent provincial food and drug administrativedepartment to make rectification within a prescribed time limit, and failure to make such rectification may subject the platform to public exposureof incompliance and a penalty of not exceeding RMB30,000. Shanghai Xunmeng has completed the requisite procedures with the relevantadministrative authority.Filing by Third-Party Platform Providers for Online Food TradingIn July 2016, the SFDA promulgated the Measures for Investigation and Handling of Illegal Acts Involving Online Food Safety, whichbecame effective on October 1, 2016 and was amended on April 2, 2021, pursuant to which a third-party platform providing online food trading inthe PRC must file a record with the food and drug administration at the provincial level and obtain a filing number. If the platform fails to completesuch filing, it may be ordered to make rectifications and given a warning by the competent food and drug administration, and the failure to makesuch rectification may subject the third-party platform to fines ranging from RMB5,000 to RMB30,000. Shanghai Xunmeng has completed therequisite procedures with the competent food and drug administration.Regulations Relating to E-CommerceThe E-Commerce LawIn August 2018, the Standing Committee of the NPC promulgated the E-Commerce Law, which took effect in January 2019. The E-Commerce Law imposes a number 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 torespect and indiscriminately protect consumers’ legitimate rights and provide options to consumers, and also requires e-commerce operators toclearly identify bundle sales in which additional services or products are added by merchants to consumers’ orders, and not to assume thatconsumers will consent to such bundle sales by default. E-commerce platform operators are required under the E-Commerce Law to establish acredit evaluation system and publicize the credit evaluation rules, and provide consumers with ways to evaluate products sold or services providedon the platform. The E-Commerce Law also requires any e-commerce platform operator to develop, and continuously publish or make publiclyavailable by a prominent link on its home page, its platform service agreement and transaction rules, specifying the rights and obligations ofrelevant parties with respect to registration and de-registration on the platform, quality assurance and protection of consumer rights and personalinformation, and to ensure convenient and full access to reading and downloading such service agreement and transaction rules by merchants andconsumers. Moreover, according to the E-Commerce Law, e-commerce platform operators, who fail to take necessary actions when they know orshould have known any intellectual property infringement, product defects or other infringement of consumer rights by any merchant on theplatform, 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 theinterests of the consumers. In addition, the E-Commerce Law requires e-commerce operators, including individuals and entities carrying outbusiness online, e-commerce platform operators and merchants on these platforms, to display prominently on their home page the informationcontained in their business licenses or administrative permits relating to their operating businesses. Failure to take necessary actions againstmerchants on the e-commerce platforms that are not in compliance with such requirements may subject the e-commerce platform operators torectification within a specified period and a fine between RMB20,000 and RMB100,000.Regulations on the Registration of E-Commerce OperatorsIn December 2018, the SAMR issued the Opinions on Doing Well in E-Commerce Operator Registration, which requires e-commerceoperators, including individuals and entities carrying out business online and e-commerce platform operators and merchants on these platforms, toregister with the local branches of the SAMR. Individuals selling agricultural products or conducting certain transactions with minimum economicvalue and low volume are not subject to these registration requirements. Pursuant to these opinions, the e-commerce platform operators shallprovide identity information of the merchants on their platform to local branches of the SAMR and prompt the merchants failing to make suchregistrations to comply with the relevant registration requirements.Table of Contents67Regulations on Cross-Border E-CommerceIn March 2016, the SAT, the Ministry of Finance, or the MOF, and the General Administration of Customs jointly issued the Circular onTax Policy for Cross-Border E-commerce Retail Imports, which took effect in April 2016. Pursuant to this circular, goods imported through cross-border e-commerce channels are subject to tariff, import value-added tax, or VAT, and consumption tax based on the types of goods. Individualspurchasing any goods imported through cross-border e-commerce channels are taxpayers, and e-commerce companies, companies operating e-commerce transaction platforms or logistic companies are required to withhold the taxes.Regulations on LivestreamingOn November 12, 2020, the NRTA issued the Circular on Strengthening the Administration of Livestreaming, or the Notice 78, whichrequires, among other things, platforms that provide livestreaming to register their information and business operations. Pursuant to the circular,internet platforms that operate livestreaming 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 reviewprotocols. Online e-commerce livestreaming platforms are required to design mechanisms for qualification verification and real-nameauthentication of e-commerce business owners and individuals who conduct livestreaming marketing on their platforms and keep complete records.Subsequently, on April 23, 2021, seven PRC regulatory authorities jointly promulgated the Administrative Measures on Online LivestreamingMarketing (Trial), effective May 25, 2021, which requires livestreaming platforms to (i) intervene in risky or illegal transactions by limiting traffic,suspending livestreaming or other methods, and (ii) prominently warn users of the risks involved in transactions conducted outside of thelivestreaming platforms.Regulations on Online TransactionsIn March 2021, the SAMR issued the Measures for the Supervision and Administration of Online Transactions, or the Online TransactionsSupervision Measures, which became effective on May 1, 2021. The Online Transactions Supervision Measures provide a number of specific rulesrelating to the registration of entities that transact online, the supervision of e-commerce and other business models, and the protection ofconsumers’ rights and personal information. In particular, pursuant to the Online Transactions Supervision Measures, individual merchants with anaggregate annual online business turnover of RMB100,000 or more must register with the applicable local branches of the SAMR, and e-commerceplatforms must remind the individual merchants on their platforms to make such registrations in a timely manner.Regulations Relating to Internet Information Security and Privacy ProtectionThe PRC has extensive laws and regulations relating to internet information security and privacy protection, including with respect to thefollowing key areas:National SecurityInternet information in China is regulated from a national security standpoint. China’s National Security Law covers technology securityand information security. The Standing Committee of the NPC has also enacted the Decisions on Preserving Internet Security, which subjectviolators 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 intellectualproperty rights. The MPS has promulgated measures that prohibit use of the internet in ways which, among other things, result in the leakage ofstate secrets or the spread of socially destabilizing content. If an internet information service provider violates these measures, the MPS and itslocal branches may revoke its operating license and shut down its websites.Table of Contents68Personal Information and Data PrivacyOn August 20, 2021, the Standing Committee of the NPC promulgated the Personal Information Protection Law, which unified a numberof hitherto separate rules with respect to personal information rights and privacy protection, and took effect on November 1, 2021. The PersonalInformation Protection Law strengthened the protection of personal information. As a general principle, the processing of personal data must bedirectly related to a specific and reasonable purpose and the related collection of personal information must be tailored to what is necessary to meetthat purpose. The Personal Information Protection Law also created a number of specific requirements for the processing of personal data. Forexample, personal data processors must adopt measures necessary for safeguarding the security of the personal data that they handle. Moreover, thelaw prohibits personal data processors from engaging in price discrimination or otherwise applying unreasonable differential treatment toindividuals based on automated analysis of collected personal information. Entities that violate the Personal Information Protection law may besubjected to a number of penalties, including (i) orders to rectify their violations, (ii) the suspension or termination of the provision of theirservices, (iii) confiscation of income that was illegally earned, or (iv) fines.In addition to the Personal Information Protection Law, PRC authorities have enacted a number of other laws and regulations on internetuse to protect personal information and data privacy. On March 12, 2021, the CAC, the MIIT, the MPS and the SAMR jointly released theProvisions on the Scope of Necessary Personal Information for Common Types of Mobile Internet Applications, effective May 1, 2021. These rulesintroduce a number of other obligations for persons that process certain types of personal information. For example, mobile internet applicationoperators may not prevent users from using the basic functions and services of their mobile apps solely because such users do not agree to providetheir non-essential personal information.Under China’s Criminal Law, certain activities that infringe upon personal information privacy are criminal offenses. The laws relating topersonal information-related crimes was most recently revised in the Ninth Amendment to the Criminal Law, which became effective in November2015 and was subsequently clarified in relevant part by the Interpretations of the Supreme People’s Court and the Supreme People’s Procuratorateof the PRC on Several Issues Concerning the Application of Law in Handling Criminal Cases of Infringing Personal Information, which was issuedin May 2017. China’s Criminal Law imposes criminal culpability for the unlawful collection, transaction, and provision of personal information.Moreover, pursuant to China’s Criminal Law, ICP providers that fail to fulfill their obligations relating to internet information security underapplicable laws and refuse to rectify such failures may be subject to criminal liability.CybersecurityThe Standing Committee of the NPC promulgated the Cybersecurity Law, effective June 1, 2017, to protect the security and order ofcyberspace. Pursuant to the Cybersecurity Law, any individual or organization using the network must comply with the constitution and theapplicable laws, follow public order and respect social moralities. The Cybersecurity Law prohibits endangering cybersecurity, leveraging thenetwork to engage in activities that endanger national security, or infringe upon the fame, privacy, intellectual property or other legitimate rightsand interests of others. The Cybersecurity Law provides for various security protection obligations for network operators, which are defined as“owners and administrators of networks and network service providers.” In particular, network operators must, among other obligations, complywith requirements regarding the use of tiered cyber protection systems, verify users’ real identity, store personal data and important data gatheredand produced by key information infrastructure operators within the PRC, and assist government authorities to the extent necessary for protectingnational security and investigating crimes.Critical information infrastructure operators are subject to specific cybersecurity regulations under PRC laws and regulations. Under theRegulations on the Protection of Critical Information Infrastructure, “critical information infrastructure” is defined as those network facilities orinformation systems that may endanger national security, people’s livelihoods and the public interest if such facilities or systems were to experiencedata breaches, damage, or system malfunctions. In particular, the network facilities or information systems used in certain critical industries orsectors (such as telecommunications, energy, transportation, finance, public services and national defense) are considered critical informationinfrastructure. The administration department of each critical industry or sector is responsible for identifying the critical information infrastructureoperators in their industry or sector. In terms of legal rights and duties, the Regulations on the Protection of Critical Information Infrastructureprovide, among other things, that (i) no individual or organization may intrude into, interfere with, sabotage or endanger the security of criticalinformation infrastructure; and (ii) critical information infrastructure operators must establish a cybersecurity protection system and accountabilitysystem, and the main responsible person of a critical information infrastructure operator must take full responsibility for protecting that operator’scritical information infrastructure.Table of Contents69PRC laws and regulations impose cybersecurity review obligations on critical information infrastructure operators and network platformoperators. These obligations are imposed by the Cybersecurity Review Measures and the Regulations on the Protection of Critical InformationInfrastructure. Critical information infrastructure operators, as determined and notified by the applicable governing authorities, are required toundergo cybersecurity reviews if they procure network products and services which could affect the security of their information infrastructure,network or data and such procurement will or may affect national security. As of the date of this annual report, we have not received any notice thatwe are a critical information infrastructure operator by any government authority. Under the Cybersecurity Review Measures, any networkplatform operator that holds personal data of more than one million users must apply for a cybersecurity review before it makes any public offeringon a foreign stock exchange.In addition to the foregoing circumstances, the Cybersecurity Review Measures also impose cybersecurity review obligations on nationalsecurity grounds. In particular, if a member organization of the Cybersecurity Review Working Mechanism (consisting of the CAC, MIIT, CSRCand the other governmental authorities that jointly promulgated the Cybersecurity Review Measures) finds that an operator is engaged in offeringnetwork products and services or data processing activities affect or may affect national security, the Cybersecurity Review Office must report tothe CAC for approval and may initiate a cybersecurity review, even if the operators would not otherwise have an obligation to report for acybersecurity review in their capacity as a critical information infrastructure operator or a network platform operator. The Cybersecurity ReviewMeasures lists a number of factors for assessing national security risks, including, among others: (i) the risk of any core data, important data or alarge amount of personal data being stolen, leaked, destroyed, illegally used or illegally transferred abroad; and (ii) the risk of critical informationinfrastructure, core data, important data or a large amount of personal data being affected, controlled or maliciously used by foreign governmentsafter a foreign listing.As the Cybersecurity Review Measures and the Regulations on the Protection of Critical Information Infrastructure are relatively new,certain concepts thereunder, including the exact scope of the term “critical information infrastructure operators” and “network platform operators,”remain subject to further clarification. Therefore, it is uncertain whether we would be deemed to be a critical information infrastructure operator ora network platform operator under PRC law and become subject to the relevant PRC cybersecurity laws and regulations. In addition, some of theprovisions under the Cybersecurity Review Measures remain unclear on whether they are applicable to companies that are already listed in theUnited States, such as us.Besides the Cybersecurity Law and the Cybersecurity Review Measures, a number of other rules and regulations also regulatecybersecurity. In July 2013, the MIIT promulgated the Rules on the Protection of Personal Information of Telecommunications and Internet Userspromulgated, which became effective in September 2013 and contain detailed requirements on the use and collection of personal information, aswell as the security measures that must be taken by telecommunications business operators and internet information service providers. OnNovember 28, 2019, the Secretary Bureau of the CAC, the General Office of the MIIT, the General Office of the Ministry of Public Security andthe General Office of the State Administration for Market Regulation promulgated the Identification Method of Illegal Collection and Use ofPersonal Information Through Apps, which provides guidance for regulatory authorities to identify the illegal collection and use of personalinformation through mobile apps and for mobile app operators to conduct self-examination and self-correction. The Civil Code, promulgated in2020, also provides specific provisions regarding the protection of personal information.Data SecurityOn June 10, 2021, the Standing Committee of the NPC published the Data Security Law of the People’s Republic of China, which tookeffect on September 1, 2021. The Data Security Law broadly requires data processing, which includes the collection, storage, use, processing,transmission, provision, publication of data, to be conducted in a legitimate and proper manner. To that end, the Data Security Law imposes anumber of data security and privacy obligations on entities and individuals that process data, requiring them to engage in in risk monitoring, takeremedial measures against data security vulnerabilities and data security incidents, and timely notify users and regulators about any data securityincidents.The Data Security Law introduces a data classification and multilevel protection system, pursuant to which data is classified based on suchdata’s importance to China’s economic and social development, as well as the degree of harm that may be caused to national security, the publicinterest, and the legitimate rights and interest of individuals or organizations if such data were to be tampered with, destroyed, leaked, illegallyacquired or illegal used. Data that is classified as more important will be subject to stricter management and protection requirements. For example,the Data Security Law introduces the concept of national core data, which is defined as data that relates to national security, the lifeline of thenational economy, people’s livelihoods and major public interests. National core data is subject to more stringent regulatory control by central andlocal governments. Similarly, for data classified as important data, the Data Security Law requires the processors of such important data toregularly conduct risk assessments and submit the resultant risk assessment reports to regulators.Table of Contents70The Data Security Law imposes limitations on the cross-border transfer of data. For example, the Data Security Law prohibitsorganizations and individuals in the PRC from providing any data stored in China to foreign judicial bodies or foreign law enforcement authoritieswithout the approval of the competent PRC governmental authorities.Following the passage of the Data Security Law, the PRC government has issued additional draft regulations relating to data security. Inparticular, on October 29, 2021, the CAC issued the Draft Security Assessment Measures. These draft measures provide for security assessmentson cross-border data transfers. Pursuant to these draft measures, a data processor must apply to the competent cyberspace department to conduct adata security assessment and obtain clearance if the proposed cross-border transfer of data involves: (i) personal data and important data collectedand generated by a critical information infrastructure operator; (ii) important data; (iii) personal data collected by a data processor that processesmore than one million users’ personal information; (iv) data that, in the aggregate, comprises more than one hundred thousand users’ personal dataor more than ten thousand users’ sensitive personal data; or (v) other circumstances under which a security assessment for cross-border datatransfer is required by the CAC. However, as the Draft Security Assessment Measures were released for public comment only, there still existssubstantial uncertainties with respect to their enactment timetable and final provisions.Subsequently, on November 14, 2021, the CAC released the Draft Network Data Security Regulations for public comment. These draftregulations create cybersecurity review obligations for data processors, which are broadly defined as individuals or organizations that havediscretion in deciding the objectives and means of their data processing activities, such as data collection, storage, utilization, transmission,publication and deletion. In particular, pursuant to the Draft Network Data Security Regulations, a data processor must apply for cybersecurityreview if, among others, it (i) seeks a public offering on a foreign stock exchange and processes the data of more than one million users, (ii) it seeksa Hong Kong listing that affects or may affect national security, or (iii) otherwise conducts data processing activities that affect or may affectnational security. However, as of the date of this annual report, there have been no clarifications from the relevant authorities as to the standards fordetermining whether an activity is one that “affects or may affect national security.” In addition to the foregoing cybersecurity review obligations,the Draft Network Data Security Regulations also proposed to create a system of annual data security self-assessments, whereby data processorsthat (i) process “important data” or (ii) are listed overseas must conduct an annual data security assessment, and submit the annual assessmentreport to the applicable municipal cybersecurity department by the end of January in the following year. As of the date of this annual report, theDraft Network Data Security Regulations have only been released for public comment, and their respective provisions and anticipated adoption oreffective date remain subject to change with substantial uncertainty.To the extent the Draft Security Assessment Measures or the Draft Network Data Security Regulations are enacted into law in their currentform, data processors would be subject to additional regulatory obligations. Additionally, some of the provisions under the Draft SecurityAssessment Measures and the Draft Network Data Security Regulations remain unclear on whether they will be applicable to companies that arealready listed in the United States, such as us.Network ProductsOn July 12, 2021, the MIIT and two other authorities jointly issued the Provisions on the Administration of Security Vulnerabilities ofNetwork Products. These provisions state that organizations and individuals are prohibited from (i) abusing the security vulnerabilities of networkproducts to engage in activities that endanger network security and (ii) illegally collecting, selling, or publishing information about such securityvulnerabilities. It is also prohibited to provide technical support, advertising, payment settlement and other assistance to a person who is known tobe in violation of the provisions. Additionally, network product providers, network operators, and platforms collecting network product securityvulnerabilities must establish channels for receiving information about network product security vulnerabilities and keep such channels open, aswell as retain logs about network product security vulnerability information for at least six months. These provisions also ban the provision ofundisclosed vulnerabilities to overseas organizations or individuals other than to the providers of the products to which the vulnerabilities relate.Table of Contents71Regulations Relating to Product Quality and Consumer Rights ProtectionThe PRC Consumer Rights and Interests Protection Law, as amended in and effective March 2014, and the Online TransactionsSupervision Measures, have provided stringent requirements and obligations on business operators, including internet business operators andplatform service providers. For example, consumers are entitled to return goods purchased online, subject to certain exceptions, within seven daysupon receipt of such goods for no reason. To ensure that sellers and service providers comply with these laws and regulations, the platformoperators 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 uponin connection with consumers’ purchase of goods or acceptance of services on online marketplace platforms and the online marketplace platformproviders fail to provide consumers with the contact information of the seller or manufacturer. In addition, online marketplace platform providersmay be jointly and severally liable with sellers and manufacturers if they are aware or should be aware that any seller or manufacturer is using theonline 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 January 1, 2021, also provides that if an online service provider is aware that an online user iscommitting infringing activities, such as selling counterfeit products, through its internet services and fails to take necessary measures, it shall bejointly liable with the said online user for such infringement. If the online service provider receives any notice from the infringed party on anyinfringing activities, the online service provider shall take necessary measures, including deleting, blocking and unlinking the infringing content, ina 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 TransactionsSupervision Measures as an e-commerce platform service provider and believe that we are currently in compliance with these regulations in allmaterial aspects.Regulations Relating to Anti-unfair Competition and Anti-monopolyOn April 23, 2019, the Standing Committee of the NPC amended the PRC Anti-unfair Competition Law, pursuant to which businessoperators may not engage in anti-competitive activities including but not limited to, unduly influencing transactions, confusing or defraudingconsumers, commercial bribery, trade secret infringement and commercial libel. Failure to comply with the Anti-unfair Competition Law andrelated 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. InFebruary 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 othertransaction terms, coercive exclusivity arrangements with transaction counterparties, blocking of competitor interface through technological meansand unlawful collection of user data without consent, are prohibited. In addition, the guidelines included concentrations involving companies withVIE structure within the ambit of the SAMR’s merger control review, if certain reporting thresholds are met.In addition to the currently enacted laws and regulations, PRC authorities have proposed certain draft regulations that would furtherstrengthen unfair competition and anti-monopoly laws if enacted into law. In particular, on August 17, 2021, the SAMR issued the Draft Provisionson the Prohibition of Unfair Competition on the Internet for public comment. These draft provisions prohibit business operators from using data,algorithms and other technical methods to hijack traffic or influence users’ choices, or use technical means to illegally capture or use other businessoperators’ data. Subsequently, in October 2021, the Standing Committee of the NPC issued the Draft Amendment to the Anti-monopoly Law forpublic comment. This is the second draft of the proposed amendments to the Anti-monopoly Law. The draft amendment proposed to increase themaximum amount of fines that may be imposed on a business operator for violations of certain market concentration requirements to up to 10% ofthe business operator’s sales revenue from the preceding year. The draft amendment also proposed that the relevant authority should investigate atransaction if the concentration resulting from the transaction has or may have the effect of eliminating or restricting competition, even if suchconcentration does not reach the filing threshold.Table of Contents72Regulations Relating to Internet Advertising BusinessIn July 2016, the SAIC issued the Interim Measures for the Administration of Internet Advertising to regulate internet advertisingactivities. 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 treatments,medicines, food for special medical purposes, medical apparatuses, pesticides, veterinary medicines, dietary supplement or other specialcommodities or services subject to examination by an advertising examination authority may be published only after passing the examination. Inaddition, no entity or individual may publish any advertisement of over-the-counter medicines or tobacco on the internet. An internet advertisementmust be identifiable and clearly identified as an “advertisement” to the consumers. Paid search advertisements are required to be clearlydistinguished from natural search results. In addition, the following internet advertising activities are prohibited: providing or using anyapplications or hardware to intercept, filter, cover, fast forward or otherwise restrict any authorized advertisement of other persons; using networkpathways, network equipment or applications to disrupt the normal data transmission of advertisements, alter or block authorized advertisements ofother persons or load advertisements without authorization; or using fraudulent statistical data, transmission effect or matrices relating to onlinemarketing performance to induce incorrect quotations, seek undue interests or harm the interests of others. Internet advertisement publishers arerequired to verify relevant supporting documents and check the content of the advertisement and are prohibited from publishing any advertisementwith unverified content or without all the necessary qualifications. Internet information service providers that are not involved in internetadvertising business activities but simply provide information services are required to block any attempt to publish an illegal advisement that theyare aware of or should reasonably be aware of through their information services.In addition, the Chinese government may, from time to time, promulgate new advertising laws and regulations in the future to imposeadditional requirements on online advertising services. For example, on November 26, 2021, the SAMR promulgated a draft of the Measures forthe Administration of Internet Advertisements for public comment. These draft measures stipulate that the promotion of commodities or services inthe form of paid listings on the Internet must be prominently identified as advertisements, among other obligations. To the extent these measuresare enacted into law, internet information service providers would be subject to additional requirements under PRC online advertising laws.Regulations Relating to Payment ServicesIn June 2010, the People’s Bank of China, or PBOC, issued the Administrative Measures for the Payment Services of Non-FinancialInstitutions, or the Payment Services Measures. Under this rule, a non-financial institution must obtain a payment business license, or the PaymentLicense, to provide payment services and qualifies as a paying institution. With the Payment License, a non-financial institution may serve as anintermediary between payees and payers and provide some or all of the following services: online payment, issuance and acceptance of prepaidcard, bank card acceptance, and other payment services as specified by PBOC. Without PBOC’s approval, no non-financial institution or individualmay 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 ofsettlement services by financial institutions and third-party payment service providers to unlicensed entities. The PBOC Notice intended to preventunlicensed entities from using licensed payment service providers as a conduit for conducting the unlicensed payment settlement services, so as tosafeguard the security of funds and information. We believe that our pattern of receiving settlement services from commercial banks and third-partyonline payment service providers are not in violation of the PBOC Notice. See “Item 3. Key Information—D. Risk Factors—Risks Related to OurBusiness and Industry—We currently rely on commercial banks and third-party online payment service providers for payment processing andescrow services on our platform. If these payment services are restricted or curtailed in any way, are offered to us on less favorable terms, orbecome unavailable to us or our buyers for any reason, our business may be materially and adversely affected.”Regulations Relating to Intellectual Property in the PRCCopyrightPursuant to the Copyright Law of the PRC, copyrights include personal rights such as the right of publication and that of attribution aswell as property rights such as the right of production and that of distribution. Reproducing, distributing, performing, projecting, broadcasting orcompiling 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 thecircumstances of the case, undertake to cease the infringement, take remedial action, and offer an apology, pay damages, etc.Table of Contents73TrademarkPursuant to the Trademark Law of the PRC, the right to exclusive use of a registered trademark shall be limited to trademarks which havebeen approved for registration and to goods for which the use of such trademark has been approved. The period of validity of a registeredtrademark shall be ten years, counted from the day the registration is approved. According to this law, using a trademark that is identical to orsimilar to a registered trademark in connection with the same or similar goods without the authorization of the owner of the registered trademarkconstitutes an infringement of the exclusive right to use a registered trademark. The infringer shall, in accordance with the regulations, undertake tocease the infringement, take remedial action, and pay damages, etc.PatentPursuant to the Patent Law of the PRC, after the grant of the patent right for an invention or utility model, except where otherwiseprovided 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 resultof 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 importany 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 NamePursuant to the Measures for the Administration of Internet Domain Names of China, “domain name” shall refer to the character mark ofhierarchical 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, theapplicant becomes the holder of the domain name registered by it. Any organization or individual may file an application for settlement with thedomain names dispute resolution institution or file a lawsuit in the people’s court in accordance with the law, if such organization or individualconsider its/his legal rights and interests to be infringed by domain names registered or used by others.Regulations Relating to Labor Protection in the PRCAccording to the Labor Law of the PRC, an employer must develop and improve its rules and regulations to safeguard the rights of itsworkers. An employer must develop and improve its labor safety and health system, stringently implement national protocols and standards onlabor 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 LaborContract Law and the Implementation Regulations on Labor Contract Law that a labor contract must be made in writing. An employer and anemployee may enter into a fixed-term labor contract, an un-fixed term labor contract, or a labor contract that concludes upon the completion ofcertain work assignments, after reaching agreement upon due negotiations. An employer may legally terminate a labor contract and dismiss itsemployees after reaching agreement upon due negotiations with the employee or by fulfilling the statutory conditions. Labor contracts concludedprior to the enactment of the Labor Contract Law and subsisting within the validity period thereof shall continue to be honored. With respect to acircumstance where a labor relationship has already been established but no formal contract has been made, a written labor contract shall be enteredinto within one month from the effective date of the Labor Contract Law.According to the Interim Regulations on the Collection and Payment of Social Insurance Premiums, the Regulations on Workplace InjuryInsurance, the Regulations on Unemployment Insurance and the Trial Measures on Employee Maternity Insurance of Enterprises, enterprises in thePRC must 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 registrationwith local social insurance agencies, and shall pay or withhold relevant social insurance premiums for or on behalf of employees. The Law onSocial 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 notcomply with relevant laws and regulations on social insurance.Table of Contents74According to the Interim Measures for Participation in the Social Insurance System by Foreigners Working within the Territory of China,employers who employ foreigners must participate in the basic pension insurance, unemployment insurance, basic medical insurance, occupationalinjury insurance, and maternity leave insurance in accordance with the relevant law, with the social insurance premiums to be contributedrespectively by the employers and foreigner employees as required. In accordance with such Interim Measures, the social insurance administrativeagencies shall exercise their right to supervise and examine the legal compliance of foreign employees and employers, and the employers who donot pay social insurance premiums in conformity with the laws shall be subject to the administrative provisions provided in the Social InsuranceLaw and other relevant regulations and rules.According to the Regulations on the Administration of Housing Provident Fund, housing provident fund contributions by an individualemployee and housing provident fund contributions by his or her employer shall belong to the individual employee.The employer must timely pay up and deposit housing provident fund contributions in full amount and late or insufficient payments shallbe prohibited. The employer must process housing provident fund payment and deposit registrations with the housing provident fundadministration center. With respect to companies who violate the above regulations and fail to process housing provident fund payment and depositregistrations or open housing provident fund accounts for their employees, such companies shall be ordered by the housing provident fundadministration center to complete such procedures within a designated period. Those who fail to process their registrations within the designatedperiod shall be subject to a fine ranging from RMB10,000 to RMB50,000. When companies violate these regulations and fail to pay up housingprovident fund contributions in full amount as due, the housing provident fund administration center shall order such companies to pay up within adesignated period, and may further apply to the People’s Court for mandatory enforcement against those who still fail to comply after the expiry ofsuch period.See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—Any lack of additional requisiteapprovals, licenses or permits or failure to comply with any requirements of PRC laws, regulations and policies may materially and adversely affectour daily operations and hinder our growth.”Regulations Relating to Tax in the PRCIncome TaxThe PRC Enterprise Income Tax Law was recently amended in December 2018. The PRC Enterprise Income Tax Law applies a uniform25% enterprise income tax rate to both foreign-invested enterprises and domestic enterprises, except where tax incentives are granted to specialindustries 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% enterpriseincome tax rate on its worldwide income. Under the implementation regulations to the PRC Enterprise Income Tax Law, a “de facto managementbody” is defined as the body that exercises full and substantial control and overall management over the business, productions, personnel, accountsand properties of an enterprise.In January 2009, the 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 anonresident enterprise shall be the relevant tax withholders for such non-resident enterprise. Further, the Non-resident Enterprises Measuresprovide that, in case of an equity transfer between two non-resident enterprises occurring outside China, which is indirectly related to the transferof equity interests of a PRC resident enterprise, the non-resident enterprise which receives the equity transfer payment shall, by itself or engage anagent to, file tax declaration with the PRC tax authority located at the place of the PRC company whose equity has been transferred, and the PRCcompany whose equity has been transferred shall assist the tax authorities to collect taxes from the relevant non-resident enterprise. In April 2009,MOF and the SAT jointly issued the Notice on Issues Concerning Process of Enterprise Income Tax in Enterprise Restructuring Business. InDecember 2009, SAT issued the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC ResidentEnterprises, or Circular 698. Both the Notice on Issues Concerning Process of Enterprise Income Tax in Enterprise Restructuring Business andCircular 698 became effective retroactively as of January 2008. In February 2011, SAT issued the Notice on Several Issues Regarding the IncomeTax of Non-PRC Resident Enterprises, or SAT Circular 24. By promulgating and implementing these circulars, the PRC tax authorities haveenhanced their scrutiny over the direct or indirect transfer of equity interests in a PRC resident enterprise by a non-resident enterprise.Table of Contents75In February 2015, the SAT issued the Notice on Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-PRCResident Enterprises, or SAT Circular 7, to supersede existing provisions in relation to the indirect transfer as set forth in Circular 698, while theother provisions of Circular 698 remain in force. SAT Circular 7 introduces a new tax regime that is significantly different from that under Circular698. SAT Circular 7 extends its tax jurisdiction to capture not only indirect transfers as set forth under Circular 698 but also transactions involvingtransfer of immovable property in China and assets held under the establishment, and placement in China, of a foreign company through theoffshore transfer of a foreign intermediate holding company. SAT Circular 7 also addresses transfer of the equity interest in a foreign intermediateholding company broadly. In addition, SAT Circular 7 provides clearer criteria than Circular 698 on how to assess reasonable commercial purposesand introduces safe harbor scenarios applicable to internal group restructurings. However, it also brings challenges to both the foreign transferorand transferee of the indirect transfer as they have to determine whether the transaction should be subject to PRC tax and to file or withhold thePRC tax accordingly. In October 2017, SAT issued the Announcement on Issues Relating to Withholding at Source of Income Tax of Non-residentEnterprises, or SAT Circular 37. SAT Circular 37, effective December 2017, superseded the Non-resident Enterprises Measures and SAT Circular698 as a whole and partially amended some provisions in SAT Circular 24 and SAT Circular 7. SAT Circular 37 purports to clarify certain issues inthe implementation of the above regime, by providing, among others, the definition of equity transfer income and tax basis, the foreign exchangerate to be used in the calculation of withholding amount, and the date of occurrence of the withholding obligation. Specifically, SAT Circular 37provides that where the transfer income subject to withholding at source is derived by a non-PRC resident enterprise in instalments, the instalmentsmay first be treated as recovery of costs of previous investments. Upon recovery of all costs, the tax amount to be withheld must then be computedand withheld.Value-Added TaxAccording to the Temporary Regulations on Value-added Tax and the Detailed Implementing Rules of the Temporary Regulations onValue-added Tax, all taxpayers selling goods, providing processing, repair or replacement services or importing goods within the PRC shall payvalue-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 onthe taxpayers providing processing, repairing or replacement service; the applicable rate for the export of goods by taxpayers shall be nil, unlessotherwise stipulated.Furthermore, according to the Trial Scheme for the Conversion of Business Tax to Value-added Tax, promulgated by MOF and the SAT inNovember 2011, the State Council began to launch taxation reforms in a gradual manner in January 2012, whereby the collection of value-addedtax in lieu of business tax items was implemented on a trial basis in regions showing significant radiating effects in economic development andproviding outstanding reform examples, beginning with production service industries such as transportation and certain modern service industries.In accordance with a SAT circular that took effect in May 2016, upon approval of the State Council, the pilot program of the collection ofvalue-added tax in lieu of business tax shall be promoted nationwide in a comprehensive manner starting from May 2016, and all taxpayers ofbusiness tax engaged in the construction industry, the real estate industry, the financial industry and the life science industry shall be included in thescope of the pilot program with regard to payment of value-added tax instead of business tax.In April 2018, MOF and the SAT jointly promulgated the Circular of the Ministry of Finance and the State Administration of Taxation onAdjustment of Value-Added Tax Rates, or Circular 32, according to which (i) for VAT taxable sales acts or importation of goods originally subjectto value-added tax rates of 17% and 11% respectively, such tax rates shall be adjusted to 16% and 10%, respectively; (ii) for purchase ofagricultural products originally subject to deduction rate of 11%, such deduction rate shall be adjusted to 10%; (iii) for purchase of agriculturalproducts for the purpose of production and sales or consigned processing of goods subject to tax rate of 16%, such tax shall be calculated at thededuction 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 rateshall 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 of11%, the export tax refund rate shall be adjusted to 10%. Circular 32 became effective on May 1, 2018 and shall supersede existing provisionswhich are inconsistent with Circular 32.In March 2019, MOF, the SAT and the General Administration of Customs jointly issued the Notice on Measures to Implement theReform 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.Table of Contents76Regulations Relating to Dividend DistributionsThe principal regulations governing the distribution of dividends paid by wholly foreign-owned enterprises include the PRC CompanyLaw and the Foreign Investment Law. Under these regulations, foreign-invested enterprises in China may pay dividends only out of theiraccumulated profits, if any, as determined in accordance with PRC accounting standards and regulations. In addition, a PRC company is required toset aside at least 10% of its after-tax profit based on PRC accounting standards each year to its general reserves until its cumulative total reservefunds reaches 50% of its registered capital. These reserve funds, however, may not be distributed as cash dividends.Regulations Relating to Foreign ExchangeRegulations on Foreign Exchange Registration of Overseas Investment by PRC ResidentsThe Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing andRoundtrip Investment Through Special Purpose Vehicles, or Circular 37, issued by SAFE in and effective July 2014, regulates foreign exchangematters in relation to the use of special purpose vehicles, or SPVs, by PRC residents or entities to seek offshore investment and financing andconduct round trip investment in China. Under Circular 37, a SPV refers to an offshore entity established or controlled, directly or indirectly, byPRC residents or entities for the purpose of seeking offshore financing or making offshore investment, using legitimate domestic or offshore assetsor interests, while “round trip investment” refers to the direct investment in China by PRC residents or entities through SPVs, namely, establishingforeign-invested enterprises to obtain the ownership, control rights and management rights. Circular 37 requires that, before making contributioninto an SPV, PRC residents or entities are required to complete foreign exchange registration with SAFE or its local branch. Circular 37 furtherprovides that option or share-based incentive holders of a non-listed SPV can exercise the options or share incentive grants to become a shareholderof such non-listed SPV, subject to registration with SAFE or its local branch.PRC residents or entities who have contributed domestic or offshore interests or assets to SPVs but have yet to obtain SAFE registrationbefore the implementation of the Circular 37 shall register their ownership interests or control in such SPVs with SAFE or its local branch. Anamendment to the registration is required if there is a material change in the registered SPV, such as any change of basic information (includingchange of such PRC resident’s name and operation term), increases or decreases in investment amounts, transfers or exchanges of shares, ormergers or divisions. Failure to comply with the registration procedures set forth in Circular 37, or making misrepresentation or failure to disclosecontrollers of foreign-invested enterprise that is established through round-trip investment, may result in restrictions on the foreign exchangeactivities of the relevant foreign-invested enterprises, including payment of dividends and other distributions, to its offshore parent or affiliate, andthe capital inflow from the offshore parent, and may also subject relevant PRC residents or entities to penalties under PRC foreign exchangeadministration regulations. In February 2015, SAFE further promulgated the Circular on Further Simplifying and Improving the Administration ofthe Foreign Exchange Concerning Direct Investment, or SAFE Circular 13. This SAFE Circular 13 has amended SAFE Circular 37 by requiringPRC residents or entities to register with qualified banks rather than SAFE or its local branch in connection with their establishment or control ofan offshore entity established for the purpose of overseas investment or financing. Circular 37 is applicable to our shareholders who are PRCresidents and may be applicable to any offshore acquisitions that we make in the future. All of our shareholders who, to our knowledge, are subjectto the above SAFE regulations have completed the necessary registrations with the local SAFE branch or qualified banks as required by SAFECircular 37.In March 2015, SAFE promulgated the Circular on Reforming the Management Approach regarding the Settlement of Foreign ExchangeCapital of Foreign-invested Enterprises, or Circular 19. According to Circular 19, the foreign exchange capital of foreign-invested enterprises shallbe subject to the Discretional Foreign Exchange Settlement. The Discretional Foreign Exchange Settlement refers to the foreign exchange capital inthe capital account of a foreign-invested enterprise for which the rights and interests of monetary contribution has been confirmed by the localforeign exchange bureau (or the book-entry registration of monetary contribution by the banks), and this foreign exchange capital can be settled atthe banks based on the actual operational needs of the foreign-invested enterprise. The proportion of Discretional Foreign Exchange Settlement ofthe foreign exchange capital of a foreign-invested enterprise is temporarily determined to be 100%.Table of Contents77SAFE issued the Circular on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts, orCircular 16. Pursuant to Circular 16, enterprises registered in the PRC may also convert their foreign debts from foreign currency to Renminbi on adiscretionary basis. Circular 16 provides an integrated standard for conversion of foreign exchange under capital account items (including but notlimited to foreign currency capital and foreign debts) on a discretionary basis which applies to all enterprises registered in the PRC. Circular 16reiterates the principle that Renminbi converted from foreign currency-denominated capital of a company may not be directly or indirectly used forpurposes beyond its business scope or prohibited by PRC laws or regulations, and such converted Renminbi shall not be provided as loans to itsnon-affiliated entities. As Circular 16 is newly issued, and SAFE has not provided detailed guidelines with respect to its interpretation orimplementations, 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 OptimizingGenuineness and Compliance Verification, or Circular 3. Circular 3 sets out various measures to tighten genuineness and compliance verification ofcross-border transactions and cross-border capital flow, which include requiring banks to verify board resolutions, tax filing form, and auditedfinancial statements before wiring foreign invested enterprises’ foreign exchange distribution above US$50,000, and strengthening genuineness andcompliance verification of foreign direct investments.On October 23, 2019, SAFE promulgated the Notice of the Administration of Foreign Exchange on Further Promoting the Convenience ofCross-Border Trade and Investment, which, among other things, non-investment foreign-invested entities may use foreign exchange capital orRenminbi funds converted from the foreign exchange capital to make domestic equity investments, provided that such investments should complywith relevant PRC laws and regulations.Our PRC subsidiaries’ distributions to their offshore parents are required to comply with the requirements as described above.Regulations on Stock Incentive PlansPursuant to the Notice on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in StockIncentive Plan of Overseas Publicly Listed Company, or Circular 7, issued by SAFE in February 2012, employees, directors, supervisors and othersenior management participating in any stock incentive plan of an overseas publicly listed company who are PRC citizens or who are non-PRCcitizens residing in China for a continuous period of not less than one year are generally required to register with SAFE through a domesticqualified agent. We and our directors, executive officers and other employees who are PRC citizens or who reside in the PRC for a continuousperiod 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 regulationsregarding the registration requirements for employee stock incentive plans may subject the PRC plan participants or us to fines and other legal oradministrative sanctions.”In addition, SAT has issued certain circulars concerning employee share options or restricted shares. Under these circulars, the employeesworking in the PRC who exercise share options or are granted restricted shares will be subject to PRC individual income tax. The PRC subsidiariesof such overseas listed company have obligations to file documents related to employee share options or restricted shares with relevant taxauthorities and to withhold individual income taxes of those employees who exercise their share options. If the employees fail to pay or the PRCsubsidiaries fail to withhold their income taxes according to relevant laws and regulations, the PRC subsidiaries may face sanctions imposed by thetax authorities or other PRC government authorities.Table of Contents78Regulations Relating to Overseas Listings and M&AThe M&A RulesOn August 8, 2006, six PRC governmental and regulatory agencies, including MOFCOM and the CSRC, jointly promulgated the M&ARules, which became effective on September 8, 2006 and was subsequently amended on June 22, 2009. The M&A Rules govern merger andacquisition transactions involving foreign investors. In particular, the M&A Rules apply to foreign investors that (i) purchase equity interests in, orsubscribe for the increased capital of, a domestic company such that the domestic company becomes a foreign-invested enterprise, (ii) establish aforeign-invested enterprise in the PRC for the purpose of purchasing and operating the assets of a domestic company; or (iii) purchase the assets ofa domestic company and transfer such assets to a foreign-invested enterprise for the purpose of operating those assets. The M&A Rules require,among other things, that MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor acquires control of aPRC domestic enterprise and which involves any of the following circumstances: (i) an important industry is concerned, (ii) the transactioninvolves factors that impact or may impact national economic security, or (iii) the transaction will lead to a change in control of a domesticenterprise which holds a famous trademark or PRC time-honored brand. The M&A Rules also require that, in accordance with the Anti-monopolyLaw promulgated by the Standing Committee of the NPC, which became effective in 2008, any merger and acquisitions of domestic enterprises byforeign investors which are deemed concentrations and involve parties with specified turnover thresholds must be cleared by MOFCOM beforethey can be completed.The M&A Rules also regulate overseas listings. Pursuant to the M&A Rules, an offshore special purpose vehicle that (i) was formed forlisting purposes through the acquisition of PRC domestic companies and (ii) is controlled by PRC persons or entities must obtain the approval ofthe CSRC before it can list its securities on an overseas stock exchange. Based on the advice of our PRC legal counsel, we are of the view that wedid not need, and will not need, to obtain the CSRC’s approval for our previous offshore offerings. However, the interpretation and application ofthe regulations could change so that we may need to obtain the CSRC’s approval with respect to our previous or future offshore offerings.The 2021 Negative ListOn December 27, 2021, the NDRC and MOFCOM jointly issued the 2021 Negative List, which became effective on January 1, 2022.Pursuant to the 2021 Negative List, if a PRC company that is engaged in a prohibited business under the 2021 Negative List seeks an overseasoffering and listing of securities, it must obtain approval from the competent governmental authorities. In addition, the foreign investors of suchPRC company may not be involved in the company’s operations and management, and their shareholding percentage is subject to the relevantregulations on domestic securities investments by foreign investors. As the 2021 Negative List is relatively new, there are substantial uncertaintiesas to the interpretation and implementation of these new requirements, and it is unclear as to whether and to what extent listed companies like uswill be subject to these new requirements.Opinions and Draft Regulations on Overseas Listings and OfferingsThe PRC government authorities has recently indicated an intent to exert more oversight and control over securities offerings and othercapital markets activities that are or have been conducted overseas and foreign investment in China-based companies like us. On July 6, 2021, theGeneral Office of the Central Committee of the Communist Party of China and the General Office of the State Council issued the Opinions onStrictly Scrutinizing Illegal Securities Activities in Accordance with the Law. These opinions emphasized the need to, among other things,strengthen the supervision of overseas listings by China-based companies. These opinions also proposed the development of a regulatory system tooversee China-based overseas-listed companies.Subsequently, on December 24, 2021, the State Council issued the Draft Administrative Provisions on Overseas Securities Offerings, andthe CSRC issued the Draft Measures on Overseas Securities Offerings, in each case for public comment. Pursuant to these draft regulations, inconnection with an overseas offering and listing (such as an initial public offering or a follow-on offering) by a PRC company, the issuer or itsaffiliated PRC company, as the case may be, must make a filing with the CSRC, regardless of whether the overseas offering and listing is madedirectly or indirectly.These draft regulations define “indirect” offshore listings to include the offshore listings of companies whose principal business operationsare conducted within the PRC, even if such companies are incorporated in non-PRC jurisdictions. A company’s principal business operations willbe deemed to be conducted in the PRC if (i) the operating income, gross profit, total assets or net assets of the issuer’s affiliated PRC companies inthe most recent fiscal year accounted for more than 50% of the corresponding line items in the issuer’s audited consolidated financial statementsfor that year, (ii) most of the senior management responsible for business operations and management are PRC citizens or are ordinarily resident inthe PRC, and (iii) the business is primarily located in or carried in the PRC.Table of Contents79To satisfy the filing requirements under the Draft Administrative Provisions on Overseas Securities Offerings and the Draft Measures onOverseas Security Offerings, the issuer or its affiliated PRC company, as the case may be, must file with the CSRC within a prescribed timeframebased on the type of offering and listing. In particular, a filing must be made: (i) for initial public offerings, within three business days after theinitial filing of the listing application to the regulator in the place of the intended listing, (ii) for follow-on offerings, within three business daysafter completion of the follow-on offering, (iii) for follow-on offerings conducted for the purposes of asset acquisitions, within three business daysafter the first public announcement of the transaction, and (iv) for listings made via a reverse takeover, share swap, acquisition and similartransactions, within three business days after the initial filing of the listing application or the first public announcement of the transaction, as casemay be.Pursuant to the Draft Measures on Overseas Securities Offering, an overseas offering and listing is prohibited if it (i) is expresslyprohibited by national laws and regulations; (ii) may threaten or endanger national security, based on the legal determination of the competentauthorities under the State Council; (iii) involves material ownership disputes over the equity, major assets, core technology and other aspects ofthe issuer; (iv) involves a PRC company (or its controlling shareholders or actual controllers) that have committed or are under investigation forcommitting criminal offenses, including corruption, bribery, embezzlement, misappropriation of property or other criminal offenses disruptive tothe order of the socialist market economy; (v) involves directors, supervisors, or senior executives that have been subject, or are under investigationfor, major violations of the law or criminal offenses, or (vi) involves any other circumstances prescribed by the State Council.Failure to comply with the filing requirements under the Draft Administrative Provisions on Overseas Securities Offerings may subject aPRC company to a warning or a fine of between RMB1 million and RMB10 million. As currently proposed, if the competent governmentalauthorities deems the overseas offering of securities by a PRC company to be a serious violation of the Draft Administrative Provisions onOverseas Securities Offerings or the Draft Measures on Overseas Securities Offerings, such authorities may order the PRC company to suspend itsbusiness or revoke its permits or business license. Furthermore, the controlling shareholder, actual controllers, directors, supervisors, and otherlegally appointed persons of the PRC companies may be subjected to warnings, or fined between RMB500,000 to RMB5,000,000 on an individualor collective basis.As of the date of this annual report, the Draft Administrative Provisions on Overseas Securities Offerings and the Draft Measures onOverseas Securities Offerings have only been released for public comment. There are uncertainties as to whether they will be further amendedbefore their official enactment. Substantial uncertainties exist with respect to the timing of their enactment and final content.Table of Contents80C. Organizational StructureThe following diagram illustrates our corporate structure, including our principal subsidiaries and our VIE and its principal subsidiary, asof 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 seriesof contractual arrangements with Hangzhou Weimi, pursuant to which we have control over and are the primary beneficiary of Hangzhou Aimi.Table of Contents81Contractual Arrangements with Our VIE and Its ShareholdersThe following is a summary of the currently effective contractual arrangements by and among our wholly-owned subsidiary, HangzhouWeimi, our VIE and its shareholders. These contractual arrangements enable us to (i) exercise effective control over our VIE and its subsidiaries;(ii) receive substantially all of the economic benefits of our VIE and its subsidiaries; and (iii) have an exclusive option to purchase all or part of theequity interests in and assets of our VIE when and to the extent permitted by PRC law.Arrangements that provide us effective control over our VIE and its subsidiariesShareholders’ Voting Rights Proxy Agreement. Pursuant to the amended and restated shareholders’ voting rights proxy agreement datedJuly 15, 2020, by and among Hangzhou Weimi, Hangzhou Aimi and the shareholders of Hangzhou Aimi, each shareholder of Hangzhou Aimiirrevocably 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, seniormanagement, the power to sell or transfer such shareholder’s equity interest in Hangzhou Aimi, the power to propose to convene an extraordinaryshareholders meeting, and other shareholders’ voting rights permitted by the Articles of Association of Hangzhou Aimi. The shareholders’ votingrights proxy agreement remains irrevocable and continuously valid from the date of execution so long as each shareholder remains as a shareholderof Hangzhou Aimi.Equity Pledge Agreement. Pursuant to the amended and restated equity pledge agreement dated July 15, 2020, by and among HangzhouWeimi, Hangzhou Aimi and the shareholders of Hangzhou Aimi, the shareholders of Hangzhou Aimi pledged all of their equity interests inHangzhou Aimi to Hangzhou Weimi to guarantee their and Hangzhou Aimi’s obligations under the contractual arrangements including theexclusive consulting and services agreement, the exclusive option agreement and the shareholders’ voting rights proxy agreement and this equitypledge agreement, as well as any loss incurred due to events of default defined therein and all expenses incurred by Hangzhou Weimi in enforcingsuch obligations of Hangzhou Aimi or its shareholders. In the event of default defined therein, upon written notice to the shareholders of HangzhouAimi, Hangzhou Weimi, as pledgee, will have the right to dispose of the pledged equity interests in Hangzhou Aimi and priority in receiving theproceeds from such disposition. The shareholders of Hangzhou Aimi agree that, without Hangzhou Weimi’s prior written approval, during the termof the equity pledge agreement, they will not dispose of the pledged equity interests or create or allow any other encumbrance on the pledgedequity interests. We have completed the registration of the equity pledges with the relevant office of the SAIC in accordance with the PRC PropertyRights Law.Spousal Consent Letter. Pursuant to each spousal consent letter, the spouse of the signing shareholder of our VIE unconditionally andirrevocably agreed that the equity interest in Hangzhou Aimi held by such shareholder and registered in his name will be disposed of pursuant tothe equity interest pledge agreement, the exclusive option agreement and the shareholders’ voting rights proxy agreement. The spouse of thesigning shareholder of our VIE agreed not to assert any rights over the equity interest in Hangzhou Aimi held by the signing shareholder. Inaddition, in the event that the spouse of the signing shareholder of our VIE obtains any equity interest in Hangzhou Aimi held by the signingshareholder for any reason, the spouse agreed to be bound by the contractual arrangements.Agreements that allow us to receive economic benefits from our VIEExclusive Consulting and Services Agreement. Under the exclusive consulting and services agreement between Hangzhou Weimi andHangzhou 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. HangzhouWeimi has the exclusive ownership of intellectual property rights created as a result of the performance of this agreement. Hangzhou Aimi agreesto pay Hangzhou Weimi service fee at an amount as determined by Hangzhou Weimi. This agreement will remain effective for a ten-year term andthen be automatically renewed, unless Hangzhou Weimi gives Hangzhou Aimi a termination notice 90 days before the term ends.Table of Contents82Agreements that provide us with the option to purchase the equity interests in our VIEExclusive Option Agreement. Pursuant to the amended and restated exclusive option agreement dated July 15, 2020, by and amongHangzhou Weimi, Hangzhou Aimi and each of the shareholders of Hangzhou Aimi, each of the shareholders of Hangzhou Aimi irrevocablygranted Hangzhou Weimi an exclusive call option to purchase, or have its designated person(s) to purchase, at its discretion, all or part of theirequity interests in Hangzhou Aimi, and the purchase price shall be the lowest price permitted by applicable PRC law. In addition, Hangzhou Aimihas granted Hangzhou Weimi an exclusive call option to purchase, or have its designated person(s) to purchase, at its discretion, to the extentpermitted 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 PRClaw, 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 materialpurchase 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 inHangzhou Aimi held by the shareholders of Hangzhou Aimi and all assets of Hangzhou Aimi are transferred or assigned to Hangzhou Weimi or itsdesignated representatives.In the opinion of King & Wood Mallesons, our PRC legal counsel, the ownership structures of Hangzhou Weimi and Hangzhou Aimi arenot in any violation of PRC laws or regulations currently in effect; and the contractual arrangements among Hangzhou Weimi and Hangzhou Aimiand its shareholders governed by PRC law are legal, valid, binding and enforceable in accordance with its terms and applicable PRC laws, and donot 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 andapplication of current and future PRC laws and regulations. If the PRC government finds that the arrangements that establish the structure foroperating our e-commerce business do not comply with PRC government restrictions on foreign investment in our businesses, we could be subjectto severe penalties including being prohibited from continuing operations. See “Item 3. Key Information—D. Risk Factors—Risks Related to OurCorporate Structure—If the PRC government finds that the arrangements that establish the structure for operating some of our operations in Chinado not comply with PRC regulations relating to the relevant industries, or if these regulations or the interpretation of existing regulations change inthe future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.”D. Property, Plant and EquipmentAs of December 31, 2021, our principal executive offices were located on leased premises comprising approximately 58,811 squaremeters in Shanghai, China. Our principal executive offices are leased from independent third parties, and we plan to renew our lease from time totime as needed.Our servers are hosted in internet data centers in different geographic regions in China. We typically enter into leasing and hosting serviceagreements with internet data center providers that are renewed periodically. We believe that our existing facilities are sufficient for our currentneeds, and we will obtain additional facilities, principally through leasing, to accommodate our future expansion plans.Item 4A. Unresolved Staff CommentsNone.Item 5. Operating and Financial Review and ProspectsYou should read the following discussion and analysis of our financial condition and results of operations in conjunction with our auditedconsolidated financial statements and the related notes included elsewhere in this annual report. This discussion may contain forward-lookingstatements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated inthese forward-looking statements as a result of various factors, including those set forth under “Item 3. Key Information—D. Risk Factors” or inother parts of this annual report on Form 20-F.Table of Contents83A. Operating ResultsKey Factors Affecting Our Results of OperationsOur results of operations and financial conditions are affected by the general factors affecting China’s retail industry, including China’soverall economic growth, the increase in per capita disposable income and the growth in consumer spending in China. In addition, they are alsoaffected by factors driving online retail in China, such as the growing number of online shoppers, the improved logistics infrastructure and theincreasing adoption of mobile payment. Unfavorable changes in any of these general factors could materially and adversely affect our results ofoperations.While our business is influenced by general factors affecting our industry, our results of operations are more directly affected by certaincompany specific factors, including:Our ability to attract and retain buyers and increase buyer activitiesAttracting, engaging and retaining buyers has been our key focus since our inception. We measure our effectiveness in attracting andretaining buyers through several key performance indicators, including our active buyers, GMV, annual spending per active buyer and averagemonthly active users. In 2021, we had 868.7 million active buyers, RMB2,441.0 billion (US$383.0 billion) in GMV, and RMB2,810.0 (US$441.0)in annual spending per active buyer. For the three months of October to December of 2021, the average monthly active users on our platform was733.4 million.Our number of active buyers and annual spending per active buyer have been increasing, resulting in growth of our GMV. The increaseshave primarily been driven by the growing popularity and recognition of our brand and platform, consumer preferences for our shoppingexperience, wide selection and attractive prices of merchandise offered on our platform, and the positive impact of our promotional and marketingcampaigns.Our ability to grow and retain our buyer base and increase buyer activities depends on our ability to continue to provide value-for-moneyproducts and fun and interactive shopping experiences. We also plan to further leverage social networks and word-of-mouth viral marketing, andconduct online and offline marketing and brand promotion activities to attract new buyers and increase buyer activities. In addition, we plan tocontinue to encourage buyers to place more orders with us through a variety of means, including granting coupons and holding special promotionalevents.Our ability to establish and maintain relationships with merchantsIn addition to the scale and engagement of active buyers, our growth is also driven by the scale of merchants on our platform. In 2021, wehad 11.5 million active merchants on our platform. Merchants are attracted to our platform by our large buyer base and scale of sales volume aswell as targeted online marketing and other services provided by us. The increase in the number of active merchants leads to more competitiveprices 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 beneficialrelationships with our merchants. For example, we rely on our merchants to make available sufficient inventory and fulfill large volumes of ordersin an efficient and timely manner to ensure our user experience.Our ability to provide valuable online marketplace services and broaden service offeringsWe currently generate revenues primarily from online marketplace services that we provide to merchants. We believe that increasing thevalue and variety of our online marketplace services and the consequent return on investment to merchants from utilizing these services willincrease demand for our services. We aim to enhance the value of our online marketplace services through such means as broadening our serviceofferings, 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.Table of Contents84Our ability to manage our costs and expenses by leveraging our scale of businessOur results of operations depend on our ability to manage our costs and expenses. We expect our costs and expenses to continue toincrease as we grow our business and attract more buyers and merchants to our platform. Our costs of revenues consist primarily of paymentprocessing fees paid to third party online payment platforms, costs associated with the operation of our platform and others, such as costs andexpenses attributable to merchandise sales, fulfillment fees, merchant support services, bandwidth and server costs, amortizations, depreciation andmaintenance costs, payroll, employee benefits and share-based compensation expenses, call center, surcharges and other expenses directlyattributable to the online marketplace services. In addition, we have invested significantly in marketing activities to promote our brand and ourproducts and services. Our sales and marketing expenses increased from RMB27,174.2 million in 2019 to RMB41,194.6 million in 2020 andfurther to RMB44,801.7 million (US$7,030.4 million) in 2021, while sales and marketing expenses as a percentage of our revenues decreased from90.2% in 2019 to 69.2% in 2020, and further decreased to 47.7% in 2021.We believe our marketplace model has significant operating leverage and enables us to realize structural cost savings. We achieveeconomies of scale in our operation as a wider selection of merchandise attracts a larger number of buyers, which in turn drives an increase in thescale of our sales volume and attracts more merchants to our platform. In addition, our scale creates value for our merchants by providing aneffective channel for selling large volumes of products. We believe this value proposition will make our platform more attractive to merchants andfurther increase their sales and spending on our platform. This business model also enables us to avoid the costs, risks and capital requirementsassociated with sourcing merchandise or holding inventory.Impact of COVID-19 on Our Operations and Financial PerformanceSubstantially all of our revenues and workforce are concentrated in China. Since early 2020, in response to the intensifying efforts tocontain the spread of COVID-19, the Chinese government has taken a number of actions, including quarantining individuals suspected of havingCOVID-19 and asking residents in China to stay at home and to avoid public gatherings, among other things. COVID-19 also resulted in thetemporary closure of corporate offices, retail stores, manufacturing facilities and factories across China, and put significant strain on merchandiseshipping and delivery. There remain significant uncertainties surrounding the COVID-19 pandemic and its further development. Hence, the extentof the business disruption and the related impact on our financial results and outlook for 2022 and the periods beyond cannot be reasonablyestimated at this time.As of December 31, 2021, we had RMB6,426.7 million (US$1,008.5 million) in cash and cash equivalents and RMB86,516.6 million(US$13,576.3 million) in short-term investments. Our short-term investments mainly include time deposits and wealth management products infinancial institutions, which are highly liquid. We believe this level of liquidity is sufficient to successfully navigate an extended period ofuncertainty. See also “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—We face risks related to naturaldisasters, health epidemics and other outbreaks, most notably those related to the outbreak of COVID-19, which could significantly disrupt ouroperations.”Key Line Items and Specific Factors Affecting Our Results of OperationsRevenuesUnder our current business model, we generate revenues primarily from online marketing services. We also generate revenues fromtransaction services and merchandise sales. The following table sets forth the components of our revenues by amounts and percentages of our totalrevenues for the periods presented:For the Year Ended December 31,201920202021 RMB % RMB % RMB US$ %(in thousands, except for percentages)Revenues:Online marketing services and others 26,813,641 89.0 47,953,779 80.6 72,563,402 11,386,782 77.2Transaction services 3,328,245 11.0 5,787,415 9.7 14,140,449 2,218,945 15.1Merchandise sales—— 5,750,671 9.7 7,246,088 1,137,069 7.7Total revenues 30,141,886 100.0 59,491,865 100.0 93,949,939 14,742,796 100.0Table of Contents85Online marketing services and others. We provide online marketing services primarily to allow merchants to bid for keywords that matchproduct listings appearing in search or browser results on our platform and advertising placements such as banners, links and logos. The placementand 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 ofour continued efforts to improve user experience, we reward merchants who sell high-quality products and provide superb services withpreferential fee rates.Merchandise sales. We generate a small portion of revenues from online direct sales, where we acquired products from suppliers and soldthem directly to users.Costs of revenuesThe following table sets forth the components of our costs of revenues by amounts and percentages of costs of revenues for the periodspresented:For the Year Ended December 31,201920202021 RMB % RMB % RMB US$ %(in thousands, except for percentages)Costs of revenues:Payment processing fees (341,879) 5.4 (1,545,564) 8.0 (3,108,086) (487,727) 9.8Costs associated with the operation of our platformand others (5,996,899) 94.6 (17,733,077) 92.0 (28,610,007) (4,489,534) 90.2Total costs of revenues (6,338,778) 100.0 (19,278,641) 100.0 (31,718,093) (4,977,261) 100.0Costs of revenues consist primarily of payment processing fees paid to third party online payment platforms, costs associated with theoperation of our platform and others, such as costs and expenses attributable to merchandise sales, fulfillment fees, merchant support services,bandwidth and server costs, amortization, depreciation and maintenance costs, payroll, employee benefits and share-based compensation expenses,call center, surcharges and other expenses directly attributable to the online marketplace services.Operating expensesThe following table sets forth the components of our operating expenses by amounts and percentages of operating expenses for the periodspresented:For the Year Ended December 31,201920202021 RMB % RMB % RMB US$ %(in thousands, except for percentages)Operating expenses:Sales and marketing expenses (27,174,249) 84.0 (41,194,599) 83.1 (44,801,720) (7,030,368) 80.9General and administrative expenses (1,296,712) 4.0 (1,507,297) 3.0 (1,540,774) (241,781) 2.8Research and development expenses (3,870,358) 12.0 (6,891,653) 13.9 (8,992,590) (1,411,134) 16.3Total operating expenses (32,341,319) 100.0 (49,593,549) 100.0 (55,335,084) (8,683,283) 100.0Sales and marketing expenses. Sales and marketing expenses consist primarily of online and offline advertising, promotion and couponexpenses, as well as payroll, employee benefits, share-based compensation expenses and other related expenses associated with sales andmarketing. We expect to continue our sales and marketing spending in the foreseeable future as we seek to increase our brand awareness, enhanceuser engagement and build scale.General and administrative expenses. General and administrative expenses consist primarily of payroll, employee benefits, share-basedcompensation expenses and other related expenses. We expect to continue our general and administrative spending in the foreseeable future due tothe anticipated growth of our business as well as accounting, insurance, investor relations and other public company costs.Table of Contents86Research and development expenses. Research and development expenses consist primarily of payroll, employee benefits, share-basedcompensation expenses, R&D-related cloud services and other related expenses associated with research and platform development. We expect ourresearch and development expenses to increase as we expand our research and development team to enhance our artificial intelligence technologyand big data analytics capabilities and develop new features and functionalities on our platform.TaxationCayman IslandsThe Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there isno 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 beapplicable on instruments executed in, or brought within the jurisdiction of the Cayman Islands. There are no exchange control regulations orcurrency 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 berequired 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 toCayman Islands income or corporation tax.Hong KongWalnut HK is incorporated in Hong Kong and is subject to Hong Kong profits tax of 16.5% on its activities conducted in Hong Kong andmay be exempted from income tax on its foreign-derived income. There are no withholding taxes in Hong Kong for distribution of dividends by acompany incorporated in Hong Kong.PRCGenerally, our PRC subsidiaries, our VIE and subsidiaries of our VIE are subject to enterprise income tax on their taxable income inChina 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 andaccounting standards. Each of Shanghai Xunmeng and Walnut Shanghai was recognized as a “high and new technology enterprise” and is eligiblefor a preferential corporate income tax rate of 15% until 2023. Xinzhijiang is also eligible for a preferential corporate income tax rate of 15% until2025.We are subject to value-added tax at a rate of (i) 16% (before April 1, 2019) or 13% (on or after April 1, 2019) on the sale of goods and(ii) 6% on the sale of services (including value-added telecommunication services), in each case less any deductible value-added tax we havealready paid or borne in connection with such sale of goods or services. We are also subject to surcharges on value-added tax payments inaccordance with PRC law.Dividends paid by our wholly foreign-owned subsidiaries in China to our intermediary holding company in Hong Kong will be subject toa withholding tax rate of 10%, unless the relevant Hong Kong entity satisfies all the requirements under the Arrangement between China and theHong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes onIncome and Capital, in which case the tax rate would become 5%. See “Item 3. Key Information—D. Risk Factors—Risks Related to DoingBusiness in China—We may rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financingrequirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material and adverseeffect on our ability to conduct our business.”If our holding company in the Cayman Islands or any of our subsidiaries outside of China were deemed to be a “resident enterprise” underthe 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. KeyInformation—D. Risk Factors—Risks Related to Doing Business in China—If we are classified as a PRC resident enterprise for PRC income taxpurposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders or ADS holders.”Table of Contents87Results of OperationsThe following table sets forth a summary of our consolidated results of operations for the periods presented, both in absolute amount andas a percentage of our revenues for the periods presented. This information should be read together with our audited consolidated financialstatements and related notes included elsewhere in this annual report. The results of operations in any period are not necessarily indicative of ourfuture trends.We changed the classification and presentation of restricted cash on the consolidated statements of cash flows for each of the three years inthe 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 andnon-current) for operating leases are presented on the face of the consolidated balance sheet as of December 31, 2019, 2020 and 2021. We adoptedAccounting Standards Update (“ASU”) No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on FinancialInstruments (“ASU 2016-13”) on January 1, 2020, which requires the measurement and recognition of expected credit losses for financial assetsheld at amortized cost. ASU 2016-13 replaces the incurred loss methodology with a forward-looking current expected credit losses.For the Year Ended December 31,201920202021 RMB % RMB % RMB US$ %(in thousands, except for percentages)RevenuesOnline marketing services and others 26,813,641 89.0 47,953,779 80.6 72,563,402 11,386,782 77.2Transaction services 3,328,245 11.0 5,787,415 9.7 14,140,449 2,218,945 15.1Merchandise sales —— 5,750,671 9.7 7,246,088 1,137,069 7.7Total revenues 30,141,886 100.0 59,491,865 100.0 93,949,939 14,742,796 100.0Costs of revenues(1) (6,338,778) (21.0) (19,278,641) (32.4) (31,718,093) (4,977,261) (33.8)Gross profit 23,803,108 79.0 40,213,224 67.6 62,231,846 9,765,535 66.2Operating expenses Sales and marketing expenses(1) (27,174,249) (90.2) (41,194,599) (69.2) (44,801,720) (7,030,368) (47.7)General and administrative expenses(1) (1,296,712) (4.3) (1,507,297) (2.5) (1,540,774) (241,781) (1.6)Research and development expenses(1) (3,870,358) (12.8) (6,891,653) (11.6) (8,992,590) (1,411,134) (9.6)Total operating expenses (32,341,319) (107.3) (49,593,549) (83.4) (55,335,084) (8,683,283) (58.9)Operating (loss)/ profit (8,538,211) (28.3) (9,380,325) (15.8) 6,896,762 1,082,252 7.3Other income Interest and investment gain, net 1,541,825 5.1 2,455,366 4.13,061,662480,442 3.3Interest expenses (145,858) (0.5) (757,336) (1.3) (1,231,002) (193,171) (1.3)Foreign exchange gain 63,179 0.2 225,197 0.4 71,750 11,259 0.1Other income, net 82,786 0.3 193,702 0.3 656,255 102,981 0.7(Loss)/ profit before income tax and share of results of equityinvestees (6,996,279) (23.2) (7,263,396) (12.2) 9,455,427 1,483,763 10.1Income tax expenses —— —— (1,933,585) (303,422) (2.1)Share of results of equity investees 28,676 0.1 83,654 0.1 246,828 38,733 0.3Net (loss)/ income (6,967,603) (23.1) (7,179,742) (12.1) 7,768,670 1,219,074 8.3Note:(1)Share-based compensation expenses were allocated as follows:For the Year Ended December 31,201920202021 RMB RMB RMB US$(in thousands)Costs of revenues 23,835 32,291 26,624 4,178Sales and marketing expenses 860,862 1,093,547 1,612,219 252,992General and administrative expenses 786,641 966,985 792,421 124,348Research and development expenses 886,368 1,520,220 2,343,466 367,741Total 2,557,706 3,613,043 4,774,730 749,259Table of Contents88Year ended December 31, 2021 compared to year ended December 31, 2020RevenuesOur revenues, which consist of revenues from online marketing services and others, transaction services and merchandise sales, increasedby 57.9% from RMB59,491.9 million in 2020 to RMB93,949.9 million (US$14,742.8 million) in 2021. Revenues from online marketing servicesand others increased from RMB47,953.8 million in 2020 to RMB72,563.4 million (US$11,386.8 million) in 2021, primarily attributable to ourstronger brand and market position as a result of our branding campaigns, more active merchants offering greater breadth of products and theincrease in the number of our active buyers and annual spending per active buyer. Revenues from transaction services increased from RMB5,787.4million in 2020 to RMB14,140.4 million (US$2,218.9 million) in 2021, primarily due to the increase in GMV. Revenues from merchandise salesincreased from RMB5,750.7 million in 2020 to RMB7,246.1 million (US$1,137.1 million) in 2021.Costs of revenuesOur costs of revenues increased by 64.5% from RMB19,278.6 million in 2020 to RMB31,718.1 million (US$4,977.3 million) in 2021,primarily due to the increase in payment processing fees and costs directly attributable to the operation of our platform and others. The increase inpayment processing fees from RMB1,545.6 million in 2020 to RMB3,108.1 million (US$487.7 million) in 2021 was primarily due to the growth ofour GMV. The increase in costs directly attributable to the operation of our platform and others from RMB17,733.1 million in 2020 toRMB28,610.0 million (US$4,489.5 million) in 2021 was primarily due to the increase of RMB8,920.3 million in fulfillment fees and merchantsupport services and the increase of RMB761.6 million in cost and expenses attributable to merchandise sales.Gross profitAs a result of the foregoing, our gross profit increased to RMB62,231.8 million (US$9,765.5 million) in 2021, from RMB40,213.2 millionin 2020. The improvement was primarily attributable to the continued growth in revenues.Operating expensesOur total operating expenses increased by 11.6% from RMB49,593.5 million in 2020 to RMB55,335.1 million (US$8,683.3 million) in2021 primarily due to the increase in sales and marketing expenses and research and development expenses.Sales and marketing expenses. Our sales and marketing expenses increased from RMB41,194.6 million in 2020 to RMB44,801.7 million(US$7,030.4 million) in 2021, primarily attributable to the increase of RMB2,158.9 million in advertising expenses and promotion and couponexpenses and the increase of RMB1,376.9 million in staff related costs. The increase in advertising expenses and promotion and coupon expenseswas 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 slightly from RMB1,507.3 million in 2020 toRMB1,540.8 million (US$241.8 million) in 2021.Research and development expenses. Our research and development expenses increased substantially from RMB6,891.7 million in 2020to RMB8,992.6 million (US$1,411.1 million) in 2021, primarily due to the increase of RMB2,556.9 million in staff related costs. The increase instaff costs was primarily attributable to the increase in headcount for our research and development personnel, as we hired additional experiencedresearch and development personnel.Operating profit/(loss)As a result of the foregoing, we recorded operating profit of RMB6,896.8 million (US$1,082.3 million) in 2021, compared to operatingloss of RMB9,380.3 million in 2020.Table of Contents89Other income/(expenses)Interest and investment income, net. Net interest and investment income mainly represents interest earned on demand deposits, timedeposits and wealth management products in financial institutions. We had net interest and investment income of RMB2,455.4 million andRMB3,061.7 million (US$480.4 million) in 2020 and 2021, respectively. The increase was primarily attributable to the increase of our timedeposits and wealth management products.Interest expense. We had interest expense of RMB1,231.0 million (US$193.2 million) in 2021, compared to interest expense ofRMB757.3 million in 2020, primarily due to the increase of RMB526.0 million in interest expenses related to the convertible bonds’ amortizationto face value.Other income, net. We had other net income of RMB656.3 million (US$103.0 million) in 2021, compared to other net income ofRMB193.7 million in 2020, primarily due to the increase in the amount of subsidies received, such as tax refunds, disposal gains and other non-operating income items.Income tax expenseWe had income tax expense of RMB1,933.6 million (US$303.4 million) and nil in 2021 and 2020, respectively.Share of results of equity investeesWe had share of results of equity investees of RMB246.8 million (US$38.7 million) in 2021, compared to RMB83.7 million in 2020.Net income/(loss)As a result of the foregoing, we had net income of RMB7,768.7 million (US$1,219.1 million) in 2021, compared to net loss ofRMB7,179.7 million in 2020.Year ended December 31, 2020 compared to year ended December 31, 2019RevenuesOur revenues, which consist of revenues from online marketing services and others, transaction services and merchandise sales, increasedby 97.4% from RMB30,141.9 million in 2019 to RMB59,491.9 million in 2020. Revenues from online marketing services and others increasedfrom RMB26,813.6 million in 2019 to RMB47,953.8 million, primarily attributable to our stronger brand and market position as a result of ourbranding campaigns, more active merchants offering greater breadth of products and the significant increase in the number of our active buyers andannual spending per active buyer. Revenues from transaction services increased from RMB3,328.2 million in 2019 to RMB5,787.4 million in 2020,primarily due to the increase in GMV. Revenues from merchandise sales increased from nil to RMB5,750.7 million in 2020, primarily attributableto our online direct sales, where we acquired products from suppliers and sold them directly to users.Costs of revenuesOur costs of revenues increased by 204.1% from RMB6,338.8 million in 2019 to RMB19,278.6 million in 2020, primarily due toincreases in payment processing fees and costs directly attributable to the operation of our platform and others. The increase in payment processingfees from RMB341.9 million in 2019 to RMB1,545.6 million in 2020 was primarily due to the growth of our GMV. The increase in costs directlyattributable to the operation of our platform and others from RMB5,996.9 million in 2019 to RMB17,733.1 million in 2020 was primarily due tothe increase of RMB7,198.7 million in cost and expenses attributable to merchandise sales and delivery and storage fees, the increase ofRMB2,061.8 million in bandwidth and server costs to keep pace with the growth of our online marketplace services, and the increase ofRMB1,466.2 million in call center and merchant support services.Gross profitAs a result of the foregoing, our gross profit increased to RMB40,213.2 million in 2020, from RMB23,803.1 million in 2019. Theimprovement was primarily attributable to the continued growth in revenues.Table of Contents90Operating expensesOur total operating expenses increased by 53.3% from RMB32,341.3 million in 2019 to RMB49,593.5 million in 2020 primarily due toincreases in sales and marketing expenses and research and development expenses.Sales and marketing expenses. Our sales and marketing expenses increased substantially from RMB27,174.2 million in 2019 toRMB41,194.6 million in 2020, primarily attributable to the increase of RMB13,430.1 million in advertising expenses and promotion and couponexpenses. The increase in advertising expenses and promotion and coupon expenses was focused on building our brand awareness and driving usergrowth and engagement on our platform.General and administrative expenses. Our general and administrative expenses increased from RMB1,296.7 million in 2019 toRMB1,507.3 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 2019to RMB6,891.7 million in 2020, primarily due to the increase of RMB1,987.2 million in staff related costs and the increase of RMB946.6 millionin R&D-related cloud services expenses. The increase in staff costs was primarily attributable to the increase in headcount for our research anddevelopment personnel, as we hired additional experienced research and development personnel to execute our technology-related strategies ofimproving our platform.Operating lossAs a result of the foregoing, we incurred operating loss of RMB8,538.2 million and RMB9,380.3 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, timedeposits and wealth management products in financial institutions. We had net interest and investment income of RMB1,541.8 million andRMB2,455.4 million in 2019 and 2020, respectively. The increase was primarily attributable to the increase of our short-term investments and cashbalance.Interest expense. We had interest expense of RMB757.3 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 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 investeesWe had share of results of equity investees of RMB83.7 million in 2020, compared to RMB28.7 million in 2019.Net lossAs a result of the foregoing, we incurred net loss of RMB7,179.7 million in 2020, compared to net loss of RMB6,967.6 million in 2019.Critical Accounting PoliciesAn accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that arehighly uncertain at the time such estimate is made, and if different accounting estimates that reasonably could have been used, or changes in theaccounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements.Table of Contents91We prepare our financial statements in conformity with U.S. GAAP, which requires us to make judgments, estimates and assumptions. Wecontinually evaluate these estimates and assumptions based on the most recently available information, our own historical experiences and variousother assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financialreporting process, actual results could differ from our expectations as a result of changes in our estimates. Some of our accounting policies requirea higher degree of judgment than others in their application and require us to make significant accounting estimates.The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our consolidatedfinancial statements and accompanying notes and other disclosures included in this annual report. When reviewing our financial statements, youshould 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 recognitionRevenues are principally comprised of those generated from online marketplace services and merchandise sales. Revenues from onlinemarketplace services primarily consist of online marketing services revenues and transaction services fees. Revenues represent the amount ofconsideration that we are entitled to in exchange for the transfer of promised goods or services in the ordinary course of our activities and arerecorded net of value-added tax (“VAT”). Consistent with the criteria of ASC Topic 606 (“ASC 606”), Revenue from Contracts with Customers, werecognize revenue when the performance obligation in a contract is satisfied by transferring the control of a promised good or service to acustomer. We also evaluate whether it is appropriate to record the gross amounts of goods and services sold and the related costs, or the netamounts earned as commissions. Payments for services or goods are generally received before deliveries.Online marketing servicesWe entered into contractual agreements with certain merchants to provide online marketing services on our online marketplace for whichwe receive service fees from merchants. Online marketing services allow merchants to bid for keywords that match product listings appearing insearch 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 onlinemarketing services are completed by us for the merchants. The positioning of such listings and the price for such positioning are determinedthrough an online auction system, which facilitates price discovery through a market-based mechanism.We also provide display marketing services that allow the merchants to place advertisements on the platform primarily at fixed prices. Ingeneral, the merchants need to prepay for display marketing which is accounted for as customer advances and deferred revenues and revenues areprimarily recognized over the period during which the advertising services are provided.Transaction servicesWe charge fees for transaction services to merchants for sales transactions completed on our platform, where we do not take control of theproducts 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 sold by the merchants. Revenuesrelated to transaction services are recognized in consolidated statements of comprehensive income/(loss) at the time when our service obligations tothe merchants are determined to have been completed under each sales transaction upon the confirmation of the receipts of goods by theconsumers. The majority fees charged for transaction services are not refundable if and when consumers return the merchandise to merchantsWe provide rebates to certain merchants on the online marketplace services by meeting certain requirements. Such rebates are nettedagainst the online marketplace services revenues.Merchandise salesWe in certain cases acquire the merchandises from suppliers and sell directly to the consumers. We act as a principal for and take controlof the merchandises, are primarily obligated for the merchandises sold to the consumers, bear inventory risks and have the latitude in establishingprices. Revenues from merchandise sales are recorded on a gross basis, net of discounts and return allowances when the products are delivered andtitles are passed to the consumers who are our customers in these transactions. Proceeds received in advance of customer acceptance are recordedas current liabilities in customer advances and deferred revenues.Table of Contents92Membership servicesCertain 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 subscriptionperiods, the membership fees are recognized as revenue over the subscription periods on a straight-line basis. Coupons provided by us to themembers are netted against the membership revenue with the resulting negative revenue, if any, being reclassed to marketing expenses for eachmembership contract. The membership revenue as recorded in the consolidated financial statements was immaterial during each presented period.Incentives provided to the consumersIn order to promote our online marketplace and attract more registered consumers, we at our own discretion provide various forms ofincentives, for example, coupons, credits and discounts that are not specific to any merchant, to the consumers that are not our customers. Despitethe absence of any explicit contractual obligations to incentivize the non-customer consumers on behalf of the merchants, we further evaluated thevarying features of different incentive programs to determine that whether the incentives represent implicit obligations to the consumers on behalfof merchants and if so, should be recorded as reduction of revenues. Based on that evaluation, we determined that incentives provided to theconsumers are not considered as payments to the merchant-customers.We, at our discretion, issue to the consumers coupons and credits upon completion of certain actions to promote our platform. Thecoupons can be used for future purchases of eligible merchandise offered on our online marketplace to reduce purchase price and the credits can beused to redeem cash from us. We recognize the amounts of coupons and credits as marketing expenses when future purchases are completed orwhen the credits are issued. Discounts unconditionally provided to the consumers are recognized as marketing expenses when the relatedtransaction services revenues from merchants are recognized. Certain discounts are provided to consumers upon their completion of certain actionsto promote the platform, we record the related costs in marketing expenses upon the completion of such promotion tasks.Income taxesWe follow the liability method of accounting for income taxes in accordance with ASC 740 (“ASC 740”), Income Taxes. Under thismethod, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets andliabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. We record a valuationallowance 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 thedeferred 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 includesthe 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 benefitrecognized in accordance with ASC 740 are classified in the consolidated statements of comprehensive income/(loss) as income tax expenses.Share-based compensationWe adopted a global share incentive plan in 2015, which we refer to as the 2015 Plan in this annual report, for the purpose of grantingshare-based compensation awards to employees, directors and consultants to incentivize their performance and align their interests with ours. As ofDecember 31, 2021, the maximum aggregate number of ordinary shares which may be issued pursuant to all options granted under the 2015 Planwas 581,972,860 Class A ordinary shares, subject to adjustment and amendment.Table of Contents93In 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 thebest available personnel, provide additional incentives to employees, directors and consultants and promote the success of our business. Themaximum aggregate number of shares which may be issued pursuant to all awards under the 2018 Plan was initially 363,130,400, plus an annualincrease 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 precedingfiscal year, and (ii) such number of shares as may be determined by our board of directors. In March 2021, our board of directors approved anamendment 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, 2021, the maximum aggregate numbers of ordinary shares which may be issued pursuant to all options and the restrictedshare units, RSUs, granted under the 2018 Plan were 138,030,676 and 41,518,464 Class A ordinary shares, respectively, subject to adjustment andamendment.We apply ASC 718 (“ASC 718”), Compensation-Stock Compensation, to account for our employee share-based payments. In accordancewith 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 theaward at the grant date. Expense is recognized using accelerated method over the requisite service period. The fair value of share options at thetime of grant is determined using the binomial-lattice option pricing model. In accordance with ASU No. 2016-09, Compensation-StockCompensation (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 RMB2,557.7 million, RMB3,613.0 million and RMB4,774.7 million(US$749.3 million), for the years ended December 31, 2019, 2020 and 2021, respectively. As of December 31, 2021, total unrecognized share-based compensation expenses relating to options and RSUs were RMB10,135.0 million (US$1,590.4 million) and RMB3,024.5 million (US$474.6million), which are expected to be recognized over a weighted-average period of 3.06 years and 2.46 years, respectively.Recent Accounting PronouncementsSee Item 17 of Part III, “Financial Statements—Note 2—Summary of significant accounting policies—Recent accountingpronouncements.”B. Liquidity and Capital ResourcesThe following table sets forth a summary of our cash flows for the periods presented:For the Year Ended December 31,201920202021 RMB RMB RMB US$Summary Consolidated Cash Flow Data:Net cash generated from operating activities 14,820,976 28,196,627 28,783,011 4,516,683Net cash used in investing activities (28,319,678) (38,357,901) (35,562,365) (5,580,511)Net cash generated from / (used in) financing activities 15,854,731 51,798,996 (1,875,154) (294,253)Exchange rate effect on cash, cash equivalents and restricted cash 450,142 (139,943) (145,157) (22,779)Net increase / (decrease) in cash, cash equivalents and restricted cash 2,806,171 41,497,779 (8,799,665) (1,380,860)Cash, cash equivalents and restricted cash at beginning of the year 30,539,686 33,345,857 74,843,636 11,744,600Cash, cash equivalents and restricted cash at end of the year 33,345,857 74,843,636 66,043,971 10,363,740To date, we have financed our operating and investing activities through cash generated by historical equity financing activities. We alsoraised proceeds from the initial public offering of our ADSs in July 2018, a follow-on offering of our ADSs in February 2019, a convertible seniornotes offering in September 2019, a private placement in April 2020, a convertible senior notes offering and a concurrent follow-on offering of ourADSs in November 2020, and a private placement in December 2020. As of December 31, 2021, our cash and cash equivalents were RMB6,426.7million (US$1,008.5 million). Our cash and cash equivalents primarily consist of cash at banks. As of the same date, we had restricted cash ofRMB59,617.3 million (US$9,355.2 million), mainly representing cash received from buyers and reserved in a bank supervised account forpayments to merchants.Table of Contents94We believe that our current cash and cash equivalents and our anticipated cash flows from operations will be sufficient to meet ouranticipated working capital requirements and capital expenditures for at least the next 12 months. We may decide to enhance our liquidity positionor increase our cash reserve for future investments through additional equity and debt financing. The issuance and sale of additional equity wouldresult in further dilution to our shareholders. The incurrence of indebtedness would result in an increase in fixed obligations and could result inoperating covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable tous, if at all.As of December 31, 2021, 92.8% of our cash and cash equivalents were held in China, and 37.8% were held by our VIE and itssubsidiaries and denominated in Renminbi. Although we consolidate the results of our VIE and its subsidiaries, we only have access to the assets orearnings of our VIE and its subsidiaries through our contractual arrangements with our VIE and its shareholders. See “Item 4. Information on theCompany—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 privateplacements, we may make additional capital contributions to our PRC subsidiaries, establish new PRC subsidiaries and make capital contributionsto 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 inChina—PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currencyconversion may delay or prevent us from using the proceeds of our offshore financing to make loans or additional capital contributions to our PRCsubsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.”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- andservice-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 routineprocedural requirements. However, approval from or registration with competent government authorities is required where the Renminbi is to beconverted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreigncurrencies. The PRC government may at its discretion restrict access to foreign currencies for current account transactions in the future.Operating activitiesNet cash generated from operating activities in 2021 was RMB28,783.0 million (US$4,516.7 million), as compared to net income ofRMB7,768.7 million (US$1,219.1 million) in the same period. The difference was primarily due to the increase of RMB8,686.5 million(US$1,363.1 million) in payables to merchants, an increase of RMB2,651.2 million (US$416.0 million) in merchant deposits, an increase ofRMB3,492.0 million (US$548.0 million) in accrued expenses and other liabilities, and a decrease of RMB1,744.6 million (US$273.8 million) inprepayments and other current assets, partially offset by a decrease of RMB1,422.9 million (US$223.3 million) in amounts due to related partiesand a decrease of RMB1,256.4 million (US$197.2 million) in customer advances and deferred revenues. The increase in payables to merchants,merchant deposits and accrued expenses and other liabilities was primarily attributable to our business expansion and the increase of number ofmerchants on our platform. The principal non-cash items affecting the difference between our net income and our net cash generated fromoperating activities in 2021 were RMB4,774.7 million (US$749.3 million) in share-based compensation expenses and RMB1,495.4 million(US$234.7 million) in depreciation and amortization.Net cash generated from operating activities in 2020 was RMB28,196.6 million, as compared to net loss of RMB7,179.7 million in thesame period. The difference was primarily due to the increase of RMB23,934.2 million in payables to merchants, an increase of RMB3,085.4million in merchant deposits, an increase of RMB5,849.1 million in accrued expenses and other liabilities, an increase of RMB1,883.0 million inamounts due to related parties, and an increase of RMB1,817.2 million in customer advances and deferred revenues, partially offset by an increaseof RMB4,048.5 million in prepayments and other current assets and an increase of RMB1,636.5 million in amounts due from related parties. Theincrease in payables to merchants, merchant deposits, accrued expenses and other liabilities and customer advances and deferred revenues wasprimarily attributable to our business expansion and the increase of number of merchants on our platform. The principal non-cash item affecting thedifference between our net loss and our net cash generated from operating activities in 2020 was RMB3,613.0 million in share-based compensationexpenses.Table of Contents95Net cash generated from operating activities in 2019 was RMB14,821.0 million, as compared to net loss of RMB6,967.6 million in thesame period. The difference was primarily due to the increase of RMB12,650.8 million in payables to merchants, an increase of RMB3,652.6million in merchant deposits, an increase of RMB2,648.9 million in accrued expenses and other liabilities, and an increase of RMB1,024.8 millionin amounts due to related parties, partially offset by an increase of RMB886.9 million in amounts due from related parties and an increase ofRMB803.4 million in receivables from online payment platforms. The increase in payables to merchants, merchant deposits and accrued expensesand other liabilities was attributable to our business expansion and the increase of number of merchants on our platform. The principal non-cashitem 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.Investing activitiesNet cash used in investing activities in 2021 was RMB35,562.4 million (US$5,580.5 million), primarily due to purchase of short-terminvestments of RMB116,639.6 million (US$18,303.3 million), purchase of long-term investments of RMB13,628.1 million (US$2,138.5 million),and purchase of property, equipment, software and intangible assets of RMB3,287.2 million (US$515.8 million), partially offset by proceeds fromsales of short-term investments of RMB97,547.0 million (US$15,307.3 million).Net cash used in investing activities in 2020 was RMB38,357.9 million, primarily due to purchase of short-term investments ofRMB86,438.1 million and purchase of long-term investments of RMB6,722.2 million, partially offset by proceeds from sales of short-terminvestments of RMB55,083.4 million.Net cash used in investing activities in 2019 was RMB28,319.7 million, primarily due to purchase of short-term investments ofRMB52,451.6 million, partially offset by proceeds from sales of short-term investments of RMB24,797.6 million.Financing activitiesNet cash used in financing activities in 2021 was RMB1,875.2 million (US$294.3 million), primarily attributable to the repayment ofshort-term borrowings.Net cash generated from financing activities in 2020 was RMB51,799.0 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-onoffering, net proceeds from issuance of convertible bonds, and net proceeds from short-term borrowings.Material cash requirementsOur material cash requirements as of December 31, 2021 and any subsequent interim period primarily include our capital expenditures,convertible bonds obligations, operating lease commitments and investment commitments.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 RMB27.4 million in 2019,RMB43.0 million in 2020 and RMB3,287.2 million (US$515.8 million) in 2021.Our convertible bonds obligations represent our principal payments. Please see “convertible bonds” under Note 12 to our auditedconsolidated financial statements. Payment due by December 31, 2021 for our convertible bonds obligations amounted to RMB14,193.9 million(US$2,227.3 million).Our operating lease commitments mainly represent our obligations for leasing offices and warehouses, which include all future cashoutflows under ASC Topic 842, Leases. Please see “Leases” under Note 8 to our audited consolidated financial statements. Payment due byDecember 31, 2021 for our operating lease commitments amounted to RMB1,032.4 million (US$162.0 million).Our investment commitments primarily relate to capital contributions obligation under certain arrangement which does not havecontractual maturity date. Payment due by December 31, 2021 for our investment commitments amounted to RMB140.0 million (US$22.0million).Table of Contents96We intend to fund our future capital expenditures with anticipated cash flows from operations, our existing cash balance and short-terminvestments. We will continue to make cash commitments, including capital expenditures, to meet the expected growth of our business.We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. We donot have retained or contingent interests in assets transferred. We have not entered into contractual arrangements that support the credit, liquidity ormarket risk for transferred assets. We do not have obligations that arise or could arise from variable interests held in an unconsolidated entity, orobligations related to derivative instruments that are both indexed to and classified in our own equity, or not reflected in the statement of financialposition.Holding Company StructurePinduoduo Inc. is a holding company with no material operations of its own. We conduct our operations primarily through our PRCsubsidiaries, our VIE and its subsidiaries in China. As a result, Pinduoduo Inc.’s ability to pay dividends depends upon dividends paid by our PRCsubsidiaries. If our existing PRC subsidiaries or any newly formed ones incur debt on their own behalf in the future, the instruments governing theirdebt may restrict their ability to pay dividends to us. In addition, our wholly foreign-owned subsidiaries in China are permitted to pay dividends tous only out of its retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Under PRC law, each ofour 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 reservefunds until such reserve funds reach 50% of their registered capital. In addition, our wholly foreign-owned subsidiaries in China may allocate aportion of their after-tax profits based on PRC accounting standards to a staff welfare and bonus fund at their discretion. The statutory reserve fundsand the discretionary funds are not distributable as cash dividends. Remittance of dividends by a wholly foreign-owned company out of China issubject to examination by the banks designated by SAFE. Our PRC subsidiaries have not paid dividends and will not be able to pay dividends untilthey generate accumulated profits and meet the requirements for statutory reserve funds.C. Research and DevelopmentSee “Item 4. Information on the Company—B. Business Overview—Technology” and “Item 4. Information on the Company—B.Business Overview—Intellectual Property.”D. Trend InformationOther than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events forthe year ended December 31, 2021 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 operationsor financial conditions.E. Critical Accounting EstimatesFor our critical accounting estimates, see “Item 5. Operating and Financial Review and Prospects—A. Operating Results—CriticalAccounting Policies.”Table of Contents97Item 6. Directors, Senior Management and EmployeesA. Directors and Senior ManagementPinduoduo PartnershipTo ensure the sustainability and governance of our company and better align them with the interests of our shareholders, our managementhas established an executive partnership, the Pinduoduo Partnership, to help us better manage our business and to carry out our vision, mission andvalue continuously. The structure of the Pinduoduo Partnership is designed to promote people with diverse skillsets but sharing the same corevalues and beliefs that we hold dear.The Pinduoduo Partnership will be operated under principles, policies and procedures that evolve with our business and encompass thefollowing major aspects:Nomination and Election of PartnersPartners will be elected annually through a nomination process, whereby any existing partner may propose candidates to the partnershipcommittee (the “Partnership Committee”), which reviews the nomination and propose candidates to the entire partnership for election. Election ofnew partners requires the affirmative vote of at least 75% of all the partners. In order to be elected a partner, the partner candidate must meetcertain quality standards including, among other things, a high standard of personal character and integrity, continued service as a director, officeror employee with our company for no less than five years (or a shorter period before our company reaches a five-year operating history), aconsistent 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 ameaningful level of equity interests in our company during his or her tenure as a partner. The specific level of equity interests to be maintainedshall 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 CEOnomination right, will not become effective until the Pinduoduo Partnership consists of no less than five limited partners (the “PartnershipCondition”). Currently, such rights and functions have yet to come into effect.Partnership CommitteeThe Partnership Committee will be the primary management body of the Pinduoduo Partnership. The Partnership Committee must consistof 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, thePartnership 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 RightThe Pinduoduo Partnership will be entitled to appoint executive directors and nominate and recommend the chief executive officer of ourcompany.Table of Contents98An executive director refers to the director of the company that is (i) neither a director who satisfies the “independence” requirements ofRule 5605(a)(2) of the Nasdaq Stock Market Rules or Section 303A of the Corporate Governance Rules of the New York Stock Exchange nor adirector 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 ordinaryshares converted from preferred shares of our company prior to our initial public offering, and (ii) maintains an employment relationship with ourcompany. Pursuant to our currently effective articles of association, our board of directors shall consist of not less than three but not more than ninedirectors, and shall include (i) two executive directors, if there are no more than five directors, and (ii) three executive directors, if there are morethan five but no more than nine directors. The executive directors shall be nominated by the Pinduoduo Partnership for so long as certain conditionsare satisfied. Our board of directors is obligated to cause the executive director candidate duly nominated by the Pinduoduo Partnership to beappointed by the board upon the delivery by the Pinduoduo Partnership of a written notice (duly executed by the general partner of the PinduoduoPartnership) to us, and such executive director shall serve until expiry of his or her terms, unless removed by the shareholders by ordinaryresolutions 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, appointany 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 totalnumber of executive directors on the board nominated by the Pinduoduo Partnership is less than two or three, as applicable based on the then boardcomposition, for any reason, the Pinduoduo Partnership shall be entitled to appoint such number of executive directors to the board as may benecessary to ensure that the board includes the number of executive directors as required pursuant to our articles of association. Such appointmentof 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 ourcompany.The chief executive officer candidate nominated by the Pinduoduo Partnership shall stand for appointment by the nominating andcorporate governance committee of the board of directors. If the candidate is not appointed by the nominating and corporate governance committeein accordance with our articles of association, the Pinduoduo Partnership may nominate a replacement nominee until the nominating and corporategovernance committee appoints such nominee as chief executive officer, or if the nominating and corporate governance committee fails to appointmore than three candidates nominated by the Pinduoduo Partnership consecutively, the board of directors may then nominate and appoint anyperson to serve as the chief executive officer of our company in accordance with our articles of association.Any partner may propose to the Partnership Committee any qualified individual to stand for nomination for executive director or chiefexecutive 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 theaffirmative votes of a majority of the partners.Partner Termination, Retirement and RemovalPartners may elect to retire or withdraw from the Pinduoduo Partnership at any time. All partners are required to retire upon reaching theage of sixty or upon termination of their employment. Any partner may be removed upon affirmative vote of a majority of all partners, in the eventthat 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. Honorarypartners may not act as partner, but may be entitled to allocations from the deferred portion of the bonus pool.Amendment of Partnership AgreementPursuant to the partnership agreement, amendment of the partnership agreement requires the approval of 75% of the partners.Table of Contents99Directors and Executive OfficersThe following table sets forth information regarding our directors and executive officers as of the date of this annual report.Directors and Executive Officers Age Position/TitleLei Chen 42 Chairman of the Board of Directors and Chief Executive OfficerAnthony Kam Ping Leung61Independent DirectorHaifeng Lin 45 DirectorQi Lu 60 Independent DirectorNanpeng Shen 54 Independent DirectorGeorge Yong-Boon Yeo 67 Independent DirectorJun Liu39Vice President of FinanceJunyun Xiao42Senior Vice President of OperationZhenwei Zheng 38 Senior Vice President of Product DevelopmentJianchong Zhu43General CounselLei Chen is a founding member of our company and has served as director and our chief executive officer since July 2020. Mr. Chen wasappointed as our chairman of the board of directors in March 2021. Mr. Chen served as our chief technology officer since 2016 and as our directorfrom 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 internationalconferences, such as the ACM SIGMOD Conference, Very Large Data Bases (VLDB) Conferences and International Conference on MachineLearning. Mr. Chen received his bachelor’s degree in computer science from Tsinghua University and his doctoral degree in computer science fromUniversity of Wisconsin-Madison.Anthony Kam Ping Leung has served as our independent director and chairman of the audit committee since August 2019. Mr. Kam hasmore than 30 years of experience in the financial services industry in Asia. He is a Chartered Financial Analyst and a chartered accountant inSingapore. He also serves as an independent director of OCBC Wing Hang Bank (China) Ltd since September 2021. Mr. Kam served as the deputychief executive officer and the executive director of HSBC Bank (China) Company Limited (“HSBC China”) from February 2016 to April 2018and served as the chief financial officer of HSBC China from May 2013 to February 2016. Prior to that, Mr. Kam served as the chief financialofficer of HSBC Bank (Singapore) Limited (“HSBC Singapore”) from September 2005 to May 2013. In addition to financial accounting andcontrol, management accounting and tax responsibilities, Mr. Kam had direct oversight on specific risk management functions such as treasuryproduct control and asset & liabilities management. Mr. Kam was also a member of the asset and liabilities management meeting and a member ofthe risk management meeting under the executive committee of HSBC Singapore and HSBC China. Mr. Kam received bachelor of science fromUniversity 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 corporatevice president of Tencent Holdings Limited (HKEx: 00700). Prior to that, he served as general manager of the merger and acquisitions departmentof Tencent Technology (Shenzhen) Company Limited, an affiliate of Tencent Holdings Limited. From July 2003 to November 2010, Mr. Lin servedin different roles in finance, strategy and business operation at Microsoft. Prior to that, Mr. Lin worked at Nokia China from 1999 to 2001. Mr. Linalso serves as a non-executive director of Linklogis Inc. (HKEx: 09959) since October 2019. Mr. Lin received his bachelor’s degree in engineeringfrom Zhejiang University in June 1997 and his master’s degree in business administration from the Wharton School of the University ofPennsylvania in May 2003.Qi Lu has served as our independent director and chairman of our compensation committee since July 2018. Currently, he is the foundingCEO of Miracle Plus. He was president and COO of Baidu, and prior to that served as Microsoft’s global executive vice president and ledApplications and Services Group. Dr. Lu joined Microsoft in 2009 as president of its Online Services Division. Earlier in his career, Dr. Lu joinedYahoo! in 1998, later becoming senior vice president in charge of search and advertising technologies, and subsequently executive vice president in2007. Dr. Lu holds both bachelor and master degrees in computer science from Fudan University in Shanghai and a Ph.D. in computer science fromCarnegie Mellon University. He holds over 40 US patents and has authored many papers in his field.Table of Contents100Nanpeng Shen has served as our independent director since April 2018. Mr. Shen is the founding managing partner of Sequoia CapitalChina since September 2005. Prior to founding Sequoia Capital China, Mr. Shen co-founded Trip.com Group Ltd (Nasdaq: TCOM), formerlyCtrip.com International, Ltd. (Nasdaq: CTRP), or Ctrip, a leading travel service provider in China, in 1999. Mr. Shen served as Ctrip’s presidentfrom 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 sinceOctober 2008, a non-executive director of BTG Hotels Group (SHSE: 600258) since January 2017, a non-executive director of Noah HoldingsLimited (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 inNovember 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 sinceJuly 2018. He currently serves as Senior Adviser to Kuok Group and is an independent non-executive director of AIA Group Limited (HKEx:01299) and an independent non-executive director of Creative Technology Ltd. (SGX: C76). Prior to that, Mr. Yeo served 23 years in thegovernment of Singapore, and was Minister for Information and the Arts, Health, Trade & Industry, and Foreign Affairs of Singapore. Mr. Yeo isalso a member of the Board of Trustees of Berggruen Institute on Governance and International Advisory Panel of Peking University, amongothers. Mr. Yeo studied Engineering at Cambridge University on a President’s Scholarship, graduating with a Double First in 1976, and became aSignals Officer in the Singapore Armed Forces. After graduating from the Singapore Command and Staff College in 1979, he was posted to theRepublic of Singapore Air Force. Mr. Yeo graduated with an MBA (Baker Scholar) from the Harvard Business School in 1985. He was appointedChief-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.Jun Liu has served as our vice president of finance since January 2022. Ms. Liu served as our director of finance from 2017 to 2021. Priorto joining our company, Ms. Liu served as the director of finance at Xiaohongshu.com and an associate director of finance at Light-In-The-BoxLimited. From 2005 to 2013, she was an associate and then manager at PricewaterhouseCoopers Consultants (Shenzhen) Limited. Ms. Liu receivedher bachelor’s degree in economics from Zhongnan University of Economics and Law.Junyun Xiao is a founding member of our company and has served as our senior vice president of operation since 2016 and our directorfrom April 2018 to July 2018. Prior to joining our company, Mr. Xiao served as operation director of Xinyoudi Studio since 2011. Prior to that, hewas 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, andour director from April 2018 to July 2018. Prior to joining our company, Mr. Zheng served as chief executive officer of Xinyoudi Studio since2011. Prior to that, he held various positions at Baidu (Nasdaq: BIDU) from 2008 to 2010. Mr. Zheng received his bachelor’s degree and master’sdegree 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 thencounsel in Skadden, Arps, Slate, Meagher & Flom LLP. Mr. Zhu received his bachelor’s degree in English language and literature from TsinghuaUniversity, and his juris doctor’s degree from University of California Hastings College of the Law.B. CompensationIn the year ended December 31, 2021, we paid an aggregate of US$2.6 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. OurPRC subsidiaries and our VIE are required by law to make contributions equal to certain percentages of each employee’s salary for his or hermedical insurance, maternity insurance, workplace injury insurance, unemployment insurance, pension benefits through a PRC government-mandated multi-employer defined contribution plan and other statutory benefits.Table of Contents101Employment Agreements and Indemnification AgreementsWe have entered into employment agreements with each of our executive officers. Under these agreements, each of our executive officersis employed for a specified time period. We may terminate employment for cause, at any time, without advance notice or remuneration, for certainacts of the executive officer, such as conviction or plea of guilty to a felony or any crime involving moral turpitude, negligent or dishonest acts toour detriment, or misconduct or a failure to perform agreed duties. We may also terminate an executive officer’s employment without cause uponthree-month advance written notice. In such case of termination by us, we will provide severance payments to the executive officer as expresslyrequired by applicable law of the jurisdiction where the executive officer is based. The executive officer may resign at any time with a three-monthadvance written notice.Each executive officer has agreed to hold, both during and after the termination or expiry of his or her employment agreement, in strictconfidence and not to use, except as required in the performance of his or her duties in connection with the employment or pursuant to applicablelaw, any of our confidential information or trade secrets, any confidential information or trade secrets of our clients or prospective clients, or theconfidential or proprietary information of any third party received by us and for which we have confidential obligations. The executive officershave also agreed to disclose in confidence to us all inventions, designs and trade secrets which they conceive, develop or reduce to practice duringthe 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 orher 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 arepresentative of us for the purpose of doing business with such persons or entities that will harm our business relationships with these persons orentities; (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 isemployed 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 agreeto indemnify our directors and executive officers against certain liabilities and expenses incurred by such persons in connection with claims madeby reason of their being a director or officer of our company.2015 Global Share PlanIn September 2015, our board of directors approved a 2015 global share plan, which we refer to as the 2015 Plan, to attract and retain thebest available personnel, provide additional incentives to employees, directors and consultants and promote the success of our business. Themaximum aggregate number of ordinary shares which may be issued pursuant to all awards under the 2015 Plan is 581,972,860 Class A ordinaryshares, subject to adjustment and amendment. As of December 31, 2021, options to purchase 581,972,860 Class A ordinary shares under the 2015Plan had been granted, excluding awards that were forfeited or cancelled after the relevant grant dates.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 administerthe 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 thecommittee, the plan administrator has the authority to determine the participants to receive awards, the type and number of awards to be granted toeach 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 andlimitations for each award, which may include the term of the award, the provisions applicable in the event that the grantee’s employment orservice terminates, and our authority to unilaterally or bilaterally amend, modify, suspend, cancel or rescind the award.Table of Contents102Eligibility. 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. Thevested portion of option will expire if not exercised prior to the time as the plan administrator determines at the time of its grant. However, themaximum 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 exceptionsprovided in the 2015 Plan, such as transfers by will or the laws of descent and distribution, or as provided in the relevant award agreement orotherwise 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 hasthe authority to terminate, amend or modify the plan. No termination, amendment or modification may adversely affect in any material way anoutstanding award granted pursuant to the 2015 Plan unless mutually agreed between the participant and the plan administrator.2018 Share Incentive PlanIn 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 thebest available personnel, provide additional incentives to employees, directors and consultants and promote the success of our business. Themaximum aggregate number of shares which may be issued pursuant to all awards under the 2018 Plan was initially 363,130,400, plus an annualincrease 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 precedingfiscal year, and (ii) such number of shares as may be determined by our board of directors. In March 2021, our board of directors approved anamendment 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, 2021, options to purchase 138,030,676 Class A ordinary shares and restricted share units representing 41,518,464 ClassA 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 awardsapproved by the administration committee.Plan Administration. Our board of directors or the administration committee will administer the 2018 Plan. The administration committeeor the full board of directors, as applicable, will determine the participants to receive awards, the type and number of awards to be granted to eachparticipant, 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 andlimitations for each award, which may include the term of the award, the provisions applicable in the event that the grantee’s employment orservice 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 areintended 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 awardagreement.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 providedin the 2018 Plan, such as transfers by will or the laws of descent and distribution.Table of Contents103Termination and Amendment of the 2018 Plan. Unless terminated earlier, the 2018 Plan has a term of ten years. Our board of directors hasthe authority to amend or terminate the plan. However, no such action may adversely affect in any material way any awards previously grantedunless agreed by the recipient.The following table summarizes, as of December 31, 2021, the number of Class A ordinary shares under outstanding options, restrictedshare units and other equity awards that we granted to our directors and executive officers, excluding awards that were forfeited or cancelled afterthe relevant grant dates. Class A Ordinary SharesUnderlyingEquity AwardsExercise PriceNameGranted(US$/Share)Date of GrantDate of ExpirationLei Chen* Nominal September 1, 2016 and September 1, 2020 August 31, 2026 and August 31, 2030Qi Lu*NominalVarious dates between February 1, 2019 andAugust 1, 2021Various dates between January 31, 2029 and July31, 2031George Yong-Boon Yeo*NominalVarious dates between February 1, 2019 andAugust 1, 2021Various dates between January 31, 2029 and July31, 2031Anthony Kam Ping Leung*NominalVarious dates between March 1, 2020 andSeptember 1, 2021Various dates between February 28, 2030 andAugust 31, 2031Junyun Xiao*NominalNovember 1, 2015 and September 1, 2016October 31, 2025 and August 31, 2026Zhenwei Zheng* Nominal Various dates from November 1, 2015 to March 1, 2019 Various dates from October 31, 2025 to February 28,2029Jun Liu*NominalVarious dates from September 1, 2018 to October1, 2021Various dates from August 31, 2028 to September30, 2031Jianchong Zhu*NominalJune 1, 2019May 31, 2029All directors and executive officers as a group57,572,204NominalVarious dates between November 1, 2015 andOctober 1, 2021Various dates between October 31, 2025 and September 30, 2031* Less than 1% of our total ordinary shares outstanding.As of December 31, 2021, our employees other than members of our senior management as a group held options to purchase 662,651,244Class A ordinary shares, with nominal exercise prices, and restricted share units representing 41,298,552 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—Share-Based compensation.”C. Board PracticesBoard of DirectorsOur board of directors consists of six directors. A director is not required to hold any shares in our company by way of qualification. Adirector may vote with respect to any contract or transaction or proposed contract or transaction notwithstanding that he may be interested thereinprovided (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, eitherspecifically or by way of a general notice and (b) if such contract or arrangement is a transaction with a related party, such transaction has beenapproved by the audit committee. The directors may from time to time at their discretion exercise all the powers of the company to raise or borrowmoney, 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 anythird party. None of our non-executive directors has a service contract with us that provides for benefits upon termination of service.Table of Contents104Committees of the Board of DirectorsAs a Cayman Islands exempted company listed on the Nasdaq Stock Market, we are subject to the Nasdaq corporate governance listingstandards. However, Nasdaq rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certaincorporate governance practices in the Cayman Islands, which is our home country, may differ significantly from the Nasdaq corporate governancelisting standards. For example, neither the Companies Act of the Cayman Islands nor our memorandum and articles of association requires amajority of our directors to be independent, we could include non-independent directors as members of our compensation committee andnominating committee, and our independent directors would not necessarily hold regularly scheduled meetings at which only independent directorsare 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 andcorporate 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 Shenand Mr. George Yong-Boon Yeo each satisfies the “independence” requirements of Rule 5605(c)(2) of the Nasdaq Stock Market Rules and meetthe independence standards under Rule 10A-3 under the Exchange Act, as amended. We have determined that Mr. Anthony Kam Ping Leungqualifies as an “audit committee financial expert.” The audit committee oversees our accounting and financial reporting processes and the audits ofthe 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 theindependent 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 tomonitor 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●monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of ourprocedures 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 ourcompensation committee. We have determined that Dr. Qi Lu and Mr. Nanpeng Shen each satisfies the “independence” requirements ofRule 5605(a)(2) of the Nasdaq Stock Market Rules. The compensation committee assists the board in reviewing and approving the compensationstructure, including all forms of compensation, relating to our directors and executive officers. Our chief executive officer may not be present atany 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 otherexecutive 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 thatperson’s independence from management.Table of Contents105Nominating 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 andcorporate governance committee assists the board of directors in selecting individuals qualified to become our directors and in determining thecomposition 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 theboard; and●advising the board periodically with regards to significant developments in the law and practice of corporate governance as well asour compliance with applicable laws and regulations, and making recommendations to the board on all matters of corporategovernance and on any remedial action to be taken.Duties of DirectorsUnder Cayman Islands law, our directors owe fiduciary duties to our company, including a duty to act honestly, and a duty to act in whatthey consider in good faith to be in our best interests. Our directors must also exercise their powers only for a proper purpose. A director mustexercise the skill and care of a reasonably diligent person having both – (i) the general knowledge, skill and experience that may reasonably beexpected of a person in the same position (an objective test), and (ii) if greater, the general knowledge, skill and experience that that directoractually possesses (a subjective test). In fulfilling their duty of care to our company, our directors must ensure compliance with our memorandumand articles of association, as amended and restated from time to time, and the rights vested thereunder in the holders of the shares. Our directorsowe their fiduciary duties to our company and not to our company’s individual shareholders, and it is our company which has the right to seekdamages if a duty owed by our directors is breached. In limited exceptional circumstances, a shareholder may have the right to seek damages in ourname 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 functionsand 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.Table of Contents106Terms of Directors and OfficersOur officers are elected by and serve at the discretion of the board of directors. Our directors shall serve and hold office until expiry of hisor her terms or until such time as they are removed from office by ordinary resolutions of the shareholders. Pursuant to our currently effectivearticles of association, our board of directors shall consist of not less than three but not more than nine directors, and shall include (i) two executivedirectors, 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. Theexecutive directors shall be nominated by the Pinduoduo Partnership. Our board of directors is obligated to cause the executive director candidateduly 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 executiveofficer of our company, subject to appointment by the nominating and corporate governance committee of our board of directors. For additionalinformation, see “Item 6. Directors, Senior Management and Employees—A. Directors and Senior Management—Pinduoduo Partnership.” Theoffice of a director will be vacated if the director (i) becomes bankrupt or makes any arrangement or composition with his creditors; (ii) is found tobe 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 ofdirectors, is absent from meetings of the board of directors for four consecutive meetings and the board of directors resolves that his office bevacated; or (v) is removed from office pursuant to the provisions of our memorandum and articles of association.Board DiversityBoard Diversity Matrix (As of February 28, 2022)Country of Principal Executive Offices: People’s Republic of ChinaForeign Private IssuerYesDisclosure Prohibited Under Home Country LawNoTotal Number of Directors6FemaleMaleNon- BinaryDid Not Disclose GenderPart I: Gender IdentityDirectors0600Part II: Demographic BackgroundUnderrepresented Individual in Home Country Jurisdiction0LGBTQ+0Did Not Disclose Demographic Background2D. EmployeesEmployeesAs of December 31, 2021, we had a total of 9,762 employees. We had a total of 5,828 and 7,986 employees as of December 31, 2019 and2020, respectively.The following table gives breakdowns of our employees as of December 31, 2021 by function: As of December 31,2021Function: Sales and marketing 2,791Product development 5,622Platform operation 602Management and administration 747Total 9,762Table of Contents107We are dedicated to providing employees with social benefits, diversified work environment and a wide range of career developmentopportunities. We have invested significant resources in employee career development and training opportunities. For example, we have establishedtraining programs that cover topics such as our corporate culture, employee rights and responsibilities, team-building, professional conduct and jobperformance. 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 withall 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 OwnershipExcept as specifically noted, the following table sets forth information with respect to the beneficial ownership of our Class A ordinaryshares as of February 28, 2022 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.The calculations in the table below are based on 5,057,542,676 Class A ordinary shares and no Class B ordinary Shares outstanding as ofFebruary 28, 2022.Table of Contents108Beneficial ownership is determined in accordance with the rules and regulations of the SEC. In computing the number of sharesbeneficially owned by a person and the percentage ownership of that person, we have included shares that the person has the right to acquire within60 days, including through the exercise of any option, warrant or other right or the conversion of any other security. These shares, however, are notincluded in the computation of the percentage ownership of any other person.Class A Ordinary Shares Beneficially Owned*** Number %Directors and Executive Officers**: Lei Chen* * Anthony Kam Ping Leung* * Haifeng Lin(1)* * Qi Lu* * Nanpeng Shen(2) 132,876,308 2.6 George Yong-Boon Yeo* * Jun Liu**Junyun Xiao* * Zhenwei Zheng* * Jianchong Zhu**All Directors and Executive Officers as a Group 186,817,482 3.7Principal Shareholders: Entities affiliated with Zheng Huang(3) 1,409,744,080 27.9 Entities affiliated with Tencent(4) 783,468,116 15.5 Entities affiliated with Pinduoduo Partnership (5) 370,772,220 7.3Banyan Partners Funds(6) 335,312,772 6.6 Notes:*Less than 1% of our total outstanding shares.**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’sRepublic of China.***Beneficial ownership information disclosed herein represents direct and indirect holdings of entities owned, controlled or otherwise affiliated with the applicable holder asdetermined in accordance with the rules and regulations of the SEC.(1)The business address of Mr. Lin is 12/F, Tencent Binhai Towers, No.33 Haitian 2nd Road, Nanshan District, Shenzhen, People’s Republic of China.(2)Represents (i) 120,917,348 Class A ordinary shares directly held by SCC Growth IV Holdco A, Ltd., an exempted company with limited liability incorporated under the laws ofthe Cayman Islands, (ii) 1,594,424 ADSs, representing 6,377,696 Class A ordinary shares, directly held by Sequoia Capital China Growth Fund V, L.P., an exempted partnershipwith limited liability formed under the laws of the Cayman Islands, (iii) 87,326 ADSs, representing 349,304 Class A ordinary shares, directly held by Sequoia Capital ChinaGrowth Partners Fund V, L.P., an exempted partnership with limited liability formed under the law of the Cayman Islands, (iv) 68,249 ADSs, representing 272,996 Class Aordinary 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 CaymanIslands, and (v) 4,825,404 Class A ordinary shares, and 33,390 ADSs, representing 4,958,964 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 PartnersFund 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 ChinaHolding 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.(3)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 VirginIslands, 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 VirginIslands. Each of Walnut Street Investment, Ltd. and Walnut Street Management, Ltd. is controlled by Steam Water Limited, a business company limited by shares incorporated inthe 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 thetrust, and Mr. Huang and his family members are the trust’s beneficiaries. Walnut Street Investment, Ltd., Walnut Street Management, Ltd. and Steam Water Limited arecollectively referred to as entities affiliated with Mr. Huang. The registered address of each of Walnut Street Investment, Ltd. and Walnut Street Management, Ltd. is TrinityChambers, 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.Table of Contents109(4)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 heldby 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 RoseInvestment Limited, a limited liability company incorporated in the British Virgin Islands, and (vi) 853,004 Class A ordinary shares held by Distribution Pool Limited, a limitedliability company incorporated in British Virgin Islands, as reported in a Schedule 13D/A jointly filed by Tencent Holdings Limited and Tencent Mobility Limited on March 24,2021. Tencent Mobility Limited, TPP Follow-on I Holding G Limited, Chinese Rose Investment Limited and Distribution Pool Limited are investing entities either directly orbeneficially owned by Tencent Holdings Limited, and are collectively referred to as entities affiliated with Tencent. Tencent Holdings Limited is a limited liability companyincorporated 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. 1Queen’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, CaymanIslands. The registered address of Chinese Rose Investment Limited is P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands. The registeredaddress of Distribution Pool Limited is Vistra Corporate Services Centre, Wickhams Cay II, Road Town, Tortola, VG1110, British Virgin Islands.(5)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. QuantumDot 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 exemptedcompany 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 GPLimited 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 withPinduoduo Partnership. The principal address of the entities affiliated with Pinduoduo Partnership is 28/F, No. 533 Loushanguan Road, Changning District, Shanghai, People’sRepublic of China.(6)Represents (i) 318,944,516 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) 13,913,013 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)2,455,243 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, as reported in aSchedule 13G/A jointly filed by Banyan Partners Fund II, L.P., Banyan Partners Fund III, L.P., Banyan Partners Fund III-A, L.P., Banyan Partners II Ltd. and Banyan Partners IIILtd. on February 11, 2022. 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 BanyanPartners 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 theshareholders 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 ElginAvenue, 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. isWalkers Corporate Limited, Cayman Corporate Centre, 27 Hospital Road, George Town, Grand Cayman, KY1-9008, Cayman Islands.To our knowledge, as of February 28, 2022, a total of 1,770,530,320 Class A ordinary shares are held by one record holder in the UnitedStates, representing approximately 35.0% of our total outstanding shares. The holder is Deutsche Bank Trust Company Americas, the depositary ofour 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 holdersof our ordinary shares in the United States.We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.Item 7. Major Shareholders and Related Party TransactionsA. Major ShareholdersPlease refer to “Item 6. Directors, Senior Management and Employees—E. Share Ownership.”B. Related Party TransactionsContractual Arrangements with Our VIE and Its ShareholdersFor a description of these contractual arrangements, see “Item 4. Information on the Company—C. Organizational Structure.”Shareholders AgreementWe entered into our seventh amended and restated shareholders agreement on March 5, 2018 with our then shareholders. Pursuant to thisshareholders agreement, we have granted certain registration rights to our shareholders. Set forth below is a description of the registration rightsgranted under the agreement.Table of Contents110Demand Registration Rights. Holders holding at least 30% or more of the issued and outstanding registrable securities (on an as convertedbasis) held by the preferred shareholders, the Class B ordinary shareholders and Class A ordinary shareholders have the right to demand in writingthat we file a registration statement covering the registration of at least 25% of their registrable securities. We have the right to defer filing of aregistration 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 futurewill be materially detrimental to us or our shareholders, but we cannot exercise the deferral right for more than once during any twelve-monthperiod 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 alimitation of the number of securities to be underwritten, the number of registrable securities that may be included in the underwriting shall bereduced as required by the underwriters and allocated among the holders of registrable securities on a pro rata basis according to the number ofregistrable securities requested by each holder, provided that all other equity securities are first excluded and 25% of shares of registrable securitiesrequested 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 havethe 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 registrationstatement in the near future will be materially detrimental to us or our shareholders, but we cannot exercise the deferral right for more than onceduring any twelve-month period and cannot register any other securities during such 60-day period.Piggyback Registration Rights. If we propose to register for a public offering or our securities other than relating to any share incentiveplan or a corporate reorganization, we must notify all holders of registrable securities and offer them an opportunity to be included in suchregistration. If the managing underwriter determines in good faith that market factors require a limitation of the number of registrable securities tobe underwritten, the managing underwriter may decide to exclude shares from the registration and the underwriting, and the number of shares thatmay be included in the registration and the underwriting will be allocated, first, to us, second, to each of the holders requesting inclusion of theirregistrable securities on a pro rata basis based on the total amount of registrable securities requested by each such holder, and third, to holders ofother securities of our company, provided that all other equity securities are first excluded and 25% of shares of registrable securities requested bythe holders are included.Expenses of Registration. We will bear all registration expenses, other than the underwriting discounts and commissions, fees for specialcounsel for the holders participating in such registration and certain excepted expenses as described in the shareholders agreement, incurred inconnection 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 anniversaryfrom the date of closing of a Qualified Initial Public Offering (as defined in the shareholders agreement), (ii) upon the termination, liquidation ordissolution of our company or a Liquidation Event (as defined in the shareholders agreement), or (iii) all registrable securities proposed to be soldby a holder may then be sold without registration in any 90-day period under Rule 144 of the Securities Act.Employment Agreements and Indemnification AgreementsSee “Item 6. Directors, Senior Management and Employees—B. Compensation.”Share Incentive PlansSee “Item 6. Directors, Senior Management and Employees—B. Compensation.”Table of Contents111Agreement and Business Cooperation with TencentStrategic Cooperation Framework Agreement. In February 2018, we entered into a Strategic Cooperation Framework Agreement withTencent, a provider of internet value-added services serving the largest online community in China. Pursuant to the Strategic CooperationFramework Agreement, Tencent agreed to offer us access points on the interface of Weixin Pay enabling us to utilize traffic from Tencent’s WeixinPay. 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 chargethe payment processing fee corresponding to each transaction payment through Weixin Wallet on our platform at a rate no higher than the normalrate of its payment solutions charged to third parties. Tencent also agreed to share technical and administrative resources with us and makereasonable efforts to provide support in a variety of professional areas, such as talent recruiting, training and technical resources. The StrategicCooperation Framework Agreement has a term of five years.Business Cooperation with Tencent. Tencent has been a principal shareholder of us since February 2017. In 2019, 2020 and 2021, wepurchased from Tencent certain services, including payment processing, advertising and cloud services, in the total amount of RMB2,298.1 million,RMB10,541.5 million and RMB8,416.6 million (US$1,320.8 million) respectively. As of December 31, 2019, 2020 and 2021, we had a receivablebalance from Tencent in the amount of RMB1,905.8 million, RMB3,177.5 million and RMB2,803.3 million (US$439.9 million), respectively, anda payable balance to Tencent in the amount of RMB1,502.9 million, RMB3,370.9 million and RMB1,916.5 million (US$300.7 million),respectively. In 2021, we purchased certain computer equipment from Tencent for a total amount of RMB1,833.5 million (US$287.7 million).Passive Investments in Related-Party FundsThe Company set up funds as a limited partner with related parties to make investments in privately-held companies. As of December 31,2019, 2020 and 2021, the carrying amount for the investments was RMB249.6 million, RMB252.4 million and RMB332.6 million (US$52.2million).Loan to Ningbo Hexin and Business Cooperation Agreement with Shanghai FufeitongWe currently rely on commercial banks and third-party online payment service providers for payment processing and escrow services onour 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 orcurtailed 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 bematerially and adversely affected.” To mitigate risk and impact on our business operations in the event of disruption or discontinuance of ourrelationship with commercial banks and third-party online payment service providers, we facilitated Messrs. Lei Chen and Zhenwei Zheng, ourexecutive officers, to acquire the controlling equity interests in Shanghai Fufeitong, a licensed payment service company, by providing interest-freeloans in the aggregate amount of RMB697.6 million (US$109.5 million) to Ningbo Hexin Equity Investment Partnership, or Ningbo Hexin, alimited partnership controlled by Messrs. Lei Chen and Zhenwei Zheng.As of December 31, 2021, Ningbo Hexin beneficially owned 50.01% equity interests in Shanghai Fufeitong. Subject to compliance withapplicable laws and regulations and approval by relevant regulatory authorities, Hangzhou Aimi may require Ningbo Hexin to repay the loans atany time and use the proceeds to pay for the limited partnership interests in Ningbo Hexin. As of December 31, 2021, the loans were stilloutstanding.In April 2020, Shanghai Xunmeng entered into a business cooperation agreement with Shanghai Fufeitong, pursuant to which both partiesagreed to conduct comprehensive business cooperation in payment services, technical resources and other related professional areas. As ofDecember 31, 2021, we had a receivable balance from Shanghai Fufeitong of RMB748.9 million (US$117.5 million), and a payable balance toShanghai Fufeitong of RMB46.5 million (US$7.3 million).C. Interests of Experts and CounselNot applicable.Table of Contents112Item 8. Financial InformationA. Consolidated Statements and Other Financial InformationWe have appended consolidated financial statements filed as part of this annual report.Legal ProceedingsFrom 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 patentinfringement, and other matters. For example, in July 2018, a complaint was filed against us in the U.S. federal court alleging contributorytrademark 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 afee 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 representsplaintiff in this matter. Accordingly, starting in April 2020, the Company commenced efforts to enforce the judgment. Those efforts weresuccessful, and in November 2020, the plaintiff paid the Company the full amount of the judgment plus additional interest for the delay. TheCompany 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 officersand directors in the U.S. District Court for the Southern District of New York (“SDNY”) and the Superior Court of the State of California. Theplaintiffs in these cases alleged, in sum and substance, that certain disclosure and statements made by our company in connection with our initialpublic offering contained material misstatements and omissions in violation of the federal securities laws. In March 2020, the court granted ourmotion to dismiss the claims in the consolidated action in the SDNY. In August 2021, the United States Court of Appeals for the Second Circuitaffirmed the district court’s dismissal of the federal action, and the matter is now closed. The consolidated action in the Superior Court of the Stateof California was stayed in June 2019 at our request while the abovementioned SDNY action was pending. In October 2020, the stay was lifted. InFebruary 2021, the Superior Court of the State of California dismissed all claims against us for lack of personal jurisdiction, and the time period forplaintiffs to appeal the dismissal has expired. For risks and uncertainties relating to lawsuits 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 lawsuits,which could have a material adverse impact on our business, financial condition, results of operation, cash flows and reputation” and “Item 3. KeyInformation—D. Risk Factors—Risks Related to Our Business—We may incur liability for counterfeit, unauthorized, illegal, or infringing productssold or misleading information available on our platforms.”Dividend PolicyOur board of directors has complete discretion on whether to distribute dividends, subject to our memorandum and articles of associationand certain requirements of Cayman Islands law. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend mayexceed the amount recommended by our board of directors. Even if our board of directors decides to pay dividends, the form, frequency andamount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictionsand 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 retainmost, 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 cashrequirements, including any payment of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiaries to paydividends to us. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Relating to DividendDistributions.”Table of Contents113If we pay any dividends on our ordinary shares, we will pay those dividends which are payable in respect of the Class A ordinary sharesunderlying our ADSs to the depositary, as the registered holder of such Class A ordinary shares, and the depositary then will pay such amounts toour ADS holders in proportion to Class A ordinary shares underlying the ADSs held by such ADS holders, subject to the terms of the depositagreement, including the fees and expenses payable thereunder. Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.B. Significant ChangesExcept as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our auditedconsolidated financial statements included in this annual report.Item 9. The Offer and ListingA. Offering and Listing DetailsOur ADSs, each representing four Class A ordinary shares, have been listed on Nasdaq Stock Market since July 26, 2018. Our ADSs tradeunder the symbol “PDD.”B. Plan of DistributionNot applicable.C. MarketsOur ADSs, each representing four Class A ordinary shares of ours, have been listed on Nasdaq Stock Market since July 26, 2018 under thesymbol “PDD.”D. Selling ShareholdersNot applicable.E. DilutionNot applicable.F. Expenses of the IssueNot applicable.Item 10. Additional InformationA. Share CapitalNot applicable.B. Memorandum and Articles of AssociationThe following are summaries of material provisions of our currently effective memorandum and articles of association and of theCompanies 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 thefull power and authority to carry out any object not prohibited by the law of the Cayman Islands.Table of Contents114Ordinary Shares. Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of our Class Aordinary shares and Class B ordinary shares will have the same rights except for voting and conversion rights. Each Class A ordinary share shallentitle 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 theholder thereof to ten (10) votes on all matters subject to vote at our general meetings. Our ordinary shares are issued in registered form and areissued 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 ordinaryshares are not convertible into Class B ordinary shares under any circumstances. Upon any sale, transfer, assignment or disposition of any Class Bordinary shares by a holder thereof to any person other than Mr. Zheng Huang or any entity which is not ultimately controlled by Mr. ZhengHuang, 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 lawsof the Cayman Islands, our company may declare and pay a dividend out of either profit or share premium account, provided that in nocircumstances 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 ofbusiness.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 ofour shareholders, except as may otherwise be required by law or provided for in our memorandum and articles of association. In respect of mattersrequiring shareholders’ vote, each Class A ordinary share is entitled to one vote, and each Class B ordinary share is entitled to ten votes. At anygeneral 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 theresult 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 votesattaching 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 dulyauthorized representative. Advance notice of at least ten calendar days is required for the convening of our annual general meeting and othershareholders meetings.An ordinary resolution to be passed at a meeting by the shareholders requires the affirmative vote of a simple majority of the votesattaching to the ordinary shares cast at a meeting. A special resolution requires the affirmative vote of no less than two-thirds of the votes castattaching to the outstanding shares at a meeting. Our articles of association provide that a special resolution shall be required, and that for thepurposes of any such special resolution, the affirmative vote of no less than 95% of votes cast by the shareholders entitled to vote who are presentin person or by proxy at a general meeting shall be required to approve any amendments to any provisions of our articles of association that relateto or have an impact upon: (i) the right of the Pinduoduo Partnership to appoint executive directors and nominate the chief executive officercandidate 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, appointmentand removal of directors or size of the board. Both ordinary resolutions and special resolutions may also be passed by a unanimous writtenresolution signed by all the shareholders of our company, as permitted by the Companies Act and our memorandum and articles of association. Aspecial 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 callshareholders’ annual general meetings. Our articles of association provide that we may (but are not obliged to) in each year hold a general meetingas 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 beheld at such time and place as may be determined by our directors.Table of Contents115Shareholders’ 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 ourshareholders. A quorum required for any general meeting of shareholders consists of one or more shareholders present or by proxy, representingnot 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 maybe provided in a company’s articles of association. Our memorandum and articles of association provide that upon the requisition of shareholdersrepresenting 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 thedeposit carry the right to vote at general meetings of our company, our board of directors will convene an extraordinary general meeting and put theresolutions so requisitioned to a vote at such meeting. However, our memorandum and articles of association do not provide our shareholders withany 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 ordinaryshares 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 upshare, 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 onwhich 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 otherevidence 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 exceedfour; and●a fee of such maximum sum as the Nasdaq Global Select Market may determine to be payable or such lesser sum as our directorsmay 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 waslodged, 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 registerclosed at such times and for such periods as our board of directors may from time to time determine, provided, however, that the registration oftransfers shall not be suspended nor the register closed for more than 30 calendar days in any calendar year as our board may determine.Liquidation. On the winding up of our company, if the assets available for distribution amongst our shareholders shall be more thansufficient to repay the whole of the share capital at the commencement of the winding up, the surplus shall be distributed amongst our shareholdersin 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 inrespect of which there are monies due, of all monies payable to our company for unpaid calls or otherwise. If our assets available for distributionare 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 thepar 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 amountsunpaid 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 havebeen called upon and remain unpaid are subject to forfeiture.Table of Contents116Redemption, Repurchase and Surrender of Shares. We may issue shares on terms that such shares are subject to redemption, at our optionor 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 theshareholders by special resolutions. Our company may also repurchase any of our shares on such terms and in such manner as have been approvedby our board of directors or by an ordinary resolution of our shareholders. Under the Companies Act, the redemption or repurchase of any sharemay 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 purposeof such redemption or repurchase, or out of capital if our company can, immediately following such payment, pay its debts as they fall due in theordinary 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 our 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 ofshares (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 variedwith 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 separatemeeting 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 holdersof 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 bevaried 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 ordinaryshares 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 preferenceshares 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 ofthese 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 obtaincopies of our list of shareholders or our corporate records. However, we will provide our shareholders with annual audited financial statements.Anti-Takeover Provisions. Some provisions of our memorandum and articles of association may discourage, delay or prevent a change ofcontrol 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 andarticles of association for a proper purpose and for what they believe in good faith to be in the best interests of our company.Table of Contents117Exempted Company. We are an exempted company with limited liability under the Companies Act. The Companies Act distinguishesbetween ordinary resident companies and exempted companies. Any company that is registered in the Cayman Islands but conducts businessmainly outside of the Cayman Islands may apply to be registered as an exempted company. The requirements for an exempted company areessentially 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 firstinstance);●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 thecompany.C. Material ContractsWe 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 inthis annual report on Form 20-F.D. Exchange ControlsSee “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Relating to Foreign Exchange.”E. TaxationThe following summary of the material Cayman Islands, PRC and U.S. federal income tax consequences of an investment in our ADSs orordinary shares is based upon laws and relevant interpretations thereof in effect as of the date of this annual report, all of which are subject tochange. This summary does not deal with all possible tax consequences relating to an investment in our ADSs or ordinary shares, such as the taxconsequences 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 TaxationThe Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there isno 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 theCayman Islands except for stamp duties which may be applicable on instruments executed in, or brought within the jurisdiction of the CaymanIslands. 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 noexchange 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, andno 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 fromthe disposal of our ordinary shares or ADSs be subject to Cayman Islands income or corporation tax.Table of Contents118No stamp duty is payable in respect of the issue of the shares or on an instrument of transfer in respect of shares in Cayman Islandsexempted companies, except for those companies which hold interests in land in the Cayman Islands or if the relevant instrument is brought intothe Cayman Islands.PRC TaxationUnder the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside the PRC with “de factomanagement body” within the PRC is considered a resident enterprise. The implementation rules define the term “de facto management body” asthe body that exercises full and substantial control and overall management over the business, productions, personnel, accounts and properties of anenterprise. In April 2009, the SAT issued a circular, known as Circular 82, which provides certain specific criteria for determining whether the “defacto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Although this circular only applies tooffshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners, the criteria setforth in the circular may reflect the SAT’s general position on how the “de facto management body” text should be applied in determining the taxresident status of all offshore enterprises. According to Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRCenterprise 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 followingconditions are met: (i) the primary location of the day-to-day operational management is in the PRC; (ii) decisions relating to the enterprise’sfinancial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s primaryassets, accounting books and records, company seals, and board and shareholder resolutions, are located or maintained in the PRC; and (iv) at least50% 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 PRCenterprise or PRC enterprise group and we do not believe that Pinduoduo Inc. meets all of the conditions above. Pinduoduo Inc. is a companyincorporated outside China. As a holding company, its key assets are its ownership interests in its subsidiaries, and its records (including theresolutions of its board of directors and the resolutions of its shareholders) are maintained, outside China. In addition, we are not aware of anyoffshore holding companies with a similar corporate structure as ours ever having been deemed a PRC “resident enterprise” by the PRC taxauthorities. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain withrespect to the interpretation of the term “de facto management body.”If the PRC tax authorities determine that Pinduoduo Inc. is a PRC resident enterprise for enterprise income tax purposes, we may berequired to withhold a 10% withholding tax from dividends we pay to our shareholders that are non-resident enterprises, including the holders ofour ADSs. In addition, non-resident enterprise shareholders (including our ADS holders) may be subject to a 10% PRC tax on gains realized on thesale or other disposition of ADSs or ordinary shares, if such income is treated as sourced from within China. It is unclear whether our non-PRCindividual shareholders (including our ADS holders) would be subject to any PRC tax on dividends or gains obtained by such non-PRC individualshareholders 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 wouldgenerally apply at a rate of 20% unless a reduced rate is available under an applicable tax treaty. However, it is also unclear whether non-PRCshareholders of Pinduoduo Inc. would be able to claim the benefits of any tax treaties between their country of tax residence and China in the eventthat Pinduoduo Inc. is treated as a PRC resident enterprise. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business inChina—If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable taxconsequences to us and our non-PRC shareholders or ADS holders.”Table of Contents119U.S. Federal Income Tax ConsiderationsThe following discussion is a summary of U.S. federal income tax considerations generally applicable to the ownership and disposition ofour 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 uponexisting U.S. federal income tax law, which is subject to differing interpretations and may be changed, possibly with retroactive effect. There canbe no assurance that the Internal Revenue Service (the “IRS”) or a court will not take a contrary position. This discussion does not address allaspects of U.S. federal income taxation that may be important to particular investors in light of their individual circumstances, including investorssubject 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, regulatedinvestment 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, orconstructively) 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 functionalcurrency other than the U.S. dollar, all of whom may be subject to tax rules that differ significantly from those summarized below. In addition, thisdiscussion 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 estatetax) 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.GeneralFor 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. federalincome 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 forU.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 whichis 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 substantialdecisions 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 ourADSs or Class A ordinary shares, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and theactivities of the partnership. Partnerships holding our ADSs or Class A ordinary shares and partners in such partnerships are urged to consult theirtax advisors as to the particular U.S. federal income tax consequences of an investment in our ADSs or Class A ordinary shares.For U.S. federal income tax purposes, a U.S. holder of ADSs will generally be treated as the beneficial owner of the underlying sharesrepresented 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 theunderlying shares represented by the ADSs. Accordingly, deposits or withdrawals of Class A ordinary shares for ADSs will generally not be subjectto U.S. federal income tax.Passive Foreign Investment Company ConsiderationsA non-U.S. corporation, such as our company, will be a “passive foreign investment company,” or “PFIC,” for U.S. federal income taxpurposes, 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 theproduction of passive income. Cash is categorized as a passive asset and the company’s unbooked intangibles associated with active businessactivities 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.Table of Contents120We will be treated as owning a proportionate share of the assets and earning a proportionate share of the income of any other corporationin 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 exerciseeffective control over the operation of such entity but also because we are entitled to substantially all of its economic benefits, and, as a result, weconsolidate 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 aPFIC for the taxable year ended December 31, 2021 and we do not expect to be classified as a PFIC in the current taxable year or for theforeseeable future.While we do not expect to be or become a PFIC in the current or the foreseeable future, the determination of whether we are or willbecome a PFIC will depend in part upon the value of our goodwill and other unbooked intangibles (which will depend upon the market price of ourADSs from time-to-time, which may be volatile). In particular, recent decline in the market price of our ADSs increased our risk of becoming aPFIC. The market price of our ADSs may continue to fluctuate considerably and, consequently, we cannot assure you of our PFIC status for anytaxable year. In estimating the value of our goodwill and other unbooked intangibles, we have taken into account our market capitalization. Amongother matters, if our market capitalization is less than anticipated or subsequently declines, we may be or become a PFIC for the current or futuretaxable 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, whichmay 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 orif 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 noassurance 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 suchU.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 thatwe 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 currenttaxable year or any subsequent taxable year are generally discussed below under “Passive Foreign Investment Company Rules.”DividendsSubject to the PFIC rules discussed below, any cash distributions paid on our ADSs or Class A ordinary shares (including the amount ofany tax withheld) out of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles, will generally beincludible 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 ofClass 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 ofU.S. federal income tax principles, we will generally report any distribution paid as a dividend for U.S. federal income tax purposes. Dividendsreceived on the ADSs or Class A ordinary shares will not be eligible for the dividends received deduction allowed to corporations.Table of Contents121Individuals and other non-corporate U.S. holders will generally be subject to tax at the lower capital gain tax rate applicable to “qualifieddividend income,” provided that certain conditions are satisfied, including that (1) our ADSs are readily tradable on an established securitiesmarket 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 thebenefit 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(but not our ordinary shares) are listed on the Nasdaq Global Select Market and is considered readily tradeable on an established securities marketin the United States. There can be no assurance that our ADSs will continue to be considered readily tradable on an established securities market inlater years. Since we do not expect that our Class A ordinary shares will be listed on established securities markets, we do not believe thatdividends 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 ofthe United States-PRC income tax treaty (which the U.S. Treasury Department has determined is satisfactory for this purpose) and in that case, wewould 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 incomefor 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 constitutepassive category income. In the event that we are deemed to be a PRC “resident enterprise” under the Enterprise Income Tax Law, a U.S. holdermay 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 inrespect of any foreign withholding taxes imposed on dividends received on ADSs or Class A ordinary shares. A U.S. holder who does not elect toclaim a foreign tax credit for foreign tax withheld may instead claim a deduction, for U.S. federal income tax purposes, in respect of suchwithholdings, 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 foreigntax credit are complex. U.S. holders are advised to consult their tax advisors regarding the availability of the foreign tax credit under their particularcircumstances.Sale or Other Disposition of ADSs or Class A Ordinary SharesSubject to the PFIC rules discussed below, a U.S. holder generally will recognize capital gain or loss upon the sale or other disposition ofADSs or Class A ordinary shares in an amount equal to the difference between the amount realized upon the disposition and the U.S. holder’sadjusted 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 havebeen 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 ofindividuals and other non-corporate U.S. holders generally are eligible for a reduced rate of taxation. The deductibility of a capital loss may besubject to limitations.In the event that we are treated as a PRC “resident enterprise” under the Enterprise Income Tax Law and gain from the disposition of theADSs 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 theUnited States and the PRC may elect to treat the gain as PRC source income. Pursuant to recently issued United States Treasury Regulations,however, if a U.S. Holder is not eligible for the benefits of the Treaty or does not elect to apply the Treaty, then such holder may not be able toclaim a foreign tax credit arising from any PRC tax imposed on the disposition of ADSs or ordinary shares. The rules regarding foreign tax creditsand deduction of foreign taxes are complex. U.S. Holders should consult their tax advisors regarding the availability of a foreign tax credit ordeduction in light of their particular circumstances, including their eligibility for benefits under the Treaty and the potential impact of the recentlyissued United States Treasury Regulations.Passive Foreign Investment Company RulesIf 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. holdermakes 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 (whichgenerally 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 thethree 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 onthe 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 ordinaryshares;Table of Contents122●such amount allocated to the current taxable year and any taxable years in the U.S. holder’s holding period prior to the first taxableyear 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 forthat 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 forpurposes 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 ofour 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 respectto such stock, provided that such stock is regularly traded on a qualified exchange or other market, as defined in the applicable United StatesTreasury Regulations. For those purposes, our ADSs, but not our ordinary shares, are listed on the Nasdaq Global Market, which is a qualifiedexchange. We anticipate that our ADSs should 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 electionwith 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 anyinvestments held by us that are treated as an equity interest in a PFIC for U.S. federal income tax purposes.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 incomefor 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 taxbasis 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 suchADSs 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-marketelection. 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-marketelection. 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 ordinaryincome 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 allsubsequent taxable years unless the ADSs are no longer regularly traded on a qualified exchange or the IRS consents to the revocation of theelection. 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 GlobalSelect Market. Consequently, if a U.S. holder holds Class A ordinary shares that are not represented by ADSs, such holder generally will not beeligible 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 notbe 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, wouldresult 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 berequired to file an annual IRS Form 8621. Each U.S. holder is advised to consult its tax advisors regarding the potential tax consequences to suchholder if we are or become a PFIC, including the possibility of making a mark-to-market election.F. Dividends and Paying AgentsNot applicable.G. Statement by ExpertsNot applicable.Table of Contents123H. Documents on DisplayWe are subject to periodic reporting and other informational requirements of the Exchange Act as applicable to foreign private issuers, andare required to file reports and other information with the SEC. Specifically, we are required to file annually an annual report on Form 20-F withinfour 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 theSEC’s website at www.sec.gov. As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing andcontent of quarterly reports and proxy statements, and officers, directors and principal shareholders are exempt from the reporting and short-swingprofit recovery provisions contained in Section 16 of the Exchange Act.We will furnish Deutsche Bank Trust Company Americas, the depositary of our ADSs, with our annual reports, which will include areview 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 containedin 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 athttp://investor.pinduoduo.com. In addition, we will provide hardcopies of our annual report free of charge to shareholders and ADS holders uponrequest.I. Subsidiary InformationNot applicable.Item 11. Quantitative and Qualitative Disclosures about Market RiskForeign exchange riskSubstantially all of our revenues and expenses are denominated in RMB. We do not believe that we currently have any significant directforeign exchange risk and have not used any derivative financial instruments to hedge exposure to such risk. Although our exposure to foreignexchange risks should be limited in general, the value of your investment in our ADSs will be affected by the exchange rate between U.S. dollarand 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. TheRenminbi 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. dollarwould have an adverse effect on the RMB amount we receive from the conversion. Conversely, if we decide to convert Renminbi into U.S. dollarsfor the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollaragainst the Renminbi would have a negative effect on the U.S. dollar amounts available to us.Interest rate riskOur exposure to interest rate risk primarily relates to the interest income generated by excess cash, which is mostly held in interest-bearingbank deposits, restricted cash and short-term investments. Interest-earning instruments carry a degree of interest rate risk. We have not beenexposed to material risks due to changes in interest rates, and we have not used any derivative financial instruments to manage our interest riskexposure.InflationTo 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 2019, 2020 and 2021 were increases of 4.5%, 0.2%, and 1.5%,respectively. Although we have not been materially affected by inflation in the past, we can provide no assurance that we will not be affected byhigher rates of inflation in China in the future.Table of Contents124Item 12. Description of Securities Other than Equity SecuritiesA. Debt SecuritiesNot applicable.B. Warrants and RightsNot applicable.C. Other SecuritiesNot applicable.D. American Depositary SharesFees and Expenses Our ADS Holders May Have to PayAs an ADS holder, you will be required to pay the following service fees to the depositary bank and certain taxes and governmentalcharges (in addition to any applicable fees, expenses, taxes and other governmental charges payable on the deposited securities represented by anyof your ADSs):Service Fees· To any person to which ADSs are issued or to any person to which adistribution is made in respect of ADS distributions pursuant to stock dividendsor other free distributions of stock, bonus distributions, stock splits or otherdistributions (except where converted to cash) Up to US$0.05 per ADS issued· Cancellation of ADSs, including the case of termination of the depositagreement 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 cashproceeds 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 additionalADSs Up to US$0.05 per ADS held· Depositary services Up to US$0.05 per ADS held on the applicable record date(s)established by the depositary bankAs an ADS holder, you will also be responsible to pay certain fees and expenses incurred by the depositary bank and certain taxes andgovernmental charges (in addition to any applicable fees, expenses, taxes and other governmental charges payable on the deposited securitiesrepresented 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 ordinaryshares in the Cayman Islands (i.e., upon deposit and withdrawal of Class A ordinary shares).●Expenses incurred for converting foreign currency into U.S. dollars.●Expenses for cable, telex and fax transmissions and for delivery of securities.Table of Contents125●Taxes and duties upon the transfer of securities, including any applicable stamp duties, any stock transfer charges or withholdingtaxes (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 requirementsapplicable 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 (onbehalf of their clients) receiving the newly issued ADSs from the depositary bank and by the brokers (on behalf of their clients) delivering theADSs to the depositary bank for cancellation. The brokers in turn charge these fees to their clients. Depositary fees payable in connection withdistributions of cash or securities to ADS holders and the depositary services fee are charged by the depositary bank to the holders of record ofADSs 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 ofdistributable property to pay the fees. In the case of distributions other than cash (i.e., share dividends, rights), the depositary bank charges theapplicable fee to the ADS record date holders concurrent with the distribution. In the case of ADSs registered in the name of the investor (whethercertificated or uncertificated in direct registration), the depositary bank sends invoices to the applicable record date ADS holders. In the case ofADSs 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. Thebrokers and custodians who hold their clients’ ADSs in DTC accounts in turn charge their clients’ accounts the amount of the fees paid to thedepositary banks.In the event of refusal to pay the depositary fees, the depositary bank may, under the terms of the deposit agreement, refuse the requestedservice 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 UsThe depositary has agreed to make payments to us and reimburse us for certain costs and expenses upon such rates and terms as agreedbetween the depository and us. Pursuant to such agreement, we received from the depository US$3.8 million, after deduction of applicable U.S.taxes, in the year ended December 31, 2021.PART IIItem 13. Defaults, Dividend Arrearages and DelinquenciesNone.Item 14. Material Modifications to the Rights of Security Holders and Use of ProceedsNone.Item 15. Controls and ProceduresEvaluation of Disclosure Controls and ProceduresOur management, under the supervision and with the participation of our chief executive officer and vice president of finance, carried outan evaluation of the effectiveness of our disclosure controls and procedures, which is defined in Rules 13a-15(e) of the Exchange Act, as ofDecember 31, 2021. Based upon that evaluation, our management, with the participation of our chief executive officer and vice president offinance, has concluded that, as of the end of the period covered by this annual report, our disclosure controls and procedures were effective inensuring 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 inthe reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executiveofficer and vice president of finance, as appropriate, to allow timely decisions regarding required disclosure.Table of Contents126Management’s Annual Report on Internal Control over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules13a-15 (f) under the Exchange Act. Our management, with the participation of our chief executive officer, evaluated the effectiveness of ourinternal control over financial reporting based on criteria established in the framework in Internal Control-Integrated Framework (2013) issued bythe Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management has concluded that ourinternal control over financial reporting was effective as of December 31, 2021.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections ofany evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, orthat 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 controlover financial reporting as of December 31, 2021, as stated in its report, which appears on page F-4 of this annual report.Changes in Internal Control over Financial ReportingOther than as described above, there were no changes in our internal controls over financial reporting that occurred during the periodcovered by this annual report on Form 20-F that have materially affected, or are reasonably likely to materially affect, our internal control overfinancial reporting.Item 16A. Audit Committee Financial ExpertOur board of directors has determined that Mr. Anthony Kam Ping Leung, an independent director (under the standards set forth in NasdaqStock Market Rule 5605(a)(2) and Rule 10A-3 under the Exchange Act) and member of our audit committee, is an audit committee financialexpert.Item 16B. Code of EthicsOur 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 ServicesThe following table sets forth the aggregate fees by categories specified below in connection with certain professional services renderedby Ernst & Young Hua Ming LLP, our principal external auditors, for the periods indicated.20202021 US$ US$(in thousands)Audit fees(1) 2,170 3,099All other fees(2) 43 71(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 financialstatements, issue of comfort letters in connection with our initial public offering, follow-on offering, and issuance of unsecured senior notes, assistance with and review ofdocuments 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 “AuditFees.”The policy of our audit committee is to pre-approve all audit and non-audit services provided by Ernst & Young Hua Ming LLP, includingaudit services, audit-related services, tax services and other services as described above, other than those for de minimis services which areapproved by the audit committee prior to the completion of the audit.Item 16D. Exemptions from the Listing Standards for Audit CommitteesNot applicable.Table of Contents127Item 16E. Purchases of Equity Securities by the Issuer and Affiliated PurchasersNot applicable.Item 16F. Change in Registrant’s Certifying AccountantNot applicable.Item 16G. Corporate GovernanceAs a Cayman Islands exempted company listed on Nasdaq Stock Market, we are subject to the Nasdaq corporate governance listingstandards. However, Nasdaq rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certaincorporate governance practices in the Cayman Islands, which is our home country, may differ significantly from the Nasdaq corporate governancelisting standards. Although we did not rely on the home country practice exemption in 2021, we have relied on the exemption in prior years. Wemay also opt to rely on additional home country practice exemptions in the future. As a result, our shareholders may be afforded less protectionthan 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 an exempted company incorporated in the Cayman Islands, we arepermitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the Nasdaq corporategovernance listing standards; these practices may afford less protection to shareholders than they would enjoy if we complied fully with the Nasdaqcorporate governance listing standards.”Item 16H. Mine Safety DisclosureNot applicable.Item 16I. Disclosure Regarding Foreign Jurisdictions That Prevent InspectionsNot applicable.PART IIIItem 17. Financial StatementsWe have elected to provide financial statements pursuant to Item 18.Item 18. Financial StatementsThe consolidated financial statements of Pinduoduo Inc., its subsidiaries and its consolidated variable interest entity are included at theend of this annual report.Item 19. ExhibitsExhibit Number Description of Document1.1 Ninth Amended and Restated Memorandum and Articles of Association of the Registrant (incorporated herein by reference toExhibit 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)) 2.1 Registrant’s Specimen American Depositary Receipt (included in Exhibit 2.3) 2.2 Registrant’s Specimen Certificate for Class A Ordinary Shares (incorporated herein by reference to Exhibit 4.2 to theregistration statement on Form F-1/A filed with the Securities and Exchange Commission on July 16, 2018 (File No. 333-226014)) Table of Contents128Exhibit Number Description of Document2.3 Deposit Agreement by and among the Registrant, the depositary and the holders and beneficial owners of the AmericanDepositary Receipts issued thereunder dated July 25, 2018 (incorporated herein by reference to Exhibit 4.3 to the registrationstatement on Form F-1 filed with the Securities and Exchange Commission on February 5, 2019 (File No. 333-229523)) 2.4 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))2.5Indenture 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))2.6Indenture dated as of November 20, 2020 between Pinduoduo Inc. and Deutsche Bank Trust Company Americas, as trustee(incorporated herein by reference to Exhibit 2.6 to the annual report on Form 20-F filed on April 30, 2021 (File No. 001-38591))2.7First Supplemental Indenture dated as of November 20, 2020 between Pinduoduo Inc. and Deutsche Bank Trust CompanyAmericas, as trustee, supplementing the Indenture dated as of November 20, 2020 between Pinduoduo Inc. and Deutsche BankTrust Company Americas (incorporated herein by reference to Exhibit 2.7 to the annual report on Form 20-F filed on April 30,2021 (File No. 001-38591))2.8* Description of Securities2.9Description of the Registrant’s US$2,000,000,000 0.00% Convertible Senior Notes Due 2025 (incorporated herein by referenceto (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 ofthe Notes” in the prospectus supplement, in the form filed by the Registrant with the Securities and Exchange Commission onNovember 19, 2020 pursuant to Rule 424(b) under the Securities Act of 1933, as amended)4.1 2015 Global Share Plan (incorporated herein by reference to Exhibit 10.1 to the registration statement on Form F-1 filed withthe Securities and Exchange Commission on June 29, 2018 (File No. 333-226014)) 4.2 Amended and Restated 2018 Share Incentive Plan (incorporated herein by reference to Exhibit 4.2 to the annual report on Form20-F filed on April 30, 2021 (File No. 001-38591)) 4.3 Form of Indemnification Agreement between the Registrant and its directors and executive officers (incorporated herein byreference to Exhibit 10.2 to the registration statement on Form F-1 filed with the Securities and Exchange Commission onJune 29, 2018 (File No. 333-226014)) 4.4 Form of Employment Agreement between the Registrant and its executive officers(incorporated herein by reference toExhibit 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)) 4.5 English translation of the Shareholders’ Voting Rights Proxy Agreement among Hangzhou Weimi, Hangzhou Aimi and theshareholders of Hangzhou Aimi dated July 15, 2020 (incorporated herein by reference to Exhibit 4.5 to the annual report onForm 20-F filed on April 30, 2021 (File No. 001-38591))4.6 English translation of the Equity Pledge Agreement among Hangzhou Weimi, Hangzhou Aimi and the shareholders ofHangzhou Aimi dated July 15, 2020 (incorporated herein by reference to Exhibit 4.6 to the annual report on Form 20-F filed onApril 30, 2021 (File No. 001-38591)) 4.7 English translation of the Exclusive Consulting and Services Agreement between Hangzhou Weimi and Hangzhou Aimi datedJune 5, 2015 (incorporated herein by reference to Exhibit 10.6 to the registration statement on Form F-1 filed with the Securitiesand Exchange Commission on June 29, 2018 (File No. 333-226014))Table of Contents129Exhibit Number Description of Document 4.8 English translation of the Exclusive Option Agreement among Hangzhou Weimi, Hangzhou Aimi and the shareholders ofHangzhou Aimi dated July 15, 2020 (incorporated herein by reference to Exhibit 4.8 to the annual report on Form 20-F filed onApril 30, 2021 (File No. 001-38591)) 4.9 English translation of the Spousal Consent Letter (incorporated herein by reference to Exhibit 4.9 to the annual report on Form20-F filed on April 30, 2021 (File No. 001-38591)) 4.10 English translation of the Strategic Cooperation Framework Agreement by and between the Registrant and an affiliate ofTencent Holdings Limited dated February 27, 2018 (incorporated herein by reference to Exhibit 10.13 to the registrationstatement on Form F-1 filed with the Securities and Exchange Commission on June 29, 2018 (File No. 333-226014))8.1* List of Subsidiaries and Consolidated Variable Interest Entity of the Registrant 11.1 Code of Business Conduct and Ethics of the Registrant (incorporated herein by reference to Exhibit 99.1 to the registrationstatement 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 200213.2** CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 15.1* Consent of King & Wood Mallesons15.2*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 Document104Cover Page Interactive Data File (embedded within the Inline XBRL document)* Filed with this Annual Report on Form 20-F.** Furnished with this Annual Report on Form 20-F.Table of Contents130SIGNATURESThe registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized theundersigned to sign this annual report on its behalf.Pinduoduo Inc.By:/s/ Lei ChenName:Lei ChenTitle:Chairman of the Board of Directorsand Chief Executive OfficerDate: April 25, 2022Table of ContentsF-1PINDUODUO INC.Index to Consolidated Financial StatementsContents Page(s) Reports of Independent Registered Public Accounting Firm (PCAOB ID: 1408)F-2 – F-4 Consolidated Balance Sheets as of December 31, 2020 and 2021F-5 – F-6 Consolidated Statements of Comprehensive Income/(Loss) for the Years Ended December 31, 2019, 2020 and 2021F-7 Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2019, 2020 and 2021F-8 – F-10 Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2020 and 2021F-11 Notes to Consolidated Financial StatementsF-12 – F-49Table of ContentsF-2REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Shareholders and the Board of Directors of Pinduoduo Inc.Opinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of Pinduoduo Inc. (the Company) as of December 31, 2020 and 2021, the relatedconsolidated statements of comprehensive (loss)/income, shareholders’ equity and cash flows for each of the three years in the period endedDecember 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidatedfinancial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2021, and the results ofits operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally acceptedaccounting principles.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), theCompany’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-IntegratedFramework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated April 25,2022 expressed an unqualified opinion thereon.Basis for OpinionThese financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’sfinancial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent withrespect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and ExchangeCommission 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 obtainreasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits includedperforming procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performingprocedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in thefinancial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well asevaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.Table of ContentsF-3Critical Audit MatterThe critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicatedor required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statementsand (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matter does not alter in any wayour opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providinga separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.Classification of Incentives Provided to the ConsumersDescription of theMatterAs described in Note 2 to the consolidated financial statements, to promote its online marketplace and attract moreregistered consumers, the Company at its own discretion provides 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. Theseincentives are primarily used by the consumers to purchase merchandises provided on the Company’s online marketplace atreduced prices or to redeem cash from the Company. Despite the absence of any explicit contractual obligations toincentivize the non-customer consumers on behalf of the merchants, the Company further evaluated the varying features ofdifferent incentive programs to determine whether the incentives represent implicit obligations to consumers on behalf ofmerchants. Based on that evaluation, the Company determined that incentives provided to the consumers are not consideredas payments to the merchant-customers.Auditing the classification of the Company’s incentives provided to consumers was complex due to judgement involved inanalyzing the varying features in the different incentive programs. This included evaluating the Company’s determinationof whether the incentives provided represent implicit obligations to the consumers on behalf of the merchants and if so, theincentives should be considered as payments to customers. Such determination is used in the process of evaluating theclassification of the costs associated with the incentives as marketing expenses or net of revenues.How weaddressed thematter in ourauditWe obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’sclassification of the incentives. For example, we tested the controls over the management’s review of the analysis of thevarying features in the incentive programs for the appropriate classification of the incentives.To audit the classification of incentives provided to the consumers, we compared the incentive programs and theirrespective features documented in management’s analysis to the program terms and conditions presented to the consumersand the merchants by the Company on its platform. We also evaluated management’s judgement applied in determiningwhether the terms and conditions underlying the incentive programs create any implicit obligations of the Company toincentivize the consumers on behalf of the merchants. In addition, we assessed the adequacy of the Company’s disclosuresincluded in Note 2 to the consolidated financial statements regarding the classification of incentives provided to theconsumers./s/ Ernst & Young Hua Ming LLPWe have served as the Company’s auditor since 2018.Shanghai, the People’s Republic of ChinaApril 25, 2022Table of ContentsF-4REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Shareholders and the Board of Directors of Pinduoduo Inc.Opinion on Internal Control Over Financial ReportingWe have audited Pinduoduo Inc.’s internal control over financial reporting as of December 31, 2021 based on criteria established in InternalControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (theCOSO criteria). In our opinion, Pinduoduo Inc. (the Company) maintained, in all material respects, effective internal control over financialreporting as of December 31, 2021, based on the COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), theconsolidated balance sheets of the Company as of December 31, 2020 and 2021, and the related consolidated statements of comprehensive(loss)/income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2021 and the related notes(collectively referred to as the “consolidated financial statements”) and our report dated April 25, 2022 expressed an unqualified opinion thereon.Basis for OpinionThe Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of theeffectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control OverFinancial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. Weare a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with theU.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 obtainreasonable 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, testingand evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.Definition and Limitations of Internal Control Over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Acompany’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance thattransactions 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 thecompany; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate./s/ Ernst & Young Hua Ming LLPShanghai, the People’s Republic of ChinaApril 25, 2022Table of ContentsF-5PINDUODUO INC.CONSOLIDATED BALANCE SHEETS (Amounts in thousands of RMB and US$, except for number of shares and per share data)As of December 31, Notes20202021 RMB RMB US$ASSETSCurrent assets Cash and cash equivalents 22,421,189 6,426,7151,008,492Restricted cash 52,422,447 59,617,2569,355,248Receivables from online payment platforms 729,548 673,737105,724Short-term investments 464,551,094 86,516,61813,576,345Amounts due from related parties 184,240,069 4,250,155666,942Prepayments and other current assets 55,159,531 3,424,687537,408Total current assets 149,523,878 160,909,16825,250,159Non-current assets Property, equipment and software, net 6202,853 2,203,323 345,749Intangible assets71,276,751701,220110,037Right-of-use assets8629,827938,537147,277Deferred tax assets17—31,5044,944Other non-current assets97,275,30516,425,9662,577,593Total non-current assets 9,384,736 20,300,550 3,185,600Total Assets 158,908,614 181,209,718 28,435,759LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Amounts due to related parties (including amounts due to related parties of the consolidated VIE and itssubsidiaries without recourse to the primary beneficiary of RMB3,385,863 and RMB1,962,029(US$307,885) as of December 31, 2020 and 2021, respectively) 18 3,385,863 1,963,007 308,039Customer advances and deferred revenues (including customer advances and deferred revenues of theconsolidated VIE and its subsidiaries without recourse to the primary beneficiary of RMB2,422,907 andRMB1,158,738 (US$181,831) as of December 31, 2020 and 2021, respectively) 2,423,190 1,166,764 183,091Payable to merchants (including payable to merchants of the consolidated VIE and its subsidiaries withoutrecourse to the primary beneficiary of RMB53,417,259 and RMB61,947,517 (US$9,720,917) as ofDecember 31, 2020 and 2021, respectively) 53,833,981 62,509,714 9,809,138Accrued expenses and other liabilities (including accrued expenses and other liabilities of the consolidated VIEand its subsidiaries without recourse to the primary beneficiary of RMB6,999,827 and RMB9,360,166(US$1,468,814) as of December 31, 2020 and 2021, respectively) 10 11,193,372 14,085,513 2,210,324Merchant deposits (including merchant deposits of the consolidated VIE and its subsidiaries without recourse tothe primary beneficiary of RMB10,926,319 and RMB13,360,409 (US$2,096,540) as of December 31, 2020and 2021, respectively) 10,926,319 13,577,552 2,130,614Short-term borrowings (including short-term borrowings of the consolidated VIE and its subsidiaries withoutrecourse to the primary beneficiary of RMB1,866,316 and nil as of December 31, 2020 and 2021,respectively)111,866,316——Lease liabilities (including lease liabilities of the consolidated VIE and its subsidiaries without recourse to theprimary beneficiary of RMB134,131 and RMB138,667 (US$21,760) as of December 31, 2020 and 2021,respectively)8253,036427,16467,031Total current liabilities 83,882,077 93,729,714 14,708,237Non-current liabilitiesConvertible bonds1214,432,79211,788,9071,849,937Lease liabilities (including lease liabilities of the consolidated VIE and its subsidiaries without recourse to theprimary beneficiary of RMB366,834 and RMB305,068 (US$47,872) as of December 31, 2020 and 2021,respectively)8414,939544,26385,407Deferred tax liabilities (including deferred tax liabilities of the consolidated VIE and its subsidiaries withoutrecourse to the primary beneficiary of nil and RMB19,217 (US$3,016) as of December 31, 2020 and 2021,respectively)17—31,2914,910Other non-current liabilities2,918996156Total non-current liabilities14,850,64912,365,4571,940,410Total liabilities98,732,726106,095,17116,648,647Commitments and contingencies22The accompanying notes are an integral part of the consolidated financial statements.Table of ContentsF-6PINDUODUO INC.CONSOLIDATED BALANCE SHEETS (CONTINUED) (Amounts in thousands of RMB and US$, except for number of shares and per share data)As of December 31, Notes20202021 RMB RMB US$Shareholders’ equityClass A ordinary shares (US$0.000005 par value; 77,300,000,000 sharesauthorized, 3,545,065,888 and 5,057,542,676 shares issued and outstandingas of December 31, 2020 and 2021, respectively)14 115 161 25Class B ordinary shares (US$0.000005 par value; 2,200,000,000 sharesauthorized, 1,409,744,080 and nil shares issued and outstanding as ofDecember 31, 2020 and 2021, respectively)14 44 — —Additional paid-in capital 86,698,660 95,340,819 14,961,055Accumulated other comprehensive loss (1,047,728) (2,519,900) (395,427)Accumulated deficits (25,475,203) (17,706,533) (2,778,541)Total shareholders’ equity 60,175,888 75,114,547 11,787,112Total liabilities and shareholders’ equity 158,908,614 181,209,718 28,435,759The accompanying notes are an integral part of the consolidated financial statements.Table of ContentsF-7PINDUODUO INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS) (Amounts in thousands of RMB and US$, except for number of shares and per share data)For the years ended December 31, Notes 2019 2020 2021 RMB RMB RMB US$Revenues 1530,141,886 59,491,865 93,949,939 14,742,796Costs of revenues (including services received from relatedparties of RMB1,424,786, RMB4,570,292 andRMB5,166,381 (US$810,718) for the years endedDecember 31, 2019, 2020 and 2021, respectively) (6,338,778) (19,278,641) (31,718,093) (4,977,261)Gross profit 23,803,108 40,213,224 62,231,846 9,765,535Sales and marketing expenses (including services receivedfrom a related party of nil, 4,166,230 and RMB2,857,063(US$448,336) for the years ended December 31, 2019, 2020and 2021, respectively) (27,174,249) (41,194,599) (44,801,720) (7,030,368)General and administrative expenses (1,296,712) (1,507,297) (1,540,774) (241,781)Research and development expenses (including servicesreceived from related parties of RMB873,288,RMB1,850,321 and RMB604,605 (US$94,876) for the yearsended December 31, 2019, 2020 and 2021, respectively) (3,870,358) (6,891,653) (8,992,590) (1,411,134)Total operating expenses (32,341,319) (49,593,549) (55,335,084) (8,683,283)Operating (loss)/ profit (8,538,211) (9,380,325) 6,896,762 1,082,252Interest and investment income, net 1,541,825 2,455,366 3,061,662 480,442Interest expenses(145,858)(757,336)(1,231,002)(193,171)Foreign exchange gain 63,179 225,197 71,750 11,259Other income, net 82,786 193,702 656,255 102,981(Loss)/ profit before income tax and share of results ofequity investees (6,996,279) (7,263,396) 9,455,427 1,483,763Income tax expenses17——(1,933,585)(303,422)Share of results of equity investees 928,676 83,654 246,828 38,733Net (loss)/ income (6,967,603) (7,179,742) 7,768,670 1,219,074Net (loss)/ income (6,967,603) (7,179,742) 7,768,670 1,219,074(Loss)/ earnings per share: 19 Basic (1.51) (1.51) 1.55 0.24Diluted (1.51) (1.51) 1.36 0.21Shares used in (loss)/ earnings per share computation: Basic 4,627,278,394 4,768,343,300 5,012,651,334 5,012,651,334Diluted 4,627,278,394 4,768,343,300 5,713,764,297 5,713,764,297Other comprehensive income/(loss), net of tax of nil Foreign currency translation difference, net of tax of nil 412,447 (2,495,958) (1,472,172) (231,016)Comprehensive (loss)/ income (6,555,156) (9,675,700) 6,296,498 988,058The accompanying notes are an integral part of the consolidated financial statements.Table of ContentsF-8PINDUODUO INC.CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY(Amounts in thousands of RMB and US$, except for number of shares and per share data) Accumulated Number ofAdditionalotherordinaryOrdinarypaid-incomprehensiveAccumulatedTotal shareholders’Notessharessharescapitalincomedeficitsequity RMB RMB RMB RMB RMBBalance as of January 1, 2019 4,455,688,688 142 29,114,527 1,035,783 (11,327,858) 18,822,594Net loss — — — — (6,967,603) (6,967,603)Foreign currency translation difference — — — 412,447 — 412,447Follow-on offering14193,740,00067,993,822——7,993,828Equity component of convertible bonds— — 1,827,894 — — 1,827,894Shares issued to depository bank19600,000—————Exercise of share-based awards567,636—————Settlement of share-basedcompensation with shares held bydepository bank 19(567,636) — — — — —Share-based compensation 16— — 2,557,706 — — 2,557,706Balance as of December 31, 20194,650,028,68814841,493,9491,448,230(18,295,461)24,646,866The accompanying notes are an integral part of the consolidated financial statements.Table of ContentsF-9PINDUODUO INC.CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (CONTINUED)(Amounts in thousands of RMB and US$, except for number of shares and per share data) Accumulated Number ofAdditionalotherordinaryOrdinarypaid-incomprehensiveAccumulatedTotal shareholders’Notessharessharescapitalincome/(loss)deficitsequity RMB RMB RMB RMB RMBBalance as of January 1, 2020 4,650,028,688 148 41,493,949 1,448,230 (18,295,461)24,646,866Net loss — — — — (7,179,742)(7,179,742)Foreign currency translation difference — — — (2,495,958) —(2,495,958)Issuance of ordinary shares for privateplacements14150,810,912511,063,334——11,063,339Follow-on offering 14132,020,000 5 26,805,433 — —26,805,438Conversion of the convertible bondsinto ordinary shares129,900,3681317,541——317,542Equity component of convertible bonds12——3,405,360——3,405,360Shares issued to depository bank1912,050,000—————Exercise of share-based awards 4,950,492— — — — —Settlement of share-basedcompensation with shares held bydepository bank 19(4,950,492) — — — — —Share-based compensation16——3,613,043——3,613,043Balance as of December 31, 20204,954,809,96815986,698,660(1,047,728)(25,475,203)60,175,888The accompanying notes are an integral part of the consolidated financial statements.Table of ContentsF-10PINDUODUO INC.CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (CONTINUED)(Amounts in thousands of RMB and US$, except for number of shares and per share data) Accumulated Number ofAdditionalotherordinaryOrdinarypaid-incomprehensiveAccumulatedTotal shareholders’Notes sharessharescapitallossdeficitsequityRMBRMBRMBRMBRMBBalance as of January 1, 2021 4,954,809,968 159 86,698,660(1,047,728)(25,475,203) 60,175,888Net income — — ——7,768,670 7,768,670Foreign currency translation difference — — —(1,472,172)— (1,472,172)Conversion of the convertible bondsinto ordinary shares1262,732,70823,867,054——3,867,056Shares issued to depository bank1940,000,000—————Exercise of share-based awards24,395,952—375——375Settlement of share-basedcompensation with shares held bydepository bank19(24,395,952)—————Share-based compensation 16— — 4,774,730—— 4,774,730Balance as of December 31, 2021 5,057,542,676 161 95,340,819(2,519,900)(17,706,533) 75,114,547Balance as of December 31, 2021(US$)25 14,961,055(395,427)(2,778,541) 11,787,112The accompanying notes are an integral part of the consolidated financial statements.Table of ContentsF-11PINDUODUO INC.CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands of RMB and US$, except for number of shares and per share data))For the years ended December 31, 201920202021 RMB RMB RMB US$CASH FLOW FROM OPERATING ACTIVITIES Net (loss)/income (6,967,603) (7,179,742) 7,768,670 1,219,074Adjustments to reconcile net (loss)/income to net cash provided by operating activities:Interest expense145,858757,3361,231,002193,171Allowance for credit losses11,78243,43449,3007,736Depreciation and amortization 637,831 651,523 1,495,380 234,658Deferred income tax, net——(213)(34)Amortization of right-of-use assets73,206148,945348,86354,744Interest and investment gain, net (209,580) (469,486) (146,972) (23,063)Loss/(gain) on disposal of property and equipment 175 24 (258) (40)Share-based compensation 2,557,706 3,613,043 4,774,730 749,259Foreign exchange gain(5,380)(225,197)(71,750)(11,259)Share of results of equity investees(28,676)(83,654)(246,828)(38,733)Fair value change of investments—(104,068)22,1703,479Gain on extinguishment of convertible bonds—(5,188)(2,788)(437)Changes in operating assets and liabilities: Receivables from online payment platforms (803,388) 321,426 55,811 8,758Amounts due from related parties (886,863) (1,636,541) (10,086) (1,583)Prepayments and other current assets 12,449 (4,048,536) 1,744,645 273,773Customer advances and deferred revenues 414,488 1,817,220 (1,256,426) (197,161)Amounts due to related parties 1,024,779 1,882,971 (1,422,856) (223,277)Payable to merchants 12,650,833 23,934,151 8,686,493 1,363,100Accrued expenses and other liabilities 2,648,869 5,849,148 3,492,038 547,979Merchant deposits3,652,6393,085,4072,651,233416,036Lease liabilities(46,067)(137,936)(354,123)(55,570)Other non-current assets(69,471)(13,182)(23,102)(3,625)Other non-current liabilities 7,389 (4,471) (1,922) (302)Net cash provided by operating activities 14,820,976 28,196,627 28,783,011 4,516,683CASH FLOW FROM INVESTING ACTIVITIES Purchase of short-term investments(52,451,615)(86,438,068)(116,639,550)(18,303,291)Proceeds from sales of short-term investments 24,797,630 55,083,390 97,547,038 15,307,259Purchase of long-term investments(214,100)(6,722,228)(13,628,052)(2,138,539)Purchase of property, equipment and software and intangible assets(27,436)(43,046)(3,287,232)(515,838)Proceeds from disposal of property and equipment4755139462Loans to a related party(459,632)(238,000)——Repayments from third parties35,000———Others——445,03769,836Net cash used in investing activities (28,319,678) (38,357,901) (35,562,365) (5,580,511)CASH FLOW FROM FINANCING ACTIVITIES Net proceeds from the follow-on offerings 7,993,828 26,805,438 — —Proceeds from the private placements—11,063,339——Net proceeds from the issuance of convertible bonds6,963,88113,024,199——Proceeds from short-term borrowings897,0221,828,923——Repayment of short-term borrowings—(922,897)(1,875,472)(294,303)Others—(6)31850Net cash provided by/ (used in) financing activities 15,854,731 51,798,996 (1,875,154) (294,253)Effect of exchange rate changes on cash, cash equivalents and restricted cash 450,142 (139,943) (145,157) (22,779)Increase/(decrease) in cash, cash equivalents and restricted cash 2,806,171 41,497,779 (8,799,665) (1,380,860)Cash, cash equivalents and restricted cash at beginning of the year 30,539,686 33,345,857 74,843,636 11,744,600Cash, cash equivalents and restricted cash at end of the year 33,345,857 74,843,636 66,043,971 10,363,740Supplement disclosure of cash flow information： Interest received 1,211,443 1,881,812 2,936,860 460,857Supplement disclosure of non-cash operating activities：Recognition of right-of-use assets and lease liabilities632,507265,821704,142110,495Supplement disclosure of non-cash investing activities： Purchase of property, equipment and software included in accrued expenses and other liabilities2,160162,641194,38530,503Reconciliation of cash, cash equivalents and restricted cash:Cash and cash equivalents5,768,18622,421,1896,426,7151,008,492Restricted cash27,577,671 52,422,447 59,617,256 9,355,248Total cash, cash equivalents and restricted cash in the statements of cash flows 33,345,857 74,843,636 66,043,971 10,363,740The accompanying notes are an integral part of the consolidated financial statements.Table of ContentsPINDUODUO INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Amounts in thousands of RMB and US$, except for number of shares and per share data)F-121.OrganizationPinduoduo Inc. (the “Company”) was incorporated in the Cayman Islands on April 20, 2015 under the Cayman Islands Companies Law as anexempted company with limited liability. The Company through its consolidated subsidiaries, variable interest entity (the “VIE”) and thesubsidiaries of the VIE (collectively, the “Group”) are principally engaged in the merchandise sales and the provision of online marketplace tohelp 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 businessoperations through its VIE and subsidiaries of the VIE.As of December 31, 2021, the details of the Company’s major subsidiaries, consolidated VIE and the subsidiaries of the VIE are as follows: Percentage of Date ofPlace ofownership by thePrincipalEntityincorporationincorporationCompany activitiesDirect IndirectSubsidiaries: HongKong Walnut Street Limited (“Walnut HK”)April 28, 2015 Hong Kong 100% — Holding companyHangzhou Weimi Network Technology Co., Ltd.(“Hangzhou Weimi” or the “WFOE”)May 28, 2015 PRC 100% — Technology researchand developmentWalnut Street (Shanghai) Information Technology Co.,Ltd. (“Walnut Shanghai”)January 25,2018 PRC 100% — Technology researchand developmentShenzhen Qianhai Xinzhijiang Information TechnologyCo., Ltd. (“Xinzhijiang”)April 25, 2018PRC100% —E-commerce platformShanghai Yucan Information Technology Co., Ltd.September 14, 2020PRC100% —E-commerce platformVIE: Hangzhou Aimi Network Technology Co., Ltd.(“Hangzhou Aimi” or the “VIE”)April 14, 2015 PRC — 100% E-commerce platformVIE’s subsidiary: Shanghai Xunmeng Information Technology Co., Ltd.(“Shanghai Xunmeng”)January 9, 2014 PRC — 100% E-commerce platformTable of ContentsPINDUODUO INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(Amounts in thousands of RMB and US$, except for number of shares and per share data)F-131.Organization (Continued)The VIE agreementsThe PRC laws and regulations currently place certain restrictions on foreign ownership of companies that engage in internet content and otherrestricted businesses. To comply with PRC laws and regulations, the Group conducts the majority of its business in China through the VIE andsubsidiaries of the VIE. Despite the lack of technical majority ownership, the Company has effective control of the VIE through a series ofcontractual arrangements (the “Contractual Agreements”) and a parent-subsidiary relationship exists between the Company and the VIE. Theequity interests of the VIE are legally held by PRC individuals (the “Nominee Shareholders”). Through the Contractual Agreements, theNominee Shareholders of the VIE effectively assigned all of their voting rights underlying their equity interests in the VIE to the Company, viathe WFOE, and therefore, the Company has the power to direct the activities of the VIE that most significantly impact its economicperformance. The Company also has the right to receive economic benefits and obligations to absorb losses from the VIE, via the WFOE, thatpotentially 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.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 theWFOE, the Nominee Shareholders granted to the WFOE or its designees proxy of shareholders rights and voting rights of their respectiveequity 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 ofthe options to purchase all or part of the equity interests in the VIE will be the minimum amount of consideration permitted by the applicablePRC laws. Any proceeds received by the Nominee Shareholders from the exercise of the options shall be remitted to the WFOE or itsdesignated party, to the extent permitted under PRC laws. The Exclusive Option Agreements will remain in effect until all the equity interestsin VIE held by Nominee Shareholders are transferred to the WFOE or its designated party. The WFOE may terminate the Exclusive OptionAgreements 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 NomineeShareholders and the VIE, the Nominee Shareholders pledged all of their equity interests in the VIE to the WFOE as collateral to secure theirobligations under the Contractual Agreements. The Nominee Shareholders further undertake that they will remit any distributions inconnection with such shareholders’ equity interests in the VIE to the WFOE, to the extent permitted by PRC laws. If the VIE or any of theirNominee Shareholders breach any of their respective contractual obligations under the above agreements, the WFOE, as the pledgee, will beentitled to certain rights, including the right to sell, transfer or dispose of the pledged equity interest. The Nominee Shareholders of the VIEagree not to create any encumbrance on or otherwise transfer or dispose of their respective equity interest in the VIE, without the prior consentof the WFOE. The Equity Pledge Agreement will be valid until the VIE and the shareholders fulfill all the contractual obligations under theContractual Agreements in full and the pledged equity interests have been transferred to the WFOE and/or its designee.Table of ContentsPINDUODUO INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(Amounts in thousands of RMB and US$, except for number of shares and per share data)F-141.Organization (Continued)The VIE agreements (Continued)Shareholders’ Voting Rights Proxy Agreement Pursuant to the Shareholders’ Voting Rights Proxy Agreement entered into among theNominee Shareholders, the VIE and the WFOE (the ”Proxy Agreement”), the Nominee Shareholders authorized the WFOE or its designatedparty to (1) act on behalf of the Nominee Shareholders as exclusive agent and attorney with all respect to all matters concerning theshareholding including but not limited to attend shareholders’ meetings of the VIE; (2) exercise all the shareholders’ rights, including votingrights; and (3) designate and appoint on behalf of each shareholder and the senior management members of the VIE. The proxy remainsirrevocable and continuously valid from the date of execution so long as each Nominee Shareholder remains as a shareholder of the VIE. Theproxy agreements were subsequently reassigned to the Company.Exclusive Consulting and Services Agreement Pursuant to the Exclusive Consulting and Services Agreement (the ”Consulting and ServicesAgreement”), 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 theintellectual property rights developed in the performance of the agreement. In exchange for these services, WFOE is entitled to charge the VIEannual service fees which typically amount to what would be substantially all of the VIE’s pre-tax profits, resulting in a transfer ofsubstantially 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 beautomatically renewed every ten-year thereafter if the WFOE does not provide notice of termination to the Nominee Shareholders threemonths prior to expiration.Financial support undertaking letter The Company and the VIE entered into a financial support undertaking letter pursuant to which, theCompany is obligated and hereby undertakes to provide unlimited financial support to the VIE, to the extent permissible under the applicablePRC laws and regulations, whether or not any such operational loss is actually incurred. The Company will not request repayment of the loansor 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 VIEand the subsidiaries of the VIE, is not in violation with any applicable PRC laws and (ii) each of the VIE agreements is legal, valid, bindingand 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 andbusinesses 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 VIEare found in violation of any existing or future laws or regulations, or fail to obtain or maintain any of the required permits or approvals, therelevant 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 tocollect revenues, being required to restructure its operations, imposition of additional conditions or requirements with which the Group maynot be able to comply, or other regulatory or enforcement actions against the Group that could be harmful to its business. The imposition ofany 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 theimposition of any of these penalties causes the Company to lose the rights to direct the activities of the VIE or the right to receive theireconomic benefits, the Company would no longer be able to consolidate the VIE.Table of ContentsPINDUODUO INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(Amounts in thousands of RMB and US$, except for number of shares and per share data)F-151.Organization (Continued)The VIE agreements (Continued)In addition, if the VIE or the Nominee Shareholders fail to perform their obligations under the Contractual Agreements, the Group may have toincur substantial costs and expend resources to enforce the primary beneficiary’ rights under the contracts. The Group may have to rely onlegal 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 PRClegal procedures. Uncertainties in the PRC legal system could limit the Group’s ability to enforce these contractual arrangements. Under PRClaws, rulings by arbitrators are final, parties cannot appeal the arbitration results in courts, and prevailing parties may only enforce thearbitration awards in PRC courts through arbitration award recognition proceedings, which would incur additional expenses and delay. In theevent the Group is unable to enforce the Contractual Agreements, the primary beneficiary may not be able to exert effective control over itsVIE, and the Group’s ability to conduct its business may be negatively affected.The VIE and its subsidiaries contributed to 58.5%, 65.1% and 59.3% of the Group’s consolidated revenues for the years ended December 31,2019, 2020 and 2021, respectively. As of December 31, 2020 and 2021, the VIE and its subsidiaries accounted for an aggregate of 48.2% and48.7%, respectively of the consolidated total assets, and 80.5% and 83.2%, 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 andinternally-developed intangible assets including trademarks, patents, copyrights and domain names.Table of ContentsPINDUODUO INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(Amounts in thousands of RMB and US$, except for number of shares and per share data)F-161.Organization (Continued)The VIE agreements (Continued)The following tables represent the financial information for the VIE as of December 31, 2020 and 2021 and for the years ended December 31,2019, 2020 and 2021 before eliminating the inter-company balances and transactions between the VIE, the subsidiaries of the VIE and otherentities within the Group:As of December 31, 20202021 RMB RMB US$ASSETS Current assets Cash and cash equivalents 3,593,192 2,430,440 381,389Restricted cash 52,148,852 59,402,079 9,321,482Receivables from online payment platforms 726,063 668,953 104,973Short-term investments 7,026,442 12,306,340 1,931,133Amounts due from related parties (i) 3,999,612 4,198,391 658,819Amounts due from Group companies9,932,41840,425,8726,343,701Prepayments and other current assets 4,062,849 1,330,772 208,827Total current assets 81,489,428 120,762,847 18,950,324 Non-current assets Property, equipment and software, net 186,403 2,116,566 332,135Intangible asset—27,1634,262Right-of-use assets 468,387 417,455 65,508Deferred tax assets—19,9083,124Other non-current assets 4,380,476 5,300,938 831,833Total non-current assets 5,035,266 7,882,030 1,236,862Total assets86,524,694 128,644,877 20,187,186As of December 31, 20202021 RMB RMB US$LIABILITIES Current liabilities Amounts due to related parties (i) 3,385,863 1,962,029 307,885Amounts due to Group companies 9,759,506 27,978,153 4,390,383Customer advances and deferred revenues 2,422,907 1,158,738 181,831Payable to merchants 53,417,259 61,947,517 9,720,917Accrued expenses and other liabilities 6,999,827 9,360,166 1,468,814Merchant deposits 10,926,319 13,360,409 2,096,540Short-term borrowings1,866,316——Lease liabilities134,131138,66721,760Total current liabilities88,912,128115,905,67918,188,130Lease liabilities366,834305,06847,872Deferred tax liabilities—19,2173,016Total non-current liabilities 366,834 324,285 50,888Total liabilities 89,278,962 116,229,964 18,239,018Table of ContentsPINDUODUO INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(Amounts in thousands of RMB and US$, except for number of shares and per share data)F-171.Organization (Continued)The VIE agreements (Continued)For the years ended December 31, 201920202021 RMB RMB RMB US$Net revenues fromGroup companies 2,244,429 12,602,673 22,136,726 3,473,735External 17,630,903 38,749,188 55,740,613 8,746,919Net revenues 19,875,332 51,351,861 77,877,339 12,220,654Net (loss)/income (3,611,656) 2,552,665 15,169,180 2,380,375(i)Information with respect to related parties is discussed in Note 18.For the years ended December 31, 201920202021 RMB RMB RMB US$Net cash generated from operating activities 11,139,572 29,379,799 34,365,025 5,392,622Net cash used in investing activities (5,249,046) (11,802,074) (26,828,581) (4,209,990)Net cash generated from/(used in) financing activities 4,546,481 7,818,632 (1,445,969) (226,904)Net increase in cash, cash equivalents and restricted cash 10,437,007 25,396,357 6,090,475 955,728There are no consolidated VIE’s assets that are pledged or collateralized for the VIE’s obligations and which can only be used to settle theVIE’s obligations, except for registered capital and the PRC statutory reserves. Relevant PRC laws and regulations restrict the VIE fromtransferring a portion of its net assets, equivalent to the balance of their statutory reserves and its share capital, to the Company in the form ofloans and advances or cash dividends. Please refer to Note 20 for disclosure of the restricted net assets. As the VIE is incorporated as a limitedliability company under the PRC Company Law, creditors of the VIE do not have recourse to the general credit of the Company for any of theliabilities of the VIE. There were no other pledges or collateralization of the VIE’s assets.2.Summary of Significant Accounting Policies(a)Basis of presentationThe accompanying consolidated financial statements have been prepared in accordance with the accounting principles generally accepted inthe United States of America (“US GAAP”).(b)Principles of consolidationThe consolidated financial statements include the financial statements of the Company, its subsidiaries, the VIE and the subsidiaries of theVIE. All significant inter-company transactions and balances between the Company, its subsidiaries, the VIE and subsidiaries of the VIE havebeen eliminated upon consolidation.Table of ContentsPINDUODUO INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(Amounts in thousands of RMB and US$, except for number of shares and per share data)F-182.Summary of Significant Accounting Policies (Continued)(c)Use of estimatesThe preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities at the balance sheet dates and revenues and expenses during the reporting periods. Significantaccounting estimates reflected in the Group’s consolidated financial statements include, but are not limited to allowance for doubtful accountsarising from expected credit losses, 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 convertiblebonds 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 currencyThe functional currency of the Company and its overseas subsidiaries is the US$. The Company’s PRC subsidiaries, the VIE and subsidiariesof the VIE determined their functional currencies to be RMB based on the criteria of ASC 830, Foreign Currency Matters. The Group uses theRMB as its reporting currency.Transactions denominated in foreign currencies are re-measured into the functional currency at the exchange rates prevailing on the transactiondates. Monetary assets and liabilities denominated in foreign currencies are re-measured at the exchange rates prevailing at the balance sheetdate. Non-monetary items that are measured in terms of historical cost in foreign currency are re-measured using the exchange rates at thedates of the initial transactions. Exchange gains and losses are included in the consolidated statements of comprehensive income/(loss).The Company uses the average exchange rate for the year and the exchange rate at the balance sheet date to translate the operating results andfinancial position, respectively. Translation differences are recorded in accumulated other comprehensive income/(loss), a component ofshareholders’ equity.(e)Convenience translationAmounts in US$ are presented for the convenience of the reader and are translated at the noon buying rate of US$1.00 to RMB6.3726 onDecember 30, 2021, the last business day in December 2021, as published on the website of the United States Federal Reserve Board. Norepresentation is made that the RMB amounts could have been, or could be, converted into US$ at such rate.(f)Cash and cash equivalentsCash and cash equivalents consist of cash on hand and highly liquid investments which are unrestricted as to withdrawal or use and haveoriginal maturities of three months or less when purchased.(g)Restricted cashRestricted cash mainly represents cash received from consumers and reserved in a bank supervised account for payments to merchants.Table of ContentsPINDUODUO INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(Amounts in thousands of RMB and US$, except for number of shares and per share data)F-192.Summary of Significant Accounting Policies (Continued)(h)Short-term investmentsAll highly liquid investments with original maturities of greater than three months but less than twelve months, are classified as short-terminvestments. 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 intentand ability to hold to maturity, both of which are categorized as “held to maturity”. Wealth management products with the intention to sell inthe near term are classified as trading securities and measured 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 inearnings 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 income/(loss).(i)Long-term investmentsThe Group’s long-term investments consist of long-term held-to-maturity debt securities, investment in convertible bonds and equity methodinvestments, 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-DebtSecurities. Long-term held-to-maturity debt securities include time deposits in financial institutions, with maturities of greater than twelvemonths, 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 permitsreporting entities to apply the fair value option on an instrument-by-instrument basis. Therefore, a reporting entity can elect the fair valueoption for certain instruments but not others within a group of similar instruments. The fair value option permits the irrevocable election on aninstrument-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 thatinstrument. The investments accounted for under the fair value option are carried at fair value with realized and unrealized gains or lossesrecorded in the consolidated statements of comprehensive income/(loss).The Group’s investments in common stock or in-substance common stock in entities in which it can exercise significant influence but does notown a majority equity interest or control are accounted for using the equity method of accounting and classified as “equity methodinvestments” in accordance with ASC Subtopics 323-10 (“ASC 323-10”), Investments-Equity Method and Joint Ventures: Overall. The Groupapplies 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 proportionateshare of each equity investees’ profits or loss into earnings. The Group evaluates the equity method investments for impairment under ASC323-10. An impairment loss on the equity method investments is recognized in earnings when the decline in value is determined to be other-than-temporary.Table of ContentsPINDUODUO INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(Amounts in thousands of RMB and US$, except for number of shares and per share data)F-202.Summary of Significant Accounting Policies (Continued)(j)Property, equipment and software, netProperty, equipment and software are stated at cost and are depreciated and amortized using the straight-line method over the estimated usefullives of the assets, as follows:Category Estimated useful lifeComputer equipment 1-3 yearsOffice equipment3 yearsPurchased software3-5 yearsLeasehold improvements Over the shorter of lease terms or the estimated useful lives of the assetsRepair and maintenance costs are charged to expense as incurred, whereas the costs of renewals and betterments that extend the useful lives ofproperty, equipment and software are capitalized as additions to the related assets. Retirements, sales and disposals of assets are recorded byremoving the cost and accumulated depreciation from the asset and accumulated depreciation accounts with any resulting gain or loss reflectedin the consolidated statements of comprehensive income/(loss).Direct costs that are related to the construction of property, equipment and software and incurred in connection with bringing the assets to theirintended 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)InventoriesInventories, primarily consisting of products available for sale, are stated at the lower of cost and net realizable value. Cost of inventories isdetermined using the weighted average cost method.(l)Impairment of long-lived assets other than goodwillThe Group evaluates its long-lived assets, including fixed assets and intangible assets with finite lives, for impairment whenever events orchanges in circumstances, such as a significant adverse change to market conditions that will impact the future use of the assets, indicate thatthe carrying amount of an asset may not be fully recoverable. When these events occur, the Group evaluates the recoverability of long-livedassets by comparing the carrying amounts of the assets to the future undiscounted cash flows expected to result from the use of the assets andtheir eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying amounts of the assets, the Grouprecognizes an impairment loss based on the excess of the carrying amounts of the assets over their fair value. Fair value is generallydetermined 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.Table of ContentsPINDUODUO INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(Amounts in thousands of RMB and US$, except for number of shares and per share data)F-212.Summary of Significant Accounting Policies (Continued)(m)Fair value of financial instrumentsThe Group’s financial instruments include cash and cash equivalents, restricted cash, receivables from online payment platforms, amounts duefrom/to related parties, 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 carryingamount approximate to their respective fair values because of the general short maturities. The carrying amounts of long-term held-to-maturitydebt securities approximate to fair values as the related interest rates currently offered by financial institutions for similar debt instruments ofcomparable 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 formeasuring fair value and expands disclosures about fair value measurements. ASC 820 requires disclosures to be provided on fair valuemeasurement.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 orcomparable 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 theamount that would currently be required to replace an asset.(n)Revenue recognitionRevenues are principally comprised of those generated from online marketplace services and merchandise sales. Revenues from onlinemarketplace services primarily consist of online marketing services revenues and transaction services fees. Revenues represent the amount ofconsideration that the Company is entitled to in exchange for the transfer of promised goods or services in the ordinary course of theCompany’s activities and is recorded net of value-added tax (“VAT”). Consistent with the criteria of ASC Topic 606 (“ASC 606”), Revenuefrom Contracts with Customers, the Group recognizes revenue when the performance obligation in a contract is satisfied by transferring thecontrol of a promised good or service to a customer. The Group also evaluates whether it is appropriate to record the gross amounts of goodsand services sold and the related costs, or the net amounts earned as commissions. Payments for services or goods are generally receivedbefore deliveries.Table of ContentsPINDUODUO INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(Amounts in thousands of RMB and US$, except for number of shares and per share data)F-222.Summary of Significant Accounting Policies (Continued)(n)Revenue recognition (Continued)Online marketing servicesThe Group entered into contractual agreements with certain merchants to provide online marketing services on the Group’s online marketplacefor which the Group receives service fees from merchants. Online marketing services allow merchants to bid for keywords that match productlistings appearing in search or browser results on the Group’s online marketplace. Merchants prepay for online marketing services that arecharged 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 pricefor 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 andrevenues are primarily recognized over the period during which the advertising services are provided.Transaction servicesThe Group charges fees for transaction services to merchants for sales transactions completed on the Group’s platform, where the Group doesnot take control of the products provided by the merchants at any point in the time during the transactions and does not have latitude overpricing of the merchandise. Transaction services fee is primarily determined as a percentage based on the purchase price of merchandise soldby the merchants. Revenues related to transaction services are recognized in consolidated statements of comprehensive income/(loss) at thetime when the Group’s service obligations to the merchants are determined to have been completed under each sales transaction upon theconfirmation of the receipts of goods by the consumers. The majority fees charged for transaction services are not refundable if and whenconsumers return the merchandise to merchants.The Group provides rebates to certain merchants on the online marketplace services by meeting certain requirements. Such rebates are nettedagainst the online marketplace services revenues.Merchandise salesThe Group in certain cases acquires the merchandises from suppliers and sells directly to the consumers. The Group acts as a principal for ittakes control of the merchandises, is primarily obligated for the merchandise sold to the consumers, bears inventory risks and has the latitudein establishing prices. Revenues from merchandise sales are recorded on a gross basis, net of discounts and return allowances when theproducts are delivered and titles are passed to the consumers who are the Group’s customers in these transactions. Proceeds received inadvance of customer acceptance are recorded as current liabilities in customer advances and deferred revenues.Membership servicesCertain consumers pay in advance for certain periods memberships in exchange for the access to a suite of benefits including coupons, whichrepresent a single stand-ready obligation. As the members receive and consume the benefits of the Group’s promise throughout thesubscription periods, the membership fees are recognized as revenue over the subscription periods on a straight-line basis. Coupons providedby the Group to the members are netted against the membership revenue with the resulting negative revenue, if any, being reclassed tomarketing expenses for each membership contract. The membership revenue as recorded in the Group’s consolidated financial statements wasimmaterial during each presented period.Table of ContentsPINDUODUO INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(Amounts in thousands of RMB and US$, except for number of shares and per share data)F-232.Summary of Significant Accounting Policies (Continued)(n)Revenue recognition (Continued)Incentives provided to the consumersIn order to promote its online marketplace and attract more registered consumers, the Group at its own discretion provides various forms ofincentives, for example, coupons, credits and discounts that are not specific to any merchant, to the consumers that are not customers of theGroup. Despite the absence of any explicit contractual obligations to incentivize the non-customer consumers on behalf of the merchants, theGroup further evaluated the varying features of different incentive programs to determine that whether the incentives represent implicitobligations to the consumers on behalf of merchants and if so, should be recorded as reduction of revenues. Based on that evaluation, theGroup determined that incentives provided to the consumers are not considered as payments to the merchant-customers.The Group at its discretion issues to the 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 andthe credits can be used to redeem cash from the Group. The Group recognizes the amounts of coupons and credits as marketing expenses whenfuture purchases are completed or when the credits are issued. Discounts unconditionally provided to the consumers are recognized asmarketing expenses when the related transaction services revenues from merchants are recognized. Certain discounts are provided toconsumers upon their completion of certain actions to promote the platform, the Group records the related costs in marketing expenses uponthe completion of such promotion tasks.(o)Costs of revenuesCosts of revenues consist primarily of payment processing fees paid to third party online payment platforms, costs associated with theoperation of the platform and others, such as costs and expenses attributable to merchandise sales, fulfillment fees, merchant support services,bandwidth and server costs, amortization, depreciation and maintenance costs, payroll, employee benefits and share-based compensationexpenses, call center, surcharges and other expenses directly attributable to the online marketplace services.(p)Advertising expendituresAdvertising expenditures are expensed when incurred and are included in sales and marketing expenses. Total amount of advertisingexpenditures and incentive programs recognized in sales and marketing expenses were RMB25,867,772, RMB39,297,890 andRMB41,456,838 (US$6,505,483) for the years ended December 31, 2019, 2020 and 2021, respectively.(q)Research and development expensesResearch and development expenses include payroll, employee benefits, and other operating expenses associated with research and platformdevelopment. Research and development expenses also include rent, depreciation and other related expenses. To date, expenditures incurredbetween when the application has reached the development stage and when it is substantially complete and ready for its intended use havebeen inconsequential and, as a result, the Group did not capitalize any software development costs in the accompanying consolidated financialstatements.Table of ContentsPINDUODUO INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(Amounts in thousands of RMB and US$, except for number of shares and per share data)F-242.Summary of Significant Accounting Policies (Continued)(r)Credit lossOn 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 Groupchanged the impairment model to utilize a forward-looking current expected credit losses (CECL) model in place of the incurred lossmethodology for financial instruments measured at amortized cost, including the short-term investments and other non-current assetscategorized as “held to maturity” and payments made on behalf of merchants. CECL estimates are recorded as general and administrativeexpenses in the consolidated statements of comprehensive income/(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 and 2021reflects the best estimation of the expected future losses for its financial instruments measured at amortized cost, based on the currenteconomic conditions; however, as a result of the uncertainty caused by the coronavirus (COVID-19) pandemic and other factors, theseestimates may change and future actual losses may differ from the estimates. The Group will continue to monitor economic conditions and willrevise the estimates of the expected future losses for financial instruments measured at amortized cost as necessary.(s)LeasesThe Group adopted ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), effective January 1, 2019 using the modified retrospectivemethod 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 theinitial direct costs on those leases on the adoption date. The Group also elected the practical expedient of the short-term lease exemption forcontracts 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 accordancewith the recognition criteria in ASC 842-20-25. The Group’s lease portfolio consisted entirely of operating leases as of December 31, 2019,2020 and 2021. 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 valueof the lease payments over the lease term. Variable lease payments not dependent on an index or rate are excluded from the ROU asset andlease liability calculations and are recognized in expense in the period which the obligation for those payments is incurred. As the rate implicitin the Group’s lease is not typically readily available, the Group uses an incremental borrowing rate based on the information available at thelease commencement date in determining the present value of lease payments. This incremental borrowing rate reflects the fixed rate at whichthe Group could borrow on a collateralized basis the amount of the lease payments in the same currency, for a similar term, in a similareconomic environment. ROU assets include any lease prepayments and are reduced by lease incentives. Operating lease expense for leasepayments is recognized on a straight-line basis over the lease term. Lease terms are based on the non-cancelable term of the lease and maycontain options to extend the lease when it is reasonably certain that the Group will exercise that option.Table of ContentsPINDUODUO INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(Amounts in thousands of RMB and US$, except for number of shares and per share data)F-252.Summary of Significant Accounting Policies (Continued)(t)Income taxesThe Group follows the liability method of accounting for income taxes in accordance with ASC 740 (“ASC 740”), Income Taxes. Under thismethod, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets andliabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The Group records avaluation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, orall, 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 periodthat 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 benefitrecognized in accordance with ASC 740 are classified in the consolidated statements of comprehensive income/(loss) as income tax expenses.(u)Share-based compensationThe Group applies ASC 718 (“ASC 718”), Compensation—Stock Compensation, to account for its employee share-based payments. Inaccordance with ASC 718, the Group determines whether an award should be classified and accounted for as a liability award or an equityaward. All of the Group’s share-based awards to employees were classified as equity awards. The Group measures the employee share-basedcompensation based on the fair value of the award at the grant date. Expense is recognized using accelerated method over the requisite serviceperiod. The fair value of share options at the time of grant is determined using the binomial-lattice option pricing model. In accordance withASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvement to Employee Share-based Payment Accounting, the Groupelected to account for forfeitures as they occurred.(v)Employee benefit expensesAs stipulated by the regulations of the PRC, full-time employees of the Group are entitled to various government statutory employee benefitplans, including medical insurance, maternity insurance, workplace injury insurance, unemployment insurance and pension benefits through aPRC government-mandated multi-employer defined contribution plan. The Group is required to make contributions to the plan and accrues forthese benefits based on certain percentages of the qualified employees’ salaries.(w)Comprehensive income/(loss)Comprehensive income/(loss) is defined as the changes in equity of the Group during a period from transactions and other events andcircumstances 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 ofcomprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. For eachof the periods presented, the Group’s comprehensive income/(loss) includes net income/(loss) and foreign currency translation difference andis presented in the consolidated statements of comprehensive income/(loss).Table of ContentsPINDUODUO INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(Amounts in thousands of RMB and US$, except for number of shares and per share data)F-262.Summary of Significant Accounting Policies (Continued)(x)Earnings/(Loss) per shareBasic earnings/(loss) per share is computed by dividing net income/(loss) attributable to ordinary shareholders by the weighted averagenumber of ordinary shares outstanding during the period using the two-class method. Under the two-class method, net income/(loss) isallocated between ordinary shares and other participating securities based on their participating rights. Diluted earnings/(loss) per share iscalculated by dividing net income/(loss) attributable to ordinary shareholders by the weighted average number of ordinary and dilutiveordinary equivalent shares outstanding during the period. Ordinary equivalent shares consist of unvested restricted share unites (“RSUs”) andshares issuable upon the exercise of share options using the treasury stock method, and conversion of convertible bonds using the if-convertedmethod. Ordinary equivalent shares are not included in the denominator of the diluted earnings/(loss) per share calculation when inclusion ofsuch shares would be anti-dilutive.Basic and diluted earnings/(loss) per share are not reported separately for Class A ordinary shares or Class B ordinary shares (the ”OrdinaryShares”) as each class of shares has the same rights to undistributed and distributed earnings.(y)Segment reportingThe Group follows ASC 280, Segment Reporting. The Group’s Chief Executive Officer as the chief operating decision-maker reviews theconsolidated financial results when making decisions about allocating resources and assessing the performance of the Group as a whole andhence, 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 geographicalsegments are presented.Table of ContentsPINDUODUO INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(Amounts in thousands of RMB and US$, except for number of shares and per share data)F-272.Summary of Significant Accounting Policies (Continued)(z)Recent accounting pronouncementsIn August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU2020-06”), which focuses on amending the legacy guidance on convertible instruments and the derivatives scope exception for contracts in anentity’s own equity. ASU 2020-06 simplifies an issuer’s accounting for convertible instruments by reducing the number of accounting modelsthat require separate accounting for embedded conversion features. ASU 2020-06 also simplifies the settlement assessment that entities arerequired to perform to determine whether a contract qualifies for equity classification. Further, ASU 2020-06 enhances informationtransparency by making targeted improvements to the disclosures for convertible instruments and earnings-per-share (EPS) guidance, i.e.,aligning the diluted EPS calculation for convertible instruments by requiring that an entity use the if-converted method and that the effect ofpotential share settlement be included in the diluted EPS calculation when an instrument may be settled in cash or shares, adding informationabout events or conditions that occur during the reporting period that cause conversion contingencies to be met or conversion terms to besignificantly changed. This update will be effective for the Group’s fiscal years beginning after December 15, 2021, and interim periods withinthose fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, and interim periods withinthose fiscal years. Entities can elect to adopt the new guidance through either a modified retrospective method of transition or a fullyretrospective method of transition. The Group has preliminary assessed the impact of ASU 2020-06 adoption on the Group’s consolidatedfinancial statements, including but not limited to the accounting for convertible notes. The Group will adopt on January 1, 2022, using themodified retrospective method, which will result in a cumulative-effect adjustment to decrease the opening balance of additional paid-incapital on January 1, 2022 by RMB3,818,926 (US$599,273), and increase the opening balance of accumulated deficits and convertible bondson January 1, 2022 by RMB1,366,506 (US$214,435) and RMB2,316,324 (US$363,482), with remaining impact shown in accumulated othercomprehensive income/(loss).Table of ContentsPINDUODUO INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(Amounts in thousands of RMB and US$, except for number of shares and per share data)F-283.Concentration of Risks(a)Concentration of credit riskFinancial instruments that potentially subject the Group to significant concentration of credit risk consist primarily of cash and cashequivalents, restricted cash, receivables from online payment platforms, amounts due from related parties, short-term investments, and long-term debt investments. As of December 31, 2020 and 2021, majority of the Group’s cash and cash equivalents, restricted cash, short-terminvestments and long-term debt investments were held at reputable financial institutions with high-credit ratings. In the event of bankruptcy ofone of these financial institutions, the Group may not be able to claim its cash and demand deposits back in full. The Group continues tomonitor 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$,derived from transactions on the Group’s online marketplace to consumers, are exposed to credit risk. The risk is mitigated by creditevaluations the Group performs on the selected online payment platforms that are highly reputable and market leaders. There has been nodefault of payments from these online payment platforms.(b)Business, customer, political, social and economic risksThe Group participates in a dynamic and competitive high technology industry and believes that changes in any of the following areas couldhave a material adverse effect on the Group’s future financial position, results of operations or cash flows: changes in the overall demand forservices; changes in competitive landscape including potential new entrants; advances and new trends in new technology; strategicrelationships or customer relationships; regulatory considerations; and risks associated with the Group’s ability to attract and retain employeesnecessary to support its growth.(i)Business supplier risk - there were no suppliers whose purchases individually represent greater than 10% of the total purchases of theGroup for the years ended December 31, 2019. The purchases from Tencent Group accounted for over 10% of the total purchases of the Groupfor the years ended December 31, 2020 and 2021. Please refer to Note 18 for disclosure of the related party transactions.(ii)Customer risk - there were no customers whose revenues individually represent greater than 10% of the total revenues of the Group for theyears ended December 31, 2019, 2020 and 2021.(iii)Economic risk - the Group’s operations could be adversely affected by significant political, economic and social changes in the PRC.Table of ContentsPINDUODUO INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(Amounts in thousands of RMB and US$, except for number of shares and per share data)F-293.Concentration of Risks (Continued)(c)Foreign currency exchange rate riskThe Group is exposed to foreign currency exchange rate risk, which mainly affects the monetary assets denominated in the currencies otherthan the functional currencies of the respective entities. From July 21, 2005, the RMB is permitted to fluctuate within a narrow and managedband against a basket of certain foreign currencies. The appreciation/(depreciation) of the US$ against RMB was approximately 1.6%, (6.5)%and (2.3)% for the years ended December 31, 2019, 2020 and 2021, respectively. The functional currency and the reporting currency of theCompany are the US$ and the RMB, respectively. Most of the Group’s revenues and costs are denominated in RMB, while a portion of cashand 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.(d)Currency convertibility riskThe Group transacts most of its business in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactionscontinue to take place either through the PBOC or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by thePBOC. Approval of foreign currency payments by the PBOC or other institutions requires submitting a payment application form togetherwith suppliers’ invoices, shipping documents and signed contracts.4.Short-term InvestmentsShort-term investments classification as of December 31, 2020 and 2021 were shown as below:As of December 31, 202020212021RMBRMBUS$Held-to-maturity debt securities 61,549,143 86,203,296 13,527,177Trading debt securities 3,001,951 313,322 49,168 64,551,094 86,516,618 13,576,345The gross unrecognized holding gain or loss on the held-to-maturity debt securities was nil as of December 31, 2020 and 2021.The cost of trading debt securities was RMB2,998,310 and RMB300,000 (US$47,077), with net unrealized gain of RMB3,641 andRMB13,322 (US$2,091) as of December 31, 2020 and 2021, respectively.For the years ended December 31, 2019, 2020 and 2021, interest income related to short-term debt securities was RMB500,298,RMB1,175,842 and RMB1,093,654 (US$171,618), respectively.5.Prepayments and Other Current AssetsThe components of prepayments and other current assets are as follows:As of December 31, 202020212021 RMB RMB US$Prepayments 2,515,711 1,392,929 218,581Inventories1,718,41014,1962,228VAT recoverable 371,958 670,541 105,222Interest receivables 309,027 364,594 57,213Rental and other deposits 54,773 111,139 17,440Others 189,652 871,288 136,724 5,159,531 3,424,687 537,408The prepayments primarily consist of advertising fees paid in advance.Table of ContentsPINDUODUO INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(Amounts in thousands of RMB and US$, except for number of shares and per share data)F-306.Property, Equipment and Software, Net As of December 31, 2020 2021 2021RMBRMBUS$At cost:Computer equipment, office equipment and purchased software229,387 3,135,385 492,010Leasehold improvement23,78028,7734,515253,1673,164,158496,525Less: accumulated depreciation(50,314) (960,835) (150,776)202,853 2,203,323 345,749For the years ended December 31, 2019, 2020 and 2021, the Group recorded depreciation expenses included in the following captions: For the years ended December 31, 2019 2020 2021 2021RMBRMBRMBUS$Costs of revenues3,603 10,983 127,040 19,935Sales and marketing expenses2,415 2,477 6,217 976General and administrative expenses1,901 1,936 2,113 332Research and development expenses10,179 12,603 776,594 121,86418,098 27,999 911,964 143,1077.Intangible AssetsIntangible assets consisted of the following: TotalRMBBalance as of January 1, 2020 1,994,292Amortization (623,524)Foreign currency translation difference (94,017)Balance as of December 31, 20201,276,751Addition30,073Amortization(583,416)Foreign currency translation difference(22,188)Balance as of December 31, 2021 701,220In February 2018, the Company entered into a strategic cooperation framework agreement (the “Agreement”) with an affiliate of TencentGroup. The Company and Tencent Group agreed to cooperate in a number of areas primarily for Tencent Group to provide the Company withWeixin access point and other services and to pursue additional opportunities for future potential cooperation. The Agreement is valid for fiveyears, from March 1, 2018 to February 28, 2023. The Company recognized the Agreement as an intangible asset at the fair value ofconsideration paid in the form of convertible preferred shares of RMB2,852 million. The Group recognizes the related amortization expense incosts of revenues, over the period of five years using the straight-line method. Amortization expense for intangible assets were RMB619,733,RMB623,524 and RMB583,416 (US$91,551) for the years ended December 31, 2019, 2020 and 2021, respectively. No impairment charge wasrecognized on the intangible assets for any of the three years in the period ended December 31, 2021.Table of ContentsPINDUODUO INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(Amounts in thousands of RMB and US$, except for number of shares and per share data)F-317.Intangible Assets (Continued)The estimated annual amortization expense for each of the remaining fiscal years is as follows: AmortizationRMB US$2022 576,506 90,4662023 103,566 16,2522024 3,007 4722025 3,007 4722026 and after15,1342,3758.LeasesThe Group has operating leases mainly for offices and warehouses in China. For the years ended December 31, 2019, 2020 and 2021,operating lease costs were RMB94,929, RMB177,976 and RMB385,377 (US$60,474); and short-term lease costs were RMB34,255,RMB31,394 and RMB141,507 (US$22,206), respectively. There were no leasing costs other than the operating lease costs and short-term leasecosts for the years ended December 31, 2019, 2020 and 2021.A maturity analysis of the Company’s operating lease liabilities and reconciliation of the undiscounted cash flows to the operating leaseliabilities recognized on the consolidated balance sheet was as below:RentalRMBUS$2022 460,710 72,2952023 304,207 47,7372024 180,341 28,2992025 73,786 11,5792026 and after 13,325 2,091Total undiscounted cash flows 1,032,369 162,001Less: imputed interest (60,942) (9,563)Present value of lease liabilities 971,427 152,438As of December 31, 2019, 2020 and 2021, the Company had no operating leases that had not yet commenced.As of December 31, 2019, 2020 and 2021, the weighted average remaining lease term was 4.37 years, 3.39 years and 2.74 years, respectively,and the weighted average discount rate was 5.36%, 4.90% and 4.38% for the Company’s operating leases, respectively.Other supplemental information related to leases is summarized below:For the years ended December 31, 2019202020212021 RMB RMBRMB US$Operating cash flows for operating leases 76,130 166,967388,144 60,908ROU assets obtained in exchange for new operating lease liabilities 402,646 265,821704,142 110,495Table of ContentsPINDUODUO INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(Amounts in thousands of RMB and US$, except for number of shares and per share data)F-329.Other Non-current AssetsOther 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 abilityto hold to maturity. As of December 31, 2020 and 2021, the carrying amount for the investments, net of allowance for credit losses, wasRMB4,315,096 and RMB13,008,899 (US$2,041,380), respectively. As of December 31, 2020 and 2021, the allowance for credit losses wasRMB6,343 and RMB14,378 (US$2,256), respectively. The gross unrecognized holding gain or loss on the investments was nil as of December31, 2020 and 2021. Gains recorded on these time deposits in the consolidated statements of comprehensive income/(loss) were nil,RMB66,602 and RMB83,728 (US$13,139) for the years ended December 31, 2019, 2020 and 2021, respectively.The following table summarizes the net carrying amount of long-term held-to-maturity debt securities with stated contractual dates, classifiedby the contractual maturity date of the investments: As of December 31, 2020 2021 2021 RMB RMB US$Due in 1 year through 2 years 2,217,888 8,936,424 1,402,320Due in 2 years through 3 years 2,097,208 4,072,475 639,060 4,315,096 13,008,899 2,041,380The Group invested in convertible bonds issued by a third party in 2020, which is accounted for under the fair value option. As of December31, 2020 and 2021, the fair value was RMB1,388,916 and RMB1,290,901 (US$202,571), respectively. Unrealized gains recorded on theseconvertible bonds in the consolidated statements of comprehensive income/(loss) was RMB88,928 for the year ended December 31, 2020,while unrealized loss of RMB67,065 (US$10,524) was recorded for the year ended December 31, 2021.Equity method investments consist of the Group’s investments as a limited partner in certain limited partnership funds, including funds set upby the Company’s related parties, to make strategic investments. As of December 31, 2020 and 2021, the carrying amount for the investmentswas RMB1,135,141 and RMB1,968,156 (US$308,847), respectively. No equity method investments were considered, individually or inaggregate, material as of December 31, 2020 and 2021. During the year ended December 31, 2019, 2020 and 2021, the Group shared theprofits of the equity investees and recognized RMB28,676, RMB83,654 and RMB246,828 (US$38,733) in share of results of equity investeesin the consolidated statements of comprehensive income/(loss), respectively. There was no impairment on these investments during the yearsended December 31, 2020 and 2021.10.Accrued Expenses and Other LiabilitiesThe components of accrued expenses and other liabilities are as follows:As of December 31, 2020 2021 2021RMBRMBUS$Accrued advertising and marketing expenses 4,552,069 3,652,648 573,180VAT and other tax payable 2,882,177 5,734,281 899,834Payroll payable1,806,7871,949,173305,868Accounts payable1,137,5661,951,681306,261Others 814,773 797,730 125,181 11,193,372 14,085,513 2,210,324Table of ContentsPINDUODUO INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(Amounts in thousands of RMB and US$, except for number of shares and per share data)F-3311.Short-term BorrowingsAs of December 31, 2020 and 2021, the short-term borrowings obtained from the banks were RMB1,828,923 and nil, respectively. As ofDecember 31, 2020 and 2021, the borrowings were collateralized by bank wealth management products of RMB1,876,250 and nil,respectively, which were classified as short-term investments as provided by one of the Group’s wholly-owned subsidiaries. For the yearsended December 31, 2019, 2020 and 2021, the Group recognized interest expense of RMB1,726, RMB61,542 and RMB9,156 (US$1,437),respectively, in the consolidated statements of comprehensive income/(loss).12.Convertible Bonds(a)2024 Convertible BondsIn September 2019, the Company issued US$1,000,000 principal amount 0.00% convertible senior notes including US$125,000 sold upon theexercise of the over-allotment option (the “2024 Notes”). The 2024 Notes will mature on October 1, 2024 unless redeemed, repurchased orconverted prior to such date.Table of ContentsPINDUODUO INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(Amounts in thousands of RMB and US$, except for number of shares and per share data)F-3412.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, 2024only 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”), eachrepresenting four Class A ordinary shares of the Company, par value US$0.000005 per share, for at least 20 trading days (whether or notconsecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately precedingcalendar 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 perUS$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 lastreported sale price of the ADSs and the conversion rate on each such trading day; (3) if the Company calls the 2024 Notes for a taxredemption; (4) if the Company calls the 2024 Notes for redemption at its option or (5) upon the occurrence of specified corporate events. Onor after April 1, 2024 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders mayconvert their 2024 Notes at any time. Upon conversion, the Company will pay or deliver, as the case may be, cash, ADSs, or a combination ofcash 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 isequivalent to an initial conversion price of approximately US$42.61 per ADS). The conversion rate will be subject to adjustment in someevents. In addition, following certain corporate events that occur prior to the maturity date, if a make-whole fundamental change occurs priorto the maturity date of the 2024 Notes, or under certain circumstances upon a tax redemption or the Company’s optional redemption, theCompany will, in certain circumstances, increase the conversion rate for a holder who elects to convert its 2024 Notes in connection with suchcorporate 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 AmericanDepositary Shares has been at least 130% of the conversion price then in effect on (i) each of at least 20 trading days (whether or notconsecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately prior to the date theCompany provides notice of redemption; and (ii) the trading day immediately preceding the date the Company sends such notice. Holders ofthe 2024 Notes may require the Company to repurchase all or part of their 2024 Notes in cash on October 1, 2022 (the “Repurchase Date”) orin the event of certain fundamental changes. No sinking fund is provided for the 2024 Notes.(b)2025 Convertible BondsIn November 2020, the Company issued US$2,000,000 principal amount 0.00% convertible senior notes including US$250,000 sold upon theexercise of the over-allotment option (the “2025 Notes”). The Notes will mature on December 1, 2025 unless redeemed, repurchased orconverted prior to such date.Table of ContentsPINDUODUO INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(Amounts in thousands of RMB and US$, except for number of shares and per share data)F-3512.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, 2025only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on March 31, 2021 (andonly 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 20trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of theimmediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during thefive-business-day period after any ten-consecutive-trading-day period (the “measurement period”) in which the “trading price” (as definedbelow) 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 thelast 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 taxredemption; (4) if the Company calls the 2024 Notes for redemption at its option or (5) upon the occurrence of specified corporate events. Onor after June 1, 2025 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders mayconvert their 2025 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver, as the casemay 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 ofapproximately US$190.63 per ADS). The conversion rate will be subject to adjustment in some events but will not be adjusted for any accruedand unpaid special interest, if any. In addition, following certain corporate events that occur prior to the maturity date or following theCompany’s delivery of a notice of a tax or optional redemption, the Company will, in certain circumstances, increase the conversion rate for aholder who elects to convert its 2025 Notes in connection with such a corporate event or such notice of tax or optional redemption, as the casemay 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 least130% of the conversion price then in effect on (i) each of at least 20 trading days (whether or not consecutive) during any 30 consecutivetrading 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 torepurchase all or part of their 2025 Notes in cash on December 1, 2023 (the “Repurchase Date”) or in the event of certain fundamentalchanges. No sinking fund is provided for the 2025 Notes.(c)Accounting for Convertible BondsAs the conversion option may be settled in cash, ADSs, or a combination of cash and ADSs at the Company’s option, the Company separatedthe 2024 Notes and the 2025 Notes (collectively as the “Notes”) into liability and equity components in accordance with ASC 470-20, Debtwith Conversion and Other Options. The carrying amount of the liability component was initially calculated by measuring the fair value of asimilar liability that does not have an associated conversion feature. The carrying amount of the equity component representing the conversionoption was determined by deducting the fair value of the liability component from the initial proceeds and recorded as additional paid-incapital. The resulting discount, together with the allocated issuance costs as mentioned below, are accreted at an effective interest rate over theperiod 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 theassistance from independent valuation firms.Table of ContentsPINDUODUO INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(Amounts in thousands of RMB and US$, except for number of shares and per share data)F-3612.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 andoffering 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 andoffering expenses were approximately US$20,607, which were allocated to the liability and equity components proportionately.As of December 31, 2020 and 2021, the principal amount of the liability component of the Notes were US$2,883,024 and US$2,226,253,unamortized debt discount were US$671,068 and US$377,216, and net carrying amount of the liability component was RMB14,432,792 andRMB11,788,907, respectively. The carrying amount of the equity component was US$478,633 and US$(1,849,645), respectively. For the yearsended December 31, 2020 and 2021, the amount of interest cost recognized relating to the amortization of the discount on the liabilitycomponent was RMB695,794 and RMB1,221,846 (US$191,734), respectively. As of December 31, 2021, the liability component of 2024Notes and 2025 Notes will be accreted up to the principal amount over a remaining period of 0.75 years and 1.92 years, respectively.For the year ended December 31,2020 and 2021, holders of 2024 Notes exercised their right to convert US$116,976 and US$656,771 principalamount of their notes, respectively, into shares under the 2024 Price Condition at its initial conversion price. Upon conversion, the Companyissued 9,900,368 and 62,732,708 ordinary shares, respectively for the years ended December 31, 2020 and 2021. As of December 31, 2021, theif-converted values of remaining 2024 Notes were US$312,163, which exceeded their principal amount of US$226,253.13.Fair Value MeasurementIn accordance with ASC 820, the Company measures investment in convertible bonds and certain wealth management products classified astrading securities on a recurring basis. The following tables set forth the financial instruments measured at fair value on a recurring basis bylevel within the fair value hierarchy:Fair Value Measurements Quoted Price in Significant Active MarketOtherUnobservablefor IdenticalObservableInputsAssets (Level 1)Inputs (Level 2)(Level 3)RMBRMBRMBRecurring As of December 31, 2020: Short-term investments: Trading debt securities — 3,001,951 —Other non-current assets:Investment in convertible bonds——1,388,916 — 3,001,951 1,388,916Table of ContentsPINDUODUO INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(Amounts in thousands of RMB and US$, except for number of shares and per share data)F-3713.Fair Value Measurement (Continued)Fair Value MeasurementsQuoted Price in SignificantActive Market OtherUnobservablefor Identical Observable InputsAssets (Level 1) Inputs (Level 2) (Level 3) RMB RMB RMBRecurring As of December 31, 2021:Short-term investments:Trading debt securities—313,322—Other non-current assets:Investment in convertible bonds——1,290,901— 313,322 1,290,901Investment in convertible notes is classified under level 3 in the fair value hierarchy, with the fair value estimated based on the third-partyappraisal report using the binomial model. Key inputs and parameters include volatility which is an expected rate based on the historical stockprice 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 ofcomparable 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 valuedetermined based on quoted prices of similar assets.Reconciliations of assets categorized within Level 3 under the fair value hierarchy are as follow:Amounts RMB US$Balance at December 31, 2020 1,388,916 217,951Net unrealized fair value (67,065) (10,524)Foreign currency translation adjustments (30,950) (4,856)Balance at December 31, 2021 1,290,901 202,571As of December 31, 2020 and 2021, the Group did not have any assets or liabilities that were measured at fair value on a non-recurring basisand no impairment charge was recorded.Table of ContentsPINDUODUO INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(Amounts in thousands of RMB and US$, except for number of shares and per share data)F-3813.Fair Value Measurement (Continued)The followings are financial instruments not measured at fair value in the consolidated balance sheets, but for which the fair value is estimatedfor disclosure purposes. The fair values of held-to-maturity debt investments are estimated using prevailing interest rates. The fair values of theconvertible bonds are based on broker quotes:Fair Value MeasurementsQuoted Price inSignificantActive MarketOtherUnobservablefor IdenticalObservableInputsAssets (Level 1)Inputs (Level 2)(Level 3) RMB RMB RMBAs of December 31, 2020: Short-term investments: Held-to-maturity debt securities—61,549,143 —Other non-current assets:Held-to-maturity debt securities—4,315,096—Convertible bonds—40,760,994—As of December 31, 2021: Short-term investments:Held-to-maturity debt securities—86,203,296 —Other non-current assets:Held-to-maturity debt securities—13,008,899—Convertible bonds—13,690,953 —14.Ordinary SharesHolders of Class A ordinary shares and Class B ordinary shares are entitled to the same rights except for voting rights. In respect of mattersrequiring 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 the third quarter of 2018, the Company completed its Initial Public Offering (“IPO”) on the National Association of Securities DealAutomated Quotations under the symbol of “PDD”.In February 2019, the Company completed a follow-on public offering and issued 48,435,000 ADSs, representing 193,740,000 Class Aordinary 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 ofUS$1,100,000.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 Aordinary 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 ofUS$500,000.In March 2021, 1,409,744,080 Class B ordinary shares were converted into Class A ordinary shares by the holder on a one-for-one basis.Table of ContentsPINDUODUO INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(Amounts in thousands of RMB and US$, except for number of shares and per share data)F-3915.RevenuesFor the years ended December 31, 2019 2020 20212021 RMBRMB RMB US$Online marketing services and others 26,813,641 47,953,779 72,563,402 11,386,782Transaction services 3,328,245 5,787,415 14,140,449 2,218,945Merchandise sales — 5,750,671 7,246,088 1,137,069 30,141,886 59,491,865 93,949,939 14,742,796Contract balancesThe Group’s contract liabilities comprised of customer advances and deferred revenues and portions of payable to merchants:As ofDecember 31, 2020December 31, 2021December 31, 2021 RMB RMB US$Customer advances and deferred revenues 2,423,190 1,166,764 183,091Payable to merchants 224,896319,32950,110Customer advances and deferred revenues and payable to merchants relate to considerations received in advance for online marketplaceservices and merchandise sales, for which control of the services occur at a later point in time. During the year ended December 31, 2021,revenues of RMB2,487,806 were recognized from the carrying value of contract liabilities as of December 31, 2020. During the year endedDecember 31, 2020, revenues of RMB651,877 were recognized from the carrying value of contract liabilities as of December 31,2019.16.Share-Based CompensationIn order to provide additional incentives to employees and to promote the success of the Group’s business, the Group adopted a share incentiveplan 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 yearsfrom the date of grant.In July 2018, the Group adopted the 2018 Share Incentive Plan (the “2018 Plan”). The 2018 Plan allows the Group to grant options and RSUsto employees, directors or consultants. Under the 2018 Plan, the maximum aggregate number of shares that may be issued pursuant to allawards 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 Plancommencing 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 issuedand outstanding on the last day of the immediately preceding fiscal year, and (ii) such number of shares as may be determined by our board ofdirectors. In March 2021, our board of directors approved an amendment to the 2018 Plan to increase the annual increase percentage from1.0% 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 theoptions vesting annually, Class A ordinary shares acquired from the exercise of vested options cannot be sold or transferred by the employeeswithout the prior written consents of the Company within the first three years of vested (“Restricted Shares”). In the event that employmentrelationship is terminated with the Company, voluntarily or involuntarily, within the three-year lock-up periods, the Company may, at its solediscretion, repurchase the Restricted Shares at the employee’s exercise price. The Group determined the substance of the lock up periods to beadditional implicit service periods of three years, thereby extending the vesting terms of the options to be seven years in total.Table of ContentsPINDUODUO INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(Amounts in thousands of RMB and US$, except for number of shares and per share data)F-4016.Share-Based Compensation (Continued)The RSUs granted under the 2018 Plan vest over a period of four years with 25% vesting on each anniversary from the date of grant, or with50% of the RSUs vesting on the second anniversary and 25% on each of the third and fourth anniversary from the date of grant.(a)Share options:The following table summarize the Group’s option activities under the 2015 Plan and the 2018 Plan:Weighted WeightedWeighted average averageaverage Aggregate remaining Number of exercisegrant dateintrinsic contractual share options price fair value value term US$ US$ US$YearsOutstanding as of December 31, 2020 731,051,100 0.0065 3.1775 32,466,710 6.94Granted 21,307,640 0.0065 32.0457 Forfeited (23,324,000) 0.0065 4.6934 Exercised(9,031,204)0.00650.0789Outstanding as of December 31, 2021 720,003,536 0.0065 4.0216 10,489,372 6.07Vested and expected to vest as of December 31, 2021 720,003,536 0.0065 4.0216 10,489,372 6.07Exercisable as of December 31, 2021 552,456,551 0.0065 2.4085 8,048,463 5.68The aggregate intrinsic value is calculated as the difference between the exercise price of the awards and the fair value of the underlyingOrdinary 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 RMB3,949,471 (US$619,758) for the years ended December 31 2021. As of December 31, 2021, totalunrecognized share-based compensation expense relating to unvested awards was RMB10,135,015 (US$1,590,405) which is expected to berecognized over a weighted-average period of 3.06 years.The Group calculated the estimated fair value of the options on the respective grant dates using the binomial-lattice option valuation modelwith the following assumptions for each applicable period which took into account variables such as volatility, dividend yield, and risk-freeinterest rates: For the years ended December 31, 2019 2020 2021Risk-free interest rates1.50%-2.90%0.62%-1.13%1.31%-1.69%Expected volatility43.52%-57.59%43.89%-46.68%46.28%-46.87%Expected dividend yield0%0%0%Exercise multiple2.80 2.80 2.80Post-vesting forfeit rate0%0%0%Fair value of underlying ordinary shares$4.8550-$8.9875$8.9450-$34.1350$22.0375-$46.5375Fair value of share option$4.8485-$8.9810$8.9385-$34.1285$22.0310-$46.5310Table of ContentsPINDUODUO INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(Amounts in thousands of RMB and US$, except for number of shares and per share data)F-4116.Share-Based Compensation (Continued)(b)RSUs:The following table summarize the Group’s RSU activities under the 2018 Plan: Weighted Number ofaverage grant RSUs date fair valueUS$Outstanding as of December 31, 202043,820,4569.1088Granted17,384,04432.4843Vested(15,364,748)6.8158Forfeited(4,321,288)15.7243Outstanding as of December 31, 2021 41,518,464 19.0563The total fair value of the RSUs vested during the years ended December 31, 2021 was RMB675,837 (US$ 106,054).As of December 31, 2021, RMB3,024,500 (US$474,610) of unrecognized share-based compensation expenses related to RSUs is expected tobe recognized over a weighted average vesting period of 2.46 years using the accelerated method. Total unrecognized share-basedcompensation expenses may be adjusted for future changes when actual forfeitures incurred.(c)Share-based compensation expense by function:The Group recognized share-based compensation expenses for the years ended December 31, 2019, 2020 and 2021 as follows:For the years endedDecember 31, 2019202020212021 RMBRMB RMB US$Costs of revenues23,83532,29126,624 4,178Sales and marketing expenses860,8621,093,5471,612,219 252,992General and administrative expenses786,641966,985792,421 124,348Research and development expenses886,3681,520,2202,343,466 367,7412,557,7063,613,0434,774,730 749,25917.Income TaxesCayman IslandsUnder 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 KongWalnut HK is incorporated in Hong Kong and is subject to Hong Kong profits tax at the rate of 16.5% on its activities conducted inHong Kong and it may be exempted from income tax on its foreign-derived income and there are no withholding taxes in Hong Kong onremittance of dividends.Table of ContentsPINDUODUO INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(Amounts in thousands of RMB and US$, except for number of shares and per share data)F-4217.Income Taxes (Continued)PRCThe Company’s subsidiaries and VIE and its subsidiaries in the PRC are subject to the statutory rate of 25%, in accordance with the EnterpriseIncome Tax law (the ”EIT Law”), which was effective since January 1, 2008, except for certain entities eligible for preferential tax rates.Shanghai Xunmeng, a subsidiary of VIE, was recognized as high and new technology enterprise (“HNTE”) and was eligible for a preferentialtax rate of 15% from 2018 to 2023. Walnut Shanghai, a subsidiary of the Company, was recognized as HNTE and was eligible for apreferential tax rate of 15% from 2021 to 2023.Xinzhijiang, a subsidiary of the Company established in April 2018, located in Qianhai District, Shenzhen, Guangdong Province, was eligiblefor a preferential tax rate of 15% and started to apply this rate from then on. The preferential tax rate is awarded to companies that are locatedin Qianhai District which operate in certain encouraged industries, from 2014 to 2025.Dividends, interests, rent or royalties payable by the Company’s PRC subsidiaries, to non-PRC resident enterprises, and proceeds from anysuch non-resident enterprise investor’s disposition of assets (after deducting the net value of such assets) shall be subject to 10% withholdingtax, unless the respective non-PRC resident enterprise’s jurisdiction of incorporation has a tax treaty or arrangements with China that providesfor a reduced withholding tax rate or an exemption from withholding tax.The Group’s (loss)/profit before income taxes consisted of: For the years ended December 31, 2019 2020 2021 2021RMBRMBRMBUS$Non-PRC(2,741,219) (3,763,962) (5,633,012) (883,942)PRC(4,226,384) (3,415,780) 15,335,267 2,406,438(6,967,603) (7,179,742) 9,702,255 1,522,496The Group’s income taxes consisted of:For the years ended December 31, 2019 2020 2021 2021RMBRMBRMBUS$Current income tax — — 1,933,798 303,456Deferred income tax benefit — — (213) (34) — — 1,933,585 303,422Table of ContentsPINDUODUO INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(Amounts in thousands of RMB and US$, except for number of shares and per share data)F-4317.Income Taxes (Continued)PRC (Continued)The reconciliations of the income tax expenses for the years ended December 31, 2019, 2020 and 2021 were as follows:For the years ended December 31, 2019 2020 2021 2021 RMBRMBRMBUS$ (Loss)/ profit before income tax expense (6,967,603) (7,179,742) 9,702,255 1,522,496PRC statutory tax rate 25% 25% 25% 25%Income tax (benefits)/ expense at PRC statutory tax rate (1,741,901) (1,794,935) 2,425,564 380,624International tax rate differential 735,028 1,077,383 1,522,480 238,910Preferential tax rate differential358,79657,483(1,439,100)(225,826)Non-deductible expenses (5,980) 108 167,098 26,221Non-taxable income (61,151) (164,120) (139,417) (21,877)Deferred tax items tax rate differential(570,382)(110,821)51,4938,080Additional deduction of research and development expenses(67,628)(124,858)(223,591)(35,086)Change in valuation allowance 1,353,218 1,059,760 (430,942) (67,624)Income tax expenses — — 1,933,585 303,422The significant components of the Group’s deferred tax balances were as follows:As of December 31, 2020 2021 2021RMBRMBUS$Deferred tax assetsTax losses carried forward1,956,901 1,432,514 224,793Carryforwards of non-deductible advertising expenses and donations1,143,8581,331,067208,873Others94,18631,9265,010Less: valuation allowance(3,194,945) (2,764,003) (433,732)Total deferred tax assets— 31,504 4,944Total deferred tax liabilities—(31,291)(4,910)Net deferred tax assets—21334In assessing the ability to realize the deferred tax assets, the Group has considered whether it is more likely than not that some portion or all ofthe deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxableincome during the periods in which those temporary differences become deductible. The Group evaluates the potential realization of deferredtax assets on an entity-by-entity basis. As of December 31, 2020 and 2021, management recorded full valuation allowance against deferred taxassets in entities that were in a cumulative loss with no forecast profits in the foreseeable future.As of December 31, 2020 and 2021, the Group had taxable losses of RMB8,689,427 and RMB5,881,960 (US$923,008) derived from entitiesin the PRC, which can be carried forward for five years to offset future taxable profit, and the period was extended to ten years for entitiesqualified as HNTEs in 2021 and thereafter. The PRC taxable loss will expire from December 31, 2022 to 2030 if not utilized. The tax losses inHong Kong can be carried forward with no expiration date.The Group plans to indefinitely reinvest the undistributed earnings of its subsidiaries, the VIE and the subsidiaries of the VIE located in thePRC. As of December 31, 2020 and 2021, all of the earnings distributable by our subsidiaries in China were reserved for permanentreinvestment in China, and no withholding tax has been accrued.As of December 31, 2020 and 2021, the Group did not have significant unrecognized tax benefit, all of which were presented on a net basisagainst the deferred tax assets related to tax loss carry forwards on the consolidated balance sheets. It is possible that the amount ofunrecognized benefit will further change in the next 12 months; however, an estimate of the range of the possible change cannot be made atthis moment.Table of ContentsPINDUODUO INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(Amounts in thousands of RMB and US$, except for number of shares and per share data)F-4417.Income Taxes (Continued)PRC (Continued)For the years ended December 31, 2019, 2020 and 2021, no interest expense was accrued in relation to the unrecognized tax benefit. As ofDecember 31, 2020 and 2021 there were no accumulated interest expenses recorded in unrecognized tax benefit.As of December 31, 2021, the tax years ended December 31, 2016 through period ended as of the reporting dates for the WFOE, the VIE andthe subsidiaries of the VIE remain open to examination by the PRC tax authorities.18.Related Party Transactions(a)Related partiesNames of related parties Relationship with the GroupTencent and its affiliates (“Tencent Group”)A shareholder of the CompanyNingbo Hexin Equity Investment PartnershipCompany controlled by one of the executive officers of the CompanyShanghai Fufeitong Information Service Co., Ltd. (“ShanghaiFufeitong”)Company controlled by one of the executive officers of the Company(b)Other than disclosed elsewhere, the Group had the following significant related party transactions for the years ended December 31, 2019,2020 and 2021, respectively:For the years ended December 31, 20192020 2021 2021RMBRMBRMBUS$Services received from:Tencent Group 2,298,074 10,541,479 8,416,635 1,320,755Shanghai Fufeitong — 45,364 211,414 33,175In 2021, the Group purchased a batch of computer equipment from Tencent Group with a total amount of RMB1,833,495 (US$287,715).(c)The Group had the following significant related party balances as of December 31, 2020 and 2021:As of December 31, 202020212021 RMB RMB US$Amounts due from related parties: Current: Tencent Group* 3,177,536 2,803,265 439,893Ningbo Hexin Equity Investment Partnership ** 697,632 697,632 109,474Shanghai Fufeitong364,517748,875117,515Amounts due to related parties: Current:Tencent Group 3,370,928 1,916,482 300,738Shanghai Fufeitong 14,935 46,525 7,301*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 theCompany.Table of ContentsPINDUODUO INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(Amounts in thousands of RMB and US$, except for number of shares and per share data)F-4519.Earnings/(Loss) Per ShareThe following table sets forth the computation of basic and diluted net earnings/(loss) per share for the following periods: For the year ended December 31, 2019 2020 2021 2021RMBRMBRMBUS$Numerator:Net (loss)/ income(6,967,603) (7,179,742) 7,768,670 1,219,074Net (loss)/ income attributable to ordinary shareholders(6,967,603) (7,179,742) 7,768,670 1,219,074Denominator (in thousands of shares):Weighted-average number of ordinary shares outstanding – basic4,627,278 4,768,343 5,012,651 5,012,651Adjustments for dilutive RSUs and share options——701,113701,113Weighted-average number of ordinary shares outstanding – diluted4,627,2784,768,3435,713,7645,713,764(Loss)/ earnings per share – basic(1.51) (1.51) 1.55 0.24(Loss)/ earnings per share –diluted(1.51)(1.51)1.360.21During the years ended December 31, 2020 and 2021, the Company issued 12,050,000 and 40,000,000 ordinary shares to its share depositarybank, respectively. No consideration was received by the Company for the issuance. As of December 31, 2021, 29,914,080 out of the total52,650,000 ordinary shares were used to settle share-based compensation. The remaining 22,735,920 ordinary shares are legally issued andoutstanding but are treated as escrowed shares for accounting purposes and therefore, have been excluded from the computation ofearnings/(loss) per share.The Group did not include certain share options, restricted shares and the effect of convertible bonds in the computation of diluted loss pershare for the years ended December 31, 2019 and 2020 because those share options, restricted shares and convertible bonds were anti-dilutive.The Group did not include the effect of convertible bonds in the computation of diluted earnings per share for the year ended December 31,2021 because those convertible bonds were anti-dilutive.20.Restricted Net AssetsThe Company’s ability to pay dividends is primarily dependent on the Company receiving distributions of funds from its subsidiaries, the VIEand 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 andregulations. The results of operations reflected in the consolidated financial statements prepared in accordance with U.S. GAAP differ fromthose 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 PRCsubsidiaries, 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 PRCstatutory accounts. A foreign-invested enterprise is required to allocate at least 10% of its annual after-tax profit to the general reserve funduntil such reserve has reached 50% of its respective registered capital based on the enterprise’s PRC statutory accounts. Appropriations to theenterprise 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 asa foreign-invested enterprise and, therefore, is subject to the above mandated restrictions on distributable profits. For the years endedDecember 31, 2019, 2020 and 2021, WFOE did not have after-tax profit and therefore no statutory reserves have been allocated.Table of ContentsPINDUODUO INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(Amounts in thousands of RMB and US$, except for number of shares and per share data)F-4620.Restricted Net Assets (Continued)Foreign exchange and other regulations in the PRC may further restrict the Company’s VIE from transferring funds to the Company in theform of dividends, loans and advances. Amounts restricted include paid-in capital and statutory reserves of the Company’s PRC Subsidiariesand the equity of the VIE, as determined pursuant to PRC generally accepted accounting principles. As of December 31, 2021, restricted netassets of the Company’s PRC subsidiaries, the VIE and subsidiaries of the VIE were RMB23,306,392 (US$3,657,281).21.Mainland China Employee Contribution PlanAs stipulated by the regulations of the PRC, full-time employees of the Group are entitled to various government statutory employee benefitplans, including medical insurance, maternity insurance, workplace injury insurance, unemployment insurance and pension benefits through aPRC government-mandated multi-employer defined contribution plan. The Group is required to make contributions to the plan based oncertain percentages of employees’ salaries.The total expenses the Group incurred for the plan were RMB334,434, RMB277,429 andRMB829,440 (US$130,157) for the years ended December 31, 2019, 2020 and 2021, respectively.22.Commitments and Contingencies(a)Operating lease commitmentsThe Company leases offices for operation under operating leases. Future minimum lease payments under non-cancellable operating leases withinitial terms in excess of one year is included in Note 8.(b)Investment commitmentsThe Group’s investment commitments primarily relate to capital contributions obligation under certain arrangement which does not havecontractual maturity date. As of December 31, 2021, the total investment commitments contracted but not yet reflected in the financialstatements amounted to approximately RMB140,000 (US$21,969).(c)ContingenciesIn the ordinary course of business, the Group is from time to time involved in legal proceedings and litigations. Between August andDecember 2018, several putative shareholder class action lawsuits were filed against the Group and certain of its officers and directors in theU.S. District Court for the Southern District of New York (“SDNY”) and the Superior Court of the State of California. In March 2020, thecourt granted the Group’s motion to dismiss the claims in the consolidated action in the SDNY, following which the plaintiffs filed an appeal inApril 2020. The judgement of the U.S. District Court for SDNY was affirmed by the United States Court of Appeals for the Second Circuit inAugust 2021. In February 2021, the Superior Court of the State of California dismissed all claims against the Group for lack of personaljurisdiction. As of December 31, 2021, the Group did not consider an unfavorable outcome in any material respects in the outstanding legalproceedings and litigations to be probable.Table of ContentsPINDUODUO INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(Amounts in thousands of RMB and US$, except for number of shares and per share data)F-4723.Condensed Financial Information of the CompanyThe following is the condensed financial information of the Company on a parent company only basis.As of December 31, 20202021 RMB RMB US$ASSETSCurrent assetsCash and cash equivalents6,566 2,269 356Short-term investments5,840,247——Others359 390 61Total current assets5,847,172 2,659 417Non-current assetsIntangible asset1,276,751674,057105,774Investments in subsidiaries, the VIE and subsidiaries of the VIE67,814,679 86,252,341 13,534,875Total non-current assets69,091,430 86,926,398 13,640,649Total assets74,938,602 86,929,057 13,641,066LIABILITIES AND SHAREHOLDERS’ EQUITYCurrent liabilities Accrued expenses and other liabilities327,004 24,607 3,861Total current liabilities327,004 24,607 3,861Convertible bonds14,432,792 11,788,907 1,849,937Other non-current liabilities2,918 996 156Total non-current liabilities14,435,710 11,789,903 1,850,093Total liabilities14,762,714 11,814,510 1,853,954Shareholders’ equity Class A ordinary shares (US$0.000005 par value; 77,300,000,000 shares authorized; 3,545,065,888 and 5,057,542,676 shares issued andoutstanding as of December 31, 2020 and 2021, respectively) 115 161 25Class B ordinary shares (US$0.000005 par value; 2,200,000,000 shares authorized; 1,409,744,080 and nil shares issued and outstandingas of December 31, 2020 and 2021, respectively) 44 — —Additional paid-in capital 86,698,660 95,340,819 14,961,055Accumulated other comprehensive loss (1,047,728) (2,519,900) (395,427)Accumulated deficits (25,475,203) (17,706,533) (2,778,541)Total shareholders’ equity 60,175,888 75,114,547 11,787,112Total liabilities and shareholders’ equity 74,938,602 86,929,057 13,641,066Table of ContentsPINDUODUO INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(Amounts in thousands of RMB and US$, except for number of shares and per share data)F-4823.Condensed Financial Information of the Company (Continued)For the years ended December 31, 2019 20202021 RMBRMB RMB US$Costs of revenues(619,733)(623,524)(580,506)(91,094)Sales and marketing expenses(47,746)(36,940)(27,839)(4,369)General and administrative expenses (3,245) (6,746) (40,826) (6,406)Total operating expenses (50,991) (43,686) (68,665) (10,775)Operating loss (670,724) (667,210) (649,171) (101,869)Interest income 318,166 126,502 32,452 5,092Interest expense(144,132)(695,794)(1,221,846)(191,734)Other (loss)/gain (31) 53,244 27,497 4,315Share of results from subsidiaries, the VIE and subsidiaries of the VIE (6,470,882) (5,996,484) 9,579,738 1,503,270(Loss)/ profit before income tax (6,967,603) (7,179,742) 7,768,670 1,219,074Income tax expenses————Net (loss)/ income (6,967,603) (7,179,742) 7,768,670 1,219,074Other comprehensive income/(loss), net of tax of nil Foreign currency translation difference, net of tax of nil 412,447 (2,495,958) (1,472,172) (231,016)Comprehensive (loss)/ income (6,555,156) (9,675,700) 6,296,498 988,058For the years ended December 31, 2019 20202021 RMBRMB RMB US$Net cash generated from operating activities259,409 735,231 82,074 12,879Cash flows from investing activities: Proceeds from sales of short-term investments6,049,5906,034,8635,764,134 904,518Cash given to purchase of short-term investments(5,998,024)(6,250,248)——Cash given to subsidiaries, the VIE and subsidiaries of the VIE, net(20,293,132)(52,051,474)(5,855,304) (918,825)Net cash used in investing activities(20,241,566)(52,266,859)(91,170) (14,307)Cash flows from financing activities: Proceeds from the private placements— 11,063,339 — —Net proceeds from the follow-on offerings7,993,82826,805,438——Net proceeds from the issuance of convertible bonds6,966,75713,024,199——Others—(6)31850Net cash generated from financing activities14,960,585 50,892,970 318 50Exchange rate effect on cash, cash equivalents and restricted cash141,540 (16,490) 4,481 704Net decrease in cash, cash equivalents and restricted cash(4,880,032) (655,148) (4,297) (674)Cash, cash equivalents and restricted cash at beginning of year5,541,746 661,714 6,566 1,030Cash, cash equivalents and restricted cash at end of year661,714 6,566 2,269 356Table of ContentsPINDUODUO INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(Amounts in thousands of RMB and US$, except for number of shares and per share data)F-4923.Condensed Financial Information of the Company (Continued)Basis of presentationCondensed financial information is used for the presentation of the Company, or the parent company. The condensed financial information ofthe parent company has been prepared using the same accounting policies as set out in the Company’s consolidated financial statements exceptthat 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 prescribedin ASC 323, Investments-Equity Method and Joint Ventures. Such investments are presented on the condensed balance sheets as “Investmentsin subsidiaries, the VIE and 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 subsidiaries of the VIE” on the condensed statements of comprehensiveincome/(loss). Equity method accounting ceases when the carrying amount of the investment, including any additional financial support, insubsidiaries, 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 ofthe VIE subsequently reports net income, the parent company shall resume applying the equity method only after its share of that net incomeequals the share of net income/(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. Exhibit 2.8Description of rights of each class of securitiesregistered under Section 12 of the Securities Exchange Act of 1934 (the “Exchange Act”)Class A ordinary shares, par value US$0.000005 per share, of Pinduoduo Inc. (“we,” “our,” “our company,” or “us”) are registered underSection 12(b) of the Exchange Act, and our American depositary shares (“ADSs”), each representing four Class A ordinary shares, are listed andtraded on the Nasdaq Global Select Market. This exhibit contains a description of the rights of (i) the holders of Class A ordinary shares and (ii) theholders of ADSs. Class A ordinary shares underlying the ADSs are held by Deutsche Bank Trust Company Americas, as depositary, and holders ofADSs will not be treated as holders of the Class A ordinary shares.Description of Class A Ordinary SharesThe following is a summary of material provisions of our currently effective amended and restated memorandum and articles ofassociation (the “Memorandum and Articles of Association”), as well as the Companies Act (as amended) of the Cayman Islands (the “CompaniesAct”) insofar as they relate to the material terms of our ordinary shares. Notwithstanding this, because it is a summary, it may not contain all theinformation that you may otherwise deem important. For more complete information, you should read our Memorandum and Articles ofAssociation, which has been filed with the SEC as an exhibit to our Registration Statement on Form F-1 (File No. 333- 226014).Type and Class of Securities (Item 9.A.5 of Form 20-F)Each Class A ordinary share has US$0.000005 par value. The number of Class A ordinary shares that have been issued as of the last dayof each financial year is provided on the cover of the annual report on Form 20-F filed for such financial year (the “Form 20-F”). Our Class Aordinary shares may be held in either certificated or uncertificated form.Preemptive Rights (Item 9.A.3 of Form 20-F)Our shareholders do not have preemptive rights.Limitations or Qualifications (Item 9.A.6 of Form 20-F)We have a dual-class voting structure such that our ordinary shares consist of Class A ordinary shares and Class B ordinary shares. EachClass A ordinary share shall entitle the holder thereof to one vote on all matters subject to the vote at general meetings of our company, and eachClass B ordinary share shall entitle the holder thereof to ten (10) votes on all matters subject to the vote at general meetings of our company. Due tothe super voting power of Class B ordinary share holder, the voting power of the Class A ordinary shares may be materially limited.Rights of Other Types of Securities (Item 9.A.7 of Form 20-F)Not applicable.2Rights of Class A Ordinary Shares (Item 10.B.3 of Form 20-F)ConversionEach Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary shares arenot convertible into Class B ordinary shares under any circumstances. Upon any sale of Class B ordinary shares by a holder thereof to any personother than Mr. Zheng Huang or any entity which is not ultimately controlled by Mr. Zheng Huang, such Class B ordinary shares shall beautomatically and immediately converted into the same number of Class A ordinary shares.DividendsThe holders of our ordinary shares are entitled to such dividends as may be declared by our board of directors. Under the laws of theCayman Islands, our company may declare and pay a dividend out of either profit or share premium account, provided that in no circumstancesmay 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 RightsOur Class A ordinary shares and Class B ordinary shares vote together as a single class on all matters submitted to a vote of ourshareholders, except as may otherwise be required by law or provided for in our memorandum and articles of association. In respect of mattersrequiring shareholders’ vote, each Class A ordinary share is entitled to one vote, and each Class B ordinary share is entitled to ten votes. At anygeneral 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 theresult of the show of hands) demanded by the chairman.A quorum required for a meeting of shareholders consists of one or more shareholders holding not less than a majority of all votesattaching 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 dulyauthorized representative. Advance notice of at least ten calendar days is required for the convening of our annual general meeting and othershareholders meetings.An ordinary resolution to be passed at a meeting by the shareholders requires the affirmative vote of a simple majority of the votesattaching to the ordinary shares cast at a meeting. A special resolution requires the affirmative vote of no less than two-thirds of the votes castattaching to the outstanding shares at a meeting. Our articles of association provide that a special resolution shall be required, and that for thepurposes of any such special resolution, the affirmative vote of no less than 95% of votes cast by the shareholders entitled to vote who are presentin person or by proxy at a general meeting shall be required to approve any amendments to any provisions of our articles of association that relateto or have an impact upon: (i) the right of the Pinduoduo Partnership to appoint executive directors and nominate and recommend chief executiveofficer of our company and (ii) the procedures regarding the election, appointment and removal of directors or size of the board. Both ordinaryresolutions and special resolutions may also be passed by a unanimous written resolution signed by all the shareholders of our company, aspermitted by the Companies Act and our memorandum and articles of association. A special resolution will be3required for important matters such as a change of name or making changes that will affect the rights, preferences, privileges or powers of thepreferred shareholders.General Meetings of Shareholders.As a Cayman Islands exempted company, we are not obliged by the Companies Act to call shareholders’ annual general meetings. Ourarticles 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 casewe 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 bedetermined by our directors.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 ourshareholders. A quorum required for any general meeting of shareholders consists of one or more shareholders present or by proxy, representingnot less than a majority of all votes attaching to all of our shares in issue and entitled to vote.The Companies Act provides shareholders with only limited rights to requisition a general meeting, and does not provide shareholderswith any right to put any proposal before a general meeting. However, these rights may be provided in a company’s articles of association. Ourmemorandum and articles of association provide that upon the requisition of shareholders representing in aggregate not less than one-third of allvotes 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 ofour company, our board of directors will convene an extraordinary general meeting and put the resolutions so requisitioned to a vote at suchmeeting. However, our memorandum and articles of association do not provide our shareholders with any right to put any proposals before annualgeneral 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 oftransfer 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 sorequire, 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 onwhich 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 otherevidence 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;4·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 exceedfour; 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 mayfrom 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 waslodged, 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 registerclosed at such times and for such periods as our board of directors may from time to time determine, provided, however, that the registration oftransfers shall not be suspended nor the register closed for more than 30 calendar days in any calendar year as our board may determine.LiquidationOn the winding up of our company, if the assets available for distribution amongst our shareholders shall be more than sufficient to repaythe whole of the share capital at the commencement of the winding up, the surplus shall be distributed amongst our shareholders in proportion tothe 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 thereare monies due, of all monies payable to our company for unpaid calls or otherwise. If our assets available for distribution are insufficient to repayall 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 sharesheld by them.Calls on Shares and Forfeiture of SharesOur board of directors may from time to time make calls upon shareholders for any amounts unpaid on their shares in a notice served tosuch shareholders at least 14 calendar days prior to the specified time of payment. The shares that have been called upon and remain unpaid aresubject to forfeiture.Redemption, Repurchase and Surrender of SharesWe 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, onsuch terms and in such manner as may be determined by our board of directors, or by the shareholders by special resolutions. Our Company mayalso 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 ofour shareholders. Under the Companies Act, the redemption or repurchase of any share may be paid out of our Company’s profits or out of theproceeds of a new issue of shares made for the purpose of such redemption or repurchase, or out of capital (including share premium account andcapital redemption reserve) if our company can, immediately following such payment, pay its debts as they fall due in the ordinary course of5business. In addition, under the Companies Act no such share may be redeemed or repurchased (a) unless it is fully paid up, (b) if such redemptionor repurchase would result in there being no shares outstanding or (c) if the company has commenced liquidation. In addition, our company mayaccept the surrender of any fully paid share for no consideration.Requirements to Change the Rights of Holders of Class A Ordinary Shares (Item 10.B.4 of Form 20-F)Variations of Rights of SharesIf at any time, our share capital is divided into different classes of shares, the rights attached to any class of shares (unless otherwiseprovided 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 inwriting 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 holdersof 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 anyclass 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 creationor issue of further shares ranking pari passu with such existing class of shares.Limitations on the Rights to Own Class A Ordinary Shares (Item 10.B.6 of Form 20-F)There are no limitations imposed by our memorandum and articles of association on the rights of non-resident or foreign shareholders tohold or exercise voting rights on our shares. In addition, there are no provisions in our memorandum and articles of association governing theownership threshold above which shareholder ownership must be disclosed.Provisions Affecting Any Change of Control (Item 10.B.7 of Form 20-F)Anti-Takeover Provisions.Some provisions of our memorandum and articles of association may discourage, delay or prevent a change of control of our company ormanagement 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·limit 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 andarticles of association for a proper purpose and for what they believe in good faith to be in the best interests of our company.Ownership Threshold (Item 10.B.8 of Form 20-F)6There are no provisions in our memorandum and articles of association governing the ownership threshold above which shareholderownership must be disclosed.Differences Between the Law of Different Jurisdictions (Item 10.B.9 of Form 20-F)The Companies Act is modeled after that of England but does not follow recent English statutory enactments and differs from lawsapplicable to U.S. corporations and their shareholders. Set forth below is a summary of the significant differences between the provisions of theCompanies Act applicable to us and the laws applicable to companies incorporated in the United States and their shareholders.Mergers and Similar Arrangements.The Companies Act permits mergers and consolidations between Cayman Islands companies and between Cayman Islands companies andnon-Cayman Islands companies. For these purposes, (a) “merger” means the merging of two or more constituent companies and the vesting of theirundertaking, property and liabilities in one of such companies as the surviving company, and (b) a “consolidation” means the combination of twoor more constituent companies into a consolidated company and the vesting of the undertaking, property and liabilities of such companies to theconsolidated company. In order to effect such a merger or consolidation, the directors of each constituent company must approve a written plan ofmerger or consolidation, which must then be authorized by (a) a special resolution of the shareholders of each constituent company, and (b) suchother authorization, if any, as may be specified in such constituent company’s articles of association. The plan must be filed with the Registrar ofCompanies of the Cayman Islands together with a declaration as to the solvency of the consolidated or surviving company, a list of the assets andliabilities of each constituent company and an undertaking that a copy of the certificate of merger or consolidation will be given to the membersand creditors of each constituent company and that notification of the merger or consolidation will be published in the Cayman Islands Gazette.Court approval is not required for a merger or consolidation which is effected in compliance with these statutory procedures.A merger between a Cayman parent company and its Cayman subsidiary or subsidiaries does not require authorization by a resolution ofshareholders of that Cayman subsidiary if a copy of the plan of merger is given to every member of that Cayman subsidiary to be merged unlessthat member agrees otherwise. For this purpose a company is a “parent” of a subsidiary if it holds issued shares that together represent at least 90%of the votes at a general meeting of the subsidiary.The consent of each holder of a fixed or floating security interest over a constituent company is required unless this requirement is waivedby a court in the Cayman Islands.Save in certain limited circumstances, a shareholder of a Cayman constituent company who dissents from the merger or consolidation isentitled to payment of the fair value of his shares (which, if not agreed between the parties, will be determined by the Cayman Islands court) upondissenting to the merger or consolidation, provide the dissenting shareholder complies strictly with the procedures set out in the Companies Act.The exercise of dissenter rights will preclude the exercise by the dissenting shareholder of any other rights to which he or she might otherwise be7entitled by virtue of holding shares, save for the right to seek relief on the grounds that the merger or consolidation is void or unlawful.Separate from the statutory provisions relating to mergers and consolidations, the Companies Act also contains statutory provisions thatfacilitate the reconstruction and amalgamation of companies by way of schemes of arrangement, provided that the arrangement is approved by amajority in number of each class of shareholders and creditors with whom the arrangement is to be made, and who must in addition represent three-fourths in value of each such class of shareholders or creditors, as the case may be, that are present and voting either in person or by proxy at ameeting, or meetings, convened for that purpose. The convening of the meetings and subsequently the arrangement must be sanctioned by theGrand Court of the Cayman Islands. While a dissenting shareholder has the right to express to the court the view that the transaction ought not to beapproved, the court can be expected to approve the arrangement if it determines that:·the statutory provisions as to the required majority vote have been met;·the shareholders have been fairly represented at the meeting in question and the statutory majority are acting bona fide withoutcoercion of the minority to promote interests adverse to those of the class;·the arrangement is such that may be reasonably approved by an intelligent and honest man of that class acting in respect of hisinterest; and·the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Act.The Companies Act also contains a statutory power of compulsory acquisition which may facilitate the “squeeze out” of dissentientminority shareholder upon a tender offer. When a tender offer is made and accepted by holders of 90% of the shares affected within four months,the offeror may, within a two-month period commencing on the expiration of such four month period, require the holders of the remaining shares totransfer such shares to the offeror on the terms of the offer. An objection can be made to the Grand Court of the Cayman Islands but this is unlikelyto succeed in the case of an offer which has been so approved unless there is evidence of fraud, bad faith or collusion.If an arrangement and reconstruction is thus approved, or if a tender offer is made and accepted, a dissenting shareholder would have norights comparable to appraisal rights, save that objectors to a takeover offer may apply to the Grand Court of the Cayman Islands for various ordersthat the Grand Court of the Cayman Islands has a broad discretion to make, which would otherwise ordinarily be available to dissentingshareholders of Delaware corporations, providing rights to receive payment in cash for the judicially determined value of the shares.Shareholders’ Suits.In principle, we will normally be the proper plaintiff and as a general rule a derivative action may not be brought by a minorityshareholder. However, based on English authorities,8which would in all likelihood be of persuasive authority in the Cayman Islands, there are exceptions to the foregoing principle, including when:·a company acts or proposes to act illegally or ultra vires;·the act complained of, although not ultra vires, could only be effected duly if authorized by more than a simple majority vote that hasnot been obtained; and·those who control the company are perpetrating a “fraud on the minority.”Indemnification of Directors and Executive Officers and Limitation of Liability.Cayman Islands law does not limit the extent to which a company’s memorandum and articles of association may provide forindemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to publicpolicy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Our memorandum and articles ofassociation permit indemnification of officers and directors against all actions, proceedings, costs, charges, expenses, losses, damages or liabilitiesincurred or sustained by such officers and directors, other than by reason of such officer’s or director’s own dishonesty, willful default or fraud, inor about the conduct of our business or affairs (including as a result of any mistake of judgment) or in the execution or discharge of his or herduties, powers, authorities or discretions, including without prejudice to the generality of the foregoing, any costs, expenses, losses or liabilitiesincurred by such officer and director in defending (whether successfully or otherwise) any civil proceedings concerning us or our affairs in anycourt whether in the Cayman Islands or elsewhere. This standard of conduct is generally the same as permitted under the Delaware GeneralCorporation Law for a Delaware corporation.In addition, we have entered into indemnification agreements with our directors and executive officers that provide such persons withadditional indemnification beyond that provided in our memorandum and articles of association.Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controllingus under the foregoing provisions, we have been informed that in the opinion of the SEC, such indemnification is against public policy as expressedin the Securities Act and is therefore unenforceable.Directors’ Fiduciary Duties.Under Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the corporation and its shareholders. This dutyhas two components: the duty of care and the duty of loyalty. The duty of care requires that a director act in good faith, with the care that anordinarily prudent person would exercise under similar circumstances. Under this duty, a director must inform himself of, and disclose toshareholders, all material information reasonably available regarding a significant transaction. The duty of loyalty requires that a director acts in amanner he reasonably believes to be in the best interests of the corporation. He must not use his corporate position for personal gain or advantage.This duty prohibits self-dealing by a director and mandates that the best interest of the corporation and its shareholders take precedence over anyinterest9possessed by a director, officer or controlling shareholder and not shared by the shareholders generally. In general, actions of a director arepresumed to have been made on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of thecorporation. However, this presumption may be rebutted by evidence of a breach of one of the fiduciary duties. Should such evidence be presentedconcerning a transaction by a director, the director must prove the procedural fairness of the transaction, and that the transaction was of fair value tothe corporation.As a matter of Cayman Islands law, a director of a Cayman Islands company is in the position of a fiduciary with respect to the companyand therefore it is considered that he owes the following duties to the company—a duty to act bona fide in the best interests of the company, a dutynot to make a profit based on his position as director (unless the company permits him to do so) and a duty not to put himself in a position wherethe interests of the company conflict with his personal interest or his duty to a third party. A director of a Cayman Islands company owes to thecompany a duty to act with skill and care. It was previously considered that a director need not exhibit in the performance of his duties a greaterdegree of skill than may reasonably be expected from a person of his knowledge and experience. However, English and Commonwealth courtshave moved towards an objective standard with regard to the required skill and care and these authorities are likely to be followed in the CaymanIslands.Shareholder Action by Written Consent.Under the Delaware General Corporation Law, a corporation may eliminate the right of shareholders to act by written consent byamendment to its certificate of incorporation. Cayman Islands law and our articles of association provide that shareholders may approve corporatematters by way of a unanimous written resolution signed by or on behalf of each shareholder who would have been entitled to vote on such matterat a general meeting without a meeting being held.Shareholder Proposals.Under the Delaware General Corporation Law, a shareholder has the right to put any proposal before the annual meeting of shareholders,provided it complies with the notice provisions in the governing documents. A special meeting may be called by the board of directors or any otherperson authorized to do so in the governing documents, but shareholders may be precluded from calling special meetings.The Companies Act provide shareholders with only limited rights to requisition a general meeting, and does not provide shareholders withany right to put any proposal before a general meeting. However, these rights may be provided in a company’s articles of association. Our articlesof association allow our shareholders holding in aggregate not less than one-third of all votes attaching to the outstanding shares of our companyentitled to vote at general meetings to requisition an extraordinary general meeting of our shareholders, in which case our board is obliged toconvene an extraordinary general meeting and to put the resolutions so requisitioned to a vote at such meeting. Other than this right to requisition ashareholders’ meeting, our articles of association do not provide our shareholders with any other right to put proposals before annual generalmeetings or extraordinary general meetings. As an exempted Cayman Islands company, we are not obliged by law to call shareholders’ annualgeneral meetings.10Cumulative Voting.Under the Delaware General Corporation Law, cumulative voting for elections of directors is not permitted unless the corporation’scertificate of incorporation specifically provides for it. Cumulative voting potentially facilitates the representation of minority shareholders on aboard of directors since it permits the minority shareholder to cast all the votes to which the shareholder is entitled on a single director, whichincreases the shareholder’s voting power with respect to electing such director. There are no prohibitions in relation to cumulative voting under thelaws of the Cayman Islands but our articles of association do not provide for cumulative voting. As a result, our shareholders are not afforded anyless protections or rights on this issue than shareholders of a Delaware corporation.Removal of Directors.Under the Delaware General Corporation Law, a director of a corporation with a classified board may be removed only for cause with theapproval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. Under our articles ofassociation, directors may be removed with or without cause, by an ordinary resolution of our shareholders.Transactions with Interested Shareholders.The Delaware General Corporation Law contains a business combination statute applicable to Delaware corporations whereby, unless thecorporation has specifically elected not to be governed by such statute by amendment to its certificate of incorporation, it is prohibited fromengaging in certain business combinations with an “interested shareholder” for three years following the date that such person becomes aninterested shareholder. An interested shareholder generally is a person or a group who or which owns or owned 15% or more of the target’soutstanding voting share within the past three years. This has the effect of limiting the ability of a potential acquirer to make a two-tiered bid for thetarget in which all shareholders would not be treated equally. The statute does not apply if, among other things, prior to the date on whichsuch shareholder becomes an interested shareholder, the board of directors approves either the business combination or the transaction whichresulted in the person becoming an interested shareholder. This encourages any potential acquirer of a Delaware corporation to negotiate the termsof any acquisition transaction with the target’s board of directors.Cayman Islands law has no comparable statute. As a result, we cannot avail ourselves of the types of protections afforded by the Delawarebusiness combination statute. However, although Cayman Islands law does not regulate transactions between a company and its significantshareholders, it does provide that such transactions must be entered into bona fide in the best interests of the company and not with the effect ofconstituting a fraud on the minority shareholders.Dissolution; Winding Up.Under the Delaware General Corporation Law, unless the board of directors approves the proposal to dissolve, dissolution must beapproved by shareholders holding 100% of the total voting power of the corporation. Only if the dissolution is initiated by the board of directorsmay it be approved by a simple majority of the corporation’s outstanding shares. Delaware law allows11a Delaware corporation to include in its certificate of incorporation a supermajority voting requirement in connection with dissolutions initiated bythe board.Under Cayman Islands law, a company may be wound up by either an order of the courts of the Cayman Islands or by a special resolutionof its members or, if the company is unable to pay its debts as they fall due, by an ordinary resolution of its members. The court has authority toorder winding up in a number of specified circumstances including where it is, in the opinion of the court, just and equitable to do so. Under theCompanies Act and our articles of association, our company may be dissolved, liquidated or wound up by a special resolution of our shareholders.Variation of Rights of Shares.Under the Delaware General Corporation Law, a corporation may vary the rights of a class of shares with the approval of a majority of theoutstanding shares of such class, unless the certificate of incorporation provides otherwise. Under Cayman Islands law and our articles ofassociation, if our share capital is divided into more than one class of shares, we may vary the rights attached to any class with the written consentof the holders of two-thirds of the issued shares of that class or with the sanction of a resolution passed at a general meeting of the holders of theshares of that class by holders of two-thirds of the issued shares of that class.Amendment of Governing Documents.Under the Delaware General Corporation Law, a corporation’s governing documents may be amended with the approval of a majority ofthe outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. As permitted by Cayman Islands law, ourmemorandum and articles of association may only be amended with a special resolution of our shareholders.Changes in Capital (Item 10.B.10 of Form 20-F)Our shareholders may from time to time by ordinary resolution:·increase our share capital by such sum, to be divided into shares of such classes and amount, as the resolution shall prescribe;·consolidate and divide all or any of our share capital into shares of a larger amount than our existing shares;·convert all or any of our paid up shares into stock and reconvert that stock into paid up shares of any denomination;·subdivide our existing shares, or any of them, into shares of an amount smaller than that fixed by the memorandum, provided that inthe subdivision the proportion between the amount paid and the amount, if any, unpaid on each reduced share shall be the same as itwas in case of the share from which the reduced share is derived; or12·cancel any shares which, at the date of the passing of the resolution, have not been taken or agreed to be taken by any person anddiminish the amount of our share capital by the amount of the shares so cancelled.We may by special resolution, reduce our share capital and any capital redemption reserve in any manner permitted by law.Debt Securities (Item 12.A of Form 20-F)Not applicable.Warrants and Rights (Item 12.B of Form 20-F)Not applicable.Other Securities (Item 12.C of Form 20-F)Not applicable.Description of American Depositary Shares (Items 12.D.1 and 12.D.2 of Form 20-F)Deutsche Bank Trust Company Americas, as depositary, registers and delivers the ADSs. Each ADS represents ownership of four Class Aordinary shares, deposited with Deutsche Bank AG, Hong Kong Branch, as custodian for the depositary. Each ADS also represents ownership ofany other securities, cash or other property which may be held by the depositary. The depositary’s corporate trust office at which the ADSs will beadministered is located at 60 Wall Street, New York, NY 10005, USA. The principal executive office of the depositary is located at 60 Wall Street,New York, NY 10005, USA.The Direct Registration System, or DRS, is a system administered by The Depository Trust Company, or DTC, pursuant to which thedepositary may register the ownership of uncertificated ADSs, which ownership shall be evidenced by periodic statements issued by the depositaryto the ADS holders entitled thereto.We do not treat ADS holders as our shareholders and accordingly, you, as an ADS holder, do not have shareholder rights. Cayman Islandslaw governs shareholder rights. The depositary is the holder of the Class A ordinary shares underlying your ADSs. As a holder of ADSs, you haveADS holder rights. A deposit agreement among us, the depositary and you, as an ADS holder, and the beneficial owners of ADSs sets out ADSholder rights as well as the rights and obligations of the depositary. The laws of the State of New York govern the deposit agreement and the ADSs.The following is a summary of the material provisions of the deposit agreement. For more complete information, you should read theentire deposit agreement and the form of American Depositary Receipt. The deposit agreement has been filed with the SEC as an exhibit to aRegistration Statement on Form F-6 (File No. 333-226185) for our company.Holding the ADSs13How will you hold your ADSs?You may hold ADSs either (1) directly (a) by having an American Depositary Receipt, or ADR, which is a certificate evidencing aspecific number of ADSs, registered in your name, or (b) by holding ADSs in DRS, or (2) indirectly through your broker or other financialinstitution. If you hold ADSs directly, you are an ADS holder. This description assumes you hold your ADSs directly. ADSs will be issued throughDRS, unless you specifically request certificated ADRs. If you hold the ADSs indirectly, you must rely on the procedures of your broker or otherfinancial institution to assert the rights of ADS holders described in this section. You should consult with your broker or financial institution to findout what those procedures are.Dividends and Other DistributionsHow will you receive dividends and other distributions on the shares?The depositary has agreed to pay to you the cash dividends or other distributions it or the custodian receives on Class A ordinary shares orother deposited securities, after deducting its fees and expenses. You will receive these distributions in proportion to the number of Class Aordinary shares your ADSs represent as of the record date (which will be as close as practicable to the record date for our Class A ordinary shares)set by the depositary with respect to the ADSs.·Cash. The depositary will convert or cause to be converted any cash dividend or other cash distribution we pay on the Class Aordinary shares or any net proceeds from the sale of any Class A ordinary shares, rights, securities or other entitlements under theterms of the deposit agreement into U.S. dollars if it can do so on a practicable basis, and can transfer the U.S. dollars to the UnitedStates and will distribute promptly the amount thus received. If the depositary shall determine in its judgment that such conversionsor transfers are not practical or lawful or if any government approval or license is needed and cannot be obtained at a reasonable costwithin a reasonable period or otherwise sought, the deposit agreement allows the depositary to distribute the foreign currency only tothose ADS holders to whom it is possible to do so. It will hold or cause the custodian to hold the foreign currency it cannot convertfor the account of the ADS holders who have not been paid and such funds will be held for the respective accounts of the ADSholders. It will not invest the foreign currency and it will not be liable for any interest for the respective accounts of the ADS holders.Before making a distribution, any taxes or other governmental charges, together with fees and expenses of the depositary, that must bepaid, will be deducted. It will distribute only whole U.S. dollars and cents and will round down fractional cents to the nearest wholecent. If the exchange rates fluctuate during a time when the depositary cannot convert the foreign currency, you may lose some or allof the value of the distribution.·Shares. For any Class A ordinary shares we distribute as a dividend or free distribution, either (1) the depositary will distributeadditional ADSs representing such Class A ordinary shares or (2) existing ADSs as of the applicable record date will represent rightsand interests in the additional Class A ordinary shares distributed, to the extent reasonably practicable and permissible under law, ineither case, net of applicable fees, charges and expenses incurred by the depositary and taxes and/or other governmental14charges. The depositary will only distribute whole ADSs. It will try to sell Class A ordinary shares which would require it to deliver afractional ADS and distribute the net proceeds in the same way as it does with cash. The depositary may sell a portion of thedistributed Class A ordinary shares sufficient to pay its fees and expenses, and any taxes and governmental charges, in connectionwith that distribution.·Elective Distributions in Cash or Shares. If we offer holders of our Class A ordinary shares the option to receive dividends in eithercash or shares, the depositary, after consultation with us and having received timely notice as described in the deposit agreement ofsuch elective distribution by us, has discretion to determine to what extent such elective distribution will be made available to you asa holder of the ADSs. We must timely first instruct the depositary to make such elective distribution available to you and furnish itwith satisfactory evidence that it is legal to do so. The depositary could decide it is not legal or reasonably practicable to make suchelective distribution available to you. In such case, the depositary shall, on the basis of the same determination as is made in respectof the Class A ordinary shares for which no election is made, distribute either cash in the same way as it does in a cash distribution, oradditional ADSs representing Class A ordinary shares in the same way as it does in a share distribution. The depositary is notobligated to make available to you a method to receive the elective dividend in shares rather than in ADSs. There can be no assurancethat you will be given the opportunity to receive elective distributions on the same terms and conditions as the holders of Class Aordinary shares.·Rights to Purchase Additional Shares. If we offer holders of our Class A ordinary shares any rights to subscribe for additional shares,the depositary shall having received timely notice as described in the deposit agreement of such distribution by us, consult with us,and we must determine whether it is lawful and reasonably practicable to make these rights available to you. We must first instruct thedepositary to make such rights available to you and furnish the depositary with satisfactory evidence that it is legal to do so. If thedepositary decides it is not legal or reasonably practicable to make the rights available but that it is lawful and reasonably practicableto sell the rights, the depositary will endeavor to sell the rights and in a riskless principal capacity or otherwise, at such place andupon such terms (including public or private sale) as it may deem proper distribute the net proceeds in the same way as it does withcash.The depositary will allow rights that are not distributed or sold to lapse. In that case, you will receive no value for them.If the depositary makes rights available to you, it will establish procedures to distribute such rights and enable you to exercise therights upon your payment of applicable fees, charges and expenses incurred by the depositary and taxes and/or other governmentalcharges. The Depositary shall not be obliged to make available to you a method to exercise such rights to subscribe for Class Aordinary shares (rather than ADSs).U.S. securities laws may restrict transfers and cancellation of the ADSs represented by shares purchased upon exercise of rights. Forexample, you may not be able to trade15these ADSs freely in the United States. In this case, the depositary may deliver restricted depositary shares that have the same termsas the ADSs described in this section except for changes needed to put the necessary restrictions in place.There can be no assurance that you will be given the opportunity to exercise rights on the same terms and conditions as the holders ofClass A ordinary shares or be able to exercise such rights.·Other Distributions. Subject to receipt of timely notice, as described in the deposit agreement, from us with the request to make anysuch distribution available to you, and provided the depositary has determined such distribution is lawful and reasonably practicableand feasible and in accordance with the terms of the deposit agreement, the depositary will distribute to you anything else wedistribute on deposited securities by any means it may deem practicable, upon your payment of applicable fees, charges and expensesincurred by the depositary and taxes and/or other governmental charges. If any of the conditions above are not met, the depositarywill endeavor to sell, or cause to be sold, what we distributed and distribute the net proceeds in the same way as it does with cash; or,if it is unable to sell such property, the depositary may dispose of such property in any way it deems reasonably practicable under thecircumstances for nominal or no consideration, such that you may have no rights to or arising from such property.The depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any ADS holders. Wehave no obligation to register ADSs, shares, rights or other securities under the Securities Act. We also have no obligation to take any other actionto permit the distribution of ADSs, shares, rights or anything else to ADS holders. This means that you may not receive the distributions we makeon our shares or any value for them if we and/or the depositary determines that it is illegal or not practicable for us or the depositary to make themavailable to you.Deposit, Withdrawal and CancellationHow are ADSs issued?The depositary will deliver ADSs if you or your broker deposit Class A ordinary shares or evidence of rights to receive Class A ordinaryshares with the custodian. Upon payment of its fees and expenses and of any taxes or charges, such as stamp taxes or stock transfer taxes or fees,the depositary will register the appropriate number of ADSs in the names you request and will deliver the ADSs to or upon the order of the personor persons entitled thereto.How do ADS holders cancel an American Depositary Share?You may turn in your ADSs at the depositary’s corporate trust office or by providing appropriate instructions to your broker. Uponpayment of its fees and expenses and of any taxes or charges, such as stamp taxes or stock transfer taxes or fees, the depositary will deliver theClass A ordinary shares and any other deposited securities underlying the ADSs to you or a person you16designate at the office of the custodian. Or, at your request, risk and expense, the depositary will deliver the deposited securities at its corporatetrust office, to the extent permitted by law.How do ADS holders interchange between certificated ADSs and uncertificated ADSs?You may surrender your ADR to the depositary for the purpose of exchanging your ADR for uncertificated ADSs. The depositary willcancel that ADR and will send you a statement confirming that you are the owner of uncertificated ADSs. Alternatively, upon receipt by thedepositary of a proper instruction from a holder of uncertificated ADSs requesting the exchange of uncertificated ADSs for certificated ADSs, thedepositary will execute and deliver to you an ADR evidencing those ADSs.Voting RightsHow do you vote?You may instruct the depositary to vote the Class A ordinary shares or other deposited securities underlying your ADSs at any meeting atwhich you are entitled to vote pursuant to any applicable law, the provisions of our memorandum and articles of association, and the provisions ofor governing the deposited securities. Otherwise, you could exercise your right to vote directly if you withdraw the Class A ordinary shares.However, you may not know about the meeting sufficiently enough in advance to withdraw the Class A ordinary shares.If we ask for your instructions and upon timely notice from us by regular, ordinary mail delivery, or by electronic transmission, asdescribed in the deposit agreement, the depositary will notify you of the upcoming meeting at which you are entitled to vote pursuant to anyapplicable law, the provisions of our memorandum and articles of association, and the provisions of or governing the deposited securities, andarrange to deliver our voting materials to you. The materials will include or reproduce (a) such notice of meeting or solicitation of consents orproxies; (b) a statement that the ADS holders at the close of business on the ADS record date will be entitled, subject to any applicable law, theprovisions of our memorandum and articles of association, and the provisions of or governing the deposited securities, to instruct the depositary asto the exercise of the voting rights, if any, pertaining to the Class A ordinary shares or other deposited securities represented by such holder’sADSs; and (c) a brief statement as to the manner in which such instructions may be given or deemed given in accordance with the second to lastsentence of this paragraph if no instruction is received, to the depositary to give a discretionary proxy to a person designated by us. Votinginstructions may be given only in respect of a number of ADSs representing an integral number of Class A ordinary shares or other depositedsecurities. For instructions to be valid, the depositary must receive them in writing on or before the date specified. The depositary will try, as far aspractical, subject to applicable law and the provisions of our memorandum and articles of association, to vote or to have its agents vote the Class Aordinary shares or other deposited securities (in person or by proxy) as you instruct. The depositary will only vote or attempt to vote as you instruct.If we timely requested the depositary to solicit your instructions but no instructions are received by the depositary from an owner with respect toany of the deposited securities represented by the ADSs of that owner on or before the date established by the depositary for such purpose, thedepositary shall deem that owner to have instructed the depositary to give a discretionary proxy to a person designated by us with respect to suchdeposited17securities, and the depositary shall give a discretionary proxy to a person designated by us to vote such deposited securities. However, no suchinstruction shall be deemed given and no such discretionary proxy shall be given with respect to any matter if we inform the depositary we do notwish such proxy given, substantial opposition exists or the matter materially and adversely affects the rights of holders of the Class A ordinaryshares.We cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote the Class Aordinary shares underlying your ADSs. In addition, there can be no assurance that ADS holders and beneficial owners generally, or any holder orbeneficial owner in particular, will be given the opportunity to vote or cause the custodian to vote on the same terms and conditions as the holdersof our Class A ordinary shares.The depositary and its agents are not responsible for failing to carry out voting instructions or for the manner of carrying out votinginstructions. This means that you may not be able to exercise your right to vote and you may have no recourse if the Class A ordinary sharesunderlying your ADSs are not voted as you requested.In order to give you a reasonable opportunity to instruct the depositary as to the exercise of voting rights relating to deposited securities, ifwe request the depositary to act, we will give the depositary notice of any such meeting and details concerning the matters to be voted at least 30business days in advance of the meeting date.Compliance with RegulationsInformation RequestsEach ADS holder and beneficial owner shall (a) provide such information as we or the depositary may request pursuant to law, including,without limitation, relevant Cayman Islands law, any applicable law of the United States of America, our memorandum and articles of association,any resolutions of our Board of Directors adopted pursuant to such memorandum and articles of association, the requirements of any markets orexchanges upon which the Class A ordinary shares, ADSs or ADRs are listed or traded, or to any requirements of any electronic book-entry systemby which the ADSs or ADRs may be transferred, regarding the capacity in which they own or owned ADRs, the identity of any other persons thenor previously interested in such ADRs and the nature of such interest, and any other applicable matters, and (b) be bound by and subject toapplicable provisions of the laws of the Cayman Islands, our memorandum and articles of association, and the requirements of any markets orexchanges upon which the ADSs, ADRs or Class A ordinary shares are listed or traded, or pursuant to any requirements of any electronic book-entry system by which the ADSs, ADRs or Class A ordinary shares may be transferred, to the same extent as if such ADS holder or beneficialowner held Class A ordinary shares directly, in each case irrespective of whether or not they are ADS holders or beneficial owners at the time suchrequest is made.Disclosure of InterestsEach ADS holder and beneficial owner shall comply with our requests pursuant to Cayman Islands law, the rules and requirements of theNew York Stock Exchange and any other stock exchange on which the Class A ordinary shares are, or will be, registered, traded or listed or our18memorandum and articles of association, which requests are made to provide information, inter alia, as to the capacity in which such ADS holderor beneficial owner owns ADS and regarding the identity of any other person interested in such ADS and the nature of such interest and variousother matters, whether or not they are ADS holders or beneficial owners at the time of such requests.Fees and ExpensesAs an ADS holder, you will be required to pay the following service fees to the depositary bank and certain taxes and governmentalcharges (in addition to any applicable fees, expenses, taxes and other governmental charges payable on the deposited securities represented by anyof your ADSs):Service Fees ·To any person to which ADSs are issued or to any person to which a distribution ismade in respect of ADS distributions pursuant to stock dividends or other freedistributions of stock, bonus distributions, stock splits or other distributions (exceptwhere converted to cash)Up to US$0.05 per ADS issued·Cancellation of ADSs, including the case of termination of the deposit agreementUp to US$0.05 per ADS cancelled·Distribution of cash dividendsUp to US$0.05 per ADS held·Distribution of cash entitlements (other than cash dividends) and/or cash proceedsfrom the sale of rights, securities and other entitlementsUp 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 ADSsUp to US$0.05 per ADS held·Depositary servicesUp to US$0.05 per ADS held on the applicablerecord date(s) established by the depositary bankAs an ADS holder, you will also be responsible to pay certain fees and expenses incurred by the depositary bank and certain taxes andgovernmental charges (in addition to any applicable fees, expenses, taxes and other governmental charges payable on the deposited securitiesrepresented by any of your ADSs) such as:19·Fees for the transfer and registration of Class A ordinary shares charged by the registrar and transfer agent for the Class A ordinaryshares in the Cayman Islands (i.e., upon deposit and withdrawal of Class A ordinary shares).·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 withholdingtaxes (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 requirementsapplicable 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 (onbehalf of their clients) receiving the newly issued ADSs from the depositary bank and by the brokers (on behalf of their clients) delivering theADSs to the depositary bank for cancellation. The brokers in turn charge these fees to their clients. Depositary fees payable in connection withdistributions of cash or securities to ADS holders and the depositary services fee are charged by the depositary bank to the holders of record ofADSs 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 ofdistributable property to pay the fees. In the case of distributions other than cash (i.e., share dividends, rights), the depositary bank charges theapplicable fee to the ADS record date holders concurrent with the distribution. In the case of ADSs registered in the name of the investor (whethercertificated or uncertificated in direct registration), the depositary bank sends invoices to the applicable record date ADS holders. In the case ofADSs 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. Thebrokers and custodians who hold their clients’ ADSs in DTC accounts in turn charge their clients’ accounts the amount of the fees paid to thedepositary banks.In the event of refusal to pay the depositary fees, the depositary bank may, under the terms of the deposit agreement, refuse the requestedservice until payment is received or may set off the amount of the depositary fees from any distribution to be made to the ADS holder.20The depositary may make payments to us or reimburse us for certain costs and expenses, by making available a portion of the ADS feescollected in respect of the ADR program or otherwise, upon such terms and conditions as we and the depositary bank agree from time to time.Payment of TaxesYou will be responsible for any taxes or other governmental charges payable, or which become payable, on your ADSs or on the depositedsecurities represented by any of your ADSs. The depositary may refuse to register or transfer your ADSs or allow you to withdraw the depositedsecurities represented by your ADSs until such taxes or other charges are paid. It may apply payments owed to you or sell deposited securitiesrepresented by your ADSs to pay any taxes owed and you will remain liable for any deficiency. If the depositary sells deposited securities, it will, ifappropriate, reduce the number of ADSs to reflect the sale and pay to you any net proceeds, or send to you any property, remaining after it has paidthe taxes. You agree to indemnify us, the depositary, the custodian and each of our and their respective agents, directors, employees and affiliatesfor, and hold each of them harmless from, any claims with respect to taxes (including applicable interest and penalties thereon) arising from anyrefund of taxes, reduced rate of withholding at source or other tax benefit obtained for you. Your obligations under this paragraph shall survive anytransfer of ADRs, any surrender of ADRs and withdrawal of deposited securities or the termination of the deposit agreement.Reclassifications, Recapitalizations and MergersIf we: Then: Change the nominal or par value of our Class A ordinary sharesThe cash, shares or other securities received by the depositarywill become deposited securities.Reclassify, split up or consolidate any of the deposited securitiesEach ADS will automatically represent its equal share of thenew deposited securities.Distribute securities on the Class A ordinary shares that are not distributed toyou, or recapitalize, reorganize, merge, liquidate, sell all or substantially all ofour assets, or take any similar actionThe depositary may distribute some or all of the cash, shares orother securities it received. It may also deliver new ADSs orask you to surrender your outstanding ADRs in exchange fornew ADRs identifying the new deposited securities.Amendment and TerminationHow may the deposit agreement be amended?We may agree with the depositary to amend the deposit agreement and the form of ADR without your consent for any reason. If anamendment adds or increases fees or charges, except for taxes and other governmental charges or expenses of the depositary for registration fees,facsimile costs, delivery charges or similar items, including expenses incurred in connection with foreign exchange control regulations and othercharges specifically payable by ADS holders under the deposit agreement, or materially prejudices a substantial existing right of ADS holders, itwill21not become effective for outstanding ADSs until 30 days after the depositary notifies ADS holders of the amendment. At the time an amendmentbecomes effective, you are considered, by continuing to hold your ADSs, to agree to the amendment and to be bound by the ADRs and the depositagreement as amended . If any new laws are adopted which would require the deposit agreement to be amended in order to comply therewith, weand the depositary may amend the deposit agreement in accordance with such laws and such amendment may become effective before noticethereof is given to ADS holders.How may the deposit agreement be terminated?The depositary will terminate the deposit agreement if we ask it to do so, in which case the depositary will give notice to you at least 90days prior to termination. The depositary may also terminate the deposit agreement if the depositary has told us that it would like to resign, or if wehave removed the depositary, and in either case we have not appointed a new depositary within 90 days. In either such case, the depositary mustnotify you at least 30 days before termination.After termination, the depositary and its agents will do the following under the deposit agreement but nothing else: collect distributions onthe deposited securities, sell rights and other property and deliver Class A ordinary shares and other deposited securities upon cancellation of ADSsafter payment of any fees, charges, taxes or other governmental charges. Six months or more after the date of termination, the depositary may sellany remaining deposited securities by public or private sale. After that, the depositary will hold the money it received on the sale, as well as anyother cash it is holding under the deposit agreement, for the pro rata benefit of the ADS holders that have not surrendered their ADSs. It will notinvest the money and has no liability for interest. After such sale, the depositary’s only obligations will be to account for the money and other cash.After termination, we shall be discharged from all obligations under the deposit agreement except for our obligations to the depositary thereunder.Books of DepositaryThe depositary will maintain ADS holder records at its depositary office. You may inspect such records at such office during regularbusiness hours but solely for the purpose of communicating with other holders in the interest of business matters relating to the Company, theADRs and the deposit agreement.The depositary will maintain facilities in the Borough of Manhattan, The City of New York to record and process the issuance,cancellation, combination, split-up and transfer of ADRs.These facilities may be closed at any time or from time to time when such action is deemed necessary or advisable by the depositary inconnection with the performance of its duties under the deposit agreement or at our reasonable written request.Limitations on Obligations and LiabilityLimits on our obligations and the Obligations of the Depositary and the Custodian; Limits on Liability to Holders of ADSs22The deposit agreement expressly limits our obligations and the obligations of the depositary and the custodian. It also limits our liabilityand the liability of the depositary. The depositary and the custodian:·are only obligated to take the actions specifically set forth in the deposit agreement without gross negligence or willful misconduct;·are not liable if any of us or our respective controlling persons or agents are prevented or forbidden from, or subjected to any civil orcriminal penalty or restraint on account of, or delayed in, doing or performing any act or thing required by the terms of the depositagreement and any ADR, by reason of any provision of any present or future law or regulation of the United States or any statethereof, the Cayman Islands or any other country, or of any other governmental authority or regulatory authority or stock exchange, oron account of the possible criminal or civil penalties or restraint, or by reason of any provision, present or future, of our memorandumand articles of association or any provision of or governing any deposited securities, or by reason of any act of God or war or othercircumstances beyond its control (including, without limitation, nationalization, expropriation, currency restrictions, work stoppage,strikes, civil unrest, revolutions, rebellions, explosions and computer failure);·are not liable by reason of any exercise of, or failure to exercise, any discretion provided for in the deposit agreement or in ourmemorandum and articles of association or provisions of or governing deposited securities;·are not liable for any action or inaction of the depositary, the custodian or us or their or our respective controlling persons or agents inreliance upon the advice of or information from legal counsel, any person presenting Class A ordinary shares for deposit or any otherperson believed by it in good faith to be competent to give such advice or information;·are not liable for the inability of any holder of ADSs to benefit from any distribution on deposited securities that is not made availableto holders of ADSs under the terms of the deposit agreement;·are not liable for any special, consequential, indirect or punitive damages for any breach of the terms of the deposit agreement, orotherwise;·may rely upon any documents we believe in good faith to be genuine and to have been signed or presented by the proper party;·disclaim any liability for any action or inaction or inaction of any of us or our respective controlling persons or agents in relianceupon the advice of or information from legal counsel, accountants, any person presenting Class A ordinary shares for deposit, holdersand beneficial owners (or authorized representatives) of ADSs, or any person believed in good faith to be competent to give suchadvice or information; and23·disclaim any liability for inability of any holder to benefit from any distribution, offering, right or other benefit made available toholders of deposited securities but not made available to holders of ADS.The depositary and any of its agents also disclaim any liability (i) for any failure to carry out any instructions to vote, the manner in whichany vote is cast or the effect of any vote or failure to determine that any distribution or action may be lawful or reasonably practicable or forallowing any rights to lapse in accordance with the provisions of the deposit agreement, (ii) the failure or timeliness of any notice from us, thecontent of any information submitted to it by us for distribution to you or for any inaccuracy of any translation thereof, (iii) any investment riskassociated with the acquisition of an interest in the deposited securities, the validity or worth of the deposited securities, the credit-worthiness ofany third party, (iv) for any tax consequences that may result from ownership of ADSs, Class A ordinary shares or deposited securities, or (v) forany acts or omissions made by a successor depositary whether in connection with a previous act or omission of the depositary or in connection withany matter arising wholly after the removal or resignation of the depositary, provided that in connection with the issue out of which such potentialliability arises the depositary performed its obligations without gross negligence or willful misconduct while it acted as depositary.In addition, the deposit agreement provides that each party to the deposit agreement (including each holder, beneficial owner and holder ofinterests in the ADRs) irrevocably waives, to the fullest extent permitted by applicable law, any right it may have to a trial by jury in any lawsuit orproceeding against the depositary or our company related to our shares, the ADSs or the deposit agreement. This provision does not apply to claimsagainst us made under the federal securities laws.In the deposit agreement, we and the depositary agree to indemnify each other under certain circumstances.Requirements for Depositary ActionsBefore the depositary will issue, deliver or register a transfer of an ADS, split-up, subdivide or combine ADSs, make a distribution on anADS, or permit withdrawal of Class A ordinary shares, the depositary may require:·payment of stock transfer or other taxes or other governmental charges and transfer or registration fees charged by third parties for thetransfer of any Class A ordinary shares or other deposited securities and payment of the applicable fees, expenses and charges of thedepositary;·satisfactory proof of the identity and genuineness of any signature or any other matters contemplated in the deposit agreement; and·compliance with (A) any laws or governmental regulations relating to the execution and delivery of ADRs or ADSs or to thewithdrawal or delivery of deposited securities and (B) such reasonable regulations and procedures as the depositary may establish,24from time to time, consistent with the deposit agreement and applicable laws, including presentation of transfer documents.The depositary may refuse to issue and deliver ADSs or register transfers of ADSs generally when the register of the depositary or ourtransfer books are closed or at any time if the depositary or we determine that it is necessary or advisable to do so.Your Right to Receive the Shares Underlying your ADSsYou have the right to cancel your ADSs and withdraw the underlying Class A ordinary shares at any time except:·when temporary delays arise because: (1) the depositary has closed its transfer books or we have closed our transfer books; (2) thetransfer of Class A ordinary shares is blocked to permit voting at a shareholders’ meeting; or (3) we are paying a dividend on ourClass A ordinary shares;·when you owe money to pay fees, taxes and similar charges;·when it is necessary to prohibit withdrawals in order to comply with any laws or governmental regulations that apply to ADSs or tothe withdrawal of ordinary shares or other deposited securities, or·other circumstances specifically contemplated by Section I.A.(l) of the General Instructions to Form F-6 (as such General Instructionsmay be amended from time to time); or·for any other reason if the depositary or we determine, in good faith, that it is necessary or advisable to prohibit withdrawals.The depositary shall not knowingly accept for deposit under the deposit agreement any Class A ordinary shares or other depositedsecurities required to be registered under the provisions of the Securities Act, unless a registration statement is in effect as to such ordinary shares.This right of withdrawal may not be limited by any other provision of the deposit agreement.Direct Registration SystemIn the deposit agreement, all parties to the deposit agreement acknowledge that the DRS and Profile Modification System, or Profile, willapply to uncertificated ADSs upon acceptance thereof to DRS by DTC. DRS is the system administered by DTC pursuant to which the depositarymay register the ownership of uncertificated ADSs, which ownership shall be evidenced by periodic statements issued by the depositary to theADS holders entitled thereto. Profile is a required feature of DRS which allows a DTC participant, claiming to act on behalf of an ADS holder, todirect the depositary to register a transfer of those ADSs to DTC or its nominee and to deliver those ADSs to the DTC account of that DTCparticipant without receipt by the depositary of prior authorization from the ADS holder to register such transfer. Exhibit 8.1List of Principal Subsidiaries and Consolidated Variable Interest EntitySubsidiaryPlace of Incorporation HongKong Walnut Street Limited Hong Kong Hangzhou Weimi Network Technology Co., Ltd. PRC Walnut Street (Shanghai) Information Technology Co., Ltd. PRC Shenzhen Qianhai Xinzhijiang Information Technology Co., Ltd. PRCRadiance Sea Investment LimitedBritish Virgin IslandsRadiance Sea Group LimitedCayman IslandsRadiance Sea Hong Kong LimitedHong KongShanghai Yucan Information Technology Co., Ltd.PRCConsolidated Variable Interest EntityPlace of Incorporation Hangzhou Aimi Network Technology Co., Ltd.PRCSubsidiary of Consolidated Variable Interest EntityPlace of Incorporation Shanghai Xunmeng Information Technology Co., Ltd.PRC Exhibit 12.1Certification by the Principal Executive OfficerPursuant to Section 302 of the Sarbanes-Oxley Act of 2002I, Lei Chen, certify that:1.I have reviewed this annual report on Form 20-F of Pinduoduo Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a mate rial fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period coveredby this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly pres ent in all materialrespects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;4.The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)and 15d-15(f)) for the company and have:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the company, including its consolidated subsid iaries, is made known to us by otherswithin those entities, particularly during the period in which this report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financial re porting to be designedunder our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;(c)Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions aboutthe effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d)Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the periodcovered by the annual report that has materially affected, or is reasonably likely to materially affect, the com pany’s internal control over financialreporting; and5.The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal con trol over financialreporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial re porting which arereasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’sinternal control over financial reporting.Date: April 25, 2022 By:/s/ Lei Chen Name:Lei Chen Title:Chief Executive Officer Exhibit 12.2Certification by the Principal Financial OfficerPursuant to Section 302 of the Sarbanes-Oxley Act of 2002I, Jun Liu, certify that:1.I have reviewed this annual report on Form 20-F of Pinduoduo Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a mate rial fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period coveredby this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly pres ent in all materialrespects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;4.The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)and 15d-15(f)) for the company and have:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the company, including its consolidated subsid iaries, is made known to us by otherswithin those entities, particularly during the period in which this report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financial re porting to be designedunder our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;(c)Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions aboutthe effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d)Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the periodcovered by the annual report that has materially affected, or is reasonably likely to materially affect, the com pany’s internal control over financialreporting; and5.The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal con trol over financialreporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial re porting which arereasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’sinternal control over financial reporting.Date: April 25, 2022 By:/s/ Jun Liu Name:Jun Liu Title:Vice President of Finance Exhibit 13.1Certification by the Principal Executive OfficerPursuant to Section 906 of the Sarbanes-Oxley Act of 2002In connection with the Annual Report of Pinduoduo Inc. (the “Company”) on Form 20-F for the fiscal year ended December 31, 2021 asfiled with the Securities and Exchange Commission on the date hereof (the “Report”), I, Lei Chen, Chief Executive Officer of the Company, herebycertify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operationsof the Company.Date: April 25, 2022 By:/s/ Lei Chen Name:Lei Chen Title:Chief Executive Officer Exhibit 13.2Certification by the Principal Financial OfficerPursuant to Section 906 of the Sarbanes-Oxley Act of 2002In connection with the Annual Report of Pinduoduo Inc. (the “Company”) on Form 20-F for the fiscal year ended December 31, 2021 asfiled with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jun Liu, Vice President of Finance of the Company, herebycertify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operationsof the Company.Date: April 25, 2022 By:/s/ Jun Liu Name:Jun Liu Title:Vice President of Finance Exhibit 15.1April 25, 2022Pinduoduo Inc.28/F, No. 533 Loushanguan Road,Changning District, Shanghai 200051People's Republic of ChinaDear Sirs,Re: Consent of People’s Republic of China CounselWe consent to the reference to our firm under the headings “Item 3. KEY INFORMATION” and “Item 4. INFORMATION ON THE COMPANY”in the annual report of Pinduoduo Inc. on Form 20-F for the year ended December 31, 2021 (the “Annual Report”), which is filed with the U.S.Securities and Exchange Commission on the date hereof.In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of theSecurities Act of 1933, or under the Securities Exchange Act of 1934, in each case, as amended, or the regulations promulgated thereunder.Very truly yours,/s/ King & Wood MallesonsKing & Wood Mallesons Exhibit 15.2Consent of Independent Registered Public Accounting FirmWe consent to the incorporation by reference in the following Registration Statements:(1)Registration Statement (Form S-8 No. 333-233897) pertaining to the 2015 Global Share Plan and the 2018 Share Incentive Plan(2)Registration Statement (Form F-3 No. 333-250117) of Pinduoduo Inc.of our reports dated April 25, 2022, with respect to the consolidated financial statements of Pinduoduo Inc. and the effectiveness of internal controlover financial reporting of Pinduoduo Inc. included in this Annual Report (Form 20-F) of Pinduoduo Inc. for the year ended December 31, 2021./s/ Ernst & Young Hua Ming LLPShanghai, The People’s Republic of ChinaApril 25, 2022

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