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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 UNDER
THE SECURITIES EXCHANGE ACT OF 1934

For the month of September 2019


Commission File Number: 001- 38591


Pinduoduo Inc.

28/F, No. 533 Loushanguan Road, Changning District
Shanghai, 200051
People's Republic of China
(Address of principal executive offices)

        Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F ý   Form 40-F o

        Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): o

        Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): o

   


Exhibit Index

Exhibit No.   Description
  99.1   Management's Discussion and Analysis of Financial Condition and Results of Operations

 
 
 
Exhibit 99.1 sets forth the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section included in the Registrant's preliminary offering memorandum dated September 23, 2019 in connection with the proposed offering of convertible senior notes

 
99.2
 
Unaudited Interim Condensed Consolidated Financial Statements

 
 
 
Exhibit 99.2 sets forth the unaudited interim condensed consolidated financial statements for the six months periods ended June 30, 2018 and 2019 included in the Registrant's preliminary offering memorandum dated September 23, 2019 in connection with the proposed offering of convertible senior notes


SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

    PINDUODUO INC.

 
 
By:
 
/s/ ZHENG HUANG
        Name:   Zheng Huang
        Title:   Chairman of the Board of Directors and Chief Executive Officer

Date: September 23, 2019



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Exhibit Index
SIGNATURES

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Exhibit 99.1

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our audited consolidated financial statements for the years ended December 31, 2016, 2017 and 2018 and the notes thereto included in our Form 20-F, as well as our unaudited interim condensed consolidated financial statements for the six months ended June 30, 2018 and 2019 and the notes thereto included in our current report on Form 6-K furnished to the SEC on September 23, 2019, which are incorporated by reference in this offering memorandum. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Risk Factors" or in other parts of this offering memorandum. Our historical results do not necessarily indicate results expected for any future periods, and the results of operations for the six months ended June 30, 2019 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2019.

        Set below are certain consolidated statement of comprehensive loss and consolidated cash flow data for the years ended December 31, 2016, 2017 and 2018 and the six months ended June 30, 2018 and 2019. The summary consolidated statement of comprehensive loss and consolidated cash flow data for the years ended December 31, 2016, 2017 and 2018 have been derived from, and are qualified in its entirety by, our audited consolidated financial statements for the same periods incorporated in this offering memorandum by reference to our 2018 Form 20-F. The following summary consolidated results of operation and consolidated cash flow data for the six months ended June 30, 2018 and 2019 are derived from, and are qualified in its entirety by, our unaudited interim condensed consolidated

1

financial statements for the same periods incorporated by reference in this offering memorandum to in our current report on Form 6-K furnished to the SEC on September 23, 2019.

 
   For the Year Ended December 31,   For the Six Months Ended June 30,  
Summary Statement Of
Comprehensive Loss Data
  2016   2017   2018   2018   2019  
 
   RMB   RMB   %   RMB   %   RMB   %   RMB   US$   %  
 
   (in thousands, except for percentages)
  

Revenues

                                                              

Online marketplace services

     48,276     1,740,691     99.8     13,119,990     100.0     4,093,650     100.0     11,835,212     1,723,993     100.0  

Merchandise sales

     456,588     3,385     0.2     —     —     —     —     —     —     —  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total revenues

    504,864     1,744,076     100.0     13,119,990     100.0     4,093,650     100.0     11,835,212     1,723,993     100.0  

Costs of revenues(1)

                                                              

Costs of online marketplace services

     (93,551 )   (719,778 )   (41.2 )   (2,905,249 )   (22.1 )   (706,530 )   (17.3 )   (2,468,023 )   (359,508 )   (20.9 )

Costs of merchandise sales

     (484,319 )   (3,052 )   (0.2 )   —     —     —     —     —     —     —  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total costs of revenues

    (577,870 )   (722,830 )   (41.4 )   (2,905,249 )   (22.1 )   (706,530 )   (17.3 )   (2,468,023 )   (359,508 )   (20.9 )

Gross (loss)/profit

    (73,006 )   1,021,246     58.6     10,214,741     77.9     3,387,120     82.7     9,367,189     1,364,485     79.1  

Operating expenses

                                                              

Sales and marketing expenses(1)

     (168,990 )   (1,344,582 )   (77.1 )   (13,441,813 )   (102.5 )   (4,188,192 )   (102.3 )   (10,992,958 )   (1,601,303 )   (92.9 )

General and administrative expenses(1)

     (14,793 )   (133,207 )   (7.6 )   (6,456,612 )   (49.2 )   (5,829,434 )   (142.4 )   (514,420 )   (74,934 )   (4.3 )

Research and development expenses(1)

     (29,421 )   (129,181 )   (7.4 )   (1,116,057 )   (8.5 )   (258,847 )   (6.3 )   (1,470,745 )   (214,238 )   (12.4 )

Impairment of a long-term investment

     —     (10,000 )   (0.6 )   —     —     —     —     —     —     —  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

    (213,204 )   (1,616,970 )   (92.7 )   (21,014,482 )   (160.2 )   (10,276,473 )   (251.0 )   (12,978,123 )   (1,890,475 )   (109.7 )

Operating loss

    (286,210 )   (595,724 )   (34.1 )   (10,799,741 )   (82.3 )   (6,889,353 )   (168.3 )   (3,610,934 )   (525,990 )   (30.5 )

Interest income

     4,460     80,783     4.6     584,940     4.5     186,764     4.6     654,670     95,363     2.3  

Foreign exchange gain/(loss)

     475     (11,547 )   (0.7 )   10,037     0.1     1,460     —     42,874     6,245     0.2  

Other (loss)/income, net

     (2,034 )   1,373     0.1     (12,361 )   (0.1 )   6,220     0.2     32,432     4,724     0.1  

Loss before income tax

    (291,977 )   (525,115 )   (30.1 )   (10,217,125 )   (77.9 )   (6,694,909 )   (163.5 )   (2,880,958 )   (419,658 )   (10.3 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Income tax expenses

     —     —     —     —     —     —     —     —     —     —  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Net loss

    (291,977 )   (525,115 )   (30.1 )   (10,217,125 )   (77.9 )   (6,694,909 )   (163.5 )   (2,880,958 )   (419,658 )   (10.3 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Note:

(1)
Share-based compensation expenses were allocated as follows:
 
   For the Year Ended
December 31, 		  For the Six Months Ended
June 30, 		 
 
   2017   2018   2018   2019  
 
   RMB
   RMB
   RMB
   RMB
   US$
  
 
   (in thousands)
  

Costs of revenues

     796     3,488     811     8,012     1,167  

Sales and marketing expenses

     1,675     405,805     33,493     404,500     58,922  

General and administrative expenses

     108,141     6,296,186     5,775,733     356,052     51,865  

Research and development expenses

     5,893     136,094     24,063     322,043     46,911  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total

    116,505     6,841,573     5,834,100     1,090,607     158,865  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

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   For the Year Ended
December 31, 		  For the Six Months
Ended June 30, 		 
 
   2016
(As adjusted) 		  2017
(As adjusted) 		  2018   2018   2019  
 
   RMB   RMB   RMB   RMB   RMB   US$  
 
    
   (in thousands)
    
    
    
    
  

Summary Consolidated Cash Flow Data:

                                      

Net cash generated from operating activities

     879,777     9,686,328     7,767,927     404,117     2,604,731     379,422  

Net cash (used in)/generated from investing activities

     (307,301 )   71,651     (7,548,509 )   (1,092,706 )   (681,950 )   (99,337 )

Net cash generated from financing activities

     486,538     1,398,860     17,344,357     5,820,779     7,993,828     1,164,432  

Exchange rate effect on cash and cash equivalents

     20,397     (47,681 )   546,910     254,821     207,871     30,280  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Net increase in cash, cash equivalents and restricted cash

     1,079,411     11,109,158     18,110,685     5,387,011     10,124,480     1,474,797  

Cash, cash equivalents and restricted cash at beginning of the year/period(1)

     240,432     1,319,843     12,429,001     12,429,001     30,539,686     4,448,607  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Cash, cash equivalents and restricted cash at end of the year/period(1)

     1,319,843     12,429,001     30,539,686     17,816,012     40,664,166     5,923,404  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
(1)
As we have ceased to be an EGC as such term is defined in the JOBS Act, we adopted ASU 2016-18 effective as of January 1, 2018 on a retrospective basis to present restricted cash and restricted cash equivalents as a part of the beginning and ending balances of cash and cash equivalents. For the years ended December 31, 2016 and 2017, the changes in restricted cash of nil and RMB9,370.8 million, respectively were previously reported within net cash used in operating activities in the statements of cash flows.

Six months ended June 30, 2019 compared to six months ended June 30, 2018

Revenues

        Our revenues, which consisted of only online marketplace services revenue from 2018 onward, increased by 189.1% from RMB4,093.7 million in the six months ended June 30, 2018 to RMB11,835.2 million (US$1,724.0 million) in the six months ended June 30, 2019. This increase was primarily attributable to increases in revenues from online marketing services.

        Revenues from online marketing services increased by 199.4% from RMB3,479.1 million in the six months ended June 30, 2018 to RMB10,415.5 million (US$1,517.2 million) in the six months ended June 30, 2019. This increase was primarily attributable to increase in advertising spending by merchants on our platform. Our merchants increased their purchase of advertising products from us because of our stronger brand and market position as a result of our branding campaigns, and the significant increase in the number of our active buyers and annual spending per active buyer. Revenues from transaction services increased by 131.0% from RMB614.6 million in the six months ended June 30, 2018 to RMB1,419.7 million (US$206.8 million) in the six months ended June 30, 2019, primarily due to the increase in GMV. Our GMV in the twelve-month period ended June 30, 2018 and 2019 was RMB262.1 billion and RMB709.1 billion (US$103.3 billion) respectively, representing an increase of 170.5%.

Costs of revenues

        Our costs of revenues, which consisted of only cost of online marketplace services from 2018 onward, increased by 249.3% from RMB706.5 million in the six months ended June 30, 2018 to RMB2,468.0 million (US$359.5 million) in the six months ended June 30, 2019. The cost of revenue increased primarily due to higher bandwidths and server cost, staff costs and other expenses directly attributable to the online marketplace services, including cost for call center and merchant support services, which is partially offset by decrease in payment processing fee.

        The decrease in payment processing fees from RMB267.8 million in the six months ended June 30, 2018 to RMB221.8 million (US$32.3 million) in the six months ended June 30, 2019 was primarily due to a payment rebate from Tencent in the first quarter of 2019. The increase in bandwidths and server costs from RMB188.6 million in the six months ended June 30, 2018 to RMB614.7 million (US$89.5 million) in the six months ended June 30, 2019 was due to the increase in server capacity to

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keep pace with the growth of our online marketplace services. The increase in staff costs was primarily due to the increase in headcount for employees dedicated to the operations of our platform. The increase in other expenses directly attributable to the online marketplace services was primarily due to the higher costs of call center and merchant support services.

Gross profit

        As a result of the foregoing, our gross profit increased to RMB9,367.2 million (US$1,364.5 million) in the six months ended June 30, 2019, from RMB3,387.1 million in the six months ended June 30, 2018. The improvement was primarily attributable to the continued growth in revenues and increased economies of scale achieved through our current marketplace model.

Operating expenses

        Our total operating expenses increased from RMB10,276.5 million in the six months ended June 30, 2018 to RMB12,978.1 million (US$1,890.5 million) in the six months ended June 30, 2019, primarily as a result of the increase in sales and marketing expenses and research and development expenses.

        Sales and marketing expenses.    Our sales and marketing expenses increased substantially from RMB4,188.2 million in the six months ended June 30, 2018 to RMB10,993.0 million (US$1,601.3 million) in the six months ended June 30, 2019, primarily attributable to an increase of RMB3,053.1 million in advertising expenses and (ii) an increase of RMB3,267.2 million in promotion and coupon expenses. The increase in advertising expenses and promotion and coupon expenses were focused on building our brand awareness and driving user growth and engagement on our platform.

        General and administrative expenses.    Our general and administrative expenses decreased substantially from RMB5,829.4 million in the six months ended June 30, 2018 to RMB514.4 million (US$74.9 million) in the six months ended June 30, 2019. The decrease was primarily attributable to a one-time share based compensation expenses recorded in April, 2018.

        Research and development expenses.    Our research and development expenses increased substantially from RMB258.8 million in the six months ended June 30, 2018 to RMB1,470.7 million (US$214.2 million) in the six months ended June 30, 2019, primarily due to an increase of RMB531.7 million in staff costs and an increase of RMB350.8 million in research and development related cloud services expenses. The increase in staff costs was primarily attributable to the increase in headcount for our research and development personnel, as we hired additional experienced research and development personnel to execute our technology-related strategies of improving our platform.

Operating loss

        As a result of the foregoing, we incurred operating loss of RMB6,889.4 million and RMB3,610.9 million (US$526.0 million) in the six months ended June 30, 2018 and 2019, respectively.

Other income/(loss)

        Interest income.    Interest income represents interest earned on cash deposits and short-term investments in financial institutions. We had interest income of RMB186.8 million and RMB654.7 million (US$95.4 million) in the six months ended June 30, 2018 and 2019, respectively. The increase was primarily attributable to the increase of our cash balance.

        Foreign exchange gain.    We had foreign exchange gain of RMB42.9 million (US$6.2 million) in the six months ended June 30, 2019, compared to foreign exchange gain of RMB1.5 million in the six

4

months ended June 30, 2018, primarily due to higher cash balance held in U.S. dollar coupled with the depreciation of Renminbi against the U.S. dollar.

        Other income, net.    Other income, net primarily consists of government grants. Our other net income increased from RMB6.2 million in the six months ended June 30, 2018 to RMB32.4 million (US$4.7 million) in the six months ended June 30, 2019. The increase was primarily attributable to the increase in government grants.

Income tax expenses

        We recorded nil in income tax expenses in the six months ended June 30, 2018 and 2019.

Net loss

        As a result of the foregoing, we incurred net loss of RMB2,881.0 million (US$419.7 million) in the six months ended June 30, 2019, compared to net loss of RMB6,694.9 million in the six months ended June 30, 2018.

Cash Flows and Working Capital

        As of June 30, 2019, our cash and cash equivalents were RMB23,851.9 million (US$3,474.4 million), which primarily consist of cash at banks. As of June 30, 2019, we had restricted cash of RMB16,812.2 million (US$2,449.0 million), representing cash received from buyers and reserved in a bank supervised account for payments to merchants.

Operating activities

        Net cash generated from operating activities in the six months ended June 30, 2019 was RMB2,604.7 million (US$379.4 million), as compared to net loss of RMB2,881.0 million (US$419.7 million) in the same period. The difference was primarily due to an increase of RMB1,645.6 million (US$239.7 million) in merchant deposits, an increase of RMB1,358.3 million (US$197.9 million) in accrued expenses and other liabilities, and an increase of RMB554.8 million (US$80.8 million) in payables to merchants, partially offset by an increase of RMB226.2 million (US$32.9 million) in prepayments and other current assets and an increase of RMB204.7 million (US$29.8 million) in receivables from online payment platforms. The increases in merchant deposits and accrued expense and other liabilities were attributable to our business expansion and the increase of number of merchants on our platform. The principal non-cash items affecting the difference between our net loss and our net cash generated from operating activities in the six months ended June 30, 2019 were RMB1,090.6 million (US$158.9 million) in share-based compensation expenses.

        Net cash generated from operating activities in the six months ended June 30, 2018 was RMB404.1 million, as compared to net loss of RMB6,694.9 million in the same period. The difference was primarily due to an increase of RMB1,416.5 million in merchant deposits and an increase of 610.5 million in accrued expenses and other liabilities, partially offset by a decrease of RMB520.3 million in payable to merchants and an increase of RMB479.1 million in prepayments and other current assets. The increase in merchant deposits and accrued expenses and other liabilities were attributable to our business expansion and the increase of number of merchants on our platform. The principal non-cash items affecting the difference between our net loss and our net cash generated from operating activities in the six months ended June 30, 2018 were RMB5,834.1 million in share-based compensation expenses.

5

Investing activities

        Net cash used in investing activities in the six months ended June 30, 2019 was RMB682.0 million (US$99.3 million), primarily due to purchase of short-term investments of RMB9,727.0 million (US$1,416.9 million), partially offset by proceeds from sales of short-term investments of RMB9,229.6 million (US$1,344.4 million).

        Net cash used in investing activities in the six months ended June 30, 2018 was RMB1,092.7 million, primarily due to purchase of short-term investments of RMB1,300.0 million, partially offset by repayment from a related party of RMB159.8 million.

Financing activities

        Net cash generated from financing activities in the six months ended June 30, 2019 was RMB7,993.8 million (US$1,164.4 million) due to proceeds from follow-on public offering (net of cost).

        Net cash generated from financing activities in the six months ended June 30, 2018 was RMB5,820.8 million primarily due to proceeds from issuance of convertible preferred shares.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


 Exhibit 99.2

PINDUODUO INC.

UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS PERIODS ENDED JUNE 30, 2018 AND 2019


PINDUODUO INC.

Index to Condensed Consolidated Financial Statements

Contents
  Page(s)

Unaudited Interim Condensed Consolidated Balance Sheets as of December 31, 2018 and June 30, 2019

   1 - 2

Unaudited Interim Condensed Consolidated Statements of Comprehensive Loss for the Six Months Periods Ended June 30, 2018 and 2019

  
3 - 4

Unaudited Interim Condensed Consolidated Statement of Shareholders' Equity for the Six Months Periods Ended June 30, 2018 and 2019

  
5 - 6

Unaudited Interim Condensed Consolidated Statements of Cash Flows for the Six Months Periods Ended June 30, 2018 and 2019

  
7

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

  
8 - 24


PINDUODUO INC.

UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2018 AND AS OF JUNE 30, 2019

(Amounts in thousands of Renminbi ("RMB") and U.S. dollars ("US$"),
except for number of shares)

 
    
   As of  
 
   Note   December 31,
2018 		  June 30, 2019  
 
    
   RMB
   RMB
   US$
  

ASSETS

                        

Current Assets

                        

Cash and cash equivalents

         14,160,322     23,851,940     3,474,427  

Restricted cash

         16,379,364     16,812,226     2,448,977  

Receivables from online payment platforms

         247,586     452,266     65,880  

Short-term investments

         7,630,689     7,935,421     1,155,924  

Amounts due from related parties

   11     1,019,033     1,043,258     151,968  

Prepayments and other current assets

   3     953,989     1,210,648     176,349  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total current assets

         40,390,983     51,305,759     7,473,525  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Non-current assets

                        

Property and equipment, net

   4     29,075     33,409     4,867  

Intangible asset

   5     2,579,338     2,277,009     331,684  

Right-of-use assets

   6     —     307,735     44,827  

Other non-current assets

   7     182,667     436,938     63,647  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total non-current assets

         2,791,080     3,055,091     445,025  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total Assets

         43,182,063     54,360,850     7,918,550  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

1


 PINDUODUO INC.

UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2018 AND AS OF JUNE 30, 2019 (Continued)

(Amounts in thousands of RMB and US$, except for number of shares)

 
    
   As of  
 
   Note   December 31,
2018 		  June 30, 2019  
 
    
   RMB
   RMB
   US$
  

LIABILITIES AND SHAREHOLDERS' EQUITY

                        

Current Liabilities

  

 

    
 		    
 		    
 		  

Amounts due to related parties (including amounts due to related parties of the consolidated VIE and its subsidiaries without recourse to the primary beneficiary of RMB458,147 and RMB1,412,517 (US$205,756) as of December 31, 2018 and June 30, 2019, respectively)

   11     478,113     1,412,517     205,756  

Customer advances (including customer advances of the consolidated VIE and its subsidiaries without recourse to the primary beneficiary of RMB190,382 and RMB267,299 (US$38,936) as of December 31, 2018 and June 30, 2019, respectively)

         191,482     267,322     38,940  

Payable to merchants (including payable to merchants of the consolidated VIE and its subsidiaries without recourse to the primary beneficiary of RMB17,275,934 and RMB17,801,389 (US$2,593,065) as of December 31, 2018 and June 30,2019, respectively)

         17,275,934     17,830,719     2,597,337  

Accrued expenses and other liabilities (including accrued expenses and other liabilities of the consolidated VIE and its subsidiaries without recourse to the primary beneficiary of RMB1,500,951 and RMB2,299,419 (US$334,948) as of December 31, 2018 and June 30, 2019, respectively)

   8     2,225,667     3,573,906     520,598  

Merchant deposits (including merchant deposits of the consolidated VIE and its subsidiaries without recourse to the primary beneficiary of RMB4,188,273 and RMB5,833,878 (US$849,800) as of December 31, 2018 and June 30, 2019)

         4,188,273     5,833,878     849,800  

Lease liabilities (including lease liabilities of the consolidated VIE and its subsidiaries without recourse to the primary beneficiary of nil and RMB53,627 (US$7,812) as of December 31, 2018 and June 30, 2019, respectively)

         —     80,026     11,657  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total current liabilities

         24,359,469     28,998,368     4,224,088  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Lease liabilities (including lease liabilities of the consolidated VIE and its subsidiaries without recourse to the primary beneficiary of nil and RMB190,930 (US$27,812) as of December 31, 2018 and June 30, 2019, respectively)

         —     247,426     36,042  

Other non-current liabilities

         —     8,171     1,190  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total non-current liabilities

        —     255,597     37,232  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total Liabilities

         24,359,469     29,253,965     4,261,320  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Shareholders' equity

                        

Class A ordinary shares (US$0.000005 par value; 77,300,000,000 shares authorized, 2,381,240,988 and 2,574,980,988 shares issued and outstanding as of December 31, 2018 and June 30, 2019, respectively)

   9     78     84     12  

Class B ordinary shares (US$0.000005 par value; 2,200,000,000 shares authorized, 2,074,447,700 shares issued and outstanding as of December 31, 2018 and June 30, 2019)

   9     64     64     9  

Additional paid-in capital

         29,114,527     38,198,956     5,564,305  

Accumulated other comprehensive income

         1,035,783     1,116,597     162,651  

Accumulated deficits

         (11,327,858 )   (14,208,816 )   (2,069,747 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total shareholders' equity

         18,822,594     25,106,885     3,657,230  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total liabilities and shareholders' equity

         43,182,063     54,360,850     7,918,550  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

2


PINDUODUO INC.

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE LOSS

FOR THE SIX MONTHS PERIODS ENDED JUNE 30, 2018 AND 2019

(Amounts in thousands of RMB and US$, except for per share data)

 
    
   For the six months periods ended June 30,  
 
   Note   2018   2019  
 
    
   RMB
   RMB
   US$
  

Revenues

   10                    

Online marketplace services

         4,093,650     11,835,212     1,723,993  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total Revenues

        4,093,650     11,835,212     1,723,993  

Costs of revenues

  

 

    
 		    
 		    
 		  

Costs of online marketplace services

         (706,530 )   (2,468,023 )   (359,508 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total costs of revenues

        (706,530 )   (2,468,023 )   (359,508 )

Gross profit

       
3,387,120		    
9,367,189		    
1,364,485		  

Sales and marketing expenses

        
(4,188,192
)		  
(10,992,958
)		  
(1,601,303
)

General and administrative expenses

         (5,829,434 )   (514,420 )   (74,934 )

Research and development expenses

         (258,847 )   (1,470,745 )   (214,238 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total operating expenses

        (10,276,473 )   (12,978,123 )   (1,890,475 )

Operating loss

       
(6,889,353
)		  
(3,610,934
)		  
(525,990
)

Interest income

        
186,764		    
654,670		    
95,363		  

Foreign exchange gain

         1,460     42,874     6,245  

Other income, net

         6,220     32,432     4,724  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Loss before income tax

        (6,694,909 )   (2,880,958 )   (419,658 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Income tax expenses

         —     —     —  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Net loss

        (6,694,909 )   (2,880,958 )   (419,658 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

3


PINDUODUO INC.

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE LOSS

FOR THE SIX MONTHS PERIODS ENDED JUNE 30, 2018 AND 2019 (CONTINUED)

(Amounts in thousands of RMB and US$, except for per share data)

 
    
   For the six months periods ended June 30,  
 
   Note   2018   2019  
 
    
   RMB
   RMB
   US$
  

Net loss

        (6,694,909 )   (2,880,958 )   (419,658 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Deemed distribution to certain holders of convertible preferred shares

         (80,496 )   —     —  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Net loss attributable to ordinary shareholders

        (6,775,405 )   (2,880,958 )   (419,658 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Loss per share:

   12                    

Basic

         (3.66 )   (0.63 )   (0.09 )

Diluted

         (3.66 )   (0.63 )   (0.09 )

Shares used in loss per share computation (in thousands of shares):

  

 

    
 		    
 		    
 		  

Basic

         1,850,155     4,604,472     4,604,472  

Diluted

         1,850,155     4,604,472     4,604,472  

Other comprehensive income, net of tax of nil:

  

 

    
 		    
 		    
 		  

Foreign currency translation difference, net of tax of nil

         419,641     80,814     11,772  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Comprehensive loss

        (6,275,268 )   (2,800,144 )   (407,886 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

4


PINDUODUO INC.

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICITS

FOR THE SIX MONTHS PERIOD ENDED JUNE 30, 2018

(Amounts in thousands of RMB and US$, except for number of shares)

 
   Number of
ordinary
shares 		  Ordinary
shares 		  Additional
paid-in
capital 		  Accumulated
other
comprehensive
(loss)/income 		  Accumulated
deficits 		  Total
shareholders'
deficits 		 
 
    
   RMB
   RMB
   RMB
   RMB
   RMB
  

Balance as of January 1, 2018

    1,758,769,820     54     61,326     (23,101 )   (1,030,237 )   (991,958 )

Net loss

     —     —     —     —     (6,694,909 )   (6,694,909 )

Foreign currency translation difference

     —     —     —     419,641     —     419,641  

Deemed distribution to certain holders of convertible preferred shares

     —     —     —     —     (80,496 )   (80,496 )

Share-based compensation

     254,473,500     8     5,787,567     —     —     5,787,575  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Balance as of June 30, 2018

    2,013,243,320     62     5,848,893     396,540     (7,805,642 )   (1,560,147 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

5


PINDUODUO INC.

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

FOR THE SIX MONTHS PERIOD ENDED JUNE 30, 2019

(Amounts in thousands of RMB and US$, except for number of shares)

 
   Number of
ordinary
shares 		  Ordinary
shares 		  Additional
paid-in
capital 		  Accumulated
other
comprehensive
income 		  Accumulated
deficits 		  Total
shareholders'
equity 		 
 
    
   RMB
   RMB
   RMB
   RMB
   RMB
  

Balance as of January 1, 2019

    4,455,688,688     142     29,114,527     1,035,783     (11,327,858 )   18,822,594  

Net loss

     —     —     —     —     (2,880,958 )   (2,880,958 )

Foreign currency translation difference

     —     —     —     80,814     —     80,814  

Follow-on offering (Note 9)

     193,740,000     6     7,993,822     —     —     7,993,828  

Share-based compensation

     —     —     1,090,607     —     —     1,090,607  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Balance as of June 30, 2019

    4,649,428,688     148     38,198,956     1,116,597     (14,208,816 )   25,106,885  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Balance as of June 30, 2019 (US$)

          21     5,564,305     162,651     (2,069,747 )   3,657,230  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

6


PINDUODUO INC.

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS PERIODS ENDED JUNE 30, 2018 AND 2019

(Amounts in thousands of RMB and US$)

 
   For the six months periods ended
June 30, 		 
 
   2018   2019  
 
   RMB
   RMB
   US$
  

CASH FLOW FROM OPERATING ACTIVITIES

                    

Net loss

     (6,694,909 )   (2,880,958 )   (419,658 )

Depreciation and amortization

     186,062     310,358     45,209  

Provision for payments made on behalf of merchants

     453     4,891     712  

Interest income

     (64,481 )   —     —  

Loss on disposal of property and equipment

     3     152     22  

Share-based compensation

     5,834,053     1,090,607     158,865  

Foreign exchange gain

     —     (11,330 )   (1,650 )

Changes in operating assets and liabilities:

    
 		    
 		    
 		  

Receivables from online payment platforms

     (6,270 )   (204,680 )   (29,815 )

Amounts due from related parties

     (145,166 )   (24,225 )   (3,529 )

Prepayments and other current assets

     (479,062 )   (226,182 )   (32,947 )

Right-of-use assets

     —     (86,214 )   (12,558 )

Other non-current assets

     —     (42,354 )   (6,170 )

Amounts due to related parties

     218,144     934,404     136,111  

Customer advances

     48,560     75,840     11,047  

Payables to merchants

     (520,299 )   554,785     80,814  

Accrued expenses and other liabilities

     610,505     1,358,270     197,854  

Merchant deposits

     1,416,524     1,645,605     239,709  

Other non-current liabilities

     —     8,171     1,190  

Lease liabilities

     —     97,591     14,216  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Net cash flow generated from operating activities

     404,117     2,604,731     379,422  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

CASH FLOW FROM INVESTING ACTIVITIES

                    

Proceeds from sales of short-term investments

     50,000     9,229,590     1,344,441  

Purchase of short-term investments

     (1,300,000 )   (9,727,015 )   (1,416,899 )

Proceeds from disposal of a long-term investment

     5,000     —     —  

Purchase of long-term investments

     —     (209,897 )   (30,575 )

Purchase of property and equipment

     (7,496 )   (10,092 )   (1,470 )

Proceeds from disposal of property and equipment

     —     464     68  

Repayment from a related party

     159,790     —     —  

Repayment from third parties

     —     35,000     5,098  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Net cash flow used in investing activities

     (1,092,706 )   (681,950 )   (99,337 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

CASH FLOW FROM FINANCING ACTIVITIES

                    

Proceeds from follow-on offering

     —     8,194,597     1,193,678  

Proceeds from issuance of convertible preferred shares

     5,824,568     —     —  

Costs incurred for the follow-on offering

     —     (200,769 )   (29,246 )

Costs incurred for the issuance of convertible preferred shares

     (3,789 )   —     —  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Net cash flow generated from financing activities

     5,820,779     7,993,828     1,164,432  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Exchange rate effect on cash, cash equivalents and restricted cash

     254,821     207,871     30,280  

Net increase in cash, cash equivalents and restricted cash

     5,387,011     10,124,480     1,474,797  

Cash, cash equivalents and restricted cash at beginning of period

     12,429,001     30,539,686     4,448,607  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Cash, cash equivalents and restricted cash at end of period

     17,816,012     40,664,166     5,923,404  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Supplement disclosure of non-cash investing activities:

                    

Acquisition of intangible asset

     2,852,370     —     —  

Reconciliation of cash, cash equivalents and restricted cash:

    
 		    
 		    
 		  

Cash and cash equivalents

     9,030,874     23,851,940     3,474,427  

Restricted cash

     8,785,138     16,812,226     2,448,977  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total cash, cash equivalents and restricted cash in the statements of cash flows

     17,816,012     40,664,166     5,923,404  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

7


PINDUODUO INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of RMB and US$, except for number of shares and per share data)

1. Organization

        Pinduoduo Inc. (the "Company") was incorporated in the Cayman Islands on April 20, 2015 under the Cayman Islands Companies Law as an exempted company with limited liability. The Company through its consolidated subsidiaries, variable interest entity (the "VIE") and the subsidiaries of the VIE (collectively, the "Group") are principally engaged in the provision of online marketplace to help merchants leverage the power of the internet to engage with their customers in the People's Republic of China (the "PRC" or "China"). Due to the PRC legal restrictions on foreign ownership and investment in such business, the Company conducts its primary business operations through its VIE and subsidiaries of the VIE.

        As of June 30, 2019, the details of the Company's major subsidiaries, consolidated VIE and the subsidiaries of the VIE are as follows:

 
    
    
   Percentage of
ownership by the
Company 		   
 
   Date of
incorporation 		  Place of
incorporation 		  Principal
activities
Entity
  Direct   Indirect
Subsidiaries:                        

HongKong Walnut Street Limited ("Walnut HK")
 
April 28, 2015
 
Hong Kong
 
 
100
%
 
—
 
Holding company
Hangzhou Weimi Network Technology Co., Ltd. ("Hangzhou Weimi" or the "WFOE")   May 28, 2015   PRC     100 %   —   Technology research and development
Shenzhen Qianhai Xinzhijiang Information Technology Co., Ltd. ("Xinzhijiang")   April 25, 2018   PRC     100 %   —   E-commerce platform

VIE:
 
 
 
 
 
 
 
 
 
 
 
 

Hangzhou Aimi Network Technology Co., Ltd. ("Hangzhou Aimi" or the "VIE")
 
April 14, 2015
 
PRC
 
 
—
 
 
100
%
E-commerce platform

VIE's subsidiary:
 
 
 
 
 
 
 
 
 
 
 
 

Shanghai Xunmeng Information Technology Co., Ltd. ("Shanghai Xunmeng")
 
January 9, 2014
 
PRC
 
 
—
 
 
100
%
E-commerce platform

The VIE agreements

        The PRC laws and regulations currently place certain restrictions on foreign ownership of companies that engage in internet content and other restricted businesses. To comply with PRC laws and regulations, the Group conducts all of its business in China through the VIE and subsidiaries of the VIE. Despite the lack of technical majority ownership, the Company has effective control of the

8


PINDUODUO INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of RMB and US$, except for number of shares and per share data)

1. Organization (Continued)

VIE through a series of contractual arrangements (the "Contractual Agreements") and a parent-subsidiary relationship exists between the Company and the VIE. The equity interests of the VIE are legally held by PRC individuals and a PRC entity (the "Nominee Shareholders"). Through the Contractual Agreements, the Nominee Shareholders of the VIE effectively assigned all of their voting rights underlying their equity interests in the VIE to the Company, via the WFOE, and therefore, the Company has the power to direct the activities of the VIE that most significantly impact its economic performance. The Company also has the right to receive economic benefits and obligations to absorb losses from the VIE, via the WFOE, that potentially could be significant to the VIE. Based on the above, the Company consolidates the VIE in accordance with SEC Regulation SX-3A-02 and ASC810-10, Consolidation: Overall.

        The following is a summary of the Contractual Agreements:

        Exclusive Option Agreements    Pursuant to the Exclusive Option Agreements entered into between the Nominee Shareholders, the VIE and the WFOE, the Nominee Shareholders granted to the WFOE or its designees proxy of shareholders rights and voting rights of their respective equity interests in the VIE. The WFOE has the sole discretion as to when to exercise the options, whether in part or full. The exercise price of the options to purchase all or part of the equity interests in the VIE will be the minimum amount of consideration permitted by the applicable PRC laws. Any proceeds received by the Nominee Shareholders from the exercise of the options shall be remitted to the WFOE or its designated party, to the extent permitted under PRC laws. The Exclusive Option Agreements will remain in effect until all the equity interests in VIE held by Nominee Shareholders are transferred to the WFOE or its designated party. The WFOE may terminate the Exclusive Option Agreements at its sole discretion, whereas under no circumstances may the VIE or the Nominee Shareholders terminate the agreements.

        Equity Pledge Agreement    Pursuant to the Equity Pledge Agreement entered into among the WFOE (the "Pledge Agreement"), the Nominee Shareholders and the VIE, the Nominee Shareholders pledged all of their equity interests in the VIE to the WFOE as collateral to secure their obligations under the Contractual Agreements. The Nominee Shareholders further undertake that they will remit any distributions in connection with such shareholders' equity interests in the VIE to the WFOE, to the extent permitted by PRC laws. If the VIE or any of their Nominee Shareholders breach any of their respective contractual obligations under the above agreements, the WFOE, as the pledgee, will be entitled to certain rights, including the right to sell, transfer or dispose of the pledged equity interest. The Nominee Shareholders of the VIE agree not to create any encumbrance on or otherwise transfer or dispose of their respective equity interest in the VIE, without the prior consent of the WFOE. The Equity Pledge Agreement will be valid until the VIE and the shareholders fulfill all the contractual obligations under the Contractual Agreements in full and the pledged equity interests have been transferred to the WFOE and/or its designee.

        Shareholders' Voting Rights Proxy Agreement    Pursuant to the Shareholders' Voting Rights Proxy Agreement entered into between the Nominee Shareholders, the VIE and the WFOE (the "Proxy Agreement"), the Nominee Shareholders authorized the WFOE or its designated party to act on behalf of the Nominee Shareholders as exclusive agent and attorney with all respect to all matters concerning the shareholding including but not limited to attend shareholders' meetings of the VIE; (2) exercise all

9


PINDUODUO INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of RMB and US$, except for number of shares and per share data)

1. Organization (Continued)

the shareholders' rights, including voting rights; and (3) designate and appoint on behalf of each shareholder the senior management members of the VIE. The proxy remains irrevocable and continuously valid from the date of execution so long as each Nominee Shareholder remains as a shareholder of the VIE. The proxy agreements were subsequently reassigned to the Company.

        Exclusive Consulting and Services Agreement    Pursuant to the Exclusive Consulting and Services Agreement (the "Consulting and Services Agreement"), WFOE retains exclusive right to provide to the VIE the technical support and consulting services, including but not limited to, technology development and maintenance service, marketing consulting service and administrative consulting service. WFOE owns the intellectual property rights developed in the performance of the agreement. In exchange for these services, WFOE is entitled to charge the VIE annual service fees which typically amount to what would be substantially all of the VIE's pre-tax profits, resulting in a transfer of substantially all of the profits from the VIE to the WFOE. The term of the agreement is 10 years, expiring on June 5, 2025, which will be automatically renewed every ten-year thereafter if the WFOE does not provide notice of termination to the Nominee Shareholders three months prior to expiration.

        Financial support undertaking letter    The Company and the VIE entered into a financial support undertaking letter pursuant to which, the Company is obligated and hereby undertakes to provide unlimited financial support to the VIE, to the extent permissible under the applicable PRC laws and regulations, whether or not any such operational loss is actually incurred. The Company will not request repayment of the loans or borrowings if the VIE or its shareholders do not have sufficient funds or are unable to repay.

        In the opinion of the Company's management and PRC counsel, (i) the ownership structure of the Group, including its subsidiary, the VIE and the subsidiaries of the VIE, is not in violation with any applicable PRC laws, (ii) each of the VIE agreements is legal, valid, binding and enforceable to each party of such agreements in accordance with its terms and applicable PRC Laws; and (iii) each of the Group's PRC subsidiaries, the VIE and the subsidiaries of the VIE have the necessary corporate power and authority to conduct its business as described in its business scope under its business license, which is in full force and effect, and the Group's business operation in PRC are in compliance with existing PRC laws and regulations.

        However, uncertainties in the PRC legal system could cause the relevant regulatory authorities to find the current Contractual Agreements and businesses to be in violation of any existing or future PRC laws or regulations. If the Company, the WFOE or any of its current or future VIE are found in violation of any existing or future laws or regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion in dealing with such violations, which may include, but not limited to, revocation of business and operating licenses, being required to discontinue or restrict its business operations, restriction of the Group's right to collect revenues, being required to restructure its operations, imposition of additional conditions or requirements with which the Group may not be able to comply, or other regulatory or enforcement actions against the Group that could be harmful to its business. The imposition of any of these or other penalties may result in a material and adverse effect on the Group's ability to conduct its business. In addition, if the imposition of any of these penalties causes the Company to lose the rights to direct the

10


PINDUODUO INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of RMB and US$, except for number of shares and per share data)

1. Organization (Continued)

activities of the VIE or the right to receive their economic benefits, the Company would no longer be able to consolidate the VIE.

        In addition, if the VIE or the Nominee Shareholders fail to perform their obligations under the Contractual Agreements, the Group may have to incur substantial costs and expend resources to enforce the primary beneficiary' rights under the contracts. The Group may have to rely on legal remedies under PRC laws, including seeking specific performance or injunctive relief and claiming damages, which may not be effective. All of the Contractual Agreements are governed by PRC laws and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures. The legal system in PRC is not as developed as in other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit the Group's ability to enforce these contractual arrangements. Under PRC laws, rulings by arbitrators are final, parties cannot appeal the arbitration results in courts, and prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would incur additional expenses and delay. In the event the Group is unable to enforce the Contractual Agreements, the primary beneficiary may not be able to exert effective control over its VIE, and the Group's ability to conduct its business may be negatively affected.

        The VIE and the subsidiaries of VIE contributed 100.0% and 61.4% of the Group's consolidated revenues for the six months periods ended June 30, 2018 and 2019 respectively. As of December 31, 2018 and June 30, 2019, the VIE accounted for an aggregate of 53.1% and 49.1%, respectively of the consolidated total assets, and 96.9% and 95.2%, respectively of the consolidated total liabilities.

        The following tables represent the financial information for the VIE as of December 31, 2018 and June 30, 2019 and for the six months periods ended June 30, 2018 and 2019 before eliminating the

11


PINDUODUO INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of RMB and US$, except for number of shares and per share data)

1. Organization (Continued)

inter-company balances and transactions between the VIE, the subsidiaries of the VIE and other entities within the Group:

 
   As of  
 
   December 31,
2018 		  June 30, 2019  
 
   RMB
   RMB
   US$
  

ASSETS

                    

Current assets

                    

Cash and cash equivalents

     3,529,316     3,956,927     576,391  

Restricted cash

     16,379,364     16,812,226     2,448,977  

Receivables from online payment platforms

     247,586     452,266     65,880  

Short-term investments

     1,300,000     3,650,000     531,682  

Amounts due from related parties(i)

     1,018,963     1,041,802     151,756  

Amounts due from Group companies

     565,101     965,880     140,696  

Prepayments and other current assets

     441,590     497,819     72,517  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total current assets

    23,481,920     27,376,920     3,987,899  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Non-current assets

                    

Property and equipment, net

     16,578     22,264     3,243  

Right-of-use assets

     —     232,889     33,924  

Other non-current assets

     —     33,119     4,824  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total non-current assets

    16,578     288,272     41,991  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total assets

    23,498,498     27,665,192     4,029,890  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

LIABILITIES

                    

Current liabilities

                    

Amounts due to Group companies

     1,575,534     3,074,503     447,852  

Amounts due to related parties(i)

     458,147     1,412,517     205,756  

Customer advances

     190,382     267,299     38,936  

Payable to merchants

     17,275,934     17,801,389     2,593,065  

Accrued expenses and other liabilities

     1,500,951     2,299,419     334,948  

Merchant deposits

     4,188,273     5,833,878     849,800  

Lease liabilities

     —     53,627     7,812  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total current liabilities

    25,189,221     30,742,632     4,478,169  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Amounts due to Group companies

     —     203,758     29,681  

Lease liabilities

     —     190,930     27,812  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total non-current liabilities

    —     394,688     57,493  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total liabilities

    25,189,221     31,137,320     4,535,662  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
(i)
Information with respect to related parties is discussed in Note 11.

12


PINDUODUO INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of RMB and US$, except for number of shares and per share data)

1. Organization (Continued)

 
   For the six months periods
ended June 30, 		 
 
   2018   2019  
 
   RMB
   RMB
   US$
  

Net revenues from

                    

Group companies

     —     456,551     66,504  

External

     4,093,650     7,268,499     1,058,776  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Net revenues

     4,093,650     7,725,050     1,125,280  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​


 
   For the six months periods ended June 30,  
 
   2018   2019  
 
   RMB
   RMB
   US$
  

Net cash generated from operating activities

     700,770     1,633,736     237,980  

Net cash used in investing activities

     (1,097,718 )   (2,325,459 )   (338,741 )

Net cash (used in)/provided by financing activities

     (199,700 )   1,552,196     226,103  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Net (decrease)/increase in cash, cash equivalents and restricted cash

    (596,648 )   860,473     125,342  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Cash, cash equivalents and restricted cash at beginning of period

     11,563,516     19,908,680     2,900,026  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Cash, cash equivalents and restricted cash at end of period

    10,966,868     20,769,153     3,025,368  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Reconciliation of cash, cash equivalents and restricted cash:

                    

Cash and cash equivalents

     2,181,730     3,956,927     576,391  

Restricted cash

     8,785,138     16,812,226     2,448,977  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total cash, cash equivalents and restricted cash in the statements of cash flows

    10,966,868     20,769,153     3,025,368  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

2. Summary of Significant Accounting Policies

(a)    Concentration of credit risk

        Financial instruments that potentially subject the Group to significant concentration of credit risk consist primarily of cash and cash equivalents, restricted cash, receivables from online payment platforms and short-term investments. As of December 31, 2018 and June 30, 2019, all of the Group's cash and cash equivalents, restricted cash and short-term investments were held at reputable financial institutions with high-credit ratings. In the event of bankruptcy of one of these financial institutions, the Group may not be able to claim its cash and demand deposits back in full. The Group continues to monitor the financial strength of the financial institutions and there has been no recent history of default in relation to these financial institutions. Receivables from online payment platforms including amounts due from a related party (Note 11), unsecured and denominated in RMB, are derived from merchandise sales on the Group's online marketplace to consumers, and exposed to credit risk. The risk is mitigated by credit evaluations the Group performs on the selected online payment platforms that are highly reputable and market leaders. There has been no default of payments from these online payment platforms.

13


PINDUODUO INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of RMB and US$, except for number of shares and per share data)

2. Summary of Significant Accounting Policies (Continued)

(b)    Basis of presentation

        The accompanying unaudited interim condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("US GAAP") and applicable rules and regulations of the Securities and Exchange Commission regarding financial reporting and include all normal and recurring adjustments that management of the Group considers necessary for a fair presentation of its financial position and operation results. Certain information and footnote disclosures normally included in financial statements prepared in conformity with US GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these statements should be read in conjunction with the Group's audited consolidated financial statements as of and for the years ended December 31, 2017 and 2018.

(c)    Convenience translation

        Amounts in US$ are presented for the convenience of the reader and are translated at the noon buying rate of US$1.00 to RMB6.8650 on June 28, 2019, the last business day in June 2019, as published on the website of the United States Federal Reserve Board. No representation is made that the RMB amounts could have been, or could be, converted into US$ at such rate.

(d)    Revenue recognition

        The Group through its platform primarily offers online marketplace services that enable third-party merchants to sell their products to consumers in China. Revenues from marketplace services consist of online marketing services revenue and transaction services fees. Payments for services are generally received before deliveries.

        Effective January 1, 2018, the Group adopted ASU 2014-09, Revenue from contracts with Customers (Topic 606), using the modified retrospective method applying to those contracts not yet completed as of January 1, 2018. There were no changes made to the Group's revenue recognition policy as a result of the adoption of Topic 606. Under Topic 606, revenues are recognized when control of the promised services are transferred to the Group's customers in amounts that reflect the consideration the Group expects to be entitled to in exchange for those services. The Group also evaluates whether it is appropriate to record the gross amounts of goods and services sold and the related costs, or the net amounts earned as commissions.

        The Group presents value added taxes ("VAT") as reductions of revenues.

Online marketplace services

        The Group charges fees for transaction services to merchants for sales transactions completed on the Group's online marketplace, where the Group does not take control of the products provided by the merchants at any point in the time during the transactions and does not have latitude over pricing of the merchandise. Transaction services fee is determined as a percentage based on the value of merchandise being sold by the merchants. Revenues related to transaction services are recognized in the unaudited interim condensed consolidated statements of comprehensive loss at the time when the Group's service obligations to the merchants are determined to have been completed under each sales

14


PINDUODUO INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of RMB and US$, except for number of shares and per share data)

2. Summary of Significant Accounting Policies (Continued)

transaction upon the consumers confirming the receipts of goods. Fees charged for transaction services are not refundable if and when consumers return the merchandise to merchants.

        The Group also entered into contractual agreements with certain merchants to provide online marketing services on the Group's online marketplace for which the Group receives service fees from merchants. Online marketing services mainly allow merchants to bid for keywords that match product listings appearing in search or browser results on the Group's online marketplace. Merchants prepay for online marketing services that are charged on a cost-per-click basis. The Group provides the online marketing services on its own platforms without involvement of any other party. Under ASC 606, the related revenues are recognized at a point of time when consumers click the merchants' product listings when services are completed by the Group for the merchants. The positioning of such listings and the price for such positioning are determined through an online auction system, which facilitates price discovery through a market-based mechanism.

        In order to promote its online marketplace and attract more registered consumers, the Group at its own discretion offers incentives such as coupons, credits and discounts to consumers. Consumers are not customers of the Group, therefore incentives offered to consumers are not considered payments to customers. Coupons and credits redeemable for coupons can only be used in future purchases of eligible merchandise offered on the Group's online marketplace to reduce purchase price that are not specific to any merchant. As the consumers are required to make future purchases of the merchants' merchandise to redeem these coupons, the Group recognizes the amounts of redeemed coupons as marketing expenses when future purchases are made. Discounts provided to consumers are not specific to any merchant and the associated costs to the Group are recognized as marketing expenses when the related transaction services revenues are recognized.

        During the six months periods ended June 30, 2018 and 2019, the Group also issued to consumers at its discretion, cash redeemable credits upon their completion of certain actions unrelated to the purchases of merchant products on the Group's online marketplace. As the credits were redeemable for cash, the Group accrued for the related costs in marketing expenses based on the cash redemption value of each credit as it is issued, assuming all credits will be redeemed. As of December 31, 2018 and June 30, 2019, the amount of outstanding credits were immaterial.

(e)    Advertising expenditures

        Advertising expenditures are expensed when incurred and are included in sales and marketing expenses. Total amounts of advertising expenditures and incentive programs recognized in sales and marketing expenses were RMB4,094,587 and RMB10,414,890 (US$1,517,100) for the six months periods ended June 30, 2018 and 2019, respectively.

(f)    Lease

        The Group adopted ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"), effective January 1, 2019 using the modified retrospective method and did not restate comparable period. 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

15


PINDUODUO INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of RMB and US$, except for number of shares and per share data)

2. Summary of Significant Accounting Policies (Continued)

accounting for the initial direct costs on those leases that on the adoption date. The Group also elected the practical expedient of the short-term lease exemption for contracts with lease terms of 12 months or less.

        The Group as the lessee determines if an arrangement is a lease at inception. Leases are classified as operating or finance leases in accordance with the recognition criteria in ASC 842-20-25. The Group's lease portfolio consists entirely of operating leases as of January 1 and June 30, 2019. The Group's leases do not contain any residual value guarantees or material restrictive covenants.

        At the commencement date of an operating lease, the Group records a right-of-use ("ROU") asset and lease liability based on the present value of the lease payments over the lease term. Variable lease payments not dependent on an index or rate are excluded from the ROU asset and lease liability calculations and are recognized in expense in the period which the obligation for those payments is incurred. As the rate implicit in the Group's lease is not typically readily available, the Group uses an incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. This incremental borrowing rate reflects the fixed rate at which the Group could borrow on a collateralized basis the amount of the lease payments in the same currency, for a similar term, in a similar economic environment. ROU assets include any lease prepayments and are reduced by lease incentives. Operating lease expense for lease payments is recognized on a straight-line basis over the lease term. Lease terms are based on the non-cancelable term of the lease and may contain options to extend the lease when it is reasonably certain that the Group will exercise that option.

        The cumulative effects of changes made to the Group's condensed consolidated balance sheet on January 1, 2019 for the adoption of ASU 2016-02 were as follows:

 
   Balance at
December 31,
2018 		  Adjustments   Balance at
January 1, 2019 		 
 
   RMB
   RMB
   RMB
   US$
  

Assets:

                          

Prepayments and other current assets

     953,989     (2,768 )   951,221     138,561  

ROU assets

     —     221,521     221,521     32,268  

Liabilities:

                          

Current portion of lease liabilities

     —     55,180     55,180     8,038  

Non-Current portion of lease liabilities

     —     174,681     174,681     25,445  

Accrued expenses and other liabilities

     2,225,667     (11,108 )   2,214,559     322,587  

        The difference between the lease liabilities and ROU assets related to the reversal of existing deferred rent and prepaid rent balances of RMB11,108 (US$1,618) and RMB2,768 (US$403), respectively. The adoption of the standard did not impact the Company's interim condensed consolidated statements of operations and cash flows.

16


PINDUODUO INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of RMB and US$, except for number of shares and per share data)

2. Summary of Significant Accounting Policies (Continued)

(g)    Short-term investments

        All highly liquid investments with original maturities of greater than three months but less than twelve months, are classified as short-term investments. Investments that are expected to be realized in cash during the next twelve months are also included in short-term investments. The Group accounts for short-term investments in accordance with ASC Topic 320 ("ASC 320"), Investments—Debt and Equity Securities. Interest income are recognized when earned. Any realized gains or losses on the sale of the short-term investments are determined on a specific identification method and such gains and losses are reflected in earnings during the periods in which they are realized. The carrying values of these financial instruments approximated their fair values as of December 31, 2018 and June 30, 2019 due to their short-term maturities.

(h)    Equity method investments

        The Group accounts for its investments in common stock or in-substance common stock in entities in which it can exercise significant influence but does not own a majority equity interest or control using the equity method of accounting in accordance with ASC Subtopics 323-10 ("ASC 323-10"), Investments—Equity Method and Joint Ventures: Overall. The Group applies the equity method of accounting that is consistent with ASC 323-10 in limited partnerships which the Group has significant influence. Under the equity method, the Group initially records its investment at cost and the difference between the cost of the equity investee and the fair value of the underlying equity in the net assets of the equity investee is recognized as equity method goodwill, which is included in the equity method investment on the consolidated balance sheets. The Group subsequently adjusts the carrying amount of the investment to recognize the Group's proportionate share of each equity investee's net income or loss into earnings after the date of investment. The Group evaluates the equity method investments for impairment under ASC 323-10. An impairment loss on the equity method investments is recognized in earnings when the decline in value is determined to be other-than-temporary.

(i)    Segment reporting

        The Group follows ASC 280, Segment Reporting. The Group's Chief Executive Officer as the chief operating decision-maker reviews the consolidated financial results when making decisions about allocating resources and assessing the performance of the Group as a whole and hence, the Group has only one reportable segment. The Group operates and manages its business as a single segment. As the Group's long-lived assets are substantially all located in the PRC and substantially all the Group revenues are derived from within the PRC, no geographical segments are presented.

17


PINDUODUO INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of RMB and US$, except for number of shares and per share data)

3. Prepayments and Other Current Assets

        The components of prepayments and other current assets were as follows:

 
   As of  
 
   December 31,
2018 		  June 30,
2019 		  June 30,
2019 		 
 
   RMB
   RMB
   US$
  

Prepayments

     667,113     787,220     114,671  

Interest receivables

     101,062     320,067     46,623  

VAT recoverable

     63,005     32,626     4,753  

Rental and other deposits

     64,902     50,295     7,326  

Loan to a third party

     35,000     —     —  

Staff advances

     7,868     5,910     861  

Payments made on behalf of merchants

     11,105     18,352     2,673  

Provision for payments made on behalf of merchants

     (3,249 )   (8,140 )   (1,186 )

Others

     7,183     4,318     628  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

    953,989     1,210,648     176,349  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

        The prepayments primarily consist of advertising fees paid in advance.

4. Property and Equipment, Net

 
   As of  
 
   December 31,
2018 		  June 30,
2019 		  June 30,
2019 		 
 
   RMB
   RMB
   US$
  

At cost:

                    

Computer and office equipment

     27,148     36,280     5,285  

Leasehold improvement

     10,654     14,093     2,053  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

    37,802     50,373     7,338  

Less: accumulated depreciation

     (8,727 )   (16,964 )   (2,471 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

    29,075     33,409     4,867  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

18


PINDUODUO INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of RMB and US$, except for number of shares and per share data)

4. Property and Equipment, Net (Continued)

        For the six months periods ended June 30, 2018 and 2019, the Group recorded depreciation expenses of RMB2,101 and RMB8,355 (US$1,217), respectively which were included in the following captions:

 
   For the six months
periods ended June 30, 		 
 
   2018   2019   2019  
 
   RMB
   RMB
   US$
  

Costs of revenues

     427     1,795     261  

Sales and marketing expenses

     292     1,146     167  

General and administrative expenses

     415     832     121  

Research and development expenses

     967     4,582     668  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

    2,101     8,355     1,217  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

5. Intangible Asset

        Intangible asset consisted of the following:

 
   Total  
 
   RMB
  

Balance as of January 1, 2018

     —  

Addition

     2,852,370  

Amortization

     (491,069 )

Foreign currency translation difference

     218,037  
​ ​ ​ ​ ​

Balance as of December 31, 2018

     2,579,338  
​ ​ ​ ​ ​
​ ​ ​ ​ ​
​ ​ ​ ​ ​

Balance as of January 1, 2019

     2,579,338  

Amortization

     (302,003 )

Foreign currency translation difference

     (326 )
​ ​ ​ ​ ​

Balance as of June 30, 2019

     2,277,009  
​ ​ ​ ​ ​
​ ​ ​ ​ ​
​ ​ ​ ​ ​

        In February 2018, the Company entered into a strategic cooperation framework agreement (the "Agreement") with an affiliate of Tencent Group. The Company and Tencent Group agreed to cooperate in a number of areas primarily for Tencent Group to provide the Company Weixin access point and other services and to pursue additional opportunities for future potential cooperation. The Agreement is valid for five years, from March 1, 2018 to February 28, 2023. The Company recognized the Agreement as an intangible asset at the fair value of consideration paid in the form of convertible preferred shares of RMB2,852 million. The Group recognizes the related amortization expense in costs of revenues, over the period of five years using the straight-line method. No impairment charges were recognized on the intangible asset for the six months period ended June 30, 2018 and 2019.

19


PINDUODUO INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of RMB and US$, except for number of shares and per share data)

5. Intangible Asset (Continued)

        The estimated annual amortization expense for each of the five succeeding fiscal years is as follows:

 
   Amortization  
 
   RMB
   US$
  

For six months ending December 31, 2019

     311,293     45,345  

For the years ending December 31,

              

2020

     617,514     89,951  

2021

     617,514     89,951  

2022

     617,514     89,951  

2023

     109,957     16,017  

6. Leases

        The Company has operating leases mainly for offices in China. For the six months periods ended June 30, 2019, operating lease costs and short-term lease costs were RMB42,049 and RMB18,459, respectively. There were no leasing costs other than the operating lease costs and short-term lease costs for the six months ended June 30, 2019.

        A maturity analysis of the Company's operating lease liabilities and reconciliation of the undiscounted cash flows to the operating lease liabilities recognized on the unaudited interim condensed consolidated balance sheet was as below:

 
   Rental  
 
   RMB
   US$
  

The remainder of 2019

     49,675     7,236  

2020

     100,781     14,681  

2021

     93,228     13,580  

2022

     71,027     10,346  

2023 and after

     55,145     8,033  
​ ​ ​ ​ ​ ​ ​ ​

Total undiscounted cash flows

     369,856     53,876  

Less: imputed interest

     (42,404 )   (6,177 )
​ ​ ​ ​ ​ ​ ​ ​

Present value of lease liabilities

     327,452     47,699  
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​

        As of June 30, 2019, the Company had no operating leases that had not yet commenced. The weighted average remaining lease terms of the right-of-use assets was 3.89 years.

        A weighted average incremental borrowing rate of 5.33% was adopted on the commencement date in determining the present value of lease payments.

20


PINDUODUO INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of RMB and US$, except for number of shares and per share data)

6. Leases (Continued)

        Other supplemental information related to leases is summarized below:

 
   For the six months
periods ended
June 30, 		 
 
   2019   2019  
 
   RMB
   US$
  

Operating cash flows for operating leases

     30,672     4,468  

ROU assets obtained in exchange for new operating lease liabilities

     144,232     21,010  

7. Other Non-current Assets

        Equity method investments are included in other non-current assets on the Company's consolidated balance sheets, consisting of the Company's investments as a limited partner in the funds, including funds set up by a Company's related parties, to make strategic investments in privately-held companies. Such investments amounted in total to RMB182,667 and RMB 394,584 (US$57,478) as of December 31, 2018 and June 30, 2019, respectively. No equity method investments were considered, individually or in aggregate, material as of December 31, 2018 and June 30, 2019. As the profit or loss from the funds was immaterial for the six months ended June 30, 2019, there was no gain or loss from the equity method investments recognized during the same period. There was no impairment on these investments during the six months ended June 30, 2019.

8. Accrued Expenses and Other Liabilities

        The components of accrued expenses and other liabilities were as follows:

 
   As of  
 
   December 31,
2018 		  June 30,
2019 		  June 30,
2019 		 
 
   RMB
   RMB
   US$
  

Accrued expenses

     1,371,483     2,411,870     351,328  

VAT and other tax payable

     436,495     733,142     106,794  

Payroll payable

     389,615     390,545     56,889  

Others

     28,074     38,349     5,587  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

    2,225,667     3,573,906     520,598  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

        Accrued expenses primarily consisted of accrued advertising and marketing expenses.

9. Ordinary Shares

        In the third quarter of 2018, the Company completed its Initial Public Offering ("IPO") on the National Association of Securities Deal Automated Quotations under the symbol of "PDD" of 91,735,827 ADSs (including 6,135,827 ADSs sold upon the exercise of the underwriters' over-allotment

21


PINDUODUO INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of RMB and US$, except for number of shares and per share data)

9. Ordinary Shares (Continued)

option), representing 366,943,308 Class A Ordinary Shares for a total proceeds net of issuance costs of US$1,690,696 (RMB11,523,631).

        Upon completion of the IPO, all convertible preferred shares were converted into ordinary shares.

        In February 2019, the Company completed a follow-on public offering and issued 48,435,000 ADSs, representing 193,740,000 Class A Ordinary Shares for total proceeds net of issuance costs of US$1,181,209 (RMB7,993,828).

10. Revenue

 
   For the six months periods ended
June 30, 		 
 
   2018   2019  
 
   RMB
   RMB
   US$
  

Online marketplace services

                    

—Online marketing services

     3,479,052     10,415,487     1,517,187  

—Transaction services

     614,598     1,419,725     206,806  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

    4,093,650     11,835,212     1,723,993  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Contract balances

        The Group's contract liabilities comprised of customer advances and portions of payables to merchants:

 
   As of  
 
   December 31,
2018 		  June 30,
2019 		  June 30,
2019 		 
 
   RMB
   RMB
   US$
  

Customer advances

     191,482     267,322     38,940  

Contract liability

     72,939     65,390     9,525  

        Customer advances and contract liability relate to considerations received in advance for online marketing services and transaction services, respectively, for which control of the services occurs at a later point in time. Contract liability is included in Payable to merchants in the Company's unaudited interim condensed consolidated balance sheets. The significant increase in the balance of customer advances was due to the increase in advance payments from customers in line with the growth in online marketing services revenues. Revenues recognized from the carrying value of customer advances and contract liability as of January 1, 2018 during the six months ended June 30, 2018 were RMB42,871 (US$6,245) and RMB38,935 (US$5,672) respectively. Revenues recognized from the carrying value of customer advances and contract liability as of January 1, 2019 during the six months ended June 30, 2019 were RMB149,176 (US$21,730) and RMB72,939 (US$10,625), respectively.

22


PINDUODUO INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of RMB and US$, except for number of shares and per share data)

11. Related Party Transactions

(a)
Major related parties:
Names of related parties
  Relationship with the Group
Tencent and its affiliates ("Tencent Group")   A shareholder and its affiliates of the Company
Toshare Group Holding Limited   Company controlled by the Founder
(b)
Other than those disclosed elsewhere, the Group had the following significant related party transactions for the six months periods ended June 30, 2018 and 2019, respectively:
 
   For the six months periods ended
June 30, 		 
 
   2018   2019   2019  
 
   RMB
   RMB
   US$
  

Services received from:

                    

Tencent Group

     417,733     1,448,890     211,055  
(c)
The Group had the following major related party balances as of December 31, 2018 and June 30, 2019, respectively:
 
   As of  
 
   December 31,
2018 		  June 30,
2019 		  June 30,
2019 		 
 
   RMB
   RMB
   US$
  

Amounts due from related parties:

                    

Tencent Group*

     1,018,963     1,043,156     151,953  

 

 
   As of  
 
   December 31,
2018 		  June 30,
2019 		  June 30,
2019 		 
 
   RMB
   RMB
   US$
  

Amounts due to related parties:

                    

Tencent Group

     458,147     1,412,517     205,756  

Toshare Group Holding Limited

     19,966     —     —  
*
The balances represented receivables due from the online payment platform operated by Tencent Group.

        All balances with the related parties as of June 30, 2019 were unsecured, interest-free and had no fixed terms of repayment.

12. Loss Per Share

        During 2018, the Company effected a change of authorized share capital by repurchasing all of the then issued and outstanding ordinary shares at par value and reissued 42,486,360 Class A Ordinary Shares and 1,716,283,460 Class B Ordinary Shares to its existing holders of ordinary shares. The number of shares and per-share price in the unaudited interim condensed consolidated financial

23


PINDUODUO INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of RMB and US$, except for number of shares and per share data)

12. Loss Per Share (Continued)

statements were recasted on a retroactive basis to reflect the effect of these changes for the six months period ended June 30, 2018.

        Basic and diluted loss per share are not reported separately for Class A ordinary shares or Class B ordinary shares (the "Ordinary Shares") as each class of shares has the same rights to undistributed and distributed earnings.

        The following table sets forth the computation of basic and diluted net loss per share for the following periods:

 
   For the six months periods ended June 30,  
 
   2018   2019   2019  
 
   RMB
   RMB
   US$
  

Numerator:

                    

Net loss

     (6,694,909 )   (2,880,958 )   (419,658 )

Deemed distribution to certain holders of convertible preferred shares

     (80,496 )   —     —  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Net loss attributable to ordinary shareholders

     (6,775,405 )   (2,880,958 )   (419,658 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Denominator: (in thousands of shares)

                    

Weighted-average number of ordinary shares outstanding—basic and diluted

     1,850,155     4,604,472     4,604,472  

Loss per share—basic and diluted

    
(3.66
)		  
(0.63
)		  
(0.09
)

24