PROSPECTUS
SUMMARY
This
summary highlights certain information that appears elsewhere in this prospectus or in documents incorporated by reference herein,
and this summary is qualified in its entirety by that more detailed information. This summary may not contain all of the information
that may be important to you. We urge you to carefully read this entire prospectus and the documents incorporated by reference
herein. As an investor or prospective investor, you should also review carefully the sections entitled “Special Note Regarding
Forward-Looking Statements” and “Risk Factors” in this prospectus.
Overview
The
Restructure
Description
of the Proposed Merger
Effective as of October
23, 2020, LLIT, Merger Sub, and Newegg entered into a merger agreement (the “Merger Agreement”). If the transactions
contemplated by the Merger Agreement (“Merger”) are completed, Merger Sub will merge into Newegg and Newegg
will be the surviving entity. LLIT will become the 100% owner of the surviving entity. Pursuant to the Merger Agreement, LLIT
will issue an aggregate of approximately 363,325,542 Common Shares of the Company (the “Exchange Shares”) to
the stockholders of Newegg. Each issued and outstanding shares of Newegg (excluding any shares owned by any stockholder of Newegg
who has validly exercised its appraisal rights pursuant to Section 262 of the Delaware General Corporation Law) will be exchanged
for a certain number of the Exchange Shares based on the LLIT Conversion Ratio. The “LLIT Conversion Ratio” shall
equal to a calculated “Newegg Per Share Value” divided by a calculated “LLIT Per Share Value”. The “Newegg
Per Share Value” shall equal $880,000,000 divided by the number of outstanding Newegg Shares on the date hereof. The “LLIT
Per Share Value” shall equal (i) the volume-weighted average trading price of Class A Common Shares for the consecutive
twenty (20) Trading Days immediately preceding October 16, 2020 minus (ii) (A) $3,500,000 (which shall be deposited into an escrow
account) divided by (B) the number of Class A Common Shares and Class B Common Shares issued and outstanding on the execution
date of the Merger Agreement.
In addition, as
an inducement and a condition to the willingness of LLIT, Merger Sub and Newegg to enter into the Merger Agreement, and in
consideration of the substantial expenses incurred and to be incurred by them in connection therewith, Two entities
controlled by Zhitao He, Hangzhou Lianluo and Hyperfinite Galaxy Holding Limited, agreed to enter into certain support
agreement with LLIT and Newegg to vote in the LLIT’s special shareholder meeting all their shares of LLIT, which
represents 86.64% of total voting power as of the date of this registration statement, in favor of the Merger, the
Disposition, and several amendments to LLIT’s current Memorandum and Articles of Association including the Share
Redesignation, the Share Increase, the Share Combination, the Name Change and certain rights of the Principal Shareholders as
discussed below. Ping Chen, who holds 11.75% of our Class A Common Shares and has 1.25% voting power in total as of date
of this registration statement, also agreed to enter into the same support agreement separately with LLIT and Newegg.
The Company has
placed $3,500,000 into a U.S. bank account designated by a third-party escrow agent mutually selected by the Company and Newegg.
The escrow amount will be used solely to (i) defend, indemnify and hold harmless the parties to the merger agreement and each
of their respective affiliates and representatives against, and satisfy any liabilities relating to, any actions relating to the
securities purchase agreements dated February 12, 2020, February 21, 2020 and February 27, 2020 between the Company and certain
investors or the Class A common share purchase warrants issued on February 12, 2020, February 25, 2020, and March 2, 2020, in
each case as amended or restated and (ii) pay the amount of any fee that is payable from the Company to Newegg for termination
of the merger agreement.
Prior to the Merger,
Hangzhou Lianluo, through its wholly owned subsidiary Digital Grid (Hong Kong) Technology Co., Ltd. (“Digital Grid”),
owns 61.33% of the equity interests of Newegg. In addition, prior to the Merger, Hangzhou Lianluo also holds 1,388,888 of our
Class B Common Shares issued and outstanding, representing approximately 86.3% of the voting power of our Common Shares, as well
as warrants exercisable for 125,000 Class B Common Shares. Hangzhou Lianluo is controlled by Mr. Zhitao He, our former Chairman
and CEO, who currently serves as a director of Newegg and will be the chairman of the board of directors of the post-closing issuer.
Description
of the Proposed Disposition
Lianluo Smart Limited,
through its wholly owned PRC subsidiaries, has been engaged in the medical device business, currently focusing on the development,
production and marketing of sleep respiratory analysis systems in China (the “Medical Device Business”). As
previously disclosed in the Form 6-K filed on August 14, 2020, on August 13, 2020, Lianluo Connection entered into that certain
agreement with China Mine United Investment Group Co., Ltd. (“China Mine”), pursuant to which Lianluo Connection
agreed to transfer its 100% equity interests in its wholly-owned PRC subsidiary, Beijing Dehaier, to China Mine for cash consideration
of RMB 0. As of the date of this registration statement, Lianluo Connection, Lianluo Technology, and Merger Sub are the only subsidiaries
of LLIT.
Effective as of
October 23, 2020, the Company entered into an equity transfer agreement (the “Disposition Agreement”) with
Beijing Fenjin Times Technology Development Co., Ltd. If the transactions contemplated by the Disposition Agreement are completed,
the Company will sell all of the business, assets and liabilities of Lianluo Connection to Beijing Fenjin Times Technology Development
Co., Ltd. (“Fenjin Times”) for cash consideration of $0. Fenjin Times also agreed to make contribution of RMB87.784
million to Lianluo Connection’s registered capital by September 23, 2023 and the Company agreed to convert the debt owed
by Lianluo Connection to in an aggregate amount of $11,255,188.47 into additional paid-in capital of Lianluo Connection. Upon
completion of this Disposition, Lianluo Connection will be 100% owned by Fenjin Times. The Disposition will be completed and become
effective immediately following completion of the Merger. The Disposition will close upon satisfaction of the closing conditions
of the Disposition Agreement, including but not limited to the closing of the Merger and this Offering, approval by the Company’s
shareholders of the Disposition Agreement and the transactions contemplated thereunder and receipt of a fairness opinion in respect
of the fairness of the Disposition to the Company’s shareholders from a financial point of view.
Share Ownership upon Consummation of
the Proposed Merger and Proposed Disposition
Immediately after
consummation of the Merger and Disposition, we will own 100% of Newegg. The stockholders of Newegg who receive Common Shares in
the Merger will own approximately 98.68% of the Company and our existing shareholders will own approximately 1.32% of the Company.
We estimate that
we may issue approximately 363,325,542 common shares to Newegg stockholders upon completion of the merger, based on the number
of shares of Newegg issued and outstanding as of February 10, 2021t. Based on the number of our common shares and Newegg stock
outstanding as of such date, immediately following the completion of merger, our shareholders immediately prior to the merger
are expected to own approximately 1.32% of our outstanding common shares and former Newegg stockholders are expected to own approximately
98.68% of our outstanding common shares (on a fully-diluted basis
In addition, Mr. Zhitao He and Mr. Fred Faching Chang will own
approximately 60.91% and 35.98%, respectively, of the voting power of our issued and outstanding common shares, and 96.89%, collectively,
based on the number of our Common Shares and Newegg stock outstanding as of February 10, 2021. Moreover, Mr. Zhitao He and Mr.
Fred Chang, both of whom will serve as our directors upon closing, will be able to exercise substantial influence over our business
and operations. They may also have a conflict of interests with the minority shareholders. Where those conflicts exist, the minority
shareholders will be dependent upon Mr. He, Mr. Chang, and other directors exercising, in a manner fair to all of our shareholders,
their fiduciary duties. Also, Mr. He and Mr. Chang will have the ability to control the outcome of most corporate actions requiring
shareholder approval, including the sale of all or substantially all of our assets and amendments to our Memorandum and Articles
of Association. Moreover, such concentration of voting power could have the effect of delaying, deterring, or preventing a change
of control or other business combination, which may, in turn, have an adverse effect on the market price of our shares or prevent
our minority shareholders from realizing a premium over the then-prevailing market price for their shares.
See additional
disclosures relating to the shares held by Mr. He under “Risk Factors – A majority of our common shares will be pledged
as collateral to support delinquent indebtedness of our parent company and could be sold to satisfy that indebtedness.”
Simultaneous
Closing of the Restructure and Offering and Our Business upon Consummation of the Restructure
The closing of the
Restructure and the Offering are closing conditions to each other. Upon consummation of the Merger and Disposition and the simultaneous
closing of the Offering, our business will solely be the business of Newegg.
Newegg’s
Business Overview
The preliminary
estimated unaudited financial results of Newegg for the year ended December 31, 2020 included in this prospectus have been prepared
by, and are the responsibility of, Newegg’s management. Newegg’s independent registered public accounting firm, BDO
USA, LLP, has not audited, reviewed, compiled or performed any procedures with respect to the preliminary financial results. Accordingly,
BDO USA, LLP does not express an opinion or any other form of assurance with respect thereto.
Newegg is a tech-focused
e-commerce company in North America, and ranked second after Best Buy as the global top electronics online marketplace according
to Web Retailer’s report, as measured by 32.4 million visits per month in 2019. Through Newegg.com, the company’s
flagship business-to-consumer (“B2C”) B2C platform, business-to-business (“B2B”) operations,
and other online platforms, it operates direct sales and marketplace model for IT computer components, consumer electronics (“CE”),
entertainment, smart home and gaming products and provides certain third party logistics services globally. Newegg has received
numerous awards and accolades for its services since its inception, among which, the company was ranked No. 5 on Newsweek’s
2020 List of Best Online Shops – Consumer Electronics.
Newegg’s Competitive
Strengths
Newegg
believes that it maintains its market leading position through the following continual refinement of key competitive advantages.
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Strong brand recognition. Newegg
has operated for over twenty years and built an excellent reputation among technology enthusiasts. Newegg has earned consistent
recognition as one of the strongest brands in IT/CE ecommerce. Our operating history has given us strong brand equity and
authority in this segment. Many consumers consider us the best retailer for PC components and high end PC systems.
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Robust platform of marketplace sellers.
Newegg’s large customer base allows the platform to attract top tier marketplace sellers. These sellers provide
their product assortment, competitive pricing, fulfillment and marketing thus increasing the value of the Newegg platform
to our customers. Marketplace sellers are responsible for the vast majority of the SKUs available for sale on Newegg. Additionally,
Newegg offers its Sponsored Product Ads (SPA) Program to its sellers’ partners which strengthens visibility and sales
of key seller items.
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Vendor Relationships. Newegg has
built robust, long term relationships with many of the most important brands in IT/CE including Nvidia, AMD and Intel. These
relationships allow Newegg to secure inventory at competitive pricing. As a trusted partner to top manufacturers, Newegg is
able to match supply to consumer demands.
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Excellence in supply chain management.
Newegg has adopted cost-effective, automated solutions which provide accuracy and speed in fulfillment including Bastian’s
OPEX Perfect Pick and Pick to Light. These warehouse automation systems allow Newegg to achieve 99+ percent same-day e-commerce
fulfillment (defined in this prospectus as the processing of an order for shipment) and inventory accuracy rates. Newegg’s
highly efficient logistics allow the Company to offer its capabilities to many of its marketplace sellers and vendors via
Newegg Logistics. Newegg Logistics has expanded its third-party logistics (“3PL”) portfolio over time to
include a variety of services including Shipped by Newegg (SBN.) In 2020, Newegg added two additional service offerings as
part of its portfolio including Newegg Bridge, a turnkey customer service outsourcing solution and Newegg Staffing, a seasonal
and direct placement employment firm.
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Industry
leading customer service. Newegg’s customer service is well known, consistently
earning industry accolades. Its proven track record of delivering excellent customer
service for nearly two decades particularly qualifies Newegg to serve as the customer
service gateway for its 3PL clients via its new Newegg Bridge service.
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Newegg’s
Growth Strategies
Newegg’s
goal is to enhance its position as a leading tech-focused e-commerce company and to continue to expand globally and into new related
business. Newegg plans to achieve this through the following:
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Further
strengthen its position as a leading tech-focused e-commerce company. Newegg has
cultivated a strong and loyal customer base. Newegg intends to further expand and engage
with its customer base by increasing the efficiency of its platforms and implementing
new features to augment its platforms’ mobile functionality. Newegg also plans
to continue enhancing its award-winning customer service function. Newegg intends to
engage in brand promotion campaigns and other marketing activities across online and
offline channels to further drive its growth and enhance its brand recognition worldwide.
Newegg plans to continue engaging its existing customers and reaching out to new customers
utilizing social media, customer interactions on its platforms and offline marketing
events in both domestic and overseas markets.
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Increase
Newegg’s product assortment and introduce new product categories. Newegg will
continue to grow its direct sales and Marketplace business by increasing its product
assortment and introducing new product categories. Newegg is confident that its suppliers
and Marketplace sellers will increase their offerings on its platforms if it continues
to offer a compelling value proposition and further develop its data-led insights, real-time
visibility of customer preference shifts and improved fulfillment and logistics capabilities.
Newegg also intends to attract new third-party sellers to its Marketplace by providing
them with access to its growing customer base, majority of whom are tech-savvy, and its
ancillary e-commerce solutions. This will enable us to further enhance its sourcing capabilities,
expand the diversity and availability of its merchandise and penetrate into additional
information technology/consumer electronics (“IT/CE”) related categories,
such as lifestyle electronics, health tech, tech toys, maker components and kits and
Internet of Things (“IoT”) products.
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Expand
private label business. Newegg intends to further expand its Rosewill and ABS private
labels assortment by continuing to offer high quality, feature rich, value priced products. As of December 31, 2020, private
label products (consisting of Rosewill and ABS products) across all Newegg platforms (Newegg.com, Newegg.ca
and NeweggBusiness.com) constituted collectively about 0.002% of Newegg’s total active SKU count, while products offered
by Newegg’s Marketplace sellers constituted 99.670% of Newegg’s total active SKU count. Newegg plans to further
expand its offerings under its Rosewill brand in targeted categories which it believes provide strong growth potential
and higher margins, including DIY components, gaming accessories, gaming chairs, headsets, home automation and IoT connected
devices. Under its ABS brand, its goal is to continue to drive significant growth in its line of gaming and business
grade PCs’ by leveraging its large audience of gamers and business customers who seek a high quality, high powered PC.
Both brands are offered globally through its cross border initiative and will be included in all future cross border expansion.
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Grow
its small and medium sized business and public sector segments. Newegg seeks to expand
its B2B business by further penetrating into small- and mid-sized businesses and public
sector institutions and continuously enhancing its value proposition tailored to meet
the needs of its target verticals. Newegg plans to provide enhanced access to its staff of account executives dedicated to helping B2B customers tackle
industry-specific challenges, as well as to offer additional electronic tools and content
that allow B2B customers to troubleshoot issues on their own before without having to
wait for a customer representative. Newegg is also expanding its broad assortment of
business class products from top brands at competitive prices, which it offers with rapid
delivery options and seamless customer and technical services. Newegg aims to continue
to attract new customers and increase existing customers’ retention and repeat
purchase rates by emphasizing its personal touch in customer relationships and focusing
on comprehensive online and offline marketing campaigns, effective customer engagement
via social media and referrals, deals and promotions and efficient conversion of high-value
accounts from Newegg.com.
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Further
develop its IT infrastructure and expand globally and into new businesses. Newegg
plans to capitalize on its leading technology and infrastructure to enter into new markets
and new businesses. Newegg expects to further develop its IT infrastructure, and mobile
e-commerce platform to include big data applications, supply chain management systems
and AI-driven analytical capabilities by integrating commercial software packages and
open-source components into its software and systems. Newegg also aims to build on its
success in selective countries, such as Canada, and apply its model to expand into fast-growing
markets where there are attractive opportunities.
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Pursue
selective strategic partnership, investments and acquisition opportunities. Newegg
intends to selectively pursue strategic alliances and strategic partnership that are
complementary to its business and operations, including opportunities that can help us
further promote its brand to new customers, increase its product offerings, improve its
technology and fulfillment infrastructure, and expand its presence to more markets.
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Increase
Service Offerings. Newegg aims to expand its offering of a variety of value-added
Direct to Consumer (“D2C”) platform services and solutions. It believes
by providing these services, Newegg creates additional value for its business partners
and customers and ultimately benefit the Newegg ecosystem and all its participants. Currently,
Newegg offers 3PL, including Shipped by Newegg® Service, Newegg Logistics, Newegg
Staffing, Pure Facility Solutions, Inc., Newegg Bridge, a PC Builder tool, and expects
to launch a Newegg personal computer assembly service in the near future.
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Proposed
Amendment to the M&A
In connection with
the Restructure, the Board of the Company has recommended the shareholders to approve the several proposals to reclassify our authorized
share capital to eliminate the dual class structure, to effectuate a share combination of the issued and outstanding common shares,
to increase the number of authorized shares following the share combination, to change the Company’s name, to give certain
shareholders rights to appoint and remove certain number of the post-Restructure entity’s directors in proportion to such
shareholders’ voting percentage in the post-Restructure entity (subject to the compliance with applicable laws and NASDAQ’s
rules), and to adopt an amended and restated Memorandum and Articles of Association of the Company (the “Fifth Amended
and Restated Memorandum and Articles of Association”) to reflect the share combination, the removal of automatic
conversion, the share increase and the change of Company’s name.
Description of the Share Redesignation
Immediately prior to the closing of the Restructure, each Class
B Common Share issued and outstanding will be converted into one Class A Common Share and the outstanding warrant to purchase 125,000
Class B Common Shares will be converted to a warrant to acquire 125,000 Class A Common Shares. As a result, there will be no outstanding
Class B Common Shares or any other outstanding securities that are convertible into Class B Common Shares upon the closing of the
Restructure.
In connection with the
Restructure and the Offering, we are seeking our shareholders’ approval to redesignate all of our issued and unissued Class
A Common Shares of par value of $0.021848 each and Class B Common Shares of par value of $0.021848 each into common shares
of par value of $0.021848 each on a one to one basis (the common shares of LLIT after the Share Redesignation, “Common
Shares”) thus eliminating the Company’s dual class structure (the “Share Redesignation”);
Description
of Share Combination
NASDAQ rules require the post-Merger entity to comply with the
initial listing standards of the applicable NASDAQ market to continue to be listed on such market following a change of control
transaction. The NASDAQ Capital Market’s initial listing standards require a company to have, among other things, a $4.00
per share minimum bid price or a lower minimum per share closing price if additional financial requirements are met. As the Company’s
current share price is far less than $4.00, the share combination is necessary to meet the minimum bid price listing requirement.
The Board of the Company recommends the shareholders to approve a share combination by a ratio of not less than one-for-two and
not more than one-for-fifty, on or prior to June 30, 2021 (the “Share Combination”), with the exact ratio to be set at a whole number within
this range, as determined by the Company’s board of directors in its sole discretion. At the time the share combination is
effective, our authorized Common Shares will be consolidated at the same combination ratio.
Description
of the Share Increase
The Board
believes that it is necessary and advisable to increase the number of Common Shares that the Company is authorized to issue
to allow for adequate shares to be issued to the stockholders of Newegg for the consummation of the Merger and adequate
shares to be offered in this concurrent Offering. In addition, the Board considers that the increase of the numbers of the
Common Shares that the Company is authorized to issue will provide the Company with flexibility for other potential
acquisitions and capital raising activities in the future, if any. As a result, the Board of the Company is seeking its
shareholders’ approval for the increase of the number of Common Shares that the Company is authorized to issue
unlimited Common Shares (the “Share Increase”) following the Share Combination and the
Share Redesignation.
Description
of Certain Principal Shareholders’ Rights (the “Rights of Principal Shareholders”)
The Fifth Amended and
Restated Memorandum and Articles of Association, effective upon the closing of the Restructure and this Offering and subject to
compliance with applicable laws and NASDAQ rules, provides, among other things, Digital Grid and Newegg’s stockholders other than Digital Grid (the “Legacy Shareholder”, collectively with Digital Grid “Principal Shareholders”)
with the rights to appoint certain number of directors of the post-closing issuer. The Legacy Shareholders holding a majority of
Exchange Shares issued to all the Legacy Shareholders in the Merger shall select a representative (“Minority Representative”
which initially is Fred Chang) and have the power to remove and reselect a different Minority Representative from time to time.
Pursuant to Article 8.1(i) of the Fifth
Amended and Restated Memorandum and Articles of Association and subject to compliance with applicable laws and NASDAQ rules, the
board of post-closing issuer shall consist of up to seven directors. Initially, four of the directors shall be appointed by Digital
Grid, and three of the directors shall be appointed by the Minority Representative.
If the number of
Common Shares or other Equity Interests (as defined in the Fifth Amended and Restated Memorandum and Articles of Association)
of the post-closing issuer held by the Legacy Shareholders represents (i) more than two sevenths (2/7) of the total voting
power of all outstanding Shares or other Equity Interests of the post-closing issuer, then the Minority Representative shall
be entitled to appoint and replace three directors, (ii) less than or equal to two sevenths (2/7) and more than one seventh
(1/7) of the total voting power of all outstanding Common Shares or Equity Interests of the post-closing issuer, then, then
the Minority Representative shall be entitled to appoint and replace two directors, and (iii) less than or equal to one
seventh (1/7) and more than five percent (5%) of the total voting power of all outstanding Common Shares or other Equity
Interests of the post-closing issuer, then the
Minority Representative shall be entitled to appoint and replace one director; and (iv) less than or equal to five percent
(5%) of the total voting power of all outstanding Common Shares or other Equity Interests of the post-closing issuer, then
the Minority Representative shall no longer be entitled to appoint any directors under the Article 8.1(i) of the Fifth Amended and Restated Memorandum and Articles of Association.
If the number of
Common Shares or other Equity Interests held by Digital Grid or its affiliates represents (i) (i) more than fifty percent
(50%) of total voting power of all outstanding Common Shares or other Equity Interests of the post-closing issuer, then
Digital Grid shall be entitled to appoint and remove four directors, (ii) less than or equal to fifty percent (50%) and more
than two sevenths (2/7) the total voting power of all outstanding Common Shares or other Equity Interests of the post-closing
issuer, then Digital Grid shall be entitled to appoint and remove three directors, (iii) less than or equal to two sevenths
(2/7) and more than one seventh (1/7) of the total voting power of all outstanding Common Shares or other Equity Interests of
the post-closing issuer, then Digital Grid shall be entitled to appoint and replace two directors (iv) less than or
equal to one seventh (1/7) and more than five percent (5%) of the total voting power of all outstanding Common Shares or
other Equity Interests of the post-closing issuer, then Digital Grid shall be entitled to appoint and replace one director,
and (v) less than or equal to five percent (5%) of the total voting power of all outstanding Common Shares or other Equity
Interests of the Company, then Digital Grid shall no longer be entitled to appoint any directors under the Article 8.1(i) of
the Fifth Amended and Restated Memorandum and Articles of Association.
Of the directors appointed by the Minority Representative, one
shall be designated by the Minority Representative to be the “Primary Minority Board Appointee” from time to time by
delivering written notice thereof to the board. The initial Primary Minority Board Appointee shall be Fred Chang.
Any director positions
which neither Digital nor the Minority Representative are entitled to appoint under the Fifth Amended and Restated Memorandum and
Articles of Association shall be appointed by a majority of the remaining directors, or by any other means allowed under the Fifth
Amended and Restated Memorandum and Articles of Association and the BVI Business Companies Act, 2004.
In addition, the
Fifth Amended and Restated Memorandum and Articles of Association also provides that, if Legacy Shareholders hold more than
ten percent (10%) of the Equity Interest of the post-closing issuer, then neither the post-closing issuer, nor any officer or
agent of the post-closing issuer can take, or permit our subsidiaries to take, certain actions, without the approval of
the affirmative vote of not less than a majority (50%) of the number of votes represented by the directors (excluding
vacancies), which majority must include the Primary Minority Board Appointee,
including but not limited to, initiating any liquidation, dissolution, bankruptcy filing or similar action, recapitalization,
restructuring or reorganization, purchasing or otherwise acquiring all or any part of the assets or business of, or equity
interest or other evidences of beneficial ownership of, invest in or participate in any joint venture, partnership or similar
arrangement with, any person (other than the post-closing issuer or any of its subsidiaries), in each case in any transaction
or series of related transactions involving a commitment in excess of $10,000,000, entering into any related-party
transactions, and appointing or removing the chief executive officer of the post-closing issuer.
Description of the Name Change
Immediately prior
to the closing of the Restructure and this Offering, and subject to shareholders’ approval, the Company will change its
name to “Newegg Commerce, Inc.” (the “Name Change”). The Company also plans to change its trading
symbol to “NEGG” to better reflect the Company’s business following the consummation of the Restructure.
Based on the foregoing,
to effectuate and reflect the Share Redesignation, the Share Combination, the Share Increase, the Rights of Principal Shareholders,
and the Name Change, the Company will adopt the Fifth Amended and Restated Memorandum and Articles of Association upon obtaining
shareholders’ approval.
Implication of Being a Foreign Private
Issuer and a Controlled Company
We are a foreign
private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions of the
securities rules and regulations in the United States that are applicable to U.S. domestic issuers. Upon the completion of the
Offering and the Merger, our business will be administered through Newegg principally in the U.S. Nevertheless, we expect that
we will continue to be a foreign private issuer within the meaning of rule 3b-4(c) of Exchange Act, because we are organized under
the laws of the British Virgin Islands and more than 50% of our outstanding voting securities will be held by residents outside
of the United States.
As a foreign private
issuer, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to
that required to be filed with the SEC by U.S. domestic issuers. In addition, as a company incorporated in the British Virgin
Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly
from the NASDAQ listing standards. Following this offering, we intend to rely on home country practice to be exempted from some
of NASDAQ’s corporate governance requirements. For instance, unlike the requirements of NASDAQ, we are not required, under
the corporate governance practice requirements in the British Virgin Islands, to have our board consist of a majority of independent
directors, nor are we required to have a compensation committee or a nomination and corporate governance committee consisting
entirely of independent directors, or have regular executive sessions with only independent directors each year. These practices
may afford less protection to shareholders than they would enjoy if we complied fully with the NASDAQ listing standards. In the
future, we expect to rely on available NASDAQ exemptions that would allow us to follow our home country practice.
Additionally, upon
the completion of the Restructure and this Offering, we will be a “controlled company” as defined under the NASDAQ
Listing Rules because Mr. Zhitao He, who will be the chairman of the board of directors of the post-closing issuer, will beneficially
own [●] of our Common Shares and will be able to exercise [●]% of our total voting power assuming the underwriters
do not exercise their over-allotment option, or [●]% of our total voting power if the underwriters exercise their over-allotment
option in full. For so long as we remain a controlled company under that definition, we are permitted to elect to rely, and may
rely, on certain exemptions from corporate governance rules, including an exemption from the rule that a majority of our board
of directors must be independent directors or that we have to establish a nominating committee and a compensation committee composed
entirely of independent directors. As a result, you will not have the same protection afforded to shareholders of companies that
are subject to these corporate governance requirements.
Summary
of Risk Factors
Investing in our
Common Shares involves significant risks. You should carefully consider all of the information in this prospectus before making
an investment in our Common Shares. Below please find a summary of the principal risks we face, organized under relevant headings.
These risks are discussed more fully in the section titled “Risk factors.”
Risks Relating to the Proposed Restructure
Risks and uncertainties
related to the proposed Restructure include, but are not limited to, the following:
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The
proposed Merger is subject to a number of conditions, including, among others, the approval
of our shareholders, and the simultaneous completion of the Disposition and the consummation
of this Offering, which may not be accomplished, or on a timely basis.
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Upon
consummation of the merger, Mr. Zhitao He and Mr. Fred Chang will beneficially own approximately
61.16% and 36.11%, respectively, of the voting power of our issued and outstanding common
shares, and 97.26%, collectively, of the voting power of our issued and outstanding common
shares. They will exert significant influence on our business and operations and may
have a conflict of interest with the minority shareholders.
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We
will be a “controlled company” within the meaning of the NASDAQ Capital Market
rules and, as a result, will qualify for, and intend to rely on, exemptions from certain
corporate governance requirements. You will not have the same protections afforded to
shareholders of companies that are subject to such requirements.
|
|
●
|
The
Fifth Amended and Restated Memorandum and Articles of Association which provides certain
rights to the Principal Shareholders of the post-closing issuer will limit your ability
to appoint director and influence corporate matters and could discourage others from
pursuing any change of control transactions that minority holders of Common Shares may
view as beneficial.
|
|
●
|
Following
the Restructure, the Company’s business may suffer as a result of the lack of public
company operating experience of new management.
|
|
●
|
Newegg
is not a publicly traded company, making it difficult to determine the fair market value
of Newegg. Also, we may fail to uncover all liabilities of Newegg’s business through
the due diligence process prior to the proposed Merger, exposing us to potentially large,
unanticipated costs.
|
|
●
|
Our
future results following the proposed Restructure may differ materially from the unaudited
pro forma financial information included in this registration statement.
|
|
●
|
Certain
provisions of Newegg’s Amended Shareholders Agreement may delay or prevent us from
raising funding in the future and may have an adverse impact on us and the liquidity
and market price of our Common Shares.
|
Risks Relating to Newegg’s
Business
We are also
subject to risks and uncertainties related to Newegg’s business, including, but not limited to, the following:
|
●
|
Newegg
faces risks related to system interruption, including failures caused or experienced
by third-party service providers, and lack of redundancy and timely upgrades.
|
|
●
|
Newegg’s
business faces intense domestic and international competition.
|
|
●
|
A
decline in demand for IT and CE products could adversely affect Newegg’s operating
results.
|
|
●
|
The
loss of key employees or the failure to attract qualified personnel could have a material
adverse effect on Newegg’s ability to run its business.
|
|
●
|
If
Newegg is unable to provide a satisfactory customer experience, its reputation would
be harmed and it could lose customers.
|
|
●
|
Newegg
depends on its vendors to source sufficient quantities of merchandise on favorable terms.
If Newegg fails to maintain strong vendor relationships or if its vendors are otherwise
unable to supply products that meet its standards in a timely manner, its net sales and
net income could suffer.
|
|
●
|
Newegg’s
international sales and operations require access to international markets and are subject
to applicable laws relating to trade, export and import controls and economic sanctions,
the violation of which could adversely affect its operations.
|
|
●
|
Newegg
has incurred net loss in the past and may continue to experience losses in the future.
|
|
●
|
The
successful operation of Newegg’s business depends upon the performance, reliability
and security of the internet infrastructure in the countries where it operates.
|
|
●
|
Because
many of the products that Newegg sells are manufactured abroad, Newegg may face delays,
increased cost or quality control deficiencies in the importation of these products,
which could reduce its net sales and profitability.
|
|
●
|
Assertions,
claims and allegations, even if not true, that Newegg has infringed or violated intellectual
property rights could harm Newegg’s business and reputation. Also, Newegg may be
subject to product liability claims, which could be costly and time-consuming to defend.
|
|
●
|
Newegg
may incur additional costs due to tax assessments resulting from ongoing and future audits
by tax authorities.
|
|
●
|
Significant
developments stemming from recent U.S. government actions and proposals concerning tariffs
and other economic proposals could have a material adverse effect on us.
|
|
●
|
Newegg
and certain of its subsidiaries are parties to a revolving credit agreement, which contain
a number of covenants that may restrict Newegg’s current and future operations
and could adversely affect Newegg’s ability to execute business needs.
|
Risks Relating to the Common Shares
and this Offering
In addition to
the risks described above, we are subject to general risks and uncertainties related to our Common Shares and this offering,
including, but not limited to, the following:
|
●
|
If
we fail to maintain compliance with NASDAQ Listing Rules, we may be delisted from the
NASDAQ Capital Market, which would result in a limited public market for trading our
shares and make obtaining future debt or equity financing more difficult for us.
|
|
●
|
The
trading price of the Common Shares is likely to be volatile and could fluctuate widely
due to multiple factors, some of which are beyond our control.
|
|
●
|
Our
directors, officers and we may be involved in investigations or other forms of regulatory
or governmental inquiry which may cause reputational harm to the Company, incur additional
expenses, and distract our management from our day-to-day operations.
|
|
●
|
Because
our offering price is substantially higher than our net tangible book value per share,
you will experience immediate and substantial dilution.
|
|
●
|
Certain
types of class or derivative actions generally available under U.S. law may not be available
as a result of the fact that we are incorporated in the BVI. As a result, the rights
of shareholders may be limited.
|
|
●
|
As
a company incorporated in the British Virgin Islands, we are permitted to adopt certain
home country practices in relation to corporate governance matters that differ significantly
from NASDAQ’S corporate governance listing standards. These practices may afford
less protection to shareholders than they would enjoy if we complied fully with NASDAQ’s
corporate governance listing standards.
|
|
●
|
We are a foreign private issuer and as such
we are exempt from certain provisions applicable to U.S. domestic public companies. As such we are exempt from certain
provisions applicable to U.S. domestic public companies such as quarterly reporting, current reports, and certain compensation
disclosure requirements. As a result, you may not obtain as much information about us as you would for a domestic issuer
|
THE
OFFERING
Common Shares offered by us
|
|
[●] Common Shares.
|
|
|
|
Price per Common Shares
|
|
We currently estimate that the public offering price will be $[●] per Common Shares.
|
|
|
|
Over-allotment
|
|
We have granted the underwriters an option for a period of up to [●] days to purchase up to additional Common Shares.
|
|
|
|
Number of the Common Shares issued and
outstanding prior to completion of this Offering (assuming that the Share Redesignation is completed and the Exchange Shares
for the Merger have not been issued)
|
|
3,465,683 Common Shares
|
Number of the Common Shares outstanding immediately after this
Offering (assuming that the Share Redesignation is completed and the Exchange Shares for the Merger have been issued)
|
|
[●] Common Shares
|
|
|
|
Listing
|
|
Our common shares
currently trade on the NASDAQ under the symbol “LLIT” and we have applied change of the trading symbol to be “NEGG”
upon closing of this Offering.
|
|
|
|
Use of proceeds
|
|
We intend to use
the net proceeds from this Offering for working capital, to fund incremental growth and other general corporate purposes,
including possible acquisitions. However, we do not currently have any definitive or preliminary plans with respect to the
use of proceeds for such purposes. We may also use a portion of the net proceeds to acquire or invest in complementary businesses,
products, websites or technologies or to enter into strategic relationships with third parties. We have no present understandings,
commitments or agreements to enter into any acquisitions or investments. The amount actually expended for the purposes listed
above will depend upon a number of factors, including the growth of our sales and customer base, competitive developments
in e-commerce, the actual cost of capital expenditures and our cash flow from operations and the growth of our business. The
amount of what, and timing of when, we actually spend for these purposes may vary significantly and will depend on a number
of factors, including our future revenue and cash generated by operations and the other factors described in “Risk Factors.”
|
|
|
|
Risk factors
|
|
The Common Shares offered hereby involve a high degree of risk. You should read “Risk Factors,” beginning on page 13
for a discussion of factors to consider before deciding to invest in our Common Shares.
|
|
|
|
Lock-Up Agreements
|
|
Subject to certain
exceptions, we, all of our executive officers and directors and affiliates that own [●]% or more of our outstanding
common shares, as of the effective date of the registration statement have agreed not to offer, issue, sell, contract to sell,
encumber, grant any option for the sale of any common shares, or otherwise dispose of or transfer any of our common shares
or other securities convertible into or exercisable or exchangeable for our common shares for a period of [●] days
after this Offering is completed without the prior written consent of the underwriters.
|
Summary
Financial Data
The following
summary financial data for the year ended December 31, 2019 are derived from our unaudited pro forma combined financial statements
included elsewhere in this registration statement. The following summary financial data for the six months ended June 30, 2020
are derived from our unaudited pro forma combined financial statements included elsewhere in this registration statement. Our historical
results for period ended June 30, 2020 are not necessarily indicative of results to be expected for any future period. You should
read the following summary financial information in conjunction with the consolidated financial statements and related notes and
the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
included elsewhere in this registration statement.
|
|
Six Months ended June 30, 2020
|
|
|
|
(In thousands) (Unaudited)
|
|
|
|
Newegg
|
|
|
LLIT
|
|
|
Pro Forma Adjustments
|
|
|
Pro Forma Combined
|
|
Net sales
|
|
$
|
862,700
|
|
|
$
|
339
|
|
|
$
|
(339
|
)
|
|
$
|
862,700
|
|
Cost of sales
|
|
|
738,122
|
|
|
|
580
|
|
|
|
(580
|
)
|
|
|
738,122
|
|
Gross profit (loss)
|
|
|
124,578
|
|
|
|
(241
|
)
|
|
|
241
|
|
|
|
124,578
|
|
Other operating income
|
|
|
264
|
|
|
|
—
|
|
|
|
—
|
|
|
|
264
|
|
Selling, general, and administrative expenses
|
|
|
107,138
|
|
|
|
1,273
|
|
|
|
(836
|
)
|
|
|
107,575
|
|
Income (loss) from operations
|
|
|
17,704
|
|
|
|
(1,514
|
)
|
|
|
1,077
|
|
|
|
17,267
|
|
Interest income
|
|
|
590
|
|
|
|
—
|
|
|
|
1
|
|
|
|
591
|
|
Interest expense
|
|
|
(378
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(380
|
)
|
Other income (expense), net
|
|
|
2,790
|
|
|
|
(24
|
)
|
|
|
24
|
|
|
|
2,790
|
|
Unrealized loss on securities
|
|
|
—
|
|
|
|
143
|
|
|
|
—
|
|
|
|
143
|
|
Change in fair value of warrants liabilities
|
|
|
—
|
|
|
|
(300
|
)
|
|
|
—
|
|
|
|
(300)
|
|
Income (loss) before provision for income taxes
|
|
|
20,706
|
|
|
|
(1,696
|
)
|
|
|
1,101
|
|
|
|
20,111
|
|
Provision for income taxes
|
|
|
1,767
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,767
|
|
Net income (loss)
|
|
$
|
18,939
|
|
|
$
|
(1,696
|
)
|
|
$
|
1,101
|
|
|
$
|
18,344
|
|
|
|
June 30, 2020
|
|
|
|
(In thousands) (Unaudited)
|
|
|
|
Newegg
|
|
|
LLIT
|
|
|
Pro Forma Adjustments
|
|
|
Pro Forma Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
141,855
|
|
|
$
|
6,396
|
|
|
$
|
(6
|
)
|
|
$
|
148,245
|
|
Other assets
|
|
|
331,152
|
|
|
|
1,787
|
|
|
|
(1,480
|
)
|
|
|
331,459
|
|
Total assets
|
|
|
473,007
|
|
|
|
8,183
|
|
|
|
(1,486
|
)
|
|
|
479,704
|
|
Total liabilities
|
|
|
348,276
|
|
|
|
3,959
|
|
|
|
(3,132
|
)
|
|
|
349,103
|
|
Total temporary equity
|
|
|
187,801
|
|
|
|
—
|
|
|
|
(187,801
|
)
|
|
|
—
|
|
Total shareholders’ equity
|
|
$
|
(63,070)
|
|
|
$
|
4,224
|
|
|
$
|
189,447
|
|
|
$
|
130,601
|
|
|
|
Year ended December 31, 2019
|
|
|
|
(In thousands) (Unaudited)
|
|
|
|
Newegg
|
|
|
LLIT
|
|
|
Pro Forma Adjustments
|
|
|
Pro Forma Combined
|
|
Net sales
|
|
$
|
1,533,928
|
|
|
$
|
383
|
|
|
$
|
(383
|
)
|
|
$
|
1,533,928
|
|
Cost of sales
|
|
|
1,369,054
|
|
|
|
744
|
|
|
|
(744
|
)
|
|
|
1,369,054
|
|
Gross profit
|
|
|
164,874
|
|
|
|
(361
|
)
|
|
|
361
|
|
|
|
164,874
|
|
Other operating income (expense)
|
|
|
28,314
|
|
|
|
—
|
|
|
|
—
|
|
|
|
28,314
|
|
Selling, general, and administrative expenses
|
|
|
229,192
|
|
|
|
3,442
|
|
|
|
(2,675
|
)
|
|
|
229,959
|
|
Loss from operations
|
|
|
(36,004
|
)
|
|
|
(3,803
|
)
|
|
|
3,036
|
|
|
|
(36,771
|
)
|
Interest income
|
|
|
586
|
|
|
|
1
|
|
|
|
2
|
|
|
|
589
|
|
Interest expense
|
|
|
(2,945
|
)
|
|
|
—
|
|
|
|
(4
|
)
|
|
|
(2,949
|
)
|
Other income (expense), net
|
|
|
4,184
|
|
|
|
(32
|
)
|
|
|
32
|
|
|
|
4,184
|
|
Unrealized loss on securities
|
|
|
—
|
|
|
|
(1,357
|
)
|
|
|
—
|
|
|
|
(1,357
|
)
|
Change in fair value of warrants liabilities
|
|
|
—
|
|
|
|
740
|
|
|
|
—
|
|
|
|
740
|
|
Gain from sale of and equity income from equity method investments
|
|
|
21,777
|
|
|
|
—
|
|
|
|
—
|
|
|
|
21,777
|
|
Loss before provision for income taxes
|
|
|
(12,402
|
)
|
|
|
(4,451
|
)
|
|
|
3,066
|
|
|
|
(13,787
|
)
|
Provision for income taxes
|
|
|
4,589
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,589
|
|
Net loss
|
|
$
|
(16,991
|
)
|
|
$
|
(4,451
|
)
|
|
$
|
3,066
|
|
|
$
|
(18,376
|
)
|
RISK
FACTORS
In
addition to the other information contained or incorporated by reference in this registration statement, including those risk
factors related to our business set forth in our Annual Report on Form 20-F for the year ended December 31, 2019, filed
on May 15, 2020, you should carefully consider the following risk factors:
Risks
Relating to the Proposed Restructure
The proposed
Merger is subject to a number of conditions, including, among others, the approval of our shareholders, and the simultaneous completion
of the Disposition and the consummation of this Offering, which may not be accomplished, or on a timely basis.
Completion of the proposed Merger is conditioned upon, among
other matters, the approval of our shareholders, the simultaneous closing of the Disposition of Lianluo Connection and this
Offering. There can be no assurance that any of these conditions will be satisfied, or that all of them will be satisfied on a
timely basis. Any failure to meet these conditions on a timely basis may result in the delay or abandonment of the proposed Restructure.
Our shareholders
may not realize a benefit from the Merger commensurate with the ownership dilution they will experience in connection
with the Merger. In addition, our shareholders’ ownership interests in the Company may be further diluted as a result of
the Offering.
If we are unable
to realize the full strategic and financial benefits anticipated from the Merger, our shareholders will have experienced substantial dilution of
their ownership interests in the Company without receiving any commensurate benefit, or only receiving part of the commensurate
benefit to the extent we are able to realize only part of the strategic and financial benefits anticipated from the merger.
In addition, as
a condition to the closing of the merger, the Company shall have consummated a public offering of our Common Shares for $30 million,
or such other amount necessary to meet NASDAQ’s initial listing requirements simultaneously along with the merger. There
can be no assurance as to what the per share offering price will be in the public offering. As a result of the completion of the
Offering, our existing shareholders’ ownership interests in the Company could be further diluted.
Certain of
our director, executive officer and major shareholders have interests in the proposed Restructure that are different from, and
may potentially conflict with, our interests and the interests of our unaffiliated shareholders.
Certain of our
directors, executive officers and major shareholders have interests in the proposed Restructure that may be different from, or
in addition to, the interests of our unaffiliated shareholders and that may create potential conflicts of interest. Ms. Yingmei
Yang, our Chief Financial Officer and a director, also serves on the board of Newegg. In addition, Mr. Zhitao He, our former Chairman
and former Chief Executive Officer, controls approximately 86.6% of our total voting power through Hangzhou Lianluo, consisting
of 58,937 Class A Common Shares held by Hyperfinite Galaxy Holding Limited and 1,388,888 Class B Common Shares held by Hangzhou
Lianluo. Through Digital Grid, Mr. He also holds 490,706 shares of Newegg’s Class A Common Stock and 24,870,027 shares of
Newegg’s Series AA Preferred Stock and 12,782,546 shares of Newegg’s Series A Preferred Stock, which collectively
represents 61.33% of all issued and outstanding shares of Newegg. See additional disclosures relating to the shares held by Mr.
He below “– A majority of our common shares will be pledged as collateral to support delinquent indebtedness of our
parent company and could be sold to satisfy that indebtedness.” Also, because the closing of the Disposition is contingent
upon the completion of the Merger, Mr. Zhitao He and Ms. Yingmei Yang may also have interests in the disposition that may be different
from, or in addition to, the interests of our unaffiliated shareholder. Hangzhou Lianluo has indicated that one of the reasons
it would like to complete the merger is that they believe it is the best way for Newegg to become publicly listed, which will
provide them and other Newegg stockholders better liquidity for their Newegg investment. The beneficial ownership of our major
shareholders and directorship of our officer in Newegg may create additional conflicts of interest in respect of the proposed
Merger described in this registration statement.
Upon consummation
of the merger, Mr. Zhitao He and Mr. Fred Chang will beneficially own approximately 60.91% and 35.98%, respectively, of the voting
power of our issued and outstanding common shares, and 96.90%, collectively, of the voting power of our issued and outstanding
common shares. They will exert significant influence on our business and operations and may have a conflict of interest with our
other shareholders.
Upon the consummation of merger, Mr. Zhitao He and Mr. Fred
Chang will own approximately 60.91% and 35.98%, respectively, of the voting power of our issued and outstanding common shares,
and 96.89%, collectively, based on the number of our common shares and Newegg stock outstanding as of February 10, 2021. Additionally,
Mr. Zhitao He and Mr. Fred Chang, both of whom will serve as our directors upon closing, will be able to exercise substantial influence
over our business and operations. They may also have a conflict of interests with our other shareholders. Where those conflicts
exist, our other shareholders will be dependent upon Mr. He, Mr. Chang, and other directors exercising, in a manner fair to all
of our shareholders, their fiduciary duties. Also, Mr. He and Mr. Chang will have the ability to control the outcome of most corporate
actions requiring shareholder approval, including the sale of all or substantially all of our assets and amendments to our Memorandum
and Articles of Association. Moreover, such concentration of voting power could have the effect of delaying, deterring, or preventing
a change of control or other business combination, which may, in turn, have an adverse effect on the market price of our shares
or prevent our shareholders from realizing a premium over the then-prevailing market price for their shares.
A majority
of our common shares will be pledged as collateral to support delinquent indebtedness of our parent company and could be sold
to satisfy that indebtedness.
Digital Grid is
the record owner of 38,143,279 shares of Newegg stock that will be converted into 222,821,591 of our common shares upon completion
of the merger. This will represent approximately 60.5% of our outstanding shares, based on our and Newegg’s capitalization
on February 10, 2021. All of these shares have been pledged by Digital Grid to Bank of China Limited Zhejiang Branch, or BOC as
collateral to support working capital loans and letters of credit provided by BOC to Hangzhou Lianluo. The loans have been guaranteed
jointly and severally by Beijing Digital Grid Technology Co., Ltd., a subsidiary of Hangzhou Lianluo, and Mr. Zhitao He. The total
amount owed under these loans is RMB400 million in RMB denominated loans, plus $66.5 million in U.S. dollar loans, plus interest,
fees and penalties on such amounts. In May 2020, BOC filed several lawsuits against Hangzhou Lianluo, Digital Grid, Beijing Digital
Grid Technology Co., Ltd. and Mr. He in the Hangzhou Intermediate People’s Court in China alleging that Hangzhou Lianluo
has failed to repay the loans when due and is in breach of the loan agreements. This litigation is ongoing.
Digital Grid’s
Newegg stock certificates are physically in the possession of BOC. Any transfer of those shares to a non-affiliate of Digital
Grid would be subject to our amended and restated shareholder agreement under the laws of Delaware prior to completion of the
merger and the laws of the British Virgin Islands after completion of the merger. The shareholders agreement gives a right of
first refusal in favor of Newegg (or, after the merger, the Company), and a right of second refusal in favor of the current Newegg
stockholders (which primarily includes Mr. Fred Chang), to purchase all shares being transferred. A transfer of those shares would
also be subject to a customary lock-up agreement between Digital Grid and the Company that restricts such transfer for 180 days
after completion of the merger under California law. The lock-up agreement and the amended and restated shareholder agreement
may not be recognized or enforceable in China’s courts.
This pledge and
related delinquent indebtedness and litigation could result in the sale of some or all of Digital Grid’s shares of Newegg
and the Company. Any such sale could result in a change of control of the Company to Mr. Fred Chang upon exercise of the right
of first refusal or right of second refusal, or to any other buyer of such shares. It could also result in the forced sale of
some or all of Digital Grid’s shares, which comprise up to 60.5% of our outstanding Common Shares. This could cause our
share price to fall significantly.
We are a
“controlled company” within the meaning of the NASDAQ Capital Market rules and, as a result, qualify for exemptions
from certain corporate governance requirements. You will not have the same protections afforded to shareholders of companies that
are subject to such requirements.
Currently and after
completion of this Offering, Mr. Zhitao He, through Hangzhou Lianluo, Hyperfinite Galaxy Holding Limited, and Digital Grid, is
and will continue to control a majority of the voting power of our outstanding Common Shares. As a result, we are and will continue
to be a “controlled company” within the meaning of NASDAQ’s corporate governance standards. Under these rules,
a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled
company.” For so long as we remain a controlled company under this definition, we are permitted to elect to rely on certain
exemptions from corporate governance rules, including:
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an
exemption from the rule that a majority of our board of directors must be independent directors;
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an
exemption from the rule that the compensation of our chief executive officer must be determined or recommended solely by independent
directors; and
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an
exemption from the rule that our director nominees must be selected or recommended solely by independent directors.
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As a result, you will
not have the same protection afforded to shareholders of companies that are subject to these corporate governance requirements.
The Fifth Amended and Restated Memorandum
and Articles of Association which provides certain rights to the Principal Shareholders of the post-closing issuer will limit your
ability to appoint director and influence corporate matters and could discourage others from pursuing any change of control transactions
that minority holders of Common Shares may view as beneficial.
Upon the completion
of the Restructure and this Offering, the board of post-closing issuer shall consist of up to seven directors. Initially, four
of the directors shall be appointed by Digital Grid, which will control approximately 60.91% of our total voting power upon completion
of this Offering, and three of the directors shall be initially appointed by Mr. Fred Chang, acting on as a “Minority Representative”
which is selected by a majority of the Legacy Shareholders, who collectively will own approximately 35.98% of our total voting
power upon completion of this Offering. The number of directors that Digital Grid and the Minority Representative are entitled
to appoint will decrease proportionately with the decrease of the respective voting power of Digital Grid and the Legacy Shareholders.
Any director positions which neither Digital Grid nor the Minority Representative are entitled to appoint shall be appointed by
the remaining directors, or by any other means allowed under the Fifth Amended and Restated Memorandum and Articles of Association.
Immediately upon
Closing of the Offering you will have no right to appoint or elect any director to our board. The Fifth Amended and Restated Memorandum
and Articles of Association will limit your ability to appoint or elect persons for service on the post-closing entity’s
board of directors and may discourage proxy contests for the election of directors and purchases of substantial blocks of shares
by making it more difficult for a potential acquirer to gain control of post-closing entity’s board of directors.
We
may not have the ability to repurchase certain warrants.
In
February and March 2020, we sold warrants exercisable for an
aggregate of 1,373,750 shares of our Class A Common Shares to certain investors in private placements in conjunction with a number
of registered direct offerings. The warrants are exercisable for five and one-half years from the date of issuance. In late January
2021, 1,255,000 of these warrants were exercised resulting in aggregate cash proceeds to the Company of $6.8 million and leaving
118,750 warrants that remain outstanding.
Under certain circumstances, if a fundamental transaction (as defined
in the warrants) is consummated, the holder of the warrants may require us to repurchase the remaining unexercised portion of such
warrants for an amount of cash equal to the value of the warrant as determined in accordance with the Black Scholes option pricing
model and the terms of the warrants. The Black Scholes model requires multiple input variables, such as the then effective exercise
price of the warrants, the then current market price of our Class A common shares, the time to expiration of the warrants, the
risk-free rate, and the volatility. While it is difficult for us to estimate the cash amount that we may need to pay warrant holders
upon the repurchase, if a fundamental transaction were to occur, the cash amount required to repurchase the remaining outstanding
warrants under the Black Scholes option pricing model would be approximately $0.7 million, based on the closing trading price of
$7.42 for our Class A common shares on February 5, 2021, and an assumed exercise price of $5.60, 5-year T-bill rate of 0.42%, implied
volatility/HVT function of 109.6%, and assuming these are the prevailing values on the fundamental transaction date, which is assumed
to be April 1,
2021.
Our ability to
repurchase the warrants depends on our available cash resources at such time. We cannot assure you that upon closing of the Restructure,
we will maintain sufficient cash reserves or that our post-Restructure business will generate cash flow from operations at levels
sufficient to permit us to repurchase the warrants.
Failure
to complete the proposed Restructure could negatively impact our business, financial condition, results of operations or share
price.
Completion
of the proposed Restructure is conditioned upon the satisfaction of certain closing conditions, including those discussed
above, and other closing conditions customary for a transaction of this size and type. The required conditions to closing may
not be satisfied in a timely manner, if at all. If the proposed Restructure is not consummated for these or any other
reasons, we may be subject to a number of adverse effects, including:
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we may be required
under certain circumstances to pay Newegg a termination fee;
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the price of our
Common Shares may decline to the extent that the current market price reflects a market assumption that the proposed
Restructure will be completed;
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our operations may
continue to incur loss;
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we may have difficulty
maintaining compliance with NASDAQ continued listing rules, and as a result, be delisted from NASDAQ Capital Market; and
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costs related to
the Restructure, such as legal, accounting, financial advisory and printing fees, must be paid even if the Restructure is not
completed.
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Furthermore,
if the Restructure is not completed, there can be no assurance that we will be able to find another target business on terms
as favorable as those of the Merger Agreement.
There can
be no assurances that Newegg stockholders will not be required to recognize gain for U.S. federal income tax purposes upon the
exchange of Newegg stock for common shares of the Company stock in the merger.
The Company and
Newegg have structured the Merger with the intent that it will qualify as a “reorganization” within the meaning of
Section 368(a) of the Code, specifically as a “reverse triangular merger” under Section 368(a)(2)(E) of the Code.
However, the qualification of the Merger as a reorganization depends on compliance with numerous technical requirements. The Company
and Newegg have not sought and will not seek any ruling from the IRS regarding any matter affecting the merger or any of the United
States federal income tax consequences discussed herein, and have not sought and will not seek any tax opinion from their respective
legal counsel regarding the qualification of the Merger as a “reorganization” within the meaning of Section 368(a)
of the Code. Thus, there can be no assurance that the IRS will ultimately conclude that the Merger does meet all of the requirements
for qualification as a “reorganization” within the meaning of Section 368(a) of the Code, and there can be no assurance
that any of the other statements made herein would not be challenged by the IRS and, if so challenged, would be sustained upon
review in a court. A successful challenge by the IRS could result in taxable income to Newegg and its stockholders.
Following
the Restructure, the Company’s business may suffer as a result of the lack of public company operating
experience of new management.
Prior
to the completion of the Restructure, Newegg has been a privately-held company. Most members of Newegg’s management will
become members of the Company’s management after the Restructure but have limited experience managing a publicly-traded
company and complying with reporting and other obligations under securities law. The new management may not successfully manage
Newegg’s transition into a public company which will be subject to significant regulatory oversight, reporting obligations
under the federal securities laws and the continuous scrutiny of securities analysts and investors. These new responsibilities
may require significant attention from Newegg’s management and could divert their attention and resources from the management
of Newegg’s business, which could negatively affect the new management’s ability to achieve the anticipated benefits
of the proposed Restructure.
The
transition to becoming the subsidiary of a public company will require changes in the way that Newegg operates its business
and incur additional expenses pertaining to SEC reporting obligations and SEC compliance matters, and the post-closing issuer’s disclosure controls
and procedures may not prevent or detect all errors or acts of fraud.
Private companies often
have less regulated methods of operation than public companies. This results in less transparency and presents greater risks of
noncompliance with rules and regulations. In anticipation of the proposed transactions, Newegg’s management has begun to
implement a variety of measures to ensure that the company follows the rules applicable to public companies in the United States.
To the extent these new procedures and policies could not change historical behaviors that might be inconsistent with the rules
regulating U.S. public company, Newegg could be at risk of violation or poor reporting as a public company following this transaction.
In the event Newegg’s directors or executive officers inadvertently fail to identify, review or disclose a new relationship
or arrangement causing the post-closing issuer to fail to properly disclose any related party transaction disclosures or in the event that it fails to comply
with SEC reporting and internal controls and procedures, the post-closing issuer may be subject to securities laws violations that may result in additional
compliance costs or costs associated with SEC judgments or fines, both of which will increase our costs and negatively affect our
potential profitability and our ability to conduct our business. The public reporting requirements and controls are new for
the management of the post-closing issuer, and may require the post-closing issuer to obtain outside assistance from legal, accounting or other professionals
that will increase the costs of doing business.
Newegg
is not a publicly traded company, making it difficult to determine the fair market value of Newegg.
The
outstanding capital stock of Newegg is privately held and is not traded on any public market, which makes it difficult to determine
the fair market value of Newegg. There can be no assurance that the Merger consideration to be issued to Newegg stockholders will
not exceed the actual value of Newegg.
We
may fail to uncover all liabilities of Newegg’s business through the due diligence process prior to the proposed Merger,
exposing us to potentially large, unanticipated costs.
Prior
to completing the proposed Merger, we have and expect to continue to perform, certain due diligence reviews of the
Newegg’s business. In view of timing and other considerations relevant to our successfully achieving the closing of the
proposed Merger, our due diligence reviews will necessarily be limited in nature and may not adequately uncover all of the
contingent or undisclosed liabilities we may incur as a consequence of the proposed Merger. Any such liabilities could cause
us to potentially experience significant losses, which could materially adversely affect our business, results of operations
and financial condition.
We
have incurred and expect to continue to incur substantial transaction-related costs in connection with the proposed Restructure.
We
have incurred, and expect to continue to incur, a number of non-recurring transaction-related costs associated with completing
the Restructure. These fees and costs have been, and will continue to be, substantial. Non-recurring transaction costs include,
but are not limited to, fees paid to legal, financial and accounting advisors, filing fees and printing costs. Additional unanticipated
costs may be incurred, which may be higher than expected and could have a material adverse effect on the new business’s
financial condition and operating results.
The market price
of our Common Shares may decline as a result of the proposed Restructure.
We could encounter
larger than anticipated transaction-related costs, may fail to realize some or all of the benefits anticipated from the proposed
Restructure or be subject to other factors that may adversely affect preliminary estimates of the results of the proposed Restructure.
Any of these factors could delay the expected accretive effect of the proposed Restructure and contribute to a decrease in the
price of our Common Shares.
In addition, we
are unable to predict the potential effects of the issuance of Common Shares as the purchase price for the Merger of Newegg and
in the concurrent Offering on the trading activity and market price of our Common Shares. The Common Shares issued in connection
with the concurrent Offering can be freely traded on NASDAQ Capital Market following the lapse of applicable lock-up periods.
Sales of a substantial number of our Common Shares in the public market, or the perception that such sales might occur, could
have a material adverse effect on the price of our Common Shares.
Certain
of our current shareholders will have reduced ownership and voting power after the proposed Restructure.
As consideration for
the proposed Merger, we will issue to the stockholders of Newegg in aggregate of approximately 363,325,542 Common Shares, which
will entitle the holder thereof to one votes per share on any matter submitted to a vote of the post-closing issuer’s shareholders.
Upon consummation of the Restructure and immediately prior to the closing of Offering, these shares would represent approximately
99.08% of the total voting power. Our current shareholders will, therefore, have proportionately less ownership and voting power
in us following the proposed Merger than they have now.
Our
future results following the proposed Restructure may differ materially from the unaudited pro forma financial information included
in this registration statement.
The unaudited pro forma
financial information contained in this prospectus is presented for purposes of presenting our historical consolidated financial
statements with the historical financial statements of Newegg, as adjusted to give effect to the proposed Restructure, and is not
necessarily indicative of the financial condition or results of operations of the business following the proposed Restructure.
The assumptions used in preparing the pro forma financial information may not prove to be accurate, and other factors may affect
our financial condition and results of operations following the Proposed Restructure. Any change in our financial condition or
results of operations may cause significant variations in the price of our Common Shares. See the section of this registration
statement captioned “Unaudited Pro Forma Financial Information” for more information.
NASDAQ may not
list our Common Shares on its exchange, which could prevent consummation of the Restructure or limit investors’ ability to
make transactions in our shares. Consequently, we may be subject to additional trading restrictions.
It is a closing condition
to the Merger that our Common Shares are listed on NASDAQ. The post-Merger entity will be required to meet the initial listing
standards of NASDAQ. We may not be able to meet those initial listing requirements. Even if our securities are so listed, we may
be unable to maintain the listing of our securities in the future. If we fail to meet the initial listing requirements, neither
we nor Newegg would be required to consummate the Merger. In the event that we and Newegg elected to waive this condition, our
Company and the shareholders could face significant material adverse consequences, including:
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limited availability of market quotations for
our securities;
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limited amount of news coverage for the Company;
and
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decreased ability to issue additional securities
or obtain additional financing in the future.
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Newegg
may not realize anticipated growth opportunities.
Newegg
expects that it will realize growth opportunities and other financial and operating benefits as a result of the Restructure.
Newegg cannot predict with certainty if or when these growth opportunities and benefits will occur, or the extent to which they
actually will be achieved. For example, the benefits from the Restructure may be offset by costs incurred as a result of being
a public company. See “Risks Relating to Newegg’s Business” below for more discussion of the risks relating
to Newegg following the Restructure.
Certain provisions
of Newegg’s Amended Shareholders Agreement may delay or prevent us from raising funding in the future and may have an adverse
impact on us and the liquidity and market price of our Common Shares.
Prior to the Restructure
and this Offering, Newegg’s shareholders have entered into certain shareholders agreement, dated March 30, 2017 (the “Shareholders
Agreement”). In connection with the Merger Agreement, Newegg, Digital Grid, the Principal Shareholders and we agreed
to enter into certain amendment to the Shareholders Agreement, dated October 23, 2020 (such amendment, the “Amended Shareholders
Agreement”), pursuant to which we agreed to assume all of the rights and obligations of Newegg under the Shareholders
Agreement upon the closing of the Restructure.
Under the Amended
Shareholders Agreement, the Principal Shareholders will have pre-emptive rights to acquire additional shares when the
post-closing issuer issues or sells additional securities in the future, except for the “excluded issuance” as
defined in the Amended Shareholders Agreement or Common Shares offered pursuant to a registration statement filed with the
SEC.
In addition, the
post-closing issuer and the Principal Shareholders also has rights of first refusal over transfers of the Common Shares by the
Principal Shareholders, pursuant to the Amended Shareholders Agreement and subject to compliance with applicable laws and NASDAQ’s
rules. If any Principal Shareholders receives a bona fide offer from any person other than its affiliate to acquire any of the
Principal Shareholders’ Common Shares (the “ROFR Shares”), then the post-closing issuer has a right of
first refusal, but not the obligation, to elect to purchase all (and not less than all) of the ROFR Shares, at the same price,
and on the same terms and conditions offered by the purchaser (the “ROFR Terms”). In the event the post-closing
issuer does not decide to purchase all such ROFR Shares, then each of the Principal Stockholders other than the selling Principal
Shareholders shall have a right of first refusal to elect to purchase all (and not less than all) of its Pro Rata Share of the
ROFR Shares on the ROFR Terms. For the purpose of this Amended Shareholders Agreement, “Pro Rata Share” means the
percentage which corresponds to the ratio which each selling Principal Stockholder’s “Percentage Interest” (which
is calculated by dividing (i) the number of the Common Shares owned by such Principal Stockholder, by (ii) total number of the
then outstanding shares of the Common Shares held by all Principal Stockholders) bears to the total Percentage Interests of all
Principal Stockholders exercising their right of first refusal. In the event that the ROFR Shares are in exchange for non-cash
consideration, then such right of first refusal shall be exercisable based on the fair market value determined in good faith by
the board of such non-cash consideration.
Such right of first
refusal and pre-emptive rights may delay or prevent us from raising funding in the future and may have an adverse impact on the
liquidity and market price of our Common Shares.
Risks
Relating to Newegg’s Business
The
impact of COVID-19 may adversely affect Newegg’s business and financial results.
The
spread of the novel coronavirus (“COVID-19”), which was declared a pandemic by the World Health Organization
in March 2020, has caused different countries and cities to mandate curfews, including “shelter-in-place” and closures
of most non-essential businesses as well as other measures to mitigate the spread of the virus.
Newegg’s online
business and warehouse operations have remained active to serve its customers during the COVID-19 outbreak, and to-date the Newegg
has seen increased demand for its products and services during the outbreak. By contrast, some of the Newegg’s brick-and-mortar
competitors have been forced to close down at least some of their retail locations temporarily, while some competitors have de-emphasized
certain lines of business, such as computers and electronics, which represent the Newegg’s core business. Both of these industry
trends have contributed to increased sales and market share for Newegg. However, the course of the outbreak remains uncertain,
and a prolonged global economic slowdown and increased unemployment could have a material adverse impact on economic conditions,
which in turn could lead to a reduced demand for Newegg’s products and services.
As
a consequence of the COVID-19 outbreak, Newegg has experienced occasional supply constraints,
primarily in the form of delays in shipment of inventory. Newegg has also experienced
some increases in the cost of certain products, as well as a decrease in promotions by
some manufacturers. While it considers such events to be relatively minor and temporary,
continued supply chain disruptions could lead to delayed receipt of, or shortages in,
inventory and higher costs, and negatively impact sales in fiscal year 2020 and beyond.
COVID-19 impacted
the supply chain of Newegg’s brand partners and Marketplace sellers, and Newegg’s ability to timely fulfill orders
and deliver such orders to its customers, particularly as a result of mandatory shutdowns in different countries and cities to
mitigate the spread of the virus.
Although Newegg cannot
estimate the length or gravity of the impact of the COVID-19 outbreak at this time, if the pandemic continues, it may have an adverse
effect on the results of future operations of Newegg. The potential negative impact of COVID-19 on Newegg’s operations remains
uncertain and potentially wide-spread, including:
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Newegg’s
ability to successfully forecast sales and execute its long-term growth strategy during these uncertain
times;
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the
build-up of excess inventory as a result of lower consumer demand;
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supply
chain disruptions experienced by brand partners and Marketplace sellers, resulting from
closed factories, reduced workforces, scarcity of raw materials, and scrutiny or embargoing
of goods produced in infected areas, along with increased freight costs for Newegg;
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Newegg’s
ability to access capital sources and maintain compliance with its credit facilities,
as well as the ability of its key customers, suppliers, and vendors to do the same in
regard to their own obligations;
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Newegg’s ability to collect outstanding receivables from its customers;
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Newegg’s ability to attend and participate in industry and trade shows; and
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diversion
of management and employee attention and resources from key business activities and risk
management outside of COVID-19 response efforts, including cybersecurity and maintenance
of internal controls, with resulting potential loss of employee productivity.
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The
COVID-19 pandemic remains highly volatile and continues to evolve on a daily basis and therefore, there can be no assurance that
these potential negative impacts will not materialize, and these and other impacts of COVID-19 may adversely affect Newegg’s
future business, financial condition, cash flow, liquidity and results of operations.
Newegg
faces risks related to system interruption, including failures caused or experienced by third-party service providers, and lack
of redundancy and timely upgrades.
Newegg’s
success depends on its ability to successfully receive and fulfill orders and to promptly deliver such orders to its customers.
It could lose existing customers or fail to attract new customers, potentially resulting in a decline in net sales, if its online
platforms are inaccessible or if its transaction processing systems, order fulfillment processes or network infrastructure are
not operational or performing to its customers’ satisfaction.
Any
internet network interruptions, latency or problems with its online platforms’ availability could prevent customers
from accessing, browsing and placing orders on its online platforms, and impact its ability to fulfill orders or bill
customers, which may cause customer dissatisfaction and damage its reputation and brand. Newegg has experienced brief
computer system interruptions in the past, and it believes that others will occur from time to time in the future. Its
systems and operations potentially are vulnerable to damage or interruption from a number of sources, including the
following:
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natural
disaster or other catastrophic event such as earthquake, fire, power loss or interruption,
telecommunications failure, hurricane, volcanic eruption, flood or terrorist attack.
For example, its headquarters and the majority of its infrastructure, including some
of its servers, are located in Southern California, a seismically active region. In addition,
California has in the past experienced power outages as a result of limited electric
power supply;
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diseases
or pandemics (including COVID-19) that have affected and may continue to affect supply
chain of its brand partners and Marketplace sellers, and its logistics in the future
due to inconsistent and unanticipated order patterns, other diseases or pandemics or
unforeseen natural disasters;
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computer
malware, physical or electronic break-ins and similar disruptions;
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security
breaches and hacking attacks;
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failure
by third-party vendors, including data center and bandwidth providers, to provide steady
and high-speed access to its online platforms and systems. Any disruption in its network
access or co-location services, which are the services that house some of its servers and provide
internet access to them, provided by these third-party providers or any failure of these
third-party vendors to handle existing or higher volumes of use could significantly harm
its business. Any financial or other difficulties these vendors face could also adversely
affect its business; and
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Newegg
has not yet created sufficient redundancy for its information technology systems and data, and it does not presently maintain
backup copies of all of its data. Newegg has a limited disaster recovery plan in effect and may not have sufficient insurance
for losses that may occur from natural disasters, catastrophic events or the resulting business interruption. Newegg is generally
self-insured outside the United States. Any substantial damage to, or disruption of, its technology infrastructure could cause
interruptions or delays, loss of data, or reduced system availability, which could have a material adverse effect on its business,
financial condition and results of operations.
Newegg
may be unable to accurately project the rate or timing of traffic flow, including any traffic increases, or successfully and cost-effectively
upgrade its systems and infrastructure in a timely manner to accommodate higher traffic levels on its online platforms. If the
volume of traffic on its online platforms or the number of purchases made by its customers increases substantially, it may experience
unanticipated system disruptions, slower response times, reduced levels of customer service and impaired quality and delays in
reporting accurate financial information. For example, it experiences surges in online traffic and orders associated with promotional
activities and holiday seasons, especially during the Christmas season, which can put additional demands on its technology platform
at specific times.
Additionally, Newegg
must continue to upgrade and improve its technology and infrastructure to support its business growth, and failure to do so could
impede its growth. However, Newegg cannot assure you that it will be successful in executing these system upgrades and improvement
strategies. Any such upgrades to its systems and infrastructure could require substantial investments. In particular, its systems
may experience interruptions during upgrades, and the new technologies or infrastructures may not be fully integrated with the
existing systems on a timely basis, or at all. If its existing or future technology and infrastructure do not function properly,
it could cause system disruptions and slow response times, affecting data transmission, which in turn could materially and adversely
affect its business, financial condition and results of operations.
Newegg relies
on third-party payment processors to process deposits and withdrawals made by users of its marketplace, and if Newegg cannot manage
its relationships with such third parties and other payment-related risks, its business, financial condition and results of operations
could be adversely affected.
Newegg relies on a
limited number of third-party payment solutions to process deposits and withdrawals made by users of its marketplace. If any third-party
payment solution terminates its relationship with Newegg or refuses to renew its agreement with Newegg on commercially reasonable
terms, Newegg would need to find an alternate payment solution, and may not be able to secure similar terms or replace such payment
solution in an acceptable time frame. Further, the software and services provided by Newegg’s third-party payment solutions
may not meet its expectations, contain errors or vulnerabilities, be compromised or experience outages. Any of these risks could
cause Newegg to lose its ability to accept online payments or other payment transactions or make timely payments to users of its
marketplace, any of which could make Newegg’s marketplace less trustworthy and convenient and adversely affect its ability
to attract and retain its users.
Nearly all of Newegg’s
users’ payments are made by credit card, debit card or through other third-party payment services, which subjects Newegg
to certain regulations and to the risk of fraud. Newegg may in the future offer new payment options to users that may be subject
to additional regulations and risks. Newegg is also subject to a number of other laws and regulations relating to the payments
Newegg accepts from its users, including with respect to money laundering, money transfers, privacy and information security. If
it fails to comply with applicable rules and regulations, Newegg may be subject to civil or criminal penalties, fines and/or higher
transaction fees and may lose its ability to accept online payments or other payment card transactions, which could make its marketplace
less convenient and attractive to the users. If any of these events were to occur, Newegg’s business, financial condition
and results of operations could be adversely affected.
Additionally, Card
Organizations, including Visa, require Newegg to comply with payment card network operating rules, which are set and interpreted
by the payment card networks. The payment card networks could adopt new operating rules or interpret or reinterpret existing rules
in ways that might prohibit Newegg from providing certain offerings to some users, be costly to implement or difficult to follow.
Newegg have agreed to reimburse its payment processors for fines, penalties or assessments they are assessed by Card Organizations,
if Newegg or the users on its marketplace violate these rules. Any of the foregoing risks could adversely affect its business,
financial condition and results of operations.
Newegg’s
business faces intense domestic and international competition.
The
e-commerce market is intensely competitive with limited barriers to entry. Newegg’s current and potential competitors include
retailers, manufacturers and distributors that offer a wide range of similar product categories and companies that provide D2C
platform services, fulfillment and logistics services and other e-commerce related services. It is expected that the competition
in this market will intensify in the future as companies develop new business models and enhanced technologies, new competitors
enter the market, competitors forge new business combinations or alliances, and established companies in other market segments
expand to become competitive with the business of Newegg.
Many
of Newegg’s current and potential online and brick-and-mortar competitors have larger bases of customers and marketplace
sellers, better brand recognition and greater financial, marketing, technical, management and other resources than it does. In
addition, some of its competitors have used and may continue to use aggressive pricing or promotional strategies, may have stronger
supplier relationships with more favorable terms and inventory allocation and may devote substantially greater resources to their
online platforms and system development than it does. Increased competition may result in reduced operating margins, reduced profitability,
loss of market share and diminished brand recognition for Newegg.
Newegg
competes with online retailers such as Amazon and traditional retailers like Best Buy and
Walmart, who sell through brick-and mortar stores and their online websites. In addition, Newegg also faces competition in
the international markets it participates in or may enter in the future. Certain other competitors in countries where it
operates are subsidiaries of e-commerce competitors in the United States with established local operations and brands and
with greater experience and resources than Newegg has. In other countries that Newegg may enter, there may be incumbent
online and multi-channel online or brick-and-mortar competitors presently selling IT and CE products. These incumbents may have advantages that could impede Newegg’s expansion and growth in
these markets.
Newegg could also
experience significant competitive pressure if any of its manufacturers or distributors were to initiate or expand their own online
retail operations. Because Newegg’s manufacturers and distributors have access to merchandise at a lower cost than Newegg,
they could sell products at lower prices and maintain a higher gross margin on their product sales than Newegg can, and they may
have the ability to directly connect with buyers at relatively low cost. This could result in Newegg’s current and potential
buyers deciding to purchase directly from these manufacturers and distributors instead of from Newegg. Increased competition from
any manufacturer or distributor capable of maintaining high sales volumes and acquiring products at lower prices than Newegg could
significantly reduce Newegg’s market share and adversely impact Newegg’s operating results.
There
is no assurance that Newegg will be able to compete successfully against current and future competitors. Competitive pressures
may materially and adversely affect Newegg’s business, financial condition and results of operations.
A
decline in demand for IT and CE products could adversely affect Newegg’s operating results.
Newegg
and its Marketplace sellers primarily sell IT and CE products that are often discretionary purchases rather than necessities for
consumers. Consequently, Newegg’s results of operations tend to be sensitive to changes in macroeconomic conditions and
their impact on consumer spending. Factors including customer confidence, employment levels, conditions in the residential real
estate and mortgage markets, access to credit, interest rates, tax rates, customer debt levels and fuel and energy costs could
reduce customer spending or change customer purchasing habits in ways that materially and adversely affect demand for the products
that Newegg and its Marketplace sellers offer.
There
could be declines in the sales of the products offered by Newegg and its Marketplace sellers due to several factors, including:
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decreased
demand for IT or CE products, particularly computer components and parts that have historically
generated a significant portion of Newegg’s net sales;
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poor
economic conditions and any related decline in customers’ demand for the products
Newegg and its Marketplace sellers offer;
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increased
price competition from Newegg’s competitors; or
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technological
obsolescence of the products that Newegg and its Marketplace sellers offer.
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Additionally,
it is expected that some of Newegg’s future growth should be driven by product releases or upgrades that may occur in
the near future. If such product releases do not occur or do not drive sales of IT products to the extent expected,
Newegg’s future sales may be less than predicted, negatively impacting Newegg’s net sales and net
income.
The
loss of key employees or the failure to attract qualified personnel could have a material adverse effect on Newegg’s ability
to run its business.
The loss of any
of Newegg’s current executives, key employees or key advisors, or the failure to attract, integrate, motivate and retain
additional key employees, could have a material adverse effect on Newegg’s business. Although Newegg has employment agreements
with its executive officers, all of its executive officers are employed “at-will” and could terminate their employment
at any time. If Newegg loses one or more of its executive officers or other key employees, its ability to implement its business
strategy successfully could be seriously harmed. Furthermore, replacing executive officers or other key employees with other highly
skilled and qualified candidates may be difficult and may take an extended period of time. Recruiting skilled personnel is highly
competitive. There can be no assurance that it will continue to attract and retain the personnel needed for its business. The
failure to attract or retain qualified personnel could have a material adverse effect on Newegg’s business.
If
Newegg is unable to provide a satisfactory customer experience, its reputation would be harmed and it could lose customers.
The
success of Newegg’s business depends largely on its ability to provide a superior customer experience to maintain and grow
its customer base and keep its customers highly engaged on its online platforms, which in turn depends on a variety of factors.
These include Newegg’s ability to continue to maintain a wide range of product offerings with attractive pricing, provide
timely and reliable order fulfillment and provide high-quality customer support and service. If Newegg’s customers are not
satisfied with its platforms, products or services, or its online platforms are severely interrupted or otherwise fail to meet
its customers’ requests, Newegg’s reputation could be adversely affected.
As
an e-commerce company, Newegg has limited ability to allow buyers to touch, test and feel products, personally interact with sales
and customer service representatives, and receive or return products without waiting or paying for the products to be shipped,
like brick-and-mortar retailers or online retailers that have brick-and-mortar operations do. Therefore, it is important that
Newegg continues to improve its online platforms, including efforts to encourage the creation of more high-quality and useful
user-generated content, such as reviews and commentary, on the products Newegg and its Marketplace sellers offer. If Newegg does
not continue to make investments in the development of its online platforms and customer service operations and, as a result,
or due to other reasons, fails to provide a high-quality customer experience, Newegg may lose customers, which could adversely
impact its operating results.
Newegg currently
operates customer service centers in California and Texas and has customer service representatives working remotely in
Indiana, Nevada and New Jersey, focusing on serving North American buyers. To enhance its service capabilities and maintain
increased access, Newegg operates an Asia-based multilingual customer service center that is available 24 hours a day, seven
days a week via e-mail and instant messaging. Any material disruption or slowdown in its customer support services resulting
from telephone or internet failures, power or service outages, natural disasters, labor disputes or other events could make
it difficult or impossible for Newegg to provide adequate customer support. In addition, the future volume of customer
complaints and inquiries may exceed Newegg’s present system capacities. If this occurs, Newegg could experience delays
in responding to customer inquiries and addressing customer complaints and concerns. Newegg’s current level of customer
support may also fail to meet the expectations of customers. Failure to provide satisfactory levels of customer service may
harm Newegg’s reputation, causing potential loss of existing customers and difficulty in acquiring new customers.
Newegg
may not succeed in promoting and strengthening its Newegg brand, which may materially and adversely affect its business and results
of operations.
Brand
recognition is a primary competitive factor in the e-commerce market and will be a key factor in maintaining and expanding Newegg’s
customer base, market position and bargaining power with vendors. Any loss of trust in Newegg’s brand could harm its reputation
and result in consumers, sellers, brands, vendors and other participants reducing their activity level in Newegg’s business,
which could materially reduce its profitability.
If
Newegg does not, or is unable to continue to, promote and strengthen the Newegg brand, or if the brand fails to continue to be
viewed favorably, Newegg may not be successful in attracting new customers and Marketplace sellers, which could have a material
adverse effect on its financial condition and results of operations. Additionally, Newegg competes not only for customers and
Marketplace sellers, but also for favorable product allocations and cooperative advertising support from its vendors. If Newegg
fails to maintain favorable recognition of its brand, it may not be successful in maintaining and strengthening its relationships
with vendors in existing and new product categories or in maintaining existing offerings and sourcing new products at competitive
prices and with adequate levels of inventory.
Adverse
publicity about Newegg may arise from time to time. Negative comments about its online platforms, the products and services offered
by it and its Marketplace sellers or its management may appear in internet postings and other media sources from time to time,
and there is no assurance that other types of negative publicity of a more serious nature will not arise in the future. For example,
if Newegg’s customer service representatives fail to satisfy the individual needs of the customers, the customers may become
disgruntled and disseminate negative comments about Newegg’s customer service. In addition, Newegg’s Marketplace sellers
and brand partners may also be subject to negative publicity for various reasons, such as customers’ complaints about the
quality of their products and related services or other public relations incidents, which may adversely affect the sales of their
products through Newegg and indirectly affect Newegg’s reputation. Moreover, negative publicity about other online retailers
or the e-commerce industry in general may arise from time to time and cause customers to lose confidence in the products and services
Newegg offers. Any such negative publicity, regardless of veracity, may have a material adverse effect on its business, reputation
and financial condition.
Newegg
is, or may become, subject to risks associated with its international operations, principally in Canada, which may harm its business.
Newegg
began operations on its Canadian retail website, www.newegg.ca, in October 2008. Newegg also has a physical presence
in China, Taiwan and the UK. While Newegg is investing in building its business in other markets, it may not be able to successfully
manage the challenges associated with its current and future international operations due to risks, such as:
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international
economic and political conditions;
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changes
in, or impositions of, legislative or regulatory requirements on e-commerce businesses
and companies, such as U.S. sanctions laws and regulations, and limitations on its ability
to directly own or control key assets, such as overseas warehouses;
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the
legal and regulatory environment in foreign jurisdictions, including with respect to
consumer privacy and data protection laws, tax, law enforcement, network security, trade
compliance and intellectual property matters, as well as consumer litigation;
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tax
laws, regulations and treaties, including U.S. taxes on foreign operations and repatriation
of funds;
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difficulties
in identifying, attracting, hiring, training and retaining qualified personnel, and overseeing
international operations, including the efficient management of its international operations;
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delays
or additional costs resulting from import/export controls, duties, tariffs or other barriers
to trade; and
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currency
exchange controls or changes in exchange rates, which could make its pricing less competitive
or reduce its profit margins.
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Any
one of the foregoing factors could cause Newegg’s business, financial condition and results of operations to suffer.
Newegg’s
expansion into new product categories, services, technologies and geographic regions subjects it to additional business, legal,
financial and competitive risks.
An
important element of Newegg’s business strategy is to expand into new product categories, services, technologies and regions,
such as its expansion into Canada and other countries, and its plans to offer various D2C platform services for third parties.
In directing its focus into these new areas, Newegg faces numerous risks and challenges, including alienating its core customer
base, facing new competitors, having the increased need to develop new strategic relationships and straining its management, personnel,
operations, systems, technical performance, financial resources, and internal financial control and reporting functions. There
is no assurance that Newegg’s strategy will result in increased net sales or net income. Furthermore, growth into new business
areas may require changes to its existing business model and cost structure, modifications to its infrastructure, and exposure
to new regulatory and legal risks related to operating in new jurisdictions, any of which may require expertise in areas in which
it has little or no experience. These risks may pose a material adverse risk to Newegg’s business, financial condition and
results of operations.
Any
interruption in Newegg’s fulfillment operations may have an adverse impact on its business.
Newegg’s
ability to process and fulfill orders accurately and provide high-quality customer service depends on the smooth operation of
its fulfillment infrastructure, including its warehouses and order processing centers. If it does not optimize and operate its
fulfillment infrastructure successfully and efficiently, it could result in excess or insufficient fulfillment capacity, an increase
in costs or impairment charges and a reduction in its gross profit margin, or harm its business in other ways. If Newegg does
not have sufficient fulfillment capacity or experiences a problem fulfilling orders in a timely manner or if certain products
are out of stock, its customers may experience delays in receiving their orders, which could harm its reputation and its relationship
with its customers.
Newegg’s
fulfillment infrastructure may be vulnerable to damage caused by fire, floods, power outages, telecommunications failures,
break-ins, earthquakes, human error and other events. For example, its warehouse located in Indianapolis experienced a
significant fire in January 2019, causing damage to its inventory. Its fulfillment infrastructure and processes may also
contain undetected errors or design flaws that may cause its fulfillment operations to fail and materially impact its
business and results of operations. If, for example, any of its warehouses were rendered incapable of operations, Newegg may
be unable to fulfill any orders in areas that rely on that warehouse. The occurrence of any of the foregoing risks could have
a material adverse effect on Newegg’s business, prospects, financial condition and results of operations.
Newegg
depends on its vendors to source sufficient quantities of merchandise on favorable terms. If Newegg fails to maintain strong vendor
relationships or if its vendors are otherwise unable to supply products that meet its standards in a timely manner, its net sales
and net income could suffer.
Newegg’s
contracts or arrangements with vendors generally do not guarantee the availability of merchandise or provide for the continuation
of particular pricing or other practices. Newegg’s vendors may not continue to sell their inventory to it on current terms
or at all, and, if the terms are changed, Newegg may not be able to establish new supply relationships on similar or better terms.
In most cases, Newegg’s relationships with its vendors do not restrict them from selling their products through its competitors.
Newegg competes with other retailers for favorable product allocations and vendor incentives from product manufacturers and distributors,
including marketing dollars and volume-based sales incentive programs. Some of Newegg’s competitors could enter into exclusive
or favorable distribution arrangements for certain products with its vendors, which would deny Newegg complete or partial access
to those products and marketing and promotional resources. In addition, some vendors whose products are offered on Newegg’s
online platforms also sell their products directly to customers. If Newegg is unable to develop and maintain relationships with
vendors that permit it to obtain sufficient quantities of desirable merchandise on favorable terms, Newegg’s business, financial
condition and results of operations could be adversely impacted.
Newegg’s
relationship with any particular vendor is dependent on its sales of products manufactured or distributed by that vendor. For
certain products, Newegg does not currently, and in the future may not be able to, meet the sales volumes or other requirements
necessary to receive favorable treatment from the manufacturer of that product. As a result, Newegg may not receive favorable
pricing, vendor incentives or other considerations from those vendors. During times of short supply for highly desirable products,
Newegg may not receive adequate, or any, allocation of a popular product, leading to lost sales and customer dissatisfaction.
Certain
products help create and maintain customer loyalty to the Newegg brand. Failing to maintain an adequate supply of these products
could damage its ability to retain customers. Newegg currently does not carry the full product portfolio of, and in some cases
does not carry any products of, certain well-known brands. As a result, consumers who are searching for those brands may not be
able to purchase products from Newegg or purchase them at the most favorable prices, leading to potentially reduced net sales
and net income.
Certain
vendors provide a significant portion of Newegg’s merchandise. In the United States and Canada, for the year ended December
31, 2020, ASI Corporation, an IT and CE product distributor, and Newegg’s 10 largest suppliers (including ASI Corporation)
accounted for approximately 12.8% and 70.6% of the merchandise Newegg purchased, respectively. Failure to maintain a positive
relationship with these key suppliers could impact Newegg’s ability to sell to customers the products they want.
Newegg’s
vendors’ financial performance, liquidity and access to capital may be materially adversely affected by many factors, including
but not limited to general economic factors, such as a continued slowdown in the U.S. or global economy or an uncertain economic
outlook; political or financial instability; merchandise quality issues; product safety concerns; trade restrictions; work stoppages;
tariffs; international trade war; foreign currency exchange rates; transportation capacity and costs; inflation; or outbreak of
pandemics. These and other issues may affect their ability to maintain their inventories, production levels and/or product quality
and could cause them to raise prices, lower production levels or cease their operations, all of which may in turn materially adversely
affect Newegg’s net sales and net income.
If
Newegg fails to attract, retain and engage appropriately skilled personnel, including senior management and technology and fulfillment
professionals, Newegg’s business may be harmed.
Newegg’s
future success depends on its retention of executives. Competition for well-qualified and skilled employees is intense globally,
and Newegg’s future success also depends on its continuing ability to attract, develop, motivate and retain highly qualified
and skilled employees, including, in particular, software engineers, data scientists and technology and fulfillment professionals.
Newegg’s continued ability to compete effectively depends on its ability to attract new employees and to retain and motivate
existing employees. All of its senior management and key personnel are employees at will and, as a result, any of these employees
could leave with little or no prior notice. If any member of its senior management team or other key employees leave Newegg, its
ability to successfully operate its business and execute its business strategy could be adversely affected. Newegg may also have
to incur significant costs in identifying, hiring, training and retaining replacements of departing employees.
Newegg’s
international sales and operations require access to international markets and are subject to applicable laws relating to trade,
export and import controls and economic sanctions, the violation of which could adversely affect its operations.
Newegg
must comply with all applicable U.S. export and import laws and regulations. Such laws and regulations include, but are not limited
to, the Export Administration Act and the Export Administration Regulations. Newegg must also comply with U.S. sanctions laws
and regulations, which are primarily administered by the U.S. Department of Treasury’s Office of Foreign Assets Control,
as well as other U.S. government agencies. U.S. sanctions generally prohibit transactions by U.S. persons, including us, involving
sanctioned countries, entities and persons, without U.S. government authorization (which will rarely be granted). Non-U.S. subsidiaries
of U.S. companies are required to comply with U.S. sanctions against Cuba and Iran.
Violations
of U.S. laws and regulations relating to trade, export and import controls and economic sanctions could result in significant
civil and/or criminal penalties on Newegg or on its foreign subsidiaries, including fines, prohibitions on exporting and importing,
prohibitions on receiving government contracts or other government assistance and other trade-related restrictions. U.S. enforcement
of such laws and regulations continues to increase.
Newegg
must also comply with applicable foreign laws relating to trade, export and import controls and economic sanctions. Newegg may
not be aware of all of such laws applicable in the markets in which it does business, which subjects it to the risk of potential
violations.
Newegg
conducts marketing activities to help attract visitors to its online platforms, and if it is unable to attract these visitors
or convert them into customers in a cost-effective manner, Newegg’s business and results of operations could be harmed.
Newegg’s
success depends on its ability to attract visitors to its online platforms and convert them into customers in a cost-effective
manner. Newegg relies on search engines, social media, shopping comparison sites and other affiliate networks to provide content,
advertising banners and other links that direct visitors to its online platforms. As of December 31, 2020, approximately 36% of
its website and mobile app visitors were referred to it through paid and unpaid search engine listings, shopping comparison sites
and other affiliate networks that provide links to its online platforms. In particular, Newegg relies on search engines, such
as Google, Microsoft Bing and Yahoo!, as important marketing channels. If search engines change their search engine algorithms
periodically or penalize Newegg for non-compliance with their guidelines while using their algorithms, terms of service, or display
and featuring of search results, or if competition increases for advertisements, Newegg may be unable to cost-effectively drive
visitors to its websites and mobile apps. Newegg also sometimes pays these third parties to include or highlight its websites
in their search results. If such third parties modify or terminate their relationship with Newegg or increase the price they charge
to Newegg, if Newegg’s competitors offer them greater fees for traffic, or if any free third-party platforms on which Newegg
relies begin charging fees for listing or placement, Newegg’s expenses could rise and traffic to its websites could decrease,
resulting in harm to its operations.
Newegg’s
success also depends on its ability to convert its visitors to its websites and mobile apps into paying customers, a process which
is partially reliant upon its ability to identify and purchase relevant keyword search terms, provide relevant content on its
online platforms and effectively target its other marketing programs, such as internet portal referrals, e-mail campaigns and
affiliate programs. If Newegg is unable to attract visitors to its websites and mobile apps and convert them into customers cost-effectively,
its business and financial results may be harmed.
Newegg
is partially dependent on third parties to perform a number of its e-commerce functions. If such third parties are unwilling or
unable to continue providing these services, Newegg’s business could be harmed.
As of December
31, 2020, approximately 5.7% of Newegg’s Gross Merchandise Value (“GMV”) were generated by the sale of products
fulfilled through third parties. These third parties provide various services on Newegg’s behalf, including inventory maintenance
and order processing. Newegg has no effective means to ensure that these third parties will continue to perform these services
to its satisfaction, in a manner satisfactory to its customers or on commercially reasonable terms. Newegg’s customers may
become dissatisfied and cancel their orders or decline to make future purchases if these third parties fail to deliver products
on a timely basis. If Newegg’s customers become dissatisfied with the services provided by these third parties, Newegg’s
reputation and brand could suffer.
If
Newegg fails to manage its inventory effectively, its financial condition, results of operations and liquidity may be materially
and adversely affected.
Newegg’s
scale and business model require it to manage a large volume of inventory effectively. As Newegg may continue expanding its product
offerings, Newegg expects to include more SKUs in its inventory, which could make it more challenging for Newegg to manage its
inventory effectively and put more pressure on its warehousing system.
Newegg purchases most
of the merchandise that it sells directly to customers on its online platforms from manufacturers or distributors. Newegg assumes
inventory damage, theft, obsolescence, and price erosion risks for its inventory. These risks are especially significant as most
of the merchandise sold on its online platforms is characterized by rapid technological change, obsolescence and price erosion.
For the six months ended June 30, 2020, Newegg recorded inventory write-offs or write-downs totaling $1.5 million, or 0.2% of its
cost of goods sold. Newegg may sell obsolete or dated merchandise at a discount or loss. If there were unforeseen product developments
or if vendors were to change their terms and conditions, Newegg’s inventory risks could increase. Newegg also periodically
takes advantage of cost savings associated with certain opportunistic bulk inventory purchases offered by its vendors. These bulk
purchases increase Newegg’s exposure to inventory obsolescence. Newegg’s success depends on its ability to sell its
inventory rapidly, purchase inventory at attractive prices relative to its resale value and manage customer returns and the shrinkage
resulting from theft, loss and misrecording of inventory. If Newegg is unsuccessful in any of these areas, it may be forced to
write down or write off substantial amounts of inventory, or sell it at a discount or loss, which could materially and adversely
impact Newegg’s business, financial condition and results of operations.
Newegg
depends on its demand forecasts for various kinds of products to make purchase decisions and to manage its inventory. Newegg is
exposed to inventory risks as a result of seasonality, new product launches, rapid changes in product cycles and pricing, defective
merchandise, changes in consumer demand, tastes and spending patterns, and other factors. While Newegg endeavors to accurately
predict these trends and avoid overstocking or understocking products it sells, the demand for products can change significantly
between the time inventory is ordered and the date of sale, and Newegg may be unable to sell products in sufficient quantities
as it expects. Furthermore, Newegg may in the future open additional warehouses and duplicate part of the inventory for its direct
sales business that is stored at its current warehouses to increase its overall fulfillment efficiency as it grows its business,
which will also increase the inventory risks its direct sales business faces. Failure to effectively manage its inventory risk
could have a material adverse effect on Newegg’s business, financial condition and results of operations.
Newegg has incurred
net loss in the past and may continue to experience losses in the future.
Newegg incurred a net loss of $17.0 million and $33.6 million
in 2019 and 2018, respectively. We cannot assure you that Newegg will be able to generate net profits or positive cash flow from
operating activities in the future. Newegg’s ability to achieve and maintain profitability will depend in large part on its
ability to, among other things, source and sell more high margin products, grow and diversify its supplier base, and optimize its
cost structure. Newegg may not be able to achieve any of the above. As Newegg continues to grow and expand its business, its operating
expenses may increase further. As a result of the foregoing, we believe that Newegg may incur net losses for in the future.
If
Newegg fails to adopt new technologies or adapt its websites, mobile apps and systems to changing customer requirements or emerging
industry standards, its business may be materially and adversely affected.
To
remain competitive, Newegg must continue to enhance and improve the responsiveness, functionality and features of its online platforms,
including its websites and mobile apps. The internet and the e-commerce industry are characterized by rapid technological evolution,
frequent introductions of new products and services embodying new technologies and the emergence of new industry standards and
practices, and changes in customer requirements and preferences, any of which could render Newegg’s existing technologies
and systems obsolete. Newegg may be required to devote substantial resources to developing proprietary technologies or license
technologies, enhancing its existing websites and mobile apps, developing new services and technology that address the increasingly
sophisticated and varied needs of its current and prospective customers and adapting to technological advances and emerging industry
and regulatory standards and practices in a cost-effective and timely manner. The development of proprietary technology entails
significant technical and business risks. There can be no assurance that Newegg’s efforts to develop proprietary technologies
will succeed or that any technology licenses will be available on commercially reasonable terms. Substantial investments will
be required to remain technologically competitive, and Newegg’s failure to do so may harm its business and results of operations.
The
seasonality of Newegg’s business places increased strain on its operations.
Newegg
historically experiences higher sales in the fourth quarter due to the holiday season. If Newegg does not stock or restock popular
products in sufficient amounts such that it fails to meet customer demand, it could significantly affect its revenue and future
growth. If Newegg overstocks products, Newegg may be required to take significant inventory markdowns or write-offs and incur
commitment costs, which could reduce profitability. Newegg may experience an increase in its net shipping cost due to complimentary
upgrades, split-shipments and additional long-zone shipments necessary to ensure timely delivery for the holiday season. If too
many customers access its online platforms within a short period of time due to increased holiday demand, Newegg may experience
system interruptions that make its online platforms unavailable or prevent it from efficiently fulfilling orders, which may reduce
the volume of goods sold through its online platforms and the attractiveness of its products and services. In addition, Newegg
may be unable to adequately staff its fulfillment and customer service capability during these peak periods.
As Newegg tends
to experience higher sales in the fourth quarter, Newegg experiences an increase in its cash position at year-end, as compared
to the first, second and third quarters when sales are lower. As of December 31 of each year, Newegg’s cash, cash equivalents,
and marketable securities balances typically reach their highest level (other than as a result of cash flows provided by or used
in investing and financing activities). In anticipation of higher sales during the holiday season, Newegg typically begins building
up inventory levels in the later part of the third quarter. As a result of this inventory build-up and faster inventory turnover
during the fourth quarter, Newegg’s accounts payable are typically at their highest levels at year-end. As sales begin to
slow in the first and second quarters, inventory levels decrease, inventory turnover lengthens, and accounts payable and cash
balances decrease as Newegg pays its vendors. The COVID-19 pandemic has resulted in an increased cash and accounts payable balances
due to an increased demand in Newegg’s products. Inventory levels increased and turned faster than normal as a result of
increased sales.
The
successful operation of Newegg’s business depends upon the performance, reliability and security of the internet infrastructure
in the countries where it operates.
Newegg’s
business depends on the performance, reliability and security of the telecommunications and internet infrastructure in the countries
where it operates. Newegg has several servers located in China providing development, testing and quality control services. Almost
all access to the internet in China is maintained through state-owned telecommunication operators under the administrative control
and regulatory supervision of the Ministry of Industry and Information Technology of the People’s Republic of China, or
the MIIT. In addition, the national networks in China are connected to the internet through state-owned international gateways,
which are the only channels through which a domestic user can connect to the internet outside China. Newegg may face similar or
other limitations in other countries in which it operates. Newegg may not have access to alternative networks in the event of
disruptions, failures or other problems with the internet infrastructure in China or elsewhere. In addition, the internet infrastructure
in the countries in which it operates may not support the demands associated with continued growth in internet usage.
The
failure of telecommunications network operators to provide Newegg with the requisite bandwidth could also interfere with the speed
and availability of Newegg’s websites and mobile apps. If the prices that Newegg pays for telecommunications and internet
services rise significantly, Newegg’s gross margins could be adversely affected. In addition, if internet access fees or
other charges to internet users increase, Newegg’s user traffic may decrease, which in turn may significantly decrease its
revenues.
If
Newegg is unable to manage its growth or execute its strategies effectively, Newegg’s business and prospects may be materially
and adversely affected.
Newegg’s
success depends upon its ability to manage the growth of its operations effectively. Newegg anticipates expanding further as it
pursues its growth strategies. Newegg’s expansion increases the complexity of its business and places a significant strain
on its management, operations, technical systems, financial resources and internal control over financial reporting functions.
Newegg’s current and planned personnel, systems, procedures and controls may not be adequate to support and effectively
manage its future operations, especially as it employs personnel in several geographic locations. In addition, Newegg’s
growth will require it to improve its operational and financial systems, procedures and controls, successfully manage international
operations and hire additional personnel. These efforts may not be successful, and Newegg may be unable to improve its systems,
procedures and controls in a timely manner. Delays or problems associated with any of these initiatives could harm its business
and operating results. These initiatives will also cause its operating expenses to increase. If Newegg fails to accurately estimate
and assess its growth or fails to increase net sales to match its increased operating expenses, Newegg’s financial condition
and results of operations could suffer.
An
adverse change in the vendor payment terms and conditions may have a material adverse effect on Newegg’s business, financial
condition and results of operations.
Newegg purchases its
inventory from vendors on trade accounts typically requiring payment between 15 and 45 days after the date the inventory is shipped
to Newegg. As of June 30, 2020, its accounts payable balance was approximately $221.9 million with 55 days of payables outstanding.
Newegg’s accounts payable balances as of June 30, 2020 represented 46.3% of its liabilities, temporary equity and stockholders’
equity. An adverse change in its vendors’ payment terms and conditions would significantly increase its working capital requirements
and have a material adverse effect on Newegg’s business, financial condition and results of operations.
Because
many of the products that Newegg sells are manufactured abroad, Newegg may face delays, increased cost or quality control deficiencies
in the importation of these products, which could reduce its net sales and profitability.
Many
of the products that Newegg purchases for direct sale on its online platforms are manufactured in countries outside the United
States. These imported products subject Newegg to the risk of changes in import duties or quotas, new restrictions on imports,
work stoppages, delays in shipment, freight cost increases, product cost increases due to foreign currency fluctuations or revaluations
and economic uncertainties (including the imposition of antidumping or countervailing duty orders, safeguards, remedies or compensation
and retaliation due to illegal foreign trade practices) and instability in the political and economic environments of the countries
in which the manufacturers of these products operate. If any of these or other factors were to cause a disruption of trade from
these countries, Newegg may be unable to obtain sufficient quantities of these imported products to satisfy its requirements or
its cost of obtaining such products may increase. Historically, instability in the political and economic environments of the
countries in which Newegg’s suppliers operate has not had a material adverse effect on its operations. However, the effect
that future changes in economic or political conditions in the foreign countries where Newegg’s supplying manufacturers
are located may have on its operations cannot be predicted. Potential disruptions or delays in supply due to economic or political
conditions in foreign countries could adversely affect Newegg’s results of operations unless and until alternative supply
arrangements are made.
Newegg
may not be able to adequately protect its intellectual property rights.
Newegg
relies on trademark and copyright law, trade secret protection and confidentiality or licensing agreements with employees,
buyers, third-party sellers, brand partners and others to protect its proprietary rights. These steps may be inadequate,
agreements may be violated or there may be inadequate remedies for a violation of such agreements. Newegg’s competitors
may independently develop equivalent proprietary information and rights or may otherwise gain access to Newegg’s trade
secrets or proprietary information, which could affect Newegg’s ability to compete in the market. There is no assurance
that the steps that Newegg has taken will adequately protect its proprietary rights, especially in countries where the laws
or enforcement of the laws may not protect its rights to the same extent or in the same way as in the United
States.
In
addition, third parties may infringe or misappropriate Newegg’s proprietary rights, and Newegg could be required to enforce
its intellectual property rights, which could require expenditure of significant financial and managerial resources. Newegg has
registered and common law trademark rights in the United States and certain foreign jurisdictions, as well as pending trademark
applications for a number of marks and associated domain names. Even if it obtains approval for such pending applications, the
resulting registrations may not adequately cover its trademarks or protect it against infringement or dilution by others. Effective
trademark, service mark, copyright, patent and trade secret protection may not be available in every country or jurisdiction in
which Newegg’s products may be made available online, which may cause Newegg’s business and operating results to suffer.
In addition, Newegg may be unable to acquire or protect relevant domain names in the United States and in other countries. If
Newegg is not able to acquire or protect its trademarks, domain names or other intellectual property, it may experience difficulties
in achieving and maintaining brand recognition and customer loyalty.
Assertions,
claims and allegations, even if not true, that Newegg has infringed or violated intellectual property rights could harm Newegg’s
business and reputation.
Third
parties have, and likely will in the future, assert allegations and claims of intellectual property infringement against Newegg
on the items or their descriptions listed on Newegg’s websites and mobile apps. Any such claims, disputes or litigation,
even if resolved in Newegg’s favor or not true, could be time-consuming and costly to defend, and could divert its management’s
efforts from growing its business. Newegg has intellectual property complaint and take-down procedures in place to address communications
alleging that items listed on online platforms, including the Newegg Marketplace, infringe third-party copyrights, trademarks
or other intellectual property rights. Newegg follows these procedures to review complaints and relevant facts to determine the
appropriate action, which may include removal of the item from its online platforms and, in certain cases, discontinuing its relationship
with a Marketplace seller or brand partner who violates Newegg’s policies. However, these rules and procedures
may not effectively reduce or eliminate Newegg’s liability. In particular, Newegg may be subject to civil or criminal liability
for activities carried out, including products listed, by sellers or brands on its online platforms.
If
any third parties prevail in their intellectual property rights claims against Newegg, Newegg may be required to pay significant
licensing fees, damages and attorney’s fees, and may even be liable for punitive damages if Newegg is found to have willfully
infringed third parties’ proprietary rights. Newegg may have to stop using certain technology or solutions and need to develop
or acquire alternative, non-infringing technology or solutions, which could require significant time and resources. Newegg could
even be required to obtain a license to use certain technologies, although such licenses may not be available on reasonable terms
or at all, which may result in substantial payments and royalties and significantly increase its operating expenses. If Newegg
cannot develop non-infringing technology or license the appropriate technology at commercially reasonable rates, an intellectual
property claim successfully asserted against it could cause significant business interruptions in Newegg’s operations, which
could restrict Newegg’s ability to compete effectively and have a material adverse effect on its financial condition and
results of operations.
Newegg
may be subject to product liability claims, which could be costly and time-consuming to defend.
The
majority of the products sold on Newegg’s online platforms are manufactured by third parties, and some of them may be
defectively designed or manufactured. If any product Newegg sells were to cause physical injury or injury to property, an
injured party could bring claims against Newegg as the retailer of the product. Furthermore, Newegg also offers IT components
and peripherals under its private labels on its platforms or through other e-commerce platforms, such as eBay, which could
potentially create more exposure for Newegg with respect to product liability than if Newegg simply acted as a retailer of
third-party products. Newegg’s insurance coverage may not be adequate against such product liability claims. If a
successful claim were brought against Newegg in excess of its insurance coverage, it could adversely affect Newegg’s
financial condition and results of operations. Even unsuccessful claims could result in the expenditure of significant funds
and management time in defending them and could have a negative impact on Newegg’s reputation and business.
Some
of Newegg’s software and systems contain open source software, which may pose particular risks to Newegg’s proprietary
software and solutions.
Newegg
has incorporated open source software code into some of its internal software and systems and expects to continue to use this open
source software in the future. The licenses applicable to open source software typically require that the source code subject
to the license be made available to the public and that any modifications or derivative works to open source software continue
to be licensed under open source licenses. From time to time, Newegg may face intellectual property infringement claims from third
parties, demands for the release or license of the open source software or derivative works that Newegg developed using such software
(which could include Newegg’s proprietary source code) or claims that otherwise seek to enforce the terms of the applicable
open source license. These claims could result in litigation and could require Newegg to purchase a costly license, publicly release
the affected portions of Newegg’s source code, be limited in the licensing of Newegg’s technologies or cease offering
the implicated solutions unless and until Newegg can re-engineer them to avoid infringement or change the use of the implicated
open source software. In addition to risks related to license requirements, use of certain open source software can lead to greater
risks than use of third-party commercial software, as open source licensors generally do not provide warranties, indemnities or
other contractual protections with respect to the software (for example, non-infringement or functionality). Newegg’s use
of open source software may also present additional security risks because the source code for open source software is publicly
available, which may make it easier for hackers and other third parties to determine how to breach Newegg’s websites, mobile
apps and systems that rely on open source software. Any of these risks could be difficult to eliminate or manage and, if not addressed,
could have a material adverse effect on Newegg’s business, financial condition and results of operations.
Newegg
and its Marketplace sellers’ pricing strategy may not meet customers’ price expectations or result in net income.
Demand for Newegg’s
products is generally highly sensitive to price. Its pricing strategies have had, and may continue to have, a significant impact
on its net sales and net income. Newegg often offers discounted prices, free or discounted shipping or bundled products as a means
of attracting customers and encouraging repeat purchases. Such offers and discounts may reduce its margins. Moreover, Newegg’s
competitors’ pricing and marketing strategies are beyond its control and can significantly impact the results of its pricing
strategies. If Newegg fails to meet its customers’ price expectations in any given period, or if its competitors decide to
engage in aggressive pricing strategies, its business and results of operations would suffer.
In addition, under
applicable federal and state unfair competition laws, including the California Consumer Legal Remedies Act, and U.S. Federal Trade
Commission regulations, Newegg is required to accurately identify product offerings, not make misleading claims on its platforms,
and use qualifying disclosures where and when appropriate. Newegg is particularly subject to the risks associated with its discounting
pricing practices as a result of the aggressive judicial interpretations of deceptive pricing laws, particularly in California,
which has led to numerous class action settlements by online and brick-mortar retailers over the past few years. For example, Newegg
was named as the defendant in a putative class action accusing it of violating the False Advertising Law, the Unfair Competition
Law and the Consumer Legal Remedies Act by using allegedly deceptive list prices with allegedly overstated discounts for its electronic
products. While the trial court had sustained without leave to amend Newegg’s demurrer to such lawsuit, in July 2018, a California
appellate panel reversed the trial court’s judgment and reinstated the action against it. This matter is still pending as
of the date of this registration statement. There can be no assurance that Newegg will be able to prevail in the foregoing action
or that we will be able to settle the dispute on terms favorable to us. Any adverse outcome of the foregoing class action or other
lawsuits challenging deceptive pricing against it could have a material adverse effect on Newegg’s reputation, business and
financial condition.
Newegg does not control
the pricing strategies of its Marketplace sellers, which could affect its net income and its ability to effectively compete on
price with other e-commerce retailers and brick-and-mortar stores. Its Marketplace sellers may determine that they can more competitively
price their products through other distribution channels and may choose such other channels instead of listing products on Newegg’s
Marketplace, which could adversely affect its business, financial condition, results of operations and prospects. Additionally,
retailers and brands often employ different pricing based on the geographical location of consumers, which is accomplished online
through geo-blocking that blocks a consumer’s ability to access certain websites based on geography. Legislation in the European
Union removed certain types of geo-blocking in the European Union. This could allow Newegg’s consumers registered in the
European Union to access and make purchases through its Marketplace at the prices listed in different European geographies irrespective
of their country of residence in Europe. This could adversely affect Newegg’s business, financial condition, results of operations
and prospects.
Newegg
may incur additional costs due to tax assessments resulting from ongoing and future audits by tax authorities.
In
the ordinary course of business, Newegg is subject to tax examinations by various governmental tax authorities. The global
and diverse nature of its business means that there could be additional examinations by governmental tax authorities and the
resolution of ongoing and other probable audits which could impose a future risk to the results of Newegg’s business. For
example, in February 2018, Newegg received from the Commonwealth of Massachusetts Department of Revenue a notice of intent to
assess sales and use taxes relating to a prior tax period, which subsequently resulted in an assessment of $295,910.68,
including penalties and interest. In May 2020, Newegg received from the Commonwealth of Massachusetts Department of Revenue
another notice of assessment for sales and use taxes for additional prior tax periods in the amount of a total assessment of
$2,721,369.77, including penalties and interest. Newegg has appealed these assessments and Newegg intends to vigorously
protest the assessments. The outcome of the
matter or the timing of such payment, if any, cannot be predicted at this time. However, the ultimate results, if
unfavorable, could have a material impact on Newegg’s consolidated financial position, cash flows, and results of
operations.
Significant
developments stemming from recent U.S. government actions and proposals concerning tariffs and other economic proposals could
have a material adverse effect on us.
As of December
31, 2020, approximately 61% of Newegg’s products that were sold through its platforms were manufactured in China. Recent
U.S. government actions are imposing greater restrictions and economic disincentives on international trade impacting imports
and exports. The U.S. government has adopted changes, and intends to adopt further changes, to trade policy and in some cases,
to renegotiate, or potentially terminate, certain existing bilateral or multi-lateral trade agreements. It has initiated the imposition
of additional tariffs on certain foreign goods, including steel and aluminum, semiconductor manufacturing equipment and spare
parts thereof. The government has amended export regulations regarding sales to companies on the U.S. Entity List. These changes
prevent sales of foreign produced direct product of the U.S. that is manufactured using controlled U.S.-origin equipment, technology,
and software located outside the United States to companies on the U.S. Entity List.
Examples of recent
actions are tariffs on steel and aluminum product imports announced by the U.S. Department of Commerce in March 2018, the scope
of which increased on February 8, 2020, and a 25% tariff on certain products that originate in China announced by the United States
Trade Representative (“USTR”) in June 2018. The USTR also announced in June and July 2018 two additional supplemental
lists of products that are subject to tariffs if the goods imported into the United States originate in China, which would increase
the cost of imported products. These supplemental lists issued by the USTR added an additional 25% tariff on certain semiconductor
equipment and parts originating in China that are sold by it or used in its business in the United States. In August 2018, the
second list was made effective with a 25% tariff and in September 2018 the third list was made effective with a 10% tariff, increasing
to 25% in May 2019. A fourth list was proposed by USTR in May 2019 for all remaining items originating in China. A portion of
the fourth list (“4a”), was made effective September 1, 2019, with an additional tariff of 15%, reduced to 7.5% on
February 14, 2020. The remainder of the fourth list (“4b”) was scheduled to have an additional tariff of 15% go into
effect on December 15, 2019; however on December 13, 2019, the tariffs for list 4b were suspended after the U.S. announced it
would enter into a trade agreement with China (the “Phase 1 Agreement”). Although the Phase 1 Agreement was signed
January 15, 2020, implementation has been delayed due to COVID-19; however, Phase 1 will have no impact on the tariffs imposed
on Company products. A Phase 2 Agreement has not been announced as of the date of this prospectus. Any increase in the cost of
importing such goods and parts could decrease its margins, reduce the competitiveness of its products, or inhibit its ability
to sell products or purchase necessary parts, which could have a material adverse effect on Newegg’s business results, results
of operations, or financial condition.
On April 28, 2020
the U.S. Department of Commerce issued new rules that (1) expand the definition of military end use and (2) eliminate the applicability
of certain license exceptions for exports to countries on Country Group D of Supplement No. 1 to part 740 of the Export Administration
Regulations. These changes expand export license requirements for U.S. companies to sell certain items to companies in China that
have operations that could support military end uses, even if the items sold by the U.S. companies are for civilian end use and
they reduce the applicability of license exceptions for exports to those countries listed on Country Group D, including China.
Additionally, amendments have been made to General Prohibition Three (Foreign-Produced Direct Product Rule) and the Entity List,
the most recent of which were effective August 17, 2020. These amendments expand the restrictions on the sale of foreign-made
goods that are based on U.S. technology, and software located outside the United States to companies on the U.S. Entity List,
and regulate the use of U.S. origin semiconductor manufacturing equipment that produces semiconductor devices for companies on
the U.S. Entity List. The rule changes for export controls may reduce or impair Newegg’s customers’ ability to sell
products internationally, which could in turn decrease the demand for its products and have a material adverse effect on Newegg’s
revenues and profitability. At this time, the additional proposed rule changes are not anticipated to impact the Company’s
sales of non-U.S. products; however, any unpredicted rule changes could adversely affect Newegg’s business results, operations,
or financial condition.
Changes in U.S. trade
policy could result in one or more U.S. trading partners adopting responsive trade policy making it more difficult or costly for
Newegg to export its products to those countries. As indicated above, these measures could also result in increased costs for goods
imported into the U.S. This in turn could require Newegg to increase prices to its customers which may reduce demand, or, if Newegg
is unable to increase prices, result in lowering its margin on goods and services sold. To the extent that trade tariffs and other
restrictions imposed by the U.S. increase the price of semiconductor equipment and related parts imported into the U.S., the cost
of its materials may be adversely affected and the demand from customers for products and services may be diminished, which could
adversely affect Newegg’s revenues and profitability.
We cannot predict future
trade policy, the terms of any renegotiated trade agreements or additional imposed tariffs and their impact on Newegg’s business.
The adoption and expansion of trade restrictions, the occurrence of a trade war, or other governmental action related to tariffs
or trade agreements or policies has the potential to adversely impact demand for its products, its costs, its customers, its suppliers,
and the U.S. economy, which in turn could adversely impact Newegg’s business, financial condition and results of operations.
Changes
in U.S. social, political, regulatory and economic conditions or in laws and policies governing foreign trade, manufacturing,
development and investment in the territories and countries where it currently develops and sells products, and any negative sentiments
towards the United States as a result of such changes, could adversely affect Newegg’s business. In addition, negative sentiments towards
the United States among non-U.S. customers and among non-U.S. employees or prospective employees could adversely affect sales
or hiring and retention, respectively.
Employment
laws in some of the countries in which Newegg operates are relatively stringent.
As of December
31, 2020, Newegg had 1,789 full-time employees, of whom approximately 55% were located in the United States, 37% in China, 7%
in Taiwan, 2% in Canada and 0% in other countries and regions. In some of the countries in which it operates, employment laws
may grant significant job protection to employees, including rights on termination of employment and setting maximum number of
hours and days per week that a particular employee is permitted to work. In addition, in certain countries in which it operates,
Newegg is or may be required to consult and seek the advice of employee representatives and/or unions. These laws, coupled with
the requirement to consult with any relevant employee representatives and unions, could impact its ability to react to market
changes and the needs of its business.
Newegg
and certain of its subsidiaries are parties to a revolving credit agreement, which contain a number of covenants that
may restrict Newegg’s current and future operations and could adversely affect Newegg’s ability to execute
business needs.
Newegg
and certain of its subsidiaries have entered into a credit agreement with financial institutions which contain a
number of covenants that limit its ability and its subsidiaries’ ability to, among other things, incur indebtedness,
create liens, make investments, merge with other companies, dispose of its assets, prepay other indebtedness and make
dividends and other distributions. The obligations under the credit agreements are also guaranteed by assets of Newegg or
those of Newegg’s subsidiaries. The terms of the credit agreements may restrict Newegg’s current and future
operations and could adversely affect Newegg’s ability to finance its future operations or capital needs or to execute
business strategies in the means or manner desired. In addition, complying with these covenants may make it more difficult
for it to successfully execute its business strategy, invest in its growth strategy and compete against companies who are not
subject to such restrictions. The credit agreements also contain financial covenants that
require Newegg to maintain certain minimum financial ratios and maintain an operating banking relationship with the financial
institutions. Although Newegg has been in compliance with the financial covenants, it cannot guarantee that it will continue
to be able to generate sufficient cash flow or sales to meet the financial covenants or pay the principal or interest under
the credit agreements.
If
Newegg is unable to comply with its payment requirements, the financial institutions may accelerate Newegg’s obligations
under the credit agreement and foreclose upon the collateral, or it may be forced to sell assets, restructure its indebtedness
or seek additional equity capital, which would dilute shareholders’ interests. If Newegg fails to comply with any covenant
it could result in an event of default under the agreement and the lenders could make the entire debt immediately due and payable.
If this occurs, Newegg might not be able to repay the debt or borrow sufficient funds to refinance it. Even if new financing is
available, it may not be on terms that are acceptable to Newegg.
Risks Relating to the Common Shares
and this Offering
If we fail
to maintain compliance with NASDAQ Listing Rules, we may be delisted from the NASDAQ Capital Market, which would result in a limited
public market for trading our shares and make obtaining future debt or equity financing more difficult for us.
Our Class A common
shares are traded and listed on the NASDAQ Capital Market under the symbol of “LLIT.” On September 11, 2019, we received
a notification letter from the NASDAQ Listing Qualifications Staff of NASDAQ notifying us that the minimum bid price per share
for our Class A common shares had been below $1.00 for a period of 30 consecutive business days and we therefore no longer met
the minimum bid price requirements set forth in NASDAQ Listing Rule 5550(a)(2). We were granted a compliance period of 180 days,
or until March 9, 2020 to regain the compliance.
On January 2, 2020,
we received another notification letter from the NASDAQ Listing Qualifications Staff notifying us that we no longer complied with
the minimum of $2.5 million in stockholders’ equity for continued listing on NASDAQ under NASDAQ’s Listing Rule 5550(b)(1)
and that we also did not comply with either of the two alternative standards of Listing Rule 5550(b), the market value standard
and the net income standard. We thereafter submitted a plan to regain compliance with NASDAQ’s applicable listing standards.
On March 10, 2020, in consideration of our three financings during the first quarter of 2020, from which we received gross proceeds
of approximately $8.08 million, the NASDAQ Listing Qualifications Staff determined that we complied with the stockholders’
equity requirement set forth in Listing Rule 5550(b)(1). On that date, we met all applicable requirements for initial listing
on NASDAQ, other than the minimum bid price requirement. The NASDAQ Listing Qualifications Staff recognized our intention of curing
the minimum bid price deficiency by effecting a reverse stock split, and granted a second compliance period of 180 days, or until
September 8, 2020, to regain compliance. The second compliance period was thereafter extended to November 20, 2020 by NASDAQ per
SR-NASDAQ-2020-021. On October 21, 2020, we effectuated a share combination of our common shares at a ratio of one-for-eight in
order to increase the per share trading price of our Class A common shares to satisfy the $1.00 minimum bid price requirement.
We regained compliance with the minimum bid price rule on November 10, 2020.
However, there
is no assurance that we will be able to continue to maintain our compliance with NASDAQ continued listing requirements. If we
fail to do so, our Class A common shares may lose their status on Nasdaq Capital Market and they would likely be traded on the
over-the-counter market, including the Pink Sheets market. As a result, selling our common shares could be more difficult because
smaller quantities of shares would likely be bought and sold, transactions could be delayed, and security analysts’ coverage
of us may be reduced. In addition, in the event our common shares are delisted, broker dealers would bear certain regulatory burdens
which may discourage broker dealers from effecting transactions in our common shares and further limit the liquidity of our shares.
These factors could result in lower prices and larger spreads in the bid and ask prices for our common shares. Such delisting
from NASDAQ and continued or further declines in our common share price could also greatly impair our ability to raise additional
necessary capital through equity or debt financing and could significantly increase the ownership dilution to shareholders caused
by our issuing equity in financing or other transactions.
An active trading
market for our Common Shares may not develop and the trading price for the Common Shares may fluctuate significantly.
Prior to the completion
of this Offering, our Class A Common Shares are trading on NASDAQ. The post-Merger entity will be required to meet the initial
listing standards of NASDAQ, which are generally more stringent than NASDAQ’s continued listing standards. We have applied
to NASDAQ to list our Common Shares upon the consummation of the Restructure and this Offering when our dual class structure is
eliminated, but we cannot assure you that a liquid public market for our Common Shares will develop, especially given the our
Principal Shareholders will own approximately [●]% of the Company’s Common Share assuming gross proceeds of $30 million
from this Offering. If an active public market for our common shares does not develop following the completion of this Offering,
the market price and liquidity of our common shares may be materially and adversely affected. The offering price for our common
shares shall be determined by negotiation between us and the underwriters based upon several factors, and we can provide no assurance
that the trading price of our common shares after this Offering will not decline below the initial public offering price. As a
result, investors in our securities may experience a significant decrease in the value of their common shares.
The trading price
of the Common Shares is likely to be volatile and could fluctuate widely due to multiple factors, some of which are beyond our
control.
This may happen because
of broad market and industry factors. In addition to market and industry factors, the price and trading volume for the Common Shares
may be highly volatile due to other factors, including the following:
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variations
in our revenues, operating costs and expenses, earnings, and cash flow;
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announcements
of new investments, acquisitions, strategic partnerships or joint ventures by us or our
competitors;
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announcements
about our earnings that are not in line with analysts’ expectations;
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announcements
of new products and services by us or our competitors;
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changes
in financial estimates by securities analysts;
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detrimental
adverse publicity about us, our shareholders, affiliates, directors, officers or employees,
our product offerings, our business model, or our industry;
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announcements
of new regulations, rules or policies relevant for our business;
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additions
or departures of key personnel;
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release
of lock-up or other transfer restrictions on our outstanding equity securities or sales
of additional equity securities; and
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potential
litigation or regulatory investigations.
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Our directors,
officers and we may be involved in investigations or other forms of regulatory or governmental inquiry which may cause reputational
harm to the Company, incur additional expenses, and distract our management from our day-to-day operations.
From time to time,
our directors, officers and we may be involved in investigations or other forms of regulatory or governmental inquiry covering
a range of possible issues including but not limited to securities laws compliance. These inquiries or investigations could lead
to administrative, civil or criminal proceedings involving us and could result in fines, penalties, restitution, other types of
sanctions, or the need for us to undertake remedial actions, or to alter its business, financial or accounting practices. Our practice
is to cooperate fully with regulatory and governmental inquiries and investigations.
For example, on
August 6, 2020, Hangzhou Lianluo and Mr. Zhitao He received an investigation notice from China Securities Regulatory Commission
(“CSRC”) for alleged violation of laws and regulations regarding information disclosures of Hangzhou Lianluo.
Hangzhou Lianluo is a PRC company with shares listed on Shenzhen Stock Exchange. Mr. He is the Chairman and Chief Executive Officer
of Hangzhou Lianluo. Hangzhou Lianluo is also the largest shareholder of the Company and Mr. He was the former Chairman and the
former Chief Executive Officer of LLIT and will be appointed as the chairman of the board of the post-closing issuer immediately
prior to the completion of this Offering. Hangzhou Lianluo has announced this investigation on August 7, 2020 and stated that
it will fully cooperate with CSRC in the investigation. As the investigation is still at a relatively early stage, the Company
is currently unable to assess the likely outcomes of such proceedings. On October 19, 2020, Hangzhou Lianluo announced that it
has received a notice of administrative punishment from Zhejiang Regulatory Bureau of CSRC, which provides, among others, that
(i) Hangzhou Lianluo is receiving a warning and required to correct its unlawful acts and pay a fine of RMB 300,000, and (ii)
Mr. Zhitao He is receiving a warning and required to pay a fine of RMB 400,000. The unfavorable ultimate outcome regarding this
investigation could cause reputational harm to us.
Legal proceedings,
inquiries and regulatory investigations are often unpredictable, and it is possible that the ultimate resolution of any such matters,
if unfavorable, may be material to the our results of operations in any future period, depending, in part, upon the size of the
loss or liability imposed and the operating results for the period, and could have a material adverse effect on the our business.
In addition, regardless of the ultimate outcome of any such legal proceeding, inquiry or investigation, any such matter could cause
us to incur additional expenses, which could be significant, and possibly material, to our results of operations in any future
period.
Any of these factors
may result in large and sudden changes in the volume and price at which the Common Shares will trade.
In
the past, shareholders of a public company often brought securities class action suits against the company following periods of
instability in the market price of that company’s securities. If we were involved in a class action suit, it could divert
a significant amount of our management’s attention and other resources from our business and operations, which could harm
our results of operations and require us to incur significant expenses to defend the suit. Any such class action suit, whether
or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim
is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on
our financial condition and results of operations.
Because
our offering price is substantially higher than our net tangible book value per share, you will experience immediate and substantial
dilution.
If you purchase Common
Shares in this Offering, you will pay more for the Common Shares than the amount paid by our existing shareholders for their Common
Shares on a per-Common Share basis. As a result, you will experience immediate and substantial dilution of approximately $[●]
per Common Share, based on an assumed offering price of $[●] per Common Share, being the midpoint of the estimated range
of the offering price shown on the cover of this prospectus. See “Dilution” for a more complete description of how
the value of your investment in the Common Shares will be diluted upon the completion of this Offering.
If securities
or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding
the Common Shares, the market price for the Common Shares and trading volume could decline.
The trading market
for the Common Shares 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 the Common Shares, the market price for the Common Shares would likely decline.
If one or more of these analysts cease to cover us or fail to regularly publish reports on us, we could lose visibility in the
financial markets, which in turn could cause the market price or trading volume for the Common Shares to decline.
Techniques
employed by short sellers may drive down the market price of our common shares.
Short selling is
the practice of selling securities that the seller does not own but rather has borrowed from a third party with the intention
of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a decline in
the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short
seller expects to pay less in that purchase than it received in the sale. As it is in the short seller’s interest for the
price of the security to decline, many short sellers publish, or arrange for the publication of, negative opinions and allegations
regarding the relevant issuer and its business prospects in order to create negative market momentum and generate profits for
themselves after selling a security short. These short attacks appear to have, in the past, led to selling of our shares in the
market. If we were to become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue,
we could have to expend a significant amount of resources to investigate such allegations and/or defend ourselves. We may not
be able defend against any such short seller attacks, and may be constrained in the manner in which we can proceed against the
relevant short seller by principles of freedom of speech, applicable state law or issues of commercial confidentiality.
Investors may
have difficulty enforcing judgments against us, our directors and management.
We are incorporated
under the laws of the BVI and many of our directors and some of our officers reside outside the United States. Moreover, many of
these persons do not have significant assets in the United States. As a result, it may be difficult or impossible to effect service
of process within the United States upon these persons, or to recover against us or them on judgments of U.S. courts, including
judgments predicated upon the civil liability provisions of the U.S. federal securities laws.
The courts of the BVI
would not automatically enforce judgments of U.S. courts obtained in actions against us or our directors and officers, or some
of the experts named herein, predicated upon the civil liability provisions of the U.S. federal securities laws, or entertain actions
brought in the BVI against us or such persons predicated solely upon U.S. federal securities laws. Further, there is no treaty
in effect between the United States and the BVI providing for the enforcement of judgments of U.S. courts in civil and commercial
matters, and there are grounds upon which BVI courts may decline to enforce the judgments of U.S. courts. Some remedies available
under the laws of U.S. jurisdictions, including remedies available under the U.S. federal securities laws, may not be allowed in
the BVI courts if contrary to public policy in the BVI. Because judgments of U.S. courts are not automatically enforceable in the
BVI, it may be difficult for you to recover against us or our directors and officers based upon such judgments.
In addition, under
PRC law, a foreign judgment, which does not otherwise violate basic legal principles, state sovereignty, safety or social public
interest, may be recognized and enforced by a PRC court, based either on treaties between China and the country where the judgment
is made or on principles of reciprocity between jurisdictions. As currently there exists no treaty or other form of reciprocity
between China and the U.S. governing the recognition and enforcement of judgments, including those predicated upon the liability
provisions of the U.S. federal securities laws, there is uncertainty whether and on what basis a PRC court would enforce judgments
rendered by United States courts.
Certain types
of class or derivative actions generally available under U.S. law may not be available as a result of the fact that we are incorporated
in the BVI. As a result, the rights of shareholders may be limited.
Shareholders of BVI
companies may not have standing to initiate a shareholder derivative action in a court of the United States. The BVI courts are
also unlikely to recognize or enforce against us judgments of courts in the United States based on certain liability provisions
of U.S. securities law or to impose liabilities against us, in original actions brought in the BVI, based on certain liability
provisions of U.S. securities laws that are penal in nature.
You may have
more difficulty protecting your interests than you would as a shareholder of a U.S. corporation.
Our corporate affairs
will be governed by the provisions of our memorandum and articles of association, as amended and restated from time to time, and
by the provisions of applicable BVI law. The rights of shareholders and the fiduciary responsibilities of our directors and officers
under BVI law are not as clearly established as they would be under statutes or judicial precedents in some jurisdictions in the
United States, and some states (such as Delaware) have more fully developed and judicially interpreted bodies of corporate law.
These rights and responsibilities
are to a large extent governed by the British Virgin Island Business Companies Act, 2004 as amended from time to time (the “BVI
Act”) and the common law of the BVI. The common law of the BVI is derived in part from judicial precedent in the BVI
as well as from English common law, which has persuasive, but not binding, authority on a court in the BVI. In addition, BVI law
does not make a distinction between public and private companies and some of the protections and safeguards (such as statutory pre-emption rights,
save to the extent expressly provided for in the memorandum and articles of association) that investors may expect to find in
relation to a public company are not provided for under BVI law.
There may be less
publicly available information about us than is regularly published by or about U.S. issuers. Also, the BVI regulations governing
the securities of BVI companies may not be as extensive as those in effect in the United States, and the BVI law and regulations
regarding corporate governance matters may not be as protective of our shareholders as state corporation laws in the United States.
Therefore, you may have more difficulty protecting your interests in connection with actions taken by our directors and officers
or our Principal Shareholders than you would as a shareholder of a corporation incorporated in the United States.
The laws
of BVI provide limited protections for our shareholders, so our shareholders will not have the same options as to recourse in
comparison to the United States if the shareholders are dissatisfied with the conduct of our affairs.
Under the laws
of the BVI there is limited statutory protection of our shareholders other than the provisions of the BVI Act dealing with shareholder
remedies. The principal protections under BVI statutory law are derivative actions, actions brought by one or more shareholders
for relief from unfair prejudice, oppression and unfair discrimination and/or to enforce the BVI Act or the memorandum and articles
of association. Shareholders are entitled to have the affairs of the company conducted in accordance with the BVI Act and the
memorandum and articles of association, and are entitled to payment of the fair value of their respective shares upon dissenting
from certain enumerated corporate transactions.
There are common law
rights for the protection of shareholders that may be invoked, largely dependent on English company law, since the common law of
the BVI is limited. Under the general rule pursuant to English company law known as the rule in Foss v. Harbottle, a court will
generally refuse to interfere with the management of a company at the insistence of a minority of its shareholders who express
dissatisfaction with the conduct of the company’s affairs by the majority or the board of directors. However, every shareholder
is entitled to seek to have the affairs of the company conducted properly according to law and the constitutional documents of
the company. As such, if those who control the company have persistently disregarded the requirements of company law or the provisions
of the company’s memorandum and articles of association, then the courts may grant relief. Generally, the areas in which
the courts will intervene are the following: (i) a company is acting or proposing to act illegally or beyond the scope of its authority;
(ii) the act complained of, although not beyond the scope of the authority, could only be effected if duly authorized by more than
the number of votes which have actually been obtained; (iii) the individual rights of the plaintiff shareholder have been infringed
or are about to be infringed; or (iv) those who control the company are perpetrating a “fraud on the minority.”
These rights may
be more limited than the rights afforded to our shareholders under the laws of states in the United States.
Shareholders
of British Virgin Islands exempted companies like us have no general rights under British Virgin Islands law to inspect corporate
records or to obtain copies of lists of shareholders of these companies. Our directors have discretion under our articles of association
that will become effective immediately prior to completion of this Offering to determine whether or not, and under what conditions,
our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This
may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion
or to solicit proxies from other shareholders in connection with a proxy contest.
As a result of all
of the above, our public shareholders may have more difficulty in protecting their interests in the face of actions taken by our
management, members of the board of directors or controlling shareholders than they would as public shareholders of a company
incorporated in the United States. For a discussion of significant differences between the provisions of the BVI Act and the laws
applicable to companies incorporated in the United States and their shareholders, see “Description of Share Capital—Differences
in Corporate Law.”
Techniques employed
by short sellers may drive down the market price of the Common Shares.
Short
selling is the practice of selling securities that the seller does not own but rather has borrowed from a third party with the
intention of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a
decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares,
as the short seller expects to pay less in that purchase than it received in the sale. As it is in the short seller’s interest
for the price of the security to decline, many short sellers publish, or arrange for the publication of, negative opinions and
allegations regarding the relevant issuer and its business prospects in order to create negative market momentum and generate
profits for themselves after selling a security short. These short attacks have, in the past, led to selling of shares in the
market. If we were to become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue,
we could have to expend a significant amount of resources to investigate such allegations and/or defend ourselves. While we would
strongly defend against any such short seller attacks, we may be constrained in the manner in which we can proceed against the
relevant short seller by principles of freedom of speech, applicable state law or issues of commercial confidentiality.
Because we do
not expect to pay dividends in the foreseeable future after this Offering, you must rely on a price appreciation of the Common
Shares for a return on your investment.
We currently intend
to retain most, if not all, of our funds and any future earnings after this Offering to fund the development and growth of our
business. As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on
an investment in the Common Shares 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 British Virgin Islands law.
In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended
by our directors. Under British Virgin Islands law, a British Virgin Islands company may pay a dividend out of either profit or
share premium account, provided that in no circumstances may a dividend be paid if this would result in the company being unable
to pay its debts as they fall due in the ordinary course of business. Even if our board of directors decides to declare and pay
dividends, the timing, amount and form of future dividends, if any, will depend on our future results of operations and cash flow,
our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial
condition, contractual restrictions, and other factors deemed relevant by our board of directors. Accordingly, the return on your
investment in the Common Shares will likely depend entirely upon any future price appreciation of the Common Shares. There is
no guarantee that the Common Shares will appreciate in value after this Offering or even maintain the price at which you purchased
the Common Shares. You may not realize a return on your investment in the Common Shares and you may even lose your entire investment
in the Common Shares. Additionally, because we are a holding company, our ability to pay dividends on our common shares may be
limited by restrictions on the ability of our subsidiaries to pay dividends or make distributions to us, including restrictions
that are imposed under the terms of the agreements governing our subsidiaries’ loan and credit facilities. There is no assurance
that future dividends will be paid, and if dividends are paid, there is no assurance with respect to the amount of such dividend.
You
may experience dilution of your holdings due to the inability to participate in rights offerings.
We
may, from time to time, distribute rights to our shareholders, including rights to acquire securities. Under the deposit agreement,
the depositary will not distribute rights to holders of Common Shares unless the distribution and sale of rights and the securities
to which these rights relate are either exempt from registration under the Securities Act with respect to all holders of Common
Shares, or are registered under the provisions of the Securities Act. The depositary may, but is not required to, attempt to sell
these undistributed rights to third parties, and may allow the rights to lapse. We may be unable to establish an exemption from
registration under the Securities Act, and we are under no obligation to file a registration statement with respect to these rights
or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, holders of Common Shares
may be unable to participate in our rights offerings and may experience dilution of their holdings as a result.
As a company
incorporated in the British Virgin Islands, we are permitted to adopt certain home country practices in relation to corporate
governance matters that differ significantly from NASDAQ’S corporate governance listing standards. These practices may afford
less protection to shareholders than they would enjoy if we complied fully with NASDAQ’s corporate governance listing standards.
As a British Virgin
Islands company listed on NASDAQ Capital Market, we are subject to NASDAQ’s Capital Market corporate governance listing
standards. However, NASDAQ Capital Market rules permit a foreign private issuer like us to follow the corporate governance practices
of its home country. Certain corporate governance practices in the British Virgin Islands, which is our home country, may differ
significantly from NASDAQ’s corporate governance listing standards. We intend to follow British Virgin Islands corporate
governance practices in lieu of the following corporate governance requirements of NASDAQ that listed companies must have for
as long as we qualify as a foreign private issuer: (i) a majority of independent directors; (ii) a nominating/corporate governance
committee composed entirely of independent directors; and (iii) a compensation committee composed entirely of independent directors.
To the extent we choose to follow home country practice in the future, our shareholders may be afforded less protection than they
otherwise would enjoy under NASDAQ’s corporate governance listing standards applicable to U.S. domestic issuers.
We
are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions
applicable to U.S. domestic public companies.
Because
we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and
regulations in the United States that are applicable to U.S. domestic issuers, including:
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the
rules under the Exchange Act requiring the filing with the SEC of quarterly reports on
Form 10-Q or current reports on Form 8-K;
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the
sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations
in respect of a security registered under the Exchange Act;
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the
sections of the Exchange Act requiring insiders to file public reports of their share
ownership and trading activities and liability for insiders who profit from trades made
in a short period of time; and
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the
rules under Regulation FD governing selective disclosure rules of material nonpublic
information.
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We are and will
continue to be required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition,
upon closing of the Offering we intend to publish our results on a semi-annual basis as press releases, distributed pursuant to
the rules and regulations of NASDAQ. Press releases relating to financial results and material events will also be furnished to
the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less extensive and less
timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same
protections or information that would be made available to you were you investing in a U.S. domestic issuer.
There can be
no assurance that we will not be a passive foreign investment company, or PFIC, for any taxable year, which could result in adverse
U.S. federal income tax consequences to U.S. investors in the Common Shares.
In general, a non-U.S.
corporation is a PFIC for any taxable year in which (i) 75% or more of its gross income consists of passive income; or (ii) 50%
or more of the average quarterly value of its assets consists of assets that produce, or are held for the production of, passive
income. For purposes of the above calculations, a non-U.S. corporation that owns, directly or indirectly, at least 25% by value
of the shares of another corporation is treated as if it held its proportionate share of the assets of the other corporation and
received directly its proportionate share of the income of the other corporation. Cash is a passive asset for these purposes.
Based on the expected composition of our income and assets and the value of our assets, including goodwill, which is based on
the expected price of the Common Shares in this Offering, we do not expect to be a PFIC for our current taxable year. Because
we will hold a substantial amount of cash following this Offering, and because our PFIC status for any taxable year will depend
on the composition of our income and assets and the value of our assets from time to time (which may be determined, in part, by
reference to the market price of the Common Shares, which could be volatile), there can be no assurance that we will not be a
PFIC for our current or any future taxable year. If we were a PFIC for any taxable year during which a U.S. taxpayer holds Common
Shares, certain adverse U.S. federal income tax consequences could apply to such U.S. taxpayer. See “Taxation—U.S.
Federal Income Taxation—Passive Foreign Investment Company Rules.”
DISCLOSURE
REGARDING FORWARD-LOOKING STATEMENTS
This
prospectus contains forward-looking statements that reflect our current expectations and views of future events, all of which
are subject to risks and uncertainties. Forward-looking statements give our current expectations or forecasts of future events.
You can identify these statements by the fact that they do not relate strictly to historical or current facts. You can find many
(but not all) of these statements by the use of words such as “approximates,” “believes,” “hopes,”
“expects,” “anticipates,” “estimates,” “projects,” “intends,” “plans,”
“will,” “would,” “should,” “could,” “may” or other similar expressions
in this prospectus. These statements are likely to address our growth strategy, financial results and product and development
programs. You must carefully consider any such statements and should understand that many factors could cause actual results to
differ from our forward-looking statements. These factors may include inaccurate assumptions and a broad variety of other risks
and uncertainties, including some that are known and some that are not. No forward-looking statement can be guaranteed and actual
future results may vary materially. Factors that could cause actual results to differ from those discussed in the forward-looking
statements include, but are not limited to:
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future
financial and operating results, including revenues, income, expenditures, cash balances and other financial items;
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our
ability to execute our growth, and expansion, including our ability to meet our goals;
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current
and future economic and political conditions;
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our
ability to compete in an industry with low barriers to entry;
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our
capital requirements and our ability to raise any additional financing which we may require;
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our
ability to attract clients, win primary agency sale bids, and further enhance our brand recognition; and
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our
ability to hire and retain qualified management personnel and key employees in order to enable us to develop our business;
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trends
and competition in the advertising industry;
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Uncertainty
about the spread of the COVID-19 virus and the impact it may have on the Company’s
operations, the demand for the Company’s products, supply chains, and economic
activity in general; and
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other
assumptions described in this prospectus underlying or relating to any forward-looking statements.
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We
describe material risks, uncertainties and assumptions that could affect our business, including our financial condition and results
of operations, under “Risk Factors.” We base our forward-looking statements on our management’s beliefs and
assumptions based on information available to our management at the time the statements are made. We caution you that actual outcomes
and results may, and are likely to, differ materially from what is expressed, implied or forecast by our forward-looking statements.
Accordingly, you should be careful about relying on any forward-looking statements. Except as required under the federal securities
laws, we do not have any intention or obligation to update publicly any forward-looking statements after the distribution of this
prospectus, whether as a result of new information, future events, changes in assumptions, or otherwise.
INDUSTRY
Upon the closing of this Offering and
the Restructure, our sole business will be the business of Newegg. Therefore, this section analyzes the e-commerce industry and
the IT/CE segments of such industry, in which Newegg operates. All the information and data presented in this section have been
derived from Frost & Sullivan (“Frost & Sullivan”)’s industry report commissioned by Newegg in September
2020 titled “The E-Commerce Industry Landscape” (the “Frost & Sullivan Report”) unless otherwise noted.
Frost & Sullivan has advised Newegg that the statistical and graphical information contained herein is drawn from its database
and other sources. The following discussion contains projections for future growth, which may not occur at the rates that are projected
or at all.
Overview of the Global and North American
E-Commerce Market
Global and North American Retail E-Commerce
Market
E-commerce’s share of retail spend
has steadily been on the rise, growing from 10.5% in 2016 to 16% in 2019. We expect this steady growth to continue and that the
market size of the global retail e-commerce market will be able to generate $8.56 trillion in revenue in 2025.
In addition, the ongoing COVID-19
pandemic has simultaneously forced millions of retailers to accelerate their digital transformation and invest in e-commerce
in order to survive and caused a significant change in consumer behavior towards online marketplaces for groceries, home
goods etc. Even as brick and mortar retail re-opens around the world, we expect e-commerce to be an integral and increasing
portion of retail in the years to come.
Global and North American B2B E-Commerce
Market
The global B2B e-commerce industry accounted
for $12.2 trillion in 2019, driven by the increased adoption of digital technology by businesses worldwide with the goal of saving
costs and improving efficiencies. COVID-19 has also accelerated the B2B transformation to e-commerce in an unprecedented way. 80%
of business leaders are expected to retain their new, digital selling models, even after the pandemic ends.
North America formed 12% of the global
market, as greater numbers of businesses relied on e-commerce for their procurement needs. North American B2B e-commerce will grow
at a compound annual growth rate of 20.7% from $1.77 trillion in 2020 to $4.53 trillion in 2025.
Overview of the Global and North American
IT/CE E-Commerce Market
As global lockdowns were announced during
the COVID-19 pandemic, there were significant jumps reported across the world for B2C and B2B IT/CE sales.
Global and North American IT/CE Retail
E-Commerce Market
There have been significant spikes in e-commerce
activity for IT/CE since March with peaking in April/May. A large chunk of the growth in consumer electronics was led by the new
“normal” whereby millions of people adjusted to working from home during the COVID-19 pandemic.
North American
households are expected to significantly contribute to the increase in e-commerce spend for IT/CE products, resulting from
the need to work from home and enable distance learning for students. Apart from IT/CE products for learning and work
productivity, in-home entertainment CE products (such as for gaming and video streaming) have also gained significantly
during the pandemic as US parents tried to keep children occupied through the summer.
Global and North American IT/CE B2B
E-Commerce Market
We believe the B2B IT/CE e-commerce industry
has the following market drivers:
Companies use experience in B2C e-commerce
to drive sales in B2B market. E-commerce solutions provide intuitive, self-service platforms that enable easy price comparisons
as well as better relationship management with buyers. B2B companies are increasingly being run by millennials who are also B2C
consumers. A higher affinity to shopping online, supported by the convenience and best-offer prices, is expected to drive a similar
trend in enterprise procurement. B2B sellers can significantly increase conversion rates and drive up overall sales through effective
engagement and serving the needs of enterprise customers.
Increasing
office automation and newer technology offerings driving IT/CE purchases in businesses. Release of newer products and
technology upgrades such as 5G and AI/ML accelerates the office automation trend, spurring the need to upgrade existing
enterprise IT/CE equipment. 5G networks for instance will enable IoT office environments, boosting the demand for
smarter conference rooms with real-time communications, AR/VR devices and AI-integrated office automation products. B2B IT/CE
e-commerce will benefit as a result. In the COVID-19 era, technologies that support employees as they work from home are the
biggest priority in the short and medium term as we await a rebound in 2021.
COVID-19 induced shift to digital in
B2B enterprises. Digital channels have taken center stage as a must-have for B2B companies during COVID-19 with more than 90%
of B2Bs having transitioned to a virtual sales model during the pandemic. According to B2B research from McKinsey, customers are showing
a strong preference for digitally enabled sales interactions with suppliers’ mobile app downloads and social media apps seeing
a strong spike since the pandemic began. Buyers also strongly preferred self-service options.
Competitive
Landscape of the North American IT/CE E-Commerce Market
The COVID-19 pandemic has shifted buying
habits around the world, driving many to shop online for the first time ever. In order to survive, most brick and mortar stores
have taken their businesses online, accelerating the growth of an already booming e-commerce industry. Increased industry competition
and continually evolving online shopping behavior translates into a need for differentiation to remain relevant and maximize success
during an unprecedented time.
The IT/CE retail e-commerce marketplace
in North America is dominated by a handful of companies, including but not limited to: Amazon, BestBuy, Wal-Mart, eBay, Newegg,
Costco, AliExpress, and Wish. Apart from these retailers, there are many other IT/CE companies such as Apple, Samsung, and Dell
that have a significant portion of their sales coming from selling direct to consumers online.
According to Frost & Sullivan’s
survey among 515 consumers in the US and Canada, Amazon leads in the e-commerce retailer selection process and is the first choice
for over half of the consumers. Newegg comes fifth, after other key players, yet is considered by almost half of consumers, and
its rejection rate is very low. Newegg is also perceived as a trusted retailer that evokes a positive purchasing experience. The
products offered are of attractive pricing and variety.
We believe the following are the key success
factors in the e-commerce industry:
Data-driven personalization. Data-driven
personalization serves as a key factor of success, providing consumers with a customized experience. Online transactions by nature
lack traditional retail’s benefits of human touch points. E-commerce vendors can mimic this behavior by personalizing the
customer’s online journey through targeted recommendations based on browsing and purchasing history, and personal preferences
and other demographic data.
Interactive product visualization.
In-person retail offers an interactive, intuitive experience and enables customers to touch, see, listen to, and test merchandise
before making a purchasing decision. E-commerce can closely replicate this experience through interactive product visualization,
allowing customers to fully interact with and visually customize products, and learn product feature and specification details.
Positive pre-purchase interaction in a digital setting can increase brand loyalty and consumer mindshare. Interactive product visualization
can be achieved through ever evolving 3-D, virtual reality, and augmented reality technologies.
Excellent user experience. A user
friendly interface and ease of navigation provide the foundation for a simple, enjoyable, and successful purchasing experience.
User experience is influenced by a combination of factors, namely the look and feel of the online storefront; the ease of finding
the desired item or obtaining recommendations for alternate/additional products; the ability to access product details, specifications,
and peer reviews; and buyer confidence in a secure checkout experience. Increasingly, e-commerce vendors have been offering free/low-cost
and fast shipping, providing customers near instantaneous gratification as if purchasing from a physical store.
ENFORCEABILITY
OF CIVIL LIABILITIES
We
are incorporated under the laws of the British Virgin Islands as an exempted company with limited liability. We changed our domicile
to the British Virgin Islands because of certain benefits associated with being a British Virgin Islands corporation, such as
political and economic stability, an effective judicial system, a favorable tax system, the absence of foreign exchange control
or currency restrictions and the availability of professional and support services. However, the British Virgin Islands have a
less developed body of securities laws that provides significantly less protection to investors as compared to the securities
laws of the United States. In addition, British Virgin Islands companies may not have standing to sue before the federal courts
of the United States.
According
to our local British Virgin Islands counsel, there is uncertainty as to whether the courts of the British Virgin Islands would recognize as a valid judgment, a final and conclusive judgment in personam obtained in a competent federal
or state court of the United States of America against the Company under which a sum of money is payable (other than a sum of money
payable in respect of multiple damages, taxes or other charges of a like nature or in respect of a fine or other penalty) and would
give a judgment based thereon provided that (a) such courts had proper jurisdiction over the parties subject to such judgment;
(b) such courts did not contravene the rules of natural justice of the British Virgin Islands; (c) such judgment was not obtained
by fraud; (d) the enforcement of the judgment would not be contrary to the public policy of the British Virgin Islands; (e) no
new admissible evidence relevant to the action is submitted prior to the rendering of the judgment by the courts of the British
Virgin Islands; and (f) there is due compliance with the correct procedures under the laws of the British Virgin Islands
British
Virgin Islands counsel further advised that, although there is no statutory enforcement in the British Virgin Islands of final
and conclusive monetary judgments obtained in a competent federal or state court of the United States for a definite sum (and
the British Virgin Islands are not a party to any treaties for the reciprocal enforcement or recognition of such judgments), such
a judgment obtained in such jurisdiction can be expected to be recognized and enforced in the courts of the British Virgin Islands
at common law, without any re-examination of the merits of the underlying dispute, by an action commenced on the foreign judgment
debt in the Grand Court of the British Virgin Islands, provided such judgment (i) is given by a foreign court of competent jurisdiction;
(ii) imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given; (iii) is final;
(iv) is not in respect of taxes, a fine or a penalty; (v) is not inconsistent with a British Virgin Islands judgment of the same
matter; (vi) was not obtained on grounds of fraud; and (vii) was not obtained in a manner and is not of a kind the enforcement
of which is contrary to natural justice or the public policy of the British Virgin Islands. However, the British Virgin Islands
courts are unlikely to enforce a judgment obtained from the U.S. courts under civil liability provisions of the U.S. federal securities
law if such judgment is determined by the courts of the British Virgin Islands to give rise to obligations to make payments that
are penal or punitive in nature.
USE
OF PROCEEDS
We estimate that the
net proceeds from this Offering will be approximately $[●], or $[●] if the underwriters exercise their option to purchase
additional common shares in full, after deducting the estimated underwriting discounts and commissions and estimated offering expenses
payable by us.
The
principal purposes of this Offering are to satisfy the listing requirements of NASDAQ, facilitate access to the public equity
markets, increase our visibility in the marketplace, as well as to obtain additional capital.
We plan to use
the net proceeds of this offering to expand our business operations as follows:
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approximately
30% to enhance and expand our marketplace seller recruitment and platform services for marketplace sellers;
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approximately
35% to enhance our technological capabilities, including our technology infrastructure;
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approximately
25% to expand and improve our fulfillment facilities; and
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the
balance for general corporate purposes, which may include funding working capital needs and potential strategic investments and
acquisitions, although we have not identified any specific investments or acquisition opportunities at this time.
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Pending
any use described above, we
may also use a portion of the net proceeds to acquire or invest in complementary businesses, products, websites or technologies
or to enter into strategic relationships with third parties. We have no present understandings, commitments or agreements to enter
into any acquisitions or investments. The amount actually expended for the purposes listed above will depend upon a number of
factors, including the growth of our sales and customer base, competitive developments in e-commerce, the actual cost of capital
expenditures and our cash flow from operations and the growth of our business. The amount of what, and timing of when, we actually
spend for these purposes may vary significantly and will depend on a number of factors, including our future revenue and cash
generated by operations and the other factors described in “Risk Factors.” Accordingly, we will have broad discretion
in deploying the net proceeds of this Offering.
The
foregoing represents our current intentions based upon our present plans and business conditions to use and allocate the net proceeds
of this Offering. Our management, however, will have significant flexibility and discretion to apply the net proceeds of this
Offering. If an unforeseen event occurs or business conditions change, we may use the proceeds of this Offering differently than
as described in this prospectus. To the extent that the net proceeds we receive from this Offering are not immediately used for
the above purposes, we intend to invest our net proceeds in short-term, interest-bearing bank deposits or debt instruments.
DIVIDEND
POLICY
To
date, we have not paid any cash dividends on our shares. As a BVI company, we may only declare and pay dividends if our directors
are satisfied, on reasonable grounds, that immediately after the distribution (i) the value of our assets will exceed our liabilities
and (ii) we will be able to pay our debts as they fall due. We currently anticipate that we will retain any available funds to
finance the growth and operation of our business and we do not anticipate paying any cash dividends in the foreseeable future.
Additionally, our cash held in foreign countries may be subject to certain control limitations or repatriation requirements, limiting
our ability to use this cash to pay dividends.
CAPITALIZATION
The following table sets forth our capitalization
as of June 30, 2020:
You
should read this capitalization table in conjunction with “Use of Proceeds,” “Selected Consolidated Financial
and Operating Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
and the consolidated financial statements and the related notes appearing elsewhere in this prospectus.
|
|
As of June 30, 2020
|
|
|
|
Actual
|
|
|
As Adjusted
|
|
|
|
(in $)
|
|
Equity:
|
|
|
|
|
|
|
Class A Common Share, $00.021848 par value,
4,736,111 shares authorized, 2,210,683 shares issued and outstanding on an actual basis and [ ] Shares outstanding
on an as adjusted basis
|
|
|
48,299
|
|
|
|
|
|
Class B Common Share, $0.021848 par value, 1,513,889 shares
authorized, 1,388,888 shares issued and outstanding on an actual basis and [ ] Shares outstanding on an as adjusted
basis
|
|
|
30,345
|
|
|
|
|
|
Additional paid-in capital
|
|
|
47,995,773
|
|
|
|
|
|
Retained earnings (accumulated deficit)
|
|
|
(46,303,194
|
)
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
2,452,697
|
|
|
|
|
|
Total shareholders’ equity
|
|
|
4,223,920
|
|
|
|
|
|
Total capitalization
|
|
|
4,223,920
|
|
|
|
|
|
DILUTION
If you invest in our
Common Shares, your interest will be diluted for each Common Shares you purchase to the extent of the difference between the offering
price per Common Shares and our net tangible book value per Common Shares after this Offering. Dilution results from the fact that
the offering price per Common Shares is substantially in excess of the net tangible book value per Common Shares attributable to
the existing shareholders for our presently outstanding Common Shares.
The
following table illustrates this per share dilution:
|
|
As of
June 30,
2020
|
|
Public Offering price per share
|
|
$
|
|
|
Net tangible book value per share as of June 30, 2020
|
|
|
|
|
Increase in net tangible book value per share attributable to existing shareholders
|
|
|
|
|
Pro forma net tangible book value per share after this Offering
|
|
|
|
|
Dilution per share to new investors
|
|
|
|
|
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 the
section entitled “Selected Consolidated Financial Data” and our consolidated financial statements and the related
notes included elsewhere in this prospectus. This discussion contains forward-looking statements that are subject to known and
unknown risks and uncertainties. The additional or unforeseen effects from the COVID-19 pandemic amplify many of these risks.
Actual results and the timing of events may differ significantly from those expressed or implied in such forward-looking statements
due to a number of factors, including those set forth in the sections entitled “Risk Factors” and “Special Note
Regarding Forward-Looking Statements” and elsewhere in this prospectus. We have prepared our financial statements in accordance
with U.S. GAAP.
Pursuant to the
Merger Agreement and the Disposition Agreement, upon consummation of the Restructure, Merger Sub will merge into Newegg and LLIT
will dispose of Lianluo Connection. Upon closing of the Merger, Newegg will then be the wholly owned Subsidiary of the Company.
Pursuant to the Merger Agreement the Company will issue a certain number of Common Shares to Newegg Stockholders based on the LLIT
Conversion Ratio. As a result, Newegg Stockholders will become the controlling shareholder of the Company. The Merger is accounted
for as a reverse merger under common control effected by a share exchange, wherein Newegg is considered the acquirer for accounting
and financial reporting purposes.
Newegg’s
Business Overview and COVID-19 Update
Newegg
is a tech-focused e-commerce company in North America, and ranked second after Best Buy as the global top electronics online marketplace
according to Web Retailer’s report, as measured by 32.4 million visits per month in 2019. Through Newegg.com, its
flagship retail site, and other online platforms, Newegg connects its global customer base to a wide and increasing assortment
of tech products and a massive pool of brands, sellers, suppliers, manufacturers, distributors and third-party service providers.
Headquartered
in California, Newegg’s reach is global. Leveraging its extensive fulfillment and warehousing network and the global footprint
of its suppliers and sellers, Newegg is able to offer merchandise sourced from over 30 countries and regions to customers located
in over 20 countries and regions, and deliver customer services in multiple languages.
Newegg
has built a massive base of loyal and highly engaged customers. As of December 31, 2020, Newegg had 4.7 million active customers
(defined as unique email addresses with at least one item purchased on its platforms in the past 12 months), with a 32.5% repeat
purchase rate, as measured by the percentage of customers who made at least two purchases in the preceding year, and an average
order value of $301, as calculated by dividing sales by transactions during the relevant 12-month measurement period. Newegg achieves
this through its deep understanding of its customers’ needs, preferences and tastes and its ability to offer an extensive
product assortment, superior customer services, flexible payment options, and speedy, reliable and efficient shipping and fulfilment.
As of December 31, 2020, Newegg offered 40.5 million SKUs across over 1,748 categories, which Newegg believes makes it one of
the top online shopping destinations for tech consumers. Newegg also maintains a global fulfilment network that ensures speedy
and reliable delivery, supported by its six strategically located warehouses in the United States and Canada. Newegg has
the capacity to deliver goods to essentially 100% of the population in the United States and to approximately 84% of the population
in Canada within just two business days using multiple service level offerings.
Newegg
maintains longstanding and extensive relationships with its suppliers, sellers and business partners to source merchandise at
competitive pricing with early or preferential access to the latest, highly sought-after tech products, fulfilling its promise
to provide its customers with all things tech. Newegg is a trusted partner and the go-to channel for many leading tech product
brands and is increasingly establishing relationships with brands in a growing number of other product categories. As of December
31, 2020, Newegg sourced merchandise from at least 2,501 brand partners for its direct sales business, and Newegg featured the
official online stores of various brand partners, including some of the most well-known IT/CE brands, such as Intel, AMD, HP,
Asus, Acer, Lenovo, MSI, Nvidia, and Samsung.
Newegg
strategically employs a dynamic mix of its established direct sales business and a scalable marketplace model. Built upon its
success in direct sales, Newegg Marketplace has grown in recent years and significantly complemented its direct sales business.
As the number of sellers and brands on its Marketplace continues to grow, the choices available to customers should also increase,
generating a strong momentum for its continued growth. As of December 31, 2020, the Newegg Marketplace connected its customers
to over 16,618 third-party sellers from over 30 countries and regions offering approximately 40.3 million SKUs.
For
the year ended December 31, 2020, Newegg estimates that its GMV will be approximately $2.6 billion, an increase of approximately
$0.7 billion or approximately 36% when compared with GMV for the year ended December 31, 2019.
For
the years ended December 31, 2017, 2018, 2019, and for the six months ended June 30, 2020, Newegg recorded net sales of $2.2 billion,
$2.0 billion, $1.5 billion, and $0.9 billion, respectively. For the same periods, its total GMV was approximately $2.5 billion,
$2.4 billion, $1.9 billion, and $1.1 billion, respectively. Newegg recorded net loss of $12.0 million, $33.6 million, and $17.0
million for the years ended December 31, 2017, 2018, and 2019, and net income of $18.9 million for the six months ended June 30,
2020. For the same periods, its adjusted EBITDA was $2 million, $(17.8) million, $1.4 million, and $25 million, respectively. See
“—Non-GAAP Financial Measures.”
The
spread of COVID-19, which was declared a pandemic by the World Health Organization in March
2020, has caused different countries and cities to mandate curfews, including “shelter-in-place” and closures of most
non-essential businesses as well as other measures to mitigate the spread of the virus.
Newegg’s
online business and warehouse operations have remained active to serve its customers during the COVID-19 outbreak, and to-date,
the Company has seen increased demand for its products and services during the outbreak. By contrast, some of the Company’s
brick-and-mortar competitors have been forced to close down at least some of their retail locations temporarily, while some competitors
have de-emphasized certain lines of business, such as computers and electronics, which represent the Company’s core business. However, the
course of the outbreak remains uncertain, and a prolonged global economic slowdown and increased unemployment could have a material
adverse impact on economic conditions, which in turn could lead to a reduced demand for its products and services.
As
a consequence of the COVID-19 outbreak, Newegg has experienced occasional supply constraints, primarily in the form of delays
in shipment of inventory. The Company has also experienced some increases in the cost of certain products, as well as a drop in
promotions by some manufacturers. While the Company considers such events to be relatively minor and temporary, continued supply
chain disruptions could lead to delayed receipt of, or shortages in, inventory and higher costs, and negatively impact sales in
fiscal year 2020.
COVID-19
impacted the supply chain of Newegg’s brand partners and Marketplace sellers, and its ability to timely fulfill orders and
deliver such orders to its customers, particularly as a result of mandatory shutdowns in different countries and cities to mitigate
the spread of the virus.
Although Newegg cannot estimate the length or gravity of the
impact of the COVID-19 outbreak at this time, if the pandemic continues, it may have an adverse effect on the Company’s results
of future operations. The potential impact of COVID-19 on its operations remain uncertain and potentially wide-spread.
Newegg’s
Business Model
GMV is the primary driver of Newegg’s net sales, as it
derives a significant majority of net sales from the GMV transacted on its online platforms, net of cancellations and returns.
Newegg defines GMV as the total dollar value of products sold on Newegg’s websites, directly to customers and by its Marketplace
sellers through Newegg Marketplace, net of returns, discounts, taxes, and cancellations. Newegg generates GMV and net sales primarily
from the following sources:
|
●
|
Direct
sales, where Newegg controls inventories sourced from suppliers and
directly sells goods to its customers on Newegg platforms or certain other third-party platforms. Newegg’s direct sales revenues
include net sales generated from sales of products directly by it to customers on its Newegg platforms (including wholesale where
Newegg sells inventories in bulk and mostly at a discount), sales through third-party websites of products Newegg sources from
suppliers, and freight revenues from fees Newegg charges for delivery of goods that Newegg directly sells to customers.
|
|
●
|
Newegg
Marketplace, where third-party sellers sell products through the Newegg Marketplace,
and Newegg recognizes commission and service fees from such third-party sellers in its net sales. The published commission rates
are based on a percentage of the GMV transacted, exclusive of the shipping fees charged, which commission rates range from 8% to
15%, depending on the product category. Newegg refers to the net sales generated from Newegg Marketplace as Marketplace revenues.
|
|
●
|
Direct
to Consumer (“D2C”) Platform Services, where Newegg generates
net sales primarily by charging service fees for a range of e-commerce services and solutions
rendered to the vendor partners, Marketplace sellers and various types of customers and
businesses, including third-party logistics (3PL) and other fulfilment and logistics
services, advertising services, and online marketing services. Newegg refers to such
net sales as services revenues.
|
Factors
Affecting Newegg’s Results of Operations
Newegg’s
financial condition and results of operations have been, and will continue to be, affected by a number of important factors, including
the following:
Newegg’s
ability to grow its customer base and increase their engagement level
Newegg
believes the principal factors necessary to maintain and grow its GMV and net sales include the number of visits to its online
platforms, its ability to convert those visits to orders, and the level of its customers’ engagement with its platforms.
Newegg
monitors the following key operating metrics to evaluate its user traffic, its ability to convert visits into orders, and the size
and engagement of its customer base:
|
|
For the Six Months Ended/As of June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Key Operating Data:
|
|
|
|
|
|
|
|
|
Total visits(1)
|
|
|
163.9 million
|
|
|
|
126.3 million
|
|
Number of customers(2)
|
|
|
35.6 million
|
|
|
|
33.6 million
|
|
Number of active customers(3)
|
|
|
3.8 million
|
|
|
|
3.7 million
|
|
Conversion rate(4)
|
|
|
2.6
|
%
|
|
|
2.6
|
%
|
Repeat purchase rate(5)
|
|
|
30.7
|
%
|
|
|
30.4
|
%
|
Average Order Value(6)
|
|
$
|
296
|
|
|
$
|
297
|
|
|
|
For the Year Ended As
of December 31,
|
|
Key Operating Data:
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Total visits(1)
|
|
|
382.2 million
|
|
|
|
262.8 million
|
|
|
|
261.6 million
|
|
|
|
263.3 million
|
|
Number of customers(2)
|
|
|
37.3
million
|
|
|
|
34.4
million
|
|
|
|
32.7
million
|
|
|
|
30.8
million
|
|
Number of active customers(3)
|
|
|
4.7
million
|
|
|
|
3.2
million
|
|
|
|
3.9
million
|
|
|
|
4.0
million
|
|
Conversion rate(4)
|
|
|
2.4
|
%
|
|
|
2.4
|
%
|
|
|
3.2
|
%
|
|
|
3.4
|
%
|
Repeat purchase rate(5)
|
|
|
32.5
|
%
|
|
|
30.0
|
%
|
|
|
30.9
|
%
|
|
|
32.8
|
%
|
Average Order Value(6)
|
|
|
301
|
|
|
|
310
|
|
|
|
299
|
|
|
|
286
|
|
Note:
(1)
|
Measured by total traffic across all Newegg
platforms, excluding search bots from competitors by filtering visits of less than three
seconds.
|
|
|
(2)
|
Calculated by the total number of registered accounts on
all Newegg platforms.
|
|
|
(3)
|
Active customers as of a given date are calculated by unique
customer ID with at least one transaction purchased on Newegg platforms during the relevant
12-month measurement period.
|
|
|
(4)
|
Calculated by dividing transactions over the total number
of visits across all Newegg platforms, excluding visits less than three seconds.
|
|
|
(5)
|
Measured by the percentage of customers who made at least
two purchases on Newegg platforms during the relevant 12-month measurement period.
|
|
|
(6)
|
Calculated by dividing sales volume by number of transactions
during the relevant 12-month measurement period.
|
Newegg
uses conversion rates to measure its ability to convert visits to orders. Newegg’s conversion rates have varied from time
to time, and there are a number of factors that may affect conversion rates, including overall economic trends, product mix, new
product releases, the level of competition Newegg faces, its merchandise sourcing ability and the purchasing patterns of consumers.
The numbers of customers and active customers and repeat purchase rates are indicators of the size and engagement of its customer
base. Total active customers have been relatively stable over the last two years.
Newegg’s
product mix
While Newegg is
a tech-focused e-retailer, Newegg also offers merchandise in a broad and increasing number of product categories, including apparel
and accessories, home furnishings, personal goods and certain other products of IT– adjacent categories. As of December
31, 2020, Newegg offered a total of 40.5 million SKUs across over 1,748 categories. Products are offered on its online platforms
across a range of types, brands and price points. Newegg believes that customers are attracted to its online platforms primarily
by the breadth and depth of its product offerings, a critical component of its ability to increase sales and drive long-term profitability.
Newegg’s results
of operations are affected by its merchandise mix, as products of different categories, brands and price points have a range of
margin and profitability profiles. For example, categories where the company holds lower market share and the company strives
to grow at an accelerated rate over market may offer relatively lower margins. Newegg’s merchandise mix may shift over time
due to the combination of a variety of factors, including consumer demands and preferences, average selling prices, its ability
to maintain and expand its supplier relationships, its ability to forecast market trends, and its marketing and promotional efforts.
Newegg continuously monitors the GMV and margin mix of its product offerings and Newegg seeks to increase the percentage of GMV
and net sales from categories and brands with attractive margin profiles.
Expansion
of Newegg Marketplace
A key component of
Newegg’s long-term strategy is to continue to grow its Newegg Marketplace, which Newegg believes is an important driver of
future profitable growth.
Newegg Marketplace
has grown in recent years with an increasing contribution to Newegg’s total sales. In 2017, 2018, 2019, and for the six months
ended June 30, 2020, its Newegg Marketplace generated GMV of $412.8 million, $472.1 million, $495.2 million, and $335.0 million,
respectively, representing a CAGR of 6%, for the years 2017 to 2019, and accounted for approximately 16.7%, 19.6%, 25.6%, and 29.3%,
respectively, of its total GMV. During the same periods, its Newegg Marketplace generated net sales of $37.2 million, $43.2 million,
$46.0 million, and $33.5 million, respectively, representing a CAGR of 7% for the years 2017 to 2019, and accounted for 1.8%, 2.2%,
3.0%, and 3.9%, respectively, of its total net sales. Over time, Newegg expects its Marketplace GMV, both in absolute amount and
as a percentage of total GMV, to continue to grow.
Newegg believes the
Marketplace model provides it with a number of benefits. As compared with direct sales, the use of the marketplace model contributes
to its working capital and cash flow as there is no need to maintain inventory. Additionally, as the number of sellers and brands
on the Newegg Marketplace continues to expand, the choices available to customers also should grow, generating strong momentum
for its continued growth. Newegg believes that the integration of its direct sales and Marketplace operations has created a virtuous,
self-reinforcing cycle.
Newegg’s
results of operations have been, and will continue to be, influenced by shifts over time in the GMV mix between direct sales and
Marketplace. This is primarily due to the difference in revenue recognition - Newegg recognizes revenues from direct sales on
a gross basis, while Newegg recognizes revenues from the Newegg Marketplace on a net basis. See “—Key Components of
Results of Operations” for details. Accordingly, for the same amount of GMV, direct sales generates more net sales than
Marketplace and, therefore, an increase in the GMV contribution of Marketplace as a portion of the total GMV would have a negative
impact on its net sales.
Newegg’s
ability to forecast consumer needs and preferences
The
IT/CE e-commerce market in North America and globally is characterized by rapidly evolving technologies, fast-changing consumer
requirements and preferences and frequent releases of new products and introductions of updated industry standards and practices.
Newegg must effectively respond to these changes to remain competitive. Newegg may have difficulty anticipating consumer demand
and preferences, and the goods offered on its online platforms may not be accepted by the market or may be rendered obsolete or
uneconomical. Newegg’s inability to adapt to these developments may lead to excessive or deficient inventories or a failure
to attract new customers and retain existing customers, which could materially and adversely affect its financial condition and
results of operations.
Newegg’s
ability to source products from key suppliers on favorable terms
As of December
31, 2020, Newegg offered over 133,000 direct sales SKUs sourced from at least 405 suppliers globally. Newegg maintains extensive,
long-standing and mutually beneficial relationships with many of the biggest tech product brands and distributors globally. However,
its contracts or arrangements with such suppliers generally do not guarantee the availability of merchandise, or provide for the
continuation of particular pricing or other practices. Newegg’s suppliers may not continue to sell their inventory to it
on current terms or at all, and, if the terms are changed, Newegg may not be able to establish new supply relationships on similar
or better terms.
Newegg
competes with other retailers and direct marketers for favorable product allocations and vendor incentive programs from product
manufacturers and distributors. Some of its competitors could enter into exclusive or favorable distribution arrangements for
certain products with its vendors, which would deny it complete or partial access to those products and marketing and promotional
resources. In addition, some vendors whose products are offered on its online platforms also sell their products directly to customers.
If Newegg is unable to develop and maintain relationships with suppliers that permit it to obtain sufficient quantities of desirable
merchandise on favorable terms, its results of operations could be adversely impacted.
Segment
Information
Newegg’s
chief operating decision maker (i.e. chief executive officer) reviews financial information presented on a consolidated basis,
accompanied by disaggregated information about revenue by countries or regions for purposes of allocating resources
and evaluating financial performance. There are no segment managers who are held accountable for operations, operating results
and plans for levels or components below the consolidated unit level. Based on qualitative and quantitative criteria established
by Accounting Standards Codification (“ASC”) 280, “Segment Reporting”, Newegg considers ourselves to be
operating within one reportable segment.
Key
Components of Results of Operations
Net
Sales
Newegg’s
net sales consist of direct sales revenues, Marketplace revenues and services revenues. See “—Newegg’s
Business Model” for more information about these sources of net sales.
Newegg’s
net sales are reported net of anticipated discounts, returns, allowances, sales tax and credit card chargebacks, which are all
estimated from historical experience. Newegg also offers customer promotional programs, which Newegg records as reductions in
sales based on anticipated redemption rates estimated from historical experience.
The
following table sets forth the components of its net sales in absolute amounts and as percentages of total net sales, for the
periods indicated.
|
|
For the Six Months Ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in millions, except for percentages)
|
|
Net sales
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Direct sales revenues
|
|
$
|
812.2
|
|
|
|
94.1
|
|
|
$
|
770.9
|
|
|
|
96.7
|
|
Marketplace revenues
|
|
|
33.5
|
|
|
|
3.9
|
|
|
|
21.0
|
|
|
|
2.6
|
|
Services revenues
|
|
|
17.0
|
|
|
|
2.0
|
|
|
|
5.5
|
|
|
|
0.7
|
|
Total
|
|
|
862.7
|
|
|
|
100.0
|
|
|
|
797.4
|
|
|
|
100.0
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
(in millions, except for percentages)
|
|
Net sales
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Direct sales revenues
|
|
$
|
1,476.7
|
|
|
|
96.3
|
|
|
$
|
1,966.3
|
|
|
|
97.2
|
|
|
$
|
2,104.6
|
|
|
|
97.5
|
|
Marketplace revenues
|
|
|
46.0
|
|
|
|
3.0
|
|
|
|
43.2
|
|
|
|
2.1
|
|
|
|
37.2
|
|
|
|
1.7
|
|
Services revenues
|
|
|
11.2
|
|
|
|
0.7
|
|
|
|
12.9
|
|
|
|
0.7
|
|
|
|
16.3
|
|
|
|
0.8
|
|
Total
|
|
|
1,533.9
|
|
|
|
100.0
|
|
|
|
2,022.4
|
|
|
|
100.0
|
|
|
|
2,158.1
|
|
|
|
100.0
|
|
Cost
of Sales
The largest component
of its cost of sales is the purchase price of goods that Newegg directly sells to customers. Cost of sales also includes (i) costs
relating to its service revenues, which include personnel expenses and other costs relating to its third-party logistics services;
(ii) inbound and outbound freight costs; and (iii) inventory write-offs relating to refurbished, slow-moving and obsolete inventories
and adjustments for vendor incentives related to inventory still on hand at the reporting date.
Cost of sales is partially offset by payments Newegg earns under
vendor incentive programs, or VIPs, such as purchase rebates, marketing development funds that vendors give it to advertise their
products, cooperative marketing programs jointly funded with vendors, and price protection refunds to offset reductions in the
manufacturer’s suggested retail price. These VIPs are sometimes tied to the volume of its purchases or sales and represent
a reduction of the selling price of the suppliers’ products. Therefore, Newegg treats these program payments as reductions
to cost of sales.
The
following table sets forth the components of its cost of sales, in absolute amounts and as percentages of total net sales, for
the periods indicated.
|
|
For the Six Months Ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in millions, except for percentages)
|
|
Cost of sales
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Purchase price of goods sold by it directly
|
|
$
|
687.2
|
|
|
|
93.1
|
|
|
$
|
682.6
|
|
|
|
95.0
|
|
Costs relating to service revenues
|
|
|
12.2
|
|
|
|
1.7
|
|
|
|
0.2
|
|
|
|
0.0
|
|
Inbound and outbound freight costs
|
|
|
36.3
|
|
|
|
4.9
|
|
|
|
33.7
|
|
|
|
4.7
|
|
Inventory write-downs
|
|
|
2.4
|
|
|
|
0.3
|
|
|
|
2.3
|
|
|
|
0.3
|
|
Total
|
|
$
|
738.1
|
|
|
|
100.0
|
|
|
$
|
718.8
|
|
|
|
100.0
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
(in millions, except for percentages)
|
|
Cost of sales
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Purchase price of goods sold by it directly
|
|
$
|
1,300.4
|
|
|
|
95.0
|
|
|
$
|
1,739.5
|
|
|
|
95.8
|
|
|
$
|
1,853.9
|
|
|
|
96.3
|
|
Costs relating to service revenues
|
|
|
1.0
|
|
|
|
0.1
|
|
|
|
1.7
|
|
|
|
0.1
|
|
|
|
2.7
|
|
|
|
0.1
|
|
Inbound and outbound freight costs
|
|
|
67.2
|
|
|
|
4.9
|
|
|
|
71.7
|
|
|
|
3.9
|
|
|
|
72.6
|
|
|
|
3.8
|
|
Inventory write-downs
|
|
|
0.4
|
|
|
|
0.0
|
|
|
|
3.9
|
|
|
|
0.2
|
|
|
|
(3.2
|
)
|
|
|
(0.2
|
)
|
Total
|
|
$
|
1,369.0
|
|
|
|
100.0
|
|
|
$
|
1,816.8
|
|
|
|
100.0
|
|
|
$
|
1,926.0
|
|
|
|
100.0
|
|
Other
Operating Income / (Expense)
During 2019, Newegg
entered into a sale leaseback transaction for one of its real estate properties in the United States. Newegg sold the property
for a gross proceed of $38.5 million, and recognized a gain of $28.8 million from the transaction, which is included as other operating
income in its consolidated statement of operations.
Selling,
General and Administrative Expenses
The
largest component of its selling, general and administrative expenses, or SG&A expenses, is salary and other compensation
costs, consisting of expenses relating to the employment of its employees, as well as temporary personnel to meet its needs in
areas such as customer service and fulfillment during seasonal peaks in orders.
Other
significant components of SG&A expenses include advertising and marketing expenses, payment and credit card processing fees,
depreciation, rent expenses, warehouse costs, office expenses, legal expenses and other general corporate costs.
The
following table sets forth the components of its SG&A expenses, in absolute amounts and as percentages of net sales, for the
periods indicated.
|
|
For the Six Months Ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in millions, except for percentages)
|
|
Selling, general and administrative expenses
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Salary and other compensation costs
|
|
$
|
47.1
|
|
|
|
43.9
|
|
|
$
|
53.4
|
|
|
|
46.2
|
|
Payment and credit card processing fees
|
|
|
22.0
|
|
|
|
20.5
|
|
|
|
19.1
|
|
|
|
16.5
|
|
Advertising and marketing
|
|
|
11.7
|
|
|
|
10.9
|
|
|
|
15.3
|
|
|
|
13.2
|
|
Depreciation and amortization
|
|
|
4.5
|
|
|
|
4.2
|
|
|
|
5.4
|
|
|
|
4.7
|
|
Others
|
|
|
22.0
|
|
|
|
20.5
|
|
|
|
22.3
|
|
|
|
19.3
|
|
Total
|
|
$
|
107.3
|
|
|
|
100.0
|
|
|
$
|
115.5
|
|
|
|
100.0
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
(in millions, except for percentages)
|
|
Selling, general and administrative expenses
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Salary and other compensation costs
|
|
$
|
107.2
|
|
|
|
46.8
|
|
|
$
|
103.5
|
|
|
|
41.9
|
|
|
$
|
96.6
|
|
|
|
39.3
|
|
Payment and credit card processing fees
|
|
|
37.6
|
|
|
|
16.4
|
|
|
|
44.2
|
|
|
|
17.9
|
|
|
|
45.4
|
|
|
|
18.4
|
|
Advertising and marketing
|
|
|
25.8
|
|
|
|
11.3
|
|
|
|
34.8
|
|
|
|
14.1
|
|
|
|
38.0
|
|
|
|
15.4
|
|
Depreciation and amortization
|
|
|
10.7
|
|
|
|
4.7
|
|
|
|
10.2
|
|
|
|
4.1
|
|
|
|
10.6
|
|
|
|
4.3
|
|
Others
|
|
|
47.9
|
|
|
|
20.8
|
|
|
|
54.5
|
|
|
|
22.0
|
|
|
|
55.5
|
|
|
|
22.6
|
|
Total
|
|
$
|
229.2
|
|
|
|
100.0
|
|
|
$
|
247.2
|
|
|
|
100.0
|
|
|
$
|
246.1
|
|
|
|
100.0
|
|
Interest
Income and Expense
Interest
income is earned on (i) its loans to affiliates; and (ii) cash invested in money market accounts or certificates of deposit. See
“Related Party Transactions—Other Related Party Transactions” for more information about its loans to affiliates.
Interest expense represents the interest Newegg is charged on its borrowings, including term loan, line of credit and capital
leases.
Other income, net
Newegg
recorded Other income, net of $2.8 million, $4.2 million, $1.6 million, and $1.1 million for the six months ended June 30, 2020
and for the years ended December 31, 2019, 2018, and 2017, respectively. For the six months ended June 30, 2019, Other income,
net, primarily consisted of insurance proceeds from the fire loss in one of the warehouses in the U.S., and vendor incentives,
and property rental income in China. In 2019, its Other income mainly consisted of insurance proceeds primarily related to the
fire loss in one of Newegg’s warehouses in the U.S., and property rental income in China. Other income, net of $1.6 million
in 2018 primarily consisted of property rental income in China while Newegg recorded Other income, net of $1.2 million in 2017
primarily from business interruption insurance recovery in connection with several instances of distributed denial-of-service attacks
that Newegg experienced in November 2015.
Gain
from Sale of and Equity Income from Equity Method Investments
Newegg
accounts for investment under the equity method for investees over which Newegg has the ability to exercise significant
influence but does not have a controlling interest. Newegg recorded a gain on equity method investment of $0.2 million, $9.6
million and $21.8 million, respectively, in 2017, 2018 and 2019. Newegg’s gain on equity method investment in 2018 was
attributed to the equity income from its equity method investment in Mountain Capital Fund L.P. (“Mountain
Capital”). The gain in 2019 primarily included gains from the partial sale of its investment in Mountain Capital.
Mountain Capital sold a portion of its investment in One97 Communication Limited (“One97”), a leading Indian
e-wallet provider and one of Mountain Capital’s portfolio companies, to various third-party buyers. Newegg’s
ownership percentage in Mountain Capital was approximately 8.0% as of June 30, 2020 and December 31, 2019.
Results
of Operations
The
following table summarizes its consolidated results of operations in absolute amounts and as percentages of its net sales for
the periods indicated. Period-to-period comparisons of historical results of operations should not be relied upon as indicative
of future performance.
|
|
For the Six Months Ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in millions, except for percentages, per share data, and average number of shares)
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
Amount
|
|
|
Net Sales
|
|
|
Amount
|
|
|
Net Sales
|
|
Net sales
|
|
$
|
862.7
|
|
|
|
100.0
|
|
|
$
|
797.40
|
|
|
|
100.0
|
|
Cost of sales
|
|
|
738.1
|
|
|
|
85.6
|
|
|
|
718.80
|
|
|
|
90.1
|
|
Gross profit
|
|
|
124.6
|
|
|
|
14.4
|
|
|
|
78.60
|
|
|
|
9.9
|
|
Other operating income
|
|
|
0.2
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
Selling, general and administrative expenses(1)
|
|
|
107.1
|
|
|
|
12.4
|
|
|
|
115.5
|
|
|
|
14.5
|
|
Gain (Loss) from operations
|
|
|
17.7
|
|
|
|
2.1
|
|
|
|
(36.9
|
)
|
|
|
-4.6
|
|
Interest income
|
|
|
0.6
|
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
0.0
|
|
Interest expense
|
|
|
(0.4
|
)
|
|
|
0.0
|
|
|
|
(2.0
|
)
|
|
|
-0.3
|
|
Other income, net
|
|
|
2.8
|
|
|
|
0.3
|
|
|
|
3.5
|
|
|
|
0.4
|
|
Gain from sale of and equity income from equity method investments
|
|
|
-
|
|
|
|
-
|
|
|
|
24.1
|
|
|
|
3.0
|
|
Gain (loss) before provision for income taxes
|
|
|
20.7
|
|
|
|
2.4
|
|
|
|
(11.1
|
)
|
|
|
-1.4
|
|
Provision for income taxes
|
|
|
1.8
|
|
|
|
0.2
|
|
|
|
4.4
|
|
|
|
0.6
|
|
Net income (loss)
|
|
$
|
18.9
|
|
|
|
2.2
|
|
|
$
|
(15.5
|
)
|
|
|
-1.9
|
|
Basic earnings per share
|
|
$
|
0.30
|
|
|
|
|
|
|
$
|
(18.22
|
)
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.16
|
|
|
|
|
|
|
$
|
(18.22
|
)
|
|
|
|
|
Weighted average shares used in computation of earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
849,159
|
|
|
|
|
|
|
|
849,159
|
|
|
|
|
|
Diluted
|
|
|
1,577,308
|
|
|
|
|
|
|
|
849,159
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
(in millions, except for percentages, net loss per share, and average number of share)
|
|
|
|
Amount
|
|
|
% of
Net Sales
|
|
|
Amount
|
|
|
% of
Net Sales
|
|
|
Amount
|
|
|
% of
Net Sales
|
|
Net sales
|
|
$
|
1,533.9
|
|
|
|
100.0
|
|
|
$
|
2,022.4
|
|
|
|
100.0
|
|
|
$
|
2,158.1
|
|
|
|
100.0
|
|
Cost of sales
|
|
|
1,369.0
|
|
|
|
89.3
|
|
|
|
1,816.8
|
|
|
|
89.8
|
|
|
|
1,926.0
|
|
|
|
89.2
|
|
Gross profit
|
|
|
164.9
|
|
|
|
10.7
|
|
|
|
205.6
|
|
|
|
10.2
|
|
|
|
232.1
|
|
|
|
10.8
|
|
Other operating Income/(expense)
|
|
|
28.3
|
|
|
|
1.8
|
|
|
|
(1.6
|
)
|
|
|
(0.1
|
)
|
|
|
0.2
|
|
|
|
0.0
|
|
Selling, general and administrative expenses(1)
|
|
|
229.2
|
|
|
|
14.9
|
|
|
|
247.2
|
|
|
|
12.2
|
|
|
|
246.1
|
|
|
|
11.4
|
|
Loss from operations
|
|
|
(36.0
|
)
|
|
|
(2.4
|
)
|
|
|
(43.1
|
)
|
|
|
(2.0
|
)
|
|
|
(13.8
|
)
|
|
|
(0.6
|
)
|
Interest income
|
|
|
0.6
|
|
|
|
0.0
|
|
|
|
1.5
|
|
|
|
0.1
|
|
|
|
1.8
|
|
|
|
0.1
|
|
Interest expense
|
|
|
(2.9
|
)
|
|
|
(0.2
|
)
|
|
|
(1.6
|
)
|
|
|
(0.1
|
)
|
|
|
(1.1
|
)
|
|
|
(0.1
|
)
|
Other income, net
|
|
|
4.2
|
|
|
|
0.3
|
|
|
|
1.6
|
|
|
|
0.1
|
|
|
|
1.1
|
|
|
|
0.1
|
|
Gain from sale of and equity income from equity method investments
|
|
|
21.8
|
|
|
|
1.4
|
|
|
|
9.6
|
|
|
|
0.5
|
|
|
|
0.2
|
|
|
|
0.0
|
|
Loss before provision for income taxes
|
|
|
(12.4
|
)
|
|
|
(0.8
|
)
|
|
|
(32.0
|
)
|
|
|
(1.6
|
)
|
|
|
(11.8
|
)
|
|
|
(0.6
|
)
|
Provision for income taxes
|
|
|
4.6
|
|
|
|
0.3
|
|
|
|
1.6
|
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
0.0
|
|
Net loss
|
|
$
|
(17.0
|
)
|
|
|
(1.1
|
)
|
|
$
|
(33.6
|
)
|
|
|
(1.7
|
)
|
|
$
|
(12.0
|
)
|
|
|
(0.6
|
)
|
Less: Dividend or deemed dividend paid to Series A convertible Preferred Stock
|
|
|
-
|
|
|
|
(0.0
|
)
|
|
|
(20.0
|
)
|
|
|
(1.0
|
)
|
|
|
(19.2
|
)
|
|
|
(0.9
|
)
|
Net loss attributable to common stock
|
|
$
|
(17.0
|
)
|
|
|
(1.1
|
)
|
|
$
|
(53.6
|
)
|
|
|
(2.6
|
)
|
|
$
|
(31.2
|
)
|
|
|
(1.4
|
)
|
Net loss per share, basic and diluted
|
|
$
|
(20.0
|
)
|
|
|
—
|
|
|
$
|
(80.7
|
)
|
|
|
—
|
|
|
$
|
(44.0
|
)
|
|
|
—
|
|
Weighted average number of common stock outstanding used in computing per share amounts, basic and diluted
|
|
|
849,159
|
|
|
|
—
|
|
|
|
663,899
|
|
|
|
—
|
|
|
|
708,760
|
|
|
|
—
|
|
|
(1)
|
Includes share-based compensation expenses of $0.7 million,
$3.9 million, and $4.0 million, respectively, in 2019, 2018 and 2017.
|
Six Months Ended June 30, 2020 Compared
to Six Months Ended June 30, 2019
Net sales
Net sales increased
by 8.2% for the six months ended June 30, 2020 compared to the comparable prior year period from $797.4 million in 2019 to $862.7
million in 2020, which was mainly due to the increase in GMV from its U.S.-focused direct sales platforms from $888.3 million for
the six months ended June 30, 2019, to $1,043.9 million for the six months ended June 30, 2020.
Such increase in GMV
was primarily due to (i) a change in buying behavior of consumers from brick-and-mortar stores to online retailers due to the COVID-19
pandemic; and (ii) strong demand in computer components as a result of working and schooling from home.
Cost of Sales
& Gross profit
For the six months
ended June 30, 2020, its cost of sales increased by 2.7% compared to the comparable prior year period from $718.8 million in 2019
to $738.1 million in 2020, generally reflective of the increase in its net sales. During the same period, its gross profit increased
by 58.5% from $78.6 million for the six months ended June 30, 2019 to $124.6 million for the six months ended June 30, 2020.
Newegg’s profit margin increased from 9.9% for the six
months ended June 30, 2019 to 14.4% for the six months ended June 30, 2020, primarily due to a strategy change where the company
focused on selling high margin products such as desktop PCs and gaming notebooks. Newegg also moved over its low margin products,
such as TVs, from its direct sale business to marketplace, where the company can receive a higher commission. Newegg also ceased
selling low margin video game console categories and applied a minimum margin policy to components, storage, and memory products.
Selling, general and administrative expenses
As of June 30, 2020,
SG&A expenses decreased from $115.5 million in 2019 to $107.1 million in 2020, which mainly resulted from (i) a decrease in
personnel expenses from $53.4 million in 2019 to $47.1 million in 2020, and (ii) a decrease in advertising and marketing expenses
from $15.3 million in 2019 to $11.7 million in 2020, which was due to more effective control over marketing and branding efforts.
These decreases were partially offset by (i) an increase in credit card charges from $19.1 million in 2019 to $22.0 million in
2020, which is directly related to the increase in net sales in 2020.
Interest income and expense
For the six months ended June 30, 2020, interest income increased
from $0.2 million in 2019 to $0.6 million in 2020. This increase was primarily driven by an increase of $0.4 million in interest
income on its loan to an affiliate.
Interest expense decreased
from $2.0 million for the six months ended June 30, 2019 to $0.4 million for the six months ended June 30, 2020, which was generally
due to a decrease in the average outstanding debt balance in 2020, as compared to that of 2019.
Other income, net
For the six months ended June 30, 2020, Newegg recorded other
income, net of $2.8 million, compared to other income, net of $3.5 million for the six months ended June 30, 2019. This decrease
was mainly due to the insurance proceeds of $0.9 million received in 2019 from the fire loss in one of Newegg’s warehouses
in the U.S.
Gain from sale of and
equity income from equity method investments
Newegg did not record
an equity income from equity method investments for the six months ended June 30, 2020. For the six months ended June 30, 2019,
Newegg recorded a gain on equity method investment of $24.1 million. This gain was mainly due to a gain on the sale of equity method
investment in Mountain Capital.
Provision for income taxes
Newegg’s provision
for income taxes decreased from $4.4 million for the six months ended June 30, 2019, to $1.8 million for the six months ended June
30, 2020. The decrease in its provision for income taxes was mainly due to the expense of withholding tax in first half of 2019
associated with the sale of its investment in One97 through Mountain Capital.
Net Income
As of June 30, 2020,
Newegg recorded a net income of $18.9 million in 2020, as compared to a net loss of $15.5 million for the same period in 2019.
The increase in net income is primarily driven by a growth in its net sales, improvement in gross margin, and improvement in selling,
general, and administrative expenses in 2020 compared to 2019.
Year
Ended December 31, 2019 Compared to Year Ended December 31, 2018
Net
sales
Net sales decreased by 24.2%, from $2,022.4 million in 2018
to $1,533.9 million in 2019, which was mainly due to a decline in the GMV from its U.S.-focused direct sales platforms from $1,745.3
million in 2018 to $1,293.5 million in 2019. Such decline in GMV was also due to the reduced price competitiveness of its product
offerings as Newegg expanded the collection of sales tax in an increasing number of U.S. states in 2019. As of December 31, 2019,
Newegg collected sales tax in 42 states whereas as of December 31, 2018 Newegg collected sales tax in 25 states.
The decline in the
GMV from its U.S.-focused platforms was primarily due to (i) softening demand in computer components; (ii) increased import tariffs
that resulted in price increases; and (iii) shortages in supply, particularly in CPU and VGA graphic cards.
The increase in the
GMV contribution by the Newegg Marketplace to the total GMV was mainly due to (i) an increase in the amount of GMV from the Newegg
Marketplace on its U.S.-focused platforms from $441.4 million in 2018 to $460.5 million in 2019, reflective of its strategic focus
in growing its Marketplace operations and adding new sellers to expand the total product offerings on its platforms; and (ii)
a partial shift in orders from the direct sales model to the Newegg Marketplace model.
Cost
of Sales & Gross profit
From
2018 to 2019, Newegg’s cost of sales decreased by 24.6% from $1,816.8 million to $1,369.1 million, generally reflective of the decline
in its net sales. During the same period, its gross profit decreased by 19.8% from $205.6 million to $164.9 million.
Newegg’s profit
margin increased from 10.2% in 2018 to 10.7% in 2019, primarily due to a strategy change where the company focused on selling
high margin products such as desktop PCs and gaming notebooks. Newegg also moved over its low margin products, such as TVs, from
its direct sale business to marketplace, where the company can receive a higher commission. Newegg also ceased selling low margin
video game console categories and applied a minimum margin policy to components, storage, and memory products.
Selling,
general and administrative expenses
SG&A expenses
decreased from $247.2 million in 2018 to $229.2 million in 2019, which mainly resulted from (i) a decrease in advertising and
marketing expenses from $34.8 million in 2018 to $25.8 million in 2019, which was due to more effective control over marketing
and branding efforts; (ii) a decrease in credit card fees from $44.2 million in 2018 to $37.6 million in 2019, which are directly
related to the decrease in sales; and (iii) a decrease in stock-based compensation from $3.9 million to $0.7 million due to an
adjustment made in 2018 as part of a repurchase of shares. These decreases were partially offset by an increase in bonus from
$1.6 million in 2018 to $5.6 million in 2019, primarily due to the profit sharing and bonus related to the sale of its equity
investment in Mountain Capital in 2019.
During
2019, Newegg entered into a sale leaseback transaction for one of its real estate properties in United Sates. Newegg sold the
property for a gross proceed of $38.5 million, and recognized a gain of $28.8 million from the transaction, which is included
as other operating income in its consolidated statement of operations. The Company concurrently leased back the property from
the buyer under a lease agreement for ten years, resulting in ROU lease asset of $14.1 million and a lease liability of $13.9
million as of the lease commencement date.
Interest
income and expense
Interest income decreased from $1.5 million in 2018 to $0.6
million in 2019. This decrease was primarily driven by a decrease of $0.9 million in interest income on its loans to affiliates,
resulting from significant amounts paid by such affiliate to it under these loans in 2019;
Interest
expense increased from $1.6 million in 2018 to $2.9 million in 2019, which was generally due to an increase in the average outstanding
debt balance in 2019, as compared to that of 2018. In 2018, Newegg entered into a number of credit agreements and a long-term
revolving loan agreement with certain financial institutions; see “—Liquidity and Capital Resources —Cash flows
and working capital” and “Contractual Obligation” for more details of these agreements.
Other
income, net
Other
income, net was $4.2 million in 2019, compared to Other income,
net of $1.6 million in 2018. In 2019, its Other income
mainly consisted of insurance proceeds of approximately $2.0 million primarily related to the fire loss in one of
Newegg’s warehouses in the U.S., property rental income of $1.2 million from one of its idle warehouses in China, and
government subsidies of an insignificant amount, while Newegg recorded Other income,
net of $1.6 million in 2018 mainly from property rental income of $1.0 million from one of its idle warehouses in China, and
government subsidies of an insignificant amount partially offset by other expense of $0.5 million.
Gain
from sale of and equity income from equity method investments
Newegg recorded a gain on equity method investment of $21.8
million in 2019, as compared to $9.6 million in 2018. This increase was mainly due to a gain on the sale of equity method investment
in Mountain Capital of $21.8 million. Mountain Capital sold a portion of its investment in One97 to various third-party buyers,
which resulted in disposal of all of Newegg’s investment in One97. The proceeds from the sale of the investment were distributed
to Newegg in 2019. In 2018, Newegg accounted for the Mountain Capital investment under the equity method, and recognized a gain
on this equity method investment of $9.6 million.
Provision
for income taxes
Newegg’s
provision for income taxes increased significantly from $1.6 million in 2018 to $4.6 million in 2019. The increase in its provision
for income taxes was mainly due to the expense of withholding tax since Newegg was generating losses and may not be able to use
the tax credit. The tax withholding is for the gain from the sale of its investment in One 97 through Mountain Capital and equity
income from equity method investments.
Net
Loss
As
a result of the foregoing, Newegg recorded a net loss of $17.0 million in 2019, as compared to a net loss of $33.6 million in
2018.
Year
Ended December 31, 2018 Compared to Year Ended December 31, 2017
Net
sales
Net sales
decreased by 6.3% from $2,158.1 million in 2017 to $2,022.4 million in 2018, which was mainly due to (i) a decline in the GMV
from its U.S.-focused direct sales platforms from $1,900.1 million in 2017 to $1,745.3 million in 2018; (ii) partially offset
by an increase in the contribution by the Newegg Marketplace to the total United States GMV from 17.2% in 2017 to 20.2% in
2018 that provided an increase of $5.7 million in Net Sales; and (iii) partially offset by an increase in GMV generated
from its internationally-focused platforms from $183.1 million in 2017 to $216.4 million in 2018.
As discussed in “—Factors
Affecting Newegg’s Results of Operations—Expansion of Newegg Marketplace,” due to the difference in revenue recognition
model, an increase in the GMV contribution from Newegg Marketplace versus direct sales tends to have a negative impact on its net
sales. Such decline in GMV was also due to the reduced price competitiveness of its product offerings as Newegg began to collect
sales tax in an increasing number of states in 2018. As of December 31, 2018, Newegg collected sales tax in 25 states whereas as
of December 31, 2017 Newegg collected sales tax in only five states.
The decline in the GMV from its U.S.-focused direct sales platforms
was primarily due to (i) a softening of demand for graphic cards and a shortage in CPUs that resulted in a $51.6 million decline
in GMV for these two categories, which historically accounted for a significant portion of its sales.
The increase in the
GMV contribution by the Newegg Marketplace to the total GMV was mainly due to (i) an increase in the amount of GMV from the Newegg
Marketplace on its U.S.-focused platforms from $393.5 million in 2017 to $441.4 million in 2018 or an increase of $5.7 million
in Net Sales, reflective of its strategic focus in growing its Marketplace operations and adding new sellers to expand the total
product offerings in its platforms; and (ii) a partial shift in orders from the direct sales model to the Newegg Marketplace model.
The
increase in GMV generated from its internationally-focused platforms was driven by its increased international marketing and branding
initiatives. In November 2017, Newegg launched its Global 50 initiative, a sales and marketing campaign designed to increase
its shipment destinations to up to 50 countries and regions globally and to increase its brand awareness and its ability to offer
dedicated local currency pricing in those markets. The Global 50 initiative had its first full year of operations in 2018,
expanding from 46 countries to 50 by the end of 2018, which significantly boosted the growth in the GMV from internationally-focused
platforms. In 2018, Newegg achieved GMV of $38.0 million attributable to its Global 50 initiative, as compared to $13.9
million in 2017. The remaining increase in international net sales is driven by growth in Canada, with GMV from Canada growing
from $169.2 million in 2017 to $178.4 million in 2018, as the company continued growing market share in the country.
Cost
of Sales & Gross profit
From 2017 to 2018,
Newegg’s cost of sales decreased by 5.7% from $1,926.0 million to $1,816.8 million, generally reflective of the decline in
its net sales. During the same period, its gross profit decreased by 11.4% from $232.1 million to $205.6 million.
Newegg’s profit
margin decreased from 10.8% in 2017 to 10.2% in 2018, primarily due to a decrease in the sales of high-margin products in 2018
as compared to 2017. In 2017, driven by price spikes of crypto currencies, Newegg had a significant increase in the sales of high-margin
crypto miners and other crypto related products, including graphic cards, motherboards and CPUs, in the fourth quarter of 2017,
which significantly improved its profit margin on a full year basis. The decrease in its profit margin between 2017 and 2018 was
also due to its increased sales with promotional pricing to offset the impact of the softening demand for IT/CE products in 2018
and increased competition for market share from competitors. In addition, freight margin declined, as Newegg moved towards more
free shipping and faster delivery to customers to match its competition. Freight margin contributed 30 basis points to the decrease
in margins, with product mix contributing 60 basis points, partially offset by 30 basis points of improvement from increased proportion
of marketplace sales.
Selling,
general and administrative expenses
SG&A expenses increased
slightly from $246.1 million in 2017 to $247.2 million 2018, which mainly came from (i) an increase in salary and other compensation
costs from $96.6 million in 2017 to $103.5 million in 2018, mainly driven by increased headcount to support Newegg’s initiatives
to grow its B2B business and marketplace operations; and (ii) an increase in other expenses from $55.5 million in 2017 to $54.5
million in 2018, primarily due to a $2.2 million lease closure liability recorded as a result of the closure of one of its warehouses.
The number of Newegg’s employees increased from 2,308 as of December 31, 2017 to 2,476 as of December 31, 2018. These increases
were partially offset by (i) a decrease in advertising and marketing expenses from $38.0 million in 2017 to $34.8 million in 2018,
which was due to more effective control over marketing and branding efforts; and (ii) a decrease in credit card fees from $45.4
million in 2017 to $44.2 million in 2018 primarily due to realized cost savings from negotiations with payment service providers
and a decrease in GMV.
Although
SG&A expenses remained generally flat between 2017 and 2018, Newegg’s SG&A expense as a percentage of net sales
increased from 11.4% in 2017 to 12.2% in 2018, primarily due to the decrease in net sales and the fixed nature of the majority
of its SG&A expenses.
Interest
income and expense
Interest
income decreased from $1.8 million in 2017 to $1.5 million in 2018. This decrease was primarily driven by (i) a decrease in the
interest income on Newegg’s loans to affiliates, resulting from significant amounts paid by such affiliates to it under
these loans in 2018; and, (ii) to a lesser extent, a decrease in the interest income generated from cash and cash equivalents
invested in money market accounts.
Interest
expense increased from $1.1 million in 2017 to $1.6 million in 2018, which was generally due to (i) an increase in the average
outstanding debt balance in 2018, as compared to that of 2017; and (ii) an increase in its weighted average interest rate during
the same period. In 2018, Newegg entered into a number of credit agreements and a long-term revolving loan agreement with certain
financial institutions; see “—Liquidity and Capital Resources —Cash flows and working capital” and “Contractual
Obligation” for more details of these agreements.
Other
income, net
Other income, net
was $1.6 million in 2018, compared to $1.2 million in 2017. In 2018, its Other income mainly consisted of property rental
income of $1.0 million from one of its idle warehouses in China, and government subsidies of an insignificant amount partially
offset by other expenses, totaling $1.6 million, while Newegg recorded Other income, net of $1.3 million in 2017 from business
interruption insurance recovery in connection with several instances of distributed denial-of-service attacks that Newegg experienced
in November 2015.
Gain
from sale of and equity income from equity method investments
Newegg recorded a gain on equity method investment of U$9.6
million in 2018, as compared to $0.2 million in 2017. This increase was mainly due to an increase in the value of its investment
in Mountain Capital, which in turn was driven by the performance of One97 in 2018.
Provision
for income taxes
Newegg’s
provision for income taxes increased from $0.2 million in 2017 to $1.6 million in 2018. The increase in its provision for income
taxes was mainly due to the change of the valuation allowance Newegg recorded against the net deferred tax assets.
Net
Loss
As
a result of the foregoing, Newegg recorded a net loss of $33.6 million in 2018, as compared to a net loss of $12.0 million in
2017.
Non-GAAP
Measures
Newegg
has included GMV and Adjusted EBITDA, non-GAAP financial measures, in this prospectus. Newegg believes that these are key measures
used by its management and board of directors to evaluate its operating performance, generate future operating plans, and make
strategic decisions regarding the allocation of capital.
GMV
GMV is the total dollar
value of products sold on Newegg’s websites, directly to customers and by its Marketplace sellers through Newegg Marketplace,
net of returns, discounts, taxes, and cancellations, and excluding the following: (i) sales by Newegg’s Asia subsidiaries,
(ii) service revenues, and (iii) sales of Rosewill and Nutrend products made through third party platforms. It helps Newegg assess
and analyze changes in revenues, and if reviewed in conjunction with net sales and other GAAP financial measures, it can provide
more information in evaluating Newegg’s current performance and in assessing its future performance. See “Newegg’s
Business Model.”
|
|
For the Six Months Ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in millions)
|
|
Net Sales
|
|
$
|
862.70
|
|
|
$
|
797.4
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
GMV - Marketplace
|
|
|
335.0
|
|
|
|
238.7
|
|
Marketplace Commission
|
|
|
(33.5
|
)
|
|
|
(21.0
|
)
|
Deferred Revenue
|
|
|
8.6
|
|
|
|
(12.2
|
)
|
Service Revenue
|
|
|
(17.0
|
)
|
|
|
(5.5
|
)
|
Asia Net Sales
|
|
|
(0.0
|
)
|
|
|
(2.5
|
)
|
Rosewill and Nutrend sales through third party platforms
|
|
|
(17.1
|
)
|
|
|
(15.0
|
)
|
Other
|
|
|
4.0
|
|
|
|
(0.8
|
)
|
GMV
|
|
$
|
1,142.6
|
|
|
$
|
979.1
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
(in millions)
|
|
|
|
|
Net Sales
|
|
$
|
1,533.9
|
|
|
$
|
2,022.4
|
|
|
$
|
2,158.1
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
GMV - Marketplace
|
|
|
495.2
|
|
|
|
472.1
|
|
|
|
412.8
|
|
Marketplace Commission
|
|
|
(46.0
|
)
|
|
|
(43.2
|
)
|
|
|
(37.2
|
)
|
Deferred Revenue
|
|
|
(6.5
|
)
|
|
|
4.5
|
|
|
|
4.8
|
|
Service Revenue
|
|
|
(11.2
|
)
|
|
|
(13.0
|
)
|
|
|
(16.3
|
)
|
Asia Net Sales
|
|
|
(3.9
|
)
|
|
|
(21.7
|
)
|
|
|
(35.9
|
)
|
Nutrend and Rosewill sales through third party platforms
|
|
|
(31.1
|
)
|
|
|
(29.8
|
)
|
|
|
(25.5
|
)
|
Other
|
|
|
2.9
|
|
|
|
11.6
|
|
|
|
16.0
|
|
GMV
|
|
$
|
1,933.4
|
|
|
$
|
2,403.0
|
|
|
$
|
2,476.7
|
|
Adjusted
EBITDA
Adjusted
EBITDA is a financial measure that includes the removal of various one-time, irregular, and non-recurring items from EBITDA. Newegg
believes that exclusion of certain expenses in calculating Adjusted EBITDA facilitates operating performance comparisons on a
period-to-period basis and excludes items that Newegg does not consider to be indicative of its core operating performance. Accordingly,
Newegg believes that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating its operating
results in the same manner as its management and board of directors.
Adjusted
EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of its
results as reported under GAAP. Some of these limitations are:
|
●
|
although
depreciation and amortization are non-cash charges, the assets being depreciated and
amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect
cash capital expenditure requirements for such replacements or for new capital expenditure
requirements;
|
|
●
|
Adjusted
EBITDA does not reflect changes in, or cash requirements for, its working capital needs;
|
|
●
|
Adjusted
EBITDA does not consider the potentially dilutive impact of stock-based compensation;
|
|
●
|
Adjusted
EBITDA does not reflect tax payments that may represent a reduction in cash available
to us; and
|
|
●
|
Other
companies, including companies in its industry, may calculate Adjusted EBITDA differently,
which reduces its usefulness as a comparative measure.
|
Because
of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash
flow metrics, operating profit and its other GAAP results.
The
following table reflects the reconciliation of net loss to Adjusted EBITDA for each of the periods indicated.
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in millions)
|
|
Net income (loss)
|
|
$
|
18.9
|
|
|
$
|
(15.5
|
)
|
Adjustments:
|
|
|
|
|
|
|
|
|
Stock-based compensation expenses
|
|
|
(0.0
|
|
|
|
0.4
|
|
Interest (income) expense, Net
|
|
|
(0.2
|
)
|
|
|
1.8
|
|
Income tax provision
|
|
|
1.8
|
|
|
|
4.4
|
|
Depreciation and amortization
|
|
|
4.5
|
|
|
|
5.4
|
|
Gain from sale of and equity
income from equity method investments
|
|
|
-
|
|
|
|
(24.1
|
)
|
Adjusted EBITDA
|
|
$
|
25.0
|
|
|
$
|
(27.6
|
)
|
|
|
For the Year Ended December
31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
(in millions)
|
|
Net loss
|
|
$
|
(17.0
|
)
|
|
$
|
(33.6
|
)
|
|
$
|
(12.0
|
)
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expenses
|
|
|
0.7
|
|
|
|
3.9
|
|
|
|
3.9
|
|
Interest (income) expense, Net
|
|
|
2.4
|
|
|
|
0.1
|
|
|
|
(0.7
|
)
|
Income tax provision
|
|
|
4.6
|
|
|
|
1.6
|
|
|
|
0.2
|
|
Depreciation and amortization
|
|
|
10.7
|
|
|
|
10.2
|
|
|
|
10.6
|
|
Gain from sale of and equity income from equity
method investments
|
|
|
(21.8
|
)
|
|
|
(9.6
|
)
|
|
|
(0.2
|
)
|
Gain from sale of real estate
property
|
|
|
(28.8
|
)
|
|
|
-
|
|
|
|
-
|
|
Adjusted EBITDA
|
|
$
|
(49.2
|
)
|
|
$
|
(27.4
|
)
|
|
$
|
1.8
|
|
Liquidity
and Capital Resources
Cash
flows and working capital
Newegg
has historically funded its operations through existing working capital, credit facilities, bank loans, return from investing
activities, and equity financings. See Note 7 and 8 to its consolidated financial statements included elsewhere in this prospectus
for more information about the line of credit and long-term debt that Newegg obtains from financial institutions and Notes 11
and 12 to its consolidated financial statements included elsewhere in this prospectus for more information about its equity financings.
Newegg’s cash
and cash equivalents consist primarily of cash on deposit, certificates of deposit, and money market accounts. Cash equivalents
are all highly liquid investments with original maturities of three months or less. Amounts receivable from credit card processors
are also considered cash equivalents as they are both short term and highly liquid in nature, and are typically converted to cash
within three business days. Amounts due to it from credit card processors that are classified as cash and cash equivalents totaled
13.2 million and $9.2 million at June 30, 2020 and December 31, 2019, respectively. Newegg anticipates that its existing cash and
funds generated from operations will be sufficient to meet its working capital needs and expected capital expenditures for at least
12 months from the date of the filing of this prospectus. Newegg’s cash and cash equivalents are primarily denominated in
U.S. dollars.
Newegg historically
experiences higher sales in the fourth quarter due to the holiday season. In anticipation of such higher sales, Newegg typically
begins building up its inventory levels in the late third quarter. Such inventory build-up may require it to expend cash faster
than Newegg generates by its operations during these periods. Also as a result of this inventory build-up and faster inventory
turnover during the fourth quarter, its accounts payable are typically at their highest levels at year-end, as compared to the
first, second and third quarters when sales are lower.
Newegg
intends to finance its future working capital requirements and capital expenditures from cash generated from operating activities
and funds raised from financing activities, including the net proceeds Newegg will receive from this Offering, and return from
investing activities. Newegg’s future capital requirements may, however, vary materially from those now planned or anticipated.
Changes in its operating plans, lower than anticipated net sales, increased expenses or other events, including those described
in “Risk Factors,” may cause it to seek additional debt or equity financing in the future. If its existing cash is
insufficient to meet its requirements, Newegg may seek to issue debt or equity securities or obtain additional credit facilities.
Financing may not be available on acceptable terms, on a timely basis, or at all, and its failure to raise adequate capital when
needed could negatively impact its growth plans and its financial condition and results of operations. Issuance of additional
equity securities, including convertible debt securities, would dilute its earnings per share. The incurrence of debt would divert
cash for working capital and capital expenditures to service debt obligations and could result in operating and financial covenants
that restrict its operations and its ability to pay dividends to its shareholders. If Newegg is unable to obtain additional equity
or debt financing as required, its business operations and prospects may suffer.
Historical
Cash Flows
The following table
sets forth its selected consolidated cash flow data for the six months ended June 30, 2020 and 2019, and the years ended December
31, 2017, 2018 and 2019.
|
|
For the Six Months Ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Summary Consolidated Cash Flow Data:
|
|
(in millions)
|
|
Net cash provided by (used in) operating activities
|
|
$
|
64.9
|
|
|
$
|
(46.2
|
)
|
Net cash provided by (used in) investing activities
|
|
|
(2.5
|
)
|
|
|
54.8
|
|
Net cash provided by (used in) financing activities
|
|
|
(0.1
|
)
|
|
|
7.4
|
|
Foreign currency effect on cash, cash equivalents and restricted cash
|
|
|
(0.1
|
)
|
|
|
(0.9
|
)
|
Net increase in cash and cash equivalents
|
|
|
62.2
|
|
|
|
15.1
|
|
Cash, cash equivalents and restricted cash at beginning of the year
|
|
|
80.5
|
|
|
|
56.7
|
|
Cash, cash equivalents and restricted cash at end of the year
|
|
|
142.7
|
|
|
|
71.8
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Summary Consolidated Cash Flow Data:
|
|
(in millions)
|
|
Net cash (used in) operating activities
|
|
$
|
(10.1
|
)
|
|
$
|
(62.9
|
)
|
|
$
|
(21.2
|
)
|
Net cash provided by (used in) investing
activities
|
|
|
84.7
|
|
|
|
(16.0
|
)
|
|
|
(55.1
|
)
|
Net cash provided by (used in) financing
activities
|
|
|
(49.7
|
)
|
|
|
2.0
|
|
|
|
144.0
|
|
Foreign currency effect on cash, cash equivalents and restricted cash
|
|
|
(1.1
|
)
|
|
|
(0.8
|
)
|
|
|
(1.1
|
)
|
Net increase (decrease) in cash and cash
equivalents
|
|
|
23.8
|
|
|
|
(77.7
|
)
|
|
|
66.6
|
|
Cash, cash equivalents and restricted cash at beginning of the year
|
|
|
56.7
|
|
|
|
134.4
|
|
|
|
67.8
|
|
Cash, cash equivalents and restricted cash at end of the year
|
|
|
80.5
|
|
|
|
56.7
|
|
|
|
134.4
|
|
Operating
activities
Net cash provided by operating
activities was $64.9 million for the six months ended June 30, 2020. The adjustments for non-cash expenses are primarily comprised
of (i) $4.5 million of depreciation and amortization that was associated with property and equipment; and (ii) $1.0 million of
provision for obsolete and excess inventory. The changes in operating assets and liabilities represented a $39.3 million increase
in cash provided by (i) a decrease in accounts receivable of $15.5 million; (ii) an increase in accounts payable of $56.0 million;
(iii) a decrease in accrued liabilities and other liabilities of $2.9 million; and (iv) an increase in deferred revenue of $11.1
million, partially offset by (i) an increase in inventory of $33.9 million; and (ii) an increase in prepaid expenses and other
assets of $6.4 million.
Net cash used in operating activities was $10.1 million in 2019.
Net loss was $17.0 million in 2019. The adjustments for non-cash expenses are primarily comprised of (i) $10.7 million of depreciation
and amortization that was associated with property and equipment; (ii) $4.3 million of provision for obsolete and excess inventory;
and (iii) $21.8 million of gain on equity method investment. The changes in operating assets and liabilities represented a $42.8
million cash provided by (i) a decrease in accounts receivable and inventory of $33.1 million and $110.1 million, respectively;
and (ii) an increase in accrued liabilities and other liabilities of $8.0 million, partially offset by (i) a decrease in accounts
payable of $100.7 million, and (ii) a decrease in deferred revenue of $11.2 million.
Net
cash used in operating activities was $62.9 million in 2018. Net cash used in operating activities consists of net loss as adjusted
for non-cash expenses and changes in operating assets and liabilities. Net loss was $33.6 million in 2018. The adjustments for
non-cash expenses are primarily comprised of (i) $10.2 million of depreciation and amortization associated with property and equipment;
(ii) $9.6 million of gain on equity method investment; and (iii) $3.9 million of stock-based compensation. Changes in operating
assets and liabilities represented a $39.2 million use of cash, primarily comprised of (i) a decrease in accounts payable of $18.5
million; (ii) an increase in inventories of $6.3 million; and (iii) a decrease in the accrued liabilities and other liabilities
of $5.9 million, partially offset by a decrease in prepaid expenses and other assets of $2.2 million.
Net
cash used in operating activities was $21.2 million in 2017. Net loss was $12.0 million in 2017. The adjustments for non-cash
expenses are primarily comprised of (i) $10.6 million of depreciation and amortization that was associated with property and equipment;
(ii) $4.0 million of stock-based compensation; and (iii) $3.6 million of provision for obsolete and excess inventory. Changes
in operating assets and liabilities represented a $28.5 million use of cash, primarily comprised of (i) a decrease in accounts
payable of $25.9 million; and (ii) an increase in inventories of $16.9 million, partially offset by (i) an increase in deferred
revenue of $10.1 million; and (ii) an increase in accrued liabilities and other liabilities of $4.9 million.
Investing
activities
Net cash used in investing
activities was $2.5 million for the six months ended June 30, 2020, which was primarily attributable to the payments made to acquire
property and equipment of $2.6 million.
Net cash provided by
investing activities was $84.7 million in 2019, which was mainly due to (i) proceeds on disposal of a warehouse of $38.6
million, and (ii) proceeds on sales of equity method investment of $77.5 million, partially offset by (i) payments of $10.3 million
made to acquire property and equipment; (ii) equity investments of $7 million; and (iii) loans to an affiliate of $15 million.
See “Related Party Transactions-Other Related Party Transactions.”
Net cash used in
investing activities was $16.0 million in 2018, which was mainly attributable to (i) equity investments of $58.0 million in
connection with its investment in Mountain Capital and Bitmain (ii) loans to an affiliate of $20.0 million; and (iii)
payments of $8.0 million made to acquire property and equipment, primarily for ongoing maintenance and upkeep of technology
infrastructure, partially offset by loan repayments from an affiliate of $70.0 million. Newegg entered into several term
loan agreements with one of its affiliates; as of December 31, 2018, there was no outstanding principal balance receivable
from affiliate. See “Related Party Transactions—Other Related Party Transactions.”
Net cash used in investing activities was $55.1 million in 2017,
which was primarily attributable to (i) loans to an affiliate of $62.6 million; and (ii) payments made to acquire property and
equipment of $5.4 million, partially offset by loan repayments from an affiliate of $12.0 million. In April 2017, Newegg loaned
$12.0 million to one of its affiliates under a term loan agreement with a maturity date of April 18, 2017. In June 2017, Newegg
loaned $50.0 million to such affiliate under a term loan agreement with a maturity date of June 15, 2018. See “Related Party
Transactions—Other Related Party Transactions.”
Financing
activities
Net cash used in financing
activities was $0.1 million for the six months ended June 30, 2020, due to the repayment of its long-term debt.
Net
cash used in financing activities was $49.7 million in 2019, which was mainly due to (i) net repayment under its line of credit
of $36.4 million; and (ii) repayment of its long-term debt of $13.3 million.
Net
cash provided by financing activities was $2.0 million in 2018, which was mainly due to (i) borrowings under its line of credit
of $123.3 million; and (ii) borrowings of long-term debt of $13.0 million, partially offset by (i) repayments under its line of
credit of $88.7 million; and (ii) payment for share repurchases of $45.1 million.
Net
cash provided by financing activities was $144.0 million in 2017, which was mainly attributable to (i) net proceeds from issuance
of preferred stock of $168.6 million; and (ii) borrowings under its line of credit of $63.3 million, partially offset by (i) repayments
under its line of credit of $67.5 million; and (ii) repayments of long-term debt of $17.7 million.
Capital
Expenditures
Newegg’s capital
expenditures are incurred primarily in connection with purchases of property and equipment and leasehold improvements. Newegg’s
capital expenditures were $5.4 million, $8.0 million, $10.3 million, and $2.6 million in 2017, 2018, 2019, and for the six months
ended June 30, 2020, respectively. Newegg intends to fund its future capital expenditures with its existing cash balance and proceeds
from this Offering.
Credit
Agreements
In July 2018, Newegg
entered into a credit agreement with East West Bank and PNC Bank that provided a revolving credit facility of up to $100.0 million
with a maturity date of July 27, 2021. Prior to July 27, 2020 and subject to certain terms and conditions, the Maximum Revolving
Advance Amount, as defined in the loan agreement, could be increased up to $140.0 million. The revolving credit facility includes
a letter of credit sublimit of $25.0 million, which can be used to issue standby and trade letters of credit, and a $10.0 million
sublimit for swingline loans. Advances from this line of credit will be subject to interest at LIBOR plus the Applicable Margin,
as defined in the loan agreement, or the Alternate Base Rate (to be defined as the highest of the financial institution’s
prime rate, the Overnight Bank Funding Rate plus 0.50%, or the daily LIBOR plus 1.0%) plus the Applicable Margin. For LIBOR loans,
Newegg may select interest periods of one, two, or three months. Interest on LIBOR loans shall be payable at the end of the selected
interest period. Interest on Alternate Base Rate loans is payable monthly. The line of credit is guaranteed by certain of Newegg’s
U.S. subsidiaries and is collateralized by certain of the assets of Newegg. Such assets include all Receivables, equipment and
fixtures, general intangibles, Inventory, Subsidiary Stock, securities, investment property, and financial assets, contract rights,
and ledger sheets, as defined in the loan agreement. To maintain availability of funds under the loan agreement, Newegg will pay
on a quarterly basis, an unused commitment fee of either 0.25% of the difference between the amount available and the amount outstanding
under the facility if the difference is less than one-third of the Maximum Revolving Advance Amount or 0.40% of the difference
between the amount available and the amount outstanding under the facility if the difference is equal to or greater than one-third
of the Maximum Revolving Advance Amount. As of December 31, 2019, there was no balance outstanding under this line of credit.
The credit facility contains customary covenants, including covenants that limit or restrict Newegg’s ability to incur capital
expenditures and lease payments, make certain investments, enter into certain related-party transactions, and pay dividends. The
credit facility also requires Newegg to maintain certain minimum financial ratios and maintain an operation banking relationship
with the financial institutions. As of December 31, 2020, Newegg was in compliance with all financial covenants related to the
line of credit.
Contractual
Obligations
The following table
sets forth its contractual obligations and commitments as of June 30, 2020.
|
|
Payments Due by Years Ending
|
|
|
|
Total
|
|
|
Less than 1 year
|
|
|
1-3 years
|
|
|
3-5 year
|
|
|
More than 5 years
|
|
|
|
(in thousand)
|
|
Long-term debt payment
|
|
$
|
2,422
|
|
|
$
|
270
|
|
|
$
|
552
|
|
|
$
|
573
|
|
|
$
|
1,027
|
|
Operating Leases
|
|
|
41,363
|
|
|
|
9,977
|
|
|
|
14,837
|
|
|
|
6,499
|
|
|
|
10,050
|
|
Total contractual obligations
|
|
$
|
43,785
|
|
|
$
|
10,247
|
|
|
$
|
15,389
|
|
|
$
|
7,072
|
|
|
$
|
11,077
|
|
Off-Balance
Sheet Commitments and Arrangements
Newegg
does not have any off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or contingent interests
in transferred assets, or any obligation arising out of a material variable interest in an unconsolidated entity. Newegg does
not have any majority-owned subsidiaries that are not included in its consolidated financial statements.
Quantitative
and Qualitative Disclosure about Market Risk
Newegg does not use
financial instruments for speculative trading purposes, and does not hold any derivative financial instruments that could expose
it to significant market risk. Newegg’s primary market risk exposures are changes in interest rates and foreign currency
fluctuations.
Interest
rate risk
Newegg’s main
interest rate exposure relates to long-term borrowings that Newegg obtains from banks and financial institutions to meet its working
capital expenditure requirements. Newegg also has interest-bearing assets, including cash and cash equivalents, restricted cash
and loans to affiliates. Newegg manages its interest rate exposure with a focus on reducing its overall cost of debt and exposure
to changes in interest rates. As of June 30, 2020 and as of December 31, 2019, Newegg had outstanding long-term borrowings in the
aggregate amount of $2.4 million and $2.5 million, respectively, with the majority of its long-term borrowings having floating
interest rates.
Newegg
has not used derivative financial instruments to hedge the interest rate risk. Newegg has not been exposed to material risks due
to changes in market interest rates. However, Newegg cannot provide assurance that Newegg will not be exposed to material risks
due to changes in market interest rate in the future.
Foreign
currency risk
Newegg has currency
fluctuation exposure arising from both sales and purchases denominated in foreign currencies. Significant changes in exchange rates
between foreign currencies in which Newegg transacts business and the U.S. dollar may adversely affect its results of operations
and financial condition. Historically, Newegg has not entered into any hedging activities, and, to the extent that Newegg continues
not to do so in the future, Newegg may be vulnerable to the effects of currency exchange-rate fluctuations.
Newegg expects its
exposure to foreign currency risk will increase as Newegg increases its operations and sales in Canada and other countries and
regions. Although the effect of currency fluctuations on its financial statements has not been material in the past, there can
be no assurance that the effect of currency fluctuations will not be material in the future. For the years ended December 31, 2017,
2018, 2019, and for the six months ended June 30, 2020, Newegg recorded foreign exchange gain of $0.2 million, loss of $1.6 million,
loss of $0.5 million, and gain of $0.3 million, respectively. Based on the balance of its foreign-denominated cash and cash equivalents,
as of December 31, 2017, 2018, 2019, and June 30, 2020, an assumed 10% negative currency movement would not have a material impact.
To
date, Newegg has not entered into any hedging transactions in an effort to reduce its exposure to foreign currency exchange risk.
Inflation
risk
Newegg
does not believe that inflation has had a material effect on its business, financial condition or results of operations. Although
Newegg does not expect it to have such an impact in the near future, Newegg cannot assure you that its business will not be affected
by inflation in the future.
Related
Party Transactions
For
a description of its related party transactions, see “Related Party Transactions” as discussed in the notes to the
consolidated financial statements within this registration statement.
Critical
Accounting Policies, Judgments and Estimates
Newegg’s
consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States
of America. The preparation of its financial statements requires it to make estimates and assumptions that affect the reported
amounts of assets, liabilities, net sales, costs and expenses, as well as the disclosure of contingent assets and liabilities
and other related disclosures. Newegg bases its estimates on historical experience and on various other assumptions that Newegg
believes to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values
of its assets and liabilities that are not readily apparent from other sources. In many instances, Newegg could have reasonably
used different accounting estimates. Actual results could differ from those estimates, and Newegg includes any revisions to its
estimates in its results for the period in which the actual amounts become known.
Newegg
believes the critical accounting policies described below affect the more significant judgments and estimates used in the preparation
of its consolidated financial statements. Accordingly, these are the policies Newegg believes are the most critical to aid in
fully understanding and evaluating its historical consolidated financial condition and results of operations:
Revenue
recognition
Newegg
adopted Accounting Standards Update No. 2014-09 Revenue From Contracts with Customers (Topic 606) as of January 1, 2018. Revenue
recognition is evaluated through the following five step process:
|
1.
|
Identification
of the contract with a customer;
|
|
2.
|
Identification
of the performance obligations in the contract;
|
|
3.
|
Determination
of the transaction price;
|
|
4.
|
Allocation
of the transaction price to the performance obligations in the contract; and
|
|
5.
|
Recognition
of revenue when or as a performance obligation is satisfied.
|
Revenue
is recognized when control of a promised product or service transfers to a customer, in an amount that reflects the consideration
to which Newegg expects to be entitled in exchange for transferring those products or services. Revenue is recognized net of sales
taxes and discounts. Newegg primarily generates revenue through product sales on its platforms and through fees earned for facilitating
marketplace transactions and extended warranty sales on its platforms.
Newegg recognizes revenue
on product sales at a point in time to customers when control of the product passes to the customer upon delivery to the customer
or when service is provided. Newegg fulfills orders with its own inventory or with inventory sourced through its suppliers. The
vast majority of the Company’s product sales are fulfilled from its own inventory. The amount recognized in revenue represents
the expected consideration to be received in exchange for such goods or services. For orders fulfilled with inventory sourced through
its suppliers, and where the products are shipped directly by the supplier to its customer, Newegg evaluates the criteria outlined
in ASC 606-10-55, Principal versus Agent Considerations, in determining whether revenue should be recognized on a gross or net
basis. Newegg determined that it is the principal in these transactions as it controls the specific good before it is transferred
to the customer. Newegg is the entity responsible for fulfilling the promise to provide the specified good to the customer and
takes responsibility for the acceptability of the goods, assumes inventory risk before the specified good has been transferred
to the customer, has discretion in establishing the price, and selects the suppliers of products sold. Newegg accounts for product
sales under these arrangements on a gross basis upon receipt of the product by the customer. Product sales exceeded 95% of consolidated
net sales in each of the years ended December 31, 2017, 2018 and 2019. Product sales for the six months ended June 30, 2020 decreased
to 94% of consolidated sales as Newegg expands its D2C platform services.
Newegg generally requires
payment by credit card upon placement of an order, and to a limited extent, grants credit to business customers typically on a
30-day term. Shipping and handling is considered a fulfillment activity, as it takes place before the customer obtains control
of the goods. Amounts billed to customers for shipping and handling are included in net sales upon completion of the performance
obligation.
Newegg’s
product sales contracts include terms that could cause variability in the transaction price such as sales returns and credit card
chargebacks. As such, the transaction price for product sales includes estimates of variable consideration to the extent it is
probable that a significant reversal of revenue recognized will not occur. Sales are reported net of estimated returns and allowances
and credit card chargebacks, based on historical experience.
Newegg
also earns fees for facilitating marketplace transactions and extended warranty sales on its platforms. For marketplace transactions,
its websites host third-party sellers and the Company also provides the payment processing function. Newegg recognizes revenue
upon sale of products made available through its marketplace store. Newegg is not the principal in this arrangement and does not
control the specific goods sold to the customer. Newegg reports the net amount earned as commissions, which are determined using
a fixed percentage of the sales price or fixed reimbursement amount. Newegg also offers extended warranty programs for various
products on behalf of an unrelated third party. Newegg reports the net amount earned as revenue at the time of sale, as it is
not the principal in this arrangement and does not control the specific goods sold to the customer.
Newegg offers its customers
the opportunity to purchase goods and services on its website using deferred financing promotional programs provided by a third-party
financing company. These programs include an option to make no payments for a period of six, twelve, eighteen or twenty-four months.
The third-party financing company makes all decisions to extend credit to the customer under a separate agreement with the customer,
owns all such receivables from the customer, assumes all risk of collection, and has no recourse to it in the event the customer
does not pay. The third-party financing company pays Newegg for the purchase price on behalf of the customer, less certain transaction
fees. Accordingly, sales generated through these programs are not reflected in Newegg’s receivables once payment is received
from the third-party financing company. The transaction fee paid by it to the third-party financing company is recognized as a
reduction of revenue. These transaction fees for the years ended December 31, 2017, 2018 and 2019, and for the six months
ended June 30, 2020 were immaterial.
To
the extent that Newegg sells its products on third-party platforms, Newegg incurs incremental contract acquisition costs in the
form of sales commissions paid to the platforms. The commissions are generally determined based on the sales price and an agreed-upon
commission rate. Newegg elects the practical expedient under Accounting Standards Update No. 2014-09 Revenue From Contracts with
Customers (Topic 606) to recognize sales commission as an expense as incurred, as the amortization period of the asset that Newegg
otherwise would have recognized is less than one year.
Newegg has three
types of contractual liabilities: (1) amounts collected, or amounts invoiced and due, related to product sales where receipt of
the product by the customer has not yet occurred or revenue cannot be recognized. Such amounts are recorded in the consolidated
balance sheets as deferred revenue and are recognized when the applicable revenue recognition criteria have been satisfied. For
all of the product sales, Newegg ships a large volume of packages through multiple carriers. Actual delivery dates may not always
be available and as such, Newegg estimates delivery dates as needed based on historical data. (2) amounts collected for its now
discontinued Premier membership services, which were typically paid upfront for membership benefits over a 3-month, 6-month, or
12-month period, including free 3-day shipping, free return, rush processing and dedicated customers services. Such amounts were
initially recorded as deferred revenue and were recognized as revenue ratably over the subscription period. Newegg discontinued
its Premier membership services in 2019, resulting in no balance of deferred revenue related to this program as of December 31,
2019. The amount of deferred revenue related to the Premier membership services was immaterial as of December 31, 2018. (3) unredeemed
gift cards, which are initially recorded as deferred revenue and are recognized in the period they are redeemed. Subject to governmental
agencies’ escheat requirements, certain gift cards not expected to be redeemed, also known as “breakage”, are
recognized as revenue based on the historical redemption pattern. These gift cards breakage revenue for the six months ended June
30, 2020 and for the years ended December 31, 2019, 2018 and 2017 were immaterial.
Incentives
Earned from Vendors
Newegg
participates in various vendor incentive programs that include, but are not limited to, purchasing-based volume discounts, sales-based
volume incentives, marketing development funds, including for certain cooperative advertising, and price protection agreements.
Vendor incentives are recognized in the consolidated statements of operations as an offset to marketing and promotional expenses
to the extent that they represent reimbursement of advertising costs incurred by it on behalf of the vendors that are specific,
incremental, and identifiable. Reimbursements that are in excess of such costs and all other vendor incentive programs are accounted
for as a reduction of cost of sales, or if the related product inventory is still on hand at the reporting date, inventory is
reduced in the consolidated balance sheets.
Equity
Investments
Investments
are accounted for using the equity method if the investment provides Newegg with the ability to exercise significant influence,
but not control, over an investee. Significant influence is generally deemed to exist if Newegg has an ownership interest in the
voting stock of the investee between 20% and 50%, although other factors are considered in determining whether the equity method
is appropriate. Also, investment in limited partnerships of more than 3% to 5% are generally viewed as more than minor and are
accounted for using the equity method.
The
investments for which Newegg is not able to exercise significant influence over the investee and which do not have readily determinable
fair values were accounted for under the cost method prior to the adoption of ASU 2016-01 Financial Instruments-Overall (Subtopic
825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. Subsequent to the adoption of this standard
as of January 1, 2018, Newegg has elected the measurement alternative to measure such investments at cost, less any impairment,
plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment
of the same issuer.
Stock-based
Compensation Expense and Valuation of Shares of its Common Stock
The
measurement and recognition of compensation expense for all stock-based payment awards made to employees, consultants and directors,
including employee stock options and restricted stock, is based on estimated fair value of the awards on the date of grant.
The value of awards that are ultimately expected to vest is recognized as expense on a straight line basis over the requisite service
periods in the consolidated statements of operations.
Stock-based compensation
includes stock option awards issued under Newegg’s 2005 Incentive Award Plan and restricted stock issued under a Significant
Shareholder Incentive Plan, which was adopted in 2016. See “Management” for a summary of the key terms and conditions
of the Newegg’s 2005 Incentive Award Plan and the Significant Shareholder Incentive Plan.
Common
Stock Valuations
The
exercise prices of stock options granted were determined contemporaneously by Newegg’s Board of Directors, in conjunction
with an independent valuation firm, based on its best estimated fair value of the underlying Class A Common Stock as of the date
of each option grant, including but not limited to, the following factors: (i) the rights, preferences and privileges of its preferred
stock relative to the common stock; (ii) its performance and stage of development; (iii) the prices paid for its preferred stock
in recent issuances of its preferred stock; and (iv) the likelihood of achieving a liquidity event for the shares of common stock
underlying these stock options.
Valuations of the Class
A Common Stock were based on a combination of the income approach and the market approach, which were used to estimate its total
enterprise value. The income approach quantifies the present value of the future cash flows that management expects to achieve
from continuing operations. These future cash flows are discounted to their present values using a rate corresponding to its estimated
weighted average cost of capital. Newegg’s weighted average cost of capital is calculated by weighting the required return
on interest-bearing debt and common equity capital in proportion to their estimated percentages in its capital structure. The market
approach considers multiples of financial metrics based on acquisition values or quoted trading prices of comparable public companies.
An implied multiple of key financial metrics based on the trading and transaction values of publicly traded peers is applied to
its similar metrics in order to derive an indication of value. A marketability discount is then applied to reflect the fact that
its Class A Common Stock is not traded on a public exchange. The amount of the discount varies based on its management’s
expectation of effecting a public offering of its Class A Common Stock within the ensuing 12 months. The enterprise value indications
from the income approach and market approach were used to estimate the fair value of Newegg’s Class A Common Stock in the
context of its capital structure as of each valuation date. Each valuation was based on certain estimates and assumptions. If different
estimates and assumptions had been used, these valuations could have been different.
Preferred
Stock Valuations
Valuations of Newegg’s
Series A preferred stock and Series AA preferred stock were based on a combination of the income approach and market approach,
which were used to estimate its total enterprise value. The income approach quantifies the present value of the future cash flows
that management expects to achieve from continuing operations. These future cash flows are discounted to their present values using
a rate corresponding to its estimated weighted average cost of capital. Newegg’s weighted average cost of capital is calculated
by weighting the required return on interest-bearing debt and common equity capital in proportion to their estimated percentages
in its capital structure. The market approach considers multiples of financial metrics based on acquisition values or quoted trading
prices of comparable public companies. An implied multiple of key financial metrics based on the trading and transaction values
of publicly traded peers is applied to its similar metrics in order to derive an indication of value. A marketability discount
is then applied to reflect the fact that Newegg’s Series A preferred stock and Series AA preferred stock are not traded on
a public exchange. The enterprise value indications from the income approach and market approach were used to estimate the fair
value of its Series A preferred stock and Series AA preferred stock in the context of its capital structure as of each valuation
date. Each valuation was based on certain estimates and assumptions. If different estimates and assumptions had been used, these
valuations could have been different.
Recent
Accounting Pronouncements
For
detailed discussion on recent accounting pronouncements, see Note 2 to the consolidated financial statements of Newegg Inc. included
elsewhere in this prospectus.
OUR BUSINESS
Pursuant to
the Merger Agreement and the Disposition Agreement, upon consummation of the Restructure, LLIT will dispose its wholly owned subsidiary,
Lianluo Connection, and the Merger Sub will merge into Newegg, which will then be the wholly owned Subsidiary of the Company.
As a result, LLIT will no longer be engaged in the Medical Device Business. Instead, the business of Newegg will become the post-Restructure
issuer’s business. Below is the description of Newegg’s business, which will be the business of the post-Restructure
entity.
Overview
Newegg is a tech-focused e-commerce company in North America,
and ranked second after Best Buy as the global top electronics online marketplace according to Web Retailer’s report, as
measured by 32.4 million visits per month in 2019. Through Newegg.com, the company’s flagship B2C platform, and other online
platforms, it operates direct sales and marketplace models for IT computer components, consumer electronics (“CE”),
entertainment, smart home and gaming products and provides certain third party logistics services globally. Newegg has received
numerous awards and accolades for its services since its inception, among which the company was ranked No. 5 on Newsweek’s
2020 List of Best Online Shops – Consumer Electronics.
The Newegg Ecosystem
Newegg takes pride
in connecting customers to a wide and increasing selection of tech products and a massive pool of brands, sellers, suppliers,
manufacturers, distributors and third-party service providers. Founded in 2001, Newegg has developed a tech-focused e-commerce
ecosystem that enables all of its participants to discover, engage and transact with each other.
At the nexus of this
e-commerce ecosystem, Newegg takes stewardship in continuously growing it and delivering compelling value propositions to its participants
in the long run. On one hand, Newegg provides customers with access to vast, yet curated tech products sourced globally; on the
other hand, Newegg creates value for Newegg’s brand partners, Marketplace sellers and suppliers by connecting them to a wide
audience with life-time value. Additionally, Newegg’s platforms offer a comprehensive suite of e-commerce solutions, including
product listing, fulfillment, marketing, customer service and other value-added tools and services.
Key Ecosystem Participants
and How Newegg Create Value for Them
There are three key
participants of Newegg’s ecosystem: the customers, the Marketplace sellers, and the brand partners.
Customers
Newegg has
built a large, highly engaged and loyal customer base. As of December 31, 2020, Newegg had 4.7 million active customers
(defined as customers who purchased at least one item on Newegg’s platform in the past 12 months).
Newegg’s core
customers include both its business-to-consumer, or B2C, customers and Newegg’s business-to-business, or B2B, customers.
See “Business —Newegg’s Business Models” for more information about Newegg’s B2C and B2B businesses.
Newegg believes that
it offers the following compelling value propositions to Newegg’s customers:
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Wide
range of tech-focused products. With approximately 40.5 million SKUs and 1,748 categories as of December 31,
2020, Newegg is a truly one-stop shop for a vast selection of tech products, ranging from brand-name IT/CE products and in-house
brands of computer hardware to peripherals under its private labels. Newegg’s extensive product offerings enable it
to meet the diverse needs of a group of sophisticated customers, which is difficult for brick-and-mortar retailers to match
due to shelf space constraints.
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Easy
and enjoyable shopping experience.
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Content-rich,
user-friendly interface. Newegg’s platforms are user-friendly and easy to navigate, with features enabling customers
to easily discover new products and trends, such as intelligent product recommendations and curated, personalized content
supported by its data and analytics capabilities. Newegg also empowers customers to make informed purchasing decisions by
offering detailed product information, customer opinions, peer reviews, product tutorials and the opportunity to network with
other members of the Newegg community. Newegg has in-house video production capabilities that generate original content to
engage and inform customers, and Newegg continues to enhance such capabilities in order to produce more and better content.
Newegg’s platforms also provide an extensive portfolio of user-generated content, including over 4.58 million product
reviews and approximately 32,000 testimonials about people’s shopping experience with Newegg as of December 31, 2020.
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Flexible
payment options. Newegg accepts a variety of payment options and has sought to add
new payment methods to cater to the needs of its customers. Newegg also offers open terms
accounts for business and public sector customers. For example, in response to increasing
customer demand, Newegg introduced the Bitcoin payment solution in 2014 and Apple Pay
in 2016.
See also “Business—Payment.”
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Timely,
secure and reliable fulfillment. Leveraging its reliable logistics network and infrastructure, Newegg is able to maintain
a high level of shipping accuracy and reliability and timely delivery. See also “—Logistics and Fulfillment.”
As of December 31, 2020, Newegg achieved, for orders directly fulfilled by it, an over 99.8% average accuracy rate, an over
97.7% 1-business day fulfillment rate in the United States and Canada if ordered prior to Newegg’s 3PM local time order
cut-off and a 99.6% 2-business day fulfillment rate in the United States and Canada.
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Vibrant
community of tech-savvy customers. While expanding its range of product offerings,
Newegg continues to maintain a large and vibrant community of tech-savvy customers, providing
inspiration for visitors to discover new tech trends and products and valuable decision-making
intelligence typically not found at traditional retailers. We have continued to offer
additional functionalities to foster this community by, for example, launching Newegg’s YouTube
channel and GameCrate, a virtual community where like-minded tech enthusiasts can share
peer reviews and have questions or concerns addressed by fellow customers, Newegg moderators,
administrators and customer support specialists.
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Attractive
pricing. Newegg is able to offer competitive pricing across a broad range of
categories because of Newegg’s scale and strong supplier and marketplace seller
relationships and the ability to maintain a cost-efficient infrastructure. Newegg’s
experienced product management team cost-effectively matches demand with supply, minimizing
inventory and allowing it to save infrastructure costs associated with brick-and-mortar
retailers. Newegg is also able to find optimized pricing points by leveraging its data
and analytics capability and by monitoring its major competitors’ pricing trends.
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Marketplace Sellers
On the Newegg Marketplace,
third-party sellers offer their products to Newegg’s customers through its platforms and pay it commissions on their sales.
See “—Newegg’s Business Models—How Newegg Deliver Newegg’s Business Model—Marketplace”
for more details. The Newegg Marketplace had 16,618 (both active and inactive) sellers, approximately 40.5 million SKUs and 1,748
categories as of December 31,2020.
Newegg is a business
enabler for the Newegg Marketplace sellers in many ways. Newegg believes the Marketplace sellers choose its platforms not just
because Newegg offers a forum for them to build online presence, but also because Newegg delivers the following additional values:
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Centralized
location of tech-focused customers. The Newegg Marketplace connects sellers, whether wholesalers or retailers, to
a growing customer base, the majority of whom are tech-savvy, in more than 20 countries and regions as of December 31, 2020,
without expanding their physical footprint. In particular, the Newegg Marketplace provides smaller vendors and retailers with
access to profitable B2B opportunities that would otherwise be difficult to reach due to their lack of ability to provide
specialized support for organizational purchasing needs.
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Access
to premium e-commerce solutions. Sellers, particularly retailers, generally face
high barriers entering the global market, including logistics and scalable economics.
The Newegg Marketplace addresses these challenges by providing sellers with a comprehensive
suite of e-commerce solutions, including an API-enabled portal, on-site promotions, a
curated marketing program, and fulfillment and delivery services. Particularly, Newegg
provides Marketplace sellers with valuable data insights, which help them to market
their products more effectively, generate additional traffic and increase conversion.
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Human
touch. The Newegg Marketplace is a key component of Newegg’s ecosystem.
Since Newegg launched the Newegg Marketplace model, Newegg has carefully nurtured Newegg’s
relationships with the Newegg Marketplace sellers and have invested in their success,
which Newegg believes drives Newegg’s continued growth in the long run. For example,
Newegg assigns dedicated account managers to qualified sellers to help them tackle all
sorts of challenges associated with operating a virtual storefront.
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Brand Partners
Newegg is a trusted
partner and the go-to channel for many leading tech product brands and is increasingly establishing relationships with brands
in a growing number of other product categories. As of December 31, 2020, Newegg sourced merchandise from over 2,000 brand partners,
and featured the official online stores of a number of brand partners, including some of the most well-known brands.
Newegg believes it
provides the following benefits for Newegg’s brand partners:
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Access
to a targeted customer base. Enabling brands cost-effectively reach target audiences,
its existing, loyal customer base is highly valued by companies targeting ready-to-buy,
tech-savvy customers and foreign brands seeking to sell products and build brand awareness
in markets in Asia and the Middle East region.
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Cost-efficient
distribution channel. Leveraging Newegg’s customer friendly online
platforms, established logistics network and infrastructure and extensive e-commerce
experience and expertise, Newegg offers to its brand partners efficient and cost-efficient
distribution channels and comprehensive supply chain capabilities, including marketing,
warehousing, fulfillment and customer services;
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Brand
building and promotion solutions. Newegg offers its brand partners solutions
and support to run special promotions and targeted marketing and brand-building campaigns
through its platforms utilizing data and interactive media in ways that cannot be achieved
through traditional media. See “Business—Newegg’s Business Models—Other
Services—Marketing Services.”
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Data
insights. Newegg collects insights from its customers’ interactions with
it through Newegg’s analytics and algorithms. Newegg uses these insights, coupled
with customer feedback and Newegg’s knowledge of the e-commerce market, to facilitate
its brand partners’ marketing decision-making.
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Newegg’s Competitive Strengths
Newegg believes that it maintains its market
leading position through the following continual refinement of key competitive advantages.
Strong brand recognition.
Newegg has operated
for over twenty years and built an excellent reputation among technology enthusiasts. Newegg has earned consistent recognition
as one of the strongest brands in IT/CE ecommerce. Our operating history has given us strong brand equity and authority in this
segment. Many consumers consider us the best retailer for PC components and high end PC systems.
Robust platform of marketplace
sellers.
Newegg’s
large customer base allows the platform to attract top tier marketplace sellers. These sellers provide their product assortment,
competitive pricing, fulfillment and marketing thus increasing the value of the Newegg platform to our customers. Marketplace
sellers are responsible for the vast majority of the SKUs available for sale on Newegg. Additionally, Newegg offers its Sponsored
Product Ads (SPA) Program to its sellers’ partners which strengthens visibility and sales of key seller items.
Vendor Relationships.
Newegg has built
robust, long term relationships with many of the most important brands in IT/CE including Nvidia, AMD and Intel. These relationships
allow Newegg to secure inventory at competitive pricing. As a trusted partner to top manufacturers, Newegg is able to match supply
to consumer demands.
Excellence in supply chain management.
Newegg has adopted
cost-effective, automated solutions which provide accuracy and speed in fulfillment including Bastian’s OPEX Perfect Pick
and Pick to Light. These warehouse automation systems allow Newegg to achieve 99+ percent same-day e-commerce fulfillment (defined
in this prospectus as the processing of an order for shipment) and inventory accuracy rates. Newegg’s highly efficient logistics
allow the Company to offer its capabilities to many of its marketplace sellers and vendors via Newegg Logistics. Newegg Logistics
has expanded its third-party logistics (“3PL”) portfolio over time to include a variety of services including
Shipped by Newegg (SBN.) In 2020, Newegg added two additional service offerings as part of its portfolio including Newegg Bridge,
a turnkey customer service outsourcing solution and Newegg Staffing, a seasonal and direct placement employment firm.
Industry leading customer service.
Newegg’s
customer service is well known, consistently earning industry accolades. Its proven track record of delivering excellent customer
service for nearly two decades particularly qualifies Newegg to serve as the customer service gateway for its 3PL clients via
its new Newegg Bridge service.
Newegg’s Growth Strategies
Newegg’s goal
is to enhance its position as a leading tech-focused e-commerce company and to continue to expand globally and into new related
business. Newegg plans to achieve this through the following:
Further strengthen its position
as a leading tech-focused e-commerce company
Newegg has cultivated
a strong and loyal customer base. Newegg intends to further expand and engage with its customer base by increasing the efficiency
of its platforms and implementing new features to augment its platforms’ mobile functionality. Newegg also plans to continue
enhancing its award-winning customer service function.
Newegg intends to
engage in brand promotion campaigns and other marketing activities across online and offline channels to further drive its growth
and enhance its brand recognition worldwide. Newegg plans to continue engaging its existing customers and reaching out to new
customers utilizing social media, customer interactions on its platforms and offline marketing events in both domestic and overseas
markets.
Increase Newegg’s
product assortment and introduce new product categories
Newegg will continue
to grow its direct sales and Marketplace business by increasing its product assortment and introducing new product categories.
Newegg is confident
that its suppliers and Marketplace sellers will increase their offerings on its platforms if it continues to offer a compelling
value proposition and further develop its data-led insights, real-time visibility of customer preference shifts and fulfillment
and logistics capabilities. Newegg also intends to attract new third-party sellers to its Marketplace, with a focus in China,
by providing them with access to its growing customer base, the majority of whom are tech-savvy, and its ancillary e-commerce
solutions. This will enable Newegg to further enhance its sourcing capabilities, expand the diversity and availability of its
merchandise and penetrate into additional IT/CE related categories, such as lifestyle electronics, health tech, tech toys, maker
components and kits and Internet of Things (IoT) products.
Expand private label business
Newegg intends
to further expand its Rosewill and ABS private label assortment by continuing to offer high quality, feature rich,
value priced products. As of December 31, 2020, private label products (consisting of Rosewill and ABS products)
across all Newegg platforms (Newegg.com, Newegg.ca and NeweggBusiness.com) constituted collectively about 0.002% of Newegg’s
total active SKU count, while products offered by Newegg’s Marketplace sellers constituted 99.670% of Newegg’s total
active SKU count.
Newegg plans to
further expand its offerings under its Rosewill brand in targeted categories which it believes provide strong growth potential
and higher margins, including DIY components, gaming accessories, gaming chairs, headsets, home automation and IoT connected devices.
Under its ABS brand, its goal is to continue to drive significant growth in its line of gaming and business grade PCs’
by leveraging its large audience of gamers and business customers who seek a high quality, high powered PC. Both brands are offered
globally through its cross border initiative and are expected to be included in future cross border expansion.
Grow its small and medium sized
business and public sector segments
Newegg seeks to
expand its B2B business by further penetrating into small- and mid-sized businesses and public sector institutions and
continuously enhancing its value proposition tailored to meet the needs of its target verticals. Newegg plans to offer
additional electronic tools and content that allow B2B customers to troubleshoot issues on their own without having to wait
for a customer representative. Newegg is also expanding its broad assortment of business class products from top brands at
competitive prices, which it offers with rapid delivery options and seamless customer and technical services.
Newegg aims to continue
to attract new customers and increase existing customers’ retention and repeat purchase rates by emphasizing its personal
touch in customer relationships and focusing on comprehensive online and offline marketing campaigns, effective customer engagement
via social media and referrals, deals and promotions and efficient conversion of high-value accounts from Newegg.com.
Further develop its IT infrastructure
and expand globally and into new businesses
Newegg plans to
capitalize on its leading technology and infrastructure to enter into new markets and new businesses. Newegg expects to further
develop its IT infrastructure and mobile e-commerce platform to include big data applications, supply chain management systems
and AI-driven analytical capabilities by integrating commercial software packages and open-source components into its software
and systems. Newegg also aims to build on its success in select countries, such as Canada, and apply its model to expand into
fast-growing markets where there are attractive opportunities, like Gulf Cooperation Council (GCC) countries.
Pursue selective strategic partnership,
investments and acquisition opportunities
Newegg intends
to selectively pursue strategic alliances and strategic partnerships that are complementary to its business and operations, including
opportunities that can help Newegg further promote its brand to new customers, increase its product offerings, improve its technology
and fulfillment infrastructure, and expand its presence to more markets with a focus on Southeast Asia.
Increase service offerings
Newegg aims to
expand its offering of a variety of value-added D2C platform services and solutions. It believes by providing these services,
Newegg creates additional value for its business partners and customers and ultimately benefits the Newegg ecosystem and all
its participants. Currently, Newegg offers the third-party logistics (3PL), including Shipped by Newegg® Service, Newegg
Logistic, Newegg Staffing, Pure Facility Solutions, Inc., Newegg Bridge, a PC Builder tool, and expects to launch a
Newegg personal computer assembly service in the near future.
Newegg’s Business Models
Newegg’s
primary business model is to help customers find and purchase their desired products through its platforms. From a
customer base and target audience perspective, Newegg categorizes its business model into B2C and B2B operations. Newegg
strives to offer a compelling online shopping experience, reliable and timely order fulfilment and superior customer service
across its B2C and B2B operations through its direct sales, market place and D2C platform services.
The following chart sets forth Newegg’s
business models:
B2C
Newegg’s
B2C business model features selling products directly to consumers. Newegg started as a B2C business since launching Newegg’s
e-commerce platform in 2001. As of December 31, 2020, Newegg had approximately 36 million registered B2C customers.
With a focus on
selling IT/CE products, Newegg’s B2C business has expanded to include an increasingly wide range of products, including
small home appliances, health & fitness, home living, sports, personal grooming, drones, auto electronics & parts,
etc.
Newegg’s
B2C customers consist primarily of sophisticated IT professionals, gamers, do-it-yourself tech enthusiasts and early tech adopters
who generally occupy a well-educated, affluent, and IT trendsetting demographic with relatively high purchase frequency and strong
willingness to embrace tech trends and try new products. Newegg believes its success is built upon its ability to cater to the
preferences, tastes and habits of this demographic. As of December 31, 2020, through Newegg’s three major platforms, namely
Newegg.com, Newegg.ca and Newegg Global, Newegg served customers in over 20 countries and regions, mostly
in Asia and the Middle East region. For details of these platforms, see “Business—The Newegg Platforms—B2C Platforms.”
Newegg’s B2C operations generated approximately $1.5 billion for the year ended December 31, 2019 and approximately $1.0
billion for the six months ended June 30, 2020.
B2B
Although business
customers have been able to shop on its Newegg.com platform since its launching in 2001, Newegg did not begin focusing
on building its B2B operations until 2009 when Newegg launched NeweggBusiness.com, a dedicated B2B e-commerce platform,
to tap into the burgeoning B2B opportunity. With a focus on providing office and IT equipment, NeweggBusiness.com offers
an increasingly extensive assortment, including access to account executives with expertise in sourcing technology for business
and processing industry specific requirements. Newegg’s B2B operations generated approximately $409.8 million for the year
ended December 31, 2019, and approximately $141.0 million for the six months ended June 30, 2020.
Newegg’s
B2B customers span across a range of verticals, including healthcare providers, K12 and educational institutions, government agencies,
and businesses of all sizes, and its B2B operations have been focused on providing specialized support for their industry- and
business-specific needs. As a major business development strategy, Newegg focuses its B2B efforts on serving small office / home
office, or SOHO, small- and medium-sized businesses, or SMBs, and private and public sector markets which Newegg believes are
underserved by other B2B retailers. As of December 31, 2020, Newegg had over 610,000 registered accounts on NeweggBusiness.com.
Currently, while Newegg
positions NeweggBusiness.com as its dedicated B2B website, a significant number of its B2B customers also shop via Newegg’s
account managers, or on its flagship retail platform, Newegg.com. See “Business—The Newegg Platforms—B2B
Platforms” for more information about these platforms.
How Newegg Delivers Its Service
Newegg sells products
to its B2C and B2B businesses through direct sales and Marketplace.
For years since
it commenced operations, Newegg operated primarily as a direct sales e-commerce platform and built a well-recognized brand, a
massive, loyal tech-focused customer base, a reliable logistics network and strong supplier relationships. Leveraging these existing
competitive advantages, the know-how and expertise from its direct sales business, in 2010 Newegg launched Newegg Marketplace
to complement its direct sales operations. Newegg Marketplace has allowed Newegg to significantly expand its global reach and
product assortment that it otherwise couldn’t offer efficiently, while incurring minimal inventory risk and costs associated
with building additional supplier relationships. The products sourced by it, together with those offered on the Marketplace, provide
Newegg’s customers access to an unparalleled product assortment. Newegg’s online platforms (direct and Marketplace)
offered approximately 40.5 million SKUs as of December 31, 2020.
Newegg believes that
the integration of its direct sales and Marketplace operations have created a virtuous, self-reinforcing cycle. The Newegg Marketplace
is built on the success of its direct sales business, and Newegg believes that many sellers are attracted to the Newegg Marketplace
by its direct sales credentials. On the other hand, as the number of sellers and brands on the Newegg Marketplace continues to
grow, the choices available to customers also should increase, generating a strong momentum for Newegg’s continued growth.
Newegg believes that this self-reinforcement, coupled with its reliable logistics network, has made it a strong player in the e-commerce
industry.
Direct Sales
Newegg acquires
products directly from its partners that consist of manufacturers, distributors and wholesalers, and sells them directly to
its B2C and B2B customers. For its direct sales, Newegg sources the products, takes inventory risk, processes customer payments,
prepares packages for shipment and delivery, and provides customer service and support. Newegg stocks and ships from its own
warehouses, and also drop ships directly to customers from its partners’ warehouses.
The success of
Newegg’s direct sales business depends largely upon its ability to secure a broad selection of products from suppliers
at competitive costs. Since the commencement of its operations, Newegg has sought and cultivated deep, longstanding
relationships with some of the biggest IT brands in the world and many of the largest, most important IT distributors.
Newegg continuously seeks to build similar relationships with suppliers in new and emerging categories and in new
geographies. Due to Newegg’s strong supplier relationships and Newegg’s purchasing volume, Newegg is able to
obtain favorable pricing, early allocation of new products, preferential allocation of products in shortage, and funding for
product promotion and cooperative marketing. Newegg also enjoys exclusive arrangements with certain suppliers where it is
able to offer highly demanded products exclusively on Newegg’s platforms. For more information about merchandise
sourced for direct sales, see “—Merchandise Sourcing.”
Direct sales
is the basis of Newegg’s business, generating approximately 74% of its GMV for the year ended December 31, 2020. Newegg
leverages the traffic, customers, infrastructure, brand promise and overall goodwill generated by its direct sales
relationships to enable entry into new models, businesses and geographies. This has allowed Newegg to continuously improve
its value proposition to its customers and reach new customers and geographies, while improving its relationships with its
partners.
Marketplace
The Newegg Marketplace
operations enable customers to discover and purchase products from qualified third-party sellers from 35 countries and regions
globally as of December 31, 2020. The Newegg Marketplace operations consist of the Newegg Marketplace launched in 2010, the Newegg
B2B Marketplace, the Newegg Canada Marketplace launched in 2014 and the International Seller Program launched in 2011, a cross-border
selling program designed to allow qualified international sellers to list products on Newegg’s platforms for sale across
at least 20 countries and regions. As of December 31, 2020, the Newegg Marketplace connected B2C and B2B customers to 16,618 third-party
sellers offering approximately 40.3 million SKUs. The Newegg Marketplace offers a wide and increasing portfolio of categories,
including emerging smart home automation, VR, and lifestyle electronics, health and beauty technology products, and houses online
stores of some of the most well-known brands in the tech industry, such as HP, Dyson, and Lenovo.
The Newegg Marketplace
sellers can use the Newegg Marketplace Seller Portal, a unified application programming interface enabled system, which enables
sellers to manage items, orders, accounts and reports, for the day-to-day operations of their online stores, including product
listings, inventory management, order fulfillment, customer service, promotional content and service reviews and returns. Newegg
also offers the following additional features and tools to help Marketplace sellers drive traffic and maximize sales:
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Curated
Marketing programs. Newegg has a dedicated marketing team specializing
in providing sellers with both highly effective marketing tools as well as curated marketing
programs, including sponsored product ads, A+ content, email communication program, social
media campaigns, video creation, and more.
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On-site
promotion. Newegg offers Marketplace sellers numerous on-site promotion options,
such as homepage banners, placements to showcase flash sales and featured products, as
well as personalized post-purchase emails.
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Shipped
by Newegg (SBN) fulfillment. Newegg gives sellers the option to use Shipped by
Newegg (SBN), an efficient and price-conscious fulfillment service to have Newegg house
inventory and pick, pack, and ship their products.
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Shipping
Label Service. Newegg gives sellers the ability to fulfill their own orders and
print a shipping label on their own network or in the office
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Integration
Providers. Newegg partners with a variety of qualified integration service providers
to help Marketplace sellers fill the gaps in the integration process with item creation,
inventory management, order processing, as well as returns and refunds.
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Newegg
Elite Seller program. Newegg offers the Newegg Elite Seller program, a membership
program designed to give qualified sellers premium access to post-purchase customer engagement,
Seller Store, and other numerous value-added operational services with significant discounts.
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While Newegg encourages
Marketplace sellers to offer the most attractive prices, they have the flexibility to price the products sold through the Newegg
Marketplace. Due to Newegg’s scale and large visitor traffic, some of the Marketplace sellers also set aside exclusive product
supplies for it and offer the most competitive pricing for its customers.
Newegg has a rigorous
process in place to assess the Newegg Marketplace sellers. Newegg selects Marketplace sellers based on a number of factors, including
service level, logistics capability, operation efficiency, category focus, sales volume, brand assortment, customer rating and
market reputation. Newegg also requires third-party sellers to meet its strict standards and protocols in terms of product authenticity,
customer services, and delivery and fulfillment so that customers are confident that they receive the same level of buying experience
and customer service that they expect when buying directly from Newegg. See also “Customer Service and Support—Marketplace
monitoring.” Only those sellers that meet its criteria are selected, and any that fall below its standards will not continue
to sell on the Newegg Marketplace.
The Newegg
Marketplace sellers pay Newegg commissions on their sales, with published commission rates varying according to the product
category from 8% to 15%. Newegg also charges membership fees for the additional value-added services and tools that it
provides to sellers based on their enrollment.
Merchandise Sourcing
As of December
31, 2020, Newegg offered over 40.5 million SKUs, consisting of 133,366 direct sales SKUs sourced from at least 405 suppliers globally
and 40.3 million SKUs on the Newegg Marketplace from 16,618 third-party sellers globally. As of December 31, 2020, approximately
36.8% of Newegg’s direct sales inventory was purchased from distributors, 61.0% directly from manufacturers and 2.2% from
other sources. As of December 31, 2020, the 10 largest suppliers accounted for 70.6% of the merchandise Newegg purchased for direct
sales.
The table below shows
Newegg’s product categories offered through its platforms and their selected featured brands and the number of SKUs in each
category:
Category
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Products
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Selected
Featured Brands
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SKUs
as of
December 31,
2020
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Computer System
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Desktops, laptops, gaming laptops, peripherals
and accessories
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Asus, MSI, HP, Lenovo, Dell, Acer, Microsoft,
Samsung, LG, Gigabyte, Westinghouse
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Approx. 6,699,466
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Components
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CPU / processors, Graphic Cards, Motherboards,
storage devices and computer accessories
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Intel, AMD, Asus, MSI, Corsair, Gigabyte,
ASRock, EVGA, Western Digital, Seagate, Samsung, G.Skill
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Approx. 2,483,957
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Electronics
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Home Video, Home Audio, Headphones, Pro Audio/Video,
Cellphones, Wearables, Digital Cameras
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Samsung, LG, Sony, Denon, Yamaha, Beyerdynamic
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Approx. 10,260,131
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Gaming
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Xbox, PlayStation, legacy gaming, gaming
titles
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Nintendo, Sony Playstation, Microsoft Xbox
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Approx. 210,710
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Networking & Smart Home
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Home networking, commercial networking, server
& components and smart home products
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Asus, TP-Link, Netgear, Linksys, SonicWall,
Polycom, Plantronics, Jabra, Yealink, Cisco, Ruckus, Ubiquiti
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Approx. 2,782,135
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Office Solutions
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Display & printing, office technology
furniture, office supplies and mailing & inventory supplies
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HP, Brother, Epson, Xerox, Lexmark, Zebra,
Honeywell, ELO Touch, Sony, Sharp, Asus, Acer, Samsung, Eureka Ergonomic, COUGAR
|
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Approx. 2,521,175
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Software & Services
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Software, Digital Downloads, Warranty &
Services, 3rd Party Gift Cards, and Entertainment Products
|
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Microsoft, Adobe, Norton, Intuit, SquareTrade
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Approx. 127,259
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Automotive & Industrial
|
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Car electronics, Marine and Aviation, Motorcycles
and ATV, Performance Parts, Tools and Equipment, Wheels and Tires
|
|
Alpine, Kenwood, 3M, Garmin, Pioneer, Boss
Audio, BFGoodrich, Continental Tires, Firestone, Goodyear, Hankook, Michelin, Toyo
|
|
Approx. 1,390,953
|
Home & Tools
|
|
Home improvement tools, home appliances,
kitchen utensils, outdoor & garden furniture, and pet supplies, Generators
|
|
Dyson, Cuisinart, Frigidaire, iRobot, Hoover,
Ninja, Shark, Keurig, Caterpillar, DEWALT, Makita, Bosch, Milwaukee
|
|
Approx. 7,302,186
|
Health & Sports
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|
Fitness, sports and health and beauty supplies
|
|
Huffy, Vilano, Razor, Garmin, Barska, Tactical
Scorpion Gear, Intex, GoPowerBike, Callaway Golf, BestMassage
|
|
Approx. 1,257,366
|
Apparel & Accessories
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|
Clothing, Costumes, Maternity, Shoes, Socks,
Men & Women Clothing
|
|
Adidas, Converse, Levis, Skechers, Timberland,
UGG, Under Armour, Crocs, DC Shoes
|
|
Approx. 2,677,644
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Hobbies & Toys
|
|
Drones, learning & educational materials,
Action Figures, Collectibles, Board Games, Stem Toys, Science and Nature Toys
|
|
Disney, Funko, Lego, Bandai, Banzai, Hasbro,
Razor, Spin Master, Little Tikes
|
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Approx. 2,392,974
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To ensure a steady
supply of products and optimized pricing and allocation, Newegg maintains multiple sourcing arrangements for most of its products.
Newegg deploys a flexible sourcing model, utilizing different distribution channels when economically and logistically beneficial
while maintaining its reseller authorizations and relationships with its brand partners. As Newegg increases in scale in new or
emerging product categories, it endeavors to increase its purchases directly from manufacturers and, where appropriate, to become
an authorized reseller, which Newegg believes provides improved product pricing and better access to preferred product allocation.
Newegg’s tech
savvy customer base, its online marketing and merchandising expertise and its ability to quickly and efficiently launch new products
make it the go-to channel for many manufacturers and distributors. Newegg is particularly strong in the components categories
where Newegg is one of the largest channels online or offline and it continues to gain significant traction with suppliers in
other categories, such as desktop PCs, laptops, and input/output devices.
Newegg maintains
extensive and longstanding relationships with many of the biggest tech product brands and distributors globally. Newegg employs
a team of merchandising professionals consisting of 53 employees as of December 31, 2020, specifically trained to cultivate and
manage relationships with large international IT brands, such as Gigabyte, MSI, Asus, G.Skill, Acer, Corsair, Coolermaster, AMD,
Intel, WD, Seagate, Samsung, Nvidia, HP, Lenovo, Microsoft and EVGA. Its merchandising professionals review Newegg’s product
categories and brands on a regular basis to assess demand and trends so that Newegg offers its customers access to the most current
and desirable products. Newegg purchases its inventory from vendors on trade accounts typically requiring payment between 15 and
45 days after the date the inventory is shipped to us.
Leveraging its
scale, brand and global footprint, Newegg seeks to enter into exclusive agreements with selected suppliers and third-party
distributors for some or all of their products with favorable terms. Newegg has created a manufacturer portal where its
suppliers can access reports regarding inventory and purchase history of the manufacturers’ products, view
Newegg’s vast record of customer reviews, and analyze information about its customer purchases of their products.
Newegg’s suppliers can access this information to assist in their marketing and product development efforts.
Private Labels
In 2004, Newegg began
to offer its private label products by launching Rosewill, its first private label brand on Newegg.com. The private
label assortment is primarily focused around categories where Newegg believes that it can compete at higher than average margins
while delivering lower cost, high quality options to its customers. Newegg offers its private label products both across its platforms
and on other e-commerce platforms, such as Walmart, Amazon, and eBay.
Newegg’s major
private labels currently include Rosewill which is focused on offering feature rich computer components,
gaming peripherals and home electronics, and ABS, a private label launched in 2014 that offers high-end gaming PCs for
consumers and custom configured computers for business applications requiring the performance of a gaming GPU.
Other Services and Solutions
In addition to online
retail sales, Newegg also generates revenues from a range of ancillary value-added D2C platform services and solutions. Newegg
believes by providing these services, Newegg creates additional value for its business partners and customers and ultimately benefits
the Newegg ecosystem and all its participants.
Supply Chain Third-party
(3PL) Services
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Shipped
by Newegg® Service. Newegg began to offer Shipped by Newegg,
a comprehensive suite of warehousing and fulfillment services, to the Newegg Marketplace
sellers in 2013. Enrolled Newegg Marketplace sellers deliver their products to one of
Newegg’s fulfillment centers, and Newegg handles the fulfillment of orders placed in the sellers’
online stores and charges service fees based on the size of the products and the shipping
methods requested.
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Newegg
Logistics. Newegg launched Newegg Logistics in 2014, a division dedicated
to providing end-to-end e-commerce logistics and supply chain solutions covering warehousing,
inventory management, order processing, packing and shipping, designed to reduce inventory
costs and streamline supply chain efficiencies, to Newegg’s other business partners,
manufacturers, whole-sellers, marketplace sellers and B2B clients. Newegg typically enters
into a master service agreement with its Newegg Logistics customers and charge
service fees at a fixed rate.
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Newegg
Staffing: Newegg launched Newegg Staffing in 2020 with a focus on providing both
Direct Placement and Seasonal Placement of employees to help its partners, offering Clerical,
Manufacturing and Logistics Employee placement. Offices have been launched in Southern
California and Indiana.
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Newegg
Bridge: Newegg launched Newegg Bridge in 2020 offering turnkey customer service
outsourcing solutions with 24/7 support. The outsourcing solutions include Phone, Chat,
and Email support, as well as Social Media monitoring. Newegg Bridge is a scalable solution
that can assist “small, medium, and larger” customers year round or seasonally.
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Pure
Facility Solutions: Newegg launched a cleaning service business named Pure
Facility Solutions in 2020 offering commercial facilities cleaning and sanitizing services to businesses.
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Newegg
PC Assembly Service: Newegg expects to launch a PC building service which will offer professional
assembly service, custom skins, and liquid cooling loops assembly service. This service
primarily will operate in two kind of builds, BTS (Build To Stock) & BTO (Build To Order).
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Marketing Services
Newegg offers flexible
marketing packages consisting of advertising sales, event organization and other marketing campaigns to its brand partners. Newegg
helps brands reach a potential audience by leveraging its online portals, marketing affiliates and promotional emails. Newegg
has a global professional marketing team consisting of 60 people as of December 31, 2020, who help its brand partners and marketplace
sellers design marketing activities with highly effective cost of sales. In addition, Newegg also utilizes social media to market
its brand partners to over three million social fans across various internet platforms, including Facebook, Twitter, YouTube and
Instagram, by offering promotions, sweepstakes, and reviews in order to maximize Newegg’s brand partners’ exposure.
The Newegg Platforms
Newegg’s websites
and mobile applications, which it refers to as the “Newegg platforms,” are the foundation of the Newegg ecosystem.
While each Newegg platform is strategically focused on differential market segments, customers and/or product categories, the
platforms share a common Newegg brand and are supported by its integrated logistics and fulfillment capability, operational expertise
and technology infrastructure, and Newegg offers the same level of customer service and dedication across all these platforms.
B2C Platforms
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Newegg.com. Launched in 2001 in the United States, Newegg.com is Newegg’s first online platform and currently its flagship e-commerce platform. Newegg.com offers a typical range of IT/CE categories with the continuous addition of emerging categories across the internet of things (IoT), home automation, robotics, drones, auto electronics and more. While Newegg.com operates predominantly as a B2C e-commerce platform, Newegg.com supports both direct sales where Newegg sells merchandise directly to customers and the Marketplace model where third-party sellers offer their inventory to Newegg’s customers. As of December 31, 2020, Newegg.com fulfilled orders originating from various countries, mostly in Asia and the Middle East region.
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Newegg.ca.
Newegg launched Newegg.ca in 2008 to sell IT/CE products in Canada with a business
model similar to that of Newegg.com. Newegg.ca is a leading e-commerce
platform focusing on IT and CE products in Canada, with approximately 1.4 million customers as of June 30, 2020, and GMV of
$71 million for the six months ended June 30, 2020. Currently, nearly half of orders on Newegg.ca are fulfilled
from Newegg warehouses. Newegg also delivers to its Canadian customers via Shipped
by Newegg or other third-party shipping companies. Orders for merchandise offered
by Canada-based Marketplace sellers are fulfilled locally by such sellers in Canada as
well.
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Newegg
Global. Newegg launched Newegg Global in 2017 as an expansion of its footprint
in the global ecommerce market. Newegg Global can automatically detect a customer’s
IP address and offer the customer an option to go to their local website or to use the
U.S. website. Newegg Global currently fulfills orders originated from 20 countries
or regions and offers five payment methods and one to seven business day door-to-door
delivery services. Newegg Global had approximately 368,000 registered
customers outside North America as of June 30, 2020, and had a GMV of 27.6 million for the six months ended June 30,
2020.
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Mobile
apps. Since the launch of Newegg’s first mobile app in 2008, Newegg has accumulated
millions of downloads of its mobile apps. Newegg currently has a mobile app for Apple
devices and for Android devices, and Newegg launches updated versions of its apps periodically.
As of February 10, 2021, Newegg’s mobile app for Apple devices has a customer rating
of 4.8 out of 5.0, and a customer rating for its Android mobile app of 4.6. For more
details, see “Business—Technology—Newegg’s IT Capability—Mobile
Apps.”
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B2B Platforms
In 2009, Newegg launched
NeweggBusiness.com, a site that currently supports substantially all of its B2B operations. Over the years, Newegg has
built NeweggBusiness.com into a dedicated B2B e-commerce platform offering a full range of IT, office and industrial products
and solutions with a wide customer base ranging from government agencies, healthcare institutions, and education institutions
to other businesses of all sizes. NeweggBusiness.com supports both direct sales and a B2B marketplace that connects its
B2B customers with over 2,000 third-party sellers globally.
Other
Platforms
In addition to the
major Newegg platforms discussed above, Newegg also operates Newegglogistics.com, a platform dedicated to providing reliable
logistics and supply chain solutions through 3PL operations. For details of Newegg’s 3PL services, see “Business—Newegg’s
Business Models—Other Services—Third-party Logistics (3PL) Services.”
Logistics and Fulfillment
Newegg has a reliable
logistics network and infrastructure designed to ensure timely and accurate shipment of a massive amount of orders. This has allowed
it to handle seamless delivery of over 32,956 parcels per day on average, with an average accuracy rate of over 99.8%, an over
97.7% 1-business day fulfillment rate in the United States and Canada if ordered prior to Newegg’s 3PM local time order
cut-off and a 99.6% 2-business day fulfillment rate in the United States and Canada, as of December 31, 2020.
Newegg stocks and
ships the vast majority of its direct sales products. Fulfillment of orders from the Newegg Marketplace is executed by the sellers
except for orders shipped through its Shipped by Newegg (SBN) services, where the items will be shipped from one of Newegg’s
warehouses.
Newegg’s logistics
and fulfillment infrastructure and capabilities include:
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Warehouses.
Newegg believes the best approach in serving its customers is to maintain reasonable inventory levels and to ship directly
from its own inventory. As of December 31, 2020, Newegg operated eight strategically-located fulfillment centers, including
seven warehouses located in North America and one in China, covering more than 1.5 million square feet in total. Each of Newegg’s
warehouses is able to process 13,000 inbound pieces and 10,000 outbound pieces on average per day. Newegg also maintains regional
warehouses in Southern California, New Jersey and Indiana and Ontario, Canada to fulfill customer orders in the United States
and Canada. The geographical placement of its warehouses and its warehouses in North America enable it to reach approximately
95% of the North American population in two business days.
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Cooperation
with reliable logistics service providers. Newegg capitalizes on a robust transportation
framework that connects international air and sea transport, domestic over-the-road carriers,
and last mile delivery to residential consumers such as United States Postal Service,
Purolator, OnTrac and UPS. Newegg has also engaged and is working with multiple logistics
partners to offer a wide array of flexible delivery options.
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Virtual
fulfillment. Newegg ships certain products to customers directly from vendors and distributors who meet its quality
fulfillment standards without going through its warehouses, a practice which Newegg refers to as virtual fulfillment. Virtual
fulfillment is fully utilized to broaden Newegg’s product assortment and avoid loss of sales when SKUs are out of stock.
In the United States, virtual fulfillment accounted for approximately 7.7% of direct sales for the year ended December 31,
2020.
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Its logistics and
fulfillment focus on reliable, efficient and flexible delivery.
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Reliability.
Newegg has a reliable technology platform and order process flows for its fulfillment
operation. Each order is verified at least twice before being shipped. Customers can
track the shipping status of their purchases through links to Newegg e-mail and/or its
websites and mobile applications. Newegg’s inventory management and tracking also
have redundant capabilities to enable each facility, if necessary, to fulfill most U.S.
orders. This redundancy could allow it to continually fulfill most orders, albeit less
efficiently, as long as a single warehouse is operational.
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Efficiency.
Newegg has a well-designed, fully-customized warehousing management software system that
is adopted by all warehouses, featuring smart categorization of inventory assortment
in various warehouse locations to maximize logistics efficiency. When Newegg orders product
from a supplier, it tracks the receipt of the merchandise and can “material optimize,”
or direct, the inventory to a specific warehouse to match customer demand in a geographical
area; when a purchase order is received, Newegg matches the order to its inventory, and
distributes a specific order fulfillment assignment to one or more warehouses for processing.
Newegg uses advanced, “pick-to-light” conveyer systems to allow its warehouse
staff to fulfill orders quickly.
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Flexibility.
Newegg’s customers may choose various shipping methods including basic ground delivery
and expedited overnight shipping, and Newegg has continuously optimized its delivery
options available to upgrade the shopping experience of its customers. For example, in
2019, in collaboration with UPS, Newegg introduced an option allowing customers to pick
up the products they purchase at a nearby UPS location instead of having them delivered
at their own addresses. This is a safe and convenient shipping option and reduces the
waiting time customers would otherwise experience between the time an order is placed
and their products are received.
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Customer Service and Support
Newegg has built its
brand on the principle of superior customer service. Newegg provides high-quality customer service and support throughout its
customers’ entire engagement with us, from purchase to returns.
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Customer
service. Newegg’s in-house customer service staff are trained to resolve customers’ inquiries as quickly
as possible. Newegg currently operates multilingual customer service centers in California and has customer service representatives
working remotely in Nevada, focusing on serving North American buyers, and a multilingual customer service centers in China
that is available 24 hours a day, seven days a week via e-mail and instant messaging. As of December 31, 2020, Newegg employed
over 212 experienced customer service representatives responsible for handling general customer inquiries, taking orders and
investigating the status of orders, shipments and payments. Newegg’s multilingual customer service representatives are
available by phone, live-chat, chatbot or email. During Christmas and other peak sales periods, Newegg also hires part-time
personnel to meet increased sales and customer inquiries.
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Marketplace
monitoring. When customers purchase items from the Newegg Marketplace sellers,
Newegg wants them to be confident that they receive the same level of customer service
they expect from Newegg direct sales. With that in mind, Newegg closely monitors the
performance of the Newegg Marketplace sellers to ensure they abide by the Newegg Marketplace
rules, provide customers with quality customer support, ship orders on time, and respond
to customer queries in a timely fashion. Newegg has adopted a zero-tolerance policy on
counterfeit products and has rules in place to take down allegedly counterfeit or pirated
products and disqualify sellers selling counterfeit or pirated products. For more information,
see “Risk Factors—Risks Related to Newegg’s Business and Industry—Newegg’s
reputation and business may be harmed if Newegg or the Newegg Marketplace sellers sell
pirated, counterfeit, illegal or “gray market” items.”
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Newegg
Marketplace Guarantee service. Newegg also offers a special customer service
program, Newegg Marketplace Guarantee, for Marketplace orders. With Newegg Marketplace
Guarantee, if a Marketplace seller fails to reimburse the customer for products that
are damaged, defective or materially different from what was displayed on the Newegg
platform by that seller, the customer can submit a claim directly to it and may be eligible
for reimbursement of the purchase price of any product they purchase from a Newegg Marketplace
seller, up to $1,000.
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Return
policy. Newegg’s standard return policy allows certain items that
are directly sold and shipped by it to be returned within 30 days of the original invoice
date for a full refund or for a replacement, with restocking fees charged in both cases.
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From a customer service
perspective, in addition to customers, Newegg broadly defines its customers to also include the Newegg Marketplace sellers, from
whom Newegg earns commissions, and purchasers of its 3PL services and other ancillary e-commerce solutions and services. See “—The
Newegg Ecosystem—Key Ecosystem Participants and How Newegg Creates Value for Them—Marketplace Sellers” and “—Newegg’s
Business Models—Other Services—Third-party logistics (3PL) services” for more information about Newegg’s
engagement with these customers.
Payment
Newegg provides its customers with the
flexibility to choose from a number of traditional online payment options, along with certain creative payment solutions that
are popular with tech enthusiasts.
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B2C
payment options. Newegg offers various mainstream online payment options to customers
on its B2C platform, including credit cards, debit cards and pre-paid gift cards. Newegg
offers customers the opportunity to pay for items purchased on its platforms with Newegg
Store Credit Card, a private label credit card that Newegg launched in partnership
with Synchrony Financial, a U.S. consumer financial services company. Newegg Store
Credit Card has a revolving credit line and offers numerous attractive financing
options, including, for example, zero interest for everyday purchases for up to 12 months,
and up to 36 months on purchases of certain items on its platforms, which Newegg believes
improves customer loyalty and purchase frequency and results in more sales amount. In
addition, Newegg allows customers to use Bitcoin and Bitcoin cash to pay for purchases
made on its platforms.
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B2B
payment options. B2B customers can make payment during checkout or request credit
and pay on terms via the above-mentioned online payment options or via ACH, wire transfer
or bank check. Newegg also offer open terms accounts for business and public sector customers.
In most cases, the payment term that Newegg grants to its B2B customers is 30 days.
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Sales and Marketing
Newegg’s marketing
strategy includes generating customer traffic, increasing its brand recognition, acquiring customers cost-efficiently, building
customer loyalty and maximizing repeat purchases. Newegg’s integrated marketing framework represents a core competency that
it regards as essential to the success of its platform. Newegg is focused on continuing to enhance Newegg’s brand awareness
through a variety of online and offline marketing and brand promotion activities, meanwhile leveraging technology to drive scalability
and sustainability and eventually achieve optimal return on investment and highly effective cost of traffic as well as sales.
Referral
Newegg benefits
significantly from word-of-mouth referrals and positive product reviews, and Newegg believes its reputation as a one-stop-tech-shop
has led to strong word-of-mouth promotion, especially among the tech-savvy. Newegg also provides live-streaming product reviews
on its platforms, through which its customers could see other people’s thoughts on the product in a more straightforward
way. As of December 31, 2020, Newegg attracted 53% of its visitors without incurring a referral, click-through or advertising
fee.
Online Marketing
Newegg conducts the
majority of its marketing efforts online through targeted marketing via affiliates, search engines, promotional emails, social
media traffic, targeting and personalization and online promotion campaigns.
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Paid
search engine marketing. Search engine marketing is a major driver of its traffic and customer acquisition. For the six months ended June 30, 2020, its spending on paid search engine marketing represented approximately 58% of its total marketing
spending. Newegg bids for specific keywords and products on search engine sites, such as Google, Yahoo! and Microsoft Bing,
for optimum visibility in the displayed results. Newegg’s broad and evolving product selection enables it to utilize
a large quantity of keywords that Newegg frequently tests and measure for their effectiveness. Newegg also uses sophisticated
software to strategically manage its keyword and SKU level bids to maximize marketing performance at an efficient rate.
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Affiliate
Marketing. Newegg also engages in affiliate marketing programs where Newegg offer
affiliated websites commissions for sales resulting from directing customer traffic to its websites through embedded hyperlinks.
Such affiliates are typically deal sites that advertise retailer deals to their audiences. Affiliate marketing is Newegg’s
second largest paid marketing channel and represents approximately 17% of Newegg’s total marketing expense for the six months
ended June 30, 2020.
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Targeting and personalization Marketing. Targeting and personalization have proved to be highly effective in terms of conversion and customer acquisition. Newegg’s CRM Marketing Team run various and highly diversified marketing programs through personalization and segmentation on multiple channels including website, email, social, paid search engine, and more. Basing on customers’ onsite behavioral data and purchase history data, Newegg are able to identify prospect customers (visitors sharing a same shopping pattern with Newegg customers) as well as existing customers and display its brand and product advertising ads to them when they are on social media or Google search or other affiliate sites.
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Others.
Other online marketing channels include click-through based advertising on shopping comparison engines, targeted messages,
email distribution, banner advertisements on high-traffic portals, social networking via major social media sites and Newegg’s
own branded portal, and onsite promotions and cross-selling opportunities on its websites, such as Daily Deals and
Marketplace Spotlight. Newegg had over 18 million email subscribers as of December 31, 2020 and successfully delivered
over 1.7 billion emails to targeted customers, which is way ahead of industry benchmarks.
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Offline Marketing
Newegg also devotes
marketing resources in various offline formats, including displaying offline advertisement through multiple channels and sponsoring
or organizing offline events.
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Newegg events. Newegg also leverages offline events
as a way to engage its customers, vendors and brand partners to extend its brand recognition. Newegg has launched various
offline events to enhance the interaction among IT enthusiasts and to promote its products and brands, including and the
Newegg Triple Crown Royal at HyperX Esports Arena in Las Vegas, Intel Extreme Masters in Chicago and the CLG Fortnite
Challenge in New York. For example, Newegg held its 15th annual Eggie Awards gala in January, 2019 at the Hakkasan, a
renowned Asian-fusion eatery & club in Las Vegas, honoring key partner companies and individuals that are important to
Newegg’s success. Other events included the Newegg Triple Crown Royal at HyperX Esports Arena Las Vegas, Caltopia at UC
Berkeley, Intel Extreme Masters at Chicago, CLG Fortnite Challenge event in New York, and CLG Tailgate event in West
Hollywood.
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Technology
Newegg’s technology
systems are a critical component of its success and are designed to enhance efficiency and scalability. Newegg’s research
and development team, coupled with its proprietary technology infrastructure and the large volume of data generated and collected
on its platforms, have created opportunities for continuous improvements in Newegg’s technology capabilities, empowering
reliability, scalability and flexibility. Newegg’s technology strategy is to develop Newegg’s own proprietary software
and license technologies from third parties as appropriate in order to simplify and improve the shopping experience, as well as
facilitate Newegg’s fulfillment, financial and customer service operations.
IT Infrastructure
Newegg has built
its technology platform relying primarily on software and systems that Newegg has developed in-house and to a lesser extent on
third-party software. Its global research and development team consists of more than 450 IT professionals and engineers as of
December 31, 2020, working to design and maintain Newegg’s IT infrastructure to support its growth. Newegg’s technology
infrastructure is designed for scalability and reliability to support business growth. It utilizes high-availability clusters
comprising groups of servers to provide sufficient redundancy and ensure continued service in the event of single point server
failure due to hostile attacks, systematic errors or other reasons. Newegg’s high-availability data system ensures that
back-up servers are connected to its network instantly once master servers experience technical difficulties.
Newegg currently has
two self-owned data centers in City of Industry, California and two co-located data centers at facilities in Los Angeles, California,
and New Jersey to provide redundancy for its e-commerce data. Newegg maintains over 1,500 servers stored in its data centers and
300 network devices. Newegg’s IT infrastructure enables it to support 54 million page views and with the capability to process
up to 0.75 million orders per day. Newegg’s platform obtained PCI Level 1 certification in 2010.
Newegg’s IT
Capability
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Websites.
Newegg’s website incorporates proprietary technology internally developed on a primarily Microsoft
.NET platform. It provides product descriptions, search and ordering functionalities
and product reviews.
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Mobile
site and apps. Customer activity on mobile devices is growing, and Newegg is investing significantly in mobile technology
to increase sales to customers using mobile devices. Newegg’s mobile app aims to create a convenient shopping experience
for its customers, by, for example, enabling users to save their profiles and payment information for future purchases, and
to provide helpful tools to Marketplace sellers, by for example offering a mobile dashboard allowing them to better manage
their inventory and orders on the go. As of December 31, 2020, the orders placed on its mobile site and apps accounted for
approximately 24.5% of its total B2C orders.
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Data
and analytics. Data collected from Newegg’s operations, including
inventory data, behavioral and transactional data and pricing data, are housed in Newegg’s
data centers. Newegg has deployed commercial business intelligence software to analyze
this data and improve the shopping experience. Newegg applies various AI capabilities
and deep learning technologies across its platforms to enhance the shopping experience.
Newegg’s sophisticated user behavior analysis system leverages its large customer
database to create customized product recommendations, allowing it to efficiently acquire
new customers and increase sales. Also, Newegg has leveraged its AI capabilities to do
category extraction for different products based on the unstructured content and images,
the results of which have been used to do miscategorization correction and site search
relevancy improvement.
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Inventory
management. Newegg’s supply chain management system includes price optimization,
inventory balancing, and inventory forecasting and other subsystems. It enables effective
sales forecasting and inventory management that increase the efficiency of Newegg’s
supply chain and help it control costs. Newegg’s inventory availability is coordinated
through Newegg’s technology platform and platforms. Newegg has added functionality
to update Newegg’s platforms on a real-time basis when items become out of stock
in Newegg’s fulfillment centers. This feature limits the number of orders placed
for out-of-stock items, allowing it to better manage aging inventory and minimize customer
dissatisfaction by eliminating backorder merchandise.
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Transaction
management. Newegg has developed and deployed a scalable back office platform
that allows it to monitor transactions and changes to financial data as well as provide
Newegg’s management with daily updates. Newegg utilizes both proprietary and third-party
applications for accepting and validating purchase orders, placing and tracking orders
with suppliers, managing inventory and assigning it to purchase orders and ensuring proper
shipment of products to customers.
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Fulfillment
management. Newegg has software for its fulfillment operations that tracks
customer orders from placement through packing and shipping. Newegg has installed sophisticated,
“pick-to-light” conveyor systems and associated software. Newegg has also
developed software modules that efficiently manage the sorting and picking process of
its products. Newegg’s systems are integrated with those from its primary U.S.
shipping vendor to facilitate tracking of the orders after shipment.
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Anti-fraud
monitoring. Online fraud is a constant threat to security and reliability of
e-commerce retailers. Newegg work with third-party vendors to monitor its network security
devices and to secure its online payment systems. Newegg has developed proprietary tools
in-house to monitor its online traffic for suspicious activities. Newegg’s websites have earned
certifications from organizations and agencies like Tevora, based on its meeting their
information protection and fraud prevention standards.
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Research & Development
Team
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Newegg’s
global research and development team, consisting of more than 450 IT professionals and engineers as of December 31, 2020,
is focused on innovation through software development, algorithm design and development and IT infrastructure design and maintenance.
Newegg’s research and development personnel constantly upgrade its platforms and continuously testing new features to
improve its customer experience. Newegg’s research and development team also develop custom-built proprietary and engaged
in third-party solutions to support its specific customer, vendor and the Newegg Marketplace seller requirements, including
handling heavy traffic on its platforms and providing quick and efficient fulfillment services to meet customer expectations.
In 2010, Newegg were granted with a CMMI Level 4 maturity certification from the Capability Maturity Model Integration Institute
for its research center in China.
|
Security and Privacy Policy
Newegg
is committed to protecting information security across all Newegg platforms. Newegg uses a variety of techniques to protect the
integrity of its networks and the confidential data it collects and stores. Confidential information concerning Newegg’s
customers, sellers and suppliers is encrypted and is protected using SSL encryption software. In addition, Newegg uses multiple
layers of network segregation and hierarchical levels of firewall technology to protect against attacks or unauthorized access
to its networks, servers and databases. Newegg also continues to build new procedural safeguards as part of its comprehensive
privacy program. Newegg operates in a secured and locked facility that requires all of its employees to check in and wear valid
ID badges.
Newegg
has adopted a detailed privacy policy that describes in plain language its data use practices and how privacy is protected at
Newegg, including the extent to which other Newegg users may have access to this information. Newegg requires users to acknowledge
and expressly agree to this policy when registering with its platforms. For more information, see “Risk Factors—Risks
Related to Newegg’s Business and Industry—Failure to protect confidential information of Newegg’s customers
and network against security breaches could damage its reputation and brand and substantially harm its business and results of
operations.”
Intellectual Property
Newegg relies on a
combination of trademark, trade secret and other intellectual property laws as well as confidentiality agreements with its employees
and suppliers for the purpose of protecting the proprietary rights associated with the products branded under Newegg’s private
labels. Newegg controls access to use and distribution of its intellectual property through license agreements, confidentiality
procedures, non-disclosure agreements with third parties and its employment and contractor agreements.
Newegg’s intellectual
property portfolio includes numerous domain names for websites that it uses in its business. Newegg has registered the domain
names newegg.com, newegg.ca and neweggbusiness.com and their variations. Newegg’s “Newegg” trademark
and logo have also been registered with the relevant authorities in the United States, Canada and China (as well as in other regions,
such as the European Union and Brazil. Furthermore, Newegg has also registered the trademarks and logos of its major private labels,
such as Rosewill and ABS Computer.
In addition to the
protection of its intellectual property, Newegg is focusing on ensuring that its product offerings (especially its private label
products) do not infringe on the intellectual property of others. Generally, its agreements with suppliers contain provisions
to safeguard it against potential intellectual property infringement by its suppliers and impose penalties in the event of any
infringement. Newegg reserves the right to refuse to work with or terminate its relationship with suppliers where it comes to
its attention that they are violating the intellectual property rights of a third party.
Competition
The worldwide market
in which Newegg competes is evolving rapidly and intensely competitive, and Newegg faces a broad array of competitors from many
different industry sectors around the world. Newegg’s current and potential competitors include: (i) online, offline
and multichannel retailers, publishers, vendors, distributors, manufacturers, and producers of the products Newegg offers and
sells to customers; (ii) companies that provide ancillary D2C platform services and solutions, including website development,
advertising, customer service and payment processing; (iii) companies that provide fulfillment and logistics services for
themselves or for third parties, whether online or offline; and (iv) companies that design, manufacture, market, or sell
consumer electronics, telecommunication, and electronic devices.
Newegg believe the
principal competitive factors in Newegg’s market are:
|
●
|
breadth
and quality of product offerings;
|
|
●
|
fulfillment
capabilities;
|
|
●
|
brand
recognition and reputation;
|
|
●
|
ability
to respond more quickly to changing consumer preferences;
|
|
●
|
ability
to reach a geographically broader set of customers; and
|
|
●
|
ability
to be more flexible in marketing to a specific set of potential customers.
|
Some of Newegg’s
current and potential competitors have greater resources, longer histories, more customers, greater brand recognition, and greater
control over inputs critical to Newegg’s various businesses. They may secure better terms from suppliers, adopt more aggressive
pricing, pursue restrictive distribution agreements that restrict Newegg’s access to supply, direct consumers to their own
offerings instead of ours, lock-in potential customers with restrictive terms, and devote more resources to technology, infrastructure,
fulfillment, and marketing. Each of Newegg’s businesses is also subject to rapid change and the development of new business
models and the entry of new and well-funded competitors. Other companies also may enter into business combinations or alliances
that strengthen their competitive positions.
In the United States,
Newegg competes with retail stores and resellers, including superstores such as Best Buy, Costco and Walmart, hardware and software
vendors that sell directly to end users, online retailers such as Amazon, and other marketers and resellers of IT and CE products.
Newegg also faces competition in the international markets Newegg participates in, such as Mongkok Computer Centre (HK), Umart
(Australia) Best Bargain Computer (Singapore), Noon in the Middle East, or may enter in the future.
See also “Risk
Factors - Risks Relating to Newegg’s Business and Newegg’s Industry - Newegg face intense domestic and international
competition.”
Awards and Accolades
Since Newegg first
launched its business, its customers have submitted a large number of positive reviews relating to their shopping experiences
with us, many of which are posted on popular consumer review sites such as ResellerRatings. Newegg has also been rated a number
of times as a top e-commerce site for IT and electronics products. For example, Newegg’s overall customer satisfaction rating
is 9.3 out of 10 on Internet retail rating site www.ResellerRatings.com. Newegg’s success in pleasing its customers has
also been validated in third-party surveys-sources. Newegg have been recognized as a “Google Trusted Store” with a
rating of 4.5 out of 5. Newegg also became a Better Business Bureau Accredited business since September 2011 with a rating of
A+.
In 2019 and as of June 30, 2020, Newegg
received a number of national awards and ratings for its excellent customer service, including:
|
●
|
No. 4 on Forrester’s 2019 Net Promoter Score for Digital Retailers;
|
|
●
|
No. 8 on 2019 Twice Top 100 CE Retailers;
|
|
●
|
No. 7 on the Multiorders 2019 Most Popular Online Marketplaces;
|
|
●
|
No. 26 on the Digital Commerce 360 2020 Top 1000 E-retailers;
|
|
●
|
No. 33 on the Digital Commerce 360 2020 Online Marketplaces Report; and
|
|
●
|
No. 5 on Newsweek’s 2020 List of Best Online Shops –
Consumer Electronics
|
Employees
As of December
31, 2018, 2019 and 2020 Newegg employed a total of 2,081, 1,561 and 1,789 full-time employees. The following tables give breakdowns
of its full-time employees as of December 31, 2020 by function and by region.
Function
|
|
Number
of Employees
|
|
ABS
|
|
|
7
|
|
Capital Markets and Investment
|
|
|
7
|
|
CEO Office
|
|
|
6
|
|
Customer Service
|
|
|
212
|
|
Facilities
|
|
|
14
|
|
Fulfillment
|
|
|
304
|
|
Global BSA
|
|
|
9
|
|
Global IT
|
|
|
27
|
|
Global MIS
|
|
|
48
|
|
Global Marketing
|
|
|
60
|
|
Global Platform
|
|
|
124
|
|
North Am Internal Audit
|
|
|
4
|
|
North Am Info. Security
|
|
|
2
|
|
3PL Operations
|
|
|
23
|
|
North Am B2B
|
|
|
25
|
|
North Am Finance
|
|
|
46
|
|
North Am Human Resources
|
|
|
12
|
|
North Am Legal
|
|
|
5
|
|
Newegg Canada
|
|
|
18
|
|
Newegg Logistics
|
|
|
19
|
|
Operations & Other Services
|
|
|
42
|
|
Planning & Analytics
|
|
|
2
|
|
Private Label
|
|
|
12
|
|
Tech
|
|
|
1
|
|
APAC Human Resources
|
|
|
14
|
|
APAC Business
|
|
|
106
|
|
APAC Finance
|
|
|
21
|
|
APAC Facilities
|
|
|
9
|
|
APAC Operations
|
|
|
194
|
|
APAC Tech
|
|
|
397
|
|
APAC Fulfillment
|
|
|
2
|
|
APAC Private Label
|
|
|
7
|
|
APAC Management Office
|
|
|
5
|
|
APAC Legal
|
|
|
1
|
|
APAC Internal Audit
|
|
|
4
|
|
|
|
|
1,789
|
|
Region
|
|
Number
of Employees
|
|
United States
|
|
|
982
|
|
China
|
|
|
654
|
|
Taiwan
|
|
|
123
|
|
Canada
|
|
|
30
|
|
Total
|
|
|
1,789
|
|
During the holiday season, Newegg have
historically added temporary workers to augment its full-time work force.
Facilities
As of December 31, 2020 Newegg leased
the following principal facilities:
Description
of Use
|
|
Approximate
Square Footage
|
|
|
Geographic
Location
|
|
Lease
Expirations
|
|
|
|
(in thousands)
|
|
|
|
|
|
Corporate
office facilities
|
|
|
149,057
|
|
|
North
America
|
|
12/31/2022 through
11/30/2029
|
Fulfillment and
warehouse operations
|
|
|
1,578,723
|
|
|
North
America
|
|
From 10/31/2021 through
11/30/2029
|
As of December 31, 2020, Newegg owned
the following principal facilities:
Description of Use
|
|
Approximate Square Footage
|
|
|
Geographic Location
|
Corporate office facilities
|
|
|
362,044
|
|
|
China
|
Corporate office facilities
|
|
|
3,369
|
|
|
Taiwan
|
Fulfillment and warehouse operations
|
|
|
109,473
|
|
|
China
|
Newegg’s corporate
headquarters is located in City of Industry, California. Newegg also leases additional corporate office facilities and
fulfillment and warehouse operations throughout North America, principally in California, Indiana and New Jersey in the United
States, and Toronto in Canada. Outside of North America, Newegg also owns or leases corporate office facilities and fulfillment
and warehouse operations, principally in China, Taiwan and the United Kingdom. Newegg’s Asia headquarters is in Shanghai.
Newegg periodically evaluates its facility requirements as necessary and believes its existing and planned facilities will be
sufficient for its needs for at least the next twelve months.
Seasonality
Newegg’s business
performance is subject to seasonal fluctuations. It has undergone and expects to continue to undergo an increase in activity during
the year-end holiday period. These seasonal effects cause differences in revenues and expenses among the various quarters of any
financial year, which means that the individual quarters should not be directly compared with each other or be used to predict
annual financial results. This intra-year seasonal fluctuation in demand is in accord with historic experience in the retail and
e-commerce industries, with increased volumes during the fourth calendar quarter of the year.
Government Regulations
Newegg is subject
to U.S. federal and state consumer protection laws, including laws protecting the privacy of customer non-public information and
regulations prohibiting unfair and deceptive trade practices. Other existing and future laws cover issues such as user privacy,
spyware and the tracking of consumer activities, marketing e-mails and communications, other advertising and promotional practices,
money transfers, pricing, content and quality of products and services, taxation, electronic contracts and other communications
and information security.
Particularly, under
applicable federal and state laws and regulations addressing privacy and data security, Newegg must provide notice to consumers
of its policies with respect to the collection and use of personal information, and its sharing of personal information with third
parties, and notice of any changes to its data handling practices. In some instances, Newegg may be obligated to give customers
the right to prevent sharing of their personal information with third parties. Under applicable federal and state laws, Newegg
also is required to comply with a number of requirements when sending commercial email to consumers, including identifying advertising
and promotional emails as such, ensuring that subject lines are not deceptive, giving consumers an opportunity to opt-out of further
communications and clearly disclosing its name and physical address in each commercial email. Regulation of privacy and data security
matters is an evolving area, with new laws and regulations enacted frequently. For example, California recently enacted legislation
that, among other things, requires new disclosures to California consumers, and affords such consumers new abilities to opt out
of certain sales of personal information, effective January 1, 2020. In addition, under applicable federal and state unfair competition
laws, including the California Consumer Legal Remedies Act, and U.S. Federal Trade Commission, or FTC, regulations, Newegg must
accurately identify product offerings, not make misleading claims on its platforms, and use qualifying disclosures where and when
appropriate.
There is also great
uncertainty over whether or how existing laws governing issues such as property ownership, sales and other taxes, auctions, libel
and personal privacy apply to the Internet and commercial online services. For example, tax authorities in a number of states are
currently reviewing the appropriate tax treatment of companies engaged in online commerce, and new state tax regulations may subject
the Company to additional state sales and income taxes. Additionally, new state legislation may also subject it to other types
of taxes. New legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently
apply to its business or the application of existing laws and regulations to the Internet and commercial online services could
result in significant additional taxes or regulatory restrictions on its business or may necessitate changes to its business practices.
These obligations or changes could have an adverse effect on Newegg’s financial position and results of operations.
Newegg’s international
operations are subject to foreign laws and regulations addressing topics such as customs duties and taxes, advertising and marketing
practices, privacy, data protection and information security and consumer rights, as well as additional laws and regulations, including
restrictions on imports from, exports to, and services provided to persons located in certain countries and territories, any of
which might apply by virtue of Newegg’s operations in foreign countries and territories or its contacts with consumers in
such foreign countries and territories. For example, in Canada, Newegg is subject to labor and employment laws, laws governing
advertising, privacy and data security laws, safety regulations and other laws, including consumer protection regulations that
apply to online retailers and/or the promotion and sale of merchandise and the operation of stores and warehouse facilities. Newegg
monitors changes in these laws, regulations, treaties and agreements, and believes that Newegg is in material compliance with applicable
laws.
Legal Proceedings
From time to time,
Newegg may be involved in legal proceedings in the ordinary course of its business. Except as disclosed below, Newegg is currently
not a party to any material legal or administrative proceedings.
In February 2018, the
Commonwealth of Massachusetts Department of Revenue issued a notice of intent to assess (“NIA”) sales/use taxes
on Newegg for the period from October 1, 2017 through October 31, 2017 for a total assessment of $652,254.68 including penalties
and interest. The Department of Revenue subsequently reduced this amount to $295,910.68. In May 2020, Newegg received from the
Commonwealth of Massachusetts Department of Revenue another notice of assessment for sales and use taxes for the months of November
2017 through September 2018 in the amount of $2,721,369.77, including penalties and interest. Newegg has appealed these assessments
and Newegg intends to vigorously protest them. The outcome of this matter or the timing of such payments, if any, cannot be predicted
at this time.
In 2017, Newegg, along
with two of its subsidiaries and various third parties, were named as defendants in a case brought by four South Korean banks in
U.S. District Court for the Central District of California. The complaint alleged claims for intentional and negligent misrepresentation,
negligent supervision and unfair competition, and sought damages against, among other entities, Newegg and two of its subsidiaries.
In April 2018, the Court dismissed all claims against Newegg Trading Limited without prejudice. In October 2018, the court granted
Newegg’s motion to dismiss all claims against Newegg and its remaining subsidiary without leave to amend.
In December 2014, an
individual plaintiff sued Newegg’s subsidiary, Newegg.com Americas Inc. (“Newegg.com Americas”), in Superior
Court in Los Angeles County, California, alleging that Newegg.com Americas had engaged in deceptive advertising practices and seeking
to certify a class action. In 2016, the trial court sustained Newegg.com Americas’ demurrer to the plaintiff’s claims
without leave to amend. The plaintiff appealed, and in July 2018 an appellate court reversed the decision of the trial court, thus
allowing the case to proceed. The matter is now pending in the trial court, with Newegg Inc. having been added as a defendant.
Newegg does not believe that a loss is probable and intends to vigorously defend itself and its subsidiaries. Depending on the
amount and timing, an unfavorable result could materially affect Newegg’s business, consolidated results of operations, financial
position or cash flows.
MANAGEMENT
Set forth below is
information concerning our directors, executive officers and other key employees as of this the date of this prospectus and upon
consummation of the Restructure and this Offering.
Name
|
|
Age
|
|
Position(s)
|
Bin Lin(1)
|
|
55
|
|
Chairman and
Chief Executive Officer
|
Yingmei Yang(1)(2)
|
|
50
|
|
Director and
Interim Chief Financial Officer
|
Richard Zhiqiang
Chang(1)
|
|
57
|
|
Independent Director
|
Bin Pan(1)
|
|
47
|
|
Independent Director
|
Fuya Zheng
|
|
53
|
|
Independent Director
|
Ping Chen(1)
|
|
57
|
|
Founder and former
Chief Executive Officer of the Company, and President and Legal Representative of Lianluo Connection
|
Zhitao “Tom”
He(2)
|
|
38
|
|
Chairman
|
Fred Faching
Chang(2)
|
|
63
|
|
Director
|
Gregory Moore(2)
|
|
70
|
|
Independent Director
|
Paul Wu(2 )
|
|
50
|
|
Independent Director
|
Anthony Chow(2)(3)
|
|
55
|
|
Director and
Chief Executive Officer
|
Robert Chang(3)
|
|
52
|
|
Chief Financial
Officer
|
Jamie Spannos(3)
|
|
43
|
|
Chief Operating
Officer
|
Montaque Hou(3)
|
|
40
|
|
Chief Technology
Officer
|
Matt Strathman(3)
|
|
51
|
|
General Counsel
|
(1)
|
Each of Mr. Bin Lin, Mr. Richard Zhiqiang
Chang, Mr. Bin Pan, and Mr. Ping Chen will resign from their current positions with us, effective immediately prior to the
closing of this Offering. Ms. Yingmei Yang will resign her position of Interim Chief Financial Officer, effective immediately
prior to the closing of this Offering.
|
(2)
|
To
be appointed as a director effective immediately prior to the closing of this Offering.
|
(3)
|
To
be employed as an officer effective immediately prior to the closing of this this Offering
|
Mr. Bin
Lin. Mr. Lin became the our chairman of the board and chief executive officer on August 25, 2020, to fill in the vacancy created
by the resignation of Mr. Zhitao He. Mr. Lin has been acting as the chairman of the board of Beijing Huitu Information Technology
Co., Ltd. (“Huitu”) since December 2013. Huitu, a company based in Beijing, China, develops and sells water resources
application software and related products. From January 2006 to December 2013, he was the chief executive officer of China Fire
& Security Group, a company engaged in the design, development, manufacturing and sale of industrial fire protection products
and services, whose common stock was listed on The NASDAQ Stock Market from 2007 to 2011. From January 2000 to December 2005,
he was the general manager of Beijing Linkehaide Technology Co., Ltd, a provider of software and hardware development platforms
and solutions for telecom equipment manufacturers and value-added service operators. Mr. Lin received a master’s degree
in Electrical Engineering from University of Toronto in 1989, a master’s degree in Management Science from Huazhong University
of Science and Technology in 1987 and a bachelor’s degree in Electrical Engineering from Huazhong University of Science
and Technology in 1986. Mr. Lin is a Canadian national and currently lives in Beijing, China. Mr. Lin will resign from his positions
of the chairman and chief executive officer upon closing.
Ms. Yingmei Yang. Immediately
prior to the closing of the Offering, Mr. Wu will resign from her position of Interim Chief Financial Officer and will be appointed
to be the director of the post-closing issuer. Ms. Yang has served as our interim Chief Financial Officer since March 15, 2018
and on our board of directors since April 1, 2020. Ms. Yang has served as the director of Newegg since July 2018. In addition,
she has acted as the Vice President of Hangzhou Lianluo Interactive Information Technology Co., Ltd., a major shareholder of the
Company since February, 2018. From January, 2015 to February, 2018, Ms. Yang has served as Chief Financial Officer and Vice President
of Lianluo Interactive. From February, 2013 to January, 2015, Ms. Yang was the Chief Financial Officer and Secretary of Board of
Beijing Digit Horizon Technology Limited, the predecessor of Lianluo Interactive. Ms. Yang currently also serves on the board of
directors of Newegg Inc.
Mr. Richard
Zhiqiang Chang. Mr. Chang has served as our independent director since 2016. Mr. Richard Chang has been CEO of Beijing
Zhineng Technology Co., Ltd. in Beijing China since October 2015. Prior to that position, he served as a Key Account Manager and
Business VP at AREVA Inc. in Beijing, China from 2013 through October 2015 and Chief Representative and Regional VP at Ventyx
Inc. in Atlanta, Georgia from July 2009 to July 2013. Mr. Chang earned a master’s degree in computer science in 1997 from
the University of Texas as Dallas, a master’s degree in automation in 1990 from Shanghai Jiaotong University and a bachelor’s
degree in automation in 1985 from the same school. Mr. Chang will resign from his position of the independent director upon closing.
Mr. Bin Pan. Mr.
Pan has served as our independent director since October 2016. Mr. Bin Pan is the Chairman of Shanghai Hubo Investment Management
Co., Ltd. He is also the independent director of Hangzhou Lianluo Interactive Information Technology Co. Ltd., Shanghai Yaoji
Playing Card Co., Ltd, Shenzhen Prolto Supply Chain Management Co., Ltd and Shanghai Zhixin Electric Co., Ltd. Mr. Pan has been
a partner in Shanghai Capital Law & Partners law firm since June 2004. He used to be the vice-president at the investment
banking division of China Southern Securities Co., Ltd. from March 1997 to June 2004. Mr. Pan earned his master’s degree
in International Economic Law from Shanghai University of International Business and Economics in 1997 and his bachelor’s
degree in 1994 from Huazhong University of Science and Technology University. Mr. Pan will resign from his position of the independent
director upon closing.
Mr. Fuya Zheng. Mr.
Zheng was appointed as an independent director on April 24, 2020 and will continue to serve as an independent director upon closing.
Mr. Zheng has extensive experience in corporate finance and investment management. He was a consultant of Yingde Gases Group Company
(“Yingde Gases”), a leading industrial gas supplier in China, from September 2017 to March 2020. Mr. Zheng was an
independent director of Yingde Gases from September 2009 to September 2017. From February 2018 until May 2019, Mr. Zheng was also
an independent director of ChinaCache International Holdings Ltd. (CCIHY). From January 2008 to November 2012, Mr. Zheng was Chief
Financial Officer of Cogo Group, Inc., a then NASDAQ listed company that provided customized module design solutions and manufactured
electronic products in China. Mr. Zheng was also a director of the same company from January 2005 to November 2012. Prior to that,
Mr. Zheng was vice president of travel service at eLong, Inc., one of the leading online travel service companies in China and
listed on NASDAQ, where he was responsible for the overall operation of eLong Inc.’s travel services. Mr. Zheng received
a Bachelor of Business Administration majoring in accounting from City University of New York in 1994.
Mr. Ping Chen. Mr.
Chen served as a director of the Company from 2003 to April 1, 2020 and our Chief Executive Officer from 2000 to April 1, 2020.
From 1993 to 2000, Mr. Chen served as the CEO of Beijing Chengcheng Medical Electronic Equipment Co. Prior to 1993, Mr. Chen was
an engineer at the No. 2 Academy, Ministry of Aeronautics and Astronautics from 1987 to 1991 and moved up to the Head of the Civilian
Products Division there from 1991 to 1993. Mr. Chen founded BTL in 2001 and has served as CEO since that time. Mr. Chen received
his bachelor’s degree in 1984 from the National University of Defense Technology and his master’s degree in 1987 from
the Ministry of Aeronautics and Astronautics. After his resignation as a director and Chief Executive Officer of the Company on
April 1, 2020, Mr. Chen continues to serve as the president and legal representative of Lianluo Connection and Beijing Dehaier.
Mr. Chen will resign from his position of the director upon closing.
Mr. Zhitao He. Immediately prior to the closing of the Offering, Mr. He will
be appointed to be the chairman of the board and director of the post-closing issuer. Mr.
He has served as the director of Newegg since March 2017 and the chairman of Newegg’s board of directors since March 2018.
In addition, Mr. He was the former chairman of the Company’s board of directors from October 2016 to August 2020, and the
Company’s former Chief Executive Officer since April 1, 2020 to August 2020. Mr. Zhitao He is also the Chairman of
the Board of Lianluo Interactive, a China-listed company and a major shareholder of the Company. Mr. Zhitao He successfully led
Lianluo Interactive to list on China’s A share market (ticker: 002280). Mr. Zhitao He was named one of the “10 Top
Entrepreneurs of Post-1980s” by Hurun Report and “Top Ten Entrepreneurial Leader of Listed Companies” by Securities
Times. In the past two years, under his leadership, Lianluo Interactive has moved into the field of smart hardware, including
the purchase of Newegg (http://www.newegg.com), investments in American virtual reality (“VR”) device manufacturer
Avegant (www.avegant.com) and hardware corporation Razer (http://www.razerzone.com), and promotion of the world’s biggest
VR Operating System OSVR in China together with Razer. This investment plan has allowed Lianluo Interactive to become a closed
loop of “Software and Hardware + Platform + Channels”. Mr. He currently serves on the board of directors of Lianluo
Interactive, Newegg Inc., Avegant Light Field Technology, Beijing Digital Grid Technology Co., Ltd., Shenzhen Ailianluo Investment
Co., Ltd., Hangzhou Lianluo Holding CO., Ltd., Beijing Lianluo Youjia Technology Co., Ltd. and Shenyang Zhitongrong Networking
Technology Co., Ltd. Mr. He received his master’s degree from Beijing University of Posts and Telecommunications. Mr. He
founded Lianluo Interactive in 2007 which was known as Beijing Digital Grid Technology Co.
Mr. Fred
Faching Chang (or Mr. Fred Chang). Immediately prior to the closing of the Offering, Mr. Chang will be appointed to be a
director of the post-closing issuer. Mr. Chang has been a member of Newegg’s board from September 2019 to present. He
currently serves as the Vice Chairman of Newegg’s board of directors and the chairman of strategy committee. He was
previously a director of Newegg from 2005 to August 2018, and was a member of Newegg’s board’s compensation
committee from 2017 to August 2018. During the periods of 2005 to 2008, January 2013 to January 2015, and October 2019 to March 2020, Mr.
Chang had also been Newegg’s Chief Executive Officer.
Mr. Gregory
Moore. Immediately prior to the closing of the Offering, Mr. Moore will be appointed to be a director of the
post-closing issuer. Mr. Moore has been a member of Newegg’s board of directors since 2011. He currently serves as
the chair of Newegg’s audit and nominating & governance committees and as a member of its compensation committee.
He previously served as chair of the compensation committee. Mr. Moore previously served as the Senior Vice President and
Controller of Yum! Brands, Inc. until he retired in 2005. Yum! Brands is the world-wide parent company of Taco Bell, KFC and
Pizza Hut. Prior to becoming Yum! Brands’ Controller, Mr. Moore was the Vice President and General Auditor of Yum!
Brands. Before that, he was with PepsiCo, Inc. and held the position of Vice President, Controller of Taco Bell and
Controller of PepsiCo Wines & Spirits International, a division of PepsiCola International. Before joining PepsiCo he was
an Audit Manager at Arthur Young & Company in its New York, New York and Stamford, Connecticut offices. Mr. Moore also
serves on the board of EF&TRH Restaurants (HK) Holding Limited, a Texas Roadhouse, Inc. joint-venture in China.
Mr. Paul
Wu. Immediately prior to the closing of the Offering, Mr. Wu will be appointed to be a director of the post-closing
issuer. Mr. Paul Wu joined Newegg’s board of directors in February 2020. He currently serves as the chair of
Newegg’s compensation committee and as a member of its audit and nominating & governance committees. Mr. Wu is the
founder and CEO of Carota, a supplier of connected car services. Mr. Wu is also the
co-founder of the MOX mobile accelerator. He previously served as the CEO of Pocketnet Tech, a mobile content provider, and
has also served in various roles with MediaTek, Hon Hai Foxconn Technology Group and Hong Kong Hutchison Wampoa’s TOM
Group. Mr. Wu obtained his degree from the Department of Agricultural Economics at Taiwan University, and obtained an MBA
from RSM Rotterdam Business School in the Netherlands.
Mr. Anthony
Chow. Immediately prior to the closing of the Offering, Mr. Chow will be appointed to be a director of the post-closing
issuer. His employment at the post-closing issuer as the Chief Executive Officer will be effective at the same time. Mr. Chow
is the Global Chief Executive Officer of Newegg. He sets the company’s strategic direction and works closely with
Newegg’s executives to ensure consistent execution across the organization. In addition to Mr. Chow’s
role as Global CEO, he also serves on the company’s board of directors. Mr. Chow’s leadership has guided Newegg
through some of the company’s most transformative years. He first served as Vice President of Newegg’s North
American business from 2006 until 2008, before moving to Shanghai to oversee Newegg’s China operation, as well as OZZO
Logistics, a Newegg subsidiary providing third-party logistics (3PL) support for other e-commerce companies based in China.
In 2011, Mr. Chow left Newegg to become CEO of OTTO Group China, the Chinese subsidiary of Germany’s largest online
retailer of fashion and lifestyle products. In this role, he helped the company extend its reach beyond Europe and into key
parts of Asia. Then in 2015, he was appointed Vice President of Haier China, a global home appliance and consumer electronics
manufacturer based in Qingdao, China. Upon rejoining Newegg in 2019, Mr. Chow made sweeping changes to position the company
for continued success in the rapidly expanding e-commerce space. Consequently, Newegg remains one of the leading tech
e-commerce companies with strong market share in consumer sales, and a growing portfolio of services for the company’s
vendor partners, marketplace sellers and 3PL clients. Mr. Chow holds a Bachelor’s degree in Electrical &
Electronics Engineering from the University of Toledo, and a Master of Business Administration from the UCLA Anderson School
of Management.
Mr. Robert
Chang. Immediately prior to the closing of the Offering, Mr. Chang will be employed to serve as the Chief Financial
Officer of the post-closing issuer. Mr. Chang is the Chief Financial Officer of Newegg. In this role, he is responsible for
overseeing all aspects of the company’s financial performance, including forecasting, evaluation and reporting. Mr.
Chang has served the company in various finance-related roles for more than two decades, first joining the company in 1999
and later being appointed to the CFO role in 2015. Prior to Newegg, Mr. Chang spent five years as an Operational Analyst at
Taiwan YFY Paper Manufacturers. Mr. Chang holds a Bachelor’s degree in Economics from Soochow University, and a
Master’s degree in Finance from University of La Verne.
Mr. Jamie
Spannos. Immediately prior to the closing of the Offering, Mr. Spannos will be employed to serve as the Chief Operating
Officer of the post-closing issuer. Mr. Spannos is the Global Chief Operating Officer of Newegg. In this role, he is
responsible for the strategic direction and operational development of Newegg’s supply chain operations, managing
end-to-end operations for the company’s 32M+ SKUs in more than 1,665 product categories sold into 20 countries across
the globe. Mr. Spannos also oversees Newegg Logistics, a separate Newegg business unit that provides third-party logistics
(3PL) services to other e-commerce companies. Prior to joining Newegg in 2018, Mr. Spannos was Senior Vice President of North
America Fulfillment and Logistics at FTD.com, where he oversaw all FTD.com and sub-brand operations across 103 drop-ship and
internal distribution centers. Before his time at FTD.com, Mr. Spannos spent five years heading up distribution for Kraft
Heinz Company, managing the company’s robust network of 26,500 3PL and Kraft Heinz employees across 128 distribution
locations. In that role, he also played an instrumental part in providing strategic and executional direction in optimizing
the company’s warehousing infrastructure, in turn unifying several distribution partnership models related to a
multitude of company mergers and divestitures. And before Kraft Heinz, he served as GM/VP/Managing Director of Home
Depot’s Import and Domestic Distribution Field Operations, helping to build the foundation of Home Depot’s supply
chain during his 12-year tenure with the company. He holds the distinction of being the youngest at Home Depot to ascend to
the GM role at the time. His experience of more than 20 years across a broad range of business functions uniquely qualifies Mr. Spannos
to continue and expand Newegg’s operational excellence, positively impacting Newegg’s customers and the many
businesses that rely on Newegg’s 3PL support.
Mr. Montaque
Hou. Immediately prior to the closing of the Offering, Mr. Hou will be employed to serve as the Chief Technical Officer
of the post-closing issuer. Mr. Hou serves as the Chief Technical Officer of Newegg since 2016. In this role, he is responsible for all
technical aspects of the Newegg shopping experience, including the website, mobile app and other touchpoints including SMS
and email interaction. Mr. Hou’s global technology team of more than 500 engineers designs, develops and deploys the
technology that underpins site design, customer service, Newegg’s marketplace, resource planning, logistics and
inventory management of more than 100M unique SKUs. The technical development under Mr. Hou’s direction infuses the
latest data science, machine learning and artificial intelligence to enhance the shopping experience with search
personalization and product recommendations, as well as safeguards that deter fraudulent activity and eliminate counterfeit
product listings on Newegg’s marketplace. Under Mr. Hou’s stewardship, Newegg built and maintains its reputation
of pioneering new e-commerce user experiences through customer-driven innovations, personalizing the shopping experience to
deliver an intuitive, rewarding shopping experience. Newegg recently became the first major e-commerce company to offer a
native Dark Mode, further cementing the company’s position as a leading e-commerce innovator. Prior to Mr. Hou’s
tenure as CTO, he held various technical positions at Newegg, including Solutions Architect, Director of Technology Strategy
and Chief Architecture Engineer. Mr. Hou holds a Master of Science in analytical chemistry from Tongji University in
Shanghai.
Mr. Matt
Strathman. Immediately prior to the closing of the Offering, Mr. Strathman will be employed to serve as the General
Counsel of the post-closing issuer. Mr. Strathman is the General Counsel of Newegg. In this role, he is responsible for
overseeing all aspects of the company’s legal matters, including compliance and litigation. Mr. Strathman has served
the company in various legal roles for more than ten years, first joining the company in 2008. Prior to Newegg, Mr. Strathman
worked as Sr. Counsel for Empire Companies, and prior to that worked as a business attorney in private practice. Mr.
Strathman holds bachelor’s degrees in Economics and History from the University of California, Riverside, and a Juris
Doctor from Loyola Law School.
Board of Directors
Our board of directors
currently consists of 5 directors, and will consist of 7 directors upon the closing of this Offering.
A director may vote
in respect of any contract or transaction in which he is interested, provided, however that the nature of the interest of any
director in any such contract or transaction shall be disclosed by him at or prior to its consideration and any vote on that matter.
A general notice or disclosure to the directors or otherwise contained in the minutes of a meeting or a written resolution of
the directors or any committee thereof of the nature of a director’s interest shall be sufficient disclosure and after such
general notice it shall not be necessary to give special notice relating to any particular transaction. A director may be counted
for a quorum upon a motion in respect of any contract or arrangement which he shall make with our company, or in which he is so
interested and may vote on such motion. There are no membership qualifications for directors. Further, there are no share ownership
qualifications for directors unless so fixed by us in a general meeting.
The Listing Rules
of NASDAQ generally require that a majority of an issuer’s board of directors must consist of independent directors. However,
the Listing Rules of NASDAQ permit foreign private issuers like us to follow “home country practice” in certain corporate
governance matters. We rely on this “home country practice” exception and do not have a majority of independent directors
serving on our board of directors. Mr. Gregory Moor, Mr. Paul Wu, and Mr. Fuya Zheng will be the independent directors of post-closing
issuer.
We do not have a lead
independent director because we believe our independent directors are encouraged to freely voice their opinions on a relatively
small company board. We believe this leadership structure is appropriate because we are a smaller reporting company.
Pursuant to the
Fifth Amended and Restated Memorandum and Articles of Association, subject to compliance with applicable laws and NASDAQ rules,
provides that Digital Grid and Mr. Fred Faching Chang, acting as the “Minority Representative”, shall be entitled
to designate nominees to our board of directors in a number that is proportionate to the voting power of Digital Grid and its
affiliate, and Legacy Shareholders in the post-closing issuer, respectively.
Digital Grid
has nominated Mr. Zhitao He, Ms. Yingmei Yang, Mr. Paul Wu, and Fuya Zheng, and Mr. Fred Chang has nominated Mr. Fred Faching
Chang, Mr. Greg Moore and Mr. Anthony Chow to serve as the directors of the post-closing issuer.
Duties of Directors
Under British Virgin
Islands law, our directors have duties to act honestly, in good faith and with a view to our best interests. Our directors also
have a duty to exercise the care, diligence and skills that a reasonably prudent person would exercise in comparable circumstances.
In fulfilling their duty of care to us, our directors must ensure compliance with our amended and restated memorandum and articles
of association. We have the right to seek damages if a duty owed by our directors is breached. The functions and powers of our
board of directors include, among others:
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appointing
officers and determining the term of office of the officers;
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authorizing
the payment of donations to religious, charitable, public or other bodies, clubs, funds
or associations as deemed advisable;
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exercising
the borrowing powers of the company and mortgaging the property of the company;
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executing
checks, promissory notes and other negotiable instruments on behalf of the company; and
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maintaining
or registering a register of mortgages, charges or other encumbrances of the company.
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Limitation of Director and Officer Liability
British Virgin Islands
law does not limit the extent to which a company’s memorandum and articles of association may provide for indemnification
of officers and directors, except to the extent any such provision may be held by the British Virgin Islands courts to be contrary
to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime.
Under our amended
and restated memorandum and articles of association, we may indemnify our directors, officers and liquidators against all expenses,
including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with
civil, criminal, administrative or investigative proceedings to which they are party or are threatened to be made a party by reason
of their acting as our director, officer or liquidator. To be entitled to indemnification, these persons must have acted honestly
and in good faith with a view to the best interest of the company and, in the case of criminal proceedings, they must have had
no reasonable cause to believe their conduct was unlawful.
Insofar as indemnification
for liabilities arising under the Securities Act may be permitted for our directors or officers under the foregoing provisions,
we have been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities
Act and is therefore unenforceable as a matter of United States law.
Involvement in Certain Legal Proceedings
On August 6, 2020,
Hangzhou Lianluo and Mr. Zhitao He received an investigation notice from China Securities Regulatory Commission (“CSRC”)
for alleged violation of laws and regulations regarding information disclosures of Hangzhou Lianluo. Hangzhou Lianluo is a PRC
company with shares listed on Shenzhen Stock Exchange. Mr. He is the Chairman and Chief Executive Officer of Hangzhou Lianluo.
Hangzhou Lianluo is also the largest shareholder of the Company and Mr. He was the former Chairman and the former Chief Executive
Officer of the Company.
Hangzhou Lianluo has
announced this investigation on August 7, 2020 and stated that it will fully cooperate with CSRC in the investigation.
On September 28, 2020,
Hangzhou Lianluo announced that it has received a letter of advance notice of administrative punishment from Zhejiang Regulatory
Bureau of CSRC, which provides, among others, that (i) Hangzhou Lianluo is receiving a warning and required to correct its unlawful
acts and pay a fine of RMB 300,000, and (ii) Mr. Zhitao He is receiving a warning and required to pay a fine of RMB 400,000.
To the best of our
knowledge, except as disclosed herein, none of our directors or executive officers has been convicted in a criminal proceeding,
excluding traffic violations or similar misdemeanors, or has been a party to any judicial or administrative proceeding during
the past ten years that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting
activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities or commodities
laws, any laws respecting financial institutions or insurance companies, any law or regulation prohibiting mail or wire fraud
in connection with any business entity or been subject to any disciplinary sanctions or orders imposed by a stock, commodities
or derivatives exchange or other self-regulatory organization, except for matters that were dismissed without sanction or settlement.
There are no other
arrangements or understandings pursuant to which our directors are selected or nominated.
Family Relationship
There are no family
relationships among any of the persons named above, and there are no arrangements or understandings with major shareholders, customers,
suppliers or others, pursuant to which any such person was selected as a director or member of senior management.
Terms of Directors and Executive Officers
Each of our directors
holds office until a successor has been duly elected and qualified unless the director was appointed by the board of directors,
in which case such director holds office until the next following annual meeting of shareholders at which time such director is
eligible for re-election. All of our executive officers are appointed by and serve at the discretion of our board of directors.
Qualification
There is currently
no shareholding qualification for directors, although a shareholding qualification for directors may be fixed by our shareholders
by ordinary resolution.
Committees of the Board of Directors
Currently, three committees
have been established under the board: the audit committee, the compensation committee and the nominating committee. Our nominating
committee consists of Bin Pan, Richard Zhiqiang Chang and Fuya Zheng. Bin Pan is the chairman of our nominating committee. The
nominating committee is responsible for the assessment of the performance of the board, considering and making recommendations
to the board with respect to the nominations or elections of directors and other governance issues. The nominating committee considers
diversity of opinion and experience when nominating directors. Each committee’s members and functions are described below.
Audit Committee
Our audit committee
currently consist of Fuya Zheng, Richard Zhiqiang Chang and Bin Pan. Fuya Zheng is the chairman of our audit committee. Upon the
closing of this Offering, Mr. Gregory Moore, Mr. Paul Wu, and Mr. Zheng will become the members of our audit committee. Mr. Moore
will be the chairman of our audit committee. We have determined that Mr. Moore, Mr. Wu, and Mr. Zheng satisfy the “independence”
requirements of Section 5605(a)(2) of the NASDAQ Listing Rules and Rule 10A-3 under the Securities Exchange Act. Our board also
has determined that Mr. Moore qualifies as an audit committee financial expert within the meaning of the SEC rules or possesses
financial sophistication within the meaning of the NASDAQ Listing Rules. The audit committee oversees our accounting and financial
reporting processes and the audits of the financial statements of our company. The audit committee is responsible for, among other
things:
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appointing
the independent auditors and pre-approving all auditing and non-auditing services permitted
to be performed by the independent auditors;
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reviewing
with the independent auditors any audit problems or difficulties and management’s
response;
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discussing
the annual audited financial statements with management and the independent auditors;
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reviewing
the adequacy and effectiveness of our accounting and internal control policies and procedures
and any steps taken to monitor and control major financial risk exposures;
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reviewing
and approving all proposed related party transactions;
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meeting
separately and periodically with management and the independent auditors; and
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monitoring
compliance with our code of business conduct and ethics, including reviewing the adequacy
and effectiveness of our procedures to ensure proper compliance.
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Compensation Committee
Our compensation
committee currently consists of Mr. Richard Zhiqiang Chang, Mr. Fuya Zheng and Mr. Bin Pan. Mr. Richard Zhiqiang Chang is the
chairman of the compensation committee. Upon the closing of this Offering, Mr. Gregory Moore, Mr. Paul Wu, and Mr. Zheng will
become the members of our compensation committee. Mr. Wu will be the chairman of our compensation committee. The compensation
committee assists the board in reviewing and approving the compensation structure, including all forms of compensation, relating
to our directors and executive officers. Our chief executive officer may not be present at any committee meeting during which
his compensation is deliberated. The compensation committee is responsible for, among other things:
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reviewing
and approving to the board with respect to the total compensation package for our most
senior executive officers;
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approving
and overseeing the total compensation package for our executives other than the most
senior executive officers;
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reviewing
and recommending to the board with respect to the compensation of our directors;
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reviewing
periodically and approving any long-term incentive compensation or equity plans;
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selecting
compensation consultants, legal counsel or other advisors after taking into consideration
all factors relevant to that person’s independence from management; and
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reviewing
programs or similar arrangements, annual bonuses, employee pension and welfare benefit
plans.
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Nominating and
Corporate Governance Committee
Our nominating
and corporate governance committee currently consists of Mr. Bin Pan, Mr. Richard Zhiqiang Chang and Mr. Fuya Zheng. Mr. Bin Pan
is the chairman of our nominating committee. Upon the closing of this Offering, Mr. Gregory Moore, Mr. Paul Wu, and Mr. Zheng
will become the members of our nominating and corporate governance committee. Mr. Zheng will be the chairperson of our nominating
and corporate governance committee. The nominating and corporate governance committee assists the board of directors in selecting
individuals qualified to become our directors and in determining the composition of the board and its committees. The nominating
and corporate governance committee is responsible for, among other things:
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identifying
and recommending nominees for election or re-election to our board of directors or for
appointment to fill any vacancy;
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reviewing
annually with our board of directors its current composition in light of the characteristics
of independence, age, skills, experience and availability of service to us;
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identifying
and recommending to our board the directors to serve as members of committees;
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advising
the board periodically with respect to significant developments in the law and practice
of corporate governance as well as our compliance with applicable laws and regulations,
and making recommendations to our board of directors on all matters of corporate governance
and on any corrective action to be taken; and
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monitoring
compliance with our code of business conduct and ethics, including reviewing the adequacy
and effectiveness of our procedures to ensure proper compliance.
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Code of Ethics
Our code of conduct
and business ethics conforms to the rules and regulations of NASDAQ. The code of conduct and business ethics applies to all of
our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting
officer, and addresses, among other things, honesty and ethical conduct, conflicts of interest, compliance with laws, regulations
and policies, including disclosure requirements under the federal securities laws, confidentiality, trading on inside information,
and reporting of violations of the code. A copy of conduct and business ethics has been filed as an exhibit to our Registration
Statement on Form S-1, File no. 333-163041, filed on November 12, 2009, as amended. The Company will provide any person a copy
of its code of ethics, without charge, upon request. Such request should be addressed to the Company at Room 1003B, 10th Floor,
BeiKong Technology Building, No. 10 Baifuquan Road, Changping District, Beijing 102200, People’s Republic of China.
COMPENSATION
LLIT Directors and Executive Officers Compensation
For the year ended
December 31, 2020, the aggregate cash compensation accrued for LLIT directors and senior management as a group was approximately
$0.168 million, among which, approximately $0.108 million was paid in 2020 and the remaining $0.06 million was paid in January
2021. LLIT does not separately set aside any amounts for pensions, retirement or other benefits for our executive officers, other
than pursuant to relevant statutory requirements. Employee directors do not receive any compensation for their services as directors.
Non-employee directors are entitled to receive payment for serving as directors and may receive option grants from LLIT.
LLIT’s Stock Option Grants and
Exercises
Under our employee
stock option plans, our stock options generally expire after ten years from the date of grant.
In 2009, in connection
with our initial public offering, we established a pool for share options for our employees (the “2009 Share Incentive
Plan”). This pool contains options to purchase up to 450,000 of our common shares. The options will vest at a rate of
20% per year for five years and have an exercise price of the market price of our shares on the date the options are granted.
We issued all 450,000 options pursuant to our 2009 Share Incentive Plan on December 29, 2011 at an exercise price of $1.45 per
share, which vest over five years until December 28, 2016 and will expire on December 29, 2021. As of October 7, 2013, 1,000 options
issued under this plan had been exercised for common shares, and the Board of the Company decided to grant Mr. Ping Chen 94,000
options recovered from former employees who received options under this plan and thereafter left the Company. These 94,000 options
were awarded to Mr. Chen on October 7, 2013, at an exercise price of $2.30 per share, which vest over five years until October
6, 2018 and will expire on October 7, 2023. As of the date of this prospectus, there are an aggregate of 199,000 options issued
and outstanding under this 2009 Share Incentive Plan.
In 2013, we established
our 2013 Share Incentive Plan. This pool allows us to issue options, common shares and other securities exercisable or convertible
into, in the aggregate, 462,000 of our common shares. We issued 131,000 options pursuant to our 2013 Share Incentive Plan on August
20, 2014 at an exercise price of $5.31 per share which vest over five years until August 19, 2019. As of the date of this prospectus,
there are 131,000 options issued and outstanding under this plan which will expire on August 20, 2024.
On July 28, 2014,
the shareholders of the Company approved the “2014 Share Incentive Plan” which provides that the maximum number of
shares authorized for issuance under this plan shall not exceed ten percent of the number of issued and outstanding shares of
company stock as of December 31 of the immediately preceding fiscal year, and an additional number of shares may be added automatically
annually to the shares issuable under the Plan on and after January 1 of each year, from January 1, 2015 through January 1, 2024.
The “2014 Share Incentive Plan” shall terminate on the tenth anniversary of its effective date of July 28, 2014.
Accordingly, our share
incentive plan for fiscal 2014 allows us to issue options, common shares and other securities exercisable or convertible into,
in the aggregate, 466,800 of our common shares. We issued 349,000 options under this share option pool on August 7, 2015, at an
exercise price of $1.64 per share, which vest over two years until August 6, 2017. As of the date of this prospectus, there are
119,000 options issued and outstanding under this plan which will expire on August 7, 2025.
In 2015, our 2014
Share Incentive Plan (2015 Tranche) allows us to issue options, common shares and other securities exercisable or convertible
into, in the aggregate, 580,867 of our common shares. We issued 580,867 options pursuant to our 2015 Tranche on March 21, 2016
at an exercise price of $1.88 per share which vest over two years until March 20, 2018. As of the date of this prospectus, there
are 345,867 options issued and outstanding under this plan which will expire on March 21, 2026.
On June 8, 2017, we
held the Annual General Meeting to approve the Company’s amended and restated Memorandum and Articles of Association in order
that the Company’s authorized share capital be re-classified and re-designated into 50,000,000 common shares of par value
of $0.002731 each, of which 37,888,889 would be designated as Class A Common Shares of par value of $0.002731 each, and 12,111,111
be designated as Class B Common Shares of par value of $0.002731 each. After this recapitalization event, shares issuable under
the “2014 Share Incentive Plan,” either directly or upon exercise of options issued under this Plan, are limited to
Class A Common Shares.
On January 12, 2018,
the Company registered on Form S-8 1,150,391 shares representing Class A Common Shares (prior to the one-for-eight reverse stock
split) issuable pursuant to the 2014 Share Incentive Plan (2018 Tranche), either directly or upon exercise of options issued under
the 2018 Tranche. We did not issue options under this Tranche.
Stock Option Plan of the Post-Closing
Issuer
Upon
closing of the Restructure and this Offering, the post-closing issuer will assume the Newegg 2005 Incentive Award Plan
(prior to the closing, the incentive award plan of Newegg is referred to as “Newegg 2005 Incentive Award Plan”;
the post-closing incentive award plan is referred to as “Incentive Award Plan”). The outstanding options under
the Newegg 2005 Incentive Award Plan granted by Newegg will be exchanged for options to acquire a certain number of Common
Shares under the Incentive Award Plan upon completion of the Merger, based on the LLIT Conversion Ratio and subject to adjustment
for the Share Combination.
Below is a description of the current Newegg’s
2005 Incentive Award Plan.
Newegg’s 2005 Incentive Award Plan:
On September 22,
2005, the Newegg 2005 Incentive Award Plan was approved and was later amended in January 2008, October 2009, December
2011 and September 2015. Under the Newegg 2005 Incentive Award Plan, Newegg may grant equity incentive awards to employees,
directors, and consultants based on Newegg’s Class A Common Stock. A committee of Newegg’s Board of Directors
determines the eligibility, types of equity awards, vesting schedules, and exercise prices for equity awards granted. Subject to
certain adjustments in the event of a change in capitalization or similar transaction, Newegg may issue a maximum of 14,200,000 shares
of its Class A Common Stock under the Newegg 2005 Incentive Award Plan. Newegg issues new shares of Class A Common
Stock from its authorized share pool to settle stock-based compensation awards. The exercise price of options granted under the
plan shall not be less than the fair value of Newegg’s Class A Common Stock as of the date of grant. Options typically
vest over a term of four years, and are typically exercisable for a period of 10 years after the date of grant, except when
granted to a holder who, at the time the option is granted, owns stock representing more than 10% of the voting power of all classes
of stock of Newegg or any subsidiaries, in which case, the term of the option shall be no more than five years from the date
of grant. In September 2015, the Newegg 2005 Incentive Award Plan was amended to permit additional awards to be made
after the tenth anniversary of the original adoption of said plan.
Newegg Significant Shareholder Incentive
Plan
In 2016, Fred Chang
established the Newegg Significant Shareholder Incentive Plan, pursuant to which he caused to be transferred a total of 5,198,458 shares
of Newegg’s Series A Preferred Stock from Tekhill USA LLC, a limited liability company fully owned by Fred Chang, into
the Fred Chang Partners Trust (the “Trust”). In March and May 2016, the Trust entered into restricted
share award agreements (the “Award Agreements”) with several key executives of Newegg, under which the
Trust granted a total of 5,090,157 restricted shares of Newegg’s Series A Preferred Stock to those executives to be
vested over a 15-year period in equal annual installments on each anniversary date of the grant date. As of December 31, 2016,
the Award Agreements were terminated with a concurrent offer from the significant shareholder to re-establish the Significant Shareholder
Incentive Program. During the year ended December 31, 2017, the re-established incentive program (the “Re-established
Significant Shareholder Incentive Program”) granted a total of 3,898,843 restricted shares of Newegg’s Series A
Preferred Stock to a subset of the same recipients with substantially the same terms as those under the Significant Shareholder
Incentive Program. The Re-established Significant Shareholder Incentive Program subsequently modified the vesting period from 15
years to 10 years during the year ended December 31, 2017, which did not have a significant impact on the consolidated financial
statements.
As
of the date of this prospectus, the restricted stock awards granted under the Newegg Significant Shareholder Incentive Plan
were all vested. The unvested amount of such restricted stock awards had been forfeited according to certain amendment to the
restricted stock award agreement by and between the Trust and recipient on March 31, 2020.
Agreements with Named Executive Officers of LLIT
We have entered into
standard three-year employment contracts, or where required by law, open-term employment contracts, with all of our officers and
managers and other key personnel, and three-year employment contracts, or where required by law, open-term employment contracts
with our other employees. These contracts prohibit our employees from engaging in any conduct or activity that would be competitive
with our business during the term of their employment. Loss of any of our key personnel could severely disrupt our business. We
may not be able to find suitable or qualified replacements and will likely incur additional expenses in order to recruit and train
any new personnel.
Agreements with Named Executive Officers of the Post-Closing
Issuer
Upon closing of the
Offering, we will enter into employment agreements with our named executive officers. Pursuant to employment agreements, the form
of which is filed as Exhibit 10.5 to this registration statement, the employment with each of our named executive officers is
for no fixed term and is “at will”, which can be terminated by us or each named executive officer at any time and
for any reason, with or without notice, with or without cause. Each named executive officer shall only use or disclose any confidential
information for the benefit of us, and as is necessary to carry out his or her responsibilities for us. Following the end of the
employment, each named executive officer shall return all confidential information and neither directly or indirectly, use or
disclose any such confidential information, except as expressly and specifically authorized in writing by us, and will hold, in
strict confidence and not to use or disclose to any person, corporation or other entity without written consent, any confidential
information.
PRINCIPAL SHAREHOLDERS
The following table
sets forth information with respect to the beneficial ownership, within the meaning of Rule 13d-3 under the Exchange Act, of our
Common Shares as of the date of this prospectus, and as adjusted to reflect the sale of the Common Shares offered in this Offering
for
|
●
|
each of
our directors and executive officers and our directors and executive officers nominees; and
|
|
●
|
each person
known to us to own beneficially more than 5% of our Common Shares.
|
Beneficial ownership
includes voting or investment power with respect to the securities. Except as indicated below, and subject to applicable community
property laws, the persons named in the table have sole voting and investment power with respect to all Common Shares shown as
beneficially owned by them. In computing the number of Common Shares beneficially owned
by a person listed below and the percentage ownership of such person, Common Shares underlying options, warrants or convertible
securities held by each such person that are exercisable or convertible within 60 days of the date of this prospectus are deemed
outstanding, but are not deemed outstanding for computing the percentage ownership of any other person. Except as otherwise indicated
in the footnotes to this table, or as required by applicable community property laws, all persons listed have sole voting and investment
power for all Common Shares shown as beneficially owned by them.
Percentage of beneficial
ownership of each listed person prior to this Offering is based on 3,465,683 Class A Common Shares and 1,388,888 Class B Common
Shares issued and as of the date of this prospectus.
Immediately prior
to completion of this offering, all outstanding Class B Common Shares and all holders of derivative securities exercisable or
convertible into Class B Common Shares shall receive certain number of Common Shares pursuant to the Fifth Amended and Restated
Memorandum and Articles of Association, while our dual class restructure will be eliminated. Therefore, percentage of beneficial
ownership of each listed person after this Offering includes Common Shares outstanding immediately after the completion of this
Offering. Immediately prior to completion of this offering, based on the Fifth Amended and Restated Memorandum and Articles of
Association, our authorized share capital will be unlimited Common Shares with a par value of $[ ] each. The number and percentage
of Class Shares beneficially owned before the offering are based on 3,465,683 Class A Common Shares and 1,388,888 Class B Common
Shares issued and outstanding as of the date of this prospectus. Information with respect to beneficial ownership has been furnished
by each director and officer nominee or beneficial owner of more than 5% of our Common Shares upon completion of this Offering.
Amount and Nature of Beneficial Ownership Prior to the Offering (1)
|
|
|
|
|
|
|
|
|
|
|
Name and Address
of Beneficial Owner
|
|
Office, If Any
|
|
Class A
Common
Shares
|
|
|
Class B
Common
Shares
|
|
|
Percent of Class(2)
|
|
|
Percent of
Aggregate Voting
Power(5)
|
|
Officers and Directors
|
Bin Lin
|
|
Chief Executive Officer, Director
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Yingmei Yang
|
|
Director and Interim Chief Financial Officer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Richard Zhiqiang Chang
|
|
Independent Director
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Bin Pan
|
|
Independent Director
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Fuya Zheng
|
|
Independent Director
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
All officers and directors as a group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
%
|
5%
Beneficial Owners
|
|
Zhitao He(4)
|
|
|
|
|
58,937
|
(3)
|
|
|
1,513,888
|
(4)
|
|
|
2.67%
(Class A Common Shares)
100% (Class B Common Shares)
|
|
|
|
86.64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hangzhou
Liaison Interactive Technology Co., Ltd.(4)
|
|
|
|
|
-
|
|
|
|
1,513,888
|
|
|
|
100
|
%
|
|
|
86.27
|
%
|
Ping Chen(6)
|
|
|
|
|
267,426
|
(6)
|
|
|
-
|
|
|
|
11.75
|
%
|
|
|
1.25
|
%
|
|
(1)
|
Beneficial Ownership
is determined in accordance with the rules of the SEC and generally includes voting or
investment power with respect to securities.
|
|
(2)
|
As of the date
of this prospectus, a total of 3,465,683 Class A Common Shares and 1,388,888 Class B
Common Shares are issued and outstanding pursuant to SEC Rule 13d-3(d)(1). For each Beneficial
Owner above, any securities that are exercisable or convertible within 60 days have been
included in the numerator and denominator for that person alone. We also have outstanding
warrants to purchase up to 1,373,750 of our Class A Common Shares, under the terms
of such warrants, the holders may not exercise the warrants to the extent that such warrant
holder, together with its affiliates, would beneficially own, after such exercise, more
than 4.99% of the Class A Common Shares then outstanding (in the case of certain holders,
9.99%), subject to the right of the holders to increase or decrease such beneficial ownership
limitation upon notice to the Company, provided that such limitation cannot exceed 9.99%,
and that any increase in the beneficial ownership limitation shall not be effective until
61 days after such notice is delivered. You can refer to the Form F-1/A filed with SEC
on May 15, 2020 for more information.
|
|
(3)
|
Represents
94,300 shares owned by Hyperfinite Galaxy Holding Limited. Hyperfinite Galaxy Holding Limited is controlled by Zhitao He.
|
|
(4)
|
Mr.
Zhitao He, our former Chief Executive Officer and a former director, is the Chairman and Chief Executive Officer of Hangzhou Lianluo.
This number also includes 125,000 Class B Common Shares underlying warrants that are exercisable within 60 days hereof. The Class
B Common Shares held by Mr. Zhitao He and the shares issuable upon exercise of this warrant will be converted to Common Shares
on a 1:1 ratio upon closing of this Offering.
|
|
(5)
|
For
each person and group included in this column, percentage of voting power is calculated by dividing the voting power owned by
such person or group by the voting power of all of Class A and Class B Common Shares as a single class. Prior to the closing of
this Offering, holders of Class A Common Shares are entitled to one vote per share, and holders of Class B Common Shares are entitled
to ten votes per share. Each Class B Common Share is convertible at any time by the holder into one (1) Class A Common Share.
Upon consummation of this Offering, holders of Common Shares are entitled to one vote per share.
|
|
(6)
|
Ping
Chen, our former Chief Executive Officer and a former director, has the sole power to
direct the voting and disposition of 201,692 Class A Common Shares held under his name.
In addition, Mr. Chen holds 65,733 Class A Common Shares underlying options, which are
vested within 60 days hereof. On August 31, 2020, Ping Chen pledged his 201,692 Class
A common shares to Hangzhou Lianluo in favor of Lianluo Connection with respect to the
indebtedness of RMB 6.5 million owed by Lianluo Connection to Hangzhou Lianluo.
|
Amount and
Nature of Beneficial Ownership after the Offering (1)
|
|
|
|
Name and Address
of Beneficial Owner
|
|
Office, If Any
|
|
Common
Shares(2)
|
|
|
Percent of
Aggregate Voting
Power(5)
|
|
Officers and Directors
|
Zhitao He(3)(4)
|
|
Director and Chairman
|
|
|
224,394,416
|
|
|
|
[●]
|
%
|
Fred Faching Chang(3)
|
|
Director
|
|
|
132,481,667
|
|
|
|
[●]
|
%
|
Gregory Moore(3)
|
|
Independent Director
|
|
|
-
|
|
|
|
-
|
|
Paul Wu(3)
|
|
Independent Director
|
|
|
125
|
|
|
|
*
|
%
|
Fuya Zheng
|
|
Independent Director
|
|
|
-
|
|
|
|
-
|
|
Yingmei Yang
|
|
Director
|
|
|
-
|
|
|
|
-
|
|
Anthony Chow(3)
|
|
Director and Chief Executive Officer
|
|
|
-
|
|
|
|
-
|
|
Robert Chang(3)
|
|
Chief Financial Officer
|
|
|
598,774
|
|
|
|
*
|
%
|
Jamie Spannos(3)
|
|
Chief Operating Officer
|
|
|
-
|
|
|
|
-
|
|
Montaque Hou(3)
|
|
Chief Technology Officer
|
|
|
-
|
|
|
|
-
|
|
Matt Strathman(3)
|
|
General Counsel
|
|
|
438,127
|
|
|
|
*
|
%
|
All officers and directors as a group
|
|
|
|
|
|
|
|
|
[●]
|
%
|
5% Beneficial
Owners
|
|
|
|
|
|
|
|
|
|
|
|
Digital Grid (Hong Kong) Technology Co.
Ltd.(4)
|
|
|
|
|
222,821,591
|
|
|
|
[●]
|
%
|
Fred Faching Chang(5)
|
|
|
|
|
132,481,667
|
|
|
|
[●]
|
%
|
|
(1)
|
Beneficial Ownership
is determined in accordance with the rules of the SEC and generally includes voting or
investment power with respect to securities.
|
|
(2)
|
Immediately prior to the closing of this Offering and Restructure, each Class B Common Share issued and outstanding will be converted
into on Common Share pursuant to the terms of the Fifth Amended and Restated Memorandum and Articles of Association. Upon closing
of this Offering and Restructure a total of [●]
Common Shares are issued and outstanding pursuant to SEC Rule 13d-3(d)(1). For each beneficial owner above, any securities that
are exercisable or convertible within 60 days have been included in the numerator and denominator for that person alone. The percentage
assumes offering of $30 million at an offering price of $[●].
|
(3)
|
To be appointed
as a director or an officer effective immediately prior to the closing of this Offering.
|
|
|
(4)
|
Among the common shares beneficially held by Mr. He immediately after this Offering, 222,821,591
common shares have been pledged by Digital Grid to Bank of China Limited Zhejiang Branch, or BOC, as collateral to support
working capital loans and letters of credit provided by BOC to Hangzhou Lianluo. The loans have been guaranteed
jointly and severally by Beijing Digital Grid Technology Co., Ltd., a subsidiary of Hangzhou Lianluo, and Mr. He. The
total amount owed under these loans is RMB400 million in RMB denominated loans, plus $66.5 million in U.S. dollar loans, plus
interest, fees and penalties on such amounts. In May 2020, BOC filed several lawsuits against Hangzhou Lianluo,
Digital Grid, Beijing Digital Grid Technology Co., Ltd. and Mr. He in the Hangzhou Intermediate People’s Court in China
alleging that Hangzhou Lianluo has failed to repay the loans when due and is in breach of the loan agreements. This
litigation is ongoing.
|
(5)
|
The
Common Shares beneficially owned by Mr. Chang immediately after this Offering include (i) 92,468,584 Common Shares held by
Tekhill USA, LLC, (ii) 23,624,115 shares held by Fred Chang Partners Trust, (iii) 9,158,558 Common Shares held by Nabal Spring,
LLC, (iv) 5,435,754 Common Shares held by Chang Trust 2008, (v) 797,625 Common Shares held by Chang 2009 Annuity Trust No.
1, (vi) 332,340 shares held by Chang 2009 Annuity Trust No.2, and (vii) 664,691 shares held by Chang 2009 Annuity Trust No.
3. Tekhill USA, LLC, Fred Chang Partners Trust, Nabal Spring, LLC, Chang Trust 2008, Chang 2009 Annuity Trust No. 1, Chang
2009 Annuity Trust No. 2, and Chang 2009 Annuity Trust No. 3, are all controlled by Fred Faching Chang. Tekhill
USA, LLC has specifically pledged 5,600,000 shares of Newegg stock, which will be exchanged into 32,713,520 Common Shares
upon closing of the Merger, and generally pledged all other shares of Newegg which it acquires, as collateral to Preferred
Bank. The pledged shares secure a loan from the bank to Mr. Chang with a principal amount of $7.1 million.
|
Rights of Certain Principal Shareholders of the Post-Closing
Issuer
Appointment and Removal of the Directors
Pursuant to Article
8.1(i) of the Fifth Amended and Restated Memorandum and Articles of Association and subject to compliance with applicable laws
and NASDAQ rules, the board of post-closing issuer shall consist of up to seven directors. Initially, four of the directors shall
be appointed by Digital Grid, and three of the directors shall be appointed by the Minority Representative.
If the number of
Common Shares or other Equity Interests (as defined in the Fifth Amended and Restated Memorandum and Articles of Association)
of the post-closing issuer held by the Legacy Shareholders represents (i) more than two sevenths (2/7) of the total voting
power of all outstanding Shares or other Equity Interests of the post-closing issuer, then the Minority Representative shall
be entitled to appoint and replace three directors, (ii) less than or equal to two sevenths (2/7) and more than one seventh
(1/7) of the total voting power of all outstanding Common Shares or Equity Interests of the post-closing issuer, then the
Minority Representative shall be entitled to appoint and replace two directors, and (iii) less than or equal to one seventh
(1/7) and more than five percent (5%) of the total voting power of all outstanding Common Shares or other Equity Interests of
the post-closing issuer, then the Minority Representative shall be entitled to appoint and replace one director; and (iv)
less than or equal to five percent (5%) of the total voting power of all outstanding Common Shares or other Equity Interests
of the post-closing issuer, then the Minority Representative shall no longer be entitled to appoint any directors under the
Article 8.1(i) of the Fifth Amended and Restated Memorandum and Articles of Association.
If the number of Common
Shares or other Equity Interests held by Digital Grid or its affiliates represents (i) (i) more than fifty percent (50%) of total
voting power of all outstanding Common Shares or other Equity Interests of the post-closing issuer, then Digital Grid shall be
entitled to appoint and remove four directors, (ii) less than or equal to fifty percent (50%) and more than two sevenths (2/7)
the total voting power of all outstanding Common Shares or other Equity Interests of the post-closing issuer, then Digital Grid
shall be entitled to appoint and remove three directors, (iii) less than or equal to two sevenths (2/7) and more than one seventh
(1/7) of the total voting power of all outstanding Common Shares or other Equity Interests of the post-closing issuer, then Digital
Grid shall be entitled to appoint and replace two directors, (iv) less than or equal to one seventh (1/7) and more than five
percent (5%) of the total voting power of all outstanding Common Shares or other Equity Interests of the post-closing issuer, then
Digital Grid shall be entitled to appoint and replace one director, and (v) less than or equal to five percent (5%) of the total
voting power of all outstanding Common Shares or other Equity Interests of the Company, then Digital Grid shall no longer be entitled
to appoint any directors under the Article 8.1(i) of the Fifth Amended and Restated Memorandum and Articles of Association.
Of the directors appointed
by the Minority Representative, one shall be designated by the Minority Representative to be the “Primary Minority Board
Appointee” from time to time by delivering written notice thereof to the board. The initial Primary Minority Board Appointee
shall be Fred Chang.
Any director positions
which neither Digital nor the Minority Representative are entitled to appoint under the Fifth Amended and Restated Memorandum and
Articles of Association shall be appointed by a majority of the remaining directors, or by any other means allowed under the Fifth
Amended and Restated Memorandum and Articles of Association and the BVI Business Companies Act, 2004.
A director or member
of a committee of the Board or the board of a subsidiary may be removed from his or her position, with cause, by the majority of
the shareholders or the majority of the Board; provided that
(i) Any
director or member of a committee of the Board or the board of a subsidiary that is appointed or nominated by the Minority Representative
shall be removed from their position upon and only upon, the written request of the Minority Representative; and
(ii) Any
director or member of a committee of the Board or the board of a subsidiary that is appointed or nominated by Digital Grid shall
be removed from their position upon and only upon, the written request of Liaison.
Requirements of Board Approval on Certain
Matters
In addition, the Fifth
Amended and Restated Memorandum and Articles of Association also provides that, if Legacy Shareholders hold more than ten percent (10%) of
the Equity Interest of the post-closing issuer, then neither the post-closing issuer, nor any officer or agent of the post-closing
issuer can take, or permit our subsidiaries to take, or permit our subsidiaries to take, certain actions, without the approval of
the affirmative vote of not less than a majority of the number of votes represented by the directors, which majority must include
the Primary Minority Board Appointee. Such actions include the following:
(i) initiate any liquidation,
dissolution, bankruptcy filing or similar action, recapitalization, restructuring or reorganization of the Company or any of its
subsidiaries;
(ii) other than to
the post-closing entity or a wholly-owned subsidiary thereof, sell, license, transfer or otherwise dispose of (including through
merger or consolidation) all or substantially all of the assets or properties of the post-closing entity or any of its subsidiaries
in any transaction or series of related transactions;
(iii) agree to any
merger, consolidation or combination of the post-closing entity or any of its subsidiaries, or to a sale of all or substantially
all of the assets of the post-closing entity in connection with a Company Sale (as defined in the Fifth Amended and Restated Memorandum
and Articles of Association);
(iv) commence or undertake
any Reorganization (as defined in the Fifth Amended and Restated Memorandum and Articles of Association);
(v) issue, directly
or indirectly, any equity interest of the post-closing entity or permit any of the subsidiaries to issue any equity interest other
than, in each case, any Excluded Issuance (as defined in the Fifth Amended and Restated Memorandum and Articles of Association);
(vi) materially alter
or fundamentally change the nature of the business of the post-closing entity and its Subsidiaries;
(vii) amend, change,
or waive any provision of, the memorandum and articles of association of the post-closing entity;
(viii) purchase or
otherwise acquire all or any part of the assets or business of, or equity interests or other evidences of beneficial ownership
of, invest in or participate in any joint venture, partnership or similar arrangement with, any Person (other than the post-closing
entity or any of its subsidiaries), in each case in any transaction or series of related transactions involving a commitment in
excess of $10,000,000;
(ix) other than to
the post-closing entity or a wholly-owned subsidiary thereof, sell, license, transfer or otherwise dispose of (including through
merger or consolidation) any assets or properties of the post-closing entity or any of its subsidiaries, in each case in any transaction
or series of related transactions involving a commitment in excess of $10,000,000;
(x) other than loans
to wholly-owned subsidiaries, (A) extend any credit or make any loans to any Person, (B) incur, assume, guarantee, endorse or otherwise
become responsible for indebtedness, or (C) amend, modify or supplement in any material respect the agreements governing (or otherwise
extend or refinance) existing indebtedness;
(xi) appoint or remove
the Chief Executive Officer of the post-closing entity;
(xii) enter into any
Affiliate Transactions (as defined in the Fifth Amended and Restated Memorandum and Articles of Association);
(xiii) amend, change
or waive any of the actions of the post-closing entity described in the Fifth Amended and Restated Articles of Association or the
required voting threshold specified herein; and
(xiv) agree or commit
to do any of the foregoing, or delegate any of the foregoing to the post-closing entity or any of its subsidiaries or any officer
or agent of the post-closing entity or subsidiary thereof.
The rights granted
to the Principal Shareholders are additive to and not intended to limit in any way the rights that the Principal Shareholders or
any of their affiliates may have to appoint, elect or remove our directors under our memorandum and articles of association or
laws of the British Virgin Islands.
Pre-emptive Rights of the Principal
Shareholders
Prior to the Restructure
and this Offering, Newegg’s shareholders have entered into certain shareholders agreement, dated March 30, 2017 (the “Shareholders
Agreement”). In connection with the Merger Agreement, Newegg, Digital Grid, the Principal Shareholders and we agreed
to enter into certain amendment to the Shareholders Agreement, dated October 23, 2020 (such amendment, the “Amended Shareholders
Agreement”), pursuant to which we agreed to assume all of the rights and obligations of Newegg under the Shareholders
Agreement upon the closing of the Restructure.
Under the Amended Shareholders
Agreement, the Principal Shareholders have pre-emptive rights to acquire additional shares when the post-closing issuer issue or
sell additional securities in the future, except for the “excluded issuance” as defined in the Amended Shareholders
Agreement or Common Shares offered pursuant to a registration statement filed with the SEC.
For the purpose of
the Amended Shareholders Agreement, the “excluded issuance” means any equity interests issued as share dividends, or
pursuant to share splits, recapitalization or other similar events that do not adversely affect the proportionate amount of the
Common Shares held by the Principal Shareholders, and (ii) Common Shares issuable pursuant to any stock option or any similar equity
incentive plan of the post-closing issuer approved by the Board; and (iii) equity interests issued pursuant to acquisitions or
strategic transactions approved by a majority of the disinterested directors of the post-closing issuer provided that any such
issuance shall only be to an entity (or to the equity holders of an entity) which is, itself or through its subsidiaries, an operating
company or an owner of an asset in a business synergistic with the business of the post-closing issuer and shall provide to the
post-closing issuer additional benefits in addition to the investment of funds, but shall not include a transaction in which the
post-closing issuer is issuing equity interests primarily for the purpose of raising capital or to an entity whose primary business
is investing in securities.
The post-closing issuer
is required to give Principal Shareholders a notice stating the price range (or formula by which the price will be determined,
which may refer to a future contingent event) and terms of issuance of new securities and to remain the offer to issue the Principal
Shareholders their Pro Rata Shares of such new securities (as defined below) open until the 15th calendar day
following the receipt of such notice. The Principal Shareholders shall deliver an exercise notice along with payment to exercise
their pre-emptive rights.
In the event that the
Principal Shareholder fails to give an exercise notice timely, or elects to purchase fewer than all of its Pro Rata Share of such
new securities, then the post-closing issuer shall sent written notice to any Principal Shareholder who has elected to purchase
all of its Pro Rata Share of such new securities, who will then have the right, by giving written notice to the post-closing issuer
within two business days upon receiving notice from the post-closing issuer, to purchase its Pro Rata Share of such unsubscribed
portion, and such right shall continue to apply repeatedly and iteratively until all of such new securities have been allocated
to the Principal Shareholders or none of the Principal Shareholders have elected to participate in such further purchase. If, at
the end of such process, there are new securities that have not been subscribed for by the Principal Shareholders, the post-closing
issuer may, for a period of time not to exceed 60 days, sell such unsubscribed new securities, on the same times to a third party
purchaser. If, however, at the end of such 60-day period, the post-closing issuer has not consummated a sale of any of such unsubscribed
new securities, the post-closing issuer shall no longer be permitted to sell such new securities without again complying with these
provisions of pre-emptive rights in the Amended Shareholders Agreement
Right of First Refusal of the Post-Closing
Issuer and Principal Shareholders
Pursuant to the Amended
Shareholders Agreement, subject to compliance with applicable laws and NASDAQ’s rules, if any Principal Shareholders, receives
a bona fide offer from any person other than its affiliate for any of the Common Shares such Principal Shareholders received in
connection with the Merger (the “ROFR Shares”), then the post-closing issuer has a right of first refusal, but
not the obligation, to elect to purchase all (and not less than all) of the ROFR Shares, at the same price, and on the same terms
and conditions offered by the purchaser (the “ROFR Terms”). In the event the post-closing issuer does not decide
to purchase such ROFR Shares or decides to purchase for less than all of the ROFR Shares, then each of the Principal Stockholders
other than the selling Principal Shareholders shall have a right of first refusal to elect to purchase all (and not less than all)
of its Pro Rata Share of the ROFR Shares on the ROFR Terms. For the purpose of this Amended Shareholders Agreement, “Pro
Rata Share” means the percentage which corresponds to the ratio which each selling Principal Stockholder’s “Percentage
Interest” (which is calculated by dividing (i) the number of the Common Shares owned by such Principal Stockholder, by (ii)
total number of the then outstanding shares of the Common Shares held by all Principal Stockholders) bears to the total Percentage
Interests of all Principal Stockholders exercising their right of first refusal. In the event that the ROFR Shares are in exchange
for non-cash consideration, then such right of first refusal shall be exercisable based on the fair market value determined in
good faith by the board of such non-cash consideration. Such right of first refusal may delay or prevent us from raising funding
in the future and may have an adverse impact on the liquidity and market price of our Common Shares.
RELATED PARTY TRANSACTIONS
Related Party Transactions Prior to Consummating of the
Restructure
Related Party Transactions of LLIT
The following discussion
is a brief summary of certain material arrangements, agreements and transactions LLIT have had with related parties since January
1, 2017, other than the compensation arrangements we describe in “Compensation of Executive Officers and Directors.”
We believe the terms obtained or consideration that we paid or received, as applicable, in connection with the transactions described
below were comparable to terms available or the amounts that would be paid or received, as applicable, in arm’s-length transactions.
Transactions between LLIT and Hangzhou
Lianluo
During the years
ended December 31, 2019, 2018 and 2017, LLIT purchased from Hangzhou Lianluo, a company controlled by Mr. Zhitao He, for inventory,
as well as from Hangzhou Lianluo’s subsidiary for service, in aggregate of $42,000, $204 and $3,760, respectively. As of
December 31, 2019, LLIT reported $42,000 in service charge payable to Hangzhou Lianluo and its subsidiary. On August 17, 2020,
the $42,000 service charge was repaid by LLIT.
Starting on July
1, 2018, LLIT leased office premises from Hangzhou Lianluo for a period of one year, with an annual rental of $84,447 (RMB580,788).
Rental payments charged as expenses in the six months ended June 30, 2020 and 2019 were $0 and $39,091 respectively. As of December
31, 2020 and 2019, LLIT reported an outstanding rental payable of $74,776 and $75,834, respectively, to Hangzhou Lianluo.
During the fiscal
year 2019, LLIT borrowed an aggregate of $942,500 from Hangzhou Lianluo and repaid $0. As of December 31, 2020, the loan balances
were $918,450. These loans were extended, interest-free as of December 31, 2020 and without specific repayment date, which is
based upon both parties’ agreement.
During the fiscal
year 2020, LLIT purchased from one of Hangzhou Lianluo’s subsidiaries for services in an aggregate amount of $44,614. As
of December 31, 2020, LLIT recorded $3,019 in service charge payable to the Hangzhou Lianluo’s subsidiary and on January
19, 2021, this balance was fully paid.
Transactions between LLIT and Digital
Grid
During 2019, Digital
Grid, a company controlled by Mr. Zhitao He, borrowed $85,000 from LLIT for a term of 12 months and LLIT borrowed $118,000 from
Digital Grid for a term of 12 months. As of June 30, 2020, the loan balance between Digital Grid and LLIT was a net principal
of $33,000 owed to Digital Grid. On July 14, 2020, the Company repaid the net principal of $33,000 to Digital Grid.
On March 15, 2018,
LLIT entered into a $6 million loan agreement with Digital Grid for a term of 12 months. As of December 27, 2018, LLIT owed RMB34.34
million in loan principal and RMB1.23 million in accrued interest to Hangzhou Lianluo, its principal shareholder. Pursuant to
an agreement, dated December 27, 2018, LLIT, Digital Grid and Hangzhou Lianluo agreed that the outstanding amount owed by Digital
Grid to LLIT of RMB35.6 million be repaid by Hangzhou Lianluo on behalf of Digital Grid, to LLIT. This repayment is agreed to
be settled in the form of offset against the amount owed by LLIT to Hangzhou Lianluo of RMB35.6 million (approximately $5.2 million)
as of December 27, 2018. As a result, LLIT no longer owed or was owed by Hangzhou Lianluo or Digital Grid any amount as of December
31, 2018.
Transactions between LLIT and Mr.
Ping Chen
Starting in 2019,
LLIT borrowed funds from Mr. Ping Chen, its former CEO, free of interest to fund its operation. In 2019, the borrowings amounted
to $387,182, and Mr. Ping Chen forgave $143,301 of the borrowings. The balance was $243,881 as of December 31, 2019.
During 2020, LLIT
borrowed additional funds from Mr. Ping Chen, free of interest to fund its operation in an aggregate amount of $498,191. As of
December 31, 2020, the balance due to Mr. Ping Chen was $787,608.
Related Party Transactions of Newegg
The following discussion
is a brief summary of certain material arrangements, agreements and transactions Newegg have had with related parties since January
1, 2017, other than the compensation arrangements we describe in “Compensation of Executive Officers and Directors.”
Investment
On April 17, 2018,
Newegg acquired an equity interest in Mountain Capital Fund L.P. from Pegasus. The sole owner of
Pegasus is the spouse of a member of the Newegg’s Board of Directors.
Loans to Affiliate
On April 13, 2017,
Newegg loaned $12.0 million to Digital Grid under a term loan agreement with a maturity date of April 18, 2017 and an interest
rate equal to the Prime Rate, as defined in the loan agreement (the “$12.0 Million Loan”). The $12.0 Million
Loan was collateralized by a security interest in 2,000,000 Series AA convertible Preferred Stock of
Newegg held by Digital Grid.
On June 16, 2017,
Newegg loaned $50.0 million to Digital Grid under a term loan agreement with a maturity date of June 15, 2018 and
an interest rate of 4% per annum (the “$50.0 Million Loan”). The $50.0 Million Loan was
collateralized by a security interest in 43,167 Series C Shares of Razer Inc., a company incorporated under the laws of the
Cayman Islands (“Razer”), held by Digital Grid.
On March 20, 2018,
Newegg loaned $20.0 million to Digital Grid under a term loan agreement with a maturity date of June 15, 2018 and an interest
rate equal to 4% per annum (the “$20.0 Million Loan”). The $20.0 Million Loan was collateralized by a security
interest in 362,732,301 Ordinary Shares of Razer held by Digital Grid.
On May 11, 2018, Newegg and
Digital Grid entered into an amended and restated loan agreement which combined all of the
remaining unpaid principal and interest on the $50.0 Million Loan and the $20.0 Million Loan into an amended and
restated secured promissory note of approximately $23.3M (the “$23.3 Million Loan”). The $23.3
Million Loan replaces, amends, and restates in their respective entirety the $50.0 Million Loan and the $20.0 Million
Loan. The $23.3 Million Loan had a maturity date of June 15, 2018 and carried an interest rate equal to 4% per annum.
This loan was collateralized by a security interest in certain convertible bonds of China Digital Culture (Group)
Limited, a company incorporated in the Cayman Islands, in the amount of HK$412,500,000 held by Digital Grid.
On June 15, 2018,
Newegg and Digital Grid entered into the First Amendment to the $23.3 Million Loan, pursuant to which the interest rate was
amended to 5% per annum and the maturity date was extended to September 30, 2018. As of December 31, 2018, there
was no outstanding principal balance receivable from affiliate.
On December
17, 2019, Newegg loaned $15.0 million to Digital Grid under a term loan agreement with a maturity date of April 30,
2020 and a fixed interest rate of 5.0% (the “$15.0 Million Loan”). The $15.0
Million Loan was subsequently extended to December 31, 2020. As of the date of this prospectus, Newegg
and Digital Grid are negotiating for an amendment to the loan agreement to revise the maturity date of the $15.0 Million
Loan.
During the years ended
December 31, 2018 and 2017, Newegg recorded interest income of $0.9 million and $1.1 million, respectively, from loans to
affiliate in interest income in the consolidated statement of operations. During the year ended December 31, 2019, Newegg interest
income from loans to affiliate included in interest income in the consolidated statement of operations was immaterial. For the
six months ended June 30, 2020, Newegg recorded interest income from loans to affiliate of $0.4 million. As of June 30, 2020,
the amount of interest receivable on the $15.0 million loan outstanding as a component of “Due from related parties”
in the consolidated balance sheet was $0.3 million. As of December 31, 2019, the amount of interest
receivable on the $15.0 million loan outstanding as a component of “Due from related parties” in the consolidated
balance sheets was immaterial. As of December 31, 2018, there was no outstanding interest receivable from loans
to affiliate.
Loans from Affiliate
On January 14,
2019, Newegg entered into three loan agreements with BARD Company Limited, an entity affiliated with Anthony Chow, Newegg’s
Chief Executive Officer, pursuant to which Newegg borrowed a total of $15.0 million. For all of the three loans, the maturity
date was March 31, 2019 unless extended to April 30, 2019 in accordance with the terms of the loan agreements, and the
interest rate is 6% per annum. Newegg repaid the three loans in their entirety as of March 8, 2019.
Sales to Related Parties
Due from related
parties and net sales to related parties primarily reflect sales of finished goods and services with the exception
of loans to affiliate as discussed above.
As of December
31, 2019 and 2018, due from related parties represent amounts receivable of $1.5 million and $1.5 million, respectively,
due from Digital Grid (Hong Kong) Technology (“Digital Grid”). Digital Grid is determined to be a related
party by virtue of common control. Sales during the year ended December 31, 2019, 2018 and 2017 to this related
party were $0, $0, and $1.5 million, respectively.
As of December
31, 2019 and 2018, due from related parties represent amounts receivable of $4.3 million and $3.5 million, respectively,
due from Connect Technova Inc. (“Connect Technova”). Connect Technova is determined to be a related party
by virtue of common control. Sales during the year ended December 31, 2019, 2018 and 2017 to this related party
were $0.8 million, $2.9 million and $0.6 million, respectively.
As of June
30, 2020 and December 31, 2019, amount due to related parties was immaterial.
Except as otherwise
indicated herein, there have been no other related party transactions, or any other transactions or relationships required to
be disclosed pursuant to Item 404 and Item 407(a) of Regulation S-K.
DESCRIPTION OF SHARE CAPITAL
We
are a British Virgin Islands exempted company with limited liability and our affairs are governed by our Amended and Restated Memorandum
and Articles of Association, the BVI Act, the common law of the British Virgin Islands, our corporate governance documents and
rules and regulations of the stock exchange on which our Class A Common Shares (after the completion of this Offering, our Common
Shares) are traded.
Prior
to the consummation of this Offering and the completion of the Share Redesignation, our authorized capital is $136,550, consisting
of 6,250,000 common shares, $0.021848 par value per share, of which 4,736,111 shares are designated as Class A Common Shares
and 1,513,889 shares are designated as Class B Common Shares. The Board of Directors has the right, in its absolute discretion
and without approval of the existing shareholders, to issue shares, grant rights over existing shares or issue other securities
in one or more series as it deems necessary and appropriate and to determine designations, powers, preferences, privileges and
other rights, including dividend rights, conversion rights, terms of redemption and liquidation preferences, any or all of which
may be greater than the powers and rights associated with the shares held by existing shareholders, at such times and on such other
terms as it deems proper. No preferred shares have been issued.
As of the date
of this prospectus, there are 3,465,683 of our Class A Common Shares issued and outstanding and 1,388,888 of our Class B Common
Shares issued and outstanding. All shares are fully paid. We do not have any preferred shares outstanding.
We
are seeking shareholders’ approval of a proposal to adopt the Fifth Amended and Restated Memorandum and Articles of Association
to effect the Share Redesignation, the Share Combination, the Share Increase, the Rights of Principal Shareholders, and the
Name Change. As a result, upon the consummation of the Restructure and the Offering, we will only have one class of security,
which is our Common Share.
Rights and Obligations of Shareholders
Each of Common Shares
confers on its holder:
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the
right to an equal share in any dividend paid by the Company in accordance with the BVI
Business Companies Act, 2004 (as amended) (the “Act”); and
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the
right to an equal share in the distribution of the surplus of the Company.
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Voting Rights.
Holders of Common Shares shall at all times vote together as one class on all resolutions submitted to a vote by the shareholders.
Each Common Share is entitled to one (1) vote on all matters subject to vote at general meetings of the Company.
Dividends.
The holders of shares are entitled to such dividends as may be declared by the directors of the Company at such time and of such
an amount as the directors think fit if they are satisfied, on reasonable grounds, that immediately after the distribution, the
value of Company assets exceeds the Company’s liabilities and the Company will be able to pay its debts as they fall due.
Pre-emptive
rights. Except as set forth in the Amended Shareholders Agreement, there are no pre-emptive rights applicable to the
issue by the Company of new shares under either the Act or the Company’s memorandum and articles of association.
The Investor Warrants
As a result of the
private placements that closed on February 14, 2020, February 25, 2020, and March 2, 2020, we have outstanding warrants issued
to several investors to purchase 1,373,750 of our Class A Common Shares. The features of these investor warrants are discussed
below:
Exercise
Price. The investor warrants issued on February 14, 2020, or the February 14th warrants, for the purchase
of up to 323,750 Class A Common Shares have an initial exercise price of $0.85 per share and were thereafter adjusted to $0.6239, subject to full ratchet anti-dilution protection. Both of the investor warrants
issued on February 25, 2020, or the February 25th warrants, for the purchase of up to 437,500 Class A Common
Shares and the investor warrants issued on March 2, 2020, or the March 2nd warrants, for the purchase of up
to 612,500 Class A Common Shares have an initial exercise price of $0.70 per share.
Exercisability.
The investor warrants are exercisable for a period of five and one-half years commencing on February 14, 2020 and expiring on
August 14, 2025, for the February 14th warrants, on February 25, 2020 and expiring on August 25, 2025, for the
February 25th warrants, and on March 2, 2020 and expiring on September 2, 2025, for the March 2nd warrants.
The investor warrants will be exercisable, at the option of each holder, in whole or in part by delivering to us a duly executed
exercise notice and, at any time a registration statement registering the issuance of Class A Common Shares underlying the investor
warrants under the Securities Act is effective and available for the issuance of such shares, or an exemption from registration
under the Securities Act is available for the issuance of such shares, by payment in full in immediately available funds for the
number of Class A Common Shares purchased upon such exercise. If a registration statement registering the issuance of the Class
A Common Shares underlying the investor warrants under the Securities Act is not effective or available, at any time after the
six-month anniversary of the warrant issue date, the holder may, in its sole discretion, elect to exercise the investor warrants
through a cashless exercise, in which case the holder would receive upon such exercise the net number of Class A Common Shares
determined according to the formula set forth in the warrant.
Exercise Limitation.
A holder will not have the right to exercise any portion of the investor warrants if the holder (together with its affiliates)
would beneficially own in excess of 4.99% (or, upon election of the holder, 9.99%) of the number of our Class A Common Shares
outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the
terms of the warrants. Any holder may increase or decrease such percentage, but in no event may such percentage be increased to
more than 9.99%, provided that any increase will not be effective until the 61st day after such election.
Exercise Price
Adjustment. The exercise price of the investor warrants is subject to appropriate adjustment in the event of certain stock
dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting our Class A Common
Shares and also upon any distributions of assets, including cash, stock or other property to our shareholder. The investor warrants
also contain full ratchet anti-dilution protection upon the issuance of any Class A Common Shares, securities convertible into
Class A Common Shares or certain other issuances at a price below the then-existing exercise price of the investor warrants, with
certain exceptions, and, with respect to the February 25th warrants, subject to the exercise price never being
adjusted to a price less than $0.1701, and with respect to the March 2nd warrants, subject to the exercise price
never being adjusted to a price less than $0.18, the “Floor Price.” The terms of the investor warrants, including
these anti-dilution protections, may make it difficult for us to raise additional capital at prevailing market terms in the future.
Exchange Listing.
There is no established trading market for the investor warrants and we do not expect a market to develop. In addition, we do
not intend to apply for the listing of the investor warrants on any national securities exchange or other trading market.
Participation Rights. If
at any time we grant, issue or sell any Class A Common Shares or Class A Common Share equivalents or rights, that is, the Purchase
Rights, to purchase stock, warrants, securities or other property pro rata to the record holders of any Class A Common Shares,
the holder of the investor warrants will be entitled to acquire, upon the terms applicable to such Purchase Rights, subject to
the beneficial ownership limitations, the aggregate amount of securities which the holder of the investor warrants could have
acquired if the Holder had held the number of Class A Common Shares acquirable upon complete exercise of the investor warrants.
Fundamental Transactions.
If (i) we, directly or indirectly, in one or more related transactions effect any merger or consolidation of the Company with
or into another person, (ii) we, directly or indirectly, effect any sale, lease, license, assignment, transfer, conveyance or
other disposition of all or substantially all of our assets in one or a series of related transactions, (iii) any, direct or indirect,
purchase offer, tender offer or exchange offer (whether by us or another person) is completed pursuant to which holders of Class
A Common Shares are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted
by the holders of 50% or more of the outstanding Class A Common Shares, (iv) we, directly or indirectly, in one or more related
transactions effect any reclassification, reorganization or recapitalization of the Class A Common Shares or any compulsory share
exchange pursuant to which the Class A Common Shares are effectively converted into or exchanged for other securities, cash or
property, or (v) we, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement
or other business combination (including, without limitation, a reorganization, recapitalization, spin-off, merger or scheme of
arrangement) with another person or group of persons whereby such other person or group acquires more than 50% of the outstanding
Class A Common Shares (not including any Class A Common Shares held by the other person or other persons making or party to, or
associated or affiliated with the other persons making or party to, such stock or share purchase agreement or other business combination),
each a “Fundamental Transaction,” then the successor entity will succeed to, and be substituted for us, and may exercise
every right and power that we may exercise and will assume all of our obligations under the investor warrants with the same effect
as if such successor entity had been named in the investor warrant itself. If holders of our Class A Common Shares are given a
choice as to the securities, cash or property to be received in a fundamental transaction, then the holder of investor warrants
shall be given the same choice as to the consideration it receives upon any exercise of the investor warrants following such fundamental
transaction. In addition, the successor entity, at the request of the holders of investor warrants, will be obligated to purchase
any unexercised portion of the investor warrants in accordance with the terms of such warrants.
Dividends.
If, at any time while the investor warrants are outstanding, we declare or make any dividend or other distribution of our assets
(or rights to acquire our assets) to holders of our Class A Common Shares, by way of return of capital or otherwise, then each
holder of investor warrants shall be entitled to participate in such distribution, subject to the beneficial ownership limitations,
to the same extent that the holder would have participated therein if the holder had held the number of Class A Common Shares
acquirable upon complete exercise of the investor warrants immediately prior to the record date for such distribution.
Rights as a Shareholder.
Except as otherwise provided in the investor warrants or by virtue of such holder’s ownership of our Class A Common Shares,
the holder of investor warrants will not have the rights or privileges of a holder of our Class A Common Shares, including any
voting rights, until the holder exercises the warrant.
Resale/Registration
Rights. We are required within 45 days of the closing of the offering in which we issued the February 14th warrants
to file a registration statement providing for the resale of the Class A Common Shares issued and issuable upon the exercise of
such warrants. We are obligated under similar requirements with respect to the February 25th warrants and the
March 2nd warrants. The registration statement in which this prospectus is included was filed to meet these registration
requirements. We are required to use commercially reasonable efforts to cause this registration to become effective within 181
days of the closing of the offering in which we issued the February 14th warrants and to keep this registration
statement effective at all times until no investor owns any investor warrants or shares issuable upon exercise thereof.
Upon Closing of the
Restructure and this Offering, the outstanding warrants to purchase any Class A Common Share will be automatically converted to
warrants to purchase such number of Common Shares.
The Class B Warrants
On August 18, 2016,
the Company closed the sale of warrants to purchase 125,000 of our Class B Common Shares to Hangzhou Lianluo pursuant to the terms
of a certain securities purchase agreement. These warrants are exercisable at any time for an exercise price of $17.60 per share,
with no expiration date.
Upon Closing of the
Restructure and this Offering, the outstanding warrants to purchase 125,000Class B Common Share will be automatically converted
to warrants to purchase 125,000Common Shares pursuant to the terms of Merger Agreement.
Fifth Amended and Restated Memorandum
and Articles of Association
We are registered
in the British Virgin Islands and have been assigned company number 553525 in the register of companies. Our registered office
is at the offices of Offshore Incorporations Limited, of P. O. Box 957, Offshore Incorporations Center, Road Town, Tortola, British
Virgin Islands. The objects for which the Company was established are unrestricted and the Company has full power and authority
to carry out any object that is not prohibited under British Virgin Islands law as set forth in Paragraph 5 of our Fifth Amended
and Restated Memorandum and Articles of Association, effective upon closing of the Restructure and the Offering.
Objects of the Company
Under our Fifth Amended
and Restated Memorandum and Articles of Association, the objects of our Company are unrestricted and we have the full power and
authority to carry out any object not prohibited by the law of the British Virgin Islands.
Amendment
Section 12.1 of our
Fifth Amended and Restated Memorandum and Articles of Association provides that the Company may amend the Memorandum or the Articles
by Resolution of Shareholders or by Resolution of Directors, provided that no amendment may be made by Resolution of Directors:
(a) to restrict the rights or powers of the Shareholders to amend the Memorandum or the Articles; (b) to change the percentage
of Shareholders required to pass a Resolution of Shareholders to amend the Memorandum or the Articles; (c) in circumstances where
the Memorandum or the Articles cannot be amended by the Shareholders; and provided that the Directors may not amend certain sections
of the Fifth Amended and Restated Memorandum and Articles of Association that would negatively affect existing stockholders.
Rights of Certain Principal Shareholders of the Post-Closing
Issuer
Appointment and Removal of the Directors
Pursuant to the Fifth
Amended and Restated Memorandum and Articles of Association and subject to compliance with applicable laws and NASDAQ rules, the
board of post-closing issuer shall consist of up to seven directors. Initially, four of the directors shall be appointed by Digital
Grid, and three of the directors shall be appointed by the Minority Representative.
If the number of Common
Shares or other Equity Interests (as defined in the Fifth Amended and Restated Memorandum and Articles of Association) of the post-closing
issuer held by the Legacy Shareholders represents (i) more than two sevenths (2/7) and less than three sevenths (3/7) of the total
voting power of all outstanding Equity Interests of the post-closing issuer, then the number of directors that the Minority Representative
shall be entitled to appoint shall decrease from three directors to two directors, (ii) more than one seventh (1/7) and less than
two sevenths (2/7) of the total voting power of all outstanding Equity Interests of the post-closing issuer, then the number of
directors that the Minority Representative shall be entitled to appoint shall decrease from two directors to one director, and
(iii) less than five percent (5%) of the total voting power of all outstanding Equity Interests of the post-closing issuer, then
the Minority Representative shall no longer be entitled to appoint any directors.
If the number of Common
Shares or other Equity Interests held by Digital Grid or its affiliates represents (i) more than three sevenths (3/7) and less
than fifty percent (50%) of the total voting power of all outstanding Equity Interests of the post-closing issuer, then the number
of directors that Digital Grid shall be entitled to appoint shall decrease from four directors to three directors, (ii) more than
two sevenths (2/7) and less than three sevenths (3/7) of the total voting power of all outstanding Equity Interests of the post-closing
issuer, then the number of directors that Digital Grid shall be entitled to appoint shall decrease from three directors to two
directors, (iii) more than one seventh (1/7) and less than two sevenths (2/7) of the total voting power of all outstanding Equity
Interests of the post-closing issuer, then the number of directors that Digital Grid shall be entitled to appoint shall decrease
from two directors to one director, and (iv) less than five percent (5%) of the total voting power of all outstanding Equity
Interests of the post-closing issuer, then Digital Grid shall no longer be entitled to appoint any directors.
Any director positions
which neither Digital nor the Minority Representative are entitled to appoint under the Fifth Amended and Restated Memorandum and
Articles of Association shall be appointed by a majority of the remaining directors, or by any other means allowed under the Fifth
Amended and Restated Memorandum and Articles of Association and the BVI Business Companies Act, 2004.
A director or member
of a committee of the Board or the board of a subsidiary may be removed from his or her position, with cause, by the majority of
the shareholders or the majority of the Board; provided that
(i) Any
director or member of a committee of the Board or the board of a subsidiary that is appointed or nominated by the Minority Representative
shall be removed from their position upon and only upon, the written request of the Minority Representative; and
(ii) Any
director or member of a committee of the Board or the board of a subsidiary that is appointed or nominated by Digital Grid shall
be removed from their position upon and only upon, the written request of Liaison.
Requirements of Board Approval on Certain
Matters
In addition, the Fifth Amended and Restated Memorandum and Articles
of Association also provides that, as long as the number of Common Shares held by Legacy Shareholders represents more than ten
percent (10%) of the total voting power of all outstanding Common Shares of the post-closing issuer, the post-closing issuer agrees
not to take, or permit our subsidiaries to take, certain actions, without the approval of the affirmative vote of not less than
a majority of the number of votes represented by the directors, which majority must include Primary Minority Board Appointee. Such actions include the following:
(i) initiate any liquidation,
dissolution, bankruptcy filing or similar action, recapitalization, restructuring or reorganization of the Company or any of its
subsidiaries;
(ii) other than to
the post-closing entity or a wholly-owned subsidiary thereof, sell, license, transfer or otherwise dispose of (including through
merger or consolidation) all or substantially all of the assets or properties of the post-closing entity or any of its subsidiaries
in any transaction or series of related transactions;
(iii) agree to any
merger, consolidation or combination of the post-closing entity or any of its subsidiaries, or to a sale of all or substantially
all of the assets of the post-closing entity in connection with a Company Sale (as defined in the Fifth Amended and Restated Memorandum
and Articles of Association);
(iv) commence or undertake
any Reorganization (as defined in the Fifth Amended and Restated Memorandum and Articles of Association);
(v) issue, directly
or indirectly, any equity interest of the post-closing entity or permit any of the subsidiaries to issue any equity interest other
than, in each case, any Excluded Issuance (as defined in the Fifth Amended and Restated Memorandum and Articles of Association);
(vi) materially alter
or fundamentally change the nature of the business of the post-closing entity and its Subsidiaries;
(vii) amend, change,
or waive any provision of, the memorandum and articles of association of the post-closing entity;
(viii) purchase or
otherwise acquire all or any part of the assets or business of, or equity interests or other evidences of beneficial ownership
of, invest in or participate in any joint venture, partnership or similar arrangement with, any Person (other than the post-closing
entity or any of its subsidiaries), in each case in any transaction or series of related transactions involving a commitment in
excess of $10,000,000;
(ix) other than to
the post-closing entity or a wholly-owned subsidiary thereof, sell, license, transfer or otherwise dispose of (including through
merger or consolidation) any assets or properties of the post-closing entity or any of its subsidiaries, in each case in any transaction
or series of related transactions involving a commitment in excess of $10,000,000;
(x) other than loans
to wholly-owned subsidiaries, (A) extend any credit or make any loans to any Person, (B) incur, assume, guarantee, endorse or otherwise
become responsible for indebtedness, or (C) amend, modify or supplement in any material respect the agreements governing (or otherwise
extend or refinance) existing indebtedness;
(xi) appoint or remove
the Chief Executive Officer of the post-closing entity;
(xii) enter into any
Affiliate Transactions (as defined in the Fifth Amended and Restated Memorandum and Articles of Association);
(xiii) amend, change
or waive any of the actions of the post-closing entity described in the Fifth Amended and Restated Articles of Association or the
required voting threshold specified herein; and
(xiv) agree or commit
to do any of the foregoing, or delegate any of the foregoing to the post-closing entity or any of its subsidiaries or any officer
or agent of the post-closing entity or subsidiary thereof.
The rights granted
to the Principal Shareholders are additive to and not intended to limit in any way the rights that the Principal Shareholders or
any of their affiliates may have to appoint, elect or remove our directors under our memorandum and articles of association or
laws of the British Virgin Islands.
Pre-emptive Rights of the Principal
Shareholders
Prior to the Restructure
and this Offering, Newegg’s shareholders have entered into certain shareholders agreement, dated March 30, 2017 (the “Shareholders
Agreement”). In connection with the Merger Agreement, Newegg, Digital Grid, the Principal Shareholders and we agreed
to enter into certain amendment to the Shareholders Agreement, dated October 23, 2020 (such amendment, the “Amended Shareholders
Agreement”), pursuant to which we agreed to assume all of the rights and obligations of Newegg under the Shareholders
Agreement upon the closing of the Restructure.
Under the Amended Shareholders
Agreement, the Principal Shareholders have pre-emptive rights to acquire additional shares when the post-closing issuer issue or
sell additional securities in the future, except for the “excluded issuance” as defined in the Amended Shareholders
Agreement or Common Shares offered pursuant to a registration statement filed with the SEC.
For the purpose of
the Amended Shareholders Agreement, the “excluded issuance” means any equity interests issued as share dividends, or
pursuant to share splits, recapitalization or other similar events that do not adversely affect the proportionate amount of the
Common Shares held by the Principal Shareholders, and (ii) Common Shares issuable pursuant to any stock option or any similar equity
incentive plan of the post-closing issuer approved by the Board; and (iii) equity interests issued pursuant to acquisitions or
strategic transactions approved by a majority of the disinterested directors of the post-closing issuer provided that any such
issuance shall only be to an entity (or to the equity holders of an entity) which is, itself or through its subsidiaries, an operating
company or an owner of an asset in a business synergistic with the business of the post-closing issuer and shall provide to the
post-closing issuer additional benefits in addition to the investment of funds, but shall not include a transaction in which the
post-closing issuer is issuing equity interests primarily for the purpose of raising capital or to an entity whose primary business
is investing in securities.
The post-closing issuer
is required to give Principal Shareholders a notice stating the price range (or formula by which the price will be determined,
which may refer to a future contingent event) and terms of issuance of new securities and to remain the offer to issue the Principal
Shareholders their Pro Rata Shares of such new securities (as defined below) open until the 15th calendar day following
the receipt of such notice. The Principal Shareholders shall deliver an exercise notice along with payment to exercise their pre-emptive
rights.
In the event that
the Principal Shareholder fails to give an exercise notice timely, or elects to purchase fewer than all of its Pro Rata Share
of such new securities, then the post-closing issuer shall sent written notice to any Principal Shareholder who has elected
to purchase all of its Pro Rata Share of such new securities, who will then have the right, by giving written notice to the
post-closing issuer within two business days upon receiving notice from the post-closing issuer, to purchase its Pro Rata
Share of such unsubscribed portion, and such right shall continue to apply repeatedly and iteratively until all of such new
securities have been allocated to the Principal Shareholders or none of the Principal Shareholders have elected to
participate in such further purchase. If, at the end of such process, there are new securities that have not been subscribed
for by the Principal Shareholders, the post-closing issuer may, for a period of time not to exceed 60 days, sell such
unsubscribed new securities, on the same times to a third party purchaser. If, however, at the end of such 60-day period, the
post-closing issuer has not consummated a sale of any of such unsubscribed new securities, the post-closing issuer shall no
longer be permitted to sell such new securities without again complying with these provisions of pre-emptive rights in the
Amended Shareholders Agreement
Right of First Refusal of the Post-Closing
Issuer and Principal Shareholders
Pursuant to the Amended
Shareholders Agreement, subject to compliance with applicable laws and NASDAQ’s rules, if any Principal Shareholders, receives
a bona fide offer from any person other than its affiliate for any of the Common Shares such Principal Shareholders received in
connection with the Merger (the “ROFR Shares”), then the post-closing issuer has a right of first refusal, but
not the obligation, to elect to purchase all (and not less than all) of the ROFR Shares, at the same price, and on the same terms
and conditions offered by the purchaser (the “ROFR Terms”). In the event the post-closing issuer does not decide
to purchase such ROFR Shares or decides to purchase for less than all of the ROFR Shares, then each of the Principal Stockholders
other than the selling Principal Shareholders shall have a right of first refusal to elect to purchase all (and not less than all)
of its Pro Rata Share of the ROFR Shares on the ROFR Terms. For the purpose of this Amended Shareholders Agreement, “Pro
Rata Share” means the percentage which corresponds to the ratio which each selling Principal Stockholder’s “Percentage
Interest” (which is calculated by dividing (i) the number of the Common Shares owned by such Principal Stockholder, by (ii)
total number of the then outstanding shares of the Common Shares held by all Principal Stockholders) bears to the total Percentage
Interests of all Principal Stockholders exercising their right of first refusal. In the event that the ROFR Shares are in exchange
for non-cash consideration, then such right of first refusal shall be exercisable based on the fair market value determined in
good faith by the board of such non-cash consideration. Such right of first refusal may delay or prevent us from raising funding
in the future and may have an adverse impact on the liquidity and market price of our Common Shares.
Limitations
on Right to Own Shares
British
Virgin Islands law and our Fifth Amended and Restated Memorandum and Articles of Association impose no limitations on the right
of nonresident or foreign owners to hold or vote our securities. There are no provisions in the Fifth Amended and Restated Memorandum
and Articles of Association governing the ownership threshold above which shareholder ownership must be disclosed.
Anti-Takeover Provisions
Some provisions of
our Articles may discourage, delay or prevent a change of control of our Company or management that shareholders may consider
favorable, including provisions that:
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limit
the ability of shareholders to requisition and convene general meetings of shareholders.
Our Memorandum and Articles of Association allow our shareholders holding shares representing
in aggregate not less than thirty percent (30%) of our share capital as carries the right
to vote to requisition a special meeting of shareholders, in which case our directors
are obliged to call such meeting and to put the resolutions so requisitioned to a vote
at such meeting.
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However, under British
Virgin Islands law, our directors may only exercise the rights and powers granted to them under our Fifth Amended and Restated
Memorandum and Articles of Association for a proper purpose and for what they believe in good faith to be in the best interests
of our Company.
Register of Members
The Company is required
to keep a register of members containing (i) the names and addresses of the shareholders, (ii) the number of each class and series
of shares held by each shareholder, (iii) the date on which the name of each shareholder was entered in the register of members,
and (iv) the date on which any person ceased to be a shareholder. A share is deemed to be issued when the name of the shareholder
is entered in the register of members and the entry of the name of a person in the register of members as a holder of a share
is prima facie evidence that legal title in the share vests in that person.
Variation of Rights of Shareholders
If at any time the
shares are divided into different classes, the rights attached to any class may only be varied, whether or not the Company is
in liquidation, by a resolution passed at a meeting by a majority of the votes cast by those entitled to vote at a meeting of
the holders of the issued shares in that class.
Meetings
Any action required
or permitted to be taken by the shareholders may be effected at a duly called annual or special meeting of the shareholders entitled
to vote on such action. An action that may be taken by the shareholders at a meeting (other than the election of Directors) may
also be taken by a resolution of shareholders consented to in writing, without the need for any notice, but if any resolution
of shareholders is adopted otherwise than by the unanimous written consent of all shareholders, a copy of such resolution shall
forthwith be sent to all shareholders not consenting to such resolution. All meetings of shareholders (whether annual or special)
will be held on such dates and at such places as may be fixed from time to time by the directors. The Company is not required
to hold an annual general meeting in any calendar year. However, where so determined by the directors of the Company, an annual
general meeting shall be held once in each calendar year at such date and time as may be determined by the directors of the Company.
At
any meeting of shareholders, a quorum will be present if there are one or more shareholders present in person or by proxy
representing not less than one third (33.3%) of the issued shares entitled to vote on the resolutions to be considered at the
meeting. The shareholders present at a duly called or held meeting of shareholders at which a quorum is present may continue
to transact business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if
any action (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum.
A
shareholder may be represented at a meeting of shareholders by a proxy who may speak and vote on behalf of the shareholder. A
shareholder will be deemed to be present at the meeting if he participates by telephone or other electronic means and all shareholders
participating in the meeting are able to hear each other.
Transfer
of Shares
Subject
to the restrictions and conditions in the Company’s memorandum and articles of association, as amended, any shareholder
may transfer all or any of his or her shares by written instrument of transfer signed by the transferor and containing the name
and address of the transferee. The transfer of a share is effective when the name of the transferee is entered on the register
of members of the Company.
Redemption
of Shares
The
Company may purchase, redeem or otherwise acquire any of its own shares for such consideration as the directors of the Company
may determine if the directors are satisfied, on reasonable grounds, that immediately after the acquisition the value of the Company’s
assets will exceed its liabilities and the Company will be able to pay its debts as they fall due. Shares that the Company purchases,
redeems or otherwise acquires may be cancelled or held as treasury shares except to the extent that such shares are in excess
of 50% of the issued shares in which case they shall be cancelled to the extent of such excess but they shall be available for
reissue.
A copy of our
current Amended and Restated Memorandum and Articles of Association was filed with the SEC as Exhibit 99.1 to the Report of Foreign
Private Issuer on Form 6-K furnished by the Company on April 21, 2020. A copy of the proposed Fifth Amended and Restated Memorandum
and Articles of Association is filed herewithin as Exhibit 3.2.
Differences Between the Law of
Different Jurisdictions
We were incorporated under, and are
governed by, the laws of the BVI. Set forth below is a summary of some of the differences between provisions of the BVI Act applicable
to us and the laws application to companies incorporated in Delaware and their shareholders.
Director’s Fiduciary Duties
Under Delaware corporate law, a director
of a Delaware corporation has a fiduciary duty to the corporation and its stockholders. This duty has 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 an ordinarily
prudent person would exercise under similar circumstances. Under this duty, a director must inform himself of, and disclose to
stockholders, all material information reasonably available regarding a significant transaction. The duty of loyalty requires
that a director act in a manner 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 stockholders take precedence over any interest possessed by a director, officer or controlling stockholder
and not shared by the stockholders generally. In general, actions of a director are presumed 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 the corporation. However, this
presumption may be rebutted by evidence of a breach of one of the fiduciary duties. Should such evidence be presented concerning
a transaction by a director, a director must prove the procedural fairness of the transaction, and that the transaction was of
fair value to the corporation.
BVI law provides that every director
of a BVI company in exercising his powers or performing his duties shall act honestly and in good faith and in what the director
believes to be in the best interests of the company. Additionally, the director shall exercise the care, diligence and skill that
a reasonable director would exercise in the same circumstances taking into account the nature of the company, the nature of the
decision and the position of the director and his responsibilities. In addition, BVI law provides that a director shall exercise
his powers as a director for a proper purpose and shall not act, or agree to the company acting, in a manner that contravenes
the BVI Act or the memorandum of association or articles of association of the company.
Amendment of Governing Documents
Under Delaware corporate law, with
very limited exceptions, a vote of the stockholders is required to amend the certificate of incorporation. Under BVI law and our
amended and restated memorandum and articles of association, we may amend the memorandum of association or articles of association
by resolution of shareholders or by resolution of directors, provided that no amendment may be made by resolution of directors:
(a) to restrict the rights or powers of the shareholders to amend the memorandum of association or the articles of association;
(b) to change the percentage of shareholders required to pass a resolution of shareholders to amend the memorandum of association
or the articles of association; (c) in circumstances where the memorandum of association or the articles of association cannot
be amended by the shareholders; and (d) provided that the directors may not amend certain sections of the amended and restated
memorandum and articles of association that would negatively affect existing shareholders.
Written Consent of Directors
Under Delaware corporate law, directors
may act by written consent only on the basis of a unanimous vote. Under BVI law, directors’ consents need only a majority
of directors signing to take effect. Under our amended and restated memorandum and articles of association, directors may act
by written consents of all directors.
Written Consent of Shareholders
Under Delaware corporate law, unless
otherwise provided in the certificate of incorporation, any action to be taken at any annual or special meeting of stockholders
of a corporation, may be taken by written consent of the holders of outstanding stock having not less than the minimum number
of votes that would be necessary to take such action at a meeting. As permitted by BVI law, shareholders’ consents need
only a majority of shareholders signing to take effect. Our amended and restated memorandum and articles of association provide
that an action that may be taken by the shareholders at a meeting (other than the election of directors) may also be taken by
a resolution of shareholders consented to in writing, without the need for any notice, but if any resolution of shareholders is
adopted otherwise than by the unanimous written consent of all shareholders, a copy of such resolution shall forthwith be sent
to all shareholders not consenting to such resolution
Shareholder Proposals
Under Delaware corporate 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 other person authorized to do so in
the governing documents, but shareholders may be precluded from calling special meetings. BVI law and our amended and restated
memorandum and articles of association provide that our directors shall call a meeting of the shareholders if requested in writing
to do so by shareholders entitled to exercise 30% or more of the voting rights in respect of the matter for which the meeting
is requested.
Sale of Assets
Under Delaware corporate law, a vote
of the stockholders is required to approve the sale of assets only when all or substantially all assets are being sold. In the
BVI, shareholder approval is required when more than 50% of a company’s total assets by value are being disposed of or sold.
Dissolution; Winding Up
Under Delaware corporate law, unless
the board of directors approves the proposal to dissolve, dissolution must be approved by shareholders holding 100% of the total
voting power of the corporation. Only if the dissolution is initiated by the board of directors may it be approved by a simple
majority of the corporation’s outstanding shares. Delaware corporate law allows a Delaware corporation to include in its
certificate of incorporation a supermajority voting requirement in connection with dissolutions initiated by the board. As permitted
by BVI law and our amended and restated memorandum and articles of association, we may by a resolution of shareholders or by resolution
of directors appoint a voluntary liquidator to undertake the liquidation of the Company.
Redemption of Shares
Under Delaware corporate law, any stock
may be made subject to redemption by the corporation at its option or at the option of the holders of such stock provided there
remains outstanding shares with full voting power. Such stock may be made redeemable for cash, property or rights, as specified
in the certificate of incorporation or in the resolution of the board of directors providing for the issue of such stock. As permitted
by BVI law and our amended and restated memorandum and articles of association, we may purchase, redeem or otherwise acquire any
of our own shares for such consideration as our directors may determine if the directors are satisfied, on reasonable grounds,
that immediately after the acquisition the value of our assets will exceed our liabilities and we will be able to pay our debts
as they fall due. Shares that the Company purchases, redeems or otherwise acquires may be cancelled or held as treasury shares
except to the extent that such shares are in excess of 50% of the issued shares in which case they shall be cancelled to the extent
of such excess but they shall be available for reissue.
Variation of Rights of Shares
Under Delaware corporate law, a corporation
may vary the rights of a class of shares with the approval of a majority of the outstanding shares of such class, unless the certificate
of incorporation provides otherwise. As permitted by BVI law and our amended and restated memorandum and articles of association,
if at any time the shares are divided into different classes, the rights attached to any class may only be varied, whether or
not the Company is in liquidation, by a resolution passed at a meeting by a majority of the votes cast by those entitled to vote
at a meeting of the holders of the issued shares in that class.
Removal of Directors
Under Delaware corporate law, a director
of a corporation with a classified board may be removed only for cause with the approval of a majority of the outstanding shares
entitled to vote, unless the certificate provides otherwise. As permitted by BVI law and our amended and restated memorandum and
articles of association, a director or member of a committee of the board or the board of a subsidiary may be removed from his
or her position, with cause, by the majority of the shareholders or the majority of the board; provided that (i) any director
or member of a committee of the board or the board of a subsidiary that is appointed or nominated by the minority representative
shall be removed from their position upon and only upon, the written request of the minority representative; and (ii) any director
or member of a committee of the board or the board of a subsidiary that is appointed or nominated by Digital Grid shall be removed
from their position upon and only upon, the written request of Digital Grid.
Mergers
Under Delaware corporate law, one or
more constituent corporations may merge into and become part of another constituent corporation in a process known as a merger.
A Delaware corporation may merge with a foreign corporation as long as the law of the foreign jurisdiction permits such a merger.
To effect a merger under Delaware General Corporation Law §251, an agreement of merger must be properly adopted and the agreement
of merger or a certificate of merger must be filed with the Delaware Secretary of State. In order to be properly adopted, the
agreement of merger must be adopted by the board of directors of each constituent corporation by a resolution or unanimous written
consent. In addition, the agreement of merger generally must be approved at a meeting of stockholders of each constituent corporation
by a majority of the outstanding stock of the corporation entitled to vote, unless the certificate of incorporation provides for
a supermajority vote. In general, the surviving corporation assumes all of the assets and liabilities of the disappearing corporation
or corporations as a result of the merger.
Under the BVI Act, two or more companies
may merge or consolidate in accordance with the statutory provisions. A merger means the merging of two or more constituent companies
into one of the constituent companies, and a consolidation means the uniting of two or more constituent companies into a new company.
In order to merger or consolidate, the directors of each constituent company must approve a written plan of merger or consolidation
which must be authorized by a resolution of shareholders.
Shareholders not otherwise entitled
to vote on the merger or consolidation may still acquire the right to vote if the plan of merger or consolidation contains any
provision which, if proposed as an amendment to the memorandum association or articles of association, would entitle them to vote
as a class or series on the proposed amendment. In any event, all shareholders must be given a copy of the plan of merger or consolidation
irrespective of whether they are entitled to vote at the meeting or consent to the written resolution to approve the plan of merger
or consolidation.
Inspection of Books and Records
Under Delaware corporate law, any shareholder
of a corporation may for any proper purpose inspect or make copies of the corporation’s stock ledger, list of shareholders
and other books and records. Holders of our shares have no general right under BVI law to inspect or obtain copies of our list
of shareholders or our corporate records.
Transactions with Interested
Shareholders
Delaware corporate law contains a business
combination statute applicable to Delaware public corporations whereby, unless the corporation has specifically elected not to
be governed by such statute by amendment to its certificate of incorporation, it is prohibited from engaging in certain business
combinations with an “interested shareholder” for three years following the date that such person becomes an interested
shareholder. An interested shareholder generally is a person or group who or that owns or owned 15% or more of the target’s
outstanding voting stock within the past three years. This has the effect of limiting the ability of a potential acquirer to make
a two-tiered bid for the target in which all shareholders would not be treated equally. The statute does not apply if, among other
things, prior to the date on which such shareholder becomes an interested shareholder, the board of directors approves either
the business combination or the transaction that resulted in the person becoming an interested shareholder. This encourages any
potential acquirer of a Delaware public corporation to negotiate the terms of any acquisition transaction with the target’s
board of directors.
BVI law has no comparable provision.
However, our amended and restated memorandum and articles of association provide that the Company shall not engage in any business
combination with any interested shareholder for a period of 3 years following the time that such shareholder became an interested
shareholder unless: (a) prior to such time the board of directors of the Company approved either the business combination or the
transaction which resulted in the shareholder becoming an interested shareholder; (b) upon consummation of the transaction which
resulted in the shareholder becoming an interested shareholder, the interested shareholder owned at least 85% of the voting shares
of the Company outstanding at the time the transaction commenced, excluding for the purposes of determining the voting shares
outstanding (but not the outstanding voting shares owned by the interested shareholder) those shares owned (i) by persons who
are directors and also officers and (ii) employee share plans in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or (c) at or subsequent
to such time the business combination is approved by the board of directors and authorized at any annual or special meeting of
the shareholders by the affirmative vote of at least 66⅔% of the outstanding voting shares which are not owned by the interested
shareholder.
Cumulative Voting
Under Delaware corporate law, cumulative
voting for elections of directors is not permitted unless the company’s certificate of incorporation specifically provides
for it. Cumulative voting potentially facilitates the representation of minority shareholders on a board of directors since it
permits the minority shareholder to cast all the votes to which the shareholder is entitled on a single director, which increases
the shareholder’s voting power with respect to electing such director. There are no prohibitions to cumulative voting under
the laws of the BVI, but our amended and restated memorandum and articles of association do not provide for cumulative voting.
COMPARISON OF SHAREHOLDER RIGHTS
The rights of our shareholders are
currently governed by our Fourth Amended And Restated Memorandum And Articles Of Association, the BVI Act and the common law
of the BVI. The rights of Newegg stockholders are currently governed by Newegg’s certificate of incorporation and
bylaws and Delaware law. As a result of the merger, Newegg stockholders will be entitled to receive merger consideration in
our Common Shares. Following completion of the merger, the rights of Newegg stockholders who become holders of our Common
Shares in the merger will be governed by our Fifth Amended And Restated Memorandum And Articles Of Association, the BVI Act and the common law of the BVI.
The following discussion summarizes
the material differences between the current rights of our shareholders and the current rights of Newegg stockholders. These differences
arise from differences between Delaware law and the laws of the BVI, the governing instruments of the two companies, and the securities
laws and regulations governing the two companies.
Although it is impracticable to compare
all of the aspects in which Delaware law and the laws of the BVI, and each company’s governing instruments, differ with
respect to shareholder rights, the following discussion summarizes certain material differences between them. This summary is
not intended to be complete, and it is qualified in its entirety by reference to Delaware law, the laws of the BVI, our amended
and restated memorandum and articles of association and Newegg’s certificate of incorporation and bylaws. In addition, the
identification of some of the differences in the rights of shareholders as material is not intended to indicate that other differences
that are equally important do not exist. We urge you to carefully read this entire proxy statement/prospectus, the relevant provisions
of Delaware law and BVI law and the other documents to which we refer in this proxy statement/prospectus for a more complete understanding
of the differences between the rights of our shareholders and the rights of Newegg stockholders. For a description of the rights
of holders of our Common Shares, see “Description of Share Capital.”
Newegg
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Company
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AUTHORIZED CAPITAL
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Newegg is authorized to issue a total
number of shares 285,889,968, consisting of (I) 142,000,000 shares of Class A Common Stock, $.001 par value per share, (ii)
59,000,000 shares of Class B Common Stock, $.001 par value per share and (iii) 84,889,968 shares of preferred stock (the “Preferred
Stock”), $.001 par value per share, of which 59,000,000 shares are designated Series A Preferred Stock and 25,889,968
shares are designated Series AA Preferred Stock.
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We are authorized to issue a maximum
6,250,000 common shares, $0.002731 par value per share, of which 4,736,111 shares are designated as Class A common shares
and 1,513,889 shares are designated as Class B common shares. Upon filing of the amended and restated memorandum and articles
of association to be adopted at the special meeting, we will be authorized to issue an unlimited number of common shares,
$[ ] par value per share.
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DIVIDEND RIGHTS
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Holders of Newegg’s
Preferred Stock:
Newegg shall not declare, pay
or set aside any dividends on shares of Newegg’s Common Stock (other than dividends on all then outstanding shares
of Newegg’s Common Stock payable in shares of Newegg’s Common Stock) in any year unless, the holders of the
Series A Preferred Stock and Series AA Preferred Stock then outstanding shall first receive, or simultaneously receive
for such year, a dividend on each outstanding share of Series A Preferred Stock and Series AA Preferred Stock in an amount
at least equal to $.0016 per share of Series A Preferred Stock and Series AA Preferred Stock (subject to appropriate adjustment
for stock dividend, stock split, reclassification, combination or other similar recapitalization affecting such shares).
The foregoing dividend shall not be cumulative.
Newegg shall not declare, pay
or set aside any dividends on shares of any class or series of capital stock of the Newegg (other than dividends on all
then outstanding shares of Newegg’s Common Stock payable in shares of Newegg’s Common Stock) unless the holders
of the Series A Preferred Stock and Series AA Preferred Stock then outstanding shall first receive, or simultaneously
receive, in addition to any dividend payable as described above, a dividend on each outstanding share of Series A Preferred
Stock and Series AA Preferred Stock in an amount at least equal to (i) in the case of a dividend on Newegg’s Common
Stock or any class or series of capital stock that is convertible into Newegg’s Common Stock, that dividend per
share of Series A Preferred Stock and Series AA Preferred Stock as would equal the product of (A) the dividend payable
on each share of such Common Stock or class or series of capital stock determined, if applicable, as if all such shares
of such class or series of capital stock had been converted into Newegg’s Common Stock and (B) the number of shares
of Newegg’s Common Stock issuable upon conversion of a share of Series A Preferred Stock and Series AA Preferred
Stock, in each case calculated on the record date for determination of holders entitled to receive such dividend or (ii)
in the case of a dividend on any class or series of capital stock that is not convertible into Newegg’s Common Stock,
at a rate per share of Series A Preferred Stock and Series AA Preferred Stock determined by dividing the amount of the
dividend payable on each share of such class or series of capital stock by the original issuance price of such class or
series of capital stock and multiplying such fraction by an amount equal to $0,02 per share (subject to appropriate adjustment
for stock dividend, stock split, reclassification, combination or other similar recapitalization affecting such shares)
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The holders of Common Shares are entitled
to such dividends as may be declared by the directors of the Company at such time and of such an amount as the directors think
fit if they are satisfied, on reasonable grounds, that immediately after the distribution, the value of Company assets exceeds
the Company’s liabilities and the Company will be able to pay its debts as they fall due.
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Newegg
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Company
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Holders of Newegg’s
Common Stock:
Subject to the preferences
applicable to any series of Preferred Stock outstanding at any time, the holders of Class A Common Stock and the holders
of Class B Common Stock shall be entitled to share equally, on a per share basis, in such dividends and other distributions
cash, property or shares of stock of Newegg as may be declared by Newegg’s board of directors from time to time
with respect to Newegg’s Common Stock out of assets or funds of Newegg legally available therefor; provided, however,
that in the event that any such dividend or distribution is paid in the form of shares of Newegg’s Common Stock
or rights to acquire Common Stock, the holders of Class A Common Stock shall receive shares of Class A Common Stock or
rights to acquire shares of Class A Common Stock, as the case may be, and the holders of Class B Common Stock shall receive
shares of Class B Common Stock or rights to acquire shares of Class B Common Stock, as the case may be.
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PURCHASE, REDEMPTION AND PREEMPTIVE RIGHTS
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Under Delaware corporate law,
Newegg may generally redeem or repurchase shares of its stock unless the Delaware statutory capital of the corporation
is impaired or such redemption or repurchase would impair the capital of the corporation.
According to Newegg Stockholders
Agreement, certain holders of Series AA convertible Preferred Stock, Series A convertible Preferred Stock and Common Stock
have pre-emptive rights to purchase any shares of Series AA convertible Preferred Stock, Series A convertible Preferred
Stock or Common Stock that Newegg proposes to issue other than in connection with an IPO and certain excluded issuances
specified in the Newegg Stockholders Agreement.
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The Company may purchase, redeem
or otherwise acquire any of its own shares for such consideration as the directors of the Company may determine if the
directors are satisfied, on reasonable grounds, that immediately after the acquisition the value of the Company’s
assets will exceed its liabilities and the Company will be able to pay its debts as they fall due.
Certain of our shareholders
following the Merger will have certain pre-emptive rights and rights of first refusal as described under “Description
of Securities—Rights of Certain Principal Shareholders of the Company” above.
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INSPECTION RIGHTS
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According to Delaware corporate law,
any stockholder of Newegg may for any proper purpose inspect or make copies of Newegg’s stock ledger, list of stockholders
and other books and records.
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Holders of our shares have no general
right under BVI law to inspect or obtain copies of our list of shareholders or our corporate records.
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Newegg
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Company
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APPRAISAL RIGHTS
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According to Delaware corporate
law, a holder of shares of any class or series of Newegg has the right, in specified circumstances, to dissent from a
merger or consolidation by demanding payment in cash for the stockholder’s shares equal to the fair value of those
shares, as determined by the Delaware Court of Chancery in an action timely brought by the corporation or a dissenting
stockholder.
In addition, appraisal rights
are not available to holders of shares of the surviving corporation in specified mergers that do not require the vote
of the stockholders of the surviving corporation.
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The
BVI Act provides that any shareholder of a BVI company is entitled to payment of the
fair value of his shares upon dissenting from any of the following: (a) a merger if the
company is a constituent company, unless the company is the surviving company and the
shareholder continues to hold the same or similar shares; (b) a consolidation if the
company is a constituent company; (c) any sale, transfer, lease, exchange or other disposition
of more than 50% in value of the assets or business of the company if not made in the
usual or regular course of the business carried on by the company but not including:
(i) a disposition pursuant to an order of the court having jurisdiction in the matter,
(ii) a disposition for money on terms requiring all or substantially all net proceeds
to be distributed to the shareholders in accordance with their respective interest within
one year after the date of disposition, or (iii) a transfer pursuant to the power of
the directors to transfer assets for the protection thereof; (d) a compulsory redemption
of 10% or fewer of the issued shares of the company required by the holders of 90% or
more of the shares of the company pursuant to the terms of the BVI Act; and (e) an arrangement,
if permitted by the BVI court.
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VOTING RIGHTS
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Except as otherwise provided
in Newegg’s certificate of incorporation or by applicable law, the holders of shares of Class A Common Stock and
Class B Common Stock shall at all times vote together as one class on all matters (including the election of directors)
submitted to a vote or for the consent of the stockholders of Newegg.
Each Class A Common Stock is
entitled to one (1) vote on all matters subject to vote at general meetings of the Company.
Each Class B Common Stock is
entitled to one (1) vote on all matters subject to vote at general meetings of the Company.
Each Series A Preferred Stock
shall be entitled to ten (10) votes for each share of Class A Common Stock into which such share of Series A Preferred
Stock is convertible as of the record date for determining stockholders entitled to vote on such matter.
Each Series AA Preferred Stock
shall be entitled to ten (10) votes for each share of Class A Common Stock into which such share of Series AA Preferred
Stock is convertible as of the record date for determining stockholders entitled to vote on such matter.
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Each common share is entitled to one
(1) vote on all matters subject to vote at general meetings of the Company.
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Newegg
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Company
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VOTE ON MERGER, CONSOLIDATIONS OR SALES OF
SUBSTANTIALLY ALL ASSETS
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Under Delaware corporate law,
one or more constituent corporations may merge into and become part of another constituent corporation in a process known
as a merger. A Delaware corporation may merge with a foreign corporation as long as the law of the foreign jurisdiction
permits such a merger. To effect a merger under Delaware General Corporation Law §251, an agreement of merger must
be properly adopted and the agreement of merger or a certificate of merger must be filed with the Delaware Secretary of
State. In order to be properly adopted, the agreement of merger must be adopted by the board of directors of each constituent
corporation by a resolution or unanimous written consent. In addition, the agreement of merger generally must be approved
at a meeting of stockholders of each constituent corporation by a majority of the outstanding stock of the corporation
entitled to vote, unless the certificate of incorporation provides for a supermajority vote. In general, the surviving
corporation assumes all of the assets and liabilities of the disappearing corporation or corporations as a result of the
merger.
Under Delaware corporate law,
a vote of the stockholders is required to approve the sale of assets only when all or substantially all assets are being
sold.
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Under the BVI Act, two or more
companies may merge or consolidate in accordance with the statutory provisions. A merger means the merging of two or more
constituent companies into one of the constituent companies, and a consolidation means the uniting of two or more constituent
companies into a new company. In order to merger or consolidate, the directors of each constituent company must approve
a written plan of merger or consolidation which must be authorized by a resolution of shareholders.
Shareholders not otherwise
entitled to vote on the merger or consolidation may still acquire the right to vote if the plan of merger or consolidation
contains any provision which, if proposed as an amendment to the memorandum association or articles of association, would
entitle them to vote as a class or series on the proposed amendment. In any event, all shareholders must be given a copy
of the plan of merger or consolidation irrespective of whether they are entitled to vote at the meeting or consent to
the written resolution to approve the plan of merger or consolidation.
In the BVI, shareholder approval
is required when more than 50% of a company’s total assets by value are being disposed of or sold.
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CHARTER
AMENDMENTS
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Under
Delaware corporate law, with very limited exceptions, a vote of the stockholders is required to amend the certificate of incorporation.
In addition, according to the stockholders agreement of Newegg dated March 30, 2017 (“Newegg Stockholders Agreement”),
Newegg’s certificate of incorporation could not be amended without the approval of the affirmative vote of not less
than 66 2/3% of the number of votes represented by the Directors (excluding any vacancies)
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Under
BVI law and our amended and restated memorandum and articles of association, we may amend the memorandum of association or
articles of association by resolution of shareholders or by resolution of directors, provided that no amendment may be made
by resolution of directors: (a) to restrict the rights or powers of the shareholders to amend the memorandum of association
or the articles of association; (b) to change the percentage of shareholders required to pass a resolution of shareholders
to amend the memorandum of association or the articles of association; (c) in circumstances where the memorandum of association
or the articles of association cannot be amended by the shareholders; and (d) provided that the directors may not amend certain
sections of the amended and restated memorandum and articles of association that would negatively affect existing shareholders.
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SHAREHOLDER
MEETINGS
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Meetings
of stockholders may be held within or without the State of Delaware, or by means of remote communication as determined by
Newegg’s board of directors. Annual meeting of Newegg’s stockholders shall be held each year on a date and a time
designated by the board of directors.
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All
meetings of shareholders (whether annual or special) will be held on such dates and at such places as may be fixed from time
to time by the directors. The Company is not required to hold an annual general meeting in any calendar year. However, where
so determined by the directors of the Company, an annual general meeting shall be held once in each calendar year at such
date and time as may be determined by the directors of the Company.
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QUORUM
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A
majority of the stock issued and outstanding and entitled to vote at any meeting of stockholders, the holders of which are
present in person or represented by proxy, shall constitute a quorum for such meeting, except as otherwise provided by Delaware
corporate law.
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At
any meeting of shareholders, a quorum will be present if there are one or more shareholders present in person or by proxy
representing not less than one third (33.3%) of the issued shares entitled to vote on the resolutions to be considered at the
meeting. The shareholders present at a duly called or held meeting of shareholders at which a quorum is present may continue
to transact business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if
any action (other than adjournment) is approved by at least a majority of the shares required to constitute a
quorum.
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SHAREHOLDER
PROPOSALS
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According
to the bylaws of Newegg, a special meeting of the stockholders could be called by the president or secretary at the requires
in writing of stockholders owning a majority in amount of Newegg’s issued and outstanding shares, and entitled to vote,
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BVI
law and our Fifth Amended And Restated Memorandum And Articles Of Association provide that our directors shall call a meeting
of the shareholders if requested in writing to do so by shareholders entitled to exercise 30% or more of the voting rights
in respect of the matter for which the meeting is requested.
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ACTION
BY WRITTEN CONSENT OF THE SHAREHOLDERS
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Under
Delaware corporate law, Newegg’s stockholders may act by written consent signed by stockholders having the minimum number
of votes that would be necessary to take such action at a meeting at which all shares entitled to vote thereon were present
and voted.
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Our
amended and restated memorandum and articles of association provide that an action that may be taken by the shareholders at
a meeting (other than the election of directors) may also be taken by a resolution of shareholders consented to in writing,
without the need for any notice, but if any resolution of shareholders is adopted otherwise than by the unanimous written
consent of all shareholders, a copy of such resolution shall forthwith be sent to all shareholders not consenting to such
resolution.
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ANTI-TAKEOVER
PROVISIONS AND OTHER SHAREHOLDER PROTECTIONS
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Some
provisions of Newegg Stockholders Agreement may discourage, delay or prevent a change of control of the Company or management
that shareholders may consider favorable, including provisions that requires an affirmative vote of not less than 66 2/3%
of the number of votes represented by the directors to take certain corporate action, including agreeing to any merger, consolidation
or combination of Newegg or any of its subsidiaries.
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Some provisions of our Fifth
Amended And Restated Memorandum And Articles Of Association may discourage, delay or prevent a change of control of the
Company or management that shareholders may consider favorable, including provisions that limit the ability of shareholders
to requisition and convene general meetings of shareholders. For instance, our Fifth Amended And Restated Memorandum And
Articles Of Association allow our shareholders holding shares representing in aggregate at least thirty percent (30%)
of our voting shares to requisition a special meeting of shareholders, in which case our directors are obliged to call
such meeting and to put the resolutions so requisitioned to a vote at such meeting.
However, under BVI law, our
directors may only exercise the rights and powers granted to them under our amended and restated memorandum and articles
of association for a proper purpose and for what they believe in good faith to be in the best interests of the Company.
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ELECTION
OF DIRECTORS
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Pursuant to Newegg Stockholders
Agreement, the board of directors shall consist of either five or seven Directors: (i) in the event the size of the board
consists of five directors, three shall be nominated by the Minority Representative, and (ii) in the event the size of
the board consists of seven directors, four of the directors shall be nominated by Digital Grid, and three of the directors
shall be nominated by the Minority Representative.
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Pursuant to the amended and
restated memorandum and articles of association to be adopted at the special meeting, and subject to compliance with applicable
laws and NASDAQ rules, the board of the Company shall consist of up to seven directors. Initially, four of the directors
shall be appointed by Digital Grid, and three of the directors shall be appointed by the minority representative.
Of the directors appointed
by the minority representative, one shall be designated by the minority representative to be the primary minority board
appointee from time to time by delivering written notice thereof to the board.
Any director positions which
neither Digital Grid nor the minority representative are entitled to appoint under the amended and restated memorandum
and articles of association shall be appointed by a majority of the remaining directors, or by any other means allowed
under the amended and restated memorandum and articles of association and the BVI Act.
See “Description of Share
Capital—Amended and Restated Memorandum and Articles of Association—Appointment and Removal of the Directors”
above for more information.
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REMOVAL
OF DIRECTORS
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No
director or member of a committee of the board or subsidiary board that is nominated by the Minority Representative from the
board, any subsidiary board, or any committee thereof shall be removed without the prior written consent of the Minority Representative.
No director or board, any subsidiary board, or any committee thereof shall be removed without the prior written consent of
Digital Grid. The parties to the Newegg Stockholders Agreement shall take all reasonable actions to remove any director that
is nominated by the Minority Representative from the board, any subsidiary board, or any committee thereof upon the written
request of the Minority Representative. Each of the parties shall take all reasonable actions to remove any director that
is nominated by Digital Grid from the board, any subsidiary board, or any committee thereof upon the written request of Digital
Grid.
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A director or member of a committee
of the board or the board of a subsidiary may be removed from his or her position, with cause, by the majority of the
shareholders or the majority of the board; provided that
(i) Any
director or member of a committee of the board or the board of a subsidiary that is appointed or nominated by the minority
representative shall be removed from their position upon and only upon, the written request of the minority representative;
and
(ii) Any
director or member of a committee of the board or the board of a subsidiary that is appointed or nominated by Digital
Grid shall be removed from their position upon and only upon, the written request of Digital Grid.
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REQUIREMENTS
OF BOARD APPROVAL ON CERTAIN MATTERS
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Neither Newegg nor any officer
or agent of the Newegg or its subsidiaries shall take, directly or indirectly, any of the following actions without the
approval of the affirmative vote of not less than 66 2/3% of the number of votes represented by the directors (excluding
any vacancies):
(i) initiate
any liquidation, dissolution, bankruptcy filing or similar action, recapitalization, restructuring or reorganization;
(ii) other
than to Newegg or a wholly-owned subsidiary thereof, sell, license, transfer or otherwise dispose of (including through
merger or consolidation) all or substantially all of the assets or properties of Newegg or any of its subsidiaries in
any transaction or series of related transactions;
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The
Fifth Amended And Restated Memorandum And Articles Of Association to be adopted at the special meeting provide that, as long
as the number of common shares held by legacy shareholders represents more than ten percent (10%) of the equity interest of
the Company, the Company or any officer or agent of the Company will not to take, or permit its subsidiaries to take, certain
actions, without the approval of the affirmative vote of not less than a majority of the number of votes represented by the
directors, which majority must include the primary minority board appointee. See “Description of Share Capital—Amended
and Restated Memorandum and Articles of Association—Requirements of Board Approval on Certain Matters” above for
a description of these matters.
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(iii) agree
to any merger, consolidation or combination of Newegg or any of its subsidiaries, or to a sale of all or substantially
all of the assets of Newegg in connection with a Company Sale (as defined in Newegg Stockholders Agreement);
(iv) commence
or undertake any reorganization;
(v) issue,
directly or indirectly, any equity interest of Newegg or permit any of the subsidiaries to issue any equity interest other
than, in each case, any excluded issuance;
(vi) materially
alter or fundamentally change the nature of the business of Newegg and its subsidiaries;
(vii) amend,
change, or waive any provision of, the certificate of incorporation or bylaws of Newegg (the “Organizational Documents”);
(viii)
purchase or otherwise acquire all or any part of the assets or business of, or equity interests or other evidences of
beneficial ownership of, invest in or participate in any joint venture, partnership or similar arrangement with, any person
(other than Newegg or any of its subsidiaries), in each case in any transaction or series of related transactions involving
a commitment in excess of $10,000,000;
(ix) other
than to Newegg or a wholly-owned subsidiary thereof, sell, license, transfer or otherwise dispose of (including through
merger or consolidation) any assets or properties of Newegg or any of its subsidiaries, in each case in any transaction
or series of related transactions involving a commitment in excess of $10,000,000;
(x) other
than loans to wholly-owned subsidiaries, (A) extend any credit or make any loans to any person, (B) incur, assume, guarantee,
endorse or otherwise become responsible for indebtedness, or (C) amend, modify or supplement in any material respect the
agreements governing (or otherwise extend or refinance) existing indebtedness;
(xi) appoint
or remove the Chief Executive Officer of Newegg;
(xii) enter into any affiliate
transactions;
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FILLING
VACANCIES ON THE BOARD OF DIRECTORS
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In
the event that any director ceases to serve as a member of the board or any committee thereof for any reason, in each case,
during such member’s term of office, the resulting vacancy on the board or committee, as applicable, shall be filled
by person appointed by Digital Grid or Minority Representative.
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Subject
to the rights of Digital Grid and the minority representative to appoint directors, the directors shall have the power from
time to time and at any time to appoint any person as a director to fill a casual vacancy on the board. Any director appointed
by the board to fill a casual vacancy shall hold office until the first general meeting of shareholders after his appointment
and shall resign and be subject to re-election at such meeting.
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INDEMNIFICATION
OF DIRECTORS AND OFFICERS AND INSURANCE
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Newegg
provides indemnification for its directors, and the directors or managers of each subsidiary thereof (each an “Indemnitee”)
against, any losses, liabilities and reasonable expenses (including reasonable attorneys’ fees) (each, a “Loss”),
arising from proceedings in which such Indemnitee may be involved, as a party or otherwise, by reason of he or she being a
director of Newegg, or director or manager of any subsidiary thereof, or by reason of his or her involvement in the management
of the affairs of Newegg or its subsidiaries, whether or not he or she continues to be such at the time any such Loss is paid
or incurred. Notwithstanding the foregoing, an Indemnitee shall not be held harmless or indemnified for any Losses arising
out of the fraud, intentional misconduct, or knowing or reckless breach of Indemnitee’s obligations under the Newegg
Stockholders Agreement, or bad faith of such Indemnitee. Without limiting the foregoing, an Indemnitee shall be entitled to
indemnification by Newegg against reasonable expenses (as incurred), including attorneys’ fees, incurred by the Indemnitee
in connection with the defense of any action to which the Indemnitee may be made a party (without regard to the success of
such defense), to the fullest extent permitted under the provisions of applicable law.
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BVI
law does not limit the extent to which a company’s memorandum and articles of association
may provide for indemnification of officers and directors, except to the extent any such
provision may be held by BVI courts to be contrary to public policy, such as to provide
indemnification against civil fraud or the consequences of committing a crime. Our Fifth
Amended And Restated Memorandum And Articles Of Association permit indemnification of
officers and directors against all actions, proceedings, costs, charges, expenses, losses,
damages or liabilities incurred in connection with the execution of their duties, powers,
authorities or discretions as a director or officer of the Company, unless such losses
or damages arise through the willful neglect or default of such directors or officers.
Our Fifth Amended And Restated
Memorandum And Articles Of Association provide that we shall purchase and maintain insurance in relation to any person
who is or was a director, officer or liquidator of the Company or any of its subsidiaries, or who at the request of the
Company is or was serving as a director, officer or liquidator of, or in any other capacity is or was acting for, another
body corporate or a partnership, joint venture, trust or other enterprise, against any liability asserted against the
person and incurred by the person in that capacity, whether or not the Company has or would have had the power to indemnify
the person against the liability as provided in our amended and restated memorandum and articles of association.
Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling us
under the foregoing provisions, we have been informed that in the opinion of the SEC, such indemnification is against
public policy as expressed in the Securities Act and is therefore unenforceable.
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Exchange Controls
BVI Exchange Controls
There are no material
exchange controls restrictions on payment of dividends, interest or other payments to the holders of our Common Shares or on the
conduct of our operations in the BVI, where we were incorporated. There are no material BVI laws that impose any material exchange
controls on us or that affect the payment of dividends, interest or other payments to nonresident holders of our Common Shares. BVI
law and our Amended and Restated Memorandum and Articles of Association do not impose any material limitations on the right of
non-residents or foreign owners to hold or vote our Common Shares.
PRC Exchange Controls
For a discussion of
PRC Exchange Controls, see “Our Business—Regulations on China Applicable to our Business - Regulation on Foreign Currency
Exchange” above.
Taxation
The following is
a general summary of certain material BVI, PRC and U.S. federal income tax considerations. The discussion is not intended to be,
nor should it be construed as, legal or tax advice to any particular shareholder or prospective shareholder. The discussion is
based on laws and relevant interpretations thereof in effect as of the date hereof, all of which are subject to change or different
interpretations, possibly with retroactive effect.
BVI Taxation
The BVI does not impose
a withholding tax on dividends paid to holders of our Common Shares, nor does the BVI levy any capital gains or income taxes on
us. Further, a holder of our Common Shares who is not a resident of the BVI is exempt from the BVI income tax on dividends paid
with respect to the Common Shares. Holders of Common Shares are not subject to the BVI income tax on gains realized on the sale
or disposition of the Common Shares.
Our Common Shares are
not subject to transfer taxes, stamp duties or similar charges in the BVI. However, as a company incorporated under the BVI Act,
we are required to pay the BVI government an annual license fee based on the number of shares we are authorized to issue.
There is no income
tax treaty or convention currently in effect between the United States and the BVI.
PRC Taxation
We are a holding company
incorporated in the BVI, which directly holds our equity interests in our PRC operating subsidiaries. The EIT Law and its implementation
rules, both of which became effective as of January 1, 2008, as amended on February 24, 2017, provide that a PRC enterprise is
subject to a standard income tax rate of 25% and China-sourced income of foreign enterprises, such as dividends paid by a PRC
subsidiaries to its overseas parent, will normally be subject to PRC withholding tax at a rate of 10%, unless there are applicable
treaties between the overseas parent’s jurisdiction of incorporation and China to reduce such rate.
The EIT Law also provides
that enterprises organized under the laws of jurisdictions outside China with their “de facto management bodies” located
within China may be considered PRC resident enterprises and therefore subject to PRC enterprise income tax at the rate of 25% on
their worldwide income. Its implementation rules further define the term “de facto management body” as the management
body that exercises substantial and overall management and control over the business, personnel, accounts and properties of an
enterprise. While we do not currently consider our company or any of our overseas subsidiaries to be a PRC resident enterprise,
there is a risk that the PRC tax authorities may deem our company or any of our overseas subsidiaries as a PRC resident enterprise
since a substantial majority of the members of our management team as well as the management team of our overseas subsidiaries
are located in China, in which case we or the overseas subsidiaries, as the case may be, would be subject to the PRC enterprise
income tax at the rate of 25% on worldwide income. If the PRC tax authorities determine that our BVI holding company is a “resident
enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. Under the
EIT Law and its implementation regulations issued by the State Council, a 10% PRC withholding tax is applicable to dividends paid
to investors that are non-resident enterprises, which do not have an establishment or place of business in the PRC or which have
such establishment or place of business but the dividends are not effectively connected with such establishment or place of business,
to the extent such dividends are derived from sources within the PRC. In addition, any gain realized on the transfer of shares
by such investors is also subject to PRC tax at a rate of 10%, if such gain is regarded as income derived from sources within the
PRC. If we are deemed a PRC resident enterprise, dividends paid on our Common Shares, and any gain realized from the transfer of
our Common Shares, may be treated as income derived from sources within the PRC and may as a result be subject to PRC taxation.
Furthermore, if we are deemed a PRC resident enterprise, dividends paid to individual investors who are non-PRC residents and any
gain realized on the transfer of Common Shares by such investors may be subject to PRC tax at a current rate of 20% (which in the
case of dividends may be withheld at source). Any PRC tax liability may be reduced under applicable tax treaties or tax arrangements
between China and other jurisdictions. If we or any of our subsidiaries established outside China are considered a PRC resident
enterprise, it is unclear whether holders of our Common Shares would be able to claim the benefit of income tax treaties or agreements
entered into between China and other countries or areas.
U.S. Federal Income Taxation
The following is a
discussion of certain material U.S. federal income tax consequences of the acquisition, ownership and disposition of our Common
Shares. It does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a particular
person’s situation. The discussion applies only to holders that hold their Common Shares as capital assets (generally property
held for investment) within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended, or the Code. This discussion
is based on the Code, income tax regulations promulgated thereunder, judicial positions, published positions of the Internal Revenue
Service, or the IRS, and other applicable authorities, all as in effect as of the date hereof and all of which are subject to change,
possibly with retroactive effect. This discussion is general in nature and is not exhaustive of all possible tax considerations,
nor does the discussion address any state, local or foreign tax considerations or any U.S. tax considerations (e.g., estate or
gift tax) other than U.S. federal income tax considerations, that may be applicable to particular holders.
This discussion does
not address all aspects of U.S. federal income taxation that may be relevant in light of particular circumstances, nor does it
address the U.S. federal income tax consequences to persons who are subject to special rules under U.S. federal income tax law,
including:
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(a)
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banks,
insurance companies or other financial institutions;
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(b)
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persons
subject to the alternative minimum tax;
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(c)
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tax-exempt
organizations;
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(d)
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controlled
foreign corporations, passive foreign investment companies and corporations that accumulate
earnings to avoid United States federal income tax;
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(e)
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certain
former citizens or long-term residents of the United States;
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(f)
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dealers
in securities or currencies;
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(g)
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traders
in securities that elect to use a mark-to-market method of accounting for their securities
holdings;
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(h)
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persons
that own, or are deemed to own, more than five percent of our capital stock;
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(i)
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holders
who acquired our stock as compensation or pursuant to the exercise of a stock option;
or
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(j)
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persons
who hold our shares as a position in a hedging transaction, “straddle,” or
other risk reduction transaction.
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For purposes of this
discussion, a U.S. holder is (i) an individual who is a citizen or resident of the United States for U.S. federal income tax purposes;
(ii) a corporation, or other entity treated as a corporation for U.S. federal income tax purposes, created or organized in or
under the laws of the United States (or treated as such under applicable U.S. tax laws), any State thereof, or the District of
Columbia; (iii) an estate the income of which is subject to U.S. federal income tax regardless of its source; or (iv) a trust
if (a) a U.S. court is able to exercise primary supervision over the administration of the trust and one or more U.S. persons
have the authority to control all substantial decisions of the trust, or (b) it has a valid election in effect under applicable
law and regulations to be treated as a U.S. person for U.S. federal income tax purposes. A non-U.S. holder is a holder that is
neither a U.S. holder nor a partnership or other entity classified as a partnership for U.S. federal income tax purposes.
In the case of a partnership
or entity classified as a partnership for U.S. federal income tax purposes, the U.S. federal income tax treatment of a partner
generally will depend on the status of the partner and the activities of the partnership. Partners of partnerships should consult
their tax advisors regarding the U.S. federal income tax consequences to them of the merger or of the ownership and disposition
of our Common Shares.
U.S. Federal Income Tax Consequences
for U.S. Holders
Distributions
We do not currently
anticipate paying distributions on our Common Shares. In the event that distributions are paid, however, the gross amount of such
distributions will be included in the gross income of the U.S. holder as dividend income on the date of receipt to the extent that
the distribution is paid out of current or accumulated earnings and profits, as determined under U.S. federal income tax principles.
Such dividends will not generally be eligible for the dividends received deduction allowed to corporations in respect of dividends
received from U.S. corporations. Dividends received by non-corporate U.S. holders, including individuals, may be subject to reduced
rates of taxation under current law. A U.S. holder may be eligible to claim a foreign tax credit with respect to any PRC withholding
tax imposed on dividends paid by us. However, the foreign tax credit rules are complex, and U.S. holders should consult their own
tax advisors with respect to any benefits they may be entitled to under the foreign tax credit rules.
To the extent that
dividends paid on our Common Shares exceed current and accumulated earnings and profits, the distributions will be treated first
as a tax-free return of tax basis on our Common Shares, and to the extent that the amount of the distribution exceeds tax basis,
the excess will be treated as gain from the disposition of those Common Shares.
Sale or Other Disposition
U.S. holders of our
Common Shares will recognize taxable gain or loss on any sale, exchange, or other taxable disposition of Common Shares equal to
the difference between the amounts realized for the Common Shares and the U.S. holder’s tax basis in the Common Shares. This
gain or loss generally will be capital gain or loss. Under current law, non-corporate U.S. holders, including individuals, are
eligible for reduced tax rates if the Common Shares have been held for more than one year. The deductibility of capital losses
is subject to limitations. A U.S. holder may be eligible to claim a foreign tax credit with respect to any PRC withholding tax
imposed on gain from the sale or other disposition of Common Shares. However, the foreign tax credit rules are complex, and U.S.
holders should consult their own tax advisors with respect to any benefits they may be entitled to under the foreign tax credit
rules.
Unearned Income Medicare Contribution
Certain U.S. holders
who are individuals, trusts or estates are required to pay an additional 3.8% Medicare tax on, among other things, dividends on
and capital gains from the sale or other disposition of shares of stock. U.S. holders should consult their own advisors regarding
the effect, if any, of this rule on their ownership and disposition of our Common Shares.
U.S. Federal Income Tax Consequences
for Non-U.S. Holders
Distributions
The rules applicable
to non-U.S. holders for determining the extent to which distributions on our Common Shares, if any, constitute dividends for U.S.
federal income tax purposes are the same as for U.S. holders. See “–U.S. Federal Income Tax Consequences for U.S. Holders–
Distributions.”
If, at any time after
the merger, the Company pays dividends to its non-U.S. holders, the Company will be required to impose U.S. withholding taxes
on such dividends at the statutory rate of 30%. That rate may be reduced under an applicable income tax treaty between the United
States and the holder’s country of residence. Non-U.S. holders must satisfy the eligibility requirements under the applicable
income tax treaty and provide the appropriate IRS Form W-8 or other withholding certificate to the Company as the withholding
agent. Under the prevailing U.S. – China income tax treaty, the rate of U.S. withholding tax on dividends paid to PRC residents
who meet the relevant eligibility requirements is reduced to 10%.
Dividends received
by a non-U.S. holder that are effectively connected with such holder’s conduct of a U.S. trade or business (and, if an income
tax treaty applies, are attributable to a permanent establishment maintained by the non-U.S. holder in the U.S.) will be subject
to U.S. federal income tax, net of certain deductions, at the rates applicable to U.S. persons. In addition, corporate non-U.S.
holders may be subject to an additional branch profits tax equal to 30% or such lower rate as may be specified by an applicable
tax treaty on dividends received that are effectively connected with the conduct of a trade or business in the United States.
Sale or Other Disposition
Except as described
below for a reduced rate of U.S. withholding tax pursuant to an applicable income tax treaty, any gain realized by a non-U.S. holder
upon the sale or other disposition of our Common Shares generally will not be subject to U.S. federal income tax unless:
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the
gain is effectively connected with the conduct of a trade or business in the United States
by such non-U.S. holder, and, if an income tax treaty applies, is attributable to a permanent
establishment maintained by such non-U.S. holder in the U.S.;
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the
non-U.S. holder is an individual who is present in the United States for 183 days or
more in the taxable year of the disposition, and certain other conditions are met; or
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Lianluo
Smart Limited is or has been a “U.S. real property holding corporation,” or USRPHC, for U.S. federal income tax purposes
at any time during the shorter of the five-year period ending on the date of disposition or the period during which the holder
has held our Common Shares.
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Non-U.S. holders whose
gain is described in the first bullet point above will be subject to U.S. federal income tax on the gain derived from the sale,
net of certain deductions, at the rates applicable to U.S. persons. Corporate non-U.S. holders whose gain is described in the
first bullet point above may also be subject to the branch profits tax described above at a 30% rate or lower rate provided by
an applicable income tax treaty. Individual non-U.S. holders described in the second bullet point above will be subject to a flat
30% U.S. federal income tax rate on the gain derived from the sale, which may be offset by U.S.-source capital losses, even though
such non-U.S. holders are not considered to be residents of the United States.
A corporation will
be a USRPHC if the fair market value of its U.S. real property interests equals or exceeds 50 percent of the aggregate of its real
property interests (U.S. and non-U.S.) and its assets used or held for use in a trade or business. Because we do not currently
own significant U.S. real property, we believe that we are not currently and will not become a USRPHC. However, because the determination
of whether we are a USRPHC depends on the fair market value of our U.S. real property relative to the fair market value of our
other business assets, there can be no assurance that we will not become a USRPHC in the future. Even if we become a USRPHC, however,
as long as our Common Shares are regularly traded on an established securities market, such Common Shares will be treated as U.S.
real property interests only if a non-U.S. holder actually or constructively holds more than 5% of such regularly traded Common
Shares at any time during the applicable period that is specified in the Code.
Foreign Account Tax Compliance
The Foreign Account
Tax Compliance provisions of the Hiring Incentives to Restore Employment Act (generally referred to as “FATCA”), when
applicable, will impose a U.S. federal withholding tax of 30% on payments of dividends on, and gross proceeds from dispositions
of, our Common Shares that are held through “foreign financial institutions” (which is broadly defined for this purpose
and in general includes investment vehicles) and certain other non-U.S. entities unless various U.S. information reporting and
due diligence requirements (generally relating to ownership by U.S. persons of certain interests in or accounts with those entities)
have been satisfied or an exemption applies. An intergovernmental agreement between the United States and an applicable foreign
country may modify these requirements. U.S. Holders should consult their tax advisers regarding the effect, if any, of the FATCA
provisions on their particular circumstances.
Information Reporting and Backup Withholding
Payments of proceeds
on the disposition of stock made to a holder of our Common Shares may be subject to information reporting and backup withholding
at a current rate of 24% unless such holder provides a correct taxpayer identification number on IRS Form W-9 (or other appropriate
withholding form) or establishes an exemption from backup withholding, for example by properly certifying the holder’s non-U.S.
status on a Form W-8BEN, Form W-8BEN-E or another appropriate version of IRS Form W-8.
Backup withholding
is not an additional tax; rather, the U.S. income tax liability of persons subject to backup withholding will be reduced by the
amount of tax withheld. If withholding results in an overpayment of taxes, a refund or credit may generally be obtained from the
IRS, provided that the required information is furnished to the IRS in a timely manner.
UNDERWRITING
Maxim
Group LLC (who we refer to herein as the Representative) is acting as representative of the underwriters of this Offering.
Subject to the terms and conditions of an underwriting agreement between us and the Representative, we have agreed to sell to
each underwriter named below, and each underwriter named below has severally agreed to purchase, at the public offering price
less the underwriting discounts set forth on the cover page of this prospectus, the number of common shares and the pre-funded
warrants listed next to its name in the following table:
Name
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Number of
Shares
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Maxim Group LLC
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Total
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The
underwriting agreement provides that the obligation of the underwriters to purchase all of the Common Shares being offered to the
public is subject to specific conditions, including the absence of any material adverse change in our business or in the financial
markets and the receipt of certain legal opinions, certificates and letters from us, our counsel and the independent auditors.
Subject to the terms of the underwriting agreement, the underwriters will purchase all of the shares being offered to the public,
other than those covered by the over-allotment option described below, if any of these shares are purchased.
Offers
and sales for this offering will be conducted both inside and outside the United States through the underwriters and their respective
selling agents. All offers or sales in the United States will be conducted by broker-dealers registered with the SEC and a member
of FINRA.
Over-Allotment
Option
We
have granted to the underwriters an option, exercisable not later than 45 days after the date of this prospectus, to purchase
up to additional Common Shares at the public
offering price, less the underwriting discounts and commissions. The underwriters may exercise this option only to cover
over-allotments made in connection with the sale of the shares offered by this prospectus. To the extent that the
underwriters exercise this option, the underwriters will become obligated, subject to conditions, to purchase, and we will be
obligated to sell, the additional shares. If any additional shares are purchased, the underwriters will offer the additional
shares on the same terms as those on which the other shares are being offered hereunder.
Commission
and Expenses
The
underwriting discounts and commissions are 7% of the public offering price. We have agreed to pay the underwriters the discounts
and commissions set forth below, assuming either no exercise or full exercise by the underwriters of the underwriters’ over-allotment
option. We have been advised by the underwriters that the underwriters propose to offer the shares to the public at the public
offering price set forth on the cover of this prospectus and to dealers at a price that represents a concession not in excess of
$ per share under the offering price. The underwriters may allow, and these dealers may re-allow, a concession of not more
than $ per share to other dealers. After the offering, the underwriters may change the offering price and other selling terms.
The
following table shows the underwriting discounts and commissions payable to the underwriters by us in connection with this offering.
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Fee Per
Share
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Total Without
Exercise of Over-
Allotment
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Total With
Exercise of Over-
Allotment
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Public offering price
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$
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Discount
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$
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In
addition, we have agreed to pay Maxim a corporate finance fee equal
to 0.75% of the gross proceeds raised in this offering. We have also agreed to reimburse the underwriters up to a maximum
allowance of $100,000 for certain out-of-pocket expenses they incur in connection with this offering, including, but not limited
to, filing offering materials with the Financial Industry Regulatory Authority, or FINRA, background checks, “road show”
expenses, costs of book-building, prospectus tracking and compliance software and the fees and disbursements of its counsel, accountants
and other agents and representatives.
We
estimate that expenses payable by us in connection with the offering of our Common Shares, other than the underwriting discounts
and commissions and the counsel fees and disbursement reimbursement provisions referred to above, will be approximately $[ ].
Right of First
Refusal
Upon
the closing of this offering, for a period of nine (9) months from such closing, we have granted Maxim the right of first refusal
to act as lead left book runner and lead left manager and/or lead left placement agent, with at least 75.0% of the economics for
a two handed deal and 50% of the economics for a three handed deal, for any and all future public and private equity, convertible
or debt offerings (excluding commercial bank debt) of our securities. Maxim is entitled to such right of first refusal only if
we engage a broker-dealer, a finder and/or an investment bank for any financing transaction during such period.
Indemnification
We
have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act and liabilities
arising from breaches of representations and warranties contained in the underwriting agreement, or to contribute to payments that
the underwriters may be required to make in respect of those liabilities.
Lock-Up Agreements
We,
all of our directors, executive officers and holders of 5% or greater of our outstanding Common Shares have agreed that, subject
to certain exceptions, they will not, without the prior written consent of the underwriters, for a period of 180 days after the
date of this prospectus: (i) offer, pledge, sell, contract to sell, grant, lend or otherwise transfer or dispose of, directly or
indirectly, any Common Shares or any securities convertible into or exercisable or exchangeable for Common Shares; (ii) enter into
any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of
Common Shares; or (iii) make any demand for or exercise any right with respect to the registration of any Common Shares or
any security convertible into or exercisable or exchangeable Common Shares, whether any such transaction described above is to
be settled by delivery of Common Shares or such other securities, in cash or otherwise.
Listing
Our
Class A Common Shares are currently listed on the Nasdaq Capital Market under the symbol “LLIT”. We have applied to
change the trading symbol of our Common Shares to “NEGG”. We make no representation that such application will be
approved or that the Common Shares will trade on such market at any time in the future.
Electronic
Distribution
A
prospectus in electronic format may be made available on the internet sites or through other online services maintained by the
underwriters, or by their affiliates. In those cases, prospective investors may view offering terms online and prospective investors
may be allowed to place orders online. Other than the prospectus in electronic format, the information on the underwriters’
websites is not part of this prospectus or the registration statement of which this prospectus forms a part, has not been approved
and/or endorsed by us or the underwriters in their capacity as underwriters and should not be relied upon by investors.
Price Stabilization,
Short Positions and Penalty Bids
In
connection with the offering the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate covering
transactions and penalty bids in accordance with Regulation M under the Exchange Act:
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Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum.
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Over-allotment involves
sales by the underwriters of shares in excess of the number of shares the underwriters
are obligated to purchase, which creates a syndicate short position. The short position
may be either a covered short position or a naked short position. In a covered short
position, the number of Common Shares over-allotted by the underwriters is not greater
than the number of Common Shares that may be purchased in the over-allotment option.
In a naked short position, the number of Common Shares involved is greater than the number
of Common Shares in the over-allotment option. The underwriters may close out any covered
short position by either exercising the over-allotment option and/or purchasing Common
Shares in the open market.
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Syndicate
covering transactions involve purchases of Common Shares in the open market
after the distribution has been completed in order to cover syndicate short positions.
In determining the source of Common Shares to close out the short position, the underwriters
will consider, among other things, the price of Common Shares available for purchase
in the open market as compared to the price at which it may purchase Common Shares through
the over-allotment option. If the underwriters sell more Common Shares than could be
covered by the over-allotment option, a naked short position, the position can only be
closed out by buying Common Shares in the open market. A naked short position is more
likely to be created if the underwriters are concerned that there could be downward pressure
on the price of the Common Shares in the open market after pricing that could adversely
affect investors who purchase in the offering.
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Penalty
bids permit the underwriters to reclaim a selling concession from a syndicate
member when the Common Shares originally sold by the syndicate member is purchased in
a stabilizing or syndicate covering transaction to cover syndicate short positions.
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These
stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market
price of Common Shares or preventing or retarding a decline in the market price of Common Shares. As a result, the price of our
Common Shares may be higher than the price that might otherwise exist in the open market. Neither we nor the underwriters make
any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have
on the price of our Common Shares. In addition, neither we nor the underwriters make any representations that the underwriters
will engage in these stabilizing transactions or that any transaction, once commenced, will not be discontinued without notice.
Relationships
The
underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may
include the sales and trading of securities, commercial and investment banking, advisory, investment management, investment research,
principal investment, hedging, market making, financing, brokerage and other financial and non-financial activities and services.
Certain of the underwriters and their respective affiliates may have, from time to time, performed, and may in the future perform,
a variety of such activities and services for us and for persons or entities with relationships with us for which they received
or will receive customary fees, commissions and expenses.
In
the ordinary course of their various business activities, the underwriters and their respective affiliates, directors, officers
and employees may at any time purchase, sell or hold a broad array of investments, and actively traded securities, derivatives,
loans, commodities, currencies, credit default swaps and other financial instruments for their own account and for the accounts
of their customers. Such investment and trading activities may involve or relate to the assets, securities and/or instruments
of us (directly, as collateral securing other obligations or otherwise) and/or persons and entities with relationships with us.
The underwriters and their respective affiliates may also communicate independent investment recommendations, market color or
trading ideas and/or publish or express independent research views in respect of such assets, securities or instruments. In addition,
the underwriters and their respective affiliates may at any time hold, or recommend to clients that they should acquire, long
and short positions in such assets, securities and instruments.
Offers
outside the United States
Other
than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the shares
offered by this prospectus in any jurisdiction where action for that purpose is required. The shares offered by this prospectus
may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in
connection with the offer and sale of any such shares be distributed or published in any jurisdiction, except under circumstances
that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this
prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution
of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any Common Shares
offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.
The
underwriters are expected to make offers and sales both in and outside the United States through their selling agents. Any offers
and sales in the United States will be conducted by broker-dealers registered with the SEC.
Australia
No
placement document, prospectus, product disclosure statement or other disclosure document has been lodged with the Australian
Securities and Investments Commission (“ASIC”), in relation to the offering. This prospectus does not constitute a
prospectus, product disclosure statement or other disclosure document under the Corporations Act 2001 (the “Corporations
Act”), and does not purport to include the information required for a prospectus, product disclosure statement or other
disclosure document under the Corporations Act. Any offer in Australia of the Common Shares may only be made to persons (the “Exempt
Investors”) who are “sophisticated investors” (within the meaning of section 708(8) of the Corporations Act),
“professional investors” (within the meaning of section 708(11) of the Corporations Act) or otherwise pursuant to
one or more exemptions contained in section 708 of the Corporations Act so that it is lawful to offer the Common Shares without
disclosure to investors under Chapter 6D of the Corporations Act. The Common Shares applied for by Exempt Investors in Australia
must not be offered for sale in Australia in the period of 12 months after the date of allotment under the offering, except in
circumstances where disclosure to investors under Chapter 6D of the Corporations Act would not be required pursuant to an exemption
under section 708 of the Corporations Act or otherwise or where the offer is pursuant to a disclosure document which complies
with Chapter 6D of the Corporations Act. Any person acquiring Common Shares must observe such Australian on-sale restrictions.
This prospectus contains general information only and does not take account of the investment objectives, financial situation
or particular needs of any particular person. It does not contain any Common Shares recommendations or financial product advice.
Before making an investment decision, investors need to consider whether the information in this prospectus is appropriate to
their needs, objectives and circumstances, and, if necessary, seek expert advice on those matters.
Bermuda
The
Common Shares may be offered or sold in Bermuda only in compliance with the provisions of the Investment Business Act of 2003
of Bermuda which regulates the sale of securities in Bermuda. Additionally, non-Bermudian persons (including companies) may not
carry on or engage in any trade or business in Bermuda unless such persons are permitted to do so under applicable Bermuda legislation.
British
Virgin Islands
The
Common Shares are not being, and may not be offered to the public or to any person in the British Virgin Islands for purchase
or subscription by us or on our behalf. The Common Shares may be offered to companies incorporated under the BVI Business Companies
Act, 2004 (British Virgin Islands) (each a BVI Company), but only where the offer will be made to, and received by, the relevant
BVI Company entirely outside of the British Virgin Islands.
This
prospectus has not been, and will not be, registered with the Financial Services Commission of the British Virgin Islands. No
registered prospectus has been or will be prepared in respect of the Common Shares for the purposes of the Securities and Investment
Business Act, 2010, or SIBA or the Public Issuers Code of the British Virgin Islands.
The
Common Shares may be offered to persons located in the British Virgin Islands who are “qualified investors” for the
purposes of SIBA. Qualified investors include (i) certain entities which are regulated by the Financial Services Commission in
the British Virgin Islands, including banks, insurance companies, licensees under SIBA and public, professional and private mutual
funds; (ii) a company, any securities of which are listed on a recognized exchange; and (iii) persons defined as “professional
investors” under SIBA, which is any person (a) whose ordinary business involves, whether for that person’s own account
or the account of others, the acquisition or disposal of property of the same kind as the property, or a substantial part of our
property; or (b) who has signed a declaration that he, whether individually or jointly with his spouse, has a net worth in excess
of $1,000,000 and that he consents to being treated as a professional investor. The ordinary shares are not being, and may not
be offered to the public or to any person in the British Virgin Islands for purchase or subscription by or on behalf of the Company.
The ordinary shares may be offered to companies incorporated under the BVI Business Companies Act, 2004 (British Virgin Islands),
but only where the offer will be made to, and received by, the relevant BVI company entirely outside of the British Virgin Islands.
Canada
Resale
Restrictions
The
distribution of Common Shares in Canada is being made only in the provinces of Ontario, Quebec, Alberta and British Columbia on
a private placement basis exempt from the requirement that we prepare and file a prospectus with the securities regulatory authorities
in each province where trades of these securities are made. Any resale of the Common Shares in Canada must be made under applicable
securities laws which may vary depending on the relevant jurisdiction, and which may require resales to be made under available
statutory exemptions or under a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers
are advised to seek legal advice prior to any resale of the Common Shares.
Representations
of Canadian Purchasers
By
purchasing the Common Shares in Canada and accepting delivery of a purchase confirmation, a purchaser is representing to us and
the dealer from whom the purchase confirmation is received that:
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the
purchaser is entitled under applicable provincial securities laws to purchase the Common
Shares without the benefit of a prospectus qualified under those securities laws as it
is an “accredited investor” as defined under National Instrument 45-106 —
Prospectus Exemptions,
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the
purchaser is a “permitted client” as defined in National Instrument 31-103 — Registration
Requirements, Exemptions and Ongoing Registrant Obligations,
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where
required by law, the purchaser is purchasing as principal and not as agent, and
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the
purchaser has reviewed the text above under Resale Restrictions.
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Conflicts
of Interest
Canadian
purchasers are hereby notified that the underwriters are relying on the exemption set out in section 3A.3 or 3A.4, if applicable,
of National Instrument 33-105 — Underwriting Conflicts from having to provide certain conflict of interest
disclosure in this document.
Statutory
Rights of Action
Securities
legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if the
offering memorandum (including any amendment thereto) such as this document contains a misrepresentation, provided that the remedies
for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the
purchaser’s province or territory. The purchaser of these securities in Canada should refer to any applicable provisions
of the securities legislation of the purchaser’s province or territory for particulars of these rights or consult with a
legal advisor.
Enforcement
of Legal Rights
All
of our directors and officers as well as the experts named herein may be located outside of Canada and, as a result, it may not
be possible for Canadian purchasers to effect service of process within Canada upon us or those persons. All or a substantial
portion of our assets and the assets of those persons may be located outside of Canada and, as a result, it may not be possible
to satisfy a judgment against us or those persons in Canada or to enforce a judgment obtained in Canadian courts against us or
those persons outside of Canada.
Taxation
and Eligibility for Investment
Canadian
purchasers of the Common Shares should consult their own legal and tax advisors with respect to the tax consequences of an investment
in the Common Shares in their particular circumstances and about the eligibility of the Common Shares for investment by the purchaser
under relevant Canadian legislation.
European
Economic Area
In
relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a Relevant Member
State), each underwriter represents and agrees that with effect from and including the date on which the Prospectus Directive
is implemented in that Relevant Member State, it has not made and will not make an offer of Common Shares which are the subject
of the offering contemplated by this prospectus to the public in that Relevant Member State other than:
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to
any legal entity which is a qualified investor as defined in the Prospectus Directive;
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to
fewer than 100 or, if the Relevant Member State has implemented the relevant provision
of the 2010 PD Amending Directive, 150, natural or legal persons (other than qualified
investors as defined in the Prospectus Directive), as permitted under the Prospectus
Directive, subject to obtaining the prior consent of the representatives for any such
offer; or
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in
any other circumstances falling within Article 3(2) of the Prospectus Directive,
provided that no such offer of Common Shares shall require us or any underwriter to publish
a prospectus pursuant to Article 3 of the Prospectus Directive.
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For
the purposes of this provision, the expression an “offer to the public” in relation to any Common Shares in any Relevant
Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the
Common Shares to be offered so as to enable an investor to decide to purchase or subscribe the Common Shares, as the same may
be varied in that Member State by any measure implementing the Prospectus Directive in that Member State, the expression Prospectus
Directive means Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented
in the Relevant Member State), and includes any relevant implementing measure in the Relevant Member State and the expression
“2010 PD Amending Directive” means Directive 2010/73/EU.
United
Kingdom
Each
of the underwriters severally represents warrants and agrees as follows:
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it
has only communicated or caused to be communicated and will only communicate or cause
to be communicated an invitation or inducement to engage in investment activity (within
the meaning of Section 21 of the Financial Services and Markets Act 2000 (FSMA) received
by it in connection with the issue or sale of the Common Shares in circumstances in which
Section 21 of the FSMA does not apply to us; and
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it
has complied with, and will comply with all applicable provisions of the FSMA with respect
to anything done by it in relation to the Common Shares in, from or otherwise involving
the United Kingdom.
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France
Neither
this prospectus nor any other offering material relating to the Common Shares described in this prospectus has been submitted
to the clearance procedures of the Autorité des Marchés Financiers or of the competent authority of another member
state of the European Economic Area and notified to the Autorité des Marchés Financiers. The Common Shares have
not been offered or sold and will not be offered or sold, directly or indirectly, to the public in France. Neither this prospectus
nor any other offering material relating to the Common Shares has been or will be:
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to
any legal entity which is a qualified investor as defined in the Prospectus Directive;
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to
fewer than 100 or, if the relevant member state has implemented the relevant provision
of the 2010 PD Amending Directive, 150 natural or legal persons (other than qualified
investors as defined in the Prospectus Directive), as permitted under the Prospectus
Directive, subject to obtaining the prior consent of the relevant Dealer or Dealers nominated
by us for any such offer; or
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in
any other circumstances falling within Article 3(2) of the Prospectus Directive;
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released,
issued, distributed or caused to be released, issued or distributed to the public in
France; or
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used
in connection with any offer for subscription or sale of the Common Shares to the public
in France.
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Such
offers, sales and distributions will be made in France only:
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to
qualified investors (investisseurs qualifiés) and/or to a restricted
circle of investors (cercle restreint d’investisseurs), in each case investing
for their own account, all as defined in, and in accordance with articles L.411-2, D.411-1,
D.411-2, D.734-1, D.744-1, D.754-1 and D.764-1 of the French Code monétaire et
financier;
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to
investment services providers authorized to engage in portfolio management on behalf
of third parties; or
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in
a transaction that, in accordance with article L.411-2-II-1°-or-2°-or 3°
of the French Code monétaire et financier and article 211-2 of the General Regulations
(Règlement Général) of the Autorité des Marchés
Financiers, does not constitute a public offer (appel public à l’épargne).
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The
Common Shares may be resold directly or indirectly, only in compliance with articles L.411-1, L.411-2, L.412-1 and L.621-8 through
L.621-8-3 of the French Code monétaire et financier.
Germany
This
prospectus does not constitute a Prospectus Directive-compliant prospectus in accordance with the German Securities Prospectus
Act (Wertpapierprospektgesetz) and does therefore not allow any public offering in the Federal Republic of Germany (“Germany”)
or any other Relevant Member State pursuant to § 17 and § 18 of the German Securities Prospectus Act. No action has
been or will be taken in Germany that would permit a public offering of the Common Shares, or distribution of a prospectus or
any other offering material relating to the Common Shares. In particular, no securities prospectus (Wertpapierprospekt)
within the meaning of the German Securities Prospectus Act or any other applicable laws of Germany, has been or will be published
within Germany, nor has this prospectus been filed with or approved by the German Federal Financial Supervisory Authority (Bundesanstalt
für Finanzdienstleistungsaufsicht) for publication within Germany.
Each
underwriter will represent, agree and undertake, (i) that it has not offered, sold or delivered and will not offer, sell
or deliver the Common Shares within Germany other than in accordance with the German Securities Prospectus Act (Wertpapierprospektgesetz)
and any other applicable laws in Germany governing the issue, sale and offering of Common Shares, and (ii) that it will distribute
in Germany any offering material relating to the Common Shares only under circumstances that will result in compliance with the
applicable rules and regulations of Germany.
This
prospectus is strictly for use of the person who has received it. It may not be forwarded to other persons or published in Germany.
Hong
Kong
The
Common Shares may not be offered or sold in Hong Kong by means of any document other than (i) to “professional investors”
as defined in the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made under that Ordinance, or (ii) in
other circumstances which do not result in the document being a “prospectus” as defined in the Companies Ordinance
(Cap. 32) of Hong Kong or which do not constitute an offer to the public within the meaning of that Ordinance. No advertisement,
invitation or document relating to the Common Shares may be issued or may be in the possession of any person for the purpose of
issue, whether in Hong Kong or elsewhere, which is directed at, or the contents of which are likely to be accessed or read by,
the public of Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to Common
Shares which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors”
as defined in the Securities and Futures Ordinance and any rules made under that Ordinance.
Israel
This
prospectus does not constitute a prospectus under the Israeli Securities Law, 5728-1968, and has not been filed with or approved
by the Israel Securities Authority. In Israel, this prospectus is being distributed only to, and is directed only at, investors
listed in the first addendum, or the Addendum, to the Israeli Securities Law, consisting primarily of joint investment in trust
funds, provident funds, insurance companies, banks, portfolio managers, investment advisors, members of the Tel Aviv Stock Exchange,
underwriters purchasing for their own account, venture capital funds, entities with equity in excess of NIS 50 million and
qualified individuals, each as defined in the Addendum (as it may be amended from time to time), collectively referred to as qualified
investors. Qualified investors may be required to submit written confirmation that they meet the criteria for one of the categories
of investors set forth in the prospectus.
Italy
The
offering of Common Shares has not been registered with the Commissione Nazionale per le Società e la Borsa(“CONSOB”)
pursuant to Italian securities legislation and, accordingly, no Common Shares may be offered, sold or delivered, nor copies of
this prospectus or any other documents relating to the Common Shares may not be distributed in Italy except:
|
●
|
to
“qualified investors”, as referred to in Article 100 of Legislative
Decree No. 58 of 24 February 1998, as amended (the “Decree No. 58”) and defined
in Article 26, paragraph 1, letter d) of CONSOB Regulation No. 16190 of 29
October 2007, as amended (“Regulation No. 16190”) pursuant to Article 34-ter,
paragraph 1, letter b) of CONSOB Regulation No. 11971 of 14 May 1999, as amended
(“Regulation No. 11971”); or
|
|
●
|
in
any other circumstances where an express exemption from compliance with the offer restrictions
applies, as provided under Decree No. 58 or Regulation No. 11971.
|
Any
offer, sale or delivery of the Common Shares or distribution of copies of this prospectus or any other documents relating to the
Common Shares in the Republic of Italy must be:
|
●
|
made
by investment firms, banks or financial intermediaries permitted to conduct such activities
in the Republic of Italy in accordance with Legislative Decree No. 385 of 1 September 1993,
as amended (the “Banking Law”), Decree No. 58 and Regulation No. 16190
and any other applicable laws and regulations;
|
|
●
|
in
compliance with Article 129 of the Banking Law, and the implementing guidelines
of the Bank of Italy, as amended; and
|
|
●
|
in
compliance with any other applicable notification requirement or limitation which may
be imposed, from time to time, by CONSOB or the Bank of Italy or other competent authority.
|
Please
note that, in accordance with Article 100-bis of Decree No. 58, where no exemption from the rules on public offerings applies,
the subsequent distribution of the Common Shares on the secondary market in Italy must be made in compliance with the public offer
and the prospectus requirement rules provided under Decree No. 58 and Regulation No. 11971.
Furthermore,
the Common Shares which are initially offered and placed in Italy or abroad to qualified investors only but in the following year
are regularly (“sistematicamente”) distributed on the secondary market in Italy to non-qualified investors
become subject to the public offer and the prospectus requirement rules provided under Decree No. 58 and Regulation No. 11971.
Failure to comply with such rules may result in the sale of the Common Shares being declared null and void and in the liability
of the intermediary transferring the Common Shares for any damages suffered by such non-qualified investors.
Japan
The
Common Shares have not been and will not be registered under the Financial Instruments and Exchange Law of Japan (Law No. 25 of
1948, as amended) and accordingly, will not be offered or sold, directly or indirectly, in Japan, or for the benefit of any Japanese
Person or to others for re-offering or resale, directly or indirectly, in Japan or to any Japanese Person, except in compliance
with all applicable laws, regulations and ministerial guidelines promulgated by relevant Japanese governmental or regulatory authorities
in effect at the relevant time. For the purposes of this paragraph, “Japanese Person” shall mean any person resident
in Japan, including any corporation or other entity organized under the laws of Japan.
PRC
This
prospectus has not been and will not be circulated or distributed in the PRC, and the Common Shares may not be offered or sold,
and will not be offered or sold, directly or indirectly, to any resident of the PRC or to persons for re-offering or resale, directly
or indirectly, to any resident of the PRC except pursuant to applicable laws and regulations of the PRC. For the purpose of this
paragraph, the PRC does not include Taiwan and the Special Administrative Regions of Hong Kong and Macao.
Singapore
This
prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and
any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of Common Shares
may not be circulated or distributed, nor may the Common Shares be offered or sold, or be made the subject of an invitation for
subscription or purchase, whether directly or indirectly, to persons in Singapore other than
|
●
|
to
an institutional investor under Section 274 of the Securities and Futures Act, Chapter
289 of Singapore (the ‘‘SFA’’),
|
|
●
|
to
a relevant person pursuant to Section 275(1), or any person pursuant to Section 275(1A),
and in accordance with the conditions specified in Section 275, of the SFA, or
|
|
●
|
otherwise
pursuant to, and in accordance with the conditions of, any other applicable provision
of the SFA.
|
Where
the Common Shares are subscribed or purchased under Section 275 of the SFA by a relevant person which is:
|
●
|
a
corporation (which is not an accredited investor (as defined in Section 4A of the
SFA)) the sole business of which is to hold investments and the entire share capital
of which is owned by one or more individuals, each of whom is an accredited investor;
or
|
|
●
|
a
trust (where the trustee is not an accredited investor) whose sole purpose is to hold
investments and each beneficiary of the trust is an individual who is an accredited investor,
securities (as defined in Section 239(1) of the SFA) of that corporation or the
beneficiaries’ rights and interest (howsoever described) in that trust shall not
be transferred within six months after that corporation or that trust has acquired
the Common Shares pursuant to an offer made under Section 275 of the SFA except:
|
|
(a)
|
to
an institutional investor or to a relevant person defined in Section 275(2) of the
SFA, or to any person arising from an offer referred to in Section 275(1A) or Section 276(4)(i)(B)
of the SFA;
|
|
(b)
|
where
no consideration is or will be given for the transfer;
|
|
(c)
|
where
the transfer is by operation of law;
|
|
(d)
|
as
specified in Section 276(7) of the SFA; or
|
|
(e)
|
as
specified in Regulation 32 of the Securities and Futures (Offers of Investments)
(Shares and Debentures) Regulations 2005 of Singapore.
|
Switzerland
This
document is not intended to constitute an offer or solicitation to purchase or invest in the Common Shares described herein. The
Common Shares may not be publicly offered, sold or advertised, directly or indirectly, in, into or from Switzerland and will not
be listed on the SIX Swiss Exchange or on any other exchange or regulated trading facility in Switzerland. Neither this document
nor any other offering or marketing material relating to the Common Shares constitutes a prospectus as such term is understood
pursuant to article 652a or article 1156 of the Swiss Code of Obligations or a listing prospectus within the meaning of the listing
rules of the SIX Swiss Exchange or any other regulated trading facility in Switzerland, and neither this document nor any other
offering or marketing material relating to the Common Shares may be publicly distributed or otherwise made publicly available
in Switzerland.
Neither
this document nor any other offering or marketing material relating to the offering, nor the Company nor the Common Shares have
been or will be filed with or approved by any Swiss regulatory authority. The Common Shares are not subject to the supervision
by any Swiss regulatory authority, e.g., the Swiss Financial Markets Supervisory Authority FINMA (FINMA), and investors in the
Common Shares will not benefit from protection or supervision by such authority.
Taiwan
The
Common Shares have not been and will not be registered or filed with, or approved by, the Financial Supervisory Commission of
Taiwan pursuant to relevant securities laws and regulations and may not be offered or sold in Taiwan through a public offering
or in circumstances which constitute an offer within the meaning of the Securities and Exchange Act of Taiwan or relevant laws
and regulations that require a registration, filing or approval of the Financial Supervisory Commission of Taiwan. No person
or entity in Taiwan has been authorized to offer or sell the Common Shares in Taiwan.
EXPENSES RELATING TO THIS OFFERING
Set forth below is
an itemization of the total expenses, excluding placement discounts and commissions, that we expect to incur in connection with
this Offering. With the exception of the SEC registration fee, the FINRA filing fee, and the NASDAQ listing fee, all amounts are
estimates.
SEC
registration fee
|
|
$
|
3,273
|
|
NASDAQ Capital
Market Listing Fee
|
|
$
|
[●]
|
|
FINRA
|
|
$
|
[●]
|
|
Transfer Agent
and Registrar fees and expenses
|
|
$
|
[●]
|
|
Legal fees and
expenses
|
|
$
|
[●]
|
|
Printing fees
and expenses
|
|
$
|
[●]
|
|
Accounting fees
and expenses
|
|
$
|
[●]
|
|
Miscellaneous
fees and expenses
|
|
$
|
[●]
|
|
Total
|
|
$
|
[●]
|
|
These expenses will
be borne by us. Underwriting discounts and commissions will be borne by us in proportion to the numbers of Common Shares sold in
the Offering.
LEGAL MATTERS
Certain legal matters
as to United States Federal and New York State law in connection with this Offering will be passed upon for us by Bevilacqua PLLC.
The validity of the Common Shares offered in this Offering and certain other legal matters as to British Virgin Island’s
law will be passed upon for us by Conyers Dill & Pearman. Legal matters as to PRC law will be passed upon for us by Beijing
Zaixian Law Firm. Bevilacqua PLLC may rely upon Conyers Dill & Pearman with respect to matters governed by British Virgin Islands
law and Beijing Zaixian Law Firm with respect to matters governed by PRC law. Ellenoff Grossman & Schole LLP is acting as counsel
to the Underwriter.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
EXPERTS
The consolidated financial
statements of the Company included in this prospectus as of and for the year ended December 31, 2019 have been audited by BDO
China Shu Lun Pan Certified Public Accountants LLP, an independent registered public accounting firm, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts
in accounting and auditing.
The financial statements
of the Company included in this prospectus as of December 31, 2018 and for the two years ended December 31, 2018 and 2017 have
been audited by Centurion ZD CPA & Co., an independent registered public accounting firm, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting
and auditing.
The consolidated financial
statements of Newegg included in this prospectus as of and for the year ended December 31, 2019 have been audited by BDO USA, LLP,
an independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein, and are included
in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
The consolidated
financial statements of Newegg as of December 31, 2018, and for each of the years in the two-year period ended December 31, 2018,
have been included herein and in the registration statement, include the effects of the adjustment to retrospectively apply the
change in the classification of Newegg’s Series A convertible Preferred Stock and Series AA convertible Preferred Stock
to temporary equity as described in Note 2(y) to the consolidated financial statements. KPMG LLP, an independent registered public
accounting firm, audited the consolidated financial statements of Newegg as of December 31, 2018, and for each of the years in
the two-year period ended December 31, 2018, before the effects of the retrospective adjustment, which financial statements are
not included herein. BDO USA, LLP, an independent registered public accounting firm, audited the retrospective adjustment. The
consolidated financial statements of Newegg as of December 31, 2018, and for each of the years in the two-year period ended December
31, 2018, have been included herein and in the registration statement in reliance upon the reports of (1) KPMG LLP, solely with
respect to the consolidated financial statements of Newegg before the effects of the retrospective adjustment, and (2) BDO USA,
LLP, solely with respect to the retrospective adjustment, included herein, and upon the authority of said firms as experts in
accounting and auditing.
INTERESTS OF NAMED EXPERTS AND COUNSEL
No expert or counsel
named in this prospectus as having prepared or certified any part of this prospectus or having given an opinion upon the validity
of the securities being registered or upon other legal matters in connection with the registration or offering of the Common Shares
was employed on a contingency basis, or had, or is to receive, in connection with the Offering, a substantial interest, direct
or indirect, in the registrant. Nor was any such person connected with the registrant as a promoter, managing or principal underwriter,
voting trustee, director, officer, or employee.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION
Insofar as indemnification
for liabilities arising under the Securities Act, may be permitted to our directors, officers or persons controlling us, we have
been advised that it is the SEC’s opinion that such indemnification is against public policy as expressed in such act and
is, therefore, unenforceable.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
This prospectus summarizes
material provisions of contracts and other documents that we refer you to. Since the prospectus may not contain all the information
that you may find important, you should review the full text of these documents.
Immediately upon the
completion of this Offering, we will be subject to periodic reporting and other informational requirements of the Exchange Act,
as applicable to foreign private issuers. Accordingly, we will be required to file reports, including annual reports on Form 20-F,
and other information with the SEC. As a foreign private issuer, we are exempt from the rules of the Exchange Act prescribing
the furnishing and content of proxy statements to shareholders under the federal proxy rules contained in Sections 14(a), (b)
and (c) of the Exchange Act, and our executive officers, directors and principal shareholders are exempt from the reporting and
short-swing profit recovery provisions contained in Section 16 of the Exchange Act.
The registration statements,
reports and other information so filed can be inspected and copied at the public reference facilities maintained by the SEC at
100 F Street, N.E., Washington, D.C. 20549. You can request copies of these documents upon payment of a duplicating fee, by writing
to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms. The
SEC also maintains a website that contains reports, proxy statements and other information about issuers, such as us, who file
electronically with the SEC. The address of that website is http://www.sec.gov. The information on that website is not a part
of this prospectus.
No dealers, salesperson
or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not
rely on any unauthorized information or representations. This prospectus is an offer to sell only the securities offered hereby,
but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is
current only as of its date.
UNAUDITED PRO
FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Lianluo Smart
Limited
Unaudited Pro
Forma Condensed Combined Balance Sheet
As of June 30,
2020
(In thousands, except
par value)
|
|
Newegg
|
|
|
Company
|
|
|
Combined
|
|
|
Pro Forma
Adjustments
|
|
|
Notes
|
|
Pro Forma
Combined
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
141,855
|
|
|
$
|
6,396
|
|
|
$
|
148,251
|
|
|
$
|
(6
|
)
|
|
Note 3(a)
|
|
$
|
148,245
|
|
Restricted cash
|
|
|
837
|
|
|
|
-
|
|
|
|
837
|
|
|
|
-
|
|
|
|
|
|
837
|
|
Marketable equity securities
|
|
|
-
|
|
|
|
287
|
|
|
|
287
|
|
|
|
-
|
|
|
|
|
|
287
|
|
Accounts receivable, net
|
|
|
38,147
|
|
|
|
92
|
|
|
|
38,239
|
|
|
|
(92
|
)
|
|
Note 3(a)
|
|
|
38,147
|
|
Inventories
|
|
|
142,275
|
|
|
|
813
|
|
|
|
143,088
|
|
|
|
(813
|
)
|
|
Note 3(a)
|
|
|
142,275
|
|
Income taxes receivable
|
|
|
2,510
|
|
|
|
291
|
|
|
|
2,801
|
|
|
|
(291
|
)
|
|
Note 3(a)
|
|
|
2,510
|
|
Prepaid expenses and other current assets
|
|
|
20,061
|
|
|
|
32
|
|
|
|
20,093
|
|
|
|
(12
|
)
|
|
Note 3(a)
|
|
|
20,081
|
|
Due from related parties
|
|
|
21,854
|
|
|
|
-
|
|
|
|
21,854
|
|
|
|
-
|
|
|
|
|
|
21,854
|
|
Total current assets
|
|
|
367,539
|
|
|
|
7,911
|
|
|
|
375,450
|
|
|
|
(1,214
|
)
|
|
|
|
|
374,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
45,098
|
|
|
|
272
|
|
|
|
45,370
|
|
|
|
(272
|
)
|
|
Note 3(a)
|
|
|
45,098
|
|
Noncurrent deferred tax assets
|
|
|
403
|
|
|
|
-
|
|
|
|
403
|
|
|
|
-
|
|
|
|
|
|
403
|
|
Equity investment
|
|
|
6,457
|
|
|
|
-
|
|
|
|
6,457
|
|
|
|
-
|
|
|
|
|
|
6,457
|
|
Investment at cost
|
|
|
15,000
|
|
|
|
-
|
|
|
|
15,000
|
|
|
|
-
|
|
|
|
|
|
15,000
|
|
Right of use assets
|
|
|
31,459
|
|
|
|
-
|
|
|
|
31,459
|
|
|
|
-
|
|
|
|
|
|
31,459
|
|
Other noncurrent assets
|
|
|
7,051
|
|
|
|
-
|
|
|
|
7,051
|
|
|
|
-
|
|
|
|
|
|
7,051
|
|
Total assets
|
|
$
|
473,007
|
|
|
$
|
8,183
|
|
|
$
|
481,190
|
|
|
$
|
(1,486
|
)
|
|
|
|
$
|
479,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities, Temporary Equity and Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
221,876
|
|
|
$
|
196
|
|
|
$
|
222,072
|
|
|
$
|
(154
|
)
|
|
Note 3(a)
|
|
$
|
221,918
|
|
Accrued liabilities
|
|
|
46,693
|
|
|
|
1,044
|
|
|
|
47,737
|
|
|
|
(982
|
)
|
|
Note 3(a)
|
|
|
46,755
|
|
Deferred revenue
|
|
|
36,975
|
|
|
|
-
|
|
|
|
36,975
|
|
|
|
-
|
|
|
|
|
|
36,975
|
|
Line of credit
|
|
|
6,510
|
|
|
|
-
|
|
|
|
6,510
|
|
|
|
-
|
|
|
|
|
|
6,510
|
|
Short-term borrowings and interest payable
|
|
|
-
|
|
|
|
2,029
|
|
|
|
2,029
|
|
|
|
(1,996
|
)
|
|
Note 3(a)
|
|
|
33
|
|
Current portion of long-term debt
|
|
|
269
|
|
|
|
-
|
|
|
|
269
|
|
|
|
-
|
|
|
|
|
|
269
|
|
Lease liabilities - current
|
|
|
8,503
|
|
|
|
-
|
|
|
|
8,503
|
|
|
|
-
|
|
|
|
|
|
8,503
|
|
Total current liabilities
|
|
|
320,826
|
|
|
|
3,269
|
|
|
|
324,095
|
|
|
|
(3,132
|
)
|
|
|
|
|
320,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current portion
|
|
|
2,153
|
|
|
|
-
|
|
|
|
2,153
|
|
|
|
-
|
|
|
|
|
|
2,153
|
|
Income taxes payable
|
|
|
675
|
|
|
|
-
|
|
|
|
675
|
|
|
|
-
|
|
|
|
|
|
675
|
|
Lease liabilities - noncurrent
|
|
|
24,556
|
|
|
|
-
|
|
|
|
24,556
|
|
|
|
-
|
|
|
|
|
|
24,556
|
|
Warrants liabilities
|
|
|
-
|
|
|
|
690
|
|
|
|
690
|
|
|
|
-
|
|
|
|
|
|
690
|
|
Other liabilities
|
|
|
66
|
|
|
|
-
|
|
|
|
66
|
|
|
|
-
|
|
|
|
|
|
66
|
|
Total liabilities
|
|
|
348,276
|
|
|
|
3,959
|
|
|
|
352,235
|
|
|
|
(3,132
|
)
|
|
|
|
|
349,103
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Temporary Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series AA convertible Preferred Stock, $.001 par
value; 25,890 shares authorized, 24,870 shares issued and outstanding as of June 30, 2020 on an actual basis; 0 shares authorized,
issued and outstanding as adjusted
|
|
|
187,146
|
|
|
|
-
|
|
|
|
187,146
|
|
|
|
(187,146
|
)
|
|
Note 3(b)
|
|
|
-
|
|
Series A convertible Preferred
Stock, $.001 par value; 59,000 shares authorized, 36,476 shares issued and outstanding as of June 30, 2020 on an actual
basis; 0 shares authorized, issued and outstanding as adjusted
|
|
|
655
|
|
|
|
-
|
|
|
|
655
|
|
|
|
(655
|
)
|
|
Note 3(b)
|
|
|
-
|
|
Total temporary equity
|
|
|
187,801
|
|
|
|
-
|
|
|
|
187,801
|
|
|
|
(187,801
|
)
|
|
|
|
|
-
|
|
Equity (deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Common Shares, $0.021848 par value; 4,736
shares authorized, 2,211 shares issued and outstanding as of June 30, 2020 on an actual basis; unlimited shares authorized,
366,925 shares issued and outstanding as adjusted
|
|
|
1
|
|
|
|
48
|
|
|
|
49
|
|
|
|
7,968
|
|
|
Note 3(b)(d)
|
|
|
8,017
|
|
Class B Common Shares, $0.021848 par value; 1,514
shares authorized; 1,389 shares issued and outstanding as of June 30, 2020 on an actual basis, 0 shares issued and outstanding
as adjusted
|
|
|
-
|
|
|
|
30
|
|
|
|
30
|
|
|
|
(30
|
)
|
|
Note 3(b)
|
|
|
-
|
|
Additional paid-in capital
|
|
|
735
|
|
|
|
47,996
|
|
|
|
48,731
|
|
|
|
137,659
|
|
|
Note 3(b)
|
|
|
186,390
|
|
Accumulated other comprehensive income (loss)
|
|
|
(1,777
|
)
|
|
|
2,453
|
|
|
|
676
|
|
|
|
(2,453
|
)
|
|
Note 3(c)
|
|
|
(1,777
|
)
|
Accumulated deficit
|
|
|
(62,029
|
)
|
|
|
(46,303
|
)
|
|
|
(108,332
|
)
|
|
|
46,303
|
|
|
Note 3(c)
|
|
|
(62,029
|
)
|
Total equity (deficit)
|
|
|
(63,070
|
)
|
|
|
4,224
|
|
|
|
(58,846
|
)
|
|
|
189,447
|
|
|
|
|
|
130,601
|
|
Total liabilities, temporary
equity and equity
|
|
$
|
473,007
|
|
|
$
|
8,183
|
|
|
$
|
481,190
|
|
|
$
|
(1,486
|
)
|
|
|
|
$
|
479,704
|
|
See accompanying notes to unaudited pro forma condensed combined
financial statements
Unaudited Pro
Forma Condensed Combined Statements of Operations
For the Six Months
Ended June 30, 2020
(In thousands, except
per share data)
|
|
Newegg
|
|
|
Company
|
|
|
Combined
|
|
|
Pro Forma
Adjustments
|
|
|
Notes
|
|
Pro Forma
Combined
|
|
Net sales
|
|
$
|
862,700
|
|
|
$
|
339
|
|
|
$
|
863,039
|
|
|
$
|
(339
|
)
|
|
Note 3(a)
|
|
$
|
862,700
|
|
Cost of sales
|
|
|
738,122
|
|
|
|
580
|
|
|
|
738,702
|
|
|
|
(580
|
)
|
|
Note 3(a)
|
|
|
738,122
|
|
Gross profit
|
|
|
124,578
|
|
|
|
(241
|
)
|
|
|
124,337
|
|
|
|
241
|
|
|
|
|
|
124,578
|
|
Other operating income(expense)
|
|
|
264
|
|
|
|
-
|
|
|
|
264
|
|
|
|
-
|
|
|
|
|
|
264
|
|
Selling, general, and administrative
expenses
|
|
|
107,138
|
|
|
|
1,273
|
|
|
|
108,411
|
|
|
|
(836
|
)
|
|
Note 3(a)
|
|
|
107,575
|
|
Income (Loss) from operations
|
|
|
17,704
|
|
|
|
(1,514
|
)
|
|
|
16,190
|
|
|
|
1,077
|
|
|
|
|
|
17,267
|
|
Interest income
|
|
|
590
|
|
|
|
-
|
|
|
|
590
|
|
|
|
1
|
|
|
Note 3(a)
|
|
|
591
|
|
Interest expense
|
|
|
(378
|
)
|
|
|
(1
|
)
|
|
|
(379
|
)
|
|
|
(1
|
)
|
|
Note 3(a)
|
|
|
(380
|
)
|
Other income (expense), net
|
|
|
2,790
|
|
|
|
(24
|
)
|
|
|
2,766
|
|
|
|
24
|
|
|
Note 3(a)
|
|
|
2,790
|
|
Unrealized loss on securities
|
|
|
-
|
|
|
|
143
|
|
|
|
143
|
|
|
|
-
|
|
|
|
|
|
143
|
|
Change in fair value of warrants liabilities
|
|
|
-
|
|
|
|
(300
|
)
|
|
|
(300
|
)
|
|
|
-
|
|
|
|
|
|
(300
|
)
|
Income (loss) before provision for income taxes
|
|
|
20,706
|
|
|
|
(1,696
|
)
|
|
|
19,010
|
|
|
|
1,101
|
|
|
|
|
|
20,111
|
|
Provision for income taxes
|
|
|
1,767
|
|
|
|
-
|
|
|
|
1,767
|
|
|
|
-
|
|
|
|
|
|
1,767
|
|
Net income (loss)
|
|
$
|
18,939
|
|
|
$
|
(1,696
|
)
|
|
$
|
17,243
|
|
|
$
|
1,101
|
|
|
|
|
$
|
18,344
|
|
Basic
earnings (loss) per share
|
|
$
|
0.30
|
|
|
$
|
(0.53
|
)
|
|
$
|
(0.23
|
)
|
|
|
|
|
|
|
|
$
|
0.05
|
|
Diluted
earnings (loss) per share
|
|
$
|
0.16
|
|
|
$
|
(0.53
|
)
|
|
$
|
(0.37
|
)
|
|
|
|
|
|
|
|
$
|
0.05
|
|
Weighted
average shares used in computation of earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
849
|
|
|
|
3,176
|
|
|
|
4,025
|
|
|
|
362,477
|
|
|
Note 4
|
|
|
366,502
|
|
Diluted
|
|
|
1,577
|
|
|
|
3,176
|
|
|
|
4,753
|
|
|
|
362,477
|
|
|
Note 4
|
|
|
367,230
|
|
See accompanying notes to unaudited pro forma condensed combined
financial statements
Unaudited Pro
Forma Condensed Combined Balance Sheet
December 31, 2019
(In thousands, except
par value)
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
Pro Forma
|
|
|
|
Newegg
|
|
|
Company
|
|
|
Combined
|
|
|
Adjustments
|
|
|
Notes
|
|
Combined
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
79,750
|
|
|
$
|
23
|
|
|
$
|
79,773
|
|
|
$
|
(20
|
)
|
|
Note 3(a)
|
|
$
|
79,753
|
|
Restricted cash
|
|
|
797
|
|
|
|
-
|
|
|
|
797
|
|
|
|
-
|
|
|
|
|
|
797
|
|
Marketable equity securities
|
|
|
-
|
|
|
|
143
|
|
|
|
143
|
|
|
|
1
|
|
|
Note 3(a)
|
|
|
144
|
|
Accounts receivable, net
|
|
|
54,185
|
|
|
|
62
|
|
|
|
54,247
|
|
|
|
(62
|
)
|
|
Note 3(a)
|
|
|
54,185
|
|
Inventories
|
|
|
109,509
|
|
|
|
1,085
|
|
|
|
110,594
|
|
|
|
(1,085
|
)
|
|
Note 3(a)
|
|
|
109,509
|
|
Income taxes receivable
|
|
|
2,521
|
|
|
|
337
|
|
|
|
2,858
|
|
|
|
(337
|
)
|
|
Note 3(a)
|
|
|
2,521
|
|
Prepaid expenses and other current assets
|
|
|
14,206
|
|
|
|
27
|
|
|
|
14,233
|
|
|
|
(22
|
)
|
|
Note 3(a)
|
|
|
14,211
|
|
Due from related parties
|
|
|
21,654
|
|
|
|
-
|
|
|
|
21,654
|
|
|
|
-
|
|
|
|
|
|
21,654
|
|
Total current assets
|
|
|
282,622
|
|
|
|
1,677
|
|
|
|
284,299
|
|
|
|
(1,525
|
)
|
|
|
|
|
282,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
47,130
|
|
|
|
657
|
|
|
|
47,787
|
|
|
|
(657
|
)
|
|
Note 3(a)
|
|
|
47,130
|
|
Noncurrent deferred tax assets
|
|
|
1,041
|
|
|
|
-
|
|
|
|
1,041
|
|
|
|
-
|
|
|
|
|
|
1,041
|
|
Equity investment
|
|
|
6,457
|
|
|
|
-
|
|
|
|
6,457
|
|
|
|
-
|
|
|
|
|
|
6,457
|
|
Investment at cost
|
|
|
15,000
|
|
|
|
-
|
|
|
|
15,000
|
|
|
|
-
|
|
|
|
|
|
15,000
|
|
Right of use assets
|
|
|
38,099
|
|
|
|
-
|
|
|
|
38,099
|
|
|
|
-
|
|
|
|
|
|
38,099
|
|
Other noncurrent assets
|
|
|
6,448
|
|
|
|
-
|
|
|
|
6,448
|
|
|
|
-
|
|
|
|
|
|
6,448
|
|
Total assets
|
|
$
|
396,797
|
|
|
$
|
2,334
|
|
|
$
|
399,131
|
|
|
$
|
(2,182
|
)
|
|
|
|
$
|
396,949
|
|
Liabilities, Temporary Equity and Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
165,653
|
|
|
$
|
226
|
|
|
$
|
165,879
|
|
|
$
|
(184
|
)
|
|
Note 3(a)
|
|
$
|
165,695
|
|
Accrued liabilities
|
|
|
49,396
|
|
|
|
1,799
|
|
|
|
51,195
|
|
|
|
(1,383
|
)
|
|
Note 3(a)
|
|
|
49,812
|
|
Deferred revenue
|
|
|
25,846
|
|
|
|
-
|
|
|
|
25,846
|
|
|
|
-
|
|
|
|
|
|
25,846
|
|
Line of credit
|
|
|
6,379
|
|
|
|
-
|
|
|
|
6,379
|
|
|
|
-
|
|
|
|
|
|
6,379
|
|
Short-term borrowings and interest payable
|
|
|
-
|
|
|
|
1,208
|
|
|
|
1,208
|
|
|
|
(1,175
|
)
|
|
Note 3(a)
|
|
|
33
|
|
Current portion of long-term debt
|
|
|
258
|
|
|
|
-
|
|
|
|
258
|
|
|
|
-
|
|
|
|
|
|
258
|
|
Lease liabilities - current
|
|
|
8,585
|
|
|
|
-
|
|
|
|
8,585
|
|
|
|
-
|
|
|
|
|
|
8,585
|
|
Total current liabilities
|
|
|
256,117
|
|
|
|
3,233
|
|
|
|
259,350
|
|
|
|
(2,742
|
)
|
|
|
|
|
256,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current portion
|
|
|
2,223
|
|
|
|
-
|
|
|
|
2,223
|
|
|
|
-
|
|
|
|
|
|
2,223
|
|
Income taxes payable
|
|
|
675
|
|
|
|
-
|
|
|
|
675
|
|
|
|
-
|
|
|
|
|
|
675
|
|
Lease liabilities - noncurrent
|
|
|
30,643
|
|
|
|
-
|
|
|
|
30,643
|
|
|
|
-
|
|
|
|
|
|
30,643
|
|
Warrants liabilities
|
|
|
-
|
|
|
|
390
|
|
|
|
390
|
|
|
|
-
|
|
|
|
|
|
390
|
|
Other liabilities
|
|
|
66
|
|
|
|
-
|
|
|
|
66
|
|
|
|
-
|
|
|
|
|
|
66
|
|
Total liabilities
|
|
|
289,724
|
|
|
|
3,623
|
|
|
|
293,347
|
|
|
|
(2,742
|
)
|
|
|
|
|
290,605
|
|
Commitments and contingencies (note 15)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Temporary Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series AA convertible Preferred Stock, $.001 par value;
25,890 shares authorized, 24,870 shares issued and outstanding as of December 31, 2019 on an actual basis; 0 shares authorized,
issued and outstanding as adjusted
|
|
|
187,146
|
|
|
|
-
|
|
|
|
187,146
|
|
|
|
(187,146
|
)
|
|
Note 3(b)
|
|
|
-
|
|
Series A convertible Preferred
Stock, $.001 par value; 59,000 shares authorized, 36,476 shares issued and outstanding as of December 31, 2019 on
an actual basis; 0 shares authorized, issued and outstanding as adjusted
|
|
|
655
|
|
|
|
-
|
|
|
|
655
|
|
|
|
(655
|
)
|
|
Note 3(b)
|
|
|
-
|
|
Total temporary equity
|
|
|
187,801
|
|
|
|
-
|
|
|
|
187,801
|
|
|
|
(187,801
|
)
|
|
|
|
|
-
|
|
Equity:
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Class
A Common Stock, $0.021848 par value; 4,736 shares authorized, 837 shares issued and outstanding as of December 31, 2019 on an
actual basis; unlimited shares authorized, 365,551 shares issued and outstanding as adjusted
|
|
|
1
|
|
|
|
18
|
|
|
|
19
|
|
|
|
7,968
|
|
|
Note 3(b)(d)
|
|
|
7,987
|
|
Class
B Common Stock, $0.021848 par value; 1,514 shares authorized; 1,389 shares issued and outstanding as of December 31, 2019 on an
actual basis, 0 shares issued and outstanding as adjusted
|
|
|
-
|
|
|
|
30
|
|
|
|
30
|
|
|
|
(30
|
)
|
|
Note 3(d)
|
|
|
-
|
|
Additional paid-in capital
|
|
|
744
|
|
|
|
40,833
|
|
|
|
41,577
|
|
|
|
138,253
|
|
|
Note 3(b)
|
|
|
179,830
|
|
Accumulated other comprehensive income (loss)
|
|
|
(505
|
)
|
|
|
2,437
|
|
|
|
1,932
|
|
|
|
(2,437
|
)
|
|
Note 3(c)
|
|
|
(505
|
)
|
Accumulated deficit
|
|
|
(80,968
|
)
|
|
|
(44,607
|
)
|
|
|
(125,575
|
)
|
|
|
44,607
|
|
|
Note 3(c)
|
|
|
(80,968
|
)
|
Total equity
|
|
|
(80,728
|
)
|
|
|
(1,289
|
)
|
|
|
(82,017
|
)
|
|
|
188,361
|
|
|
|
|
|
106,344
|
|
Total liabilities, temporary
equity and equity
|
|
$
|
396,797
|
|
|
$
|
2,334
|
|
|
$
|
399,131
|
|
|
$
|
(2,182
|
)
|
|
|
|
$
|
396,949
|
|
See accompanying notes to Unaudited Pro Forma Condensed Combined
Financial Statements.
Unaudited Pro Forma Condensed Combined
Statements of Operations
For the Year Ended December 31, 2019
(In thousands, except per share data)
|
|
Newegg
|
|
|
Company
|
|
|
Combined
|
|
|
Pro Forma
Adjustments
|
|
|
Notes
|
|
Pro Forma
Combined
|
|
Net sales
|
|
$
|
1,533,928
|
|
|
$
|
383
|
|
|
$
|
1,534,311
|
|
|
$
|
(383
|
)
|
|
Note 3(a)
|
|
$
|
1,533,928
|
|
Cost of sales
|
|
|
1,369,054
|
|
|
|
744
|
|
|
|
1,369,798
|
|
|
|
(744
|
)
|
|
Note 3(a)
|
|
|
1,369,054
|
|
Gross profit
|
|
|
164,874
|
|
|
|
(361
|
)
|
|
|
164,513
|
|
|
|
361
|
|
|
|
|
|
164,874
|
|
Other operating income/(expense)
|
|
|
28,314
|
|
|
|
-
|
|
|
|
28,314
|
|
|
|
-
|
|
|
|
|
|
28,314
|
|
Selling, general, and administrative
expenses
|
|
|
229,192
|
|
|
|
3,442
|
|
|
|
232,634
|
|
|
|
(2,675
|
)
|
|
Note 3(a)
|
|
|
229,959
|
|
Loss from operations
|
|
|
(36,004
|
)
|
|
|
(3,803
|
)
|
|
|
(39,807
|
)
|
|
|
3,036
|
|
|
|
|
|
(36,771
|
)
|
Interest income
|
|
|
586
|
|
|
|
1
|
|
|
|
587
|
|
|
|
2
|
|
|
Note 3(a)
|
|
|
589
|
|
Interest expense
|
|
|
(2,945
|
)
|
|
|
-
|
|
|
|
(2,945
|
)
|
|
|
(4
|
)
|
|
Note 3(a)
|
|
|
(2,949
|
)
|
Other income (expense), net
|
|
|
4,184
|
|
|
|
(32
|
)
|
|
|
4,152
|
|
|
|
32
|
|
|
Note 3(a)
|
|
|
4,184
|
|
Unrealized loss on securities
|
|
|
-
|
|
|
|
(1,357
|
)
|
|
|
(1,357
|
)
|
|
|
-
|
|
|
|
|
|
(1,357
|
)
|
Change in fair value of warrants liabilities
|
|
|
-
|
|
|
|
740
|
|
|
|
740
|
|
|
|
-
|
|
|
|
|
|
740
|
|
Gain from sale of and equity income from equity method
investments
|
|
|
21,777
|
|
|
|
-
|
|
|
|
21,777
|
|
|
|
-
|
|
|
|
|
|
21,777
|
|
Loss before provision for income taxes
|
|
|
(12,402
|
)
|
|
|
(4,451
|
)
|
|
|
(16,853
|
)
|
|
|
3,066
|
|
|
|
|
|
(13,787
|
)
|
Provision for income taxes
|
|
|
4,589
|
|
|
|
-
|
|
|
|
4,589
|
|
|
|
-
|
|
|
|
|
|
4,589
|
|
Net loss
|
|
$
|
(16,991
|
)
|
|
$
|
(4,451
|
)
|
|
|
(21,442
|
)
|
|
$
|
3,066
|
|
|
|
|
$
|
(18,376
|
)
|
Net
loss per share, basic and diluted
|
|
$
|
(20.01
|
)
|
|
$
|
(2.00
|
)
|
|
|
(6.97
|
)
|
|
|
|
|
|
|
|
$
|
(0.05
|
)
|
Weighted
average number of common stock outstanding used in computing per share amounts, basic and diluted
|
|
|
849
|
|
|
|
2,226
|
|
|
|
3,075
|
|
|
|
362,477
|
|
|
Note 4
|
|
|
365,552
|
|
See accompanying notes to unaudited pro forma condensed combined
financial statements
Notes to the Unaudited
Pro Forma Condensed Combined Financial Statements
Note 1 – Description of Transactions
On October 23, 2020, the Company, Merger
Sub, and Newegg entered into the merger agreement. If the transactions contemplated by the merger agreement are completed,
Merger Sub will merge into Newegg and Newegg will be the surviving entity. The Company will become the 100% owner of the surviving
entity. As the consideration of the merger, the Company will issue to all the stockholders of Newegg an aggregate of approximately
363,325,542 common shares. Each issued and outstanding share of Newegg will be exchanged for 5.8417 common shares.
On October 23, 2020, the Company entered into
the disposition agreement with the Purchaser and Lianluo Connection. If the transactions contemplated by the disposition agreement
are completed, the Company will sell of all of its equity interests in Lianluo Connection, a wholly owned subsidiary, to the Purchaser
immediately following completion of the merger for a purchase price of RMB 0.
Immediately after consummation of the
merger and disposition, the Company will own 100% of Newegg. The Newegg stockholders will own approximately 98.68% of the outstanding
Common Shares of the Company and existing Company shareholders will own approximately 1.32% of the outstanding Common Shares of
the Company.
Note 2 – Basis of Presentation
The merger will be accounted for as
a reverse merger in accordance with U.S. GAAP. Under this method of accounting, the Company will be treated as the “acquired”
company for financial reporting purposes. This determination was primarily based on Newegg comprising the ongoing operations of
the combined company, Newegg’s senior management comprising the senior management of the combined company and Newegg’s
stockholders having a majority of the voting power of the combined company. For accounting purposes, Newegg will be deemed to
be the accounting acquirer in the transaction and, consequently, the transaction will be treated as a recapitalization of Newegg
(i.e., a capital transaction involving the issuance of shares by the Company for the stock of Newegg). Accordingly, the consolidated
assets, liabilities and results of operations of Newegg will become the historical financial statements of the combined company,
and the Company’s assets, liabilities and results of operations will be consolidated with Newegg beginning on the acquisition
date.
The unaudited pro forma combined
balance sheet as of June 30, 2020 and December 31, 2019 was derived from Newegg’s consolidated balance sheet and the
Company’s consolidated balance sheet as of June 30, 2020 and December 31, 2019, respectively. The unaudited pro forma
combined balance sheet as of June 30, 2020 and December 31, 2019 assumes that the merger and disposition were completed on
June 30, 2020 and December 31, 2019, respectively.
The unaudited pro forma combined statement
of operations information for the year ended December 31, 2019 was derived from Newegg’s consolidated statement of operations
and the Company’s consolidated statements of operations for the years ended December 31, 2019. The unaudited pro forma combined
statement of operations information for the year ended December 31, 2019assumes that the merger and disposition were completed
on January 1, 2019.
The unaudited pro forma combined statement
of operations information for the six months ended June 30, 2020 was derived from Newegg’s consolidated statement of operations
and the Company’s consolidated statements of operations for the six months ended June 30, 2020. The unaudited pro forma
combined statement of operations information for the six months ended June 30, 2020 assumes that the merger and disposition were
completed on January 1, 2020.
Note 3 – Adjustments
The pro forma adjustments included in
the unaudited pro forma condensed combined financial statements are as follows:
|
(a)
|
Reflects
the disposition of Lianluo Connection.
|
|
(b)
|
Reflects the elimination of Newegg’s
preferred stock and the Company’s Class B common shares upon consummation of the merger.
|
|
(c)
|
Reflects
the elimination of accumulated deficit upon consummation of the merger and the disposition of Lianluo Connection.
|
|
(d)
|
Reflects
the issuance of 363,325,542 common shares estimated to be issued in connection with the merger.
|
Note 4 – Earnings per Share
The unaudited pro forma combined basic
and diluted earnings per share calculations are based on the historical LLIT’s weighted average number of shares outstanding
at each periods ended June 30, 2020, and December 31, 2019, adjusted by 363,325,542 shares estimated to be issued in connection
with the Merger.
Note 5 – Share Combination
On October 21, 2020, the Company completed a share combination
of its common shares at a ratio of one-for-eight, which decreased the Company’s outstanding Class A common shares from 17,685,475
shares to 2,210,683 shares and the Company’s outstanding Class B common shares from 11,111,111 shares to 1,388,888 shares.
This share combination also decreased the Company’s authorized
shares to 6,250,000 common shares of par value of $0.021848 each, of which 4,736,111 are designated as Class A common shares
and 1,513,889 are designated as Class B common shares.
All outstanding options, warrants and other rights to purchase
the Company’s common shares are adjusted proportionately as a result of the share combination. The number of shares authorized
for issuance under the Company’s option plans are also proportionately reduced to reflect the share combination.
All share and per share information contained
in these unaudited pro forma condensed combined financial statements has been restated to retroactively show the effect of this
share combination.
LIANLUO SMART LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In U.S. dollars, except for shares data)
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,396,488
|
|
|
$
|
22,834
|
|
Accounts receivable, net
|
|
|
92,236
|
|
|
|
61,779
|
|
Other receivables and prepayments, net
|
|
|
23,923
|
|
|
|
18,867
|
|
Advance to suppliers
|
|
|
7,619
|
|
|
|
7,727
|
|
Inventories, net
|
|
|
812,920
|
|
|
|
1,085,016
|
|
Other taxes receivable
|
|
|
290,651
|
|
|
|
337,412
|
|
Marketable equity securities
|
|
|
286,957
|
|
|
|
143,478
|
|
Total Current Assets
|
|
|
7,910,794
|
|
|
|
1,677,113
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
272,332
|
|
|
|
656,840
|
|
Total assets
|
|
$
|
8,183,126
|
|
|
$
|
2,333,953
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
196,334
|
|
|
$
|
226,215
|
|
Advances from customers
|
|
|
138,157
|
|
|
|
267,365
|
|
Accrued expenses and other current liabilities (including
rental payable to a related party of $74,776 and $75,834 at June 30, 2020 and December 31, 2019, respectively)
|
|
|
904,861
|
|
|
|
1,530,473
|
|
Due to related parties
|
|
|
|
|
|
|
|
|
- Short-term borrowings and interest payable
|
|
|
2,029,203
|
|
|
|
1,208,331
|
|
Warranty obligation
|
|
|
717
|
|
|
|
728
|
|
Total Current Liabilities
|
|
|
3,269,272
|
|
|
|
3,233,112
|
|
|
|
|
|
|
|
|
|
|
OTHER LIABILITIES
|
|
|
|
|
|
|
|
|
Warrants liability
|
|
|
689,934
|
|
|
|
389,630
|
|
Total Liabilities
|
|
$
|
3,959,206
|
|
|
$
|
3,622,742
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ (DEFICIT) EQUITY
|
|
|
|
|
|
|
|
|
Common stock – Class A, par value $0.021848: 4,736,111 shares authorized as of June 30, 2020 and June 30, 2019; 2,210,683 and 836,933 shares issued and outstanding as of June 30, 2020 and June 30, 2019
|
|
$
|
48,299
|
|
|
$
|
18,285
|
|
Common stock – Class B, par value $0.021848: 1,513,889 shares authorized as of June 30, 2020 and June 30, 2019; 1,388,888 shares issued and outstanding as of June 30, 2020 and June 30, 2019
|
|
|
30,345
|
|
|
|
30,345
|
|
Additional paid in capital
|
|
|
47,995,773
|
|
|
|
40,833,249
|
|
Accumulated deficit
|
|
|
(46,303,194
|
)
|
|
|
(44,607,198
|
)
|
Accumulated other comprehensive income
|
|
|
2,452,697
|
|
|
|
2,436,530
|
|
Total shareholders’ (deficit) equity
|
|
|
4,223,920
|
|
|
|
(1,288,789
|
)
|
Total liabilities and shareholders’ (deficit) equity
|
|
$
|
8,183,126
|
|
|
$
|
2,333,953
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
LIANLUO SMART LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
(In U.S. dollars, except for shares data)
|
|
For Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
339,175
|
|
|
|
242,213
|
|
|
|
|
|
|
|
|
|
|
Costs of revenue
|
|
|
(580,572
|
)
|
|
|
(418,227
|
)
|
|
|
|
|
|
|
|
|
|
Gross loss
|
|
|
(241,397
|
)
|
|
|
(176,014
|
)
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
(43,725
|
)
|
|
|
(556,213
|
)
|
General and administrative expenses
|
|
|
(1,200,494
|
)
|
|
|
(1,753,718
|
)
|
Provision for doubtful accounts
|
|
|
(28,963
|
)
|
|
|
(43,873
|
)
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(1,514,579
|
)
|
|
|
(2,529,818
|
)
|
|
|
|
|
|
|
|
|
|
Financial expenses
|
|
|
(570
|
)
|
|
|
(7,911
|
)
|
Other income
|
|
|
|
|
|
|
21,682
|
|
Other expense
|
|
|
(24,021
|
)
|
|
|
(18,044
|
)
|
Unrealized loss on securities
|
|
|
143,478
|
|
|
|
(678,304
|
)
|
Change in fair value of warrants liability
|
|
|
(300,304
|
)
|
|
|
(99,820
|
)
|
Loss before provision for income tax
|
|
|
(1,695,996
|
)
|
|
|
(3,312,215
|
)
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Lianluo Smart Limited
|
|
$
|
(1,695,996
|
)
|
|
$
|
(3,312,215
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
Foreign currency translation loss
|
|
|
16,167
|
|
|
|
(123,451
|
)
|
Comprehensive loss
|
|
$
|
(1,679,829
|
)
|
|
$
|
(3,435,666
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.53
|
)
|
|
$
|
(1.49
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
3,176,254
|
|
|
|
2,225,821
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
LIANLUO SMART LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN EQUITY
(UNAUDITED)
(In U.S. dollars, except for shares data)
Six Months Ended June 30, 2020
|
|
|
Common Stock
|
|
|
Additional Paid-in
|
|
|
Accumulated
|
|
|
Accumulated Other Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income
|
|
|
Total
|
|
Balance as of January 1, 2020
|
|
|
2,225,821
|
|
|
$
|
48,630
|
|
|
$
|
40,833,249
|
|
|
$
|
(44,607,198
|
)
|
|
$
|
2,436,530
|
|
|
$
|
(1,288,789
|
)
|
Issuance of shares
|
|
|
1,373,750
|
|
|
|
30,014
|
|
|
|
7,162,524
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,192,538
|
|
Foreign currency translation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,167
|
|
|
|
16,167
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,695,996
|
)
|
|
|
-
|
|
|
|
(1,695,996
|
)
|
Balance as of June 30, 2020
|
|
|
3,599,571
|
|
|
$
|
78,644
|
|
|
$
|
47,995,773
|
|
|
$
|
(46,303,194
|
)
|
|
$
|
2,452,697
|
|
|
$
|
4,223,920
|
|
Six Months Ended June 30, 2019
|
|
|
Common Stock
|
|
|
Additional Paid-in
|
|
|
Accumulated
|
|
|
Accumulated Other Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income
|
|
|
Total
|
|
Balance as of January 1, 2019
|
|
|
2,225,821
|
|
|
$
|
48,630
|
|
|
$
|
40,620,772
|
|
|
$
|
(40,156,204
|
)
|
|
$
|
2,603,422
|
|
|
$
|
3,116,620
|
|
Stock based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
69,177
|
|
|
|
-
|
|
|
|
-
|
|
|
|
69,177
|
|
Foreign currency translation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(123,451
|
)
|
|
|
(123,451
|
)
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,312,215
|
)
|
|
|
-
|
|
|
|
(3,312,215
|
)
|
Balance as of June 30, 2019
|
|
|
2,225,821
|
|
|
$
|
48,630
|
|
|
$
|
40,689,949
|
|
|
$
|
(43,468,419
|
)
|
|
$
|
2,479,971
|
|
|
$
|
(249,869
|
)
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
LIANLUO SMART LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(UNAUDITED)
(In U.S. dollars)
|
|
For Six Months Ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,695,996
|
)
|
|
$
|
(3,312,215
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
-
|
|
|
|
69,177
|
|
Depreciation and amortization
|
|
|
377,731
|
|
|
|
414,224
|
|
(Gain) Loss on disposal of equipment
|
|
|
-
|
|
|
|
(15,247
|
)
|
Provision for doubtful accounts
|
|
|
28,963
|
|
|
|
43,873
|
|
Change in warranty obligation
|
|
|
-
|
|
|
|
(3,881
|
)
|
Provision for inventory obsolescence
|
|
|
-
|
|
|
|
114
|
|
Change in fair value of warrants liability
|
|
|
300,304
|
|
|
|
99,820
|
|
Unrealized loss on securities
|
|
|
(143,478
|
)
|
|
|
678,304
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease (Increase) in accounts receivable
|
|
|
(59,579
|
)
|
|
|
42,873
|
|
Decrease in advances to suppliers
|
|
|
108
|
|
|
|
4,721
|
|
Decrease in other receivables and prepayments, net - third parties
|
|
|
(4,897
|
)
|
|
|
184,296
|
|
Increase in interest receivables - related party
|
|
|
-
|
|
|
|
(1,023
|
)
|
Decrease (Increase) in inventories
|
|
|
272,095
|
|
|
|
231,644
|
|
Increase in operating lease right-of-use assets, net
|
|
|
-
|
|
|
|
(59,260
|
)
|
Decrease (Increase) in other taxes receivable
|
|
|
46,762
|
|
|
|
21,642
|
|
Increase in accounts payable
|
|
|
(29,881
|
)
|
|
|
27,010
|
|
Increase in interest payable – related party
|
|
|
-
|
|
|
|
8,908
|
|
Increase in operating lease liabilities, current
|
|
|
-
|
|
|
|
44,268
|
|
Increase (Decrease) in advances from customers
|
|
|
(129,208
|
)
|
|
|
65,999
|
|
Increase (Decrease) in accrued expenses and other current liabilities
|
|
|
(625,612
|
)
|
|
|
412,154
|
|
Net cash used in operating activities
|
|
|
(1,662,688
|
)
|
|
|
(1,042,599
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Proceeds from disposal of equipment
|
|
|
-
|
|
|
|
16,302
|
|
Loan to a related party
|
|
|
-
|
|
|
|
(85,000
|
)
|
Net cash used in investing activities
|
|
|
-
|
|
|
|
(68,698
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Loans from related parties
|
|
|
842,609
|
|
|
|
818,500
|
|
Net proceeds from issuance of common stock
|
|
|
7,192,537
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
8,035,146
|
|
|
|
818,500
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate fluctuations on cash and cash equivalents
|
|
|
1,196
|
|
|
|
(130,964
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
6,373,654
|
|
|
|
(423,761
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
22,834
|
|
|
|
477,309
|
|
Cash and cash equivalents at end of period
|
|
$
|
6,396,488
|
|
|
$
|
53,548
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
Income tax paid
|
|
$
|
-
|
|
|
$
|
-
|
|
Interest paid
|
|
$
|
-
|
|
|
$
|
-
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Offset short-term borrowings - related party against loans to a related party (including accrued interests)
|
|
|
89,006
|
|
|
|
86,023
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
LIANLUO SMART LIMITED AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
(In U.S. dollars)
1.
|
ORGANIZATION AND PRINCIPAL ACTIVITIES
|
Lianluo Smart Limited (“Lianluo Smart”
or the “Company”) (previously known as “Dehaier Medical Systems Limited”) was incorporated as an international
business company under the International Business Companies Act, 1984, in the British Virgin Islands on July 22, 2003. On November
21, 2016, the Company changed its name from Dehaier Medical Systems Limited to Lianluo Smart Limited, and its NASDAQ stock ticker
from DHRM to LLIT.
Lianluo Smart distributed and provided
after-sale services for medical equipment in China mainly through its wholly-owned subsidiary, Beijing Dehaier Medical Technology
Co., Limited (“BDL”).
On February 1, 2016, Lianluo Connection
Medical Wearable Device Technology (Beijing) Co., Ltd. (“LCL”) was formed in Beijing, the PRC, for the business development
in the portable health device market.
During the late 2015, BDL intended to discontinue
part of its product lines among the traditional medical device business, which has been approved by the Board of Resolution on
February 22, 2016.
As of June 30, 2020, Lianluo Smart owns
100% of LCL and LCL owns 100% of BDL. As of August 13, 2020, LCL sold BDL to China Mine United Investment Group Co., Ltd. for cash
consideration of RMB0.
Lianluo Smart, through its subsidiaries,
distributes branded, proprietary medical equipment, such as sleep apnea machines. Standard product registration, product certification
and quality management system have been established; ISO13485 industry standard has also already been passed. Starting from fiscal
2018, the Company has been providing examination service to hospitals and medical centers through its developed medical wearable
device. Doctors could refer to examination results provided by such device in making diagnosis regarding Obstructive Sleep Apnea
Syndrome (“OSAS”).
“Lianluo Smart” or the “Company”
collectively refer to Lianluo Smart, a BVI registered company, and its subsidiaries, BDL and LCL as of the date hereof.
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis of Presentation
The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
(“U.S. GAAP”).
In the opinion of the Company, the accompanying
unaudited condensed consolidated financial statements contain all adjustments, consisting of only normal recurring adjustments,
necessary for a fair statement of its financial position, results of operations and comprehensive loss, cash flows and changes
in shareholders’ equity for the interim periods. The financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended December 31, 2019. The unaudited condensed consolidated
balance sheet at December 31, 2019 was derived from the audited annual financial statements, but does not contain all of the footnote
disclosures from the annual financial statements.
The interim results for the six months
ended June 30, 2020 are not necessarily indicative of the results expected for the full fiscal year.
Share
Combination
On
October 21, 2020, the Company completed a share combination of its common shares at a ratio of one-for-eight, which decreased
the Company’s outstanding Class A common shares from 17,685,475 shares to 2,210,683 shares and the Company’s outstanding
Class B common shares from 11,111,111 shares to 1,388,888 shares. This share combination also decreased the Company’s authorized
shares to 6,250,000 common shares of par value of $0.021848 each, of which 4,736,111 are designated as Class A common shares
and 1,513,889 are designated as Class B common shares.
Accordingly, all share and
per share information has been restated to retroactively show the effect of this share combination.
LIANLUO SMART LIMITED AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
(In U.S. dollars)
Going Concern
The accompanying condensed consolidated
financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business.
The Company has suffered recurring losses
from operations, this condition has raised substantial doubt about the Company’s ability to continue as a going concern.
The company recorded a working capital of $4.64 million as of June 30, 2020. In February and March 2020, the Company obtained approximately
$7.2 million equity financing. Considering equity financing and the cost cutting activities, the Company believes that the current
cash and cash equivalents and the anticipated cash flows from operations will be sufficient to meet the anticipated working capital
requirements and expenditures for the next 12 months. However, the ability to continue as a going concern is dependent upon the
Company’s profit generating operations in the future and/or obtaining the necessary financing to meet its obligations and
repay its liabilities arising from normal business operations when they become due.
The Company’s principal sources of
liquidity have been proceeds from issuances of equity securities and loans from related parties. No assurance can be given that
any future financing, if needed, will be available or, if available, that it will be on terms that are satisfactory to the Company.
Even if the Company is able to obtain additional financing, if needed, it may contain undue restrictions on its operations, in
the case of debt financing, or cause substantial dilution for its stock holders, in the case of equity financing.
These consolidated financial statements
do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities
that might be necessary should the Company be unable to continue as going concern.
Basis of Consolidation
The unaudited condensed consolidated financial
statements include the accounts of Lianluo Smart and its wholly-owned subsidiaries (collectively, the “Company”). All
inter-company transactions and balances are eliminated in consolidation. The results of subsidiaries are recorded in the unaudited
condensed consolidated statements of operations and comprehensive loss.
A subsidiary is an entity in which (i)
the Company directly or indirectly controls more than 50% of the voting power; or (ii) the Company has the power to appoint or
remove the majority of the members of the board of directors or to cast a majority of votes at the meeting of the board of directors
or to govern the financial and operating policies of the investee pursuant to a statute or under an agreement among the shareholders
or equity holders.
Use of Estimates
The preparation of the unaudited condensed
consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the unaudited
condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Estimates
are adjusted to reflect actual experience when necessary. Significant accounting estimates reflected in the Company’s consolidated
financial statements include revenue recognition, reserve for doubtful accounts, valuation of inventories, impairment testing of
long term assets, warranty obligation, warrants liability, stock-based compensation, useful lives of intangible assets and property
and equipment, realization of deferred tax assets and the discount rate used to determine the present value of lease payments.
Actual results could differ from those estimates.
Leases where substantially all the rewards
and risk of assets remain with the leasing company are accounted for as operating leases. Payments made under operating leases
are charged to the consolidated statement of operations on a straight-line basis over the shorter of the lease term or estimated
economic life of the leased property. The majority of the Company’s leases were short term (less than 12 months) and the
Company elected the practical expedient not to record right of use of assets for short term leases.
Equity Securities
The Company’s equity securities represent
equity investments in Guardion Health Sciences, Inc. (“GHSI”) made in November 2017. The Company holds less than 5%
of the GHSI’s total shares. The equity securities were accounted for as non-marketable securities in 2018 on the balance
sheets and as marketable securities in 2019 when GHSI went public in April 5, 2019.
As of June 30, 2020, the investment was
accounted at fair value with changes recorded through earnings.
LIANLUO SMART LIMITED AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
(In U.S. dollars)
Fair Value of Financial Instruments
ASC Topic 820, “Fair Value Measurements
and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 825, “Financial
Instruments,” defines fair value and establishes a three-level valuation hierarchy for disclosures of fair value measurement
that enhances disclosure requirements for fair value measures. The carrying amounts reported in the consolidated balance sheets
for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values
because of the short period of time between the origination of such instruments and their expected realization and their current
market rate of interest. The three levels of valuation hierarchy are defined as follows:
|
●
|
Level
1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
●
|
Level
2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that
are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
|
|
●
|
Level
3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.
|
Financial assets and liabilities are classified
in their entirety based on the lowest level of input that is significant to the fair value measurement.
The carrying amounts reported in the consolidated
financial statements for current assets and current liabilities approximate fair value due to the short-term nature of these financial
instruments.
Investments in listed equity securities
were re-measured on a recurring basis, and are categorized within Level 1 under the fair value hierarchy.
The fair value of warrants was determined
using the Black Scholes Model, with Level 3 inputs. Investments in a privately held company for which the Company elected to record
using the measurement alternative were re-measured on a non-recurring basis, and are categorized within Level 3 under the fair
value hierarchy.
The following represents the revenues by
categories, all derived from China:
|
|
For the six months ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Categories
|
|
|
|
|
|
|
Product sales
|
|
|
|
|
|
|
Medical Devices
|
|
$
|
295,726
|
|
|
$
|
59,722
|
|
Mobile Medicine (sleep apnea diagnostic products)
|
|
|
17,240
|
|
|
|
81,550
|
|
OSAS service (analysis and detection)
|
|
|
26,209
|
|
|
|
100,941
|
|
Total revenues
|
|
$
|
339,175
|
|
|
$
|
242,213
|
|
4.
|
ACCOUNTS RECEIVABLE, NET
|
Accounts receivable as of June 30, 2020
and December 31, 2019 consist of the following:
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Accounts receivable
|
|
$
|
157,082
|
|
|
$
|
98,195
|
|
Less: reserve for doubtful accounts
|
|
|
(64,846
|
)
|
|
|
(36,416
|
)
|
Accounts receivable, net
|
|
$
|
92,236
|
|
|
$
|
61,779
|
|
During the six months ended June 30, 2020
and 2019, bad debts were $29,122 and $4,509 respectively.
LIANLUO SMART LIMITED AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
(In U.S. dollars)
5.
|
OTHER RECEIVABLES AND PREPAYMENTS, NET
|
Other receivables and prepayments as of
June 30, 2020 and December 31, 2019 consist of the following:
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Rental deposits
|
|
$
|
12,499
|
|
|
$
|
36,846
|
|
Prepaid expenses
|
|
|
58,714
|
|
|
|
29,939
|
|
Advances to employees
|
|
|
77
|
|
|
|
78
|
|
|
|
|
71,290
|
|
|
|
66,863
|
|
Less: reserve for doubtful accounts
|
|
|
(47,367
|
)
|
|
|
(47,996
|
)
|
Other receivables and prepayments, net
|
|
$
|
23,923
|
|
|
$
|
18,867
|
|
During the six months ended June 30, 2020
and 2019, bad debts on other receivables and prepayments were deficit $159 and $39,364 respectively.
Inventories as of June 30, 2020 and December
31, 2019 consist of the following:
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
23,353
|
|
|
$
|
25,985
|
|
Work in progress
|
|
|
768
|
|
|
|
779
|
|
Finished goods
|
|
|
791,162
|
|
|
|
1,060,615
|
|
Total inventories
|
|
$
|
815,283
|
|
|
$
|
1,087,379
|
|
Less: inventory impairment loss
|
|
|
(2,363
|
)
|
|
|
(2,363
|
)
|
Inventories, net
|
|
|
812,920
|
|
|
|
1,085,016
|
|
During the six months ended June 30, 2020
and 2019, write-downs of inventories to lower of cost or net realizable value was $0 and $114, respectively, which were charged
as cost of revenues.
7.
|
PROPERTY AND EQUIPMENT, NET
|
Property and equipment as of June 30, 2020
and December 31, 2019 consist of the following:
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Plant and machinery
|
|
$
|
1,888,430
|
|
|
$
|
1,915,160
|
|
Automobiles
|
|
|
135,450
|
|
|
|
137,367
|
|
Office and computer equipment
|
|
|
22,372
|
|
|
|
22,689
|
|
Total property and equipment
|
|
|
2,046,252
|
|
|
|
2,075,216
|
|
Less: Accumulated depreciation
|
|
|
(1,773,920
|
)
|
|
|
(1,418,376
|
)
|
Property and equipment, net
|
|
$
|
272,332
|
|
|
$
|
656,840
|
|
Depreciation were $377,731 and $414,224
for the six months ended June 30, 2020 and 2019, respectively. The Company did not record any impairment on its property and equipment
for the six months ended June 30, 2020 and 2019.
LIANLUO SMART LIMITED AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
(In U.S. dollars)
8.
|
COMMITMENTS AND CONTINGENCIES
|
Leases
The lease commitments are for office premises
which are classified as operating leases. These non-cancelable leases have lease terms expiring through November 2020.
Lease expense for the six months ended
June 30, 2020 and 2019 was $45,298 and $177,464 respectively. The lease commitment is $17,753 with a contract maturity date at
March 19, 2021. All of Company’s leases were short term (less than 12 months) and the Company elected the practical expedient
not to record right of use of assets related to short term leases.
Employment Contracts
Under the PRC labor law, all employees
have signed employment contracts with the Company. Management employees have employment contracts with terms up to three years
and non-management employees have either a three-year employment contract renewable on an annual basis or non-fixed term employment
contract.
Contingency
The Company is periodically the subject
of various pending or threatened legal actions and claims arising out of its operations in the normal course of business. In the
opinion of management of the Company, adequate provision has been made in the Company’s financial statements at June 30,
2020.
Litigation
From time to time, the Company may become
involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject
to inherent uncertainties, and an adverse result in these, or other matters, may arise from time to time that may harm our business.
Other than the legal proceeding set forth below, the Company is currently not aware of any such legal proceedings or claims that
the Company believe will have an adverse effect on our business, financial condition or operating results.
In 2019, Beijing Dehaier and Lianluo Connection
terminated employment of over 50 employees due to business restructuring. As of December 31, 2019, 34 of these laid-off employees
filed complaints with Beijing Changping District Employment Dispute Arbitration Commission and Beijing Shijingshan District Employment
Dispute Arbitration Commission, claiming that Beijing Dehaier and Lianluo Connection failed to pay them, among others, certain
salaries, overtime fees and compensations. As of December 31, 2019, the Arbitration Commissions issued arbitral awards with respect
to 30 of the 34 employees; Beijing Dehaier and Lianluo Connection had paid off 23 of the 30 employees who had applied for enforcement
of the arbitral awards and intend to pay the additional seven employees an aggregate of approximately RMB 310,000 (approximately
$44,423) according to entered arbitral awards. As regards the total expenses pertaining to this lay-off, the Company recorded liabilities
of RMB979,716 (approximately $140,393) in employment termination compensations and RMB2.99 million (approximately $428,467) in
unpaid salaries in 2019, of which the Company had paid off RMB3,346,453 (approximately $475,866) as of June 30, 2020.
In 2020, Beijing Dehaier and Lianluo Connection
have terminated the employment of additional 25 employees due to the business downturn. Most of these former employees filed complaints
with Beijing Changping District Employment Dispute Arbitration Commission and Beijing Shijingshan District Employment Dispute Arbitration
Commission, respectively, claiming that Beijing Dehaier and Lianluo Connection failed to pay them, among others, certain salaries,
overtime fees and compensations upon terminations. As of June 30, 2020, Beijing Dehaier and Lianluo Connection have entered into
settlement agreements with 15 of these former employees and settled disputes through negotiations with the rest of these employees.
The total settlement amount for the 25 employees was RMB3,332,405 (approximately $473,868) and about RMB1,493,225 (approximately
$212,337) has been paid off.
On May 9, 2019, Tianjin Wuqing Bohai Printing
Co., Ltd., or Wuqing Bohai, filed an arbitration application with Beijing Arbitration Commission against Beijing Dehaier, claiming
that Beijing Dehaier failed to pay for goods in accordance with purchase contracts entered into with Wuqing Bohai in 2017 and 2018
and requested Beijing Dehaier to pay Wuqing Bohai an amount of RMB119,770 (approximately $17,450), plus RMB10,000 (approximately
$1,457) to cover the expenses of keeping goods that Beijing Dehaier failed to accept. On June 5, 2019, Beijing Dehaier
submitted an answer to compliant, noting that it had not received some of the goods under the contracts and Wuqing Bohai failed
to provide invoices for some of the goods allegedly received by Beijing Dehaier. Beijing Dehaier submitted that it should only
be responsible for the purchase value of RMB48,450 (approximately $7,059). On March 6, 2020, the Beijing Arbitration Commission
entered an award, ordering that Beijing Dehaier pay Wuqing Bohai the disputed amount of RMB119,770 (approximately $17,203) and
an arbitration fee of RMB10,443 (approximately $1,500) by March 24, 2020 and dismissed other claims of Wuqing Bohai. In May 2020,
Beijing Dehaier paid off the disputed amount and the arbitration fee under the case.
LIANLUO SMART LIMITED AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
(In U.S. dollars)
The following is a reconciliation of the
basic and diluted loss per share computation for the six months ended June 30, 2020 and 2019:
|
|
Six months ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Net loss attributable to the Company’s common shareholders
|
|
$
|
(1,695,996
|
)
|
|
$
|
(3,312,215
|
)
|
Weighted average shares outstanding – Basic and diluted
|
|
|
3,176,254
|
|
|
|
2,225,821
|
|
Loss per share – Basic and diluted
|
|
$
|
(0.53
|
)
|
|
$
|
(1.49
|
)
|
For the six months ended June 30, 2020
and 2019, all the outstanding warrants and options were anti-dilutive.
10.
|
RELATED PARTY TRANSACTIONS AND BALANCES
|
In addition to the transactions and balances
disclosed elsewhere in these financial statements, the Company had the following material related party transactions:
(1)
|
On July 1, 2018,
the Company leased office premises from Hangzhou Lianluo Interactive Information Technology Co., Ltd. (“HLI”),
our major shareholder, for a period of 1 year, with an annual rental of $84,447 (RMB580,788). Rental payments charged as expenses
in the six months ended June 30, 2020 and 2019 were $0 and $39,091 respectively. As of June 30, 2020 and December 31, 2019,
the Company reported an outstanding rental payable of $74,776 and $75,834 to Hangzhou Lianluo.
|
(2)
|
On February 3 and April 18, 2019, Digital Grid (Hong Kong) Technology Co. Ltd (“Digital Grid”), one of Hangzhou Lianluo’s subsidiaries, borrowed from the Company loans of principal amounts of $60,000 and $25,000 for a term of 12 months.
|
On May 20, 2019 the Company
borrowed $90,000 from Digital Grid for a term of 12 months.
As of June 30, 2019, the Company
owed a net principal of $4,345 to Digital Grid.
From November to December 2019,
the Company borrowed $28,000 from Digital Grid, for a term of 12 months.
As of June 30, 2020, the Company
owed a net principal of $33,000 to Digital Grid.
|
(3)
|
During
2019, the Company borrowed $942,500 from HLI, repaid $0; the loans are non-interest bearing.
In addition, the above loans have been extended, interest-free and without specific repayment
date, which is based upon both parties’ agreement as of the date of this report.
As of June 30, 2020 and 2019, the loan balances were $918,450 and $737,040.
|
|
(4)
|
During
the six months of 2020 and 2019, the Company borrowed $842,609 and nil from Mr. Ping Chen, its previous CEO, free of interest
to fund its operation, respectively. The balances were $1,077,753 and nil as of the six months ended June 30, 2020 and 2019.
|
LIANLUO SMART LIMITED AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
(In U.S. dollars)
Major Customers
For the six months ended June 30, 2020,
one customer accounted for approximately 87% of the Company’s revenues. For the six months ended June 30, 2019, two customers
each accounted for approximately 33% and 24%, respectively, of the Company’s revenues.
No other customer accounted for more than
10% of the Company’s revenues for the six months ended June 30, 2020 and 2019.
Major Suppliers
For the six months ended June 30, 2020
and 2019, the sole supplier accounted for 100% of the Company’s purchases.
Stock Option Plan
Under the employee stock option plan, the
Company’s stock options generally expire ten years from the date of grant.
The following is a summary of the option activity:
Stock options
|
|
Shares
|
|
|
Weighted average
exercise price
|
|
|
Aggregate
intrinsic
value(1)
|
|
Outstanding as of December 31, 2019
|
|
|
99,358
|
|
|
$
|
19.20
|
|
|
$
|
-
|
|
Forfeited
|
|
|
(26,000
|
)
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding as of June 30, 2020
|
|
|
73,358
|
|
|
|
21,12
|
|
|
$
|
-
|
|
Exercisable as of June 30, 2020
|
|
|
73,358
|
|
|
|
21,12
|
|
|
$
|
-
|
|
|
(1)
|
The
intrinsic value of the stock options at June 30, 2020 is the amount by which the market value of the Company’s common stock
of $5.52 as of June 30, 2020 exceeds the exercise price of the options.
|
As of June 30, 2020, all outstanding options
have been vested. For the six months ended June 30, 2020 and 2019, the Company recognized $0 and $69,177 respectively, as compensation
expense under its stock option plan.
LIANLUO SMART LIMITED AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
(In U.S. dollars)
On April 28, 2016, the Company signed Share
Purchase Agreement (“SPA”) with HLI. In this SPA, HLI received warrants to acquire from the Company 125,000 Class
B common shares at exercise price of $17.60 per share and exercisable by HLI at any time.
There was a total of 125,000 warrants
to purchase Class B common shares issued and outstanding as of June 30, 2020 and December 31, 2019.
The fair value of the outstanding warrants
was calculated using the Black Scholes Model with the following assumptions:
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Market price per share (USD/share)
|
|
$
|
5.52
|
|
|
$
|
3.12
|
|
Exercise price (USD/share)
|
|
|
17.60
|
|
|
|
17.60
|
|
Risk free rate
|
|
|
0.35
|
%
|
|
|
1.81
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected term/Contractual life (years)
|
|
|
5.8
|
|
|
|
6.3
|
|
Expected volatility
|
|
|
334.28
|
%
|
|
|
279.93
|
%
|
The following is a reconciliation of the
beginning and ending balances of warrants liability measured at fair value on a recurring basis using Level 3 inputs:
|
|
Six months ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
389,630
|
|
|
$
|
1,129,246
|
|
Fair value change of the issued warrants included in earnings
|
|
|
300,304
|
|
|
|
99,821
|
|
Ending balance
|
|
$
|
689,934
|
|
|
$
|
1,229,067
|
|
The following is a summary of the warrants
activity:
|
|
Number
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted Average
Remaining
Contractual Life
(Years)
|
|
Outstanding as of January 1, 2020
|
|
|
125,000
|
|
|
$
|
17.60
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Redeemed
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding as of June 30, 2020
|
|
|
125,000
|
|
|
$
|
17.60
|
|
|
|
|
|
From February to March 2020, the
Company consummated three registered direct offerings of 1,373,750 Class A Common Shares and concurrent private placements of
warrants to purchase up to 1,373,750 Class A Common Shares with three investors.
As of the date hereof, there are
outstanding warrants to purchase an aggregate of 1,373,750 Class A common shares, exercisable for five and one-half years
since the respective date of issuance and subject to full ratchet anti-dilution protection. The table below shows the
exercise price, floor price, issuance date and expiration date for these warrants.
Amount of Underlying Class A Common Shares
|
|
|
323,750
|
|
|
|
437,500
|
|
|
|
612,500
|
|
Exercise price
|
|
$
|
4.9912
|
|
|
$
|
5.60
|
|
|
$
|
5.60
|
|
Floor Price
|
|
|
N/A
|
|
|
$
|
1.3608
|
|
|
$
|
1.44
|
|
Expiration Date
|
|
|
August 14, 2025
|
|
|
|
August 25, 2025
|
|
|
|
September 2, 2025
|
|
Issuance Date
|
|
|
February 14, 2020
|
|
|
|
February 25, 2020
|
|
|
|
March 2, 2020
|
|
In accordance with ASC 815-40, the Company accounted for the
Warrants as equity instruments.
LIANLUO SMART LIMITED AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
(In U.S. dollars)
1) Debt Extension and Debt Repayment
The Company has a borrowing of $918,450
due to HLI as of June 30, 2020. The loans due at July 18, July 21, and August 6, 2020, totaling $211,950, were extended, interest-free
and without specific repayment date, which is based upon both parties’ agreement as of the date of this report.
During 2019, DGHKT borrowed from the Company
loans of principal amounts of $85,000 for a term of 12 months, and the Company borrowed $118,000 from DGHKT for a term of 12 months.
On July 14, 2020, the Company repaid a net principal of $33,000 to DGHKT.
On August 17, 2020, the outstanding amount
of $42,000 in service charge payable to HLI’s subsidiary was repaid by the Company.
2) Change of CEO and Directors
On August 12, 2020, Mr. Zhitao He resigned
from his positions as Chief Executive Officer and director of the Company. Mr. He’s resignation was not a result of any disagreement
with the Company on any matter relating to the Company’s operations, policies or practices. On August 25, 2020, Mr. Bin Lin
was appointed as Chief Executive Officer, a director and Chairman of the Company.
3) Disposition Transaction
On August 13, 2020, Lianluo Connection
entered into a Share Transfer Agreement (the “Agreement”) with China Mine United Investment Group Co., Ltd. (“China
Mine”), pursuant to which Lianluo Connection transfers its 100% equity interests in its wholly-owned PRC subsidiary Beijing
Dehaier to China Mine for cash consideration of RMB 0. In exchange for all of the equity interests in Beijing Dehaier, China Mine
agrees to assume all liabilities of Beijing Dehaier.
4) Exercise of warrants
As a result of the private placements that closed on February
14, 2020, February 25, 2020, and March 2, 2020, the Company issued to several investors warrants to purchase 1,373,750 of the
Company’s Class A common shares. In late January 2021, 1,255,000 of these warrants were exercised resulting in aggregate
cash proceeds to the Company of $6.8 million and leaving 118,750 warrants that remain outstanding.
NEWEGG
INC.
Consolidated
Financial Statements
June
30, 2020 and December 31, 2019
(Unaudited)
NEWEGG
INC.
Table
of Contents
NEWEGG
INC.
Consolidated
Balance Sheets
(In
thousands, except par value) (Unaudited)
Assets
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
141,855
|
|
|
$
|
79,750
|
|
Restricted cash
|
|
|
837
|
|
|
|
797
|
|
Accounts receivable, net
|
|
|
38,147
|
|
|
|
54,185
|
|
Inventories
|
|
|
142,275
|
|
|
|
109,509
|
|
Income taxes receivable
|
|
|
2,510
|
|
|
|
2,521
|
|
Prepaid expenses and other current assets
|
|
|
20,061
|
|
|
|
14,206
|
|
Due from related parties
|
|
|
21,854
|
|
|
|
21,654
|
|
Total current assets
|
|
|
367,539
|
|
|
|
282,622
|
|
Property and equipment, net
|
|
|
45,098
|
|
|
|
47,130
|
|
Noncurrent deferred tax assets
|
|
|
403
|
|
|
|
1,041
|
|
Equity investment
|
|
|
6,457
|
|
|
|
6,457
|
|
Investment at cost
|
|
|
15,000
|
|
|
|
15,000
|
|
Right of use assets
|
|
|
31,459
|
|
|
|
38,099
|
|
Other noncurrent assets
|
|
|
7,051
|
|
|
|
6,448
|
|
Total assets
|
|
$
|
473,007
|
|
|
$
|
396,797
|
|
Liabilities, Temporary Equity and Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
221,876
|
|
|
$
|
165,653
|
|
Accrued liabilities
|
|
|
46,693
|
|
|
|
49,396
|
|
Deferred revenue
|
|
|
36,975
|
|
|
|
25,846
|
|
Line of credit
|
|
|
6,510
|
|
|
|
6,379
|
|
Current portion of long-term debt
|
|
|
269
|
|
|
|
258
|
|
Lease liabilities - current
|
|
|
8,503
|
|
|
|
8,585
|
|
Total current liabilities
|
|
|
320,826
|
|
|
|
256,117
|
|
Long-term debt, less current portion
|
|
|
2,153
|
|
|
|
2,223
|
|
Income taxes payable
|
|
|
675
|
|
|
|
675
|
|
Lease liabilities - noncurrent
|
|
|
24,556
|
|
|
|
30,643
|
|
Other liabilities
|
|
|
66
|
|
|
|
66
|
|
Total liabilities
|
|
|
348,276
|
|
|
|
289,724
|
|
Commitments and contingencies (note 15)
|
|
|
|
|
|
|
|
|
Temporary Equity:
|
|
|
|
|
|
|
|
|
Series AA convertible Preferred Stock, $.001 par value; 25,890 shares authorized as of both June 30, 2020 and December
31, 2019; 24,870 shares issued and outstanding as of both June 30, 2020 and December 31, 2019
|
|
|
187,146
|
|
|
|
187,146
|
|
Series A convertible Preferred Stock, $.001 par value; 59,000 shares authorized; 36,476
shares issued and outstanding as of both June 30, 2020 and December 31, 2019
|
|
|
655
|
|
|
|
655
|
|
Total Temporary Equity
|
|
|
187,801
|
|
|
|
187,801
|
|
Equity (deficit):
|
|
|
|
|
|
|
|
|
Class A Common Stock, $.001 par value; 142,000 shares authorized; 849 shares issued and outstanding as of both June 30,
2020 and December 31, 2019
|
|
|
1
|
|
|
|
1
|
|
Class B Common Stock, $.001 par value; 59,000 shares authorized; none issued or outstanding as of June 30, 2020 and
December 31, 2019
|
|
|
—
|
|
|
|
—
|
|
Additional paid-in capital
|
|
|
735
|
|
|
|
744
|
|
Accumulated other comprehensive loss
|
|
|
(1,777
|
)
|
|
|
(505
|
)
|
Accumulated deficit
|
|
|
(62,029
|
)
|
|
|
(80,968
|
)
|
Total equity (deficit)
|
|
|
(63,070
|
)
|
|
|
(80,728
|
)
|
Total liabilities, temporary equity and equity
|
|
$
|
473,007
|
|
|
$
|
396,797
|
|
See
accompanying notes to consolidated financial statements.
NEWEGG
INC.
Consolidated
Statements of Operations
(In
thousands, except per share data) (Unaudited)
|
|
Six
Months Ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Net sales
|
|
$
|
862,700
|
|
|
$
|
797,426
|
|
Cost of sales
|
|
|
738,122
|
|
|
|
718,807
|
|
Gross profit
|
|
|
124,578
|
|
|
|
78,619
|
|
Other operating income
|
|
|
264
|
|
|
|
28
|
|
Selling, general, and administrative expenses
|
|
|
107,138
|
|
|
|
115,504
|
|
Income (loss) from operations
|
|
|
17,704
|
|
|
|
(36,857
|
)
|
Interest income
|
|
|
590
|
|
|
|
242
|
|
Interest expense
|
|
|
(378
|
)
|
|
|
(2,025
|
)
|
Other income, net
|
|
|
2,790
|
|
|
|
3,478
|
|
Gain from sale of and equity income from equity method investments
|
|
|
-
|
|
|
|
24,098
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
|
|
|
20,706
|
|
|
|
(11,064
|
)
|
Provision for income taxes
|
|
|
1,767
|
|
|
|
4,405
|
|
Net income (loss)
|
|
$
|
18,939
|
|
|
$
|
(15,469
|
)
|
Less: undistributed net
income allocable to Series A and Series AA convertible Preferred Stocks
|
|
|
(18,682
|
)
|
|
|
-
|
|
Undistributed net income
(loss) allocable to common stockholders of Newegg Inc. for basic earnings per share
|
|
$
|
257
|
|
|
$
|
(15,469
|
)
|
Basic earnings (loss) per share
|
|
$
|
0.30
|
|
|
$
|
(18.22
|
)
|
Diluted earnings (loss) per share
|
|
$
|
0.16
|
|
|
$
|
(18.22
|
)
|
Weighted average shares used in computation of earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
849
|
|
|
|
849
|
|
Diluted
|
|
|
1,577
|
|
|
|
849
|
|
See
accompanying notes to consolidated financial statements.
NEWEGG
INC.
Consolidated
Statements of Comprehensive Income (Loss)
(In
thousands) (Unaudited)
|
|
Six Months Ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Net income (loss)
|
|
$
|
18,939
|
|
|
$
|
(15,469
|
)
|
Foreign currency translation adjustments
|
|
|
(1,272
|
)
|
|
|
(2,285
|
)
|
Comprehensive income (loss)
|
|
$
|
17,667
|
|
|
$
|
(17,754
|
)
|
See
accompanying notes to consolidated financial statements.
NEWEGG
INC.
Consolidated
Statements of Temporary Equity and Equity (Deficit)
(In
thousands) (Unaudited)
|
|
Series AA
|
|
|
Series A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible
|
|
|
convertible
|
|
|
|
|
|
Class A
|
|
|
|
|
|
Accumulated
|
|
|
(Accumulated
|
|
|
|
|
|
|
preferred
|
|
|
preferred
|
|
|
Total
|
|
|
common
|
|
|
Additional
|
|
|
other
|
|
|
deficit)/
|
|
|
|
|
|
|
stock
|
|
|
stock
|
|
|
temporary
|
|
|
stock
|
|
|
paid-In
|
|
|
comprehensive
|
|
|
Retained
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
equity
|
|
|
Shares
|
|
|
Par value
|
|
|
capital
|
|
|
income
|
|
|
earnings
|
|
|
equity
|
|
Balance at December 31, 2018
|
|
|
24,870
|
|
|
$
|
187,146
|
|
|
|
36,476
|
|
|
$
|
655
|
|
|
$
|
187,801
|
|
|
|
849
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
628
|
|
|
$
|
(63,977
|
)
|
|
$
|
(63,348
|
)
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(15,469
|
)
|
|
|
(15,469
|
)
|
Other comprehensive loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,285
|
)
|
|
|
—
|
|
|
|
(2,285
|
)
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
371
|
|
|
|
—
|
|
|
|
—
|
|
|
|
371
|
|
Balance at June 30, 2019
|
|
|
24,870
|
|
|
$
|
187,146
|
|
|
|
36,476
|
|
|
$
|
655
|
|
|
$
|
187,801
|
|
|
|
849
|
|
|
$
|
1
|
|
|
$
|
371
|
|
|
$
|
(1,657
|
)
|
|
$
|
(79,446
|
)
|
|
$
|
(80,731
|
)
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,522
|
)
|
|
|
(1,522
|
)
|
Other comprehensive loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,152
|
|
|
|
—
|
|
|
|
1,152
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
373
|
|
|
|
—
|
|
|
|
—
|
|
|
|
373
|
|
Balance at December 31, 2019
|
|
|
24,870
|
|
|
$
|
187,146
|
|
|
|
36,476
|
|
|
$
|
655
|
|
|
$
|
187,801
|
|
|
|
849
|
|
|
$
|
1
|
|
|
$
|
744
|
|
|
$
|
(505
|
)
|
|
$
|
(80,968
|
)
|
|
$
|
(80,728
|
)
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18,939
|
|
|
|
18,939
|
|
Other comprehensive loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,272
|
)
|
|
|
—
|
|
|
|
(1,272
|
)
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(9
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(9
|
)
|
Balance at June 30, 2020
|
|
|
24,870
|
|
|
$
|
187,146
|
|
|
|
36,476
|
|
|
$
|
655
|
|
|
$
|
187,801
|
|
|
|
849
|
|
|
$
|
1
|
|
|
$
|
735
|
|
|
$
|
(1,777
|
)
|
|
$
|
(62,029
|
)
|
|
$
|
(63,070
|
)
|
See
accompanying notes to consolidated financial statements.
NEWEGG
INC.
Consolidated Statements of Cash Flows
(In thousands) (Unaudited)
|
|
Six Months Ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
18,938
|
|
|
$
|
(15,469
|
)
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,508
|
|
|
|
5,449
|
|
Bad debt expense
|
|
|
466
|
|
|
|
227
|
|
Provision for obsolete and excess inventory
|
|
|
983
|
|
|
|
3,760
|
|
Stock-based compensation
|
|
|
(9
|
)
|
|
|
371
|
|
Gain on equity method investment
|
|
|
-
|
|
|
|
(24,098
|
)
|
Deferred income taxes
|
|
|
638
|
|
|
|
(56
|
)
|
Loss on disposal of property and equipment
|
|
|
77
|
|
|
|
482
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
15,528
|
|
|
|
38,970
|
|
Inventories
|
|
|
(33,945
|
)
|
|
|
85,537
|
|
Prepaid expenses and other assets
|
|
|
(6,361
|
)
|
|
|
3,286
|
|
Accounts payable
|
|
|
56,031
|
|
|
|
(113,947
|
)
|
Accrued liabilities and other liabilities
|
|
|
(2,855
|
)
|
|
|
(15,291
|
)
|
Deferred revenue
|
|
|
11,072
|
|
|
|
(14,651
|
)
|
Dues from affiliate
|
|
|
(201
|
)
|
|
|
(750
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
64,870
|
|
|
|
(46,181
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Payments to acquire property and equipment
|
|
|
(2,609
|
)
|
|
|
(6,227
|
)
|
Proceeds on disposal of property and equipment
|
|
|
78
|
|
|
|
15
|
|
Sale of equity method investment
|
|
|
-
|
|
|
|
61,000
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(2,531
|
)
|
|
|
54,788
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Borrowings under line of credit
|
|
|
20,000
|
|
|
|
93,291
|
|
Repayments under line of credit
|
|
|
(20,000
|
)
|
|
|
(72,816
|
)
|
Repayments of long-term debt
|
|
|
(131
|
)
|
|
|
(13,120
|
)
|
Loan from affiliate
|
|
|
-
|
|
|
|
15,000
|
|
Repayment of loan from affiliate
|
|
|
-
|
|
|
|
(15,000
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(131
|
)
|
|
|
7,355
|
|
|
|
|
|
|
|
|
|
|
Foreign currency effect on cash, cash equivalents and restricted cash
|
|
|
(63
|
)
|
|
|
(794
|
)
|
Net increase in cash, cash equivalents and restricted cash
|
|
|
62,145
|
|
|
|
15,168
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash:
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
80,547
|
|
|
|
56,679
|
|
End of period
|
|
$
|
142,692
|
|
|
$
|
71,847
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
957
|
|
|
$
|
1,744
|
|
Cash paid (refund) for income taxes
|
|
$
|
131
|
|
|
$
|
(442
|
)
|
See accompanying notes to consolidated financial statements.
|
(1)
|
Organization
and Description of Business
|
Newegg
Inc. (“Newegg” or the “Company”) is an electronics-focused e-retailer that offers customers a comprehensive
selection of the latest consumer electronics products, detailed product descriptions and images, “how-to” information,
and customer reviews via its websites. The Company’s strategic focus is based on three key areas: (1) providing a differentiated
and superior online shopping experience, (2) offering reliable and timely product fulfillment, and (3) delivering superior customer
service.
The
Company was incorporated as Newegg Computers in the state of California on February 4, 2000. In June 2005, Newegg
Inc. was incorporated in the state of Delaware. On September 29, 2005, Newegg Computers was merged into Newegg Inc.
under Delaware law with Newegg Inc. being the surviving company.
In
August 2016, the Company entered into a share purchase agreement (the “Purchase Agreement”) with Hangzhou
Liaison Interactive Information Technology Co., Ltd, (“Liaison”), a publicly traded company in China. The transaction
was completed on March 30, 2017. Pursuant to the Purchase Agreement, Liaison purchased 490,706 shares of Class A Common
Stock and 12,782,546 shares of Series A convertible Preferred Stock from existing shareholders for a total consideration
of $91.9 million. Additionally, the Company issued, and Liaison purchased, 24,870,027 shares of Series AA Convertible
Preferred Stock for a total consideration of $172.2 million. Upon the close of this transaction, Liaison, through Digital
Grid (Hong Kong) Technology Co., Limited (“Digital Grid”), a fully-owned subsidiary of Liaison, became the majority
owner of the Company. See Note 12 –Convertible Preferred Stock for further discussion about the Company’s accounting
treatment for this transaction.
The
following table details our subsidiaries as of June 30, 2020.
Subsidiary
|
|
Jurisdiction
|
CAOPC, Inc.
|
|
United States
|
Chief Value Limited
|
|
Hong Kong
|
ChiefValue.com Inc.
|
|
United States
|
INOPC, Inc.
|
|
United States
|
Magnell Associate, Inc.
|
|
United States
|
Newegg Australia Pty Ltd
|
|
Australia
|
Newegg Business Inc.
|
|
United States
|
Newegg Canada Inc.
|
|
Canada
|
Newegg Capital Inc.
|
|
Taiwan
|
Newegg Capital International
|
|
Cayman Islands
|
Newegg China Inc.
|
|
Cayman Islands
|
Newegg Commerce (SH) Co., Ltd
|
|
China
|
Newegg Enterprises LLC
|
|
United States
|
Newegg Europe, Inc.
|
|
Cayman Islands
|
Newegg Greater China (Hong Kong) Company Limited
|
|
Hong Kong
|
Newegg International, Inc.
|
|
Cayman Islands
|
Newegg Logistics Services Inc.
|
|
United States
|
Newegg North America Inc.
|
|
United States
|
Newegg Staffing Inc.
|
|
United States
|
Newegg Taiwan Inc.
|
|
Taiwan
|
Newegg Tech (Chengdu) LTD
|
|
China
|
Newegg Tech (China) Co., Ltd.
|
|
China
|
Newegg Tech (Shanghai) Co., Ltd.
|
|
China
|
Newegg Tech (Xian) Co., Ltd.
|
|
China
|
Newegg Tech Corporation
|
|
Cayman Islands
|
Newegg Tech Inc.
|
|
Cayman Islands
|
Newegg Tech Research and Development Limited
|
|
Hong Kong
|
Newegg Tech Support Limited
|
|
Hong Kong
|
Newegg Tech, Inc.
|
|
United States
|
Newegg Texas, Inc.
|
|
United States
|
Newegg Trading Limited
|
|
Hong Kong
|
Newegg UK, Ltd.
|
|
United Kingdom
|
Newegg.com Americas Inc.
|
|
United States
|
NJOPC, Inc.
|
|
United States
|
Nutrend Automotive Inc.
|
|
United States
|
OZZO Inc.
|
|
United States
|
OZZO International
|
|
Cayman Islands
|
OZZO International Limited
|
|
Hong Kong
|
Pure Cleaning, Inc.
|
|
United States
|
Rosewill Inc.
|
|
United States
|
Rosewill Limited
|
|
Hong Kong
|
TNOPC, Inc.
|
|
United States
|
|
(2)
|
Summary
of Significant Accounting Policies
|
|
(a)
|
Principles of Consolidation
|
The
accompanying unaudited consolidated financial statements are prepared in accordance with accounting principles generally
accepted in the United States of America and include the accounts of all consolidated subsidiaries. All intercompany balances
and transactions have been eliminated in consolidation.
The
preparation of the Company’s consolidated financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements
and accompanying notes. Estimates are used for, but not limited to, revenue recognition, incentives earned from vendors, investment
valuation, and stock-based compensation. Actual results could differ from such estimates.
As
of June 30, 2020, the effects of the ongoing COVID-19 pandemic on our business, results of operations, and financial condition
continue to evolve. As a result, many of our estimates and assumptions required increased judgment and carry a higher degree of
variabilities and volatility. As additional information become available, our estimates may change materially in future periods.
|
(c)
|
Change in Accounting Principle
|
Effective
January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842), as amended (“ASU 2016-02”), which requires lessees
to recognize a right-of-use (“ROU”) asset and lease liabilities on the balance sheet for most lease arrangements and
expands disclosures about leasing agreements, among other items. The Company adopted ASU 2016-02 using the modified retrospective
transition approach through a cumulative-effect adjustment, which after completing the implementation analysis, resulted in no
adjustment to the Company’s January 1, 2019 beginning retained earnings balance. On January 1, 2019, the Company recognized
$26.4 million of ROU operating lease assets and $28.7 million of operating lease liabilities, including noncurrent operating lease
liabilities of $21.0 million, as a result of the adoption. The difference between the ROU operating lease assets and the operating
lease liabilities was primarily due to previously accrued rent expense relating to periods prior to January 1, 2019, and the remaining
prepaid rent balance as of December 31, 2018. The adoption of ASU 2016-02 did not have an impact on the Company’s consolidated
results of operations or cash flows.
As
part of the adoption, the Company elected the package of practical expedients, which among other things, permits the Company to
not reassess whether any expired or existing contracts are or contain leases, the lease classification for any expired or existing
leases, and the initial direct costs for any existing leases. The Company also elected the practical expedient to not assess whether
existing land easements that were not previously accounted for as lease are or contain a lease under the new guidance. The Company
did not elect the hindsight practice expedient to use hindsight when determining lease term and assessing impairment of ROU lease
assets. See Note 9 – Lease Obligations.
Certain
prior period amounts have been reclassified to conform with the current period presentation.
|
(e)
|
Cash and Cash Equivalents
|
Cash
and cash equivalents consist primarily of cash on deposit, certificates of deposit, and money market accounts. Cash equivalents
are all highly liquid investments with original maturities of three months or less. Amounts receivable from credit card processors
are also considered cash equivalents as they are both short term and highly liquid in nature, and are typically converted to cash
within three business days. Amounts due to the Company from credit card processors that are classified as cash and cash equivalents
totaled $13.2 million and $9.2 million at June 30, 2020 and December 31, 2019, respectively.
Restricted
cash includes amounts deposited in commercial bank time deposits and money market accounts to collateralize the Company’s
deposit obligations. The Company considers restricted cash related to obligations classified as current liabilities to be current
assets and restricted cash related to obligations classified as long-term liabilities as noncurrent assets. At June 30, 2020 and
December 31, 2019, the Company had $0.8 million and $0.8 million, respectively, in restricted cash, primarily related to
collateralization required pursuant to a lease agreement and the restricted cash account required under the Company’s health
insurance plan. The restricted cash balance is classified as a current asset in the consolidated balance sheets.
The
following is a reconciliation of cash and cash equivalents, and restricted cash reported within the consolidated balance sheets
that sum to the total of the same such amounts shown in the consolidated statements of cash flows (in thousands):
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Cash and cash equivalents
|
|
$
|
141,855
|
|
|
$
|
79,750
|
|
Restricted cash
|
|
|
837
|
|
|
|
797
|
|
Total cash and cash equivalents, and restricted cash
|
|
$
|
142,692
|
|
|
$
|
80,547
|
|
Accounts
receivable consist primarily of vendor receivables, which do not bear interest, and represent amounts due for marketing development
funds, cooperative advertising, price protection and other incentive programs offered to the Company by certain vendors. Accounts
receivable also include receivables from business customers on 30- to 60-day credit terms. The Company estimates an allowance
for doubtful accounts based on historical experience and other factors. Accounts receivable are written off when deemed uncollectible.
Recoveries of accounts receivable previously written off are recorded when received. Amounts receivable from business customers
were $15.6 million and $14.6 million, net of allowances of $0.1 million and $0.1 million, at June 30, 2020 and December 31,
2019, respectively. See further discussion of amounts receivable related to vendor incentive programs under Incentives Earned
from Vendors below.
Inventories,
consisting of products available for sale, are accounted for using the first-in, first-out (FIFO) method and are valued at the
lower of cost and net realizable value. In-bound freight-related costs are included as part of the cost of merchandise held for
resale. In addition, certain vendor payments are deducted from the cost of merchandise held for resale. The Company records an
inventory provision for refurbished, slow-moving, or obsolete inventories based on historical experience and assumptions of future
demand for product. These allowances are released when the related inventory is sold or disposed of. Amounts of inventory allowances
were $4.1 million and $3.7 million, as of June 30, 2020 and December 31, 2019, respectively.
|
(i)
|
Property and Equipment
|
Property
and equipment are stated at cost, less accumulated amortization and depreciation computed using the straight-line method over
the estimated useful life of each asset. Leasehold improvements are amortized over the lesser of the remaining lease term or the
estimated useful life of the assets. Expenditures for repair and maintenance costs are expensed as incurred, and expenditures
for major renewals and improvements are capitalized. Costs incurred during the application development stage of internal-use software
and website development are capitalized and included in property and equipment. When assets are retired or otherwise disposed
of, the cost and accumulated depreciation or amortization are removed from the accounts, and any gain or loss is reflected in
the Company’s consolidated statements of operations. The useful lives for depreciable assets are as follows:
Buildings
|
|
20–39 years
|
Machinery and equipment
|
|
3–7 years
|
Computer and software
|
|
3–5 years
|
Leasehold improvements
|
|
Lesser of lease term or 10 years
|
Capitalized software
|
|
3–5 years
|
Furniture and fixtures
|
|
5–7 years
|
The
Company defines lease agreements at their inception as either operating or finance leases depending on certain defined criteria.
Certain lease agreements may entitle the Company to receive rent holidays, other incentives, or periodic payment increases over
the lease term. Accordingly, rent expense under operating leases is recognized on the straight-line basis over the original lease
term, inclusive of predetermined minimum rent escalations or modifications and rent holidays.
|
(k)
|
Impairment of Long-Lived Assets
|
The
Company evaluates the recoverability of long-lived assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The impairment test comprises two steps. The first step compares
the carrying amount of the asset to the sum of expected undiscounted future cash flows. If the sum of expected undiscounted future
cash flows exceeds the carrying amount of the asset, no impairment is taken. If the sum of expected undiscounted future cash flows
is less than the carrying amount of the asset, a second step is warranted and an impairment loss is measured as the amount by
which the carrying amount of the asset exceeds its fair value calculated using the present value of estimated net future cash
flows. There have been no impairment losses recognized by the Company for the six months ended June 30, 2020 and for the year ended
December 31, 2019.
Investments
are accounted for using the equity method if the investment provides the Company has the ability to exercise significant influence,
but not control, over an investee. Significant influence is generally deemed to exist if the Company has an ownership interest
in the voting stock of the investee between 20% and 50%, although other factors are considered in determining whether the
equity method is appropriate. Also, investments in limited partnerships of more than 3% to 5% are generally viewed as more
than minor and are accounted for using the equity method.
The
investments for which the Company is not able to exercise significant influence over the investee and which do not have readily
determinable fair values were accounted for under the cost method prior to the adoption of ASU 2016-01 Financial Instruments-Overall
(Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. Subsequent to the adoption of
this standard as of January 1, 2018, the Company has elected the measurement alternative to measure such investments at cost,
less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or
a similar investment of the same issuer.
|
(m)
|
Fair Value of Financial Instruments
|
Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. To increase the comparability of fair value measures, a three-tier fair value
hierarchy prioritizes the inputs used in measuring fair value. These tiers include Level 1, defined as observable inputs
such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either
directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exist, therefore,
requiring the Company to develop its own assumptions to determine the best estimate of fair value.
The
carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and accrued and other liabilities approximate
fair value because of the short maturity of these instruments. The carrying amounts of long-term debt and line of credit at June
30, 2020 and December 31, 2019 approximates fair value because the interest rate approximates the current market interest rate.
The fair value of these financial instruments was determined using level 2 input.
|
(n)
|
Accumulated Other Comprehensive Income
(Loss)
|
Comprehensive
loss consists of net loss and adjustments to stockholders’ equity for foreign currency translation adjustments. Accumulated
other comprehensive loss consists entirely of foreign currency translation adjustments. The tax impact is not material to the
consolidated financial statements.
The
Company adopted Accounting Standards Update No. 2014-09 Revenue From Contracts with Customers (Topic 606) as of January
1, 2018. Revenue recognition is evaluated through the following five step process:
1.
Identification of the contract with a customer;
2.
Identification of the performance obligations in the contract;
3.
Determination of the transaction price;
4.
Allocation of the transaction price to the performance obligations in the contract; and
5.
Recognition of revenue when or as a performance obligation is satisfied.
Revenue
is recognized when control of a promised product or service transfers to a customer, in an amount that reflects the consideration
to which the Company expects to be entitled in exchange for transferring those products or services. Revenue is recognized net
of sales taxes and discounts. The Company primarily generates revenue through product sales on its platforms and through fees
earned for facilitating marketplace transactions and extended warranty sales on its platforms.
The
Company recognizes revenue on product sales at a point in time to customers when control of the product passes to the customer
upon delivery to the customer or when service is provided. The Company fulfills orders with its owned inventory or with inventory
sourced through its suppliers. The vast majority of the Company’s product sales are fulfilled from its owned inventory.
The amount recognized in revenue represents the expected consideration to be received in exchange for such goods or services.
For orders fulfilled with inventory sourced through the Company’s suppliers, and where the products are shipped directly
by the Company’s supplier to the Company’s customer, the Company evaluates the criteria outlined in ASC 606-10-55,
Principal versus Agent Considerations, in determining whether revenue should be recognized on a gross or net basis. The
Company determined that it is the principal in these transactions as it controls the specific good before it is transferred to
the customer. The Company is the entity responsible for fulfilling the promise to provide the specified good to the customer and
takes responsibility for the acceptability of the goods, assumes inventory risk before the specified good has been transferred
to the customer or after transfer of control to the customer, has discretion in establishing the price, and selects the suppliers
of products sold. The Company accounts for product sales under these arrangements on a gross basis upon receipt of the product
by the customer. Product sales exceeded 95% of consolidated net sales for six months ended June 30, 2020 and 2019.
The
Company generally requires payment by credit card upon placement of an order, and to a limited extent, grants credit to business
customers on 30- to 60-day terms. Shipping and handling is considered a fulfillment activity, as it takes place before the customer
obtains controls of the good. Amounts billed to customers for shipping and handling are included in net sales upon completion
of the performance obligation.
The
Company’s product sales contracts include terms that could cause variability in the transaction price such as sales returns
and credit card chargebacks. As such, the transaction price for product sales includes estimates of variable consideration to
the extent it is probable that a significant reversal of revenue recognized will not occur. Sales are reported net of estimated
returns and allowances and credit card chargebacks, based on historical experience.
The
Company also earns fees for facilitating marketplace transactions and extended warranty sales on its platforms. For marketplace
transactions, the Company’s websites host third-party sellers and the Company also provides the payment processing function.
The Company recognizes revenue upon sale of products made available through its marketplace store. The Company is not the principal
in this arrangement and does not control the specific goods sold to the customer. The Company reports the net amount earned as
commissions, which are determined using a fixed percentage of the sales price or fixed reimbursement amount. The Company also
offers extended warranty programs for various products on behalf of an unrelated third party. The Company reports the net amount
earned as revenue at the time of sale, as it is not the principal in this arrangement and does not control the specific goods
sold to the customer.
The
Company offers its customers the opportunity to purchase goods and services on its website using deferred financing promotional
programs provided by a third-party financing company. These programs include an option to make no payments for a period of six,
twelve, eighteen or twenty-four months. The third-party financing company makes all decisions to extend credit to the customer
under a separate agreement with the customer, owns all such receivables from the customer, assumes all risk of collection, and
has no recourse to the Company in the event the customer does not pay. The third-party financing company pays the Company
for the purchase price on behalf of the customer, less certain transaction fees. Accordingly, sales generated through these programs
are not reflected in the Company’s receivables once payment is received from the third-party financing company. The transaction
fee paid by the Company to the third-party financing company is recognized as a reduction of revenue. These transaction fees for
the six months ended June 30, 2020 and 2019 were immaterial.
To
the extent that the Company sells its products on third-party platforms, the Company incurs incremental contract acquisition costs
in the form of sales commissions paid to the platforms. The commissions are generally determined based on the sales price and
an agreed-upon commission rate. The Company elects the practical expedient under Accounting Standards Update No. 2014-09 Revenue
From Contracts with Customers (Topic 606) to recognize sales commission as an expense as incurred, as the amortization period
of the asset that the Company otherwise would have recognized is less than one year.
The
Company has three types of contractual liabilities: (1) amounts collected, or amounts invoiced and due, related to product sales
where receipt of the product by the customer has not yet occurred or revenue cannot be recognized. Such amounts are recorded in
the consolidated balance sheets as deferred revenue and are recognized when the applicable revenue recognition criteria have been
satisfied. For all of the product sales, the Company ships a large volume of packages through multiple carriers. Actual delivery
dates may not always be available and as such, the Company estimates delivery dates as needed based on historical data. (2) amounts
collected for the Company’s Premier membership services, which are typically paid upfront for membership benefits over a
3-month, 6-month, or 12-month period, including free 3-day shipping, free return, rush processing and dedicated customers services.
Such amounts were initially recorded as deferred revenue and were recognized as revenue ratably over the subscription period.
The Company discontinued its Premier membership services in 2019, resulting in no balance of deferred revenue related to this
program as of December 31, 2019. The amount of deferred revenue related to the Premier membership services was immaterial as of
December 31, 2018. (3) unredeemed gift cards, which are initially recorded as deferred revenue and are recognized in the period
they are redeemed. Subject to governmental agencies escheat requirements, certain gift cards not expected to be redeemed, also
known as “breakage”, are recognized as revenue based on the historical redemption pattern. These gift cards breakage
revenue for the six months ended June 30, 2020 and 2019 were immaterial.
Deferred
revenue totaled $37.0 million and $25.9 million at June 30, 2020 and December 31, 2019, respectively. During the six months ended
June 30, 2020, the Company recognized $23.1 million of net revenue included in deferred revenue at December 31, 2019. During the
six months ended June 30, 2019, the Company recognized $31.6 million of net revenue included in deferred revenue at December
31, 2018.
The
Company’s cost of sales represents the purchase price of the products it sells to its customers, offset by incentives earned
from vendors, including marketing development funds and other vendor incentive programs. See further discussion of vendor payments
under Incentives Earned from Vendors below. Cost of sales also includes freight-in and freight-out costs and charges related to
refurbished, slow-moving, or obsolete inventory.
|
(q)
|
Shipping and Handling
|
The
Company records revenue for shipping and handling billed to its customers. Shipping and handling revenue totaled approximately
$15.7 million and $8.5 million for the six months ended June 30, 2020 and 2019, respectively.
The
related shipping and handling costs are included in cost of sales. Shipping and handling costs totaled approximately $35.6 million
and $30.7 million for the six months ended June 30, 2020 and 2019, respectively.
|
(r)
|
Incentives Earned from Vendors
|
The
Company participates in various vendor incentive programs that include, but are not limited to, purchasing-based volume discounts,
sales-based volume incentives, marketing development funds, including for certain cooperative advertising, and price protection
agreements. Vendor incentives are recognized in the consolidated statements of operations as an offset to marketing and promotional
expenses to the extent that they represent reimbursement of advertising costs incurred by the Company on behalf of the vendors
that are specific, incremental, and identifiable. Reimbursements that are in excess of such costs and all other vendor incentive
programs are accounted for as a reduction of cost of sales, or if the related product inventory is still on hand at the reporting
date, inventory is reduced in the consolidated balance sheets.
The
Company reduced cost of sales by $53.7 million and $72.5 million for the six months ended June 30, 2020 and 2019, respectively,
for these vendor incentive programs. Reductions to advertising and promotional expenses related to direct reimbursements for costs
incurred in advertising vendors’ products totaled $0.6 million and $0.2 million for the six months ended June 30, 2020
and 2019, respectively. Amounts receivable related to vendor incentive programs were $19.4 million and $34.8 million, net of allowances
of $0.2 million and $0.5 million, at June 30, 2020 and December 31, 2019, respectively. Amounts due to the Company are included
in accounts receivable in the consolidated balance sheets.
|
(s)
|
Selling, General, and Administrative Expenses
|
Selling,
general, and administrative expenses primarily consist of marketing and advertising expenses, sales commission, credit card processing
fees, payroll and related benefits, depreciation and amortization, professional fees, litigation costs, rent expense, information
technology expenses, warehouse costs, office expenses, and other general corporate costs.
Advertising
and promotional expenses are charged to operations when incurred and are included in selling, general, and administrative expenses.
Advertising and promotional expenses for the six months ended June 30, 2020 and 2019 were $11.7 million and $15.3 million,
respectively.
|
(u)
|
Stock-Based Compensation
|
The
measurement and recognition of compensation expense for all stock-based payment awards made to employees and directors, including
employee stock options and restricted stock, is based on estimated fair value of the awards on the date of grant. The value of
awards that are ultimately expected to vest is recognized as expense on a straight-line basis over the requisite service periods
in the consolidated statements of operations. See Note 13 – Stock-Based Compensation for further information about
the Company’s stock compensation plans.
The
Company is subject to federal and state income taxes in the United States and taxes in foreign jurisdictions. In accordance with
ASC Topic 740, the Company uses the asset and liability method of accounting for income taxes. Under the asset and liability
method, deferred taxes are determined based on the temporary differences between the financial statement and tax bases of assets
and liabilities, using tax rates expected to be in effect during the years in which the bases differences are expected to reverse.
A valuation allowance is established against deferred tax assets when it is more likely than not that some portion or all of the
deferred tax assets will not be realized.
The
Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will
be sustained upon examination by the taxing authorities based on the technical merits of the position. The Company measures the
recognized tax benefit as the largest amount of tax benefit that has greater than a 50% likelihood of being realized upon the
ultimate settlement with a taxing authority. The Company reverses a previously recognized tax benefit if it determines that the
tax position no longer meets the more-likely-than-not threshold of being sustained. The Company accrues interest and penalties
related to unrecognized tax benefits in income tax expense.
|
(w)
|
Concentration of Credit Risk and Significant
Customers and Vendors
|
The
Company maintains its cash and cash equivalents in bank deposit accounts which, at times, may exceed federally insured limits.
The Company has not experienced any losses in such accounts and does not believe it is exposed to any significant credit risk
from cash and cash equivalents.
For
the six months ended June 30, 2020 and 2019, the Company had no individual customers that accounted for greater than 10% of net
sales.
The
Company purchases its products on credit terms from vendors located primarily in the United States. For both the six months
ended June 30, 2020 and 2019, the Company’s cumulative annual purchases from one vendor was 12.5% and 12.1% of total
purchases, respectively. The majority of products that the Company sells are available through multiple channels.
The
Company has receivables due from vendors related to its advertising and promotional programs and receivables due from
business customers with credit terms. As of June 30, 2020, the Company’s receivables from three vendors were 19.4%,
14.6%, and 14.1% of net receivables, and no receivables from business customers with credit terms exceeded 10% of net
receivables. As of December 31, 2019, the Company’s receivables from one vendor was 22.1% of net
receivables, and no receivable from business customers with credit terms exceeded 10% of net receivables.
|
(x)
|
Foreign Currency Translation
|
The
financial statements of foreign subsidiaries and affiliates where the local currency is the functional currency are translated
into U.S. dollars using exchange rates in effect at the balance sheet date for assets and liabilities and average exchange
rates during the year for revenues and expenses. Any gain or loss on currency translation is included in stockholders’ equity
as accumulated other comprehensive income.
|
(y)
|
Convertible Preferred Stock
|
Under
the Company’s current certificate of incorporation, Series A convertible Preferred Stock is convertible at the holder’s
option into Class A Common Stock by dividing the Series A Original Issue Price by the Series A Conversion Price in effect at the
time of conversion. Similarly, each share of Series AA convertible Preferred Stock is convertible at the holder’s
option into Class A Common Stock by dividing the sum of the Series AA Original Issue Price plus any dividends declared but unpaid
thereon by the Series AA Conversion Price in effect at the time of conversion. Further, upon the date of an IPO, all outstanding
shares of Series A convertible Preferred Stock and Series AA convertible Preferred Stock shall automatically be converted into
shares of Class B Common Stock at the then-effective conversion rate. Finally, upon a date (prior to the date of an IPO) specified
by vote or written consent of at least a majority of the then outstanding shares of Series A convertible Preferred Stock, all
outstanding shares of Series A convertible Preferred Stock shall automatically be converted into shares of Class A Common Stock
at the then effective conversation rate. Upon a date (prior to the date of an IPO) specified by vote or written consent of at
least a majority of the then outstanding shares of Series AA convertible Preferred Stock, all outstanding shares of Series AA
convertible Preferred Stock shall automatically be converted into shares of Class A Common Stock at the then effective conversation
rate. The Company’s current certificate of incorporation also allows the Series A convertible Preferred Stock and Series
AA convertible Preferred Stock to be redeemed upon certain defined deemed liquidation events. As the possible redemption
of these shares was outside of the control of the Company, the carrying amount of the Series A and AA convertible preferred stocks
were classified as temporary equity. The transactions and the carrying amount of the Series A and AA convertible preferred stocks
were reclassified to temporary equity retrospectively for year 2018 to conform with year 2019 presentation. The Series A and Series
AA convertible Preferred Stocks were initially recorded at their original issuance amounts, net of direct third-party costs incurred
in connection with issuance.
The
Company’s financial assets and liabilities that are measured at fair value on a recurring basis include cash and cash equivalents,
and restricted cash. The carrying amounts of cash and cash equivalents and restricted cash approximate their fair value.
The
Company’s financial assets that are measured at fair value on a non-recurring basis when impairment is identified include
equity method investment and investment in equity securities without readily determinable fair value not accounted for under the
equity method. The fair values of these investments are determined based on valuation techniques using the best information available,
and may include quoted market prices, market comparable, and discounted cash flow projections. An impairment charge is recorded
when the cost of the investment exceeds its fair value. This is considered a Level 3 fair value measurement. See Note 5 –
Investment for further information regarding the fair value measurement of these investments.
The
fair value of accounts receivables approximates carrying value due to the short-term maturities.
The
Company’s loans to affiliate, loans from affiliate, line of credit and long-term debt are carried at cost with fair value
disclosed, if required. The fair value of the amounts outstanding under the line of credit and long-term debt with a floating
interest rate approximates the carrying value due primarily to the variable nature of the interest rate of the instruments, which
is considered a Level 2 fair value measurement. The fair value of the amounts outstanding under loans to affiliate, and line of credit with a fixed interest rate is estimated based on the discounted amount of the contractual future
cash flows using an appropriate discount rate. This is considered a Level 3 fair value measurement. The following is a summary
of the carrying amounts and estimated fair values of these financial instruments as of June 30, 2020 and December 31, 2019 (in
thousands):
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
|
Carrying Value
|
|
|
Estimated Fair Value
|
|
|
Carrying Value
|
|
|
Estimated Fair Value
|
|
Loans to affiliate
|
|
$
|
15,000
|
|
|
$
|
15,000
|
|
|
$
|
15,000
|
|
|
$
|
15,000
|
|
Line of credit
|
|
$
|
6,510
|
|
|
$
|
6,510
|
|
|
$
|
6,379
|
|
|
$
|
6,379
|
|
Long-term debt
|
|
$
|
2,422
|
|
|
$
|
2,364
|
|
|
$
|
2,481
|
|
|
$
|
2,424
|
|
|
(4)
|
Property
and Equipment, Net
|
Property
and equipment, net consisted of the following (in thousands):
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Land
|
|
$
|
2,244
|
|
|
|
2,179
|
|
Buildings
|
|
|
32,326
|
|
|
|
32,455
|
|
Machinery and equipment
|
|
|
40,429
|
|
|
|
40,477
|
|
Computer and software
|
|
|
32,403
|
|
|
|
32,538
|
|
Leasehold improvements
|
|
|
12,386
|
|
|
|
12,560
|
|
Capitalized software
|
|
|
14,978
|
|
|
|
12,650
|
|
Furniture and fixtures
|
|
|
3,165
|
|
|
|
3,196
|
|
Construction in progress
|
|
|
6,684
|
|
|
|
6,706
|
|
|
|
|
144,615
|
|
|
|
142,761
|
|
Accumulated depreciation and amortization
|
|
|
(99,517
|
)
|
|
|
(95,631
|
)
|
Property and equipment, net
|
|
$
|
45,098
|
|
|
|
47,130
|
|
Depreciation
and amortization expense associated with property and equipment was $4.5 million and $5.4 million for the six months ended
June 30, 2020 and 2019, respectively.
In
September 2019, the Company entered into a sale leaseback transaction for one of its real estate properties
in the United States. The Company sold the property for gross proceeds of $38.5 million, and recognized a gain of $28.8 million
from the transaction, which is included as other operating income in its consolidated statements of operations. The Company concurrently
leased back the property from the buyer under a lease agreement for ten years, resulting in ROU lease asset of $14.1 million and
a lease liability of $13.9 million as of the lease commencement date.
On
April 17, 2018, the Company acquired an equity interest in Mountain Capital Fund L.P. (“Mountain”) from Pegasus View
Global Ltd., an international business company incorporated in the Republic of Seychelles (“Pegasus”), which is a
related party. Mountain is an exempted limited partnership registered under the partnership law in the Cayman Islands and primarily
engages in investing. The Company’s equity interest in Mountain was limited to 50% of Mountain’s investment in One97
Communications Limited and PayTM E-Commerce Private Limited (collectively, the “Mountain Investment”). In addition
to the $43.0 million initial investment made during 2018, the purchase price in this transaction included a contingent consideration
of up to $7.0 million upon satisfaction of certain conditions described in the purchase agreement. The Company evaluated the Mountain
Investment under the variable interest model and the voting interest model and concluded that Mountain Capital Fund L.P. is not
a variable interest entity and no consolidation is needed under either the variable interest model or the voting interest model.
The Company recorded an estimate of contingent consideration payable of $7.0 million as of the acquisition date.
Mountain
sold a portion of its investment in One97 Communications Limited (“One97”) to various third-party buyers during the
six months ended June 30, 2019, and sold the rest of its investment in One97 in the six months ended December 31, 2019, which
resulted in the Company’s disposal of all of its investment in One97. The Company recorded a gain on the equity method investment
in Mountain of $24.1million for the six months ended June 30, 2019. As of June 30, 2020 and December 31, 2019, the carrying value
of the Company’s investment in Mountain was $6.5 million, and the Company’s ownership percentage in Mountain was approximately
8.0%. As Mountain is a limited partnership, the Company continues accounting for the Mountain Investment under the equity method
as of June 30, 2020 and December 31, 2019 and for the periods then ended.
See
Note 17 – Related Party Transactions for further information regarding this transaction.
In
August 2018, the Company purchased 11,506,695 Series B+ Preferred shares in Bitmain Technologies Holding Company, a privately-held
company incorporated in the Cayman Islands, for a total consideration of $15.0 million. Bitmain Technologies Holding Company and
its subsidiaries (together “Bitmain”) primarily designs and sells cryptocurrency mining hardware, operate cryptocurrency
mining pools, and provide mining farm services. As this represents an investment in equity securities without readily determinable
fair values, the Company elected the measurement alternative under ASU 2016-01 to measure this investment at cost, less any impairment,
plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment
of the same issuer.
The
Company reviewed the investment in Bitmain for impairment as of June 30, 2020 and December 31, 2019, by evaluating
if events or circumstances have occurred that may have a significant adverse effect on the fair value of the investment. The Company
concluded there were no impairment indicators as of June 30, 2020 and December 31, 2019. In the absence of observable price changes
in orderly transactions for the identical or a similar investment of the same issuer during the six months ended June 30, 2020
and 2019, the carrying value of the investment remained at $15.0 million as of June 30, 2020 and December 31, 2019.
There
was no impairment loss on cost method investments for the six months ended June 30, 2020 and 2019.
Accrued
liabilities consisted of the following (in thousands):
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Accrued personnel
|
|
$
|
16,983
|
|
|
|
20,534
|
|
Allowance for sales returns
|
|
|
4,727
|
|
|
|
4,812
|
|
Accrued advertising expense
|
|
|
2,720
|
|
|
|
2,051
|
|
Sales and other taxes payable
|
|
|
11,685
|
|
|
|
8,974
|
|
Accrued legal expense
|
|
|
621
|
|
|
|
1,396
|
|
Accrued freight expense
|
|
|
2,272
|
|
|
|
3,563
|
|
Accrued medical expense
|
|
|
521
|
|
|
|
1,298
|
|
Other
|
|
|
7,164
|
|
|
|
6,768
|
|
Total accrued liabilities
|
|
$
|
46,693
|
|
|
|
49,396
|
|
In
July 2018, the Company entered into a credit agreement with several financial institutions that provided a revolving credit
facility of up to $100.0 million with a maturity date of July 27, 2021. Prior to July 27, 2020 and subject to certain
terms and conditions, the Maximum Revolving Advance Amount, as defined in the loan agreement, could be increased up to $140.0
million. The revolving credit facility includes a letter of credit sublimit of $25.0 million, which can be used to issue
standby and trade letters of credit, and a $10.0 million sublimit for swingline loans. Advances from this line of credit
will be subject to interest at LIBOR plus the Applicable Margin, as defined in the loan agreement, or the Alternate Base Rate
(to be defined as the highest of the financial institution’s prime rate, the Overnight Bank Funding Rate plus 0.50%, or
the daily LIBOR plus 1.0%) plus the Applicable Margin. For LIBOR loans, the Company may select interest periods of one, two, or
three months. Interest on LIBOR loans shall be payable at the end of the selected interest period. Interest on Alternate Base
Rate loans is payable monthly. The line of credit is guaranteed by certain of the Company’s U.S. subsidiaries and is
collateralized by certain of the assets of the Company. Such assets include all receivables, equipment and fixtures, general intangibles,
inventory, subsidiary stock, securities, investment property, and financial assets, contract rights, and ledger sheets, as defined
in the loan agreement. To maintain availability of funds under the loan agreement, the Company will pay on a quarterly basis,
an unused commitment fee of either 0.25% of the difference between the amount available and the amount outstanding under the facility
if the difference is less than one-third of the Maximum Revolving Advance Amount or 0.40% of the difference between the amount
available and the amount outstanding under the facility if the difference is equal to or greater than one-third of the Maximum
Revolving Advance Amount. As of June 30, 2020 and December 31, 2019, there was no balance outstanding under this line of
credit. The credit facility contains customary covenants, including covenants that limit or restrict the Company’s ability
to incur capital expenditures and lease payments, make certain investments, enter into certain related-party transactions, and
pay dividends. The credit facility also requires the Company to maintain certain minimum financial ratios and maintain operation
banking relationship with the financial institutions. As of June 30, 2020 and December 31, 2019, the Company was in compliance
with all financial covenants related to the line of credit.
In
July 2015, the Company entered into a credit agreement with a financial institution that provided for a revolving credit
facility of up to $5.0 million with a maturity date of no later than August 26, 2016. The Company extended the maturity
date of this credit agreement to October 24, 2020. Advances from this line of credit are subject to interest at a floating interest
rate of the one-year savings account plus 0.63% not to be lower than 1.62% per annum. The interest rate was equivalent to 1.72%
as of June 30, 2020 and December 31, 2019. The line of credit is guaranteed by one of the Company’s China subsidiaries
and is collateralized by a real estate asset of that subsidiary. As of June 30, 2020 and December 31, 2019, there was $5.1
million and $4.9 million, respectively, outstanding under this line of credit.
In
May 2018, the Company entered into a credit agreement with a financial institution that provided for a revolving credit facility
of up to $3.6 million with a maturity date of May 14, 2019. Advances from this line of credit
are subject to a fixed interest rate of 5.22% per annum. The line of credit is guaranteed by one of the Company’s China
subsidiaries and is collateralized by the foreign bank deposit assets of the same subsidiary. This credit agreement expired in
May 2019.
In
March 2019, the Company entered into a credit agreement with a financial institution that provided for a revolving credit facility
of $3.6 million with a maturity date of September 19, 2019. Advances from this line of credit were subject to interest at a floating
interest rate of the Loan Prime Rate, as defined in the credit agreement, times 142%. This credit facility is collateralized by
all of the assets of one of the Company’s subsidiaries in China. This credit agreement expired in September 2019.
In
December 2019, the Company entered into a credit agreement with a financial institution that provided for a revolving credit facility
of $1.4 million. Advances from this line of credit were subject to a fixed interest rate of 6.09% per annum. The line of credit
is collateralized by a real estate asset of that subsidiary. As of both June 30, 2020 and December 31, 2019, there was $1.4
million outstanding under this line of credit.
The
Company has entered into various loans with financial institutions. Long-term debt consisted of the following (in thousands):
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Term Loan
|
|
|
2,422
|
|
|
|
2,481
|
|
Less current portion
|
|
|
(269
|
)
|
|
|
(258
|
)
|
Long-term debt less current portion
|
|
$
|
2,153
|
|
|
|
2,223
|
|
Credit
Facility
In
March 2018, the Company entered into a long-term revolving loan agreement with a financial institution that provided a revolving
credit facility of up to $13.0 million with a maturity date of March 8, 2020 (the “Credit Facility”). For each calendar
quarter during the term of this credit agreement, advances from the Credit Facility are subject to an interest rate of either
the Wall Street Journal Prime Rate or LIBOR-Based Rate, as defined in the loan agreement, at the Company’s option. The LIBOR-Based
Rate may be calculated as either LIBOR plus 2.75% if the Compensating Deposits, as defined in the credit agreement, are less than
$15.0 million as a daily average for the previous calendar quarter or LIBOR plus 2.5% if the Compensating Deposits equal at least
$15.0 million as a daily average for the previous calendar quarter. The Credit Facility was collateralized by a real estate asset
of the Company, and contained customary covenants, including covenants that limit or restrict the Company’s ability to incur
indebtedness, capital expenditures and lease payments, make certain investments and enter into certain related-party transactions.
Additionally, there was a requirement to maintain minimum liquidity (to be defined as cash or cash equivalents and securities
that are readily marketable and are not subject to any lien, claim, encumbrance, charge or any other restriction) of $35.0 million
during the term of the Credit Facility. The Company paid off the loan in full during 2019.
Term
Loan
In
2013, the Company entered into a term loan agreement with a financial institution for $4.1 million with a maturity date of November
26, 2028 (the “Term Loan”). The Term Loan bears a floating interest rate of the one-year savings account plus 0.43%
per annum in the first two years and a floating interest rate of the one-year savings account plus 0.61% per annum for the remaining
of the term, not to be lower than 1.8% during the entire term. The interest rate was equivalent to 1.98% as of June 30, 2020.
The Term Loan is collateralized by a first position security interest in a floor of an office building owned by the Company in
Taiwan.
Aggregate
maturities of long-term debt, excluding unamortized debt issuance costs, were as follows (in thousands) as of June 30, 2020:
2020
|
|
$
|
134
|
|
2021
|
|
|
271
|
|
2022
|
|
|
276
|
|
2023
|
|
|
281
|
|
2024
|
|
|
286
|
|
Thereafter
|
|
|
1,174
|
|
|
|
$
|
2,422
|
|
Operating
Leases
The
Company leases certain office and warehouse facilities and warehouse equipment under various noncancelable operating leases. The
Company is also committed under the terms of certain of these operating lease agreements to pay property taxes, insurance, utilities,
and maintenance costs. See Note 4 – Property and Equipment, net for disclosure for sales and leaseback transaction.
Most
of the Company’s leases do not provide an implicit rate that can be readily determined. Therefore, the Company uses a discount
rate based on its incremental borrowing rate, which is determined using its credit rating and information available as of the
commencement date. The Company’s operating lease agreements may include options to extend the lease term. The Company made
an accounting policy election to exclude options that are not reasonably certain of exercise when determining the term of the
borrowing in the assessment of the incremental borrowing rate. Additionally, the Company also made an accounting policy election
to not separate lease and non-lease components of a contract, and to recognize the lease payments under short-term leases as an
expense on a straight-line basis over the lease term without recognizing the lease liability and the ROU lease asset.
The
Company evaluates whether its contractual arrangements contain leases at the inception of such arrangements. Specially, the Company
considers whether it can control the underlying asset and have the right to obtain substantially all of the economic benefits
or outputs from the assets. Substantially all of its leases are long-term operating leases with fixed payment terms. The Company
does not have significant financing leases. Its ROU operating lease assets represent the right to use an underlying asset for
the lease term, and its operating lease liabilities represent the obligation to make lease payments. ROU operating lease assets
are recorded in other noncurrent assets in the consolidated balance sheet. Operating lease liabilities are recorded in other current
liabilities or other noncurrent liabilities in the consolidated balance sheets based on their contractual due dates.
The
Company’s operating lease liability is recognized as of the lease commencement date at the present value of the lease payments
over the lease term. The Company’s ROU operating lease asset is recognized as of the lease commencement date at the amount
of the corresponding lease liability, adjusted for prepaid lease payments, lease incentives received, and initial direct costs
incurred. The Company evaluates its ROU lease assets for impairment consistent with its impairment of long-lived assets policy.
See Note 2—Summary of Significant Accounting Policies.
Operating
lease expense is recognized on a straight-line basis over the lease term, and is included in selling, general, and
administrative expenses in the consolidated statement of operations. Operating lease expense totaled $8.0 million and
$5.8 million, respectively, for the six months ended June 30, 2020 and 2019. Cash payments made for operating leases
totaled $7.3 million during the six months ended June 30, 2020, which were included in cash flows from operating activities
in the consolidated statement of cash flows. As of June 30, 2020, the Company’s ROU operating lease assets were $31.5
million, and its operating lease liabilities were $33.0 million, of which $24.6 million was classified as non-current. As of
December 31, 2019, the Company’s ROU operating lease assets were $38.1 million, and its operating lease liabilities
were $39.2 million, of which $30.6 million was classified as non-current. New ROU operating lease assets and liabilities
entered into during 2019 were $21.3 million and $20.9 million, respectively. No new ROU operating lease assets and liabilities entered into
during the six months ended June 30, 2020. The Company’s weighted average remaining
lease term and the discount rate for its operating leases were approximately 5.9 years and 5.04% at June 30, 2020, and 6.06
years and 5.06% at December 31, 2019.
The
Company has certain sublease arrangements for some of the leased office and warehouse facilities. Sublease rental income for the
six months ended June 30, 2020 and 2019 was immaterial.
The
following table summarizes the future minimum rental payments under noncancelable operating lease arrangements in effect at June
30, 2020 (in thousands):
2020
|
|
$
|
5,129
|
|
2021
|
|
|
9,696
|
|
2022
|
|
|
7,515
|
|
2023
|
|
|
4,949
|
|
2024
|
|
|
3,008
|
|
Thereafter
|
|
|
11,066
|
|
Total minimum payments
|
|
$
|
41,363
|
|
Less: Imputed interest
|
|
|
8,304
|
|
Present value of lease liabilities
|
|
$
|
33,059
|
|
The Company’s income tax
provision for interim periods is determined using an estimate of the annual effective tax rate adjusted for discrete items, if
any, for relevant interim periods. The Company updates the estimate of the annual effective tax rate each six months and makes
cumulative adjustments if the estimated annual effective tax rate changes. The quarterly tax provision and the quarterly estimate
of the annual effective tax rate are subject to significant variations due to several factors including variability in predicting
the pre-tax and taxable income and the mix of jurisdictions to which those items relate, relative changes in expenses or losses
for which tax benefits are not recognized, how the Company does business, and changes in laws, regulations, and administrative
practices. The effective tax rate can be volatile based on the amount of pre-tax income. For example, the impact of discrete items
on the effective tax rate is greater when pre-tax income is lower.
The expense or (benefit)
for income taxes for the six months ended June 30, 2020 and 2019 was $1.4 million and $4.0 million, respectively. The
effective tax rate for the six months ended June 30, 2020 and 2019 was 6.9% and (35.9)%, respectively. The low effective tax
rate is primarily attributable to the valuation allowance the Company maintains on the net deferred tax assets related to
U.S. operations and certain withholding tax in 2019.
As of June 30, 2020 and June 30,
2019, the Company’s uncertain tax positions were approximately $0.6 million and $0.6 million respectively. Changes in
tax laws, regulations, administrative practices, principles, and interpretations may impact the tax contingencies. The Company
does not anticipate the uncertain tax positions to materially change within the next twelve months.
The Company is subject to both
direct and indirect taxation in the U.S. and various states and foreign jurisdictions. The Company is under examination by certain
tax authorities for the 2010 to 2019 tax years. The Company believes that adequate amounts have been reserved for any adjustments
that may ultimately result from these or other examinations. The material jurisdictions where the Company is subject to potential
examination by tax authorities for tax years after 2010 include, among others, the U.S. (Federal and California), Canada and China.
The
Company’s Common Stock consists of Class A and Class B Common Stock (collectively, “Common Stock”).
The holders of outstanding shares of Common Stock vote as one class on all matters submitted to a vote of the stockholders of
the Company. Each holder of shares of Class A Common Stock is entitled to one vote per share, whereas each holder of shares
of Class B Common Stock is entitled to 10 votes per share. No shares of Class B Common Stock are issuable until the
Company completes an underwritten public offering of its Class A Common Stock pursuant to an effective registration statement
under the Securities Act of 1933, as amended, in which the Class A Common Stock is designated for trading on the New York
Stock Exchange or the NASDAQ Global Market (an “IPO”).
The
holders of Common Stock are entitled to share equally, on a per share basis, in any dividends or other distributions declared
by the Board of Directors with respect to the Common Stock. Each share of Class B Common Stock is convertible into one share
of Class A Common Stock at the option of the holder. Each share of Class B Common Stock will automatically convert into
one share of Class A Common Stock upon the written consent of a majority of the Class B stockholders, subject to the
consent of one of the Company’s significant shareholders.
No
Common Stock dividend was declared by the Company’s Board of Directors for the six months ended June 30, 2020 and 2019.
|
(12)
|
Convertible
Preferred Stock
|
The
Company’s convertible Preferred Stock currently consists of Series AA convertible Preferred Stock and Series A convertible
Preferred Stock.
The
following tables include the activity of the convertible Preferred Stock:
|
|
|
|
|
|
|
|
Repurchased
|
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
as of
|
|
|
as of
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
Authorized
|
|
|
Issued
|
|
|
2020
|
|
|
2020
|
|
Series A convertible preferred stock
|
|
|
59,000,000
|
|
|
|
47,402,573
|
|
|
|
(10,926,589
|
)
|
|
|
36,475,984
|
|
Series AA convertible preferred stock
|
|
|
25,889,968
|
|
|
|
24,870,027
|
|
|
|
—
|
|
|
|
24,870,027
|
|
|
|
|
|
|
|
|
|
Repurchased
|
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
as of
|
|
|
as of
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
Authorized
|
|
|
Issued
|
|
|
2019
|
|
|
2019
|
|
Series A convertible preferred stock
|
|
|
59,000,000
|
|
|
|
47,402,573
|
|
|
|
(10,926,589
|
)
|
|
|
36,475,984
|
|
Series AA convertible preferred stock
|
|
|
25,889,968
|
|
|
|
24,870,027
|
|
|
|
—
|
|
|
|
24,870,027
|
|
The
holders have various rights and preferences as follows.
The
Series AA convertible Preferred Stock and Series A convertible Preferred Stock are entitled to noncumulative dividends of
at least $0.0016 per share before any dividends may be paid on Common Stock. In addition to the dividend preferences discussed
above, the holders of the Series AA convertible Preferred Stock and Series A convertible Preferred Stock are entitled to
share in any dividends paid to holders of the Common Stock on an equal basis as if the Series AA convertible Preferred Stock and
the Series A convertible Preferred Stock had been converted to Common Stock. Such dividends are payable when and as declared
by the Company’s Board of Directors. No Series AA convertible Preferred Stock or Series A convertible Preferred Stock
dividends were declared by the Company’s Board of Directors for the six months ended June 30, 2020 and 2019.
The
holders of the Series AA convertible Preferred Stock and Series A convertible Preferred Stock are entitled to vote on all
matters presented to the stockholders of the Company for their action or consideration. The holders of the Series AA convertible
Preferred Stock and Series A convertible Preferred Stock are entitled to 10 votes per “as converted” share of
Class A Common Stock.
Each
share of Series AA convertible Preferred Stock and Series A convertible Preferred Stock is convertible at the option of the
holder at any time into Class A Common Stock. The conversion ratio is subject to adjustment for certain dilutive events,
including certain types of stock dividends, stock splits, stock issuances, stock option grants, or a combination of these. As
of both June 30, 2020 and December 31, 2019, approximately 24.9 million shares of Class A Common Stock could be issued based upon
conversion ratios of 1:1 upon optional conversion of all outstanding shares of Series AA convertible Preferred Stock. As of both
June 30, 2020 and December 31, 2019, approximately 36.5 million shares of Class A Common Stock could be issued, respectively,
based upon conversion ratios of 1:1 upon optional conversion of all outstanding shares of Series A convertible Preferred
Stock.
Each
share of Series AA convertible Preferred Stock and Series A convertible Preferred Stock will automatically convert
at the then effective conversion rate into shares of Class B Common Stock upon the closing of an IPO. Upon a vote or
written consent of holders of at least a majority of Series AA convertible Preferred Stock, all outstanding shares of
Series AA convertible Preferred Stock shall automatically be converted into shares of Class A Common Stock at the then
effective conversion rate. Upon a vote or written consent of holders of at least a majority of Series A convertible
Preferred Stock (which must include the consent of a certain significant shareholder or his designee, as long as such
significant shareholder or such designee has Voting Power (as defined in the Company’s Amended and Restated Certificate
of Incorporation, the “Charter”) with respect to at least 20% of the outstanding Series A convertible Preferred
Stock), all outstanding shares of Series A convertible Preferred Stock shall automatically be converted into shares of Class
A Common Stock at the then effective conversion rate. The conversion ratio is subject to adjustment for certain dilutive
events, including certain types of stock dividends, stock splits, or a combination of these. As of June 30, 2020 and
December 31, 2019, each share of Series AA convertible Preferred Stock and Series A convertible Preferred
Stock could be converted, as described above, into one share of Class B Common Stock or one share of Class A Common
Stock.
Upon
the occurrence of a Qualified Liquidation Event, as defined in the Charter, each share of Series AA convertible Preferred Stock
is entitled to receive, before any payment may be made to the holders of any other capital stock of the Company (including all
other series of Preferred Stock of the Company outstanding), an amount equal to the greater of (i) the original issuance price
of each share of Series AA convertible Preferred Stock, plus an amount equal to the amount of compounded annual interest that
such original purchase price would yield had it been deposited from the Series AA Preferred Issue Date, as defined in the Charter,
to the date of payment of such liquidation preference, inclusive, at the Three Month London Interbank Offered Rate (in U.S. dollars)
in effect from time to time during such period, plus 50 basis points (subject to a maximum compounded interest rate per annum
of 5%) (as adjusted for dividends in cash or in kind, share subdivisions, combinations, reclassifications, conversions and consolidations
involving the Company’s capital stock and any restructuring, recapitalization, merger and combination involving the Company),
plus all declared but unpaid dividends on such share of Series AA convertible Preferred Stock, and (ii) the amount to which the
holder thereof would have received if such holder had converted all of its shares of Series AA convertible Preferred Stock into
shares of Class A Common Stock immediately prior to such Qualified Liquidation Event. Following the payment in full of the Series
AA Liquidation Amount, as defined in the Charter, the holders of the Series A convertible Preferred Stock are entitled to
receive, before any distributions are made to the holders of the Common Stock, an amount equal to the original issuance price
of each share of Series A convertible Preferred Stock plus any declared but unpaid dividends thereon. After the payment of
all preferential amounts required to be paid to the holders of Series AA convertible Preferred Stock and Series A convertible
Preferred Stock, the remaining assets available will be distributed pro rata among the holders of Series AA convertible Preferred
Stock, Series A convertible Preferred Stock and Common Stock as if all the shares had been converted to Common Stock immediately
prior to such Qualified Liquidation Event.
|
(f)
|
Right of First Refusal
|
The
Company has a right of first refusal in the event that the holders of Series AA convertible Preferred Stock and Series A
convertible Preferred Stock attempt to sell their shares.
Certain
holders of Series AA convertible Preferred Stock, Series A convertible Preferred Stock and Common Stock have pre-emptive
rights to purchase any shares of Series AA convertible Preferred Stock, Series A convertible Preferred Stock or Common Stock
that the Company proposes to issue other than in connection with an IPO and certain excluded issuances specified in the Stockholders
Agreement.
|
(13)
|
Stock-Based Compensation
|
Stock-based
compensation includes stock option awards issued under the Company’s employee incentive plan and restricted stock issued
under a significant shareholder’s incentive plan, as further discussed in (a) below. There was no income tax benefit recognized
in the consolidated statements of operations for stock-based compensation arrangements in any of the periods presented.
|
(a)
|
Stock Incentive Programs
|
2005
Incentive Award Plan:
On
September 22, 2005, the Board of Directors approved the Company’s 2005 Equity Incentive Plan, which was amended in
January 2008, October 2009, December 2011 and September 2015 (the “Incentive Award Plan”). Under the
Incentive Award Plan, the Company may grant equity incentive awards to employees, directors, and consultants based on the Company’s
Class A Common Stock. A committee of the Board of Directors of the Company determines the eligibility, types of equity awards,
vesting schedules, and exercise prices for equity awards granted. Subject to certain adjustments in the event of a change in capitalization
or similar transaction, the Company may issue a maximum of 14,200,000 shares of its Class A Common Stock under the Incentive
Award Plan. The Company issues new shares of Class A Common Stock from its authorized share pool to settle stock-based compensation
awards. The exercise price of options granted under the plan shall not be less than the fair value of the Company’s Class A
Common Stock as of the date of grant. Options typically vest over the term of four years, and are typically exercisable for a
period of 10 years after the date of grant, except when granted to a holder who, at the time the option is granted, owns
stock representing more than 10% of the voting power of all classes of stock of the Company or any subsidiaries, in which case,
the term of the option shall be no more than five years from the date of grant. In September 2015, the Incentive Award
Plan was amended to permit additional awards to be made after the tenth anniversary of the original adoption of said plan.
Significant
Shareholder Incentive Plan:
In 2016, a significant shareholder established an incentive program (the “Significant Shareholder Incentive
Program”) where he caused to be transferred a total of 5,198,458 shares of the Company’s Series A Preferred
Stock from Tekhill USA LLC, a limited liability company fully owned by the significant shareholder, into the Fred Chang Partners
Trust (the “Trust”). In March and May 2016, the Trust entered into restricted share award agreements
(the “Award Agreements”) with several key executives of the Company, under which the Trust granted a total of
5,090,157 restricted shares of the Company’s Series A Preferred Stock to those executives to be vested over a 15-year
period in equal annual installments on each anniversary date of the grant date. As of December 31, 2016, the Award Agreements
were terminated with a concurrent offer from the significant shareholder to re-establish the Significant Shareholder Incentive
Program. During the year ended December 31, 2017, the re-established incentive program (the “Re-established Significant
Shareholder Incentive Program”) granted a total of 3,898,843 restricted shares of the Company’s Series A Preferred
Stock to a subset of the same recipients with substantially the same terms as those under the Significant Shareholder Incentive
Program. The Re-established Significant Shareholder Incentive Program subsequently modified the vesting period from 15 years to
10 years during the year ended December 31, 2017, which did not have a significant impact on the consolidated financial statements.
|
(b)
|
Stock Compensation Valuation Assumptions
|
The
fair value of each option award granted under the Incentive Award Plan is estimated using the Black-Scholes-Merton option pricing
model on the date of grant. This model requires the input of highly complex and subjective variables. These variables include,
but are not limited to, the expected stock price volatility over the expected life of the awards and actual and projected employee
stock option exercise behavior with the following inputs: risk-free interest rate, expected stock price volatility, forfeiture
rate, expected term, dividend yield and weighted average grant date fair value.
The
risk-free interest rate is based on the currently available rate on a U.S. Treasury zero-coupon issue with a remaining term
equal to the expected term of the option converted into a continuously compounded rate. The expected volatility of stock options
is based on a review of the historical volatility and the implied volatility of a peer group of publicly traded companies comparable
to the Company. In evaluating comparability, the Company considered factors such as industry, stage of life cycle, and size. After
the adoption of Accounting Standards Update No. 2016-09 Compensation-Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting as of January 1, 2017, the Company elected to continue to estimate the total number of awards
for which the requisite service period will not be rendered based on historical data. The expected term assumption used by the
Company reflects the application of the simplified method set out in Securities and Exchange Commission Staff Accounting Bulletin
No. 110, Shared-Based Payment. The simplified method defines the expected term of an option as the average of the contractual
term of the options and the weighted average vesting period for all option tranches. The dividend yield reflects the Company’s
dividend rate on the date of grant. The Company did not grant any stock options during the six months ended June 30, 2019. For
the six months ended June 30, 2020, the Company granted stock options representing the right to purchase a total of 8,888,000 shares
of the Company’s Class A Common Stock.
The
cost of the restricted shares is determined using the fair value of the Company’s Series A Convertible Preferred Stock
on the date of the grant. Compensation expense is recognized on a straight-line basis over the vesting period. There was no grant
of the restricted shares under the Re-established Significant Shareholder Incentive Program during the six months ended June 30,
2020 and 2019.
|
(c)
|
Stock Option and Restricted Stock Activity
|
Stock
Option
The
following table summarizes the activity for all stock options granted:
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
average
|
|
|
contractual
|
|
|
intrinsic
|
|
|
|
Options
|
|
|
exercise
|
|
|
terms
|
|
|
value
|
|
|
|
outstanding
|
|
|
price
|
|
|
(in years)
|
|
|
(in thousands)
|
|
Outstanding at December 31, 2019
|
|
|
2,602,178
|
|
|
$
|
2.54
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant
|
|
|
8,888,000
|
|
|
|
3.77
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(6,784
|
)
|
|
|
4.24
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2020
|
|
|
11,483,394
|
|
|
$
|
3.49
|
|
|
|
8.69
|
|
|
$
|
2,330
|
|
Vested and expected to vest at June 30, 2020
|
|
|
10,594,594
|
|
|
$
|
3.47
|
|
|
|
8.58
|
|
|
$
|
2,330
|
|
Exercisable at June 30, 2020
|
|
|
2,595,394
|
|
|
$
|
2.53
|
|
|
|
4.31
|
|
|
$
|
2,330
|
|
During
the six months ended June 30, 2020 and 2019, the total intrinsic value of stock options exercised was both $0, and the compensation
expense for stock options granted included in “Selling, general and administrative expenses” in the consolidated statements
of operations totaled $0.2 million and $0.1 million, respectively.
As
of June 30, 2020 and December 31, 2019, there were $8.1 million and $0.1 million, respectively, of unrecognized compensation
costs related to nonvested options. The weighted average remaining vesting term of the stock option was 3.96 years as of June
30, 2020.
Restricted
Stock
The
following table summarizes the activity for restricted stock issued from the Fred Chang Partners Trust under the Re-established
Significant Shareholder Incentive Program:
|
|
|
|
|
Weighted-
average
|
|
|
|
Shares
|
|
|
grant date
fair value
|
|
Unvested at December 31, 2019
|
|
|
2,358,561
|
|
|
$
|
1.58
|
|
Vested
|
|
|
(112,313
|
)
|
|
|
1.58
|
|
Cancelled
|
|
|
(2,246,248
|
)
|
|
|
1.58
|
|
Unvested at June 30, 2020
|
|
|
-
|
|
|
$
|
1.58
|
|
During
the six months ended June 30, 2020 and 2019, the compensation expense for restricted shares granted included in “Selling,
general and administrative expenses” in the consolidated statement of operations were immaterial.
At
March 31, 2020, all unvested restricted stocks were cancelled. As of June 30, 2020, the Company had no unrecognized compensation
costs related to restricted stock. As of December 31, 2019, there were $3.4 million of unrecognized compensation costs related
to restricted stock.
|
(d)
|
Common Stock Valuations
|
The
exercise prices of stock options and restricted stock granted were determined contemporaneously by the Company’s Board of
Directors based on the estimated fair value of the underlying Class A Common Stock and Series A convertible Preferred Stock.
The Class A Common Stock and Series A convertible Preferred Stock valuations were based on a combination of the income approach
and two market approaches, which were used to estimate the total enterprise value of the Company. The income approach quantifies
the present value of the future cash flows that management expects to achieve from continuing operations. These future cash flows
are discounted to their present values using a rate corresponding to the Company’s estimated weighted average cost of capital.
The Company’s weighted average cost of capital is calculated by weighting the required return on interest-bearing debt and
common equity capital in proportion to their estimated percentages in the Company’s capital structure. The market approach
considers multiples of financial metrics based on acquisition values or quoted trading prices of comparable public companies.
An implied multiple of key financial metrics based on the trading and transaction values of publicly traded peers is applied to
the Company’s similar metrics in order to derive an indication of value. A marketability discount is then applied to reflect
the fact that the Company’s Class A Common Stock and Series A convertible Preferred Stock are not traded on a public
exchange. The amount of the discount varies based on management’s expectation of effecting a public offering of the Company’s
Class A Common Stock within the ensuing 12 months. The enterprise value indications from the income approach and market approaches
were used to estimate the fair value of the Company’s Class A Common Stock and Series A convertible Preferred Stock
in the context of the Company’s capital structure as of each valuation date. Each valuation was based on certain estimates
and assumptions. If different estimates and assumptions had been used, these valuations could have been different.
|
(14)
|
Net
Income (Loss) per Share
|
Basic
earnings per share of Common Stock is calculated by dividing net income available to holders of Common stock by the weighted average
number of shares of Common Stock outstanding for the period. Under the two-class method, undistributed net income is allocated
between shares of Common Stock and participating securities based on their participating rights. The diluted earnings per share
of Common Stock calculation assumes the issuance of all dilutive potential common shares outstanding. Dilutive potential Common
Stock consists of incremental shares of Class A Common Stock issuable upon the exercise of the stock options and upon conversion
of all Preferred Stock.
In
calculating the numerator of diluted earnings per share under the two-class method, undistributed net income is re-allocated to
the common shares and participating securities that are assumed to be outstanding for diluted earnings per share purposes. In
doing so, the undistributed net income allocated to common shares and participating securities for purposes of basic earnings
per share is re-allocated in accordance with the sequencing rules of the FASB authoritative guidance to give effect to the potential
common shares and participating securities that are assumed to be outstanding for purpose of computing diluted earnings per share.
Basic
and diluted net loss per share is presented using the two-class method required for participating securities: Series AA convertible
Preferred Stock, Series A convertible Preferred Stock and Class A Common Stock. Basic net loss per share is computed using the
weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share is computed using
the weighted-average number of shares of common stock and, if dilutive, common stock equivalents outstanding during the period.
The Company’s common stock equivalents consist of shares of common stock issuable upon the exercise of stock options and
the conversion of Series AA convertible Preferred Stock and Series A convertible Preferred Stock. For the periods in which the
Company has generated net loss, the basic and diluted net loss per share are the same because common stock equivalents are excluded
from diluted net loss per share due to their antidilutive impact.
The
following table summarizes the calculation of basic and diluted net income (loss) per common share (in thousands, except per share
data):
|
|
Six Months Ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Reconciliation of net income attributable to Newegg Inc. to undistributed net income allocable to common stockholders for the basic computation
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
18,939
|
|
|
$
|
(15,469
|
)
|
Less: undistributed net income allocable to Series A and Series AA convertible Preferred Stocks
|
|
|
(18,682
|
)
|
|
|
-
|
|
Undistributed net income (loss) allocable to common stockholders of Newegg Inc. for basic earnings per share
|
|
$
|
257
|
|
|
$
|
(15,469
|
)
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
849
|
|
|
|
849
|
|
Basic earnings (loss) per share
|
|
$
|
0.30
|
|
|
$
|
(18.22
|
)
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
849
|
|
|
|
849
|
|
Dilutive effect of stock options
|
|
|
728
|
|
|
|
-
|
|
Diluted weighted average shares outstanding
|
|
|
1,577
|
|
|
|
849
|
|
Diluted earnings (loss) per share
|
|
$
|
0.16
|
|
|
$
|
(18.22
|
)
|
The
following shares were excluded from the calculation of diluted net loss per share calculation as their effect would have been
anti-dilutive (in thousands):
|
|
Six Months Ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Stock options
|
|
|
1,308
|
|
|
|
3,834
|
|
Common stock issuable from the conversion of Series AA convertible Preferred Stock and Series A convertible Preferred Stock
|
|
|
61,346
|
|
|
|
61,346
|
|
|
(15)
|
Commitments
and Contingencies
|
From
time to time, the Company is a party to various lawsuits, claims, and other legal proceedings that arise in the ordinary course
of business. The Company discloses contingencies deemed to be reasonably possible and accrues loss contingencies when, in consultation
with legal advisors, it is concluded that a loss is probable and reasonably estimable.
In February 2018, the Commonwealth of Massachusetts Department
of Revenue issued a notice of intent to assess sales/use taxes on the Company for the period from October 1, 2017 through October
31, 2017 for a total assessment of $652,255 including penalties and interest. The Department of Revenue subsequently reduced this
amount to $295,911. In May 2020, the Company received from the Commonwealth of Massachusetts Department of Revenue another notice
of assessment for sales and use taxes for the months of November 2017 through September 2018 in the amount of $2,721,370, including
penalties and interest. The Company has appealed these assessments and the Company intends to vigorously protest them. The outcome
of this matter or the timing of such payments, if any, cannot be predicted at this time.
In
December 2014, an individual plaintiff sued Newegg.com Americas Inc. (“Newegg.com Americas”) in Superior Court in
Los Angeles County, California, alleging that Newegg.com Americas had engaged in deceptive advertising practices and seeking to
certify a class action. In 2016, the Court sustained Newegg.com Americas’ demurrer to the plaintiff’s claims without
leave to amend. The plaintiff appealed, and in July 2018 the Court of Appeal reversed the decision of the trial court, thus allowing
the case to proceed. The matter is now pending in the trial court. The Company does not believe that a loss is probable and intends
to vigorously defend itself and its subsidiaries. Depending on the amount and timing, an unfavorable result could materially affect
the Company’s business, consolidated results of operations, financial position or cash flows.
In
addition to the legal proceedings mentioned above, from time to time, the Company may become involved in legal proceedings arising
in the ordinary course of business. There can be no assurance with respect to the outcome of any legal proceeding. The outcome
of the litigation described above, the other pending lawsuits filed against the Company and other claims, including those that
may be made in the future, may be adverse to the Company, and the monetary liability and other negative operational or financial
impact may be material to the Company’s consolidated results of operations, financial position, and cash flows.
|
(16)
|
Employee
Benefit Plan
|
The
Company maintains a 401(k) defined-contribution plan for the benefit of its eligible employees. All full-time domestic employees
who have completed at least six months of service and are at least 18 years of age are eligible to participate in the plan.
Eligible employees may elect to contribute up to 100% of their eligible compensation. The Company’s matching contributions
are made at the discretion of the Company’s Board of Directors. In addition, the Company may make a profit-sharing contribution
at the sole discretion of the Board of Directors. Total contributions by the Company for the six months ended June 30, 2020 and
2019 were $1.0 million and $0.9 million, respectively. Contributions made by the Company are immediately
100% vested.
|
(17)
|
Related
Party Transactions
|
Investment
On
April 17, 2018, the Company acquired an equity interest in Mountain Capital Fund L.P. from Pegasus. The sole owner of Pegasus
is the spouse of a member of the Company’s Board of Directors.
Loans
to Affiliate
On
December 17, 2019, the Company loaned $15.0 million to Digital Grid under a term loan agreement with a maturity date of April
30, 2020 and a fixed interest rate of 5.0% (the “$15.0 Million Loan”). The $15.0 Million Loan was subsequently
extended to December 31, 2020.
During
the six months ended June 30, 2020, the Company recorded interest income of $0.4 million from loans to affiliate in interest income
in the consolidated statement of operations. As of June 30, 2020 and December 31, 2019, the amount of interest receivable as a
component of “Dues from related parties” in the consolidated balance sheets was immaterial.
Loans
from Affiliate
On
January 14, 2019, the Company entered into three loan agreements with BARD Company Limited, an entity affiliated with our Chief
Executive Officer, pursuant to which the Company borrowed a total of $15.0 million. For all of the three loans, the maturity date
was March 31, 2019 unless extended to April 30, 2019 in accordance with the terms of the loan agreements, and the interest rate
is 6% per annum. The Company repaid the three loans in their entirety as of March 8, 2019.
Sales
to Related Parties
Due
from related parties and net sales to related parties primarily reflect sales of finished goods and services with the exception
of loans to affiliate as discussed above.
As
of both June 30, 2020 and December 31, 2019, due from related parties represent amounts receivable of $1.5 million,
due from Digital Grid. Digital Grid is determined to be a related
party by virtue of common control. There were no sales to this related party during the six months ended June 30, 2020 and
2019.
As
of June 30, 2020 and December 31, 2019, due from related parties represent amounts receivable of $4.3 million and $4.3
million, respectively, due from Connect Technova Inc. (“Connect Technova”). Connect Technova is determined
to be a related party by virtue of common control. Sales during the six months ended June 30, 2020 and 2019 to
this related party were immaterial.
As
of June 30, 2020 and December 31, 2019, amount due to related parties was immaterial.
The Company’s Chief
Executive Officer, who is the chief operating decision maker (“CODM”) reviews financial information presented on a
consolidated basis. There are no segment managers who are held accountable for operations, operating results and plans for levels
or components below the consolidated unit level. The Company considers itself to be operating within one reportable segment.
The following table summarizes
net sales from external customers (in thousands):
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
United States
|
|
$
|
780,689
|
|
|
$
|
715,461
|
|
Canada
|
|
|
57,200
|
|
|
|
61,772
|
|
Rest of world
|
|
|
24,810
|
|
|
|
20,193
|
|
Total
|
|
$
|
862,700
|
|
|
$
|
797,426
|
|
The following table summarizes
net sales by product category and revenue streams (in thousands):
|
|
Six Months Ended
June 30,
2020
|
|
Net Sales by Product Category
|
|
|
|
|
Components & Storage
|
|
$
|
546,296
|
|
Computer System
|
|
|
148,447
|
|
Office Solutions
|
|
|
64,692
|
|
Others
|
|
|
103,265
|
|
Total Net Sales
|
|
$
|
862,700
|
|
|
|
|
|
|
Net Sales by Revenue Stream
|
|
|
|
|
Direct sales revenues (1)
|
|
$
|
812,150
|
|
Marketplace revenues (2)
|
|
|
33,529
|
|
Services revenues (3)
|
|
|
17,020
|
|
Total Net Sales
|
|
$
|
862,700
|
|
|
(1)
|
Includes all first-party product sales where Newegg
owns and sells its own inventories within its websites and third-party marketplace platforms.
|
|
(2)
|
Includes all the commission revenues earned from sales
made by sellers on its websites.
|
|
(3)
|
Includes all revenues recognized from providing services
to customers, including third-party logistics services, advertising services, and all other third-party seller services.
|
The following table summarizes
net property, plant and equipment by country (in thousands):
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
United States
|
|
$
|
19,414
|
|
|
$
|
20,650
|
|
Canada
|
|
|
289
|
|
|
|
447
|
|
China
|
|
|
25,395
|
|
|
|
26,033
|
|
Total
|
|
$
|
45,098
|
|
|
$
|
47,130
|
|
|
(19)
|
COVID-19 Considerations
|
|
(1)
|
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community as the virus spread globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.
|
|
(2)
|
On March 27, 2020, the ‘Coronavirus Aid, Relief, and Economic Security Act’ (the CARES Act) was signed into law by the president. The CARES act provides several favorable tax provisions. The Company evaluated the impacts of CARES Act and determined it has no material impact to the income tax provision.
|
|
(3)
|
The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s financial condition, liquidity and future results of operation. Management is actively monitoring the global situation on its financial condition, liquidity, operations, suppliers, industry and workforce. Given the almost daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition or liquidity for fiscal year 2020.
|
|
(4)
|
The
Company’s online business and warehouses remain active to serve our customers during the COVID-19 outbreak, and for the
six months ended June 30, 2020, the Company has seen increased demand for its products and services as compared with the six months
ended June 30, 2019.
|
|
(5)
|
However, the course of the COVID-19 outbreak remains uncertain, and a prolonged global economic slowdown and increased unemployment could have a material adverse impact on economic and market conditions, which in turn could lead to a reduced demand for the Company’s products and services.
|
|
(6)
|
As a consequence of the COVID-19 outbreak, the Company has experienced occasional supply constraints, primarily in the form of delays in shipment of inventory. The Company has also experienced some increases in the cost of certain products, as well as a drop in promotions by some manufacturers. While the Company considers such events to be relatively minor and temporary, continued supply chain disruptions could lead to delayed receipt of, or shortages in, inventory and higher costs, and negatively impact sales in fiscal year 2020.
|
Although the Company cannot estimate
the length or gravity of the impact of the COVID-19 outbreak at this time, if the pandemic continues, it may have an adverse effect
on the Company’s results of future operations, financial position and liquidity in fiscal year 2020.
The
Company has evaluated subsequent events from the balance sheet date through October 23, 2020, the date the consolidated financial
statements were issued.
|
(1)
|
In September 2020, the Company paid back the revolving
credit facility of $1.4 million in full.
|
|
(2)
|
In October 2020, the Company entered into a lease
agreement for 275,985 square feet of office and warehouse space, with commencement date on November 1, 2020. The lease has a 100
month term, and rental cost of approximately $193,000 per month.
|
NEWEGG
INC.
Consolidated
Financial Statements
December 31,
2019 and 2018
(With
Independent Auditors’ Report Thereon)
NEWEGG
INC.
Table
of Contents
Report
of Independent Registered Public Accounting Firm
Stockholders and Board of Directors
Newegg Inc.
City of Industry, CA
Opinion on the Consolidated Financial Statements
We have audited the accompanying
consolidated balance sheet of Newegg Inc. and subsidiaries (the “Company”) as of December 31, 2019, the related
consolidated statements of operations, comprehensive loss, temporary equity and equity (deficit), and cash flows for the year then
ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our
opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the
Company at December 31, 2019, and the results of its operations and its cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States of America.
We have also audited the retrospective
adjustments to the 2018 and 2017 consolidated financial statements to reclassify the Series A and AA convertible preferred stock
to temporary equity as described in Note 2(y) to the consolidated financial statements. In our opinion, such retrospective adjustments
are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the 2018 and
2017 consolidated financial statements of the Company other than with respect to the retrospective adjustments, and accordingly,
we do not express an opinion or any other form of assurance on the 2018 and 2017 consolidated financial statements taken as a
whole.
Change in Accounting Method Related to Leases
As discussed in Note 2 to the consolidated
financial statements, the Company has changed its method of accounting for leases during the year ended December 31, 2019, due
to the adoption of Accounting Standards Codification 842, “Leases.”
Basis for Opinion
These consolidated financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated
financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with
the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required
to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are
required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures
to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe
that our audit provides a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company’s auditor since 2019.
Los Angeles, California
October 23, 2020, except for the retrospective adjustments
to the classification of the Series A and AA convertible preferred stock to temporary equity for the 2018 and 2017 consolidated
financial statements, as to which the date is December 9, 2020.
Report of Independent Registered Public
Accounting Firm
To the Stockholders and Board of Directors
Newegg Inc.:
Opinion on the Consolidated Financial Statements
We have audited, before the effects of
the adjustment to retrospectively apply the change in the classification of the Series A convertible Preferred Stock and Series
AA convertible Preferred Stock to temporary equity as described in Note 2(y), the consolidated balance sheet of Newegg Inc. and
subsidiaries (the Company) as of December 31, 2018, the related consolidated statements of operations, comprehensive loss,
temporary equity and equity (deficit), and cash flows for each of the years in the two-year period ended December 31, 2018,
and the related notes (collectively, the consolidated financial statements). The 2018 and 2017 consolidated financial statements
before the effects of the adjustment described in Note 2(y) are not presented herein. In our opinion, the consolidated financial
statements, before the effects of the adjustments to retrospectively apply the change in the classification of the Series A convertible
Preferred Stock and Series AA convertible Preferred Stock to temporary equity as described in Note 2(y), present fairly, in all
material respects, the financial position of the Company as of December 31, 2018, and the results of its operations and its
cash flows for each of the years in the two-year period ended December 31, 2018, in conformity with U.S. generally accepted
accounting principles.
We were not engaged
to audit, review, or apply any procedures to the adjustments to retrospectively apply the change in the classification of the Series
A convertible Preferred Stock and Series AA convertible Preferred Stock to temporary equity as described in Note 2(y) and, accordingly,
we do not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly
applied. Those adjustments were audited by other auditors.
Basis for Opinion
These consolidated financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based
on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures
to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe
that our audit provides a reasonable basis for our opinion.
/s/ KPMG LLP
We served as the Company’s auditor from 2014 to 2019.
Irvine, California
April 18, 2019
NEWEGG
INC.
Consolidated
Balance Sheets
December
31, 2019 and 2018
(In
thousands, except par value)
|
|
2019
|
|
|
2018
|
|
Assets
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
79,750
|
|
|
$
|
56,437
|
|
Restricted cash
|
|
|
797
|
|
|
|
242
|
|
Accounts receivable, net
|
|
|
54,185
|
|
|
|
88,161
|
|
Inventories
|
|
|
109,509
|
|
|
|
223,908
|
|
Income taxes receivable
|
|
|
2,521
|
|
|
|
2,520
|
|
Prepaid expenses and other current assets
|
|
|
14,206
|
|
|
|
17,611
|
|
Due from related parties
|
|
|
21,654
|
|
|
|
5,618
|
|
Total current assets
|
|
|
282,622
|
|
|
|
394,497
|
|
Property and equipment, net
|
|
|
47,130
|
|
|
|
57,442
|
|
Noncurrent deferred tax assets
|
|
|
1,041
|
|
|
|
34
|
|
Equity investment
|
|
|
6,457
|
|
|
|
59,617
|
|
Investment at cost
|
|
|
15,000
|
|
|
|
15,000
|
|
Right of use assets
|
|
|
38,099
|
|
|
|
—
|
|
Other noncurrent assets
|
|
|
6,448
|
|
|
|
6,434
|
|
Total assets
|
|
$
|
396,797
|
|
|
$
|
533,024
|
|
Liabilities, Temporary Equity and Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
165,653
|
|
|
$
|
266,426
|
|
Accrued liabilities
|
|
|
49,396
|
|
|
|
44,949
|
|
Deferred revenue
|
|
|
25,846
|
|
|
|
37,078
|
|
Line of credit
|
|
|
6,379
|
|
|
|
42,867
|
|
Current portion of long-term debt
|
|
|
258
|
|
|
|
248
|
|
Lease liabilities - current
|
|
|
8,585
|
|
|
|
—
|
|
Total current liabilities
|
|
|
256,117
|
|
|
|
391,568
|
|
Long-term debt, less current portion
|
|
|
2,223
|
|
|
|
15,424
|
|
Income taxes payable
|
|
|
675
|
|
|
|
650
|
|
Lease liabilities - noncurrent
|
|
|
30,643
|
|
|
|
—
|
|
Other liabilities
|
|
|
66
|
|
|
|
929
|
|
Total liabilities
|
|
|
289,724
|
|
|
|
408,571
|
|
Commitments and contingencies (note 15)
|
|
|
|
|
|
|
|
|
Temporary equity:
|
|
|
|
|
|
|
|
|
Series AA convertible Preferred Stock, $.001 par value; 25,890 shares authorized as of both December 31, 2019 and 2018; 24,870 shares issued and outstanding as of both December 31, 2019 and 2018
|
|
|
187,146
|
|
|
|
187,146
|
|
Series A convertible Preferred Stock, $.001 par value; 59,000 shares authorized; 36,476 shares issued and outstanding as of both December 31, 2019 and 2018
|
|
|
655
|
|
|
|
655
|
|
Total Temporary equity
|
|
|
187,801
|
|
|
|
187,801
|
|
Equity (deficit):
|
|
|
|
|
|
|
|
|
Class A Common Stock, $.001 par value; 142,000 shares authorized; 849 shares issued and outstanding as of both December 31, 2019 and 2018
|
|
|
1
|
|
|
|
1
|
|
Class B Common Stock, $.001 par value; 59,000 shares authorized; none issued or outstanding as of December 31, 2019 and 2018
|
|
|
—
|
|
|
|
—
|
|
Additional paid-in capital
|
|
|
744
|
|
|
|
—
|
|
Accumulated other comprehensive income (loss)
|
|
|
(505
|
)
|
|
|
628
|
|
Accumulated deficit
|
|
|
(80,968
|
)
|
|
|
(63,977
|
)
|
Total deficit
|
|
|
(80,728
|
)
|
|
|
(63,348
|
)
|
Total liabilities, temporary equity and equity
|
|
$
|
396,797
|
|
|
$
|
533,024
|
|
See accompanying notes to consolidated financial statements.
NEWEGG
INC.
Consolidated
Statements of Operations
Years
ended December 31, 2019, 2018 and 2017
(In
thousands, except per share data)
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Net sales
|
|
$
|
1,533,928
|
|
|
$
|
2,022,437
|
|
|
$
|
2,158,131
|
|
Cost of sales
|
|
|
1,369,054
|
|
|
|
1,816,834
|
|
|
|
1,925,990
|
|
Gross profit
|
|
|
164,874
|
|
|
|
205,603
|
|
|
|
232,141
|
|
Other operating income/(expense)
|
|
|
28,314
|
|
|
|
(1,555
|
)
|
|
|
170
|
|
Selling, general, and administrative expenses
|
|
|
229,192
|
|
|
|
247,174
|
|
|
|
246,106
|
|
Loss from operations
|
|
|
(36,004
|
)
|
|
|
(43,126
|
)
|
|
|
(13,795
|
)
|
Interest income
|
|
|
586
|
|
|
|
1,484
|
|
|
|
1,801
|
|
Interest expense
|
|
|
(2,945
|
)
|
|
|
(1,595
|
)
|
|
|
(1,096
|
)
|
Other income, net
|
|
|
4,184
|
|
|
|
1,599
|
|
|
|
1,216
|
|
Gain from sale of and equity income from equity method investments
|
|
|
21,777
|
|
|
|
9,617
|
|
|
|
154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(12,402
|
)
|
|
|
(32,021
|
)
|
|
|
(11,720
|
)
|
Provision for income taxes
|
|
|
4,589
|
|
|
|
1,582
|
|
|
|
247
|
|
Net loss
|
|
$
|
(16,991
|
)
|
|
$
|
(33,603
|
)
|
|
$
|
(11,967
|
)
|
Less: Dividend or deemed dividend paid to Series A convertible Preferred Stock
|
|
|
-
|
|
|
|
(19,960
|
)
|
|
|
(19,247
|
)
|
Net loss attributable to common stock
|
|
$
|
(16,991
|
)
|
|
$
|
(53,562
|
)
|
|
$
|
(31,214
|
)
|
Net loss per share, basic and diluted
|
|
$
|
(20.01
|
)
|
|
$
|
(80.68
|
)
|
|
$
|
(44.04
|
)
|
Weighted average number of common stock outstanding used in computing per share amounts, basic
and diluted
|
|
|
849
|
|
|
|
664
|
|
|
|
709
|
|
See
accompanying notes to consolidated financial statements.
NEWEGG INC.
Consolidated Statements
of Comprehensive Loss
Years ended December
31, 2019, 2018 and 2017
(In thousands)
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Net loss
|
|
$
|
(16,991
|
)
|
|
$
|
(33,603
|
)
|
|
$
|
(11,967
|
)
|
Foreign currency translation adjustments
|
|
|
(1,133
|
)
|
|
|
(2,974
|
)
|
|
|
2,222
|
|
Comprehensive loss
|
|
$
|
(18,124
|
)
|
|
$
|
(36,577
|
)
|
|
$
|
(9,745
|
)
|
See
accompanying notes to consolidated financial statements.
NEWEGG
INC.
Consolidated
Statements of Temporary Equity and Equity (Deficit)
Years
ended December 31, 2019, 2018 and 2017
(In
thousands)
|
|
Series
B-1
|
|
|
Series
B-2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
redeemable
|
|
|
redeemable
|
|
|
Series
AA
|
|
|
Series
A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible
|
|
|
convertible
|
|
|
convertible
|
|
|
convertible
|
|
|
|
|
|
Class
A
|
|
|
|
|
|
Accumulated
|
|
|
(Accumulated
|
|
|
|
|
|
|
preferred
|
|
|
preferred
|
|
|
preferred
|
|
|
preferred
|
|
|
Total
|
|
|
common
|
|
|
Additional
|
|
|
other
|
|
|
deficit)/
|
|
|
|
|
|
|
stock
|
|
|
stock
|
|
|
stock
|
|
|
stock
|
|
|
temporary
|
|
|
stock
|
|
|
paid-In
|
|
|
comprehensive
|
|
|
Retained
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
equity
|
|
|
Shares
|
|
|
Par value
|
|
|
capital
|
|
|
income
|
|
|
earnings
|
|
|
equity
|
|
Balance at December
31, 2016
|
|
|
—
|
|
|
$
|
2,637
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
42,898
|
|
|
$
|
770
|
|
|
$
|
3,407
|
|
|
|
709
|
|
|
$
|
1
|
|
|
$
|
30,493
|
|
|
$
|
1,380
|
|
|
$
|
7,094
|
|
|
$
|
38,968
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(11,967
|
)
|
|
|
(11,967
|
)
|
Other comprehensive
income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,222
|
|
|
|
—
|
|
|
|
2,222
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,996
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,996
|
|
Issuance of Series AA
convertible Preferred Stock, net of issuance costs
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
24,870
|
|
|
|
187,146
|
|
|
|
—
|
|
|
|
—
|
|
|
|
187,146
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Deemed dividend
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(19,247
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(19,247
|
)
|
Redemption
of Series B-1 redeemable convertible Preferred Stock
|
|
|
—
|
|
|
|
(2,637
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,637
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance at December
31, 2017
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
24,870
|
|
|
$
|
187,146
|
|
|
|
42,898
|
|
|
$
|
770
|
|
|
$
|
187,916
|
|
|
|
709
|
|
|
$
|
1
|
|
|
$
|
15,242
|
|
|
$
|
3,602
|
|
|
$
|
(4,873
|
)
|
|
$
|
13,972
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(33,603
|
)
|
|
|
(33,603
|
)
|
Other comprehensive
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,974
|
)
|
|
|
—
|
|
|
|
(2,974
|
)
|
Issuance of Common Stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
234
|
|
|
|
—
|
|
|
|
380
|
|
|
|
—
|
|
|
|
—
|
|
|
|
380
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,895
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,895
|
|
Deemed dividend
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(19,517
|
)
|
|
|
—
|
|
|
|
(443
|
)
|
|
|
(19,960
|
)
|
Share repurchases
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,422
|
)
|
|
|
(115
|
)
|
|
|
(115
|
)
|
|
|
(94
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(25,058
|
)
|
|
|
(25,058
|
)
|
Balance at December
31, 2018
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
24,870
|
|
|
$
|
187,146
|
|
|
|
36,476
|
|
|
$
|
655
|
|
|
$
|
187,801
|
|
|
|
849
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
628
|
|
|
$
|
(63,977
|
)
|
|
$
|
(63,348
|
)
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(16,991
|
)
|
|
|
(16,991
|
)
|
Other comprehensive
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,133
|
)
|
|
|
—
|
|
|
|
(1,133
|
)
|
Stock-based
compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
744
|
|
|
|
—
|
|
|
|
—
|
|
|
|
744
|
|
Balance at December
31, 2019
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
24,870
|
|
|
$
|
187,146
|
|
|
|
36,476
|
|
|
$
|
655
|
|
|
$
|
187,801
|
|
|
|
849
|
|
|
$
|
1
|
|
|
$
|
744
|
|
|
$
|
(505
|
)
|
|
$
|
(80,968
|
)
|
|
$
|
(80,728
|
)
|
See
accompanying notes to consolidated financial statements.
NEWEGG
INC.
Consolidated
Statements of Cash Flows
Years
ended December 31, 2019, 2018 and 2017
(In
thousands)
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(16,991
|
)
|
|
$
|
(33,603
|
)
|
|
$
|
(11,967
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
10,708
|
|
|
|
10,230
|
|
|
|
10,625
|
|
Bad debt expense
|
|
|
882
|
|
|
|
566
|
|
|
|
1,640
|
|
Provision for obsolete and excess inventory
|
|
|
4,278
|
|
|
|
3,721
|
|
|
|
3,590
|
|
Stock-based compensation
|
|
|
744
|
|
|
|
3,895
|
|
|
|
3,996
|
|
Gain on equity method investment
|
|
|
(21,777
|
)
|
|
|
(9,617
|
)
|
|
|
(154
|
)
|
Deferred income taxes
|
|
|
(1,007
|
)
|
|
|
1,173
|
|
|
|
(694
|
)
|
Loss (Gain) on disposal of property and equipment
|
|
|
(29,726
|
)
|
|
|
(30
|
)
|
|
|
284
|
|
Changes in operating assets and liabilities:
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
33,104
|
|
|
|
(3,481
|
)
|
|
|
746
|
|
Inventories
|
|
|
110,140
|
|
|
|
(6,252
|
)
|
|
|
(16,882
|
)
|
Prepaid expenses and other assets
|
|
|
4,525
|
|
|
|
2,158
|
|
|
|
1,635
|
|
Accounts payable
|
|
|
(100,733
|
)
|
|
|
(18,523
|
)
|
|
|
(25,898
|
)
|
Accrued liabilities and other liabilities
|
|
|
8,038
|
|
|
|
(5,946
|
)
|
|
|
4,862
|
|
Deferred revenue
|
|
|
(11,226
|
)
|
|
|
(5,223
|
)
|
|
|
10,087
|
|
Dues from affiliate
|
|
|
(1,036
|
)
|
|
|
(1,955
|
)
|
|
|
(3,089
|
)
|
Net cash used in operating activities
|
|
|
(10,077
|
)
|
|
|
(62,887
|
)
|
|
|
(21,219
|
)
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans to affiliate
|
|
|
(15,000
|
)
|
|
|
(20,000
|
)
|
|
|
(62,574
|
)
|
Loan repayments from affiliate
|
|
|
-
|
|
|
|
70,000
|
|
|
|
12,000
|
|
Insurance settlement proceeds
|
|
|
900
|
|
|
|
-
|
|
|
|
-
|
|
Acquisition of equity investments
|
|
|
(7,000
|
)
|
|
|
(58,000
|
)
|
|
|
-
|
|
Payments to acquire property and equipment
|
|
|
(10,283
|
)
|
|
|
(8,046
|
)
|
|
|
(5,413
|
)
|
Proceeds on disposal of property and equipment
|
|
|
38,550
|
|
|
|
-
|
|
|
|
-
|
|
Sale of equity method investment
|
|
|
77,515
|
|
|
|
-
|
|
|
|
876
|
|
Net cash provided by (used in) investing
activities
|
|
|
84,682
|
|
|
|
(16,046
|
)
|
|
|
(55,111
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
168,588
|
|
Borrowings under line of credit
|
|
|
98,001
|
|
|
|
123,289
|
|
|
|
63,304
|
|
Repayments under line of credit
|
|
|
(134,440
|
)
|
|
|
(88,709
|
)
|
|
|
(67,524
|
)
|
Borrowings of long-term debt
|
|
|
-
|
|
|
|
13,000
|
|
|
|
-
|
|
Repayments of long-term debt
|
|
|
(13,254
|
)
|
|
|
(251
|
)
|
|
|
(17,748
|
)
|
Loan from affiliate
|
|
|
15,000
|
|
|
|
-
|
|
|
|
-
|
|
Repayment of loan from affiliate
|
|
|
(15,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Debt issuance costs
|
|
|
-
|
|
|
|
(620
|
)
|
|
|
-
|
|
Proceeds from exercise of stock options
|
|
|
-
|
|
|
|
380
|
|
|
|
-
|
|
Payment for shares buyback
|
|
|
-
|
|
|
|
(45,134
|
)
|
|
|
-
|
|
Redemption of Series B-1 redeemable convertible Preferred Stock
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,637
|
)
|
Net cash provided by (used in) financing activities
|
|
|
(49,693
|
)
|
|
|
1,955
|
|
|
|
143,983
|
|
Foreign currency effect on cash, cash equivalents and restricted cash
|
|
|
(1,044
|
)
|
|
|
(770
|
)
|
|
|
(999
|
)
|
Net increase (decrease) in cash, cash equivalents and restricted cash
|
|
|
23,868
|
|
|
|
(77,748
|
)
|
|
|
66,654
|
|
Cash, cash equivalents and restricted cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
56,679
|
|
|
|
134,427
|
|
|
|
67,773
|
|
End of year
|
|
$
|
80,547
|
|
|
$
|
56,679
|
|
|
$
|
134,427
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
2,634
|
|
|
$
|
1,295
|
|
|
$
|
1,064
|
|
Cash paid for income taxes
|
|
$
|
4,700
|
|
|
$
|
1,034
|
|
|
$
|
1,301
|
|
Supplemental Schedule of Noncash Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment acquisitions included in accounts payable
|
|
$
|
-
|
|
|
$
|
19
|
|
|
$
|
262
|
|
Accrued investment cost included in accrued liabilities
|
|
$
|
2,579
|
|
|
$
|
7,000
|
|
|
$
|
-
|
|
See
accompanying notes to consolidated financial statements.
|
(1)
|
Organization
and Description of Business
|
Newegg
Inc. (“Newegg” or the “Company”) is an electronics-focused e-retailer that offers customers a comprehensive
selection of the latest consumer electronics products, detailed product descriptions and images, “how-to” information,
and customer reviews via its websites. The Company’s strategic focus is based on three key areas: (1) providing a differentiated
and superior online shopping experience, (2) offering reliable and timely product fulfillment, and (3) delivering superior customer
service.
The
Company was incorporated as Newegg Computers in the state of California on February 4, 2000. In June 2005, Newegg
Inc. was incorporated in the state of Delaware. On September 29, 2005, Newegg Computers was merged into Newegg Inc.
under Delaware law with Newegg Inc. being the surviving company.
In
August 2016, the Company entered into a share purchase agreement (the “Purchase Agreement”) with Hangzhou
Liaison Interactive Information Technology Co., Ltd, (“Liaison”), a publicly traded company in China. The transaction
was completed on March 30, 2017. Pursuant to the Purchase Agreement, Liaison purchased 490,706 shares of Class A Common
Stock and 12,782,546 shares of Series A convertible Preferred Stock from existing shareholders for a total consideration
of $91.9 million. Additionally, the Company issued, and Liaison purchased, 24,870,027 shares of Series AA Convertible
Preferred Stock for a total consideration of $172.2 million. Upon the close of this transaction, Liaison, through Digital
Grid (Hong Kong) Technology Co., Limited (“Digital Grid”), a fully-owned subsidiary of Liaison, became the majority
owner of the Company. See Note 12 – Redeemable Convertible Preferred Stock and Convertible Preferred Stock for further discussion
about the Company’s accounting treatment for this transaction.
The
following table details our subsidiaries as of December 31, 2019.
Subsidiary
|
|
Jurisdiction
|
CAOPC,
Inc.
|
|
United
States
|
Chief
Value Limited
|
|
Hong
Kong
|
ChiefValue.com
Inc.
|
|
United
States
|
INOPC,
Inc.
|
|
United
States
|
Magnell
Associate, Inc.
|
|
United
States
|
Newegg
Australia Pty Ltd
|
|
Australia
|
Newegg
Business Inc.
|
|
United
States
|
Newegg
Canada Inc.
|
|
Canada
|
Newegg
Capital International
|
|
Cayman
Islands
|
Newegg
China Inc.
|
|
Cayman
Islands
|
Newegg
Commerce (SH) Co., Ltd
|
|
China
|
Newegg
Enterprises LLC
|
|
United
States
|
Newegg
Europe, Inc.
|
|
Cayman
Islands
|
Newegg Foundation Inc.
|
|
United States
|
Newegg
Greater China (Hong Kong) Company Limited
|
|
Hong
Kong
|
Newegg
International, Inc.
|
|
Cayman Islands
|
Newegg
Logistics Services Inc.
|
|
United
States
|
Newegg Marketplace Inc.
|
|
United States
|
Newegg
North America Inc.
|
|
United
States
|
Newegg
Recoveries LLC
|
|
United
States
|
Newegg
Taiwan Inc.
|
|
Taiwan
|
Newegg
Tech (Chengdu) LTD
|
|
China
|
Newegg
Tech (China) Co., Ltd.
|
|
China
|
Newegg
Tech (Shanghai) Co., Ltd.
|
|
China
|
Newegg
Tech (Xian) Co., Ltd.
|
|
China
|
Newegg
Tech Corporation
|
|
Cayman
Islands
|
Newegg
Tech Inc.
|
|
Cayman
Islands
|
Newegg Tech Inc. (TW)
|
|
Taiwan
|
Newegg
Tech Research and Development Limited
|
|
Hong
Kong
|
Newegg
Tech Services (Shanghai) Co., Ltd.
|
|
China
|
Newegg
Tech Support (Shanghai) Co. Ltd.
|
|
China
|
Newegg
Tech Support Limited
|
|
Hong
Kong
|
Newegg
Tech, Inc.
|
|
United
States
|
Newegg
Texas., Inc.
|
|
United
States
|
Newegg
Trading (China) Co. Ltd.
|
|
China
|
Newegg
Trading Limited
|
|
Hong
Kong
|
Newegg
UK, Ltd.
|
|
United
Kingdom
|
Newegg.com
Americas Inc.
|
|
United
States
|
NJOPC,
Inc.
|
|
United
States
|
Nutrend
Automotive Inc.
|
|
United
States
|
OZZO
Inc.
|
|
United
States
|
OZZO
International
|
|
Cayman
Islands
|
OZZO
International Limited
|
|
Hong
Kong
|
OZZO
Logistics (China) Co., Ltd.
|
|
China
|
Rosewill
Inc.
|
|
United
States
|
Rosewill
Limited
|
|
Hong
Kong
|
TNOPC,
Inc.
|
|
United
States
|
|
(2)
|
Summary
of Significant Accounting Policies
|
|
(a)
|
Principles
of Consolidation
|
The
accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the
United States of America and include the accounts of all consolidated subsidiaries. All intercompany balances and transactions
have been eliminated in consolidation.
The
preparation of the Company’s consolidated financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements
and accompanying notes. Estimates are used for, but not limited to, revenue recognition, incentives earned from vendors, investment
valuation, and stock-based compensation. Actual results could differ from such estimates.
|
(c)
|
Change
in Accounting Principle
|
Effective
January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842), as amended (“ASU 2016-02”), which requires lessees
to recognize a right-of-use (“ROU”) asset and lease liabilities on the balance sheet for most lease arrangements and
expands disclosures about leasing agreements, among other items. The Company adopted ASU 2016-02 using the modified retrospective
transition approach through a cumulative-effect adjustment, which after completing the implementation analysis, resulted in no
adjustment to the Company’s January 1, 2019 beginning retained earnings balance. On January 1, 2019, the Company recognized
$26.4 million of ROU operating lease assets and $28.7 million of operating lease liabilities, including noncurrent operating lease
liabilities of $21.0 million, as a result of the adoption. The difference between the ROU operating lease assets and the operating
lease liabilities was primarily due to previously accrued rent expense relating to periods prior to January 1, 2019, and the remaining
prepaid rent balance as of December 31, 2018. The adoption of ASU 2016-02 did not have an impact on the Company’s consolidated
results of operations or cash flows.
As
part of the adoption, the Company elected the package of practical expedients, which among other things, permits the Company to
not reassess whether any expired or existing contracts are or contain leases, the lease classification for any expired or existing
leases, and the initial direct costs for any existing leases. The Company also elected the practical expedient to not assess whether
existing land easements that were not previously accounted for as lease are or contain a lease under the new guidance. The Company
did not elect the hindsight practice expedient to use hindsight when determining lease term and assessing impairment of ROU lease
assets. See Note 9 – Lease Obligations.
Certain prior period amounts have been reclassified
to conform to the current period presentation.
|
(e)
|
Cash
and Cash Equivalents
|
Cash
and cash equivalents consist primarily of cash on deposit, certificates of deposit, and money market accounts. Cash equivalents
are all highly liquid investments with original maturities of three months or less. Amounts receivable from credit card processors
are also considered cash equivalents as they are both short term and highly liquid in nature, and are typically converted to cash
within three business days. Amounts due to the Company from credit card processors that are classified as cash and cash equivalents
totaled $9.2 million and $11.0 million at December 31, 2019 and 2018, respectively.
Restricted
cash includes amounts deposited in commercial bank time deposits and money market accounts to collateralize the Company’s
deposit obligations. The Company considers restricted cash related to obligations classified as current liabilities to be current
assets and restricted cash related to obligations classified as long-term liabilities as noncurrent assets. At December 31,
2019 and 2018, the Company had $0.8 million and $0.2 million, respectively, in restricted cash, primarily related to collateralization
required pursuant to a lease agreement and the restricted cash account required under the Company’s health insurance plan.
The restricted cash balance is classified as a current asset in the consolidated balance sheets.
The
following is a reconciliation of cash and cash equivalents, and restricted cash reported within the consolidated balance sheets
that sum to the total of the same such amounts shown in the consolidated statements of cash flows (in thousands):
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Cash and cash equivalents
|
|
$
|
79,750
|
|
|
$
|
56,437
|
|
Restricted cash
|
|
|
797
|
|
|
|
242
|
|
Total cash and cash equivalents, and restricted cash
|
|
$
|
80,547
|
|
|
$
|
56,679
|
|
Accounts
receivable consist primarily of vendor receivables, which do not bear interest, and represent amounts due for marketing development
funds, cooperative advertising, price protection and other incentive programs offered to the Company by certain vendors. Accounts
receivable also include receivables from business customers on 30- to 60-day credit terms. The Company estimates an allowance
for doubtful accounts based on historical experience and other factors. Accounts receivable are written off when deemed uncollectible.
Recoveries of accounts receivable previously written off are recorded when received. Amounts receivable from business customers
were $14.6 million and $25.9 million, net of allowances of $0.1 million and $0.4 million, at December 31, 2019 and 2018,
respectively. See further discussion of amounts receivable related to vendor incentive programs under Incentives Earned from Vendors
below.
Inventories,
consisting of products available for sale, are accounted for using the first-in, first-out (FIFO) method and are valued at the
lower of cost and net realizable value. In-bound freight-related costs are included as part of the cost of merchandise held for
resale. In addition, certain vendor payments are deducted from the cost of merchandise held for resale. The Company records an
inventory provision for refurbished, slow-moving, or obsolete inventories based on historical experience and assumptions of future
demand for product. These allowances are released when the related inventory is sold or disposed of. Amounts of inventory allowances
were $3.7 million and $8.8 million, as of December 31, 2019 and 2018, respectively.
|
(i)
|
Property
and Equipment
|
Property
and equipment are stated at cost, less accumulated amortization and depreciation computed using the straight-line method over
the estimated useful life of each asset. Leasehold improvements are amortized over the lesser of the remaining lease term or the
estimated useful life of the assets. Expenditures for repair and maintenance costs are expensed as incurred, and expenditures
for major renewals and improvements are capitalized. Costs incurred during the application development stage of internal-use software
and website development are capitalized and included in property and equipment. When assets are retired or otherwise disposed
of, the cost and accumulated depreciation or amortization are removed from the accounts, and any gain or loss is reflected in
the Company’s consolidated statements of operations. The useful lives for depreciable assets are as follows:
Buildings
|
|
20–39 years
|
Machinery and equipment
|
|
3–7 years
|
Computer and software
|
|
3–5 years
|
Leasehold improvements
|
|
Lesser of lease term or 10 years
|
Capitalized software
|
|
3–5 years
|
Furniture and fixtures
|
|
5–7 years
|
The
Company defines lease agreements at their inception as either operating or finance leases depending on certain defined criteria.
Certain lease agreements may entitle the Company to receive rent holidays, other incentives, or periodic payment increases over
the lease term. Accordingly, rent expense under operating leases is recognized on the straight-line basis over the original lease
term, inclusive of predetermined minimum rent escalations or modifications and rent holidays.
|
(k)
|
Impairment
of Long-Lived Assets
|
The
Company evaluates the recoverability of long-lived assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The impairment test comprises two steps. The first step compares
the carrying amount of the asset to the sum of expected undiscounted future cash flows. If the sum of expected undiscounted future
cash flows exceeds the carrying amount of the asset, no impairment is taken. If the sum of expected undiscounted future cash flows
is less than the carrying amount of the asset, a second step is warranted and an impairment loss is measured as the amount by
which the carrying amount of the asset exceeds its fair value calculated using the present value of estimated net future cash
flows. There have been no impairment losses recognized by the Company to date.
Investments
are accounted for using the equity method if the investment provides the Company has the ability to exercise significant
influence, but not control, over an investee. Significant influence is generally deemed to exist if the Company has an
ownership interest in the voting stock of the investee between 20% and 50%, although other factors are considered in
determining whether the equity method is appropriate. Also, investments in limited partnerships of more than 3% to 5%
are generally viewed as more than minor and are accounted for using the equity method.
The
investments for which the Company is not able to exercise significant influence over the investee and which do not have readily
determinable fair values were accounted for under the cost method prior to the adoption of ASU 2016-01 Financial Instruments-Overall
(Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. Subsequent to the adoption of
this standard as of January 1, 2018, the Company has elected the measurement alternative to measure such investments at cost,
less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or
a similar investment of the same issuer.
|
(m)
|
Fair
Value of Financial Instruments
|
Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. To increase the comparability of fair value measures, a three-tier fair value
hierarchy prioritizes the inputs used in measuring fair value. These tiers include Level 1, defined as observable inputs
such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either
directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exist, therefore,
requiring the Company to develop its own assumptions to determine the best estimate of fair value.
The
carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and accrued and other liabilities approximate
fair value because of the short maturity of these instruments. The carrying amounts of long-term debt and line of credit at December
31, 2019 and 2018 approximates fair value because the interest rate approximates the current market interest rate. The fair value
of these financial instruments was determined using level 2 input.
|
(n)
|
Accumulated
Other Comprehensive Income (Loss)
|
Comprehensive
loss consists of net loss and adjustments to stockholders’ equity for foreign currency translation adjustments. Accumulated
other comprehensive loss consists entirely of foreign currency translation adjustments. The tax impact is not material to the
consolidated financial statements.
The
Company adopted Accounting Standards Update No. 2014-09 Revenue From Contracts with Customers (Topic 606) as of January
1, 2018. Revenue recognition is evaluated through the following five step process:
1.
Identification of the contract with a customer;
2.
Identification of the performance obligations in the contract;
3.
Determination of the transaction price;
4.
Allocation of the transaction price to the performance obligations in the contract; and
5.
Recognition of revenue when or as a performance obligation is satisfied.
Revenue
is recognized when control of a promised product or service transfers to a customer, in an amount that reflects the consideration
to which the Company expects to be entitled in exchange for transferring those products or services. Revenue is recognized net
of sales taxes and discounts. The Company primarily generates revenue through product sales on its platforms and through fees
earned for facilitating marketplace transactions and extended warranty sales on its platforms.
The
Company recognizes revenue on product sales at a point in time to customers when control of the product passes to the customer
upon delivery to the customer or when service is provided. The Company fulfill orders with its owned inventory or with inventory
sourced through its suppliers. The vast majority of the Company’s product sales are fulfilled from its owned inventory.
The amount recognized in revenue represents the expected consideration to be received in exchange for such goods or services.
For orders fulfilled with inventory sourced through the Company’s suppliers, and where the products are shipped directly
by the Company’s supplier to the Company’s customer, the Company evaluates the criteria outlined in ASC 606-10-55,
Principal versus Agent Considerations, in determining whether revenue should be recognized on a gross or net basis. The
Company determined that it is the principal in these transactions as it controls the specific good before it is transferred to
the customer. The Company is the entity responsible for fulfilling the promise to provide the specified good to the customer and
takes responsibility for the acceptability of the goods, assumes inventory risk before the specified good has been transferred
to the customer or after transfer of control to the customer, has discretion in establishing the price, and selects the suppliers
of products sold. The Company accounts for product sales under these arrangements on a gross basis upon receipt of the product
by the customer. Product sales exceeded 95% of consolidated net sales in each of the years ended December 31, 2019, 2018 and 2017.
The
Company generally requires payment by credit card upon placement of an order, and to a limited extent, grants credit to business
customers on 30- to 60-day terms. Shipping and handling is considered a fulfillment activity, as it takes place before the customer
obtains controls of the good. Amounts billed to customers for shipping and handling are included in net sales upon completion
of the performance obligation.
The
Company’s product sales contracts include terms that could cause variability in the transaction price such as sales returns
and credit card chargebacks. As such, the transaction price for product sales includes estimates of variable consideration to
the extent it is probable that a significant reversal of revenue recognized will not occur. Sales are reported net of estimated
returns and allowances and credit card chargebacks, based on historical experience.
The
Company also earns fees for facilitating marketplace transactions and extended warranty sales on its platforms. For marketplace
transactions, the Company’s websites host third-party sellers and the Company also provides the payment processing function.
The Company recognizes revenue upon sale of products made available through its marketplace store. The Company is not the principal
in this arrangement and does not control the specific goods sold to the customer. The Company reports the net amount earned as
commissions, which are determined using a fixed percentage of the sales price or fixed reimbursement amount. The Company also
offers extended warranty programs for various products on behalf of an unrelated third party. The Company reports the net amount
earned as revenue at the time of sale, as it is not the principal in this arrangement and does not control the specific goods
sold to the customer.
The
Company offers its customers the opportunity to purchase goods and services on its website using deferred financing promotional
programs provided by a third-party financing company. These programs include an option to make no payments for a period of six,
twelve, eighteen or twenty-four months. The third-party financing company makes all decisions to extend credit to the customer
under a separate agreement with the customer, owns all such receivables from the customer, assumes all risk of collection, and
has no recourse to the Company in the event the customer does not pay. The third-party financing company pays the Company for
the purchase price on behalf of the customer, less certain transaction fees. Accordingly, sales generated through these programs
are not reflected in the Company’s receivables once payment is received from the third-party financing company. The transaction
fee paid by the Company to the third-party financing company is recognized as a reduction of revenue. These transaction fees for
the years ended December 31, 2019, 2018 and 2017 were immaterial.
To
the extent that the Company sells its products on third-party platforms, the Company incurs incremental contract acquisition costs
in the form of sales commissions paid to the platforms. The commissions are generally determined based on the sales price and
an agreed-upon commission rate. The Company elects the practical expedient under Accounting Standards Update No. 2014-09 Revenue
From Contracts with Customers (Topic 606) to recognize sales commission as an expense as incurred, as the amortization period
of the asset that the Company otherwise would have recognized is less than one year.
The
Company has three types of contractual liabilities: (1) amounts collected, or amounts invoiced and due, related to product sales
where receipt of the product by the customer has not yet occurred or revenue cannot be recognized. Such amounts are recorded in
the consolidated balance sheets as deferred revenue and are recognized when the applicable revenue recognition criteria have been
satisfied. For all of the product sales, the Company ships a large volume of packages through multiple carriers. Actual delivery
dates may not always be available and as such, the Company estimates delivery dates as needed based on historical data. (2) amounts
collected for the Company’s Premier membership services, which are typically paid upfront for membership benefits over a
3-month, 6-month, or 12-month period, including free 3-day shipping, free return, rush processing and dedicated customers services.
Such amounts were initially recorded as deferred revenue and were recognized as revenue ratably over the subscription period.
The Company discontinued its Premier membership services in 2019, resulting in no balance of deferred revenue related to this
program as of December 31, 2019. The amount of deferred revenue related to the Premier membership services was immaterial as of
December 31, 2018. (3) unredeemed gift cards, which are initially recorded as deferred revenue and are recognized in the period
they are redeemed. Subject to governmental agencies escheat requirements, certain gift cards not expected to be redeemed, also
known as “breakage”, are recognized as revenue based on the historical redemption pattern. These gift cards breakage
revenue for the years ended December 31, 2019, 2018 and 2017 were immaterial.
Deferred
revenue totaled $25.9 million and $37.1 million at December 31, 2019 and 2018, respectively. During the year ended December 31,
2019, the Company recognized $31.6 million of net revenue included in deferred revenue at December 31, 2018.
The
Company’s cost of sales represents the purchase price of the products it sells to its customers, offset by incentives earned
from vendors, including marketing development funds and other vendor incentive programs. See further discussion of vendor payments
under Incentives Earned from Vendors below. Cost of sales also includes freight-in and freight-out costs and charges related to
refurbished, slow-moving, or obsolete inventory.
|
(q)
|
Shipping
and Handling
|
The
Company records revenue for shipping and handling billed to its customers. Shipping and handling revenue totaled approximately
$17.1 million, $21.9 million and $27.8 million for the years ended December 31, 2019, 2018 and 2017, respectively.
The
related shipping and handling costs are included in cost of sales. Shipping and handling costs totaled approximately $62.1 million,
$67.6 million and $68.3 million for the years ended December 31, 2019, 2018 and 2017, respectively.
|
(r)
|
Incentives
Earned from Vendors
|
The
Company participates in various vendor incentive programs that include, but are not limited to, purchasing-based volume discounts,
sales-based volume incentives, marketing development funds, including for certain cooperative advertising, and price protection
agreements. Vendor incentives are recognized in the consolidated statements of operations as an offset to marketing and promotional
expenses to the extent that they represent reimbursement of advertising costs incurred by the Company on behalf of the vendors
that are specific, incremental, and identifiable. Reimbursements that are in excess of such costs and all other vendor incentive
programs are accounted for as a reduction of cost of sales, or if the related product inventory is still on hand at the reporting
date, inventory is reduced in the consolidated balance sheets.
The
Company reduced cost of sales by $143.1 million, $181.7 million and $160.8 million for the years ended December 31,
2019, 2018 and 2017, respectively, for these vendor incentive programs. Reductions to advertising and promotional expenses related
to direct reimbursements for costs incurred in advertising vendors’ products totaled $0.7 million, $0.7 million and $0.6 million
for the years ended December 31, 2019, 2018 and 2017, respectively. Amounts receivable related to vendor incentive programs
were $34.8 million and $58.4 million, net of allowances of $0.5 million and $1.0 million, at December 31, 2019 and 2018,
respectively. Amounts due to the Company are included in accounts receivable in the consolidated balance sheets.
|
(s)
|
Selling,
General, and Administrative Expenses
|
Selling,
general, and administrative expenses primarily consist of marketing and advertising expenses, sales commission, credit card processing
fees, payroll and related benefits, depreciation and amortization, professional fees, litigation costs, rent expense, information
technology expenses, warehouse costs, office expenses, and other general corporate costs.
Advertising
and promotional expenses are charged to operations when incurred and are included in selling, general, and administrative expenses.
Advertising and promotional expenses for the years ended December 31, 2019, 2018 and 2017 were $25.8 million, $34.8 million
and $38.0 million, respectively.
|
(u)
|
Stock-Based
Compensation
|
The
measurement and recognition of compensation expense for all stock-based payment awards made to employees and directors, including
employee stock options and restricted stock, is based on estimated fair value of the awards on the date of grant. The value of
awards that are ultimately expected to vest is recognized as expense on a straight-line basis over the requisite service periods
in the consolidated statements of operations. See Note 13 – Stock-Based Compensation for further information about
the Company’s stock compensation plans.
The
Company is subject to federal and state income taxes in the United States and taxes in foreign jurisdictions. In accordance with
ASC Topic 740, the Company uses the asset and liability method of accounting for income taxes. Under the asset and liability
method, deferred taxes are determined based on the temporary differences between the financial statement and tax bases of assets
and liabilities, using tax rates expected to be in effect during the years in which the bases differences are expected to reverse.
A valuation allowance is established against deferred tax assets when it is more likely than not that some portion or all of the
deferred tax assets will not be realized.
The
Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will
be sustained upon examination by the taxing authorities based on the technical merits of the position. The Company measures the
recognized tax benefit as the largest amount of tax benefit that has greater than a 50% likelihood of being realized upon the
ultimate settlement with a taxing authority. The Company reverses a previously recognized tax benefit if it determines that the
tax position no longer meets the more-likely-than-not threshold of being sustained. The Company accrues interest and penalties
related to unrecognized tax benefits in income tax expense.
|
(w)
|
Concentration
of Credit Risk and Significant Customers and Vendors
|
The
Company maintains its cash and cash equivalents in bank deposit accounts which, at times, may exceed federally insured limits.
The Company has not experienced any losses in such accounts and does not believe it is exposed to any significant credit risk
from cash and cash equivalents.
For
the years ended December 31, 2019, 2018 and 2017, the Company had no individual customers that accounted for greater than
10% of net sales.
The
Company purchases its products on credit terms from vendors located primarily in the United States. For the year ended December
31, 2019, the Company’s cumulative annual purchases from two vendors exceeded 10% of total purchases. For the years ended
December 31, 2018 and 2017, the Company’s cumulative annual purchases from one vendor exceeded 10% of total purchases. The
majority of products that the Company sells are available through multiple channels.
The
Company has receivables due from vendors related to its advertising and promotional programs and receivables due from business
customers with credit terms. As of December 31, 2019, the Company’s receivables from one vendor exceeded 10% of net receivables,
and no receivables from business customers with credit terms exceeded 10% of net receivables. As of December 31, 2018, no
vendor or business customers accounted for greater than 10% of net receivables.
|
(x)
|
Foreign
Currency Translation
|
The
financial statements of foreign subsidiaries and affiliates where the local currency is the functional currency are translated
into U.S. dollars using exchange rates in effect at the balance sheet date for assets and liabilities and average exchange
rates during the year for revenues and expenses. Any gain or loss on currency translation is included in stockholders’ equity
as accumulated other comprehensive income.
|
(y)
|
Redeemable
Convertible Preferred Stock and Convertible Preferred Stock
|
As
discussed more fully in Note 12 – Redeemable Convertible Preferred Stock and Convertible Preferred Stock, the Company’s
Single Vote Series B-1, Series B-1, and Series B-2 redeemable Convertible Preferred Stock was subject to redemption.
As the possible redemption of these shares was outside of the control of the Company, the carrying amounts of the Single Vote
Series B-1, Series B-1, and Series B-2 redeemable convertible Preferred Stock were classified as temporary equity.
The Single Vote Series B-1, Series B-1, and Series B-2 redeemable convertible Preferred Stock was initially recorded
at their original issuance amounts, net of direct third-party costs incurred in connection with issuance.
Single
Vote Series B-1, Series B-1, and Series B-2 redeemable convertible Preferred Stock were redeemable at two times
their original issue price. The Company accreted the carrying value of the redeemable convertible Preferred Stock to the respective
redemption amount on the effective interest method basis over the period from the original issuance date to the date eligible
for redemption.
Under
the Company’s current certificate of incorporation, Series A convertible Preferred Stock is convertible at the holder’s
option into Class A Common Stock by dividing the Series A Original Issue Price by the Series A Conversion Price in effect at the
time of conversion. Similar, each share of Series AA convertible Preferred Stock is convertible at the holder’s option
into to Class A Common Stock by dividing the sum of the Series AA Original Issue Price plus any dividends declared but unpaid
thereon by the Series AA Conversion Price in effect at the time of conversion. Further, upon the date of an IPO, all outstanding
shares of Series A convertible Preferred Stock and Series AA convertible Preferred Stock shall automatically be converted into
shares of Class B Common Stock at the then-effective conversion rate. Finally, upon a date (prior to the date of an IPO) specified
by vote or written consent of at least a majority of the then outstanding shares of Series A convertible Preferred Stock, all
outstanding shares of Series A convertible Preferred Stock shall automatically be converted into shares of Class A Common Stock
at the then effective conversation rate. Upon a date (prior to the date of an IPO) specified by vote or written consent of at
least a majority of the then outstanding shares of Series AA convertible Preferred Stock, all outstanding shares of Series AA
convertible Preferred Stock shall automatically be converted into shares of Class A Common Stock at the then effective conversation
rate. The Company’s current certificate of incorporation also allows the Series A convertible Preferred Stock and Series
AA convertible Preferred Stock to be redeemed upon certain defined deemed liquidation events. As the possible redemption
of these shares was outside of the control of the Company, the carrying amount of the Series A and AA convertible preferred stocks
were classified as temporary equity. The
transactions and the carrying amount of the Series A and AA convertible preferred stocks were reclassified to temporary equity
retrospectively for years 2018 and 2017 to conform with year 2019 presentation. The Series A and Series AA convertible Preferred
Stocks were initially recorded at their original issuance amounts, net of direct third-party costs incurred in connection with
issuance.
The
Company’s financial assets and liabilities that are measured at fair value on a recurring basis include cash and cash equivalents,
and restricted cash. The carrying amounts of cash and cash equivalents and restricted cash approximate their fair value.
The
Company’s financial assets that are measured at fair value on a non-recurring basis when impairment is identified include
equity method investment and investment in equity securities without readily determinable fair value not accounted for under the
equity method. The fair values of these investments are determined based on valuation techniques using the best information available,
and may include quoted market prices, market comparables, and discounted cash flow projections. An impairment charge is recorded
when the cost of the investment exceeds its fair value. This is considered a Level 3 fair value measurement. See Note 5 –
Investment for further information regarding the fair value measurement of these investments.
The
fair value of accounts receivables approximates carrying value due to the short-term maturities.
The
Company’s loans to affiliate, loans from affiliate, line of credit and long-term debt are carried at cost with fair value
disclosed, if required. The fair value of the amounts outstanding under the line of credit and long-term debt with a floating
interest rate approximates the carrying value due primarily to the variable nature of the interest rate of the instruments, which
is considered a Level 2 fair value measurement. The fair value of the amounts outstanding under loans to affiliate, loans
from affiliate, and line of credit with a fixed interest rate is estimated based on the discounted amount of the contractual future
cash flows using an appropriate discount rate. This is considered a Level 3 fair value measurement. The following is a summary
of the carrying amounts and estimated fair values of these financial instruments as of December 31, 2019 and 2018 (in thousands):
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
|
|
Carrying Value
|
|
|
Estimated Fair Value
|
|
|
Carrying Value
|
|
|
Estimated Fair Value
|
|
Loans to affiliate
|
|
$
|
15,000
|
|
|
|
15,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Line of credit
|
|
$
|
6,379
|
|
|
|
6,379
|
|
|
$
|
42,867
|
|
|
$
|
42,867
|
|
Long-term debt
|
|
$
|
2,481
|
|
|
|
2,424
|
|
|
$
|
15,439
|
|
|
$
|
15,571
|
|
|
(4)
|
Property
and Equipment, Net
|
Property
and equipment, net consisted of the following (in thousands):
|
|
December 31
|
|
|
|
2019
|
|
|
2018
|
|
Land
|
|
$
|
2,179
|
|
|
|
6,203
|
|
Buildings
|
|
|
32,455
|
|
|
|
40,758
|
|
Machinery and equipment
|
|
|
40,477
|
|
|
|
40,365
|
|
Computer and software
|
|
|
32,538
|
|
|
|
32,181
|
|
Leasehold improvements
|
|
|
12,560
|
|
|
|
11,198
|
|
Capitalized software
|
|
|
12,650
|
|
|
|
9,554
|
|
Furniture and fixtures
|
|
|
3,196
|
|
|
|
2,734
|
|
Construction in progress
|
|
|
6,706
|
|
|
|
5,315
|
|
|
|
|
142,761
|
|
|
|
148,308
|
|
Accumulated depreciation and amortization
|
|
|
(95,631
|
)
|
|
|
(90,866
|
)
|
Property and equipment, net
|
|
$
|
47,130
|
|
|
|
57,442
|
|
Depreciation
and amortization expense associated with property and equipment was $10.7 million, $10.2 million and $10.6 million for the
years ended December 31, 2019, 2018 and 2017, respectively.
During 2019, the Company entered
into a sale leaseback transaction for one of its real estate properties in the United States. The Company sold the property for
gross proceeds of $38.5 million, and recognized a gain of $28.8 million from the transaction, which is included as other operating
income in its consolidated statements of operations. The Company concurrently leased back the property from the buyer under a lease
agreement for ten years, resulting in ROU lease asset of $14.1 million and a lease liability of $13.9 million as of the lease commencement
date.
On
April 17, 2018, the Company acquired an equity interest in Mountain Capital Fund L.P. (“Mountain”) from Pegasus View
Global Ltd., an international business company incorporated in the Republic of Seychelles (“Pegasus”), which is a
related party. Mountain is an exempted limited partnership registered under the partnership law in the Cayman Islands and primarily
engages in investing. The Company’s equity interest in Mountain was limited to 50% of Mountain’s investment in One97
Communications Limited and PayTM E-Commerce Private Limited (collectively, the “Mountain Investment”). In addition
to the $43.0 million initial investment made during 2018, the purchase price in this transaction included a contingent consideration
of up to $7.0 million upon satisfaction of certain conditions described in the purchase agreement. The Company evaluated the Mountain
Investment under the variable interest model and the voting interest model and concluded that Mountain Capital Fund L.P. is not
a variable interest entity and no consolidation is needed under either the variable interest model or the voting interest model.
The Company recorded an estimate of contingent consideration payable of $7.0 million as of the acquisition date. The Company accounted
for the Mountain Investment under the equity method, and recognized a gain on this equity method investment of $9.6 million for
the year ended December 31, 2018. As of December 31, 2018, the carrying value of the Mountain Investment was $59.6 million. The
Company’s ownership percentage in Mountain was approximately 48% as of December 31, 2018.
During
the year ended December 31, 2019, Mountain sold a portion of its investment in One97 Communications Limited (“One97”)
to various third-party buyers, which resulted in the Company’s disposal of all of its investment in One97. The Company recorded
a gain on the equity method investment in Mountain of $21.8 million for the year ended December 31, 2019 and continues to account
for its remaining interest in Mountain under the equity method. As of December 31, 2019, the carrying value of the Company’s
investment in Mountain was $6.5 million, and the Company’s ownership percentage in Mountain was approximately 8.0%. As Mountain
is a limited partnership, the Company continues accounting for the Mountain Investment under the equity method as of December
31, 2019 and for the year then ended.
See
Note 18 – Related Party Transactions for further information regarding this transaction.
In
August 2018, the Company purchased 11,506,695 Series B+ Preferred shares in Bitmain Technologies Holding Company, a privately-held
company incorporated in the Cayman Islands, for a total consideration of $15.0 million. Bitmain Technologies Holding Company and
its subsidiaries (together “Bitmain”) primarily design and sell cryptocurrency mining hardware, operate cryptocurrency
mining pools, and provide mining farm services. As this represents an investment in equity securities without readily determinable
fair values, the Company elected the measurement alternative under ASU 2016-01 to measure this investment at cost, less any impairment,
plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment
of the same issuer.
The
Company reviewed the investment in Bitmain for impairment as of December 31, 2019 and 2018, respectively, by evaluating if events
or circumstances have occurred that may have a significant adverse effect on the fair value of the investment. The Company concluded
there were no impairment indicators as of December 31, 2019 and 2018. In the absence of observable price changes in orderly transactions
for the identical or a similar investment of the same issuer during the years ended December 31, 2019 and 2018, the carrying value
of the investment remained at $15.0 million as of December 31, 2019 and 2018.
There
was no impairment loss on cost method investment for the years ended December 31, 2019, 2018 and 2017.
Accrued
liabilities consisted of the following (in thousands):
|
|
December 31
|
|
|
|
2019
|
|
|
2018
|
|
Accrued personnel
|
|
$
|
20,534
|
|
|
|
13,391
|
|
Allowance for sales returns
|
|
|
4,812
|
|
|
|
4,773
|
|
Accrued advertising expense
|
|
|
2,051
|
|
|
|
2,916
|
|
Sales and other taxes payable
|
|
|
8,974
|
|
|
|
5,294
|
|
Accrued legal expense
|
|
|
1,396
|
|
|
|
2,532
|
|
Accrued freight expense
|
|
|
3,563
|
|
|
|
723
|
|
Accrued investment costs
|
|
|
—
|
|
|
|
7,000
|
|
Accrued medical expense
|
|
|
1,298
|
|
|
|
596
|
|
Other
|
|
|
6,768
|
|
|
|
7,724
|
|
Total accrued liabilities
|
|
$
|
49,396
|
|
|
|
44,949
|
|
In
July 2018, the Company entered into a credit agreement with several financial institutions that provided a revolving credit
facility of up to $100.0 million with a maturity date of July 27, 2021. Prior to July 27, 2020 and subject to certain
terms and conditions, the Maximum Revolving Advance Amount, as defined in the loan agreement, could be increased up to $140.0
million. The revolving credit facility includes a letter of credit sublimit of $25.0 million, which can be used to issue
standby and trade letters of credit, and a $10.0 million sublimit for swingline loans. Advances from this line of credit
will be subject to interest at LIBOR plus the Applicable Margin, as defined in the loan agreement, or the Alternate Base Rate
(to be defined as the highest of the financial institution’s prime rate, the Overnight Bank Funding Rate plus 0.50%, or
the daily LIBOR plus 1.0%) plus the Applicable Margin. For LIBOR loans, the Company may select interest periods of one, two, or
three months. Interest on LIBOR loans shall be payable at the end of the selected interest period. Interest on Alternate Base
Rate loans is payable monthly. The line of credit is guaranteed by certain of the Company’s U.S. subsidiaries and is
collateralized by certain of the assets of the Company. Such assets include all Receivables, equipment and fixtures, general intangibles,
Inventory, Subsidiary Stock, securities, investment property, and financial assets, contract rights, and ledger sheets, as defined
in the loan agreement. To maintain availability of funds under the loan agreement, the Company will pay on a quarterly basis,
an unused commitment fee of either 0.25% of the difference between the amount available and the amount outstanding under the facility
if the difference is less than one-third of the Maximum Revolving Advance Amount or 0.40% of the difference between the amount
available and the amount outstanding under the facility if the difference is equal to or greater than one-third of the Maximum
Revolving Advance Amount. As of December 31, 2019, there was no balance outstanding under this line of credit. The credit
facility contains customary covenants, including covenants that limit or restrict the Company’s ability to incur capital
expenditures and lease payments, make certain investments, enter into certain related-party transactions, and pay dividends. The
credit facility also requires the Company to maintain certain minimum financial ratios and maintain operation banking relationship
with the financial institutions. As of December 31, 2019, the Company was in compliance with all financial covenants related
to the line of credit.
In
March 2018, the Company entered into a credit agreement with a financial institution that provided for a revolving credit facility
of up to $7.0 million with a maturity date no later than July 31, 2018. For each calendar quarter during the term of this credit
agreement, advances from this line of credit were subject to an interest rate of either the Wall Street Journal Prime Rate or
LIBOR-Based Rate, as defined in the loan agreement, at the Company’s option. The LIBOR-Based Rate may be calculated as either
LIBOR plus 2.75% if the Compensating Deposits, as defined in the credit agreement, were less than $15.0 million as a daily average
for the previous calendar quarter or LIBOR plus 2.5% if the Compensating Deposits equaled at least $15.0 million as a daily average
for the previous calendar quarter. The line of credit was collateralized by a real estate asset of the Company, and contained
customary covenants, including covenants that limit or restrict the Company’s ability to incur indebtedness, capital expenditures
and lease payments, make certain investments and enter into certain related-party transactions. Additionally, there was a requirement
to maintain minimum liquidity (to be defined as cash or cash equivalents and securities that are readily marketable and are not
subject to any lien, claim, encumbrance, charge or any other restriction) of $35.0 million during the term of this credit agreement,
and to maintain a deposit account with the financial institution with a minimum balance of $5.0 million at all times during the
term of this credit agreement. The Company was in compliance with all financial covenants during the term of this credit agreement.
In
July 2013, the Company entered into a credit agreement with several financial institutions that provided a revolving credit
facility of up to $100.0 million with a maturity date of July 31, 2018. The revolving credit facility included a letter
of credit sublimit of $25.0 million, which could be used to issue standby and trade letters of credit, and a $10.0 million
sublimit for swingline loans. Advances from this line of credit were subject to interest at LIBOR plus the Applicable Margin,
as defined in the loan agreement, or the Alternate Base Rate (to be defined as the higher of the financial institution’s
prime rate, the Federal Funds Open Rate plus 0.50%, or the daily LIBOR plus 1.0%) plus the Applicable Margin. For LIBOR loans,
the Company may select interest periods of one, two, or three months. Interest on LIBOR loans was to be payable at the end of
the selected interest period. Interest on Alternate Base Rate loans was to be payable monthly. The line of credit was guaranteed
by the Company’s U.S. subsidiaries and was collateralized by certain of the assets of the Company, as defined in the
loan agreement. To maintain availability of funds under the loan agreement, the Company paid on a quarterly basis, an unused commitment
fee of either 0.20% of the difference between the amount available and the amount outstanding under the facility if the difference
exceeded $20 million or 0.35% of the difference between the amount available and the amount outstanding under the facility
if the difference was $20 million or less. The credit facility contained customary covenants, including covenants that limit
or restrict the Company’s ability to incur capital expenditures and lease payments, make certain investments and pay dividends.
The credit facility also required the Company to maintain certain minimum financial ratios and maintain operation banking relationship
with the financial institutions. The Company terminated this credit agreement with the financial institutions during 2018.
In
July 2015, the Company entered into a credit agreement with a financial institution that provided for a revolving credit
facility of up to $5.0 million with a maturity date of no later than August 26, 2016. The Company extended the maturity
date of this credit agreement to October 24, 2020. Advances from this line of credit are subject to interest at a floating interest
rate of the one-year savings account plus 0.63% not to be lower than 1.62% per annum. The interest rate was equivalent to 1.72%
as of December 31, 2019. The line of credit is guaranteed by one of the Company’s China subsidiaries and is collateralized
by a real estate asset of that subsidiary. As of both December 31, 2019 and 2018, there was $4.9 million outstanding under
this line of credit.
In
December 2016, the Company entered into a credit agreement with a financial institution that provided for a revolving credit
facility of $3.8 million. Advances from this line of credit were subject to interest at a floating interest rate of the one year
savings account. The line of credit was guaranteed by one of the Company’s China subsidiaries and was collateralized by
the foreign bank deposit assets of the same subsidiary. This credit agreement expired in 2018.
In
May 2018, the Company entered into a credit agreement with a financial institution that provided for a revolving credit facility
of up to $3.6 million with a maturity date of May 14, 2019 (the “3.6 Million LOC”). Advances from this line of credit
are subject to a fixed interest rate of 5.22% per annum. The line of credit is guaranteed by one of the Company’s China
subsidiaries and is collateralized by the foreign bank deposit assets of the same subsidiary. As of December 31, 2018, there was
$3.0 million outstanding under this line of credit. This credit agreement expired in 2019.
In
March 2019, the Company entered into a credit agreement with a financial institution that provided for a revolving credit facility
of $3.6 million with a maturity date of September 19, 2019. Advances from this line of credit were subject to interest at a floating
interest rate of the Loan Prime Rate, as defined in the credit agreement, times 142%. This credit facility is collateralized by
all of the assets of one of the Company’s subsidiaries in China. This credit agreement expired during 2019.
In
December 2019, the Company entered into a credit agreement with a financial institution that provided for a revolving credit facility
of $1.4 million. Advances from this line of credit were subject to a fixed interest rate of 6.09% per annum. The line of credit
is collateralized by a real estate asset of that subsidiary. As of December 31, 2019, there was $1.4 million outstanding
under this line of credit.
The
Company has entered into various loans with financial institutions. Long-term debt consisted of the following (in thousands):
|
|
December 31
|
|
|
|
2019
|
|
|
2018
|
|
Credit Facility
|
|
$
|
—
|
|
|
|
13,000
|
|
Term Loan
|
|
|
2,481
|
|
|
|
2,687
|
|
Less unamortized debt issuance costs
|
|
|
—
|
|
|
|
(15
|
)
|
|
|
|
2,481
|
|
|
|
15,672
|
|
Less current portion
|
|
|
(258
|
)
|
|
|
(248
|
)
|
Long-term debt less current portion
|
|
$
|
2,223
|
|
|
|
15,424
|
|
Credit
Facility
In
March 2018, the Company entered into a long-term revolving loan agreement with a financial institution that provided a revolving
credit facility of up to $13.0 million with a maturity date of March 8, 2020 (the “Credit Facility”). For each calendar
quarter during the term of this credit agreement, advances from the Credit Facility are subject to an interest rate of either
the Wall Street Journal Prime Rate or LIBOR-Based Rate, as defined in the loan agreement, at the Company’s option. The LIBOR-Based
Rate may be calculated as either LIBOR plus 2.75% if the Compensating Deposits, as defined in the credit agreement, are less than
$15.0 million as a daily average for the previous calendar quarter or LIBOR plus 2.5% if the Compensating Deposits equal at least
$15.0 million as a daily average for the previous calendar quarter. The Credit Facility was collateralized by a real estate asset
of the Company, and contained customary covenants, including covenants that limit or restrict the Company’s ability to incur
indebtedness, capital expenditures and lease payments, make certain investments and enter into certain related-party transactions.
Additionally, there was a requirement to maintain minimum liquidity (to be defined as cash or cash equivalents and securities
that are readily marketable and are not subject to any lien, claim, encumbrance, charge or any other restriction) of $35.0 million
during the term of the Credit Facility. The Company paid off the loan in full during 2019.
Term
Loan
In
2013, the Company entered into a term loan agreement with a financial institution for $4.1 million with a maturity date of November
26, 2028 (the “Term Loan”). The Term Loan bears a floating interest rate of the one-year savings account plus
0.43% per annum in the first two years and a floating interest rate of the one-year savings account plus 0.61% per annum for the
remaining of the term, not to be lower than 1.8% during the entire term. The interest rate was equivalent to 1.8% as of December 31,
2019. The Term Loan is collateralized by a first position security interest in a floor of an office building owned by the Company
in Taiwan.
Aggregate
maturities of long-term debt, excluding unamortized debt issuance costs, were as follows (in thousands) as of December 31, 2019:
2020
|
|
$
|
258
|
|
2021
|
|
|
267
|
|
2022
|
|
|
272
|
|
2023
|
|
|
277
|
|
2024
|
|
|
282
|
|
Thereafter
|
|
|
1,125
|
|
|
|
$
|
2,481
|
|
Operating
Leases
The
Company leases certain office and warehouse facilities and warehouse equipment under various noncancelable operating leases. The
Company is also committed under the terms of certain of these operating lease agreements to pay property taxes, insurance, utilities,
and maintenance costs. See Note 4 – Property and Equipment, net for disclosure for sales and leaseback transaction.
Most
of the Company’s leases do not provide an implicit rate that can be readily determined. Therefore, the Company uses a discount
rate based on its incremental borrowing rate, which is determined using its credit rating and information available as of the
commencement date. The Company’s operating lease agreements may include options to extend the lease term. The Company made
an accounting policy election to exclude options that are not reasonably certain of exercise when determining the term of the
borrowing in the assessment of the incremental borrowing rate. Additionally, the Company also made an accounting policy election
to not separate lease and non-lease components of a contract, and to recognize the lease payments under short-term leases as an
expense on a straight-line basis over the lease term without recognizing the lease liability and the ROU lease asset.
The
Company evaluates whether its contractual arrangements contain leases at the inception of such arrangements. Specially, the Company
considers whether it can control the underlying asset and have the right to obtain substantially all of the economic benefits
or outputs from the assets. Substantially all of its leases are long-term operating leases with fixed payment terms. The Company
does not have significant financing leases. Its ROU operating lease assets represent the right to use an underlying asset for
the lease term, and its operating lease liabilities represent the obligation to make lease payments. ROU operating lease assets
are recorded in other noncurrent assets in the consolidated balance sheet. Operating lease liabilities are recorded in other current
liabilities or other noncurrent liabilities in the consolidated balance sheets based on their contractual due dates.
The
Company’s operating lease liability is recognized as of the lease commencement date at the present value of the lease payments
over the lease term. The Company’s ROU operating lease asset is recognized as of the lease commencement date at the amount
of the corresponding lease liability, adjusted for prepaid lease payments, lease incentives received, and initial direct costs
incurred. The Company evaluates its ROU lease assets for impairment consistent with its impairment of long-lived assets policy.
See Note 2—Summary of Significant Accounting Policies.
Operating
lease expense is recognized on a straight-line basis over the lease term, and is included in selling, general, and administrative
expenses in the consolidated statement of operations. Operating lease expense totaled $13.0 million, $13.2 million and $14.1 million,
respectively, for the years ended December 31, 2019, 2018 and 2017. Cash payments made for operating leases totaled $12.1
million during 2019, which were included in cash flows from operating activities in the consolidated statement of cash flows.
As of December 31, 2019, the Company’s ROU operating lease assets were $38.1 million, and its operating lease liabilities
were $39.2 million, of which $30.6 million was classified as non-current. New ROU operating lease assets and liabilities entered
into during 2019 were $21.3 million and $20.9 million, respectively. The Company’s weighted average remaining lease term
and the discount rate for its operating leases were approximately 6.06 years and 5.06% at December 31, 2019.
The
Company has certain sublease arrangements for some of the leased office and warehouse facilities. Sublease rental income for the
years ended December 31, 2019, 2018 and 2017 was immaterial.
The
following table summarizes the future minimum rental payments under noncancelable operating lease arrangements in effect at December 31,
2019 (in thousands):
2020
|
|
$
|
10,766
|
|
2021
|
|
|
9,822
|
|
2022
|
|
|
7,529
|
|
2023
|
|
|
4,964
|
|
2024
|
|
|
3,030
|
|
Thereafter
|
|
|
10,095
|
|
Total minimum payments
|
|
$
|
46,206
|
|
Less: Imputed interest
|
|
|
7,018
|
|
Present value of lease liabilities
|
|
$
|
39,188
|
|
The
components of the Company’s income tax provision expense are as follows (in thousands):
|
|
Year ended December 31
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Current provision:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
21
|
|
|
|
21
|
|
|
|
38
|
|
State and local
|
|
|
152
|
|
|
|
217
|
|
|
|
98
|
|
Foreign
|
|
|
5,423
|
|
|
|
171
|
|
|
|
825
|
|
|
|
|
5,596
|
|
|
|
409
|
|
|
|
961
|
|
Deferred expense/(benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local
|
|
|
(141
|
)
|
|
|
687
|
|
|
|
(16
|
)
|
Foreign
|
|
|
(866
|
)
|
|
|
486
|
|
|
|
(698
|
)
|
|
|
|
(1,007
|
)
|
|
|
1,173
|
|
|
|
(714
|
)
|
Provision for income taxes
|
|
$
|
4,589
|
|
|
|
1,582
|
|
|
|
247
|
|
Loss
before provision for income taxes consisted of the following (in thousands):
|
|
Year ended December 31
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
United States
|
|
$
|
(11,288
|
)
|
|
|
(37,891
|
)
|
|
|
(20,547
|
)
|
International
|
|
|
(1,114
|
)
|
|
|
5,870
|
|
|
|
8,827
|
|
Total
|
|
$
|
(12,402
|
)
|
|
|
(32,021
|
)
|
|
|
(11,720
|
)
|
Deferred
income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The Company’s deferred income tax assets and liabilities
consisted of the following (in thousands):
|
|
December 31
|
|
|
|
2019
|
|
|
2018
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
685
|
|
|
|
849
|
|
Inventories
|
|
|
2,060
|
|
|
|
2,561
|
|
Reserves and other accruals
|
|
|
3,401
|
|
|
|
2,910
|
|
Lease liabilities
|
|
|
8,313
|
|
|
|
—
|
|
Credits and other
|
|
|
1,954
|
|
|
|
1,732
|
|
Long term investment
|
|
|
4,036
|
|
|
|
—
|
|
Net operating losses
|
|
|
15,892
|
|
|
|
18,611
|
|
Gross deferred tax assets
|
|
|
36,341
|
|
|
|
26,663
|
|
Valuation allowance
|
|
|
(25,119
|
)
|
|
|
(22,806
|
)
|
Total deferred tax assets, net
|
|
|
11,222
|
|
|
|
3,857
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
(425
|
)
|
|
|
(373
|
)
|
ROU
|
|
|
(8,073
|
)
|
|
|
0
|
|
Property and equipment
|
|
|
(1,683
|
)
|
|
|
(1,282
|
)
|
Long term investment
|
|
|
0
|
|
|
|
(2,168
|
)
|
Total deferred tax liabilities
|
|
|
(10,181
|
)
|
|
|
(3,823
|
)
|
Net deferred tax assets
|
|
$
|
1,041
|
|
|
|
34
|
|
In
accordance with ASC 740, Income Taxes, the Company evaluates whether a valuation allowance should be established against
the net deferred tax assets based upon the consideration of all available evidence and using a “more-likely than-not”
standard. Significant weight is given to evidence that can be objectively verified. The determination to record a valuation allowance
is based on the recent history of cumulative losses and losses expected in the near future.
The
Company’s U.S. federal consolidated filing group includes certain international entities. Based upon results of operations
for the years ended December 31, 2019 and 2018, and estimated future trends in the Company’s business, it is determined
that it is more likely than not that the Company will not realize any benefit from the U.S. federal net deferred tax assets.
As a result of the analysis, the Company recorded a $19.5 million valuation allowance against the U. S. federal net deferred
tax assets as of December 31, 2019. The Company also maintains valuation allowances against certain non-US loss corporations.
Total valuation allowance against U.S and non-US deferred tax asset were $25.1 million as of December 31, 2019.
At
December 31, 2019, the Company had $40.7 million of federal net operating loss (“NOL”) carryforwards and
$17.6 million of apportioned state NOL carryforwards available to reduce future taxable income. The federal NOLs that were
generated prior to January 1, 2018 will expire starting in 2031 and the federal NOLs that were generated in 2018 or forward will
carryforward indefinite to offset 80% of future taxable income. The state NOL carryforwards began to expire in 2029. The Company
has $7.3 million of NOL carryforwards in China as of December 31, 2019. The Company has $10.6 million of NOL carryforwards in
Taiwan, which will begin to expire in 2024. The Company has $2.2 million NOLs in Hong Kong with indefinite carryforward.
A valuation allowance was recorded on the NOLs in China, Taiwan, and Hong Kong. The Company has not provided for deferred income
taxes on a cumulative total of $40.8 million of undistributed earnings of its foreign subsidiaries, as these amounts are
considered indefinitely reinvested outside the United States. It is not practicable to determine the estimated income tax liability
that might apply if these earnings were to be repatriated.
The
Tax Cuts and Jobs Act (the “Act”) was enacted in December 2017. The Act reduced the U.S. federal corporate tax rate
from 34 percent to 21 percent, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries
that were previously tax deferred, and created new taxes on certain foreign earnings. As of December 31, 2019, the Company has
completed its accounting for the tax effects of enactment of the Act.
A
reconciliation of the U.S. federal statutory tax rate to the Company’s effective tax rate is as follows:
|
|
Year ended December 31
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Federal taxes at statutory rate
|
|
|
21.00
|
%
|
|
|
21.00
|
%
|
|
|
34.00
|
%
|
State taxes, net of federal benefit
|
|
|
(0.02
|
)
|
|
|
(2.23
|
)
|
|
|
(0.46
|
)
|
Permanent items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other nondeductible items
|
|
|
(0.18
|
)
|
|
|
(0.24
|
)
|
|
|
0.15
|
|
Subpart F income
|
|
|
(1.24
|
)
|
|
|
(0.68
|
)
|
|
|
(2.87
|
)
|
SEC. 956 Income inclusion
|
|
|
—
|
|
|
|
—
|
|
|
|
(2.05
|
)
|
Stock-based compensation
|
|
|
—
|
|
|
|
0.16
|
|
|
|
(7.65
|
)
|
Foreign withholding tax
|
|
|
(32.12
|
)
|
|
|
—
|
|
|
|
—
|
|
Foreign rate differential and foreign tax credits
|
|
|
3.77
|
|
|
|
(1.05
|
)
|
|
|
15.60
|
|
Change in valuation allowance
|
|
|
(13.60
|
)
|
|
|
(17.94
|
)
|
|
|
(2.40
|
)
|
Federal tax reform rate differential
|
|
|
—
|
|
|
|
—
|
|
|
|
(34.96
|
)
|
Prior year adjustments and other
|
|
|
(13.22
|
)
|
|
|
(3.96
|
)
|
|
|
(1.47
|
)
|
Effective tax rate
|
|
|
(35.61
|
)%
|
|
|
(4.94
|
)%
|
|
|
(2.11
|
)%
|
The
significant item that caused the effective tax rate change related to the change of valuation allowance and foreign withholding
tax. In addition, the Company has material permanent differences, including Subpart F income and stock based compensation. In
2017, the Company remeasured its federal deferred tax balances by the new tax rate of 21%, which generated the impact on effective
tax rate by 35.0% and fully offset by the change of valuation allowance. This event had no impact in 2019 or 2018.
Uncertain
tax Positions
As
of the end of fiscal year 2019, the total liability for income tax associated with unrecognized tax benefits was $0.6 million.
Our effective tax rate will be affected by any portion of this liability we may recognize. We do not believe it is reasonably
possible that any of the uncertain tax benefits will be recognized in the next 12 months. As such, all uncertain tax positions,
including accrued interest, have been classified as long-term taxes payable on the consolidated balance sheets.
A
reconciliation of the beginning and ending amounts of uncertain tax positions is as follows (in thousands):
|
|
Year ended December 31
|
|
|
|
2019
|
|
|
2018
|
|
Beginning balance
|
|
$
|
586
|
|
|
$
|
586
|
|
Additions based on tax positions related to the prior year
|
|
|
—
|
|
|
|
—
|
|
Reductions for tax positions of prior years
|
|
|
—
|
|
|
|
—
|
|
Ending balance
|
|
$
|
586
|
|
|
$
|
586
|
|
Our
continuing practice is to recognize interest and penalties related to unrecognized tax benefits as tax expense. As of December
31, 2019 and 2018, interest and penalties related to uncertain tax positions were not material.
The
Company files a consolidated federal income tax return in the United States, as well as combined and separate U.S. state
income tax returns. Certain subsidiaries of the Company are subject to income tax in China, Taiwan, Hong Kong, and Canada. The
Company is still subject to examination for federal income tax returns for the years 2012 through 2018, for certain U.S. state
income tax returns for the years 2008 through 2018, and for certain foreign income tax returns for the years 2010 through
2018. The Company is currently under examination by the Internal Revenue Service for the years 2012 through 2014 and by the
California Franchise Tax Board for the years 2012 through 2014. The California Franchise Tax Board examination is related to amended
tax returns filed for the years under exam. No additional reserve was accrued in 2019 based on the current audit status.
The
Company’s Common Stock consists of Class A and Class B Common Stock (collectively, “Common Stock”).
The holders of outstanding shares of Common Stock vote as one class on all matters submitted to a vote of the stockholders of
the Company. Each holder of shares of Class A Common Stock is entitled to one vote per share, whereas each holder of shares
of Class B Common Stock is entitled to 10 votes per share. No shares of Class B Common Stock are issuable until the
Company completes an underwritten public offering of its Class A Common Stock pursuant to an effective registration statement
under the Securities Act of 1933, as amended, in which the Class A Common Stock is designated for trading on the New York
Stock Exchange or the NASDAQ Global Market (an “IPO”).
The
holders of Common Stock are entitled to share equally, on a per share basis, in any dividends or other distributions declared
by the Board of Directors with respect to the Common Stock. Each share of Class B Common Stock is convertible into one share
of Class A Common Stock at the option of the holder. Each share of Class B Common Stock will automatically convert into
one share of Class A Common Stock upon the written consent of a majority of the Class B stockholders, subject to the
consent of one of the Company’s significant shareholders.
No
Common Stock dividend was declared by the Company’s Board of Directors for the years ended December 31, 2019, 2018 and 2017.
|
(12)
|
Redeemable
Convertible Preferred Stock and Convertible Preferred Stock
|
Prior
to March 30, 2017, the Company’s redeemable convertible Preferred Stock consisted of Single Vote Series B-1, Series B-1,
and Series B-2 (collectively, “Series B”) redeemable convertible Preferred Stock. All issued and outstanding
Series B redeemable convertible Preferred Stock were redeemed prior to January 1, 2017. The remaining installment payments to
the holders of Series B-1 redeemable convertible Preferred Stock of $2.6 million was paid out by March 30, 2017.
The
Company’s convertible Preferred Stock currently consists of Series AA convertible Preferred Stock and Series A convertible
Preferred Stock.
The
following tables include the activity of the convertible Preferred Stock:
|
|
|
|
|
|
|
|
Repurchased
|
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
as of
|
|
|
as of
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
Authorized
|
|
|
Issued
|
|
|
2019
|
|
|
2019
|
|
Series A convertible preferred stock
|
|
|
59,000,000
|
|
|
|
47,402,573
|
|
|
|
(10,926,589
|
)
|
|
|
36,475,984
|
|
Series AA convertible preferred stock
|
|
|
25,889,968
|
|
|
|
24,870,027
|
|
|
|
—
|
|
|
|
24,870,027
|
|
|
|
|
|
|
|
|
|
Repurchased
|
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
as of
|
|
|
as of
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
Authorized
|
|
|
Issued
|
|
|
2018
|
|
|
2018
|
|
Series A convertible preferred stock
|
|
|
59,000,000
|
|
|
|
47,402,573
|
|
|
|
(10,926,589
|
)
|
|
|
36,475,984
|
|
Series AA convertible preferred stock
|
|
|
25,889,968
|
|
|
|
24,870,027
|
|
|
|
—
|
|
|
|
24,870,027
|
|
The
holders have various rights and preferences as follows.
Prior
to March 30, 2017, Series B redeemable convertible Preferred Stock was entitled to noncumulative dividends in an amount at
least equal to $0.49 per share before any dividends may be paid on the Common Stock or Series A convertible Preferred Stock.
The Series AA convertible Preferred Stock and Series A convertible Preferred Stock are entitled to noncumulative dividends
of at least $0.0016 per share before any dividends may be paid on Common Stock. In addition to the dividend preferences discussed
above, the holders of the Series AA convertible Preferred Stock and Series A convertible Preferred Stock are entitled to
share in any dividends paid to holders of the Common Stock on an equal basis as if the Series AA convertible Preferred Stock and
the Series A convertible Preferred Stock had been converted to Common Stock. Such dividends are payable when and as declared
by the Company’s Board of Directors. No Series AA convertible Preferred Stock or Series A convertible Preferred Stock
dividends were declared by the Company’s Board of Directors for the years ended December 31, 2019, 2018 and 2017.
The
holders of the Series AA convertible Preferred Stock and Series A convertible Preferred Stock are entitled to vote on all
matters presented to the stockholders of the Company for their action or consideration. The holders of the Series AA convertible
Preferred Stock and Series A convertible Preferred Stock are entitled to 10 votes per “as converted” share of
Class A Common Stock.
Each
share of Series AA convertible Preferred Stock and Series A convertible Preferred Stock is convertible at the option of the
holder at any time into Class A Common Stock. The conversion ratio is subject to adjustment for certain dilutive events,
including certain types of stock dividends, stock splits, stock issuances, stock option grants, or a combination of these. As
of both December 31, 2019 and 2018, approximately 24.9 million shares of Class A Common Stock could be issued based upon conversion
ratios of 1:1 upon optional conversion of all outstanding shares of Series AA convertible Preferred Stock. As of both December 31,
2019 and 2018, approximately 36.5 million shares of Class A Common Stock could be issued, respectively, based upon conversion
ratios of 1:1 upon optional conversion of all outstanding shares of Series A convertible Preferred Stock. There are no shares
of Single Vote Series B-1 and Series B-1 redeemable convertible Preferred Stock authorized or outstanding as of December
31, 2019 and 2018.
Each
share of Series B-2 redeemable convertible Preferred Stock was convertible into either Series A convertible Preferred
Stock, Class B Common Stock, or Class A Common Stock, depending upon when the holder would have elected conversion.
There are no shares of Series B-2 redeemable convertible Preferred Stock authorized or outstanding as of December 31,
2019 and 2018, as all shares of Series B-2 redeemable convertible Preferred Stock were redeemed by March 30, 2017.
Each
share of Series AA convertible Preferred Stock and Series A convertible Preferred Stock will automatically convert at
its then effective conversion rate into shares of Class B Common Stock upon the closing of an IPO. Upon a vote or written
consent of holders of at least a majority of Series AA convertible Preferred Stock, all outstanding shares of Series AA convertible
Preferred Stock shall automatically be converted into shares of Class A Common Stock at the then effective conversion rate. Upon
a vote or written consent of holders of at least a majority of Series A convertible Preferred Stock (which must include the
consent of a certain significant shareholder or his designee, as long as such significant shareholder or such designee has Voting
Power (as defined in the Company’s Amended and Restated Certificate of Incorporation, the “Charter”) with respect
to at least 20% of the outstanding Series A convertible Preferred Stock), all outstanding shares of Series A convertible Preferred
Stock shall automatically be converted into shares of Class A Common Stock at the then effective conversion rate. The conversion
ratio is subject to adjustment for certain dilutive events, including certain types of stock dividends, stock splits, or a combination
of these. As of December 31, 2019, each share of Series AA convertible Preferred Stock and Series A convertible
Preferred Stock could be converted, as described above, into one share of Class B Common Stock or one share of Class A
Common Stock.
Upon
the occurrence of a Qualified Liquidation Event, as defined in the Charter, each share of Series AA convertible Preferred Stock
is entitled to receive, before any payment may be made to the holders of any other capital stock of the Company (including all
other series of Preferred Stock of the Company outstanding), an amount equal to the greater of (i) the original issuance price
of each share of Series AA convertible Preferred Stock, plus an amount equal to the amount of compounded annual interest that
such original purchase price would yield had it been deposited from the Series AA Preferred Issue Date, as defined in the Charter,
to the date of payment of such liquidation preference, inclusive, at the Three Month London Interbank Offered Rate (in U.S. dollars)
in effect from time to time during such period, plus 50 basis points (subject to a maximum compounded interest rate per annum
of 5%) (as adjusted for dividends in cash or in kind, share subdivisions, combinations, reclassifications, conversions and consolidations
involving the Company’s capital stock and any restructuring, recapitalization, merger and combination involving the Company),
plus all declared but unpaid dividends on such share of Series AA convertible Preferred Stock, and (ii) the amount to which the
holder thereof would have received if such holder had converted all of its shares of Series AA convertible Preferred Stock into
shares of Class A Common Stock immediately prior to such Qualified Liquidation Event. Following the payment in full of the Series
AA Liquidation Amount, as defined in the Charter, the holders of the Series A convertible Preferred Stock are entitled to
receive, before any distributions are made to the holders of the Common Stock, an amount equal to the original issuance price
of each share of Series A convertible Preferred Stock plus any declared but unpaid dividends thereon. After the payment of
all preferential amounts required to be paid to the holders of Series AA convertible Preferred Stock and Series A convertible
Preferred Stock, the remaining assets available will be distributed pro rata among the holders of Series AA convertible Preferred
Stock, Series A convertible Preferred Stock and Common Stock as if all the shares had been converted to Common Stock immediately
prior to such Qualified Liquidation Event.
The
Series B-1 and Series B-2 redeemable convertible Preferred Stock was redeemable at any time on or after September 29,
2009 upon the receipt by the Company of written notice requesting redemption from the holders representing at least 70% of the
voting power of the then-outstanding shares of (i) the Series B-1 and Series B-2 redeemable convertible Preferred Stock
or (ii) the Series B-2 redeemable convertible Preferred Stock. Individual holders of the Series B-1 and Series B-2
redeemable convertible Preferred Stock were entitled to elect to be excluded from the mandatory redemption transaction. The initial
redemption price for the Series B-1 redeemable convertible Preferred Stock was equal to the original issue price per share
($6.18 per share) of Series B-1 redeemable convertible Preferred Stock plus any declared but unpaid dividends thereon. The
initial, and only, redemption price for the Series B-2 redeemable convertible Preferred Stock was equal to two times the
original issue price per share ($6.18 per share) of Series B-2 redeemable convertible Preferred Stock plus any declared but
unpaid dividends thereon. The mandatory redemption amounts were payable in three equal annual installments, distributed on a pro
rata basis to the holders of then-outstanding Series B-1 and Series B-2 redeemable convertible Preferred Stock. Following
the payment of all initial redemption amounts, the holders of then-outstanding Series B-1 redeemable convertible Preferred
Stock that were redeemed were then entitled to receive a secondary, additional redemption amount equal to one times the original
issue price per share ($6.18 per share) of Series B-1 redeemable convertible Preferred Stock. The secondary redemption payments
to the holders of then-outstanding Series B-1 redeemable convertible Preferred Stock that were redeemed began 60 days
after final payment of all initial redemption amounts.
On
November 16, 2012, the Company received a written notice from the holders of 100% of the outstanding shares of the Series B-2
redeemable convertible Preferred Stock, requesting redemption of all of the outstanding shares of Series B Preferred Stock.
The Company subsequently informed the holders of the Series B-1 redeemable convertible Preferred Stock that their shares
would be redeemed unless they elected to be excluded from the mandatory redemption transaction. One holder of the Series B-1
redeemable convertible Preferred Stock elected to be excluded from the mandatory redemption transaction. The first installment
payment was required to take place no later than 60 days subsequent to receipt of the written notice from the holders of
the Series B-2 redeemable convertible Preferred Stock. However, the Company exercised its right to accelerate redemption
payments and, accordingly, the first installment payment to the holders of the Series B-2 redeemable convertible Preferred
Stock was distributed in December 2012 in the amount of $13.3 million, and the second and final installment payments
were distributed in July 2013 in the amount of $26.7 million.
The
first installment payment to the holders of the Series B-1 redeemable convertible Preferred Stock was distributed in 2013
in the amount of $3.3 million. In the fourth quarter of 2013, two holders of the Series B-1 redeemable convertible Preferred
Stock received $1.4 million as payment in full for the redemption of all of their remaining outstanding shares. By accepting
this $1.4 million payment, the two holders of the Series B-1 redeemable convertible Preferred Stock elected to forego
secondary redemption payments totaling $2.0 million. The second and third installment payments to the other redeeming holders
of the Series B-1 redeemable convertible Preferred Stock were distributed in 2014 and 2015 for $2.6 million each. The
first and second installment payments under the secondary redemption were paid out in 2015 and 2016 in the amount of $2.6 million
each. The third and final installment payment under the secondary redemption to the remaining holders of Series B-1 redeemable
convertible Preferred Stock of $2.6 million was paid out in fiscal year 2017.
|
(g)
|
Right
of First Refusal
|
The
Company has a right of first refusal in the event that the holders of Series AA convertible Preferred Stock and Series A
convertible Preferred Stock attempt to sell their shares.
Certain
holders of Series AA convertible Preferred Stock, Series A convertible Preferred Stock and Common Stock have pre-emptive
rights to purchase any shares of Series AA convertible Preferred Stock, Series A convertible Preferred Stock or Common Stock
that the Company proposes to issue other than in connection with an IPO and certain excluded issuances specified in the Stockholders
Agreement.
In
March 2017, Liaison purchased 490,706 shares of Class A Common Stock and 12,782,546 shares of Series A convertible
Preferred Stock from existing shareholders for $91.9 million, and 24,870,027 shares of newly-issued Series AA Convertible
Preferred Stock from the Company for $172.2 million. These were deemed to be a bundled transaction for accounting purposes.
Separate fair value estimates were developed for the Class A Common Stock, Series A convertible Preferred Stock, and Series AA
Convertible Preferred Stock as of March 2017. Considerations that Liaison paid to existing shareholders for their Class A Common
Stock and Series A convertible Preferred Stock in excess of the estimated fair value was recorded as either additional stock-based
compensation expense if the shares sold were originally acquired through stock compensation programs, or as deemed dividend if
otherwise. This resulted in stock-based compensation expense of $2.5 million and a deemed dividend of $19.2 million during the
year ended December 31, 2017.
Additionally,
the Company’s share repurchase transaction in 2018 resulted in $20 million deemed dividend during the year ended December
31, 2018. See Note 14 – Share Repurchase for further discussion about this transaction.
|
(13)
|
Stock-Based
Compensation
|
Stock-based
compensation includes stock option awards issued under the Company’s employee incentive plan and restricted stock issued
under a significant shareholder’s incentive plan, as further discussed in (a) below. There was no income tax benefit recognized
in the consolidated statements of operations for stock-based compensation arrangements in any of the periods presented.
|
(a)
|
Stock
Incentive Programs
|
2005
Incentive Award Plan:
On
September 22, 2005, the Board of Directors approved the Company’s 2005 Equity Incentive Plan, which was amended
in January 2008, October 2009, December 2011 and September 2015 (the “Incentive Award Plan”). Under the
Incentive Award Plan, the Company may grant equity incentive awards to employees, directors, and consultants based on the
Company’s Class A Common Stock. A committee of the Board of Directors of the Company determines the eligibility,
types of equity awards, vesting schedules, and exercise prices for equity awards granted. Subject to certain adjustments in
the event of a change in capitalization or similar transaction, the Company may issue a maximum of 14,200,000 shares of
its Class A Common Stock under the Incentive Award Plan. The Company issues new shares of Class A Common Stock from
its authorized share pool to settle stock-based compensation awards. The exercise price of options granted under the plan
shall not be less than the fair value of the Company’s Class A Common Stock as of the date of grant. Options
typically vest over the term of four years, and are typically exercisable for a period of 10 years after the date of
grant, except when granted to a holder who, at the time the option is granted, owns stock representing more than 10% of the
voting power of all classes of stock of the Company or any subsidiaries, in which case, the term of the option shall be no
more than five years from the date of grant. In September 2015, the Incentive Award Plan was amended to permit
additional awards to be made after the tenth anniversary of the original adoption of said plan.
Significant
Shareholder Incentive Plan:
In
2016, a significant shareholder established an incentive program (the “Significant Shareholder Incentive
Program”) where he caused to be transferred a total of 5,198,458 shares of the Company’s Series A
Preferred Stock from Tekhill USA LLC, a limited liability company fully owned by the significant shareholder, into the Fred
Chang Partners Trust (the “Trust”). In March and May 2016, the Trust entered into restricted share
award agreements (the “Award Agreements”) with several key executives of the Company, under which the Trust
granted a total of 5,090,157 restricted shares of the Company’s Series A Preferred Stock to those executives to be
vested over a 15-year period in equal annual installments on each anniversary date of the grant date. As of December 31,
2016, the Award Agreements were terminated with a concurrent offer from the significant shareholder to re-establish the
Significant Shareholder Incentive Program. During the year ended December 31, 2017, the re-established incentive program (the
“Re-established Significant Shareholder Incentive Program”) granted a total of 3,898,843 restricted shares of the
Company’s Series A Preferred Stock to a subset of the same recipients with substantially the same terms as those under
the Significant Shareholder Incentive Program. The Re-established Significant Shareholder Incentive Program subsequently
modified the vesting period from 15 years to 10 years during the year ended December 31, 2017, which did not have a
significant impact on the consolidated financial statements.
|
(b)
|
Stock
Compensation Valuation Assumptions
|
The
fair value of each option award granted under the Incentive Award Plan is estimated using the Black-Scholes-Merton option pricing
model on the date of grant. This model requires the input of highly complex and subjective variables. These variables include,
but are not limited to, the expected stock price volatility over the expected life of the awards and actual and projected employee
stock option exercise behavior with the following inputs: risk-free interest rate, expected stock price volatility, forfeiture
rate, expected term, dividend yield and weighted average grant date fair value.
The
risk-free interest rate is based on the currently available rate on a U.S. Treasury zero-coupon issue with a remaining term
equal to the expected term of the option converted into a continuously compounded rate. The expected volatility of stock options
is based on a review of the historical volatility and the implied volatility of a peer group of publicly traded companies comparable
to the Company. In evaluating comparability, the Company considered factors such as industry, stage of life cycle, and size. After
the adoption of Accounting Standards Update No. 2016-09 Compensation-Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting as of January 1, 2017, the Company elected to continue to estimate the total number of awards
for which the requisite service period will not be rendered based on historical data. The expected term assumption used by the
Company reflects the application of the simplified method set out in Securities and Exchange Commission Staff Accounting Bulletin
No. 110, Shared-Based Payment. The simplified method defines the expected term of an option as the average of the contractual
term of the options and the weighted average vesting period for all option tranches. The dividend yield reflects the Company’s
dividend rate on the date of grant. The Company did not grant any stock options during the years ended December 31, 2019, 2018
and 2017.
The
cost of the restricted shares is determined using the fair value of the Company’s Series A Convertible Preferred Stock
on the date of the grant. Compensation expense is recognized on a straight-line basis over the vesting period. There was no grant
of the restricted shares under the Re-established Significant Shareholder Incentive Program during the years ended December 31,
2019, 2018 and 2017.
|
(c)
|
Stock
Option and Restricted Stock Activity
|
Stock
Option
The
following table summarizes the activity for all stock options granted:
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
average
|
|
|
contractual
|
|
|
intrinsic
|
|
|
|
Options
|
|
|
exercise
|
|
|
terms
|
|
|
value
|
|
|
|
outstanding
|
|
|
price
|
|
|
(in years)
|
|
|
(in thousands)
|
|
Outstanding at December 31, 2018
|
|
|
3,979,132
|
|
|
$
|
3.36
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(1,376,954
|
)
|
|
|
4.91
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
2,602,178
|
|
|
$
|
2.54
|
|
|
|
4.80
|
|
|
$
|
1,723
|
|
Vested and expected to vest at December 31, 2019
|
|
|
2,588,640
|
|
|
$
|
2.54
|
|
|
|
4.80
|
|
|
$
|
1,705
|
|
Exercisable at December 31, 2019
|
|
|
2,466,801
|
|
|
$
|
2.59
|
|
|
|
4.72
|
|
|
$
|
1,544
|
|
During
the years ended December 31, 2019, 2018 and 2017, the total intrinsic value of stock options exercised was $0, $0.8 million and
$0, respectively, and the compensation expense for stock options granted included in “Selling, general and administrative
expenses” in the consolidated statements of operations totaled $0.2 million, $0.4 million and $0.7 million, respectively.
As
of December 31, 2019 and 2018, there were $0.1 million and $0.3 million, respectively, of unrecognized compensation costs
related to nonvested options. The weighted average remaining vesting term of the stock option was 0.39 years as of December 31,
2019.
Restricted
Stock
The
following table summarizes the activity for restricted stock issued from the Fred Chang Partners Trust under the Re-established
Significant Shareholder Incentive Program:
|
|
|
|
|
Weighted-average
|
|
|
|
Shares
|
|
|
grant date
fair value
|
|
Unvested at December 31, 2018
|
|
|
2,695,497
|
|
|
$
|
1.58
|
|
Vested
|
|
|
(336,936
|
)
|
|
|
1.58
|
|
Unvested at December 31, 2019
|
|
|
2,358,561
|
|
|
$
|
1.58
|
|
During
the years ended December 31, 2019, 2018 and 2017, the compensation expense for restricted shares granted included in “Selling,
general and administrative expenses” in the consolidated statement of operations totaled $0.5 million, $0.4 million and
$0.8 million, respectively.
As
of December 31, 2019 and 2018, there were $3.4 million and $3.9 million, respectively, of unrecognized compensation costs
related to restricted stock. The weighted average remaining vesting term of the restricted stock was 6.33 years as of December
31, 2019.
|
(d)
|
Common
Stock Valuations
|
The
exercise prices of stock options and restricted stock granted were determined contemporaneously by the Company’s Board of
Directors based on the estimated fair value of the underlying Class A Common Stock and Series A convertible Preferred Stock.
The Class A Common Stock and Series A convertible Preferred Stock valuations were based on a combination of the income approach
and two market approaches, which were used to estimate the total enterprise value of the Company. The income approach quantifies
the present value of the future cash flows that management expects to achieve from continuing operations. These future cash flows
are discounted to their present values using a rate corresponding to the Company’s estimated weighted average cost of capital.
The Company’s weighted average cost of capital is calculated by weighting the required return on interest-bearing debt and
common equity capital in proportion to their estimated percentages in the Company’s capital structure. The market approach
considers multiples of financial metrics based on acquisition values or quoted trading prices of comparable public companies.
An implied multiple of key financial metrics based on the trading and transaction values of publicly traded peers is applied to
the Company’s similar metrics in order to derive an indication of value. A marketability discount is then applied to reflect
the fact that the Company’s Class A Common Stock and Series A convertible Preferred Stock are not traded on a public
exchange. The amount of the discount varies based on management’s expectation of effecting a public offering of the Company’s
Class A Common Stock within the ensuing 12 months. The enterprise value indications from the income approach and market approaches
were used to estimate the fair value of the Company’s Class A Common Stock and Series A convertible Preferred Stock
in the context of the Company’s capital structure as of each valuation date. Each valuation was based on certain estimates
and assumptions. If different estimates and assumptions had been used, these valuations could have been different.
On
March 16, 2018, the Company’s Board of Directors approved a share repurchase program authorizing the repurchase of 6,640,447
shares of Series A convertible Preferred Stock and Class A Common Stock. The following table identifies shares of the Company’s
Series A convertible Preferred Stock and Class A Common Stock that were repurchased during 2018:
|
|
Series A
Convertible
Preferred
Stock
|
|
|
Class A
Common
Stock
|
|
Shares repurchased
|
|
|
6,422,393
|
|
|
|
94,189
|
|
Price per share
|
|
$
|
6.93
|
|
|
$
|
6.93
|
|
Total investment
|
|
$
|
44,480,466
|
|
|
$
|
652,338
|
|
The
repurchase price of $6.93 per share for the Class A Common Stock and Series A convertible Preferred Stock in excess over the fair
value was recorded as additional stock-based compensation expense if the shares repurchased were originally acquired through stock
compensation programs. If the shares were not originally acquired through stock compensation programs, the repurchase price in
excess of the carrying value of the preferred shares was recorded as a deemed dividend. This resulted in a $3.1 million stock-based
compensation expense and a $20 million deemed dividend during the year ended December 31, 2018. The Company did not repurchase
any shares for the years ended December 31, 2019 and 2017. The excess of the repurchase price over the par value of the Series
A Convertible Preferred Stock and Class A Common Stock was recorded in additional paid-in capital.
Basic
and diluted net loss per share is presented using the two-class method required for participating securities: Series AA convertible
Preferred Stock, Series A convertible Preferred Stock and Class A Common Stock. Basic net loss per share is computed using the
weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share is computed using
the weighted-average number of shares of common stock and, if dilutive, common stock equivalents outstanding during the period.
The Company’s common stock equivalents consist of shares of common stock issuable upon the exercise of stock options and
the conversion of Series AA convertible Preferred Stock and Series A convertible Preferred Stock. For the periods in which the
Company has generated net loss, the basic and diluted net loss per share are the same because common stock equivalents are excluded
from diluted net loss per share due to their antidilutive impact.
The
following table summarizes the calculation of basic and diluted net loss per common share (in thousands, except per share data):
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Net loss
|
|
$
|
(16,991
|
)
|
|
$
|
(33,603
|
)
|
|
$
|
(11,967
|
)
|
Dividend or deemed dividend paid to Series A convertible
Preferred Stock
|
|
|
-
|
|
|
|
(19,960
|
)
|
|
|
(19,247
|
)
|
Net loss attributable to common stock
|
|
|
(16,991
|
)
|
|
|
(53,563
|
)
|
|
|
(31,214
|
)
|
Weighted average common shares used for basic and diluted
net loss per share computation
|
|
|
849
|
|
|
|
664
|
|
|
|
709
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(20.01
|
)
|
|
$
|
(80.68
|
)
|
|
$
|
(44.04
|
)
|
The
following shares were excluded from the calculation of diluted net loss per share calculation as their effect would have been
anti-dilutive (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Stock options
|
|
|
2,602
|
|
|
|
3,979
|
|
|
|
5,285
|
|
Common stock issuable from the conversion of Series AA
convertible Preferred Stock and Series A convertible Preferred Stock
|
|
|
61,346
|
|
|
|
61,346
|
|
|
|
67,768
|
|
|
(16)
|
Commitments
and Contingencies
|
From
time to time, the Company is a party to various lawsuits, claims, and other legal proceedings that arise in the ordinary course
of business. The Company discloses contingencies deemed to be reasonably possible and accrues loss contingencies when, in consultation
with legal advisors, it is concluded that a loss is probable and reasonably estimable.
In February 2018, the Commonwealth
of Massachusetts Department of Revenue issued a notice of intent to assess sales/use taxes on the Company for the period from October
1, 2017 through October 31, 2017 for a total assessment of $652,255 including penalties and interest. The Department of Revenue
subsequently reduced this amount to $295,911. In May 2020, the Company received from the Commonwealth of Massachusetts Department
of Revenue another notice of assessment for sales and use taxes for the months of November 2017 through September 2018 in the amount
of $2,721,370, including penalties and interest. The Company has appealed these assessments and the Company intends to vigorously
protest them. The outcome of this matter or the timing of such payments, if any, cannot be predicted at this time.
In
2017, the Company, along with two of its subsidiaries and various third parties, were named as defendants in a case brought by
four South Korean banks in U.S. District Court for the Central District of California. The complaint alleged claims for intentional
and negligent misrepresentation, negligent supervision and unfair competition, and sought damages against the Company and two
subsidiaries. In April 2018, the Court dismissed all claims against Newegg Trading Limited without prejudice. In October 2018,
the court granted the Company’s motion to dismiss all claims against the Company and its remaining subsidiary without leave
to amend.
In
December 2014, an individual plaintiff sued Newegg.com Americas Inc. (“Newegg.com Americas”) in Superior Court in
Los Angeles County, California, alleging that Newegg.com Americas had engaged in deceptive advertising practices and seeking to
certify a class action. In 2016, the Court sustained Newegg.com Americas’ demurrer to the plaintiff’s claims without
leave to amend. The plaintiff appealed, and in July 2018 the Court of Appeal reversed the decision of the trial court, thus allowing
the case to proceed. The matter is now pending in the trial court. The Company does not believe that a loss is probable and intends
to vigorously defend itself and its subsidiaries. Depending on the amount and timing, an unfavorable result could materially affect
the Company’s business, consolidated results of operations, financial position or cash flows.
In
addition to the legal proceedings mentioned above, from time to time, the Company may become involved in legal proceedings arising
in the ordinary course of business. There can be no assurance with respect to the outcome of any legal proceeding. The outcome
of the litigation described above, the other pending lawsuits filed against the Company and other claims, including those that
may be made in the future, may be adverse to the Company, and the monetary liability and other negative operational or financial
impact may be material to the Company’s consolidated results of operations, financial position, and cash flows.
|
(17)
|
Employee
Benefit Plan
|
The
Company maintains a 401(k) defined-contribution plan for the benefit of its eligible employees. All full-time domestic employees
who have completed at least six months of service and are at least 18 years of age are eligible to participate in the plan.
Eligible employees may elect to contribute up to 100% of their eligible compensation. The Company’s matching contributions
are made at the discretion of the Company’s Board of Directors. In addition, the Company may make a profit-sharing contribution
at the sole discretion of the Board of Directors. Total contributions by the Company for each of the years ended December 31,
2019, 2018 and 2017 were $1.8 million. Contributions made by the Company are immediately 100% vested.
|
(18)
|
Related
Party Transactions
|
Investment
On
April 17, 2018, the Company acquired an equity interest in Mountain Capital Fund L.P. from Pegasus. The sole owner of Pegasus
is the spouse of a member of the Company’s Board of Directors.
Loans
to Affiliate
On
April 13, 2017, the Company loaned $12.0 million to Digital Grid under a term loan agreement with a maturity date of April 18,
2017 and an interest rate equal to the Prime Rate, as defined in the loan agreement (the “$12.0 Million Loan”). The
$12.0 Million Loan was collateralized by a security interest in 2,000,000 Series AA convertible Preferred Stock of the Company
held by Digital Grid.
On
June 16, 2017, the Company loaned $50.0 million to Digital Grid under a term loan agreement with a maturity date of June 15, 2018
and an interest rate of 4% per annum (the “$50.0 Million Loan”). The $50.0 Million Loan was collateralized by a security
interest in 43,167 Series C Shares of Razer Inc., a company incorporated under the laws of the Cayman Islands (“Razer”),
held by Digital Grid.
On
March 20, 2018, the Company loaned $20.0 million to Digital Grid under a term loan agreement with a maturity date of June 15,
2018 and an interest rate equal to 4% per annum (the “$20.0 Million Loan”). The $20.0 Million Loan was collateralized
by a security interest in 362,732,301 Ordinary Shares of Razer held by Digital Grid.
On
May 11, 2018, the Company and Digital Grid entered into an amended and restated loan agreement which combined all of the remaining
unpaid principal and interest on the $50.0 Million Loan and the $20.0 Million Loan into an amended and restated secured promissory
note of approximately $23.3M (the “$23.3 Million Loan”). The $23.3 Million Loan replaces, amends, and restates in
their respective entirety the $50.0 Million Loan and the $20.0 Million Loan. The $23.3 Million Loan had a maturity date of June
15, 2018 and carried an interest rate equal to 4% per annum. This loan was collateralized by a security interest in certain convertible
bonds of China Digital Culture (Group) Limited, a company incorporated in the Cayman Islands, in the amount of HK$412,500,000
held by Digital Grid.
On
June 15, 2018, the Company and Digital Grid entered into the First Amendment to the $23.3 Million Loan, pursuant to which the
interest rate was amended to 5% per annum and the maturity date was extended to September 30, 2018. The $23.3 Million Loan was
paid back in full by September 11, 2018. As of December 31, 2018, there was no outstanding principal balance receivable from affiliate.
On
December 17, 2019, the Company loaned $15.0 million to Digital Grid under a term loan agreement with a maturity date of April
30, 2020 and a fixed interest rate of 5.0% (the “$15.0 Million Loan”). The $15.0 Million Loan was subsequently
extended to December 31, 2020.
During
the years ended December 31, 2018 and 2017, the Company recorded interest income of $0.9 million and $1.1 million, respectively,
from loans to affiliate in interest income in the consolidated statement of operations. During the year ended December 31, 2019,
the Company’s interest income from loans to affiliate included in interest income in the consolidated statement of operations
was immaterial. As of December 31, 2019, the amount of interest receivable on the $15.0 Million Loan outstanding as a component
of “Dues from related parties” in the consolidated balance sheets was immaterial. As of December 31, 2018, there was
no outstanding interest receivable from loans to affiliate.
Loans
from Affiliate
On
January 14, 2019, the Company entered into three loan agreements with BARD Company Limited, an entity affiliated with our Chief
Executive Officer, pursuant to which the Company borrowed a total of $15.0 million. For all of the three loans, the maturity date
was March 31, 2019 unless extended to April 30, 2019 in accordance with the terms of the loan agreements, and the interest rate
is 6% per annum. The Company repaid the three loans in their entirety as of March 8, 2019.
Sales
to Related Parties
Due
from related parties and net sales to related parties primarily reflect sales of finished goods and services with the exception
of loans to affiliate as discussed above.
As
of December 31, 2019 and 2018, due from related parties represent amounts receivable of $1.5 million and $1.5
million, respectively, due from Digital Grid (Hong Kong) Technology (“Digital Grid”). Digital Grid is determined
to be a related party by virtue of common control. Sales during the year ended December 31, 2019, 2018 and 2017 to
this related party were $0, $0, and $1.5 million, respectively.
As
of December 31, 2019 and 2018, due from related parties represent amounts receivable of $4.3 million and $3.5
million, respectively, due from Connect Technova Inc. (“Connect Technova”). Connect Technova is determined
to be a related party by virtue of common control. Sales during the year ended December 31, 2019, 2018 and 2017 to
this related party were $0.8 million, $2.9 million and $0.6 million, respectively.
As
of December 31, 2019 and 2018, amount due to related parties was immaterial.
The Company’s
Chief Executive Officer, who is the chief operating decision maker (“CODM”) reviews financial information presented
on a consolidated basis. There are no segment managers who are held accountable for operations, operating results and plans for
levels or components below the consolidated unit level. The Company considers itself to be operating within one reportable segment.
Revenue from
external customers for each group of similar products and services are not reported to the CODM. The Company’s product categories
as well as the aggregation of the Company’s product SKUs (“Stock Keeping Units”) into product categories regularly
change. Separate identification of this information is impractical, as it is not readily available and the cost to develop it
would be excessive. The following table summarizes net sales from external customers for the years ended December 31, 2019, 2018
and 2017 (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
United States
|
|
$
|
1,378,843
|
|
|
$
|
1,811,254
|
|
|
$
|
1,958,475
|
|
Canada
|
|
|
117,406
|
|
|
|
158,681
|
|
|
|
151,183
|
|
Rest of world
|
|
|
37,679
|
|
|
|
52,502
|
|
|
|
48,472
|
|
Total
|
|
$
|
1,533,928
|
|
|
$
|
2,022,437
|
|
|
$
|
2,158,131
|
|
The
following table summarizes net property, plant and equipment by country (in thousands):
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
United States
|
|
$
|
20,650
|
|
|
$
|
29,297
|
|
|
$
|
30,389
|
|
Canada
|
|
|
447
|
|
|
|
718
|
|
|
|
1,100
|
|
China
|
|
|
26,033
|
|
|
|
27,427
|
|
|
|
29,985
|
|
Total
|
|
$
|
47,130
|
|
|
$
|
57,442
|
|
|
$
|
61,474
|
|
The Company has evaluated subsequent
events from the balance sheet date through October 23, 2020, the date the consolidated financial statements were issued.
|
(1)
|
On
January 30, 2020, the World Health Organization (“WHO”) announced a global
health emergency because of a new strain of coronavirus originating in Wuhan, China (the
“COVID-19 outbreak”) and the risks to the international community as the
virus spread globally beyond its point of origin. In March 2020, the WHO classified the
COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.
|
|
(2)
|
On
March 27, 2020, the ‘Coronavirus Aid, Relief, and Economic Security Act’ (the CARES Act)
was signed into law by the president. The CARES act provides several favorable tax provisions.
The Company evaluated the impacts of CARES Act and determined it has no material impact
to the income tax provision.
|
|
(3)
|
The
full impact of the COVID-19 outbreak continues to evolve as of the date of this report.
As such, it is uncertain as to the full magnitude that the pandemic will have on the
Company’s financial condition, liquidity and future results of operation. Management
is actively monitoring the global situation on its financial condition, liquidity, operations,
suppliers, industry and workforce. Given the almost daily evolution of the COVID-19 outbreak
and the global responses to curb its spread, the Company is not able to estimate the
effects of the COVID-19 outbreak on its results of operations, financial condition or
liquidity for fiscal year 2020.
|
|
(4)
|
The
Company’s online business and warehouses remain active to serve our customers during
the COVID-19 outbreak, and to-date the Company has seen increased demand for its products
and services during the outbreak.
|
|
(5)
|
However,
the course of the COVID-19 outbreak remains uncertain, and a prolonged global economic
slowdown and increased unemployment could have a material adverse impact on economic
and market conditions, which in turn could lead to a reduced demand for the Company’s
products and services.
|
|
(6)
|
As
a consequence of the COVID-19 outbreak, the Company has experienced occasional supply
constraints, primarily in the form of delays in shipment of inventory. The Company has
also experienced some increases in the cost of certain products, as well as a drop in
promotions by some manufacturers. While the Company considers such events to be relatively
minor and temporary, continued supply chain disruptions could lead to delayed receipt
of, or shortages in, inventory and higher costs, and negatively impact sales in fiscal
year 2020.
|
Although
the Company cannot estimate the length or gravity of the impact of the COVID-19 outbreak at this time, if the pandemic continues,
it may have an adverse effect on the Company’s results of future operations, financial position and liquidity in fiscal
year 2020.
During
June 2020, the Company granted a total of 7.528 million options under the Incentive Award Plan with an original exercise price
of $3.20 per share. For most grantees, the options vest at the rate of twenty-five percent on the first anniversary of the grant
date, with the remaining portion vesting in 36 equal monthly increments thereafter. For grantees who are residents of the People’s
Republic of China, the options vest each year at the rate of twenty-five percent upon the date of the latter of the following
to occur: on the anniversary of the grant date or the date the Company’s Class A Common shares first become publicly traded.
Also,
in June 2020, the Company granted a total of 1.36 million options under the Incentive Award Plan with an original exercise price
of $6.93 per share. These options vest at the rate of twenty-five percent on the first anniversary of the grant date, with
the remaining portion vesting in 36 equal monthly increments thereafter.
In September 2020, the Company
paid back the revolving credit facility of $1.4 million in full.
In October 2020, the Company entered into a lease agreement
for 275,985 square feet of office and warehouse space, with commencement date on November 1, 2020. The lease has a 100 month term,
and rental cost of approximately $193,000 per month.
LIANLUO SMART LIMITED
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019,
2018 AND 2017
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Shareholders and Board of Directors of Lianluo Smart
Limited,
Beijing, China
Opinion on the Consolidated Financial
Statements
We have audited the accompanying
consolidated balance sheet of Lianluo Smart Limited and subsidiaries (the “Company”) as of December 31, 2019, and
the related consolidated statements of operations and comprehensive loss, changes in equity and cash flows for the
year ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial
statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for the
period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
Going Concern
The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2, the Company has
experienced negative operating cash flows. These matters raise substantial doubt about the Company’s ability to continue
as a going concern. Management’s plans in regard to these matters are also described in Note 2 to the consolidated financial
statements. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with
the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required
to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are
required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures
to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe
that our audit provides a reasonable basis for our opinion.
/s/ BDO China Shu Lun Pan Certified Public Accountants LLP
|
|
BDO China Shu Lun Pan Certified Public Accountants LLP
|
|
|
|
We have served as the Company’s auditor since 2020.
|
|
|
Beijing, China
|
|
|
|
May 15, 2020, except for share combination included in Note 3, as to which the date is October 23, 2020
|
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Shareholders and Board of Directors of Lianluo Smart
Limited
Opinion on the Consolidated Financial
Statements
We have audited the accompanying consolidated
balance sheet of Lianluo Smart Limited and subsidiaries (the “Company”) as of December 31, 2018, and the related consolidated
statements of operations and comprehensive loss, changes in equity and cash flows for the two years ended December 31, 2018 and
2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion,
the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December
31, 2018, and the results of its operations and its cash flows for the two years ended December 31, 2018 and 2017, in conformity
with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with
the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required
to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are
required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures
to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe
that our audits provide a reasonable basis for our opinion.
/s/ Centurion ZD CPA & Co.
|
|
Centurion ZD CPA & Co.
|
|
(successor to Centurion ZD CPA Limited)
|
|
|
|
Hong Kong, China
|
|
|
|
May 15, 2019, except for share combination included in Note 3, as to which the date is October 23, 2020
|
LIANLUO SMART LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In U.S. dollars, except for shares data)
|
|
For the Years Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
22,834
|
|
|
$
|
477,309
|
|
Accounts receivable, net
|
|
|
61,779
|
|
|
|
92,149
|
|
Other receivables and prepayments, net
|
|
|
18,867
|
|
|
|
267,781
|
|
Advances to suppliers, net
|
|
|
7,727
|
|
|
|
152,751
|
|
Inventories, net
|
|
|
1,085,016
|
|
|
|
1,349,102
|
|
Other taxes receivable
|
|
|
337,412
|
|
|
|
374,270
|
|
Marketable equity securities
|
|
|
143,478
|
|
|
|
-
|
|
Total Current Assets
|
|
|
1,677,113
|
|
|
|
2,713,362
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
656,840
|
|
|
|
1,261,493
|
|
Construction in progress
|
|
|
-
|
|
|
|
223,772
|
|
Non-marketable equity securities
|
|
|
-
|
|
|
|
1,500,043
|
|
Total Assets
|
|
$
|
2,333,953
|
|
|
$
|
5,698,670
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
226,215
|
|
|
$
|
234,449
|
|
Advances from customers
|
|
|
267,365
|
|
|
|
232,565
|
|
Accrued expenses and other current liabilities
|
|
|
1,530,473
|
|
|
|
977,119
|
|
Warranty obligation
|
|
|
728
|
|
|
|
8,671
|
|
Due to related parties - short-term borrowings
|
|
|
1,208,331
|
|
|
|
-
|
|
Total Current Liabilities
|
|
|
3,233,112
|
|
|
|
1,452,804
|
|
|
|
|
|
|
|
|
|
|
OTHER LIABILITIES
|
|
|
|
|
|
|
|
|
Warrants liability
|
|
|
389,630
|
|
|
|
1,129,246
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
3,622,742
|
|
|
|
2,582,050
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Common stock – Class A, par value $0.021848: 4,736,111 shares
authorized as of December 31, 2019 and December 31, 2018; 836,933 shares issued and outstanding as of December 31, 2019 and
December 31, 2018
|
|
|
18,285
|
|
|
|
18,285
|
|
Common stock – Class B, par value $0.021848: 1,513,889 shares
authorized as of December 31, 2019 and December 31, 2018; 1,388,888 shares issued and outstanding as of December 31, 2019 and
December 31, 2018
|
|
|
30,345
|
|
|
|
30,345
|
|
Additional paid-in capital
|
|
|
40,833,249
|
|
|
|
40,620,772
|
|
Accumulated deficit
|
|
|
(44,607,198
|
)
|
|
|
(40,156,204
|
)
|
Accumulated other comprehensive income
|
|
|
2,436,530
|
|
|
|
2,603,422
|
|
Total Equity
|
|
|
(1,288,789
|
)
|
|
|
3,116,620
|
|
Total liabilities and equity
|
|
$
|
2,333,953
|
|
|
$
|
5,698,670
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
LIANLUO SMART LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(In U.S. dollars, except for shares data)
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
383,458
|
|
|
$
|
559,386
|
|
|
$
|
882,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenue
|
|
|
(743,744
|
)
|
|
|
(757,901
|
)
|
|
|
(1,655,970
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loss
|
|
|
(360,286
|
)
|
|
|
(198,515
|
)
|
|
|
(773,959
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service income
|
|
|
-
|
|
|
|
-
|
|
|
|
56,030
|
|
Service expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,289
|
)
|
Selling expenses
|
|
|
(835,270
|
)
|
|
|
(2,082,829
|
)
|
|
|
(1,170,378
|
)
|
General and administrative expenses
|
|
|
(2,593,808
|
)
|
|
|
(3,675,465
|
)
|
|
|
(3,192,030
|
)
|
(Provision for) recovery from doubtful accounts
|
|
|
(13,011
|
)
|
|
|
(22,229
|
)
|
|
|
23,608
|
|
Impairment loss for intangible assets
|
|
|
-
|
|
|
|
(3,281,779
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(3,802,375
|
)
|
|
|
(9,260,817
|
)
|
|
|
(5,058,018
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial income (expenses)
|
|
|
557
|
|
|
|
(37,899
|
)
|
|
|
57,077
|
|
Other (expense) income, net
|
|
|
(32,227
|
)
|
|
|
(211,151
|
)
|
|
|
94,256
|
|
Unrealized loss on marketable securities
|
|
|
(1,356,565
|
)
|
|
|
-
|
|
|
|
-
|
|
Change in fair value of warrants liability
|
|
|
739,616
|
|
|
|
599,865
|
|
|
|
(229,749
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income tax and non-controlling interest
|
|
|
(4,450,994
|
)
|
|
|
(8,910,002
|
)
|
|
|
(5,136,434
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(4,450,994
|
)
|
|
|
(8,910,002
|
)
|
|
|
(5,136,434
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: net loss attributable to non-controlling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Lianluo Smart Limited
|
|
$
|
(4,450,994
|
)
|
|
$
|
(8,910,002
|
)
|
|
$
|
(5,136,434
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation (loss) gain
|
|
|
(166,892
|
)
|
|
|
(515,477
|
)
|
|
|
380,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
(4,617,886
|
)
|
|
|
(9,425,479
|
)
|
|
|
(4,756,357
|
)
|
-less comprehensive loss attributable to non-controlling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss attributable to Lianluo Smart Limited
|
|
$
|
(4,617,886
|
)
|
|
$
|
(9,425,479
|
)
|
|
$
|
(4,756,357
|
)
|
LIANLUO SMART LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS (Continued)
(In U.S. dollars, except for shares data)
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares used in computation
|
|
|
|
|
|
|
|
|
|
-Basic and diluted
|
|
|
2,225,821
|
|
|
|
2,202,176
|
|
|
|
2,164,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
-Basic and diluted
|
|
$
|
(2.00
|
)
|
|
$
|
(4.05
|
)
|
|
$
|
(2.37
|
)
|
The accompanying notes are an integral part
of these consolidated financial statements.
LIANLUO SMART LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
EQUITY
(In U.S. dollars, except for shares data)
|
|
Common Stock
Class A
|
|
|
Common Stock
Class B
|
|
|
Additional Paid-in
|
|
|
Accumulated
|
|
|
Accumulated Other Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2017
|
|
|
775,183
|
|
|
$
|
16,936
|
|
|
|
1,388,888
|
|
|
$
|
30,345
|
|
|
$
|
37,261,366
|
|
|
$
|
(26,109,768
|
)
|
|
$
|
2,738,822
|
|
|
$
|
13,937,701
|
|
Net proceeds from issuance of common stock, net of issuance costs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,492,538
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,492,538
|
|
Stock based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
479,233
|
|
|
|
-
|
|
|
|
-
|
|
|
|
479,233
|
|
Foreign currency translation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
380,077
|
|
|
|
380,077
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,136,434
|
)
|
|
|
-
|
|
|
|
(5,136,434
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2017
|
|
|
775,183
|
|
|
$
|
16,936
|
|
|
|
1,388,888
|
|
|
$
|
30,345
|
|
|
$
|
39,233,137
|
|
|
$
|
(31,246,202
|
)
|
|
$
|
3,118,899
|
|
|
$
|
11,153,115
|
|
Issuance of shares upon excise of share-based awards
|
|
|
2,375
|
|
|
|
52
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17,799
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17,851
|
|
Issuance of shares to non-employees
|
|
|
59,375
|
|
|
|
1,297
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,122,702
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,123,999
|
|
Stock based compensation to employees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
247,134
|
|
|
|
-
|
|
|
|
-
|
|
|
|
247,134
|
|
Foreign currency translation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(515,477
|
)
|
|
|
(515,477
|
)
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,910,002
|
)
|
|
|
-
|
|
|
|
(8,910,002
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2018
|
|
|
836,933
|
|
|
$
|
18,285
|
|
|
|
1,388,888
|
|
|
$
|
30,345
|
|
|
$
|
40,620,772
|
|
|
$
|
(40,156,204
|
)
|
|
$
|
2,603,422
|
|
|
$
|
3,116,620
|
|
Stock based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
69,176
|
|
|
|
-
|
|
|
|
-
|
|
|
|
69,176
|
|
Exemption of borrowings from related party
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
143,301
|
|
|
|
-
|
|
|
|
-
|
|
|
|
143,301
|
|
Foreign currency translation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(166,892
|
)
|
|
|
(166,892
|
)
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,450,994
|
)
|
|
|
-
|
|
|
|
(4,450,994
|
)
|
Balance as of December 31, 2019
|
|
|
836,933
|
|
|
$
|
18,285
|
|
|
|
1,388,888
|
|
|
$
|
30,345
|
|
|
$
|
40,833,249
|
|
|
$
|
(44,607,198
|
)
|
|
$
|
2,436,530
|
|
|
$
|
(1,288,789
|
)
|
The accompanying notes are an integral part
of these consolidated financial statements.
LIANLUO SMART LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In U.S. dollars)
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,450,994
|
)
|
|
$
|
(8,910,002
|
)
|
|
$
|
(5,136,434
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation to employees
|
|
|
69,176
|
|
|
|
247,134
|
|
|
|
479,233
|
|
Stock-based compensation to non-employees
|
|
|
179,112
|
|
|
|
944,887
|
|
|
|
|
|
Depreciation and amortization
|
|
|
778,117
|
|
|
|
827,630
|
|
|
|
1,328,403
|
|
Loss from disposal of inventories
|
|
|
6,218
|
|
|
|
58,992
|
|
|
|
-
|
|
Change in fair value of warrants liability
|
|
|
(739,616
|
)
|
|
|
(599,865
|
)
|
|
|
229,749
|
|
Loss on disposal of equipment and intangible assets
|
|
|
18,502
|
|
|
|
232,171
|
|
|
|
-
|
|
Provision for (recovery from) doubtful accounts:
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
– accounts receivable
|
|
|
10,148
|
|
|
|
5,826
|
|
|
|
(46,831
|
)
|
– other receivables and prepayments
|
|
|
499
|
|
|
|
16,403
|
|
|
|
32,213
|
|
Change in warranty obligation
|
|
|
(7,911
|
)
|
|
|
(10,261
|
)
|
|
|
(130,885
|
)
|
(Recovery from) provision for inventory obsolescence
|
|
|
2,363
|
|
|
|
-
|
|
|
|
(73,860
|
)
|
Impairment loss for intangible assets
|
|
|
-
|
|
|
|
3,281,779
|
|
|
|
-
|
|
Unrealized loss on marketable securities
|
|
|
1,356,565
|
|
|
|
-
|
|
|
|
-
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in accounts receivable
|
|
|
20,222
|
|
|
|
(88,270
|
)
|
|
|
115,239
|
|
Decrease (increase) in advances to suppliers
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
– third parties
|
|
|
145,024
|
|
|
|
233,490
|
|
|
|
(341,776
|
)
|
– related party
|
|
|
-
|
|
|
|
-
|
|
|
|
194,311
|
|
Decrease(increase) in other receivables and prepayments
|
|
|
69,773
|
|
|
|
23,352
|
|
|
|
(71,117
|
)
|
Increase in interest receivable – related party
|
|
|
(2,523
|
)
|
|
|
(161,384
|
)
|
|
|
-
|
|
Decrease(increase) in inventories
|
|
|
255,592
|
|
|
|
(137,464
|
)
|
|
|
(2,007,026
|
)
|
Decrease(increase) in other taxes receivable
|
|
|
36,858
|
|
|
|
(92,897
|
)
|
|
|
(281,373
|
)
|
Increase(decrease) in accounts payable
|
|
|
(8,234
|
)
|
|
|
186,561
|
|
|
|
(24,563
|
)
|
Increase in interest payable- related party
|
|
|
2,053
|
|
|
|
178,708
|
|
|
|
-
|
|
Decrease in due to related parties – Trade
|
|
|
-
|
|
|
|
-
|
|
|
|
(475
|
)
|
Increase (decrease) in advances from customers
|
|
|
34,799
|
|
|
|
(80,602
|
)
|
|
|
206,646
|
|
Increase in accrued expenses and other current liabilities
|
|
|
553,354
|
|
|
|
214,245
|
|
|
|
119,549
|
|
Net cash used in operating activities
|
|
|
(1,670,903
|
)
|
|
|
(3,629,567
|
)
|
|
|
(5,408,997
|
)
|
|
|
For the years ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
Proceeds from disposal of equipment
|
|
|
23,016
|
|
|
|
1,309
|
|
|
|
-
|
|
Capital expenditures and other additions
|
|
|
-
|
|
|
|
(776,328
|
)
|
|
|
(40,780
|
)
|
Loan to a related party
|
|
|
-
|
|
|
|
(6,000,000
|
)
|
|
|
(3,000,000
|
)
|
Repayment from a related party
|
|
|
-
|
|
|
|
549,192
|
|
|
|
3,000,000
|
|
Consideration paid to BTL
|
|
|
-
|
|
|
|
-
|
|
|
|
(146,032
|
)
|
Non-marketable equity investments
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,500,043
|
)
|
Net cash provided by (used in) investing activities
|
|
|
23,016
|
|
|
|
(6,225,827
|
)
|
|
|
(1,686,855
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans from related parties
|
|
|
1,362,681
|
|
|
|
3,682,642
|
|
|
|
1,480,320
|
|
Net proceeds from option exercises
|
|
|
-
|
|
|
|
17,851
|
|
|
|
-
|
|
Net proceeds from issuance of common stock, net of issuance costs
|
|
|
-
|
|
|
|
-
|
|
|
|
1,492,538
|
|
Net cash provided by financing activities
|
|
|
1,362,681
|
|
|
|
3,700,493
|
|
|
|
2,972,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate fluctuations on cash and cash equivalents
|
|
|
(169,269
|
)
|
|
|
(177,275
|
)
|
|
|
139,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(454,475
|
)
|
|
|
(6,332,176
|
)
|
|
|
(3,983,338
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
477,309
|
|
|
|
6,809,485
|
|
|
|
10,792,823
|
|
Cash and cash equivalents at end of year
|
|
$
|
22,834
|
|
|
$
|
477,309
|
|
|
$
|
6,809,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Interest
|
|
$
|
-
|
|
|
$
|
14,840
|
|
|
$
|
3,812
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger of property and equipment and construction in progress by decreasing inventories
|
|
$
|
-
|
|
|
$
|
947,172
|
|
|
$
|
-
|
|
Offset short-term borrowings - related party against loans to a related party (including accrued interests)
|
|
$
|
-
|
|
|
$
|
5,381,589
|
|
|
$
|
-
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
|
1.
|
ORGANIZATION AND PRINCIPAL
ACTIVITIES
|
Lianluo Smart Limited (“Lianluo Smart”
or the “Company”) (previously known as “Dehaier Medical Systems Limited”) was incorporated as an international
business company under the International Business Companies Act, 1984, in the British Virgin Islands on July 22, 2003. On November
21, 2016, the Company changed its name from Dehaier Medical Systems Limited to Lianluo Smart Limited, and its NASDAQ stock ticker
from DHRM to LLIT.
On April 22, 2010, the Company completed
an initial public offering of 187,500 common shares. The offering was completed at an issuance price of $64.00 per share. Prior
to the offering, the Company had 375,000 issued and outstanding shares, and after the offering, the Company had 562,500 issued
and outstanding shares.
On April 28, 2016, the Company entered
into a definitive securities purchase agreement (the “SPA”) with Hangzhou Lianluo Interactive Information Technology
Co., Ltd. (“Lianluo Interactive” or “Hangzhou Lianluo”) to sell 1,388,888 of its common shares and warrants
to purchase common shares to Lianluo Interactive for an aggregate purchase price of $20 million (Note 14).
Lianluo Smart distributed and provided
after-sale services for medical equipment in China mainly through its wholly-owned subsidiary, Beijing Dehaier Medical Technology
Co., Limited (“Beijing Dehaier”) and Lianluo Connection Medical Wearable Device Technology (Beijing) Co., Ltd.
(“Lianluo Connection”), which were both formed in Beijing, the PRC, for the business development in the health equipment
market.
Currently, Lianluo Smart owns 100% of Lianluo
Connection and Lianluo Connection owns 100% of Beijing Dehaier.
Lianluo Smart, through its subsidiaries,
now distributes branded, proprietary medical equipment, such as sleep apnea machines, ventilator air compressors, and laryngoscope.
Standard product registration, product certification and quality management system have been established; ISO13485 industry standard
has also already been passed. It also has the distribution rights for a number of international medical equipment suppliers for
products including ventilator, laryngoscope, sleep apnea machines and other medical equipment accessories.
|
2.
|
GOING CONCERN AND LIQUIDITY
|
As of December 31, 2019, the Company had
$0.02 million in cash and cash equivalents which decreased from $0.48 million at December 31, 2018. The Company’s principal
sources of liquidity have been proceeds from issuances of equity securities, and loans from banks and related parties. As reflected
in the consolidated financial statements, the Company had a net loss of $4.45 million and used $1.67 million of cash in operation
activities for the year ended December 31, 2019. The Company had a working capital deficiency of $1.56 million. This has raised
substantial doubt about the Company’s ability to continue as a going concern. In February and March 2020, the Company obtained
approximately $7.2 million equity financing. Considering equity financing and the cost cutting activities, the Company believes
that the current cash and cash equivalents and the anticipated cash flows from operations will be sufficient to meet the anticipated
working capital requirements and expenditures for the next 12 months. The Company may, however, decide to enhance the liquidity
position or increase the cash reserve for future investments or operations through additional capital, and finance funding from
banks and/or related parties. The issuance and sale of additional equity would result in further dilution to the Company’s
shareholders. The incurrence of indebtedness would result in increased fixed obligations and could result in operating covenants
that would restrict the operations.
As described in Note 21, on January 30,
2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus
originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community as the virus spreads
globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid
increase in exposure globally.
The full impact of the COVID-19 outbreak
continues to evolve as of the date of this report. As such, it is uncertain as to the full magnitude that the pandemic will have
on the Company’s financial condition, liquidity, and future results of operations. Management is actively monitoring the
global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution
of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19
outbreak on its results of operations, financial condition, or liquidity for fiscal year 2020.
As a result of these events, the Company
assessed its near-term operations, working capital, finances and capital formation opportunities, and implemented, in late December
2019 and early February 2020, a downsizing of our operations, including workforce reductions, reductions of salaried employee compensation
and a reduction of hours worked to preserve cash resources, cut costs and focus the Company’s operations on customer-centric
sales and project management activities. The extent to which COVID-19 will impact the Company’s business and financial results
will depend on future developments, which are uncertain and cannot be predicted at this time.
The Company’s service was suspended
due to restrictions and hospital closures except for essential services in February 2020 and recovered gradually in March 2020
as hospitals began to resume business.
The duration and likelihood of success
of the Company’s downsizing effort, workforce reduction and cost-cutting measures are uncertain. If these actions do not
meet the expectations, or additional capital is not available, the Company may not be able to continue their operations. Other
factors that will affect the ability to continue operations include the market demand for the products and services, the ability
to service the needs of the Company’s customers and prospects with a reduced workforce, potential contract cancellations,
project scope reductions and project delays, management of the working capital, the availability of cash to fund the operations,
and the continuation of normal payment terms and conditions for purchase of the products and services.
|
3.
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
|
Basis of Presentation
The accompanying consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.
GAAP”).
Basis of Consolidation
The consolidated financial statements include
the accounts of Lianluo Smart and its wholly-owned subsidiaries. All inter-company transactions and balances are eliminated in
consolidation.
Share Combination
On October 21, 2020, the Company completed
a share combination of its common shares at a ratio of one-for-eight, which decreased the Company’s outstanding Class A common
shares from 17,685,475 shares to 2,210,683 shares and the Company’s outstanding Class B common shares from 11,111,111 shares
to 1,388,888 shares. This share combination also decreased the Company’s authorized shares to 6,250,000 common shares of
par value of $0.021848 each, of which 4,736,111 are designated as Class A common shares and 1,513,889 are designated as Class
B common shares.
Accordingly, all share and per share information
has been restated to retroactively show the effect of this share combination.
Foreign currency translation and transactions
The functional currency of Lianluo Smart
Limited is United States dollars (“$” or “$”). The functional currency of Beijing Dehaier and Lianluo Connection
are Renminbi (“RMB”), and PRC is the primary economic environment in which the Company operates. Transactions denominated
in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at
the dates of the transactions. The resulting exchange differences are included in the determination of net income for the respective
periods.
The financial statements of the Company’s
foreign operations are translated into $ in accordance with ASC 830-10, “Foreign Currency Matters”. For financial
reporting purposes, the financial statements of the Company’s PRC subsidiary are prepared using RMB are translated into Company’s
reporting currency, the $. Assets and liabilities are translated using the exchange rate at each balance sheet date. Revenue and
expenses are translated using average rates prevailing during each reporting period, and Shareholders’ equity is translated
at historical exchange rates except for the change in retained earnings during the year which is the result of the income. The
cumulative translation adjustments are recorded in accumulated other comprehensive income in the accompanying consolidated statements
of shareholders’ equity.
The exchange rates applied are as follows:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
RMB to $ exchange rate at balance sheets dates,
|
|
|
6.9762
|
|
|
|
6.8755
|
|
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Average RMB to $ exchange rate for each year
|
|
|
6.8985
|
|
|
|
6.6090
|
|
|
|
6.7553
|
|
No representation is made that the RMB
amounts could have been, or could be, converted into U.S. dollars at the rates used in translation. The source of the exchange
rates is generated from People’s Bank of China.
Use of Estimates
The preparation of the consolidated financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting periods. Estimates are adjusted to reflect actual experience
when necessary. Significant accounting estimates reflected in the Company’s consolidated financial statements include revenue
recognition, reserve for doubtful accounts, valuation of inventories, impairment testing of long-term assets, standard warranty
obligation, warrants liability, stock-based compensation, recoverability of intangible assets, property and equipment, and realization
of deferred tax assets. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash
on hand and highly liquid investments which are unrestricted as to withdrawal or use, and which have maturities of three months
or less when purchased. The Company maintains uninsured cash and cash equivalents with various financial institutions in the PRC.
Accounts Receivable, net
Accounts receivable are presented net of
an allowance for doubtful accounts. The Company maintains an allowance for doubtful accounts for estimated losses. The Company
reviews the accounts receivable on a periodic basis and makes general and specific allowance when there is doubt as to the collectability
of individual balances. In evaluating the collectability of individual receivable balance, the Company considers many factors,
including the age of the balance, a customer’s historical payment history, its current credit-worthiness and current economic
trends. Accounts are written off after exhaustive efforts at collection. Accounts receivable terms typically are net 60-180 days
from when the services were provided, or when goods were delivered. At December 31, 2019 and 2018, the Company has established,
based on a review of its outstanding balances, an allowance for doubtful accounts in the amounts of $36,416 and $26,773, respectively.
Other Receivables and Prepayments, net
Other receivables and prepayments primarily
include advances to employees, prepaid rentals and deposits to landlords and service providers. Management regularly reviews aging
of receivables and prepayments and changes in payment trends and records a reserve when management believes collection of amounts
due are at risk. Accounts considered uncollectible are written off after exhaustive efforts at collection.
Advances to Suppliers, net
The Company, as a common practice in the
PRC, often makes advance payments to suppliers for unassembled parts. Advances to suppliers are reviewed periodically to determine
whether their carrying value has become impaired.
Fair Value of Financial Instruments
ASC Topic 820, “Fair Value Measurements
and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. Fair value is the price
that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market
for the asset or liability in an orderly transaction between market participants at the measurement date. ASC Topic 825, “Financial
Instruments,” defines fair value and establishes a three-level valuation hierarchy for disclosures of fair value measurement
that enhances disclosure requirements for fair value measures. The Company’s carrying amounts reported in the consolidated
balance sheets for receivables and current liabilities each qualify as financial instruments are a reasonable estimate of their
fair values because carrying value of cash and cash equivalents, accounts receivable, accounts payable, other payables and accrued
liabilities approximate fair value because of the short-term nature of these items. The estimated fair values of short-term related
party borrowings were not materially different from their carrying value as presented due to the short maturities. As the carrying
amounts are reasonable estimates of the fair value, these financial instruments are classified within Level 1 of the fair value
hierarchy. The three levels of valuation hierarchy are defined as follows:
|
●
|
Level 1 inputs to the valuation
methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
●
|
Level 2 inputs to the valuation
methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the
asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
|
|
●
|
Level 3 inputs to the valuation
methodology are unobservable and significant to the fair value measurement.
|
Financial assets and liabilities are classified
in their entirety based on the lowest level of input that is significant to the fair value measurement.
The marketable equity securities are accounted
at fair value, with changes in fair value recorded through earnings. The fair value of marketable equity securities was determined
using the quote price in the active market, with Level 1 inputs (Note 9).
The fair value of warrants was determined
using the Black Scholes Model, with level 3 inputs (Note 14).
Warrant Liability
For warrants that are not indexed to the
Company’s stock, the Company records the fair value of the issued warrants as a liability at each balance sheet date and
records changes in the estimated fair value as a non-cash gain or loss in the consolidated statement of operations and comprehensive
income. The warrant liability is recognized in the balance sheet at the fair value (level 3). The fair value of these warrants
has been determined using the Black-Scholes pricing mode. The Black-Scholes pricing model provides for assumptions regarding volatility,
call and put features and risk-free interest rates within the total period to maturity.
Inventories
Inventories include raw materials, working
in progress and finished goods and consist of assembled and unassembled parts relating to medical devices. Inventories are stated
at the lower of cost or net realizable value. Cost is determined on a weighted-average basis. Management compares the cost of inventories
with the net realizable value and writes down inventories to net realizable value, if lower. Net realizable value is based on estimated
selling prices in the ordinary course of business less cost to sell. These estimates are based on the current market and economic
condition and the historical experience of selling products of similar nature. Management of the Company reassesses the estimations
at the end of each reporting period.
Property and Equipment
Property and equipment are recorded at
cost less accumulated depreciation and impairment losses, if any. Depreciation is calculated on a straight-line basis over the
following estimated useful lives:
Leasehold improvements
|
|
Shorter of the useful lives or the lease term
|
Machinery and equipment
|
|
2 - 3 years
|
Furniture and office equipment
|
|
3 - 5 years
|
Motor vehicles
|
|
3 years
|
Construction in progress represents capital
expenditures for direct costs of construction or acquisition. Capitalization of these costs ceases and the construction in progress
is transferred to the appropriate category of property, plant and equipment when substantially all the activities necessary to
prepare the assets for their intended use are completed. Construction in progress is not depreciated.
Intangible Assets
Intangible assets are recorded at cost
less accumulated amortization and impairment losses, if any. Amortization is calculated on a straight-line basis over the following
estimated useful lives:
Software copyrights
|
20 years
|
Patent rights
|
10 years
|
Other software
|
5 years
|
Impairment of Long-Lived Assets
Long-lived assets such as property and
equipment and intangible assets subject to amortization are reviewed for impairment whenever events or circumstances indicate that
the carrying amount of an asset may not be fully recoverable. When these events occur, the Company compares the carrying value
of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the asset and eventual
disposition. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, an impairment
loss, equal to the excess of the carrying amount over the fair value of the asset, is recognized. Fair value is generally determined
using the asset’s expected future discounted cash flows or market value, if readily determinable. Based on its review, the
Company determined that, for the years ended December 31, 2019 and 2018, impairment loss for intangible assets was $nil and $3,281,779,
respectively.
Equity securities
The Company’s equity securities represent
equity investments in Guardion Health Sciences, Inc. (“GHSI”) made in November 2017. The Company holds less than 5%
of the GHSI’s total shares. Details see Note 9. The equity securities were accounted for as non-marketable securities in
2018 on the balance sheets and as marketable securities in 2019 when GHSI went public in April 5, 2019.
Prior to January 1, 2018, the Company accounted
for the equity securities at cost and only adjusted for other-than-temporary declines in fair value and distributions of earnings.
An impairment loss was recognized in the consolidated statements of operations equal to the excess of the investment’s cost
over its fair value at the balance sheet date of the reporting period for which the assessment was made. The fair value would then
become the new cost basis of investments.
Subsequent to the adoption of ASU 2016-01
on January 1, 2018, equity investments, except for those accounted for under the 2016-01 equity method, those that result in consolidation
of the investee and certain other investments, are measured at fair value, and any changes in fair value are recognized in earnings.
For equity securities without readily determinable fair value and do not qualify for the existing practical expedient in Accounting
Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”) to estimate
fair value using the net asset value per share (or its equivalent) of the investment, the Company elected to use the measurement
alternative to measure those investments at cost, less any impairment, plus or minus changes resulting from observable price changes
in orderly transactions for identical or similar investments of the same issuer, if any. Pursuant to ASU 2016-01, for equity investments
measured at fair value with changes in fair value recorded in earnings, the Company does not assess whether those securities are
impaired. For those equity investments that the Company elects to use the measurement alternative, the Company makes a qualitative
assessment of whether the investment is impaired at each reporting date.
As of December 31, 2018, the investment
without readily determinable fair value was accounted for under the measurement alternative method of accounting. The investment
was measured at cost, less any impairment, plus or minus any changes resulting from observable price changes in orderly transactions
for an identical or similar investment of the same issuer. As of December 31, 2019, the investment was accounted at fair value
with changes recorded through earnings.
Revenue Recognition
In May 2014 the FASB issued Accounting
Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASC 606), which supersedes all existing
revenue recognition requirements, including most industry specific guidance. This new standard requires a company to recognize
revenues when it transfers goods or services to customers in an amount that reflects the consideration that the company expects
to receive for those goods or services. We adopted these amendments with ASU 2014-09 (collectively, the new revenue standards).
The new revenue standards became effective
for the Company on January 1, 2018, and were adopted using the modified retrospective method. The adoption of the new revenue standards
as of January 1, 2018 did not change the Company’s revenue recognition as the majority of its revenues continue to be recognized
when the customer takes control of its product or services. As the Company did not identify any accounting changes that impacted
the amount of reported revenues with respect to its product revenues, no adjustment to accumulated deficit was required upon adoption.
Under the new revenue standards, the Company
recognizes revenues when its customer obtains control of promised goods or services, in an amount that reflects the consideration
which it expects to receive in exchange for those goods. The Company recognizes revenues following the five step model prescribed
under ASU No. 2014-09: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii)
determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize
revenues when (or as) the Company satisfies the performance obligation.
The following is a description of principal
activities from which the Company generates revenue and related revenue recognition policies:
|
1.
|
Sale of medical equipment
|
The Company distributes medical
equipment, such as sleep apnea machines, ventilator air compressors, laryngoscope, in China. Control of products sold transfers
to customers upon shipment from the Company’s facilities, and the Company’s performance obligations are satisfied at
that time. Shipping and handling activities are performed before the customer obtains control of the goods and therefore represent
a fulfillment activity rather than a promised service to the customer. The Company also provides after-sale services for medical
equipment, such as sleep apnea machines, ventilator air compressors, laryngoscope, in China. The Company typically sells its branded
products with standard warranty terms covering 12 months after purchase. The warranty requires the Company to repair all mechanical
malfunctions and, if necessary, replace defective components.
The Company evaluates its arrangements
with distributors and determines that it is the primary obligor in the sales of distributed products, is subject to inventory risk,
has latitude in establishing prices, and assumes credit risk for the amount billed to the customer, or has several but not all
of these indicators. In accordance with ASC 606, the Company determines that it is appropriate to record the gross amount of product
sales and related costs. As the Company is a principal and it obtains control of the specified goods before they are transferred
to the customers, the revenues should be recognized in the gross amount of consideration to which it expects to be entitled in
exchange for the specified goods transferred.
|
2.
|
Provision of sleep diagnostic
services
|
Starting from 2018, the Company
started to earn service revenue from provision of technical services in relation to detection and analysis of Obstructive Sleep
Apnea Syndrome (“OSAS”). The Company is focused on the promotion of sleep respiratory solutions and service in public
hospitals. Its wearable sleep diagnostic products and cloud-based service are also available in medical centers of Chinese private
preventive healthcare companies in China. Revenue is recognized when the Company’s diagnostic services are provided to the
user at medical centers and public hospitals.
In the PRC, value added tax (“VAT”)
of 13% and 6% of the invoice amount is collected in respect of the sales of goods and service rendered, respectively, on behalf
of tax authorities. The VAT collected is not revenue of the Company; instead, the amount is recorded as a liability on the balance
sheet until such VAT is paid to the authorities.
Cost of Revenues
Cost of revenues primarily includes wages
to assemble parts and the costs of unassembled parts, other expenses associated with the assembly and distribution of products
and depreciation of fixed assets in the provision of services.
Selling Expenses
Selling expenses consist primarily of salaries
and related expenses for personnel engaged in sales, marketing and customer support functions, and costs associated with advertising
and other marketing activities, and depreciation expenses related to equipment used for sales and marketing activities.
General and Administrative Expenses
General and administrative expenses primarily
consist of salaries and benefits and related costs for our administrative personnel and management, stock-based compensation, expenses
associated with our research and development, registration of patents and intellectual property rights in China and abroad, fees
and expenses of our outside advisers, including legal, audit and register expenses, expenses associated with our administrative
offices, and the depreciation of equipment used for administrative purposes.
Advertising Expenses
Advertising expenses are expensed as incurred.
For the years ended December 31, 2019, 2018 and 2017, advertising and promotional expenses recognized in the consolidated statements
of comprehensive loss were $19,811, $56,259 and $76,592, respectively.
Warranty
The Company typically sells its branded
products with standard warranty terms covering 12 months after purchase. The warranty requires the Company to repair all mechanical
malfunctions and, if necessary, replace defective components.
The Company provides for the estimated
cost of product warranties at the time revenue is recognized and records warranty expenses in the selling expenses. The Company’s
warranty obligation is affected by product failure rates and material usage and service delivery costs incurred in correcting product
failure. Should actual material usage or service delivery costs differ from the Company’s estimates, the Company may reverse
warranty liability at warranty expiry date.
Recovery gain from warranty expense accrued
for the years ended December 31, 2019, 2018 and 2017 was $(7,911), $(10,261) and $(130,885), respectively.
Research and Development Costs
Research and development costs relating
to the development of new products and processes, including significant improvements and refinements to existing products, are
expensed as incurred, and included in general and administrative expenses. Research and development costs were $0, $301,713 and
$344,575 for the years ended December 31, 2019, 2018 and 2017, respectively.
Government Subsidies
Government subsidies primarily consist
of financial subsidies received from provincial and local governments for operating a business in their jurisdictions and compliance
with specific policies promoted by the local governments. For certain government subsidies, there are no defined rules and regulations
to govern the criteria necessary for companies to receive such benefits, and the amount of government subsidy is determined at
the discretion of the relevant government authorities. The government subsidies of non-operating nature with no further conditions
to be met are recorded as non-operating income in “Other income” when received. The government subsidies with certain
operating conditions are recorded as “deferred income” when received and will be recorded as operating income when
the conditions are met. During the years ended December 31, 2019, 2018 and 2017, government subsidies with no further conditions
to be met of $0, $0 and $17,394, respectively, were recorded.
Leases
Leases where substantially all the rewards
and risk of assets remain with the leasing company are accounted for as operating leases. Payments made under operating leases
are charged to the consolidated statement of operations on a straight-line basis over the shorter of the lease term or estimated
economic life of the leased property. The majority of the Company’s leases were short term (less than 12 months) and the
Company elected the practical expedient not to record right of use of assets for short term leases.
Loss per Share
The Company follows the provisions of ASC
260-10, “Earnings per Share”. The Company has been authorized to issue Class A and Class B common stock. The
two classes of common stock are substantially identical in all material respects, except for voting rights. Since the Company did
not declare any dividends during the years ended December 31, 2019 and 2018, the net loss per common share attributable to each
class is the same under the “two-class” method. As such, the two classes of common stock have been presented on a combined
basis in the consolidated statements of operations and comprehensive income and in the above computation of net income per common
share.
Diluted loss per share reflect the potential
dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares.
Common stock equivalents having an anti-dilutive effect on earnings per share are excluded from the calculation of diluted loss
per share.
Value Added Tax
The Company reports revenues, net of PRC’s
value added tax, for all the periods presented in the consolidated statements of income and comprehensive income.
Stock-Based Compensation
The Company accounts for stock-based share-based
compensation awards to employees at fair value on the grant date and recognizes the expense over the employee’s requisite
service period. The Company’s expected volatility assumption is based on the historical volatility of Company’s stock
or the expected volatility of similar entities. The expected life assumption is primarily based on historical exercise patterns
and employee post-vesting termination behavior. The risk-free interest rate for the expected term of the option is based on the
U.S. Treasury yield curve in effect at the time of grant. The expected dividend is zero based on the Company’s current and
expected dividend policy.
Share-based compensation expenses for stock-based
share-based compensation awards granted to non-employees are measured at fair value at the earlier of the performance commitment
date or the date service is completed, and recognized over the period during which the service is provided. The Company applies
the guidance in ASC 718 to measure share options and restricted shares granted to non-employees based on the then-current fair
value at each reporting date.
Comprehensive
income
Comprehensive
income is comprised of net income and all changes to the statements of stockholders’ equity, except those due to investments
by stockholders, changes in paid-in capital and distributions to stockholders. For the Company, comprehensive income for the years
ended December 31, 2019, 2018 and 2017 included cumulative foreign currency translation adjustments.
Segment Information
The Company’s segments are business
units that offer different products and services and are reviewed separately by the chief operating decision maker (the “CODM”),
in deciding how to allocate resources and in assessing performance. The Company’s CODM is the Company’s Chief Executive
Officer. During 2017, there was only one segment, which is the business of developing, commercializing and distribution of medical
equipment, such as sleep apnea machines, ventilator air compressors, and laryngoscope. During 2018, the Company started to earn
service revenue from provision of technical services in relation to diagnosis of Obstructive Sleep Apnea Syndrome (“OSAS”).
The Company is focused on the promotion of sleep respiratory solutions and service in public hospitals. Its wearable sleep diagnostic
products and cloud-based service are also available in medical centers of Chinese private preventive healthcare companies in China.
We have two reportable segments: sale of medical equipment and provision of OSAS during 2018 and 2019.
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Sale of medical equipment
|
|
$
|
212,394
|
|
|
$
|
342,344
|
|
|
$
|
882,011
|
|
Provision of OSAS diagnostic services
|
|
|
171,064
|
|
|
|
217,042
|
|
|
|
-
|
|
Total net revenues
|
|
|
383,458
|
|
|
|
559,386
|
|
|
|
882,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of medical equipment
|
|
|
(112,942
|
)
|
|
|
(464,918
|
)
|
|
|
(1,655,970
|
)
|
Provision of OSAS diagnostic services
|
|
|
(630,802
|
)
|
|
|
(292,983
|
)
|
|
|
-
|
|
|
|
|
(743,744
|
)
|
|
|
(757,901
|
)
|
|
|
(1,655,970
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loss
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of medical equipment
|
|
|
99,452
|
|
|
|
(122,574
|
)
|
|
|
(773,959
|
)
|
Provision of OSAS diagnostic services
|
|
|
(459,738
|
)
|
|
|
(75,941
|
)
|
|
|
-
|
|
|
|
|
(360,286
|
)
|
|
|
(198,515
|
)
|
|
|
(773,959
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of medical equipment
|
|
$
|
84,371
|
|
|
$
|
535,800
|
|
|
$
|
1,328,403
|
|
Provision of OSAS diagnostic services
|
|
|
693,746
|
|
|
|
291,830
|
|
|
|
-
|
|
|
|
$
|
778,117
|
|
|
$
|
827,630
|
|
|
$
|
1,328,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditure
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of medical equipment
|
|
$
|
-
|
|
|
$
|
16,137
|
|
|
$
|
40,780
|
|
Provision of OSAS diagnostic services
|
|
|
-
|
|
|
|
760,191
|
|
|
|
-
|
|
|
|
$
|
-
|
|
|
$
|
776,328
|
|
|
$
|
40,780
|
|
The total assets for the two reportable
segments were shared and indistinguishable for reporting purposes.
Concentrations
of credit, economic, political risks and exchange risks
The Company’s operations are carried
out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the
political, economic and legal environment in the PRC, and by the general state of the PRC’s economy. The Company’s
operation in the PRC is subject to special considerations and significant risks not typically associated with companies in North
America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and
foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions
in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency
conversion, remittances aboard, and rates and methods of taxation, among other things.
Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. All of the Company’s
cash is maintained with state-owned banks within the PRC and none of these deposits are covered by insurance. The Company has not
experienced any losses in such accounts. A portion of the Company’s sales are credit sales which are primarily to customers
whose abilities to pay are dependent upon the industry economics prevailing in these areas; however, concentrations of credit risk
with respect to trade accounts receivables are limited due to generally short payment terms. The Company also performs ongoing
credit evaluations of its customers to help further reduce credit risk.
The Company cannot guarantee that the current
exchange rate will remain steady. Therefore, there is a possibility that the Company could post the same amount of profit for two
comparable periods and yet, because of a fluctuating exchange rates, record higher or lower profit depending on exchange rate of
PRC Renminbi (RMB) converted to U.S. dollars on the relevant dates. The exchange rate could fluctuate depending on changes in the
political and economic environment without notice.
Income Taxes
The Company uses the asset and liability
method of accounting for income taxes in accordance with ASC 740, “Accounting for Income Taxes.” Under this method,
income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current year; and, (ii) deferred tax
consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements
or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation
reserve is provided to reduce the deferred tax assets reported if, based on the weight of available positive and negative evidence.
Based on management’s estimate, it is more likely than not that all of the deferred tax assets will not be realized.
ASC 740 prescribes a recognition threshold
and measurement attribute for the financial statement recognition of a tax position taken or expected to be taken on a tax return.
Under ASC 740, a tax benefit from an uncertain tax position taken or expected to be taken may be recognized only if it is “more
likely than not” that the position is sustainable upon examination, based on its technical merits. The tax benefit of a qualifying
position under ASC 740 would equal the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate
settlement with a taxing authority having full knowledge of all the relevant information. A liability (including interest and penalties,
if applicable) is established in the financial statements to the extent a current benefit has been recognized on a tax return for
matters that are considered contingent upon the outcome of an uncertain tax position. Related interest and penalties, if any, are
included as components of income tax expense and income taxes payable.
The implementation of ASC 740 resulted
in no material liability for unrecognized tax benefits. The Company recognizes interest and penalties, if any, related to unrecognized
tax benefits as income tax expense in the statements of income and comprehensive income. During the years ended December 31, 2019,
2018 and 2017, the Company did not incur any interest or penalties.
Recently Adopted Accounting Standards
In May 2014, the FASB issued ASU No. 2014-09,
“Revenue from Contracts with Customers (Topic 606).” This guidance supersedes current guidance on revenue recognition
in Topic 605, “Revenue Recognition.” In addition, there are disclosure requirements related to the nature, amount,
timing, and uncertainty of revenue recognition. In August 2015, the FASB issued ASU No. 2015-14 to defer the effective date of
ASU No. 2014-09 for all entities by one year. For public business entities that follow U.S. GAAP, the deferral results in the new
revenue standard are being effective for fiscal years, and interim periods within those fiscal years, beginning after December
15, 2017, with early adoption permitted for interim and annual periods beginning after December 15, 2016. We applied the new revenue
standard beginning January 1, 2018. We have analyzed the Company’s revenue from contracts with customers in accordance with
the new revenue standard and determined the impact on the consolidated financial statements was not material.
In June 2018, the FASB issued ASU 2018-07,
“Improvements to Nonemployee Share-Based Payment Accounting”, which expands the requirements of ASC Topic 718 to include
nonemployee share-based payment awards while it retains specific guidance related to the attribution of compensation cost and provides
for potential differences in the valuation of options. ASU 2018-07 supersedes Subtopic 505-50, “Equity—Equity-Based
Payments to Non-Employees”, and is effective for public business entities for annual and interim periods in fiscal years
beginning after December 15, 2018. We adopted the ASU 2018-07 beginning January 1, 2019. The standard did not have a material impact
on our consolidated financial statements.
Codification Improvements to Topic 842,
Leases (“ASU 2018-10”) and ASU 2018-11, Leases (Topic 842), Targeted Improvements (“ASU 2018-11”). The
amendments in ASU 2018-10 affect only narrow aspects of the guidance issued in the amendments in ASU 2016-02, including but not
limited to lease residual value guarantee, rate implicit in the lease and lease term and purchase option. The amendments in ASU
2018-11 provide an optional transition method for adoption of the new standard, which will allow entities to continue to apply
the legacy guidance in ASC 840, including its disclosure requirements, in the comparative periods presented in the year of adoption.
Effective January 1, 2019 we adopted the
new standard using the modified retrospective approach and implemented internal controls to enable the preparation of financial
information upon adoption. We elected to adopt both the transition relief provided in ASU 2018-11 and the package of practical
expedients which allowed us, among other things, to retain historical lease classifications and accounting for any leases that
existed prior to adoption of the standard. Additionally, we elected the practical expedients allowing us not to separate lease
and non-lease components and not record leases with an initial term of twelve months or less (“short-term leases”)
on the balance sheet across all existing asset classes. The standard did not materially impact our consolidated statements of operations
or cash flows.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13,
“Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments”, which
will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The
guidance replaces the incurred loss impairment methodology with an expected credit loss model for which a company recognizes an
allowance based on the estimate of expected credit loss. The Company is currently evaluating the impact of adopting this standard
on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04,
“Intangibles—Goodwill and Other (Topic 350): simplifying the test for goodwill impairment”, the guidance removes
Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be
the amount by which a reporting unit’s carrying value exceeds its fair value, not the difference between the fair value and
carrying amount of goodwill which was the step 2 test before. The ASU should be adopted on a prospective basis for the annual or
any interim goodwill impairment tests beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill
impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of adopting this
standard on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13,
“Changes to the Disclosure Requirements for Fair Value Measurement.” This standard eliminates the current requirement
to disclose the amount or reason for transfers between level 1 and level 2 of the fair value hierarchy and the requirement to disclose
the valuation methodology for level 3 fair value measurements. The standard includes additional disclosure requirements for level
3 fair value measurements, including the requirement to disclose the changes in unrealized gains and losses in other comprehensive
income during the period and permits the disclosure of other relevant quantitative information for certain unobservable inputs.
The new guidance is effective for interim and annual periods beginning after December 15, 2019. The Company does not anticipate
that the adoption of the new standard will have a material effect on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15,
“Internal-Use Software – Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement.”
This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement service contract with
the guidance to capitalize implementation costs of internal use software. The ASU also requires that the costs for implementation
activities during the application development phase be capitalized in a hosting arrangement service contract, and costs during
the preliminary and post implementation phase are expensed. The new guidance is effective for interim and annual periods beginning
after December 15, 2019. The Company is currently evaluating the impact of adoption of this standard, but does not anticipate that
the adoption will have a material effect on its consolidated financial statements.
In October 2018, the FASB issued ASU 2018-17,
Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities, (“ASU 2018-17”).
ASU 2018-17 requires reporting entities to consider indirect interests held through related parties under common control on a proportional
basis rather than as the equivalent of a direct interest in its entirety for determining whether a decision-making fee is a variable
interest. The standard is effective for all entities for financial statements issued for fiscal years beginning after December
15, 2019, and interim periods within those fiscal years. Early adoption is permitted. Entities are required to apply the amendments
in ASU 2018-17 retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period
presented. The Company does not anticipate that the adoption of the new standard will have a material effect on its consolidated
financial statements.
In April 2019, the FASB issued ASU 2019-04,
Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825,
Financial Instruments, (“ASU 2019-04”). ASU 2019-04 clarifies and improves areas of guidance related to the recently
issued standards on credit losses (ASU 2016-13), hedging (ASU 2017-12), and recognition and measurement of financial instruments
(ASU 2016-01). The amendments generally have the same effective dates as their related standards. If already adopted, the amendments
of ASU 2016-01 and ASU 2016-13 are effective for fiscal years beginning after December 15, 2019 and the amendments of ASU 2017-12
are effective as of the beginning of the Company’s next annual reporting period; early adoption is permitted. The Company
previously adopted ASU 2016-01. The Company does not anticipate that the adoption of the new standard will have a material effect
on its consolidated financial statements.
In March 2020, the FASB issued ASU 2020-03,
Codification Improvements to Financial Instruments, (“ASU 2020-03”). ASU 2020-03 improves various financial instruments
topics, including the CECL Standard. ASU 2020-03 includes seven different issues that describe the areas of improvement and the
related amendments to GAAP, intended to make the standards easier to understand and apply by eliminating inconsistencies and providing
clarifications. The amendments related to Issue 1, Issue 2, Issue 4 and Issue 5 were effective upon issuance of ASU 2020-03. The
amendments related to Issue 3, Issue 6 and Issue 7 were effective for the Company beginning on January 1, 2020. The Company does
not anticipate that the adoption of the new standard will have a material effect on its consolidated financial statements.
|
4.
|
ACCOUNTS RECEIVABLE,
NET
|
Accounts receivable as of December 31,
2019 and 2018 consist of the following:
|
|
2019
|
|
|
2018
|
|
Accounts receivable
|
|
$
|
98,195
|
|
|
$
|
118,922
|
|
Less: reserve for doubtful accounts
|
|
|
(36,416
|
)
|
|
|
(26,773
|
)
|
Accounts receivable, net
|
|
$
|
61,779
|
|
|
$
|
92,149
|
|
During the years ended December 31, 2019,
2018 and 2017, bad debts (recovery of bad debts) were $10,148, $5,826 and $(46,831) respectively.
|
5.
|
OTHER RECEIVABLES AND
PREPAYMENTS, NET
|
Other receivables and prepayments as of
December 31, 2019 and 2018 consist of the following:
|
|
2019
|
|
|
2018
|
|
Rental deposits
|
|
$
|
36,846
|
|
|
$
|
43,838
|
|
Prepaid expenses
|
|
|
29,939
|
|
|
|
271,965
|
|
Advances to employees
|
|
|
78
|
|
|
|
47
|
|
|
|
|
66,863
|
|
|
|
315,850
|
|
Less: reserves for doubtful accounts
|
|
|
(47,996
|
)
|
|
|
(48,069
|
)
|
Other receivables, net
|
|
$
|
18,867
|
|
|
$
|
267,781
|
|
During the years ended December 31, 2019,
2018 and 2017, bad debts on other receivables were $499, $16,403 and $32,213, respectively.
Inventories as of December 31, 2019 and
2018 consist of the following:
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
25,985
|
|
|
$
|
27,638
|
|
Work in progress
|
|
|
779
|
|
|
|
902
|
|
Finished goods
|
|
|
1,060,615
|
|
|
|
1,320,562
|
|
Total inventories
|
|
|
1,087,379
|
|
|
|
1,349,102
|
|
Less: inventory impairment loss
|
|
|
(2,363
|
)
|
|
|
-
|
|
Inventories, net
|
|
$
|
1,085,016
|
|
|
$
|
1,349,102
|
|
During the years ended December 31, 2019,
2018 and 2017, write-downs of inventories to lower of cost or net realizable value of $2,363, $0 and $(73,860), respectively, were
(credited against) charged to costs of revenue in relation to the Company’s operations. Subsequent sale of impaired inventory
items is recorded as credits to inventory write-downs previously recorded.
|
7.
|
PROPERTY AND EQUIPMENT,
NET
|
Property and equipment as of December 31,
2019 and 2018 consist of the following:
|
|
2019
|
|
|
2018
|
|
Plant and machinery
|
|
$
|
1,915,160
|
|
|
$
|
1,770,626
|
|
Automobiles
|
|
|
137,367
|
|
|
|
139,380
|
|
Office and computer equipment
|
|
|
22,689
|
|
|
|
37,005
|
|
Total property and equipment
|
|
|
2,075,216
|
|
|
|
1,947,011
|
|
Less: Accumulated depreciation
|
|
|
(1,418,376
|
)
|
|
|
(685,518
|
)
|
Property and equipment, net
|
|
$
|
656,840
|
|
|
$
|
1,261,493
|
|
Depreciation from the Company’s operations
was $778,117, $467,929 and $974,432 for the years ended December 31, 2019, 2018 and 2017 respectively.
The Company did not record any impairment
on its property and equipment for the years ended December 31, 2019, 2018 and 2017.
|
8.
|
INTANGIBLE ASSETS, NET
|
Intangible assets as of December 31, 2019
and 2018 consist of the following:
|
|
2019
|
|
|
2018
|
|
Software copyright
|
|
$
|
1,673,830
|
|
|
$
|
1,698,359
|
|
Patent and others
|
|
|
2,975,905
|
|
|
|
3,019,516
|
|
Total intangible assets
|
|
|
4,649,735
|
|
|
|
4,717,875
|
|
|
|
|
|
|
|
|
|
|
Less: Accumulated amortization
|
|
|
(1,541,480
|
)
|
|
|
(1,564,070
|
)
|
Less: Impairment loss
|
|
|
(3,108,255
|
)
|
|
|
(3,153,805
|
)
|
Intangible assets, net
|
|
$
|
-
|
|
|
$
|
-
|
|
Amortization expense from the Company’s
continuing operations was $0, $359,701 and $353,971 for the years ended December 31, 2019, 2018 and 2017, respectively.
The Company recorded impairment on its
intangible assets from its continuing operations $0, $3,281,779 and $0 for the years ended December 31, 2019, 2018 and 2017, respectively.
During the year ended December 31, 2018, as a result of lower-than-expected revenue performance of the Company, management determined
not to further update and maintain its software copyright and patent for the therapy products of sleep respiratory business. The
unamortized software copyright and patent and others of $3,281,779 were fully impaired.
On November 3, 2017 (the “Effective
Date”), the Company completed a purchase of an aggregate of 1,304,348 shares of common stock, par value $0.001 per share
(the “Shares”) of Guardion Health Sciences, Inc. (“GHSI” or the “Seller”), at a purchase price
of $1.15 per Share (or a purchase price of $1.5 million in the aggregate) in a private placement (the “Private Placement”).
The Private Placement occurred pursuant to a Stock Purchase Agreement dated November 3, 2017 (the “Purchase Agreement”)
by and among GHSI as Seller and (i) LLIT and (ii) Digital Grid (Hong Kong) Technology Co., Limited (“DGHKT”; and together
with LLIT, “Purchasers”), as purchasers of, in aggregate, 4,347,827 Shares for aggregate purchase price of $5.0 million.
The investments account for less five percent of GHSI’s total shares.
Prior to January 1, 2018, the Company accounted
for the equity securities at cost and only adjusted for other-than-temporary declines in fair value and distributions of earnings.
As of December 31, 2018, under ASU 2016-01 the Company elected to measure this equity investment using the measurement alternative,
which requires that the investment is measured at cost, less any impairment, plus or minus any changes resulting from observable
price changes in orderly transactions for an identical or similar investment of the same issuer. For the year ended December 31,
2018 the investment was not impaired and there were no observable price changes.
On January 30, 2019, GHSI effectuated a one-for-two (1:2) reverse
stock split of its common stock without any change to its par value. On April 9, 2019, GHSI closed its initial public offering
of 1,250,000 shares of its common stock at a public offering price of $4.00 per share for total gross proceeds of $5.0 million,
before deducting underwriting discounts and commissions and other offering costs and expenses payable by it. GHSI’s shares
began trading on the NASDAQ Capital Market on April 5, 2019 under the symbol “GHSI”.
The Company accounted for the equity securities
as marketable securities as of December 31, 2019. The share price of GHSI at December 31, 2019 is $0.22 per share, based on which
the Company re-valued its equity securities in GHSI and recognized the fair value change of $1,356,565 through unrealized loss
on marketable securities.
|
10.
|
SHORT-TERM BORROWINGS
|
|
|
2019
|
|
|
2018
|
|
Loans from Hangzhou Lianluo Interactive.
|
|
$
|
931,450
|
|
|
$
|
-
|
|
Loans from DGHKT.
|
|
|
33,000
|
|
|
|
-
|
|
Loans from Ping Chen
|
|
|
243,881
|
|
|
|
-
|
|
Total short-term borrowings
|
|
$
|
1,208,331
|
|
|
$
|
-
|
|
The short-term borrowings are all from
related parties. See Note 19.
Interest expense on short-term borrowings
amounted to $0, $200,799 and $6,246 for the years ended December 31, 2019, 2018 and 2017, respectively.
|
11.
|
ACCRUED EXPENSES AND
OTHER CURRENT LIABILITIES
|
Other payables and other current liabilities
as of December 31, 2019 and 2018 consist of the following:
|
|
2019
|
|
|
2018
|
|
Accrued salaries and social welfare
|
|
$
|
663,929
|
|
|
$
|
337,599
|
|
Accrued expenses
|
|
|
572,932
|
|
|
|
388,572
|
|
Reimbursed employee’s expense
|
|
|
27,460
|
|
|
|
50,228
|
|
Deposits from customers
|
|
|
253,014
|
|
|
|
198,907
|
|
Others
|
|
|
13,138
|
|
|
|
1,813
|
|
Total accrued expenses and other current liabilities
|
|
$
|
1,530,473
|
|
|
$
|
977,119
|
|
|
12.
|
COMMITMENTS AND CONTINGENCY
|
Operating Leases
Rent expense for the years ended December
31, 2019, 2018 and 2017 was $206,006, $301,021 and $244,860, respectively. The lease commitment is $46,340 with a contract maturity
date at December 16, 2020. All of Company’s leases were short term (less than 12 months) and the Company elected the practical
expedient not to record right of use of assets related to short term leases.
Employment Contracts
Under the PRC labor law, all employees
have signed employment contracts with the Company. Management employees have employment contracts with terms up to three years
and non-management employees have either a three-year employment contract renewable on an annual basis or non-fixed term employment
contract.
Contingency
The Company is periodically the subject
of various pending or threatened legal actions and claims arising out of its operations in the normal course of business. In the
opinion of management of the Company, adequate provision has been made in the Company’s financial statements at December
31, 2019.
Common Shares
LLIT is authorized to issue 4,736,111
shares of Class A common stock and 1,513,889 shares of Class B common stock, each with a par value of $0.021848. Each share of
Class A common stock is entitled to one vote, and each share of Class B common stock is entitled to ten votes and is convertible
at any time into one share of Class A common stock. Shares of Class A common stock and Class B common stock are treated equally,
identically and ratably with respect to any dividends declared by the Board of Directors unless the Board of Directors declares
different dividends to the Class A common stock and Class B common stock by getting approval from a majority of common stock holders.
On April 28, 2016, the Company entered into a definitive securities
purchase agreement with Hangzhou Lianluo pursuant to which Hangzhou Lianluo has agreed to purchase 1,388,888 common shares of the
Company for an aggregate of $20,000,000. The purchase price is $14.40 per share, which represents a 35% premium to the Company’s
closing price of $10.64 on April 27, 2016. The Company completed its first closing under the securities purchase agreement on June
2, 2016, pursuant to which we sold 77,551 common shares for an aggregate purchase price of $1,116,744. On June 28, 2016, it entered
into amendment no. 1 to the securities purchase agreement to extend the closing date from June 30, 2016 to September 30, 2016.
In August 2016, the Company closed the securities purchase agreement (the “Securities Purchase Agreement”) with Hangzhou
Lianluo and Hangzhou Lianluo completed the purchase of $20 million of the Company’s common shares and warrants to purchase
common shares (Note 14). As of December 31, 2016, the Company reported a subscription receivable of $1,492,538 from Hangzhou Lianluo
which had been collected on April 13, 2017.
On June 8, 2017, the Company held the Annual
General Meeting to approve the amend and restate the Company’s amended and restated Memorandum and Articles of Association
(the “New M&AAs”) in order that the Company’s authorized share capital be re-classified and re-designated
into 6,250,000 Common Shares of par value of $0.021848 each, of which 4,736,111 would be designated as Class A Common Shares
of par value of $0.021848 each and 1,513,889 be designated as Class B Common Shares of par value of $0.021848 each.
In 2018, the Company issued an aggregate
of 34,375 common shares to a consultant under the Company’s incentive plan for advice and services provided concerning the
Company’s merger and acquisition planning, development and strategy implementation. The 34,375 common shares were issued
in two tranches including 17,187 common shares issued on February 21, 2018 and 17,187 common shares issued on March 5, 2018.
The fair value of the 34,375 common shares was $835,999, which was calculated based on the grant date stock price of $25.44 on
February 21, 2018 and of $23.20 on March 5, 2018. During the year ended December 31, 2018, the Company amortized $835,999 as consulting
expenses.
Also in 2018, the Company issued 25,000
common shares to a consulting firm for management consulting and advisory services to be provided for a period of 12 months up
to August 15, 2019. The fair value of these shares on the grant date based on the closing price was approximately $288,000. During
the year ended December 31, 2018 and 2019, the Company amortized $108,888 and $179,112 as consulting expenses.
At December 31, 2019 and 2018, the number
of shares of Class A common stock issued and outstanding was 836,933. At December 31, 2019 and 2018, the number of shares of
Class B common stock issued and outstanding was 1,388,888.
Statutory Surplus Reserves
A PRC company is required to make appropriations
to statutory surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles
of the PRC (“PRC GAAP”). Appropriations to the statutory surplus reserve is required to be at least 10% of the after-tax
net income determined in accordance with PRC GAAP until the reserve is equal to 50% of the entity’s’ registered capital.
The statutory surplus reserve fund is non-distributable
other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion
or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing
the par value of shares currently held by them, provided that the remaining statutory surplus reserve balance after such issue
is not less than 25% of the registered capital.
No amount was allocated to the statutory
surplus reserve account as both the subsidiaries in China had incurred accumulated losses as of December 31, 2019 and 2018.
Stock Option Plan
Under the employee stock option plan, the
Company’s stock options generally expire ten years from the date of grant. On December 29, 2011, the Company entered into
five-year agreements with its employees and directors, pursuant to which, the Company issued an aggregate of 56,250 options at
an exercise price of $11.60 per share. The options vest in equal annual installments over the five years of the agreements ending
December 28, 2016.
On October 7, 2013, pursuant to the Company’s
Share Incentive Plan, the Company granted a non-statutory option to acquire 11,750 of the Company’s common shares at an exercise
price of $18.40 per share to Mr. Ping Chen, the CEO of the Company. The options vest in equal annual installments over the five
years of the agreement ending October 6, 2018.
On August 20, 2014, pursuant to the Company’s
Share Incentive Plan, the Company granted additional option to acquire 16,375 of the Company’s common shares at an exercise
price of $42.48 per share to Mr. Ping Chen. The options vest in equal annual installments over the five years of the agreement ending
August 19, 2019.
On August 7, 2015, the Company entered
into two-year agreements with its employees and directors, pursuant to which the Company issued an aggregate of 43,625 options
at an exercise price of $13.12 per share. The options vest in equal annual installments over the two years of the agreements ending
August 6, 2017.
On March 21, 2016, the Company entered
into two-year agreements with its employees and directors, pursuant to which the Company issued an aggregate of 72,608 options
at an exercise price of $15.04 per share. The options vest in equal annual installments over the two years of the agreements ending
March 20, 2018.
In 2018, 1,375 options were exercised
for cash to purchase 1,375 shares of the Company’s common shares for an aggregate consideration of $17,851, and 5,000 options
were exercised on a cashless basis to purchase 1,000 common shares of the Company.
As of December 31, 2019, all outstanding
options have been vested.
The Company valued the stock options using
the Black-Scholes model with the following assumptions:
Expected
Terms (years)
|
|
Expected
Volatility
|
|
Dividend
Yield
|
|
Risk Free
Interest Rate
|
|
Grant Date
Fair Value
Per share
|
10
|
|
126%-228%
|
|
0%
|
|
0.73%-1.65%
|
|
$9.76-$41.20
|
The following is a summary of the option activity:
Stock options
|
|
Shares
|
|
|
Weighted average
exercise price
|
|
|
Aggregate
intrinsic
value (1)
|
|
Outstanding as of January 1, 2018
|
|
|
127,108
|
|
|
$
|
18.08
|
|
|
|
|
|
Forfeited
|
|
|
(10,500
|
)
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
(6,375
|
)
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2018
|
|
|
110,233
|
|
|
$
|
18.72
|
|
|
|
|
|
Forfeited
|
|
|
(10,875
|
)
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2019
|
|
|
99,358
|
|
|
$
|
19.20
|
|
|
$
|
-
|
|
|
(1)
|
The intrinsic value of
the stock options at December 31, 2019 is the amount by which the market value of the Company’s common stock of $3.12 as
of December 31, 2019 exceeds the exercise price of the options.
|
Following is a summary of the status of options outstanding
and exercisable at December 31, 2019:
Outstanding options
|
|
|
Exercisable options
|
|
Average
exercise
price
|
|
|
Number
|
|
|
Average
remaining
contractual
life (years)
|
|
|
Average
exercise
price
|
|
|
Number
|
|
|
Average
remaining
contractual
life (years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11.60
|
|
|
|
13,125
|
|
|
|
2.00
|
|
|
$
|
11.60
|
|
|
|
13,125
|
|
|
|
2.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18.40
|
|
|
|
11,750
|
|
|
|
3.77
|
|
|
$
|
18.40
|
|
|
|
11,750
|
|
|
|
3.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
42.48
|
|
|
|
16,375
|
|
|
|
4.64
|
|
|
$
|
42.48
|
|
|
|
16,375
|
|
|
|
4.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13.12
|
|
|
|
14,875
|
|
|
|
5.60
|
|
|
$
|
13.12
|
|
|
|
14,875
|
|
|
|
5.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15.04
|
|
|
|
43,233
|
|
|
|
6.22
|
|
|
$
|
15.04
|
|
|
|
43,233
|
|
|
|
6.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99,358
|
|
|
|
|
|
|
|
|
|
|
|
99,358
|
|
|
|
|
|
For the years ended December 31, 2019,
2018 and 2017, the Company recognized $69,176, $247,134 and $479,233 respectively, as compensation expense under its stock option
plan.
As of December 31, 2019, unrecognized share-based
compensation expense related to options was nil.
On April 28, 2016, the Company signed Share
Purchase Agreement (“SPA”) with Hangzhou Lianluo. In this SPA, Hangzhou Lianluo is entitled with 125,000 warrants
to acquire from the Company 125,000 common shares at purchase price of $17.60 per share. The warrants will be exercisable at any
time. The Company recognized the warrants as a derivative liability because warrants can be settled in cash. Warrants are remeasured
at fair value with changes in fair value recorded in earnings in each reporting period.
There was a total of 125,000 warrants
issued and outstanding as of December 31, 2019 and 2018.
The fair value of the outstanding warrants
was calculated using the Black Scholes Model with the following assumptions:
|
|
December 31,
|
|
Stock options
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Market price per share (USD/share)
|
|
$
|
3.12
|
|
|
$
|
9.04
|
|
|
$
|
13.84
|
|
Exercise price (USD/share)
|
|
|
17.60
|
|
|
|
17.60
|
|
|
|
17.60
|
|
Risk free rate
|
|
|
1.81
|
%
|
|
|
2.60
|
%
|
|
|
2.36
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected term/Contractual life (years)
|
|
|
6.3
|
|
|
|
7.3
|
|
|
|
8.3
|
|
Expected volatility
|
|
|
279.93
|
%
|
|
|
256.20
|
%
|
|
|
241.20
|
%
|
The following is a reconciliation of the
beginning and ending balances of warrants liability measured at fair value on a recurring basis using Level 3 inputs:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Beginning balance
|
|
$
|
1,129,246
|
|
|
$
|
1,729,111
|
|
|
$
|
1,499,362
|
|
Warrants issued to Hangzhou Lianluo
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants redeemed
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Fair value change of the issued warrants included in earnings
|
|
|
(739,616
|
)
|
|
|
(599,865
|
)
|
|
|
229,749
|
|
Ending balance
|
|
$
|
389,630
|
|
|
$
|
1,129,246
|
|
|
$
|
1,729,111
|
|
The following is a summary of the warrants
activity:
|
|
Number
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted Average
Remaining
Contractual
Life
(Years)
|
|
Outstanding as of January 1, 2018
|
|
|
125,000
|
|
|
$
|
17.60
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Redeemed
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2018
|
|
|
125,000
|
|
|
$
|
17.60
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Redeemed
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2019
|
|
|
125,000
|
|
|
$
|
17.60
|
|
|
|
|
|
The Company’s selling expenses consist
of the followings:
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Salaries and social welfare
|
|
$
|
761,774
|
|
|
$
|
1,765,019
|
|
|
$
|
805,048
|
|
Travelling expenses
|
|
|
34,244
|
|
|
|
170,931
|
|
|
|
150,648
|
|
Service fee
|
|
|
12,369
|
|
|
|
41,437
|
|
|
|
84,445
|
|
Advertising & Promotion
|
|
|
19,811
|
|
|
|
56,259
|
|
|
|
76,592
|
|
Entertainment fee
|
|
|
4,848
|
|
|
|
42,656
|
|
|
|
35,438
|
|
Office expense
|
|
|
-
|
|
|
|
1,960
|
|
|
|
7,302
|
|
Others
|
|
|
2,224
|
|
|
|
4,567
|
|
|
|
10,905
|
|
Total Selling expenses
|
|
$
|
835,270
|
|
|
$
|
2,082,829
|
|
|
$
|
1,170,378
|
|
|
16.
|
GENERAL AND ADMINISTRATIVE
EXPENSES
|
The Company’s general and administrative
expenses consist of the followings:
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Salaries and social welfare
|
|
$
|
1,358,629
|
|
|
$
|
1,068,643
|
|
|
$
|
862,660
|
|
Service fee
|
|
|
750,734
|
|
|
|
1,493,403
|
|
|
|
915,228
|
|
Office expense
|
|
|
268,555
|
|
|
|
391,850
|
|
|
|
388,751
|
|
Research & Development
|
|
|
-
|
|
|
|
301,713
|
|
|
|
344,575
|
|
Depreciation &Amortization
|
|
|
138,811
|
|
|
|
79,177
|
|
|
|
31,739
|
|
Stock compensation
|
|
|
69,176
|
|
|
|
247,134
|
|
|
|
479,233
|
|
Entertainment fee
|
|
|
4,176
|
|
|
|
22,593
|
|
|
|
-
|
|
Travel expense
|
|
|
1,056
|
|
|
|
17,902
|
|
|
|
75,080
|
|
Others
|
|
|
2,671
|
|
|
|
53,050
|
|
|
|
94,764
|
|
Total General and administrative expenses
|
|
$
|
2,593,808
|
|
|
$
|
3,675,465
|
|
|
$
|
3,192,030
|
|
The following is a reconciliation of the
basic and diluted loss per share computation for the years ended December 31, 2019 and 2018:
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to the Company’s common shareholders
|
|
$
|
(4,450,994
|
)
|
|
$
|
(8,910,002
|
)
|
|
$
|
(5,136,434
|
)
|
Weighted average shares outstanding – Basic and diluted
|
|
|
2,225,821
|
|
|
|
2,202,176
|
|
|
|
2,164,071
|
|
Loss per share – Basic and diluted
|
|
$
|
(2.00
|
)
|
|
$
|
(4.05
|
)
|
|
$
|
(2.37
|
)
|
The Company has been authorized to issue
Class A and Class B common stock. The two classes of common stock are substantially identical in all material respects, except
for voting rights. Since the Company did not declare any dividends during the years ended December 31, 2019 and 2018, the net loss
per common share attributable to each class is the same under the “two-class” method. As such, the two classes of common
stock have been presented on a combined basis in the consolidated statements of operations and comprehensive income and in the
above computation of net loss per common share.
For the years ended December 31, 2019,
2018 and 2017, all the outstanding warrants and options were anti-dilutive.
British Virgin Islands
Lianluo Smart is a tax-exempt company incorporated
in the British Virgin Islands.
PRC
PRC enterprise income tax is calculated
based on the Enterprise Income Tax Law (the “EIT Law”). Under the EIT Law, a unified enterprise income tax rate of
25% and unified tax deduction standards will be applied equally to both domestic-invested enterprises and foreign-invested enterprises.
Under the current PRC laws, PRC government
grants a preferential income tax rate of 15% to government-certified high technology companies, and under the new standard the
period of validity for the certification of high technology companies is three years. In 2009, 2012 and 2015, Beijing Dehaier updated
its certification for “high technology” company. Therefore, Beijing Dehaier used a 15% income tax rate to calculate
the income tax expense for the years ended December 31, 2017, 2016 and 2015. In 2018, Beijing Dehaier did not pass the certification
for “high technology” company, and therefore, is subject to a PRC income tax rate of 25% on its 2018 income.
The tax rate for Lianluo Connection is
25%.
The BVI and PRC components of loss before
income taxes consisted of the following:
|
|
Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
BVI
|
|
$
|
(1,385,394
|
)
|
|
$
|
(957,973
|
)
|
|
$
|
(1,724,488
|
)
|
PRC
|
|
|
(3,065,600
|
)
|
|
|
(7,952,029
|
)
|
|
|
(3,411,946
|
)
|
Loss before income taxes
|
|
$
|
(4,450,994
|
)
|
|
$
|
(8,910,002
|
)
|
|
$
|
(5,136,434
|
)
|
The income taxes (benefit) provision for the years presented
is as follows:
|
|
Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
BVI
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
PRC
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
BVI
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
PRC
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Income taxes (benefit) provision
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
A reconciliation of the provision for income
taxes determined at the statutory income tax rate to the Company’s income taxes is as follows:
|
|
Years ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Loss before provision for income tax and non-controlling interests
|
|
$
|
(4,450,994
|
)
|
|
$
|
(8,910,002
|
)
|
|
$
|
(5,136,434
|
)
|
PRC corporate income tax rate
|
|
|
25
|
%
|
|
|
25
|
%
|
|
|
25
|
%
|
Income tax benefit computed at PRC statutory corporate income tax rate
|
|
|
(1,112,749
|
)
|
|
|
(2,227,500
|
)
|
|
|
(1,284,108
|
)
|
Reconciling items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances and reserves
|
|
|
20,414
|
|
|
|
4,940
|
|
|
|
126,090
|
|
Impairment on intangible assets
|
|
|
-
|
|
|
|
818,935
|
|
|
|
-
|
|
BVI tax rate and PRC tax law differential
|
|
|
346,349
|
|
|
|
239,493
|
|
|
|
431,122
|
|
Others
|
|
|
40,828
|
|
|
|
300
|
|
|
|
39,977
|
|
Valuation allowance on deferred tax assets
|
|
|
705,158
|
|
|
|
1,163,832
|
|
|
|
686,919
|
|
Income tax benefit
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred taxes assets
Deferred tax assets and liabilities are
recognized for the expected future tax consequences of differences between the carrying amounts of assets and liabilities and their
respective tax bases using enacted tax rates in effect for the year in which the differences are expected to reverse. The tax effects
of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of December 31, 2019
and 2018 are presented below:
|
|
2019
|
|
|
2018
|
|
Deferred tax assets
|
|
|
|
|
|
|
Allowances and reserves
|
|
$
|
155,354
|
|
|
$
|
134,940
|
|
Impairment on intangible assets
|
|
|
818,935
|
|
|
|
818,935
|
|
Net operating loss carried forward
|
|
|
3,789,703
|
|
|
|
2,458,463
|
|
Valuation reserve
|
|
|
(4,763,992
|
)
|
|
|
(3,412,338
|
)
|
Deferred tax assets, non-current
|
|
$
|
-
|
|
|
$
|
-
|
|
As of December 31, 2019, the Company’s
PRC subsidiaries had net operating loss carry forwards of $15,158,812, which will expire in various years through year 2024. Management
believes it is more likely than not that the Company will not realize these potential tax benefits as these operations will not
generate any operating profits in the foreseeable future. As a result, a valuation reserve was provided against the full amount
of the potential tax benefits.
Uncertain tax position
The accounting for uncertain tax positions
prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. The Company is required to recognize in the financial statements the impact of a
tax position, if that position is more-likely than-not of being sustained on audit, based on the technical merits of the position.
The Company recorded a net charge for unrecognized tax benefits in 2019 and 2018 of $0 and $0, respectively. The Company includes
interest and penalties related to unrecognized tax benefits, if any, within the benefit from (provision for) income taxes.
The Company only files income tax returns
in PRC. According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment
of taxes is due to computational errors made by the taxpayer or its withholding agent. The statute of limitations extends to five
years under special circumstances, which are not clearly defined. In the case of a related party transaction, the statute of limitations
is ten years. There is no statute of limitations in the case of tax evasion.
|
19.
|
RELATED
PARTY TRANSACTIONS AND BALANCE
|
In addition to the transactions and balances
disclosed elsewhere in these financial statements, the Company had the following material related party transactions:
|
(1)
|
During the years ended
December 31, 2019, 2018 and 2017, the Company purchased from Hangzhou Lianluo, its controlling shareholder, and subsidiary of
$42,000, $204 and $3,760, respectively. As of December 31, 2019, the Company reported $42,000 payable to Hangzhou Lianluo and
subsidiary.
|
|
(2)
|
During the years ended
December 31, 2019, 2018 and 2017, the Company sold equipment of $9,588, $nil and $nil to a related party company in which its
previous CEO Mr. Ping Chen holds 51% ownership in, respectively. As of December 31, 2019, the Company reported an outstanding
receivable of $10,708 due from the related party company
|
|
(3)
|
On July 1, 2018, the Company
leased office premises from Hangzhou Lianluo for a period of 1 year, with an annual rental of $84,447 (RMB580,788). Rental payments
charged as expenses in 2019 and 2018 were $35,892 and $39,942, respectively. As of December 31, 2019, the Company reported an
outstanding rental payable of $75,834 to Hangzhou Lianluo.
|
|
(4)
|
Short-term borrowing from
related party companies:
|
i) Borrowings from Hangzhou Lianluo
As of December 31, 2019, the loan balance consists of the following
from Hangzhou Lianluo:
No.
|
|
Principal (USD)
|
|
|
From
|
|
To
|
1
|
|
|
57,320
|
|
|
February 2, 2019
|
|
February 1, 2020
|
2
|
|
|
24,361
|
|
|
March 7, 2019
|
|
March 6, 2020
|
3
|
|
|
85,980
|
|
|
April 8, 2019
|
|
April 7, 2020
|
4
|
|
|
57,320
|
|
|
June 27, 2019
|
|
June 26, 2020
|
5
|
|
|
56,942
|
|
|
July 19, 2019
|
|
July 18, 2020
|
6
|
|
|
12,154
|
|
|
July 22, 2019
|
|
July 21, 2020
|
7
|
|
|
145,854
|
|
|
August 6, 2019
|
|
August 6, 2020
|
8
|
|
|
71,650
|
|
|
May 20, 2019
|
|
May 19, 2020
|
9
|
|
|
419,869
|
|
|
May 21, 2019
|
|
May 20, 2020
|
Total
|
|
|
931,450
|
|
|
|
|
|
During 2019, the Company borrowed $942,500
from Hangzhou Lianluo, repaid $0; the loans are non-interest bearing. In addition, the above loans due at February 1, 2020, March
6 and April 7, 2020 has been extended, interest-free and without specific repayment date, which is based upon both parties’
agreement as of the date of this report.
As of December 31, 2018, the loan balance
was zero. During 2018, the Company borrowed $3,682,592 carrying an annual interest rate of 5%-8% and was fully settled through
debt offset agreement among the Company, Hangzhou Lianluo and DGHKT. Debt offset agreements refer to below iv) Borrowings to DGHKT.
ii) Borrowings from DGHKT
As of December 31, 2019, the loan balance consists of the following
from DGHKT, an affiliate of Hangzhou Lianluo:
No.
|
|
Principal (USD)
|
|
|
From
|
|
To
|
1
|
|
|
5,000
|
|
|
May 20, 2019
|
|
May 19, 2020
|
2
|
|
|
17,000
|
|
|
November 28, 2019
|
|
November 27, 2020
|
3
|
|
|
6,000
|
|
|
December 5, 2019
|
|
December 4, 2020
|
4
|
|
|
5,000
|
|
|
December 24, 2019
|
|
December 23, 2020
|
Total
|
|
|
33,000
|
|
|
|
|
|
During 2019, the Company borrowed $33,000 interest free, and
repaid $0 in principal.
iii) Borrowings from Mr. Ping Chen:
During 2019, the Company borrowed from
Mr. Ping Chen, its previous CEO, free of interest to fund its operation. During 2019, 2018 and 2017, the borrowings were $387,182,
nil and nil, and Mr. Ping Chen forgave a debt of $143,301 d in 2019. The balances were $243,881, nil and nil as of December 31,
2019, 2018 and 2017, respectively.
iv) Borrowings to DGHKT
On March 15, 2018, the Company entered
into a $6 million loan agreement with DGHKT (an affiliate of Hangzhou Lianluo) for a term of 12 months. The Company also borrowed
RMB34.3 million (equivalently $5.20 million) from Hangzhou Lianluo, its principal shareholder.
Pursuant to an agreement dated December
27, 2018, the Company, DGHKT, Hangzhou Lianluo agreed that the outstanding amount owed by DGHKT to us of RMB35.6 million be repaid
by Hangzhou Lianluo on behalf of DGHKT, to the Company. This repayment is agreed to be settled in the form of offset against the
amount owed by the Company to Hangzhou Lianluo of RMB35.6 million (equivalent to $5.2 million). As a result, the Company no longer
owed or were owed by Hangzhou Lianluo or DGHKT any amount as of December 31, 2018.
Major Customers
For the year ended December 31, 2019, two
customers each accounted for approximately 21% and 15%, respectively, of the Company’s revenues. For the year ended December
31, 2018, two customers each accounted for approximately 16% and 13%, respectively, of the Company’s revenues. For the year
ended December 31, 2017, two customers accounted for approximately 44% and 12%, respectively, of the Company’s revenues.
Major Suppliers
For the year ended December 31, 2019, one
supplier accounted for 100% of the Company’s purchases. For the year ended December 31, 2018, two suppliers each accounted
for approximately 31% and 17% respectively, of the Company’s purchases. For the year ended December 31, 2017, two suppliers
each accounted for approximately 40% and 23%, respectively, of the Company’s purchases.
Revenues by categories
The following represents the revenues by categories, all derived
from China:
|
|
For the years ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Categories
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
|
|
|
|
|
|
|
|
Medical Devices
|
|
$
|
58,750
|
|
|
$
|
221,414
|
|
|
$
|
827,032
|
|
Mobile Medicine (sleep apnea diagnostic products)
|
|
|
153,644
|
|
|
|
120,930
|
|
|
|
54,979
|
|
OSAS service (analysis and detection)
|
|
|
171,064
|
|
|
|
217,042
|
|
|
|
-
|
|
Total Revenues
|
|
$
|
383,458
|
|
|
$
|
559,386
|
|
|
$
|
882,011
|
|
1) Litigation
On May 9, 2019, Tianjin Wuqing Bohai Printing
Co., Ltd. (“Wuqing Bohai”) filed an arbitration application with Beijing Arbitration Commission against Beijing Dehaier,
claiming that Beijing Dehaier failed to pay for goods in accordance with purchase contracts entered into with Wuqing Bohai in 2017
and 2018 and requested Beijing Dehaier to pay Wuqing Bohai an amount of RMB119,770 (approximately $17,450), plus RMB10,000 (approximately
$1,457) to cover the expenses of keeping goods that Beijing Dehaier failed to accept. On June 5, 2019, Beijing Dehaier
submitted an answer to compliant, noting that it had not received some of the goods under the contracts and Wuqing Bohai failed
to provide invoices for some of the goods allegedly received by Beijing Dehaier. Beijing Dehaier submitted that it should only
be responsible for the purchase value of RMB48,450 (approximately $7,059). On March 6, 2020, the Beijing Arbitration Commission
entered an award, ordering that Beijing Dehaier pay Wuqing Bohai the disputed amount of RMB119,770 (approximately $17,203) and
an arbitration fee of RMB10,443 (approximately $1,500) by March 24, 2020 and dismissed other claims of Wuqing Bohai.
2) Equity Financing
On February 14, 2020, the Company
consummated a registered direct offering of 323,750 Class A Common Shares and a concurrent private placement of warrants to
purchase up to 323,750 Class A Common Shares with certain accredited investors. The purchase price per Class A Common Share
in the registered direct offering was $6.80. The warrants sold in the concurrent private placement are exercisable for a
period of five and one-half years upon issuance, at an initial exercise price of $6.80 per share, which was thereafter
adjusted to $4.9912, subject to full ratchet anti-dilution protections. On February 25, 2020, we consummated a second
registered direct offering of 437,500 Class A Common Shares and a concurrent private placement of warrants to purchase up
to 437,500 Class A Common Shares with the same accredited investors. The purchase price per Class A Common Share in the
second registered direct offering was $5.60. The warrants sold in the second concurrent private placement are exercisable for
a period of five and one-half years upon issuance, at an initial exercise price of $5.60 per share, subject to anti-dilution
protections. On March 2, 2020, we consummated a third registered direct offering of 612,500 Class A Common Shares and a
concurrent private placement of warrants to purchase up to 612,500 Class A Common Shares with the same accredited
investors. The purchase price per Class A Common Share in this registered direct offering was $5.60 per share. The warrants
sold in the third concurrent private placement are exercisable for a period of five and one-half years upon issuance, at an
initial exercise price of $5.60 per share, subject to anti-dilution protections.
The above equity financings, after deducting
the placement agent’s commissions and other expenses, generated net proceeds of approximately $7.2 million for the Company.
The following table presents the Company’s
balance sheet as of December 31, 2019 on a pro forma basis to give effect to the issuance and sale of 1,373,750 Class A Common
Shares in the foregoing three registered direct offerings:
|
|
As of December 31, 2019
|
|
|
|
Audited
|
|
|
equity financing
|
|
|
Pro Forma
|
|
Cash and cash equivalents
|
|
$
|
22,834
|
|
|
|
7,168,195
|
|
|
|
7,191,029
|
|
Total Current Liabilities
|
|
$
|
3,233,112
|
|
|
|
|
|
|
|
3,233,112
|
|
Stockholders’ equity
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Class A Common Shares,
|
|
|
18,285
|
|
|
|
30,015
|
|
|
|
48,300
|
|
Class B Common Shares
|
|
|
30,345
|
|
|
|
-
|
|
|
|
30,345
|
|
Additional paid-in capital
|
|
|
40,833,249
|
|
|
|
7,138,180
|
|
|
|
47,971,429
|
|
Accumulated deficit
|
|
|
(44,607,198
|
)
|
|
|
|
|
|
|
(44,607,198
|
)
|
Accumulated other comprehensive income
|
|
|
2,436,530
|
|
|
|
|
|
|
|
2,436,530
|
|
Total shareholders’ (deficit) equity
|
|
$
|
(1,288,789
|
)
|
|
|
|
|
|
|
5,879,406
|
|
Total capitalization
|
|
$
|
(1,288,789
|
)
|
|
|
|
|
|
|
5,879,406
|
|
3) Impact of COVID-19
On January 30, 2020, the World Health Organization
(“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the
“COVID-19 outbreak”) and the risks to the international community as the virus spreads globally beyond its point of
origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.
The full impact of the COVID-19 outbreak
continues to evolve as of the date of this report. As such, it is uncertain as to the full magnitude that the pandemic will have
on the Company’s financial condition, liquidity, and future results of operations. Management is actively monitoring the
global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution
of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19
outbreak on its results of operations, financial condition, or liquidity for fiscal year 2020.
As a result of these events, the Company
assessed the near-term operations, working capital, finances and capital formation opportunities, and implemented, in late December
2019 and early February 2020, a downsizing of our operations, including workforce reductions, reductions of salaried employee compensation
and a reduction of hours worked to preserve cash resources, cut costs and focus the operations on customer-centric sales and project
management activities. The extent to which COVID-19 will impact the business and financial results will depend on future developments,
which are uncertain and cannot be predicted at this time.
The service was suspended due to restrictions
and hospital closures except for essential services in February 2020 and recovered gradually in March 2020 as hospitals began to
resume business.
4) Staff termination
In 2019, Beijing Dehaier and Lianluo Connection
have terminated the employment of over 50 employees due to the business downturn. 34 of these former employees filed complaints
with Beijing Changping District Employment Dispute Arbitration Commission and Beijing Shijingshan District Employment Dispute Arbitration
Commission, respectively, claiming that Beijing Dehaier and Lianluo Connection failed to pay them, among others, certain salaries,
overtime fees and compensations upon terminations. As of the date of this report, Beijing Dehaier and Lianluo Connection have entered
into settlement agreements with 30 former employees and settled disputes through negotiations with the rest of these employees.
The settlement amount was RMB2,435,582 (approximately $349,019) and has been recorded in the financial statements of the first
quarter of 2020.
5) Debt Extension
As mentioned in Note 19 the Company has
a borrowing of $931,450 due from Hangzhou Lianluo as of December 31, 2019. The loans due at February 1, 2020, March 6 and April
7, 2020, totaling $167,661, were extended, interest-free and without specific repayment date, which is based upon both parties’
agreement as of the date of this report.
6) Change of CEO and Directors
On April 1, 2020, Mr. Ping Chen resigned
from his positions as Chief Executive Officer and director of Lianluo Smart Limited (the “Company”), effectively immediately.
Mr. Chen’s resignation was due to personal reasons and not because of any disagreement with the Company on any matter relating
to the Company’s operations, policies or practices.
On the same date, the Board of Directors
of the Company appointed Mr. Zhitao He as Chief Executive Officer of the Company. Mr. He has served as chairman and director of
the Company since October 2016. The Board of Directors also appointed the Company’s Interim Chief Financial Officer, Ms.
Yingmei Yang, as a director to fill the vacancy created by Mr. Chen’s resignation.
On April 24, 2020, Mr. Xiaogang Tong resigned
from his positions as an independent director and member of each committee of the Board of Directors of Lianluo Smart Limited (the
“Company”), effectively immediately. Mr. Tong’s resignation was due to personal reasons and not because of any
disagreement with the Company on any matter relating to the Company’s operations, policies or practices.
On the same date, the Board of Directors
of the Company appointed Mr. Fuya Zheng (“Mr. Zheng”) as a director, member of each of Audit Committee, Compensation
Committee and Nominating Committee and Chair of Audit Committee of the Company.
[●] Common Shares
Lianluo Smart Limited/Newegg Commerce,
Inc.
PROSPECTUS
Sole Book-Running Manager
Maxim Group LLC
[●], 2021
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 6. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
British Virgin Islands
law does not limit the extent to which a company’s memorandum and articles of association may provide for indemnification
of officers and directors, except to the extent any such provision may be held by the British Virgin Islands courts to be contrary
to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Our Memorandum
and Articles permit indemnification of officers and directors against all actions, proceedings, costs, charges, expenses, losses,
damages or liabilities incurred in connection with the execution of their duties, powers, authorities or discretions as a director
or officer of the Company, unless such losses or damages arise through the willful neglect or default of such directors or officers.
Insofar as indemnification
for liabilities arising under the Securities Act of 1933, as amended, or the Securities Act, may be permitted to our directors,
officers or persons controlling us under the foregoing provisions, we have been informed that in the opinion of the Securities
and Exchange Commission, or the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore
unenforceable.
ITEM 7. RECENT SALES OF UNREGISTERED SECURITIES.
During the past three
years, we have issued the following securities. We believe that each of the following issuances was exempt from registration under
Section 4(a)(2) of the Securities Act regarding transactions not involving a public offering and/or Regulation S promulgated thereunder
regarding offshore offers and sales.
On February 14, 2020,
the Company sold warrants to purchase 323,750 of its Class A Common Shares, on February 25, 2020, the Company sold warrants to
purchase 437,500 of its Class A Common Shares and on March 2, 2020, the Company sold warrants to purchase 612,500 of its Class
A Common Shares. These sales were made to certain institutional investors in private placements pursuant to an exemption from the
registration requirements of Section 5 of the Securities Act contained in Section 4(a)(2) thereof and/or Regulation D promulgated
thereunder.
On August 16, 2018,
we entered into a consulting agreement with FirstTrust China Ltd., or the Consultant, pursuant to which, we issued 25,000 Class
A Common Shares to the Consultant or its designees for the consulting services to be provided by the Consultant. These shares were
offered under Section 4(a)(2) of the Securities Act and have not been registered under the Securities Act.
ITEM 8. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
The exhibits of the
registration statement are listed in the Exhibit Index to this registration statement and are incorporated herein by reference.
(b) Financial Statement Schedules
Schedules have been
omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or consolidated
financial statements or the notes thereto.
ITEM 9. UNDERTAKINGS.
Insofar as indemnification
for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed
by the final adjudication of such issue.
The undersigned registrant
hereby undertakes:
(1) To file, during any period
in which offers or sales are being made, a post-effective amendment to this registration statement:
(a) To
include any prospectus required by section 10(a)(3) of the Securities Act;
(b) To
reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high
end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) (§230.424(b) of this chapter) if, in the aggregate, the changes in volume and price represent no more than 20% change
in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration
statement; and
(c) To
include any material information with respect to the plan of distribution not previously disclosed in the registration statement
or any material change to such information in the registration statement.
(2) That, for the purpose of
determining any liability under the Securities Act of 1933, each post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration
by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(4) To file a post-effective
amendment to the registration statement to include any financial statements required by “Item 8.A. of Form 20-F (17 CFR 249.220f)”
at the start of any delayed offering or throughout a continuous offering. Financial statements and information otherwise required
by Section 10(a)(3) of the Securities Act need not be furnished, provided that the registrant includes in the prospectus, by means
of a post-effective amendment, financial statements required pursuant to this paragraph (a)(4) and other information necessary
to ensure that all other information in the prospectus is at least as current as the date of those financial statements.
(5) That for purposes of determining
any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4), or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared
effective.
(6) For the purpose of determining
any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
EXHIBIT INDEX
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Incorporated
by Reference
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Exhibit
Number
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Description of Documents
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Form
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Exhibit
No.
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Filing
Date
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Filed
Herewith
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To
be Filed in Amendment
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1.1
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Form of Underwriting Agreement
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X
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2.1*
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Form
of Merger Agreement, by and among LLIT, Merger Sub, and Newegg
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2.2*
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Form
of Disposition Agreement, by and between LLIT and Beijing Fenjin Times Technology Development Co., Ltd.
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3.1
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Fourth
Amended and Restated Memorandum and Articles of Association, dated October 21, 2020
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6-K
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99.1
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October 23, 2020
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3.2*
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Proposed Fifth Amended and Restated Memorandum and Articles of Association to be filed with the BVI Registrar of Corporate Affairs
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4.1
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[Form of Underwriters’ Warrants]
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X
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4.2
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Form of Lock-Up Agreement
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X
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4.3*
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Form
of Amended and Restated Newegg Inc. Stockholders Agreement
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4.4*
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Form
of Support Agreement by and among Newegg Inc., LLIT, Hangzhou Lianluo, and Hyperfinite Galaxy Holding Limited
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4.5*
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Form
of Support Agreement by and among Newegg, LLIT and Ping Chen
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5.1
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Opinion of Conyers Dill & Pearman
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X
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10.1
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LLIT
2009 Incentive Plan
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S-8
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99.1
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December 28, 2011
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10.2
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LLIT
2013 Incentive Plan
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S-8
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99.1
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September 25, 2014
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10.3
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LLIT
2014 Incentive Plan
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DEF 14A
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A
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July 1, 2014
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10.4*
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Newegg’s
2005 Incentive Plan, as Amended
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10.5*
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Significant
Shareholder Incentive Program
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10.6*
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Form
of Employment Agreement between the Post-Restructure Entity and the Named Executives
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10.7*
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Revolving
Credit and Security Agreement by and among East West Bank, PNC Bank, Newegg and Newegg’s subsidiaries
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10.8*
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Pledge
Agreement, by and among PNC Bank, Newegg and Newegg’s subsidiaries
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Signatures
Pursuant to the requirements of the
Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements
for filing on Form F-1 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Beijing, People’s Republic of China, on February 11, 2021.
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Lianluo Smart Limited
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By:
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/s/ Bin Lin
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Bin Lin
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Chief Executive Officer and Chairman
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Pursuant to the
requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities
and on the date indicated.
Name
|
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Title
|
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Date
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/s/
Bin Lin
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Chief Executive Officer and Chairman
|
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February 11, 2021
|
Bin Lin
|
|
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*
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Interim Chief
Financial Officer
(Interim Principal financial and accounting officer) and Director
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February
11, 2021
|
Yingmei Yang
|
|
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*
|
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Director
|
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February 11, 2021
|
Fuya Zheng
|
|
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*
|
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Director
|
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February 11, 2021
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Richard Zhiqiang Chang
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|
|
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*
|
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Director
|
|
February 11, 2021
|
Bin Pan
|
|
|
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*By:
|
/s/
Bin Lin
|
|
|
Bin Lin
|
|
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Chief Executive Officer
|
|
|
Attorney-in-Fact
|
|
SIGNATURE OF AUTHORIZED REPRESENTATIVE
IN THE UNITED STATES
Pursuant to the Securities Act of 1933
as amended, the undersigned, the duly authorized representative in the United States of America, has signed this registration
statement thereto in New York, NY on February 11, 2021.
|
COGENCY GLOBAL INC.
|
|
|
|
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By:
|
/s/ Collen A. De Vries
|
|
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Name: Colleen A. De Vries
|
|
|
Title: Senior Vice President
|
II-6
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